In Re Todd Carpenter

• Decision Date: 30 July 2010
• Docket Number: No. 09-2897.,09-2897.
• Citation: 614 F.3d 930
• Parties: In re Todd CARPENTER, Debtor. Todd Carpenter, Appellee, v. Charles W. Ries, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

614 F.3d 930

In re Todd CARPENTER, Debtor.Todd Carpenter, Appellee,

v.Charles W. Ries, Appellant.

No. 09-2897.

United States Court of Appeals,Eighth Circuit.

Submitted: May 12, 2010.

Filed: July 30, 2010.

Charles W. Ries, argued, Renee C. Rubish, on the brief, Mankato, MN, for appellant.

Barbara J. May, argued, Roseville, MN, for appellee.

Before RILEY, Chief Judge, JOHN R. GIBSON and MURPHY, Circuit Judges.

RILEY, Chief Judge.

Todd Carpenter received a lump sum payment from the Social Security Administration (SSA). Shortly thereafter, Carpenter filed for bankruptcy relief under Chapter 7. Carpenter claimed the social security payment was exempt and should not be included in his bankruptcy estate, relying on 42 U.S.C. § 407 (“[N]one of the moneys paid ... under this [Social Security Act] shall be subject to ... the operation of any bankruptcy or insolvency law.”). The bankruptcy Trustee, Charles W. Ries (Trustee), objected to the exemption, and the bankruptcy court sustained the Trustee's objection, finding the social security proceeds were property of the estate pursuant to 11 U.S.C. § 541 (including “all legal or equitable interests of the debtor in property as of the commencement of the case,” and not excluding social security payments). The United States Bankruptcy Appellate Panel for the Eighth Circuit (BAP) reversed, finding the social security payment was excluded from the Chapter 7 bankruptcy estate pursuant to 42 U.S.C. § 407. We agree with the BAP and reverse the bankruptcy court.

I. BACKGROUND

In March 2006, the SSA determined Carpenter was disabled. In September 2007, the SSA sent Carpenter a lump sum payment in the amount of $17,165 for retroactive benefits due for September 2006 through August 2007. Carpenter deposited the check into a bank account on November 6, 2007, and kept the funds segregated. On April 3, 2008, Carpenter filed for relief under Chapter 7 of the Bankruptcy Code. Shortly before filing for bankruptcy, Carpenter withdrew the social security funds in the form of a cashier's check, dated January 31, 2008.

When a debtor files for bankruptcy, a bankruptcy estate is established. See 11 U.S.C. § 541(a). The bankruptcy estate is generally deemed to include all of the debtor's legal or equitable interests in property at the time of filing. See id. § 541(a)(1). The Bankruptcy Code, however, permits the debtor to exempt certain property from the estate. See Rousey v. Jacoway, 544 U.S. 320, 325, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005). There are two separate exemption schemes. See 11 U.S.C. § 522(b)(1). Debtors may choose to take either (1) the exemptions listed in the Bankruptcy Code at 11 U.S.C. § 522(d); or (2) the exemptions found in applicable state law and federal law other than § 522(d). ¹ See id. § 522(b)(1)-(3). The debtor may choose only one of these options, to the exclusion of the other, and may not combine the two.

Carpenter elected the federal bankruptcy exemptions listed in § 522(d). One of the listed exemptions under § 522(d) exempts “[t]he debtor's right to receive ... a social security benefit, unemployment compensation, or a local public assistance benefit.” Id. § 522(d)(10)(A). Carpenter claimed his social security proceeds were exempt under this provision. Carpenter further argued his accumulated social security proceeds should be excluded from the bankruptcy estate by operation of 11 U.S.C. § 541(c)(2), because the proceeds constituted “a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law.” Carpenter also generally asserted his social security proceeds were protected by 42 U.S.C. § 407, which provides, in pertinent part:

(a) The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.

(b) No other provision of law, enacted before, on, or after April 20, 1983, may be construed to limit, supersede, or otherwise modify the provisions of this section except to the extent that it does so by express reference to this section.

(emphasis added).

The bankruptcy court held the 11 U.S.C. § 541(c)(2) exclusion did not apply to the social security funds Carpenter had already received, holding, “[u]nder these circumstances, there is no trustee, beneficiary or trust res because the benefit was long since disbursed and the interest is no longer beneficial but a fully realized present interest in cash.” In re Carpenter, 395 B.R. 94, 96 (Bankr.D.Minn.2008) ( Carpenter I ). The bankruptcy court then declared, “[t]he ultimate question here is whether the amendment to [42 U.S.C.] § 407 adding paragraph (b) serves to completely exempt Carpenter's Social Security disability proceeds even though he voluntarily elected the federal exemptions and claimed the proceeds exempt under § 522(d)(10)(A).” Id. at 100. The bankruptcy court concluded “§ 407 has no application in light of the debtor's claim of exemptions under § 522(b)(2) and (d).” Id.

