Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-09-02897/USCOURTS-ca8-09-02897-0/pdf.json

Parties Involved:
Todd Carpenter
Appellee
Charles W. Ries
Appellant

Document Text:

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 09-2897

___________

In re: Todd Carpenter, *

*

Debtor. *

_________________________ *

*

Todd Carpenter, *

*

Appellee, * Appeal from the United States

* Bankruptcy Appellate Panel for the

v. * Eighth Circuit.

*

Charles W. Ries, * 

* 

Appellant. *

__________

Submitted: May 12, 2010

Filed: July 30, 2010

___________

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

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(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 (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

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Section 522(b)(2) of the Bankruptcy Code permits states to opt out of the

federal exemption scheme, thereby requiring debtors to claim the applicable state

exemptions. Minnesota, Carpenter’s home state, has not opted out, and Carpenter was

therefore free to choose between the exemptions listed in 11 U.S.C. § 522(d), or those

set forth under state and other federal law. 

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§ 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).

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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. B.A.P. 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.

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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. DISCUSSION

A. 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

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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

compensation, or a local public assistance benefit.” Id. § 522(d)(10)(A). On the other

hand, if the debtor elects to exempt the property set forth in § 522(b)(3), the debtor

generally may exempt “any property that is exempt under Federal law, other than

subsection (d) of this section, or State and local law that is applicable on the date of

the filing . . . .” Id. § 522(b)(3)(A). None of the relevant Bankruptcy Code provisions

mention 42 U.S.C. § 407, nor do they specify whether past and future social security

proceeds are excluded from property of the bankruptcy estate altogether, or whether

such proceeds may only be exempted under either § 522(b)(2) or § 522(b)(3). 

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C. Conflicting Statutes

The conflict between the applicable bankruptcy statutes and 42 U.S.C. § 407

is readily apparent. Section 407, in its original form, expressly declared, “none of the

moneys paid or payable . . . shall be subject to . . . the operation of any bankruptcy or

insolvency law.” 42 U.S.C. § 407 (1939). In contrast, under the Bankruptcy Code,

“all legal or equitable interests of the debtor in property” are deemed to be property

of the bankruptcy estate. 11 U.S.C. § 541(a)(1). The Bankruptcy Code does not

expressly reference § 407 or exclude social security income from property of the

estate, but instead provides certain exemptions, which may, or may not, permit the

debtor to exempt social security