In re West

• Decision Date: 26 March 2014
• Docket Number: No. 13bk28123.,13bk28123.
• Citation: 507 B.R. 252
• Parties: In re Debra WEST, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

507 B.R. 252

In re Debra WEST, Debtor.

No. 13bk28123.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

Signed March 26, 2014.

Edmund G. Urban, III, Esq., Urban & Burt Ltd., Oak Forest, IL, for Debtor.

Gregory K. Stern, Esq., Monica C. O'Brien, Esq., Christina M. Riepel, Esq., Rachel D. Stern, Esq., Gregory K. Stern, P.C., Chicago, IL, for Trustee.

Barry A. Chatz, Esq., Arnstein & Lehr, Chicago, IL, Trustee.

MEMORANDUM DECISION

TIMOTHY A. BARNES, Bankruptcy Judge.

The matter before the court arises out of the objection (the “ Objection ”) of the Chapter 7 trustee, Barry A. Chatz (the “ Trustee ”), to the exemption that debtor Debra West (the “ Debtor ”) claimed in her interest in her former husband's 401(k) plan. The Debtor claims the exemption under section 12–1006 of the Illinois Code of Civil Procedure. For the reasons set forth herein, the Objection is not well taken, and the claim of exemption allowed.

JURISDICTION

The federal district courts have “original and exclusive jurisdiction” of all cases under title 11 of the United States Code (the “ Bankruptcy Code ”). 28 U.S.C. § 1334(a). The federal district courts also have “original but not exclusive jurisdiction” of all civil proceedings arising under title 11 of the United States Code, or arising in or related to cases under title 11. 28 U.S.C. § 1334(b). District courts may, however, refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).

A bankruptcy judge to whom a case has been referred may enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under title 11. 28 U.S.C. § 157(b)(1). An objection to a debtor's claim of exemption is a core proceeding. 28 U.S.C. § 157(b)(2)(B); In re Johnson, 480 B.R. 305, 308 (Bankr.N.D.Ill.2012) (Baer, J.). The court also has constitutional authority to determine the exemption because, even though the exemption may derive from state law, “[t]he right to exempt property from the bankruptcy estate is established by an express provision of the Bankruptcy Code (section 522) and is central to the public bankruptcy scheme.” In re Carlew, 469 B.R. 666, 673 (Bankr.S.D.Tex.2012)aff'd sub nom. W. v. Carlew, CIV.A. H–12–0913, 2012 WL 3002197 (S.D.Tex. July 23, 2012).

Accordingly, final judgment is within the scope of the court's authority.

BACKGROUND

On July 12, 2013, the Debtor commenced the above-captioned case by filing a petition under Chapter 7 of the Bankruptcy Code. Prior to the petition date, the Debtor and her former spouse, Daniel West, were involved in a divorce proceeding in the Circuit Court of Cook County. The state court entered a Judgment for Dissolution of Marriage on April 11, 2013, which incorporated the Marital Settlement Agreement (the “ MSA ”) executed by the Debtor and Mr. West. The MSA provides for the Debtor to receive $80,000 from Mr. West's retirement plan with his employer (the “ Retirement Plan ”). However, the Debtor had not received an actual distribution of the funds prior to the commencement of this case, and has not since received such funds.

On Schedule B, the Debtor listed an interest of $80,000 in the Retirement Plan. On Schedule C, the Debtor claimed her interest in the Retirement Plan as exempt pursuant to 735 ILCS 5/12–1006. The Trustee timely filed the Objection on November 27, 2013.

PROCEDURAL HISTORY

Neither party has requested an evidentiary hearing, instead submitting this matter for ruling on their papers and arguments of counsel. In considering the Objection, the court has evaluated the arguments of the parties at the February 4, 2014 hearing on the Objection, has reviewed the Objection itself and the exhibits submitted in conjunction therewith [Docket No. 22], and has considered:

(1) Response to Chapter 7 Trustee's Objection to Debtor's Claim of Exemptions [Docket No. 29]; and

(2) Chapter 7 Trustee's Reply in Support of Objection to Debtor's Asserted Exemption Pursuant to Bankruptcy Rule 4003(b) [Docket No. 30].

Though the foregoing items do not constitute an exhaustive list of the filings in this case, the court has taken judicial notice of the contents of the docket in this matter. See Levine v. Egidi, No. 93C188, 1993 WL 69146, at *2 (N.D.Ill. Mar. 8, 1993); Inskeep v. Grosso ( In re Fin. Partners ), 116 B.R. 629, 635 (Bankr.N.D.Ill.1989) (Sonderby, J.) (authorizing a bankruptcy court to take judicial notice of its own docket).

