September 5, 2009
8th Cir BAP Rules Social Security Proceeds Not Property of the Estate
Brief by my law clerk Roksana Moradi
Carpenter v. Ries (In re Carpenter), 408 B.R. 244 (8th Cir.BAP (Minn.))
Issue: 1. Is a prepetition lump sum payment for retroactive social security benefits property of the estate? 2. Can the debtor exempt those funds pursuant to §522(d)(10)(A).
Holding: 1. No, the funds are not property of the estate pursuant to Social Security Act Section 407. 2. No, but it doesn’t matter because the funds are not property of the estate.
The Debtor is disabled and receives social security disability benefits, the first of which was a lump sum payment of $17,165 for retroactive benefits which he received in the fall of 2007 (when his disability status was determined). He deposited the funds into the bank and maintained them in a segregated fashion, then “[s]hortly before filing for bankruptcy protection he converted the proceeds into a cashier's check.”
On April 3, 2008, he filed Chapter 7 and claimed the social security proceeds exempt under §522(d)(10)(A). In response to the Trustee's objection to the exemption Carpenter contended “that social security benefits, including funds previously paid, are excluded from a debtor's bankruptcy estate altogether, and thus cannot be reached by the Trustee..” Carpenter further argued “that the funds were excluded from the estate by virtue of 11 U.S.C. § 541(c)(2).” The Bankruptcy Court ruled “that section does not apply to already-paid retroactive social security benefits because such benefits are not a trust.”
Minnesota has not opted out of the 522(d) exemptions and therefore the debtor may choose the federal exemptions. “As relevant here, §522(d)(10)(A) of the Bankruptcy Code allows a debtor …to claim as exempt ‘the debtor's right to receive ... a social security benefit....’ As the Bankruptcy Court concluded, 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.” Therefore §522(d)(10)(A) did not apply.
The BAP said, “ordinarily, that would be the end of the matter, and Carpenter would be required to turn over the funds to the Trustee for distribution to creditors. However, §522(d)(10)(A) notwithstanding, the treatment of social security payments is governed by a separate federal statute, namely §407 of the Social Security Act, which bears on the question of whether a social security recipient such as Carpenter is required to give up already-paid benefits for the benefit of his creditors in bankruptcy.”
Section 407 of the Social Security Act provides, in relevant 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.
Does this exclude social security proceeds from the recipient's bankruptcy estate altogether? In the bankruptcy context, at the commencement of a case, §544 of the Bankruptcy Code “authorizes a trustee to, in effect, capture property of the estate by exercising, as relevant here, all powers of a judgment creditor which obtains an execution that is returned unsatisfied.” Nothing in that section, §541, or §522, or any other provision of the Bankruptcy Code, makes express reference to §407 of the Social Security Act, or in any way trumps its provisions. The BAP held that since 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. “In other words, such proceeds are not property of the bankruptcy estate.”
The BAP concluded that, “although [the debtor] cannot claim the retroactive social security benefits exempt under § 522(d)(10), such benefits are excluded from the bankruptcy estate pursuant to 42 U.S.C. § 407, and may be retained by him. The judgment of the bankruptcy court is, therefore, REVERSED.”
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