Carpenter appealed the bankruptcy court's adverse finding to the BAP. The BAP agreed with the bankruptcy court's position that Carpenter's social security proceeds were not exempt under 11 U.S.C. § 522(d)(10)(A), because “the cashier's check held by Carpenter does not constitute ‘the right to receive’ a social security benefit, but instead represents funds which were previously paid as such a benefit.” Carpenter v. Ries ( In re Carpenter ), 408 B.R. 244, 246 (8th Cir.BAP 2009) ( Carpenter II ). The BAP determined “the ultimate question in this appeal is whether [42 U.S.C.] § 407 excludes social security proceeds from the recipient's bankruptcy estate altogether. If so, a court need not reach the question of whether such debtor is entitled to exempt them from that estate under another statute such as § 522(d)(10)(A).” Id. at 247. The BAP conducted an analysis of the impact of 42 U.S.C. § 407 on the Bankruptcy Code, and held,

[S]ince no provision in the Bankruptcy Code makes express reference to § 407, and, without such express reference, that statute renders social security benefits, paid or payable, free from the operation of any bankruptcy law, a bankruptcy trustee has no authority to administer, as property of the bankruptcy estate, moneys paid to a debtor as social security benefits.

Id. at 248. The BAP concluded Carpenter's social security proceeds must be excluded from the bankruptcy estate pursuant to 42 U.S.C. § 407 and may be retained by the debtor. Id. at 248-49. The Trustee appeals the BAP's decision.

II. DISCUSSIONA. Standard of Review

“Applying the same standards as the [BAP], we review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo.” Official Plan Comm. v. Expeditors Int'l of Wash., Inc. ( In re Gateway Pac. Corp.), 153 F.3d 915, 917 (8th Cir.1998).

B. Relevant Statutes

“Title II of the Social Security Act of 1935 established a social insurance program for wage earners and their dependents, to be paid out of a trust funded by the payroll taxes of wage earners and their employers.” Hildebrand v. SSA ( In re Buren ), 725 F.2d 1080, 1084 (6th Cir.1984). Section 207 of the Social Security Act protected these social security payments, stating, in part, “none of the moneys paid ... under this subchapter shall be subject to ... the operation of any bankruptcy or insolvency law.” 42 U.S.C. § 407. Congress amended Title XVI of the Social Security Act in 1972, and expanded several existing programs to establish a welfare program for “individuals who have attained the age of 65 or are blind or disabled....” Id. § 1381; see In re Buren, 725 F.2d at 1084. When Congress amended Title XVI, it explicitly incorporated § 407 to protect the added social security beneficiaries. See id. § 1383(d)(1).

Congress later enacted the Bankruptcy Reform Act of 1978, 11 U.S.C. § 101 et seq. In doing so, Congress reformulated the classes of persons who may qualify as a “debtor” for purposes of Title 11. See 11 U.S.C. § 109. The Bankruptcy Reform Act did not significantly change the previous law as to who was eligible for liquidation under Chapter 7; however, it did broaden the class of persons who were eligible for relief under Chapter 13. See id. § 109(b) and (e); H.R.Rep. No. 95-595, at 118-19 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6080 (noting under the previous law, only a “wage earner” could file a Chapter 13 case, and by extending eligibility to any “individual with regular income,” the Act would permit “even individuals whose primary income is from investments, pensions, social security, or welfare [to] use Chapter 13 if their income is sufficiently stable and regular”). Congress also expanded the definition of “property of the estate,” declaring, as relevant here, that the bankruptcy estate is comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1).

Despite this broad definition of “property of the estate,” the Bankruptcy Code contains several provisions which exclude specific property interests from the estate. See 11 U.S.C. § 541(b)(1)-(9). As discussed briefly supra, the Bankruptcy Code also permits debtors to exempt certain property from the estate. Pursuant to 11 U.S.C. § 522(b)(1), a debtor may elect to exempt the property listed under § 522(b)(2), or the property listed under § 522(b)(3), unless of course, the state opts out of the federal bankruptcy scheme. If the debtor elects to exempt the property listed under § 522(b)(2), the debtor may exempt from the estate all the property specified under § 522(d). See id. § 522(d)(1)-(12). One of the exemptions listed under § 522(d) includes “[t]he debtor's right to receive ... a social security benefit, unemployment...