DISCUSSION

At its core, the matter before the court is simple. The Debtor wishes to have the court determine that her interest in the Retirement Plan is not property of the bankruptcy estate. Failing that, the Debtor seeks to have her interest in the Retirement Plan found to be exempt from prosecution. However, given the pending transfer of the funds from the Retirement Plan to the Debtor, the issue is complicated somewhat by recent case law. The court will consider each issue in turn.

A. Property of the Bankruptcy Estate

The Debtor wishes, first and foremost, to have her interest in the Retirement Plan found not to be property of her bankruptcy estate.

In this regard, the oft-quoted phrase “[p]roperty interests are created and defined by state law” immediately comes to mind. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). As this court has pointed out in the past, however, see, e.g., Sullivan v. Glenn ( In re Glenn ), 502 B.R. 516, 542 (Bankr.N.D.Ill.2013) (Barnes, J.), the Butner decision contains one very important caveat. The Supreme Court in Butner went on to state that “[ u] nless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.” Butner, 440 U.S. at 55, 99 S.Ct. 914 (emphasis added).

This is a case that, in part, illustrates the exception.

The property in question is a portion of Mr. West's Retirement Plan. It appears that the Retirement Plan is created pursuant to and governed by section 401(k) of title 26 of the United States Code (hereinafter, the “ Internal Revenue Code ” and, in short, “IRC § ––––”). While the parties throughout the proceeding refer to the Retirement Plan as a 401(k) plan, neither party has provided the court with a copy of the Retirement Plan itself, and neither party has briefed whether the plan is a qualified plan pursuant to IRC § 401.

If the Retirement Plan is a 401(k) plan, it is federal law that must be looked to as to the creation and nature of interests in the Retirement Plan. That law permits spouses of plan participants to receive all or a portion of the benefits payable to a participant under a plan pursuant to a qualified domestic relations order. 26 U.S.C. §§ 401(a)(13)(B), 414(p)(8). Federal law makes clear, therefore, that the Debtor is permitted to have an interest in a 401(k) plan. Federal law does not, however, provide guidance as to whether such an asserted interest is otherwise valid. For that, the court must look to state law. Butner, 440 U.S. at 55, 99 S.Ct. 914.

As a matter of Illinois law, the Retirement Plan constituted marital property prior to the entry of the Judgment for Dissolution of Marriage. On this much, the parties agree. The parties further agree that the Illinois Marriage and Dissolution of Marriage Act provides that “[e]ach spouse has a species of common ownership in the marital property which vests at the time dissolution proceedings are commenced and continues only during the pendency of the action.” 750 ILCS 5/503(e). Due to that law, and thereafter due to the Judgment for Dissolution of Marriage, in accordance with that Judgment, the Debtor has an interest in the Retirement Plan. Upon the entry of the Judgment for Dissolution, which incorporated the MSA, that interest became quantified and the Debtor's sole and separate property. See Cullen v. Cullen ( In re Cullen ), Nos. 95–B–25374, 99–A–621, 2000 WL 381929, at *4 (Bankr.N.D.Ill. Apr. 12, 2000) (Ginsberg, J.); Bigelow v. Brown ( In re Brown ), 168 B.R. 331, 334 (Bankr.N.D.Ill.1994) (Ginsberg, J.). As the District Court in Szyszko v. Szyszko has made clear, there is no question that the Illinois courts would respect such rights, and this court, absent a compelling federal reason to do otherwise, must do the same. No. 01–C–2417, 2001 WL 766905, at *2 (N.D.Ill. July 6, 2001) ( citing Butner, 440 U.S. at 55, 99 S.Ct. 914) (Because the Illinois “equitable distribution law creates statutory rights in marital property, the bankruptcy court should honor those laws unless some federal interest requires a different result.”); G & R Manufacturing Co. v. Gunia ( In re G & R Manufacturing Co.), 91 B.R. 991 (Bankr.M.D.Fla.1988) (“The Bankruptcy Code ... [did not] intend for the Bankruptcy Court to serve as an appellate court for divorce decrees.”).

Whether the Debtor's interest in the Retirement Plan constitutes property of the Debtor's bankruptcy estate, however, forces the inquiry back to federal law. The commencement of a bankruptcy case creates an estate comprised of “all legal or equitable interests of the debtor in property.” 11 U.S.C. § 541(a). The scope of this provision is “broad.” United States v. Whiting Pools, Inc., 462 U.S. 198, 204–5, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). As the Seventh Circuit Court of Appeals has noted, “every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of § 541.” In re Carousel Int'l Corp., 89 F.3d 359, 362 (7th Cir.1996) (internal quotation and citation omitted).

Despite the broad scope of section 541, the Bankruptcy Code contains a number of exceptions to the general rule. The exception of greatest interest here is contained...