Pinnacol Assurance v. Laughlin
| Decision Date | 26 January 2023 |
| Docket Number | 21CA1678 |
| Parties | Pinnacol Assurance, Plaintiff-Appellee, v. Patricia Laughlin, as personal representative for the estate of Todd Wilson, deceased, Defendant-Appellant. |
| Court | Colorado Court of Appeals |
SUMMARY
A division of the court of appeals holds that even if a recipient of social security benefits commingles the benefits with other funds, he is entitled to protection from garnishment for those funds that are reasonably traceable to social security income, but if the funds are not reasonably traceable, they are not exempt from garnishment.
City and County of Denver District Court No. 21CV30219 Honorable Michael A. Martinez, Judge
Ruegsegger Simons & Stern, LLC, Michele Carey, Denver Colorado, for Plaintiff-Appellee
Irwin Fraley, PLLC, Roger Fraley, Jr., Centennial, Colorado, for Defendant-Appellant
¶ 1 Defendant, Patricia Laughlin, appeals the district court's order denying a claim of exemption from a writ of garnishment filed by plaintiff, Pinnacol Assurance (Pinnacol). We affirm.
¶ 2 Todd Wilson was injured on the job in 2015 and began receiving temporary workers' compensation benefits from Pinnacol. Years later, the Social Security Administration (SSA) determined that Wilson was entitled to disability benefits from July 2016 onward. As a result, Wilson received two large back payments from the SSA: $8,585.25 in December 2019 and $48,308.75 in January 2020. Because the back payments accounted for a period during which Wilson had also received benefits from Pinnacol, Pinnacol sought to recover the amount of overpayment. In July 2020, an administrative law judge (ALJ) determined that Wilson owed Pinnacol $22,938.89 as an overpayment. The district court subsequently converted the ALJ's order into a judgment.
¶ 3 In June 2021, with no amount of the judgment having been paid, Pinnacol initiated garnishment proceedings against Wilson. Wilson filed a claim of exemption, asserting that approximately $18,000 of the money being withheld from his bank accounts was exempt from garnishment under 42 U.S.C. § 407(a), which provides that social security benefits cannot be garnished. He later argued that other funds were exempt from garnishment under section 13-54-102(1)(u), C.R.S. 2022, which shields court-ordered child support payments from garnishment. The district court held a hearing on the matter.
¶ 4 During the hearing, Wilson's mother, Laughlin, testified, explaining that she was the representative payee for Wilson and handled both the distribution of his SSA payments and his banking affairs generally. According to her, the back payments from the SSA were first deposited into Wilson's checking account before she transferred the bulk of the money into his savings account. Subsequent SSA payments, she testified, were deposited directly into the checking account and left there for Wilson to live on. She also testified that, in addition to the ongoing SSA payments, Wilson received monthly maintenance payments from his ex-wife that were deposited into the checking account and monthly child support payments that were routinely deposited into a third account that was created just for the child support money. When the monthly SSA and maintenance payments were insufficient to cover Wilson's expenses, Laughlin explained, she would transfer funds from the savings account into the checking account.
¶ 5 On cross-examination, Laughlin disclosed a third source of money flowing into the checking account: gifts from her. As she admitted, she had transferred thousands of dollars from her own checking account to Wilson's checking account after the ALJ's order.
¶ 6 Laughlin was the only witness at the hearing. After she testified, Wilson's attorney argued that all of the money that was garnished from Wilson's savings account and the so-called child support account was exempt from garnishment because the money in the former was exclusively SSA money and the money in the latter was solely for child support. No money had been garnished from his checking account, as it contained only a nominal balance at the time.
¶ 7 Ruling from the bench, the court found that Wilson's SSA payments had been commingled with other, nonexempt funds, so much of the money that was garnished from his accounts was not reasonably traceable as exempt property. But rather than deny Wilson's exemption claim outright, the court left it to Pinnacol's counsel to comb through Wilson's bank records for deposits, like the gifts from Laughlin, that were made after the ALJ's order and were not reasonably traceable as exempt property. The court reasoned that Wilson would be ordered to pay Pinnacol the sum of those deposits.
¶ 8 Ultimately, the court entered a written order directing that Wilson pay Pinnacol $22,898.80, representing $21,110 in purportedly untraceable deposits, plus interest on that amount.
