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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.”

September 5, 2009 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

September 2, 2009

Circuit Court of Appeals Cases from Last Week

6th Circuit Court of Appeals, August 25, 2009
In re Bunn, --- F.3d ---, 2009 WL -------- (6th Cir. 2009)(under Ohio law, a recorded mortgage that contains the street address of residential property — but not the legal description of the parcel of land — is sufficient to preclude the setting aside of the otherwise valid mortgage in bankruptcy court)

7th Circuit Court of Appeals, August 25, 2009
US v. Apex Oil Co. Inc. --- F.3d ---, 2009 WL -------- (7th Cir. 2009)(government's claim to an injunction was not discharged in bankruptcy and thus can be renewed in a subsequent lawsuit as the government's equitable claim entitles it to require defendant to clean up the contaminated site at defendant's expense)

9th Circuit Court of Appeals, August 24, 2009
Khalil v. Developers Surety & Indemnity Co., --- F.3d ---, 2009 WL -------- (9th Cir. 2009)(order denying the discharge is affirmed where there was substantial evidence of debtor's fraudulent intent in making certain statements regarding the debts)

9th Circuit Court of Appeals, August 26, 2009
Craig v. Educational Cred. Mgmt. Corp., --- F.3d ---, 2009 WL -------- (9th Cir. 2009)(order declining to discharge debtor's student loan is vacated where it was unclear from the record how the bankruptcy court arrived at its conclusion regarding debtor's ability to make the required monthly payments)

Thanks to Findlaw.com. 

September 2, 2009 | Permalink | Comments (0) | TrackBack

August 31, 2009

Inside Counsel Article on Chrysler and GM 363 Sales

I am quoted in this article by Melissa Maleska (along with Douglas Baird and  Steve Jakubowski - such company!).  You can access the article here. 

August 31, 2009 | Permalink | Comments (0) | TrackBack