¶ 9 Wilson then appealed, contending that the court's order was erroneous. While the appeal was pending, however, Wilson died, so Laughlin, after appointment as his personal representative, was substituted as the appellant.
¶ 10 We next recount the relevant law and then address the issues raised on appeal.
¶ 11 This case presents mixed questions of law and fact. We review the district court's interpretations of law - for example, the statutory exemptions for social security benefits and child support funds - de novo. Roup v. Com. Rsch., LLC, 2015 CO 38, ¶ 8. But we review its factual findings for clear error, meaning that we will not disturb those findings unless they are unsupported by the record. Martinez v. Mintz L. Firm, LLC, 2016 CO 43, ¶ 17. Further, because this case involves the tracing of funds, a matter left to the sound discretion of the district court, we will not overturn the court's decision absent a showing of an abuse of discretion. United States v. Henshaw, 388 F.3d 738, 739-40 (10th Cir. 2004). A court abuses its discretion when its decision is manifestly arbitrary, unreasonable, or unfair. People v. Lindsey, 2020 CO 21, ¶ 23.
¶ 12 Colorado's garnishment process is detailed in C.R.C.P. 103. As is relevant to this case, section 6 of the rule permits a judgment debtor to claim an exemption and to have a hearing on his claim.
¶ 13 Two exemptions are at issue in this case.
¶ 14 First, federal law provides that "none of the moneys paid or payable [as social security benefits] shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law." 42 U.S.C. § 407(a). The Supreme Court has explained that this provision "imposes a broad bar against the use of any legal process to reach all social security benefits." Philpott v. Essex Cnty. Welfare Bd., 409 U.S. 413, 417 (1973).
¶ 15 Laughlin relies on Philpott and Anderson Boneless Beef, Inc. v. Sunshine Health Care Center, Inc., 852 P.2d 1340, 1344 (Colo.App. 1993), for the proposition that § 407(a) "unambiguously rules out any attempt to attach social security benefits." But the rule is not absolute - if the recipient of social security benefits commingles the benefits with other funds, he is entitled to protection for those funds that are reasonably traceable to social security income. See NCNB Fin. Servs., Inc. v. Shumate, 829 F.Supp. 178, 180-81 (W.D. Va. 1993) (citing Philpott, 409 U.S. at 416-17), aff'd sub nom. Nationsbank of N.C. v. Shumate, 45 F.3d 427 (4th Cir. 1994). If the funds are not reasonably traceable, the funds are not exempt from garnishment.
¶ 16 Second, the state law in effect at the time of Wilson's garnishments provided that child support payments required by a support order are "exempt from levy under writ of attachment or writ of execution for any debt owed by either parent," provided two things are true: (1) the money is not commingled with other funds and (2) the money "is deposited in . . . a custodial account for the benefit of the child designated for child support payments." § 13-54-102.5(1)-(2), C.R.S. 2021.[1] We liberally construe this exemption in favor of debtors. Roup, ¶ 10.
¶ 17 But how do we know if money falls into either the social security benefits exemption or the child support payments exemption?
¶ 18 With respect to child support payments, it is as straightforward as determining whether the deposit of the funds at issue complied with the requirements of section 13-54-102.5, as it existed at the time of the garnishments.
¶ 19 Social security benefits are a bit trickier, but we are persuaded by the analytical approach articulated in Schaefer Shapiro LLP v. Ball, 941 N.W.2d 755, 758 (Neb. 2020), and embraced by the district court here: When a bank account consists solely of checks directly deposited by the SSA, there is no question that the funds are exempt. But when such payments are commingled with nonexempt funds, the payments remain exempt from garnishment only "so long as the source of the exempt funds is reasonably traceable." Id. This is the method that the majority of state and federal courts employ, id., and we see no reason to take a different tack.
¶ 20 Which brings us to our next issue: the appropriate way to trace commingled funds.
¶ 21 Laughlin asks us to mandate a "first in, first out" method of accounting, whereby the first dollar deposited into an account is the first one spent. And certainly, that is one way of doing things. But it is not the only way. See In re Lantz, 451 B.R. 843, 847 (Bankr N.D.Ill. 2011) (). Moreover, because tracing is "an equitable substitute for the impossibility of specific identification," we think it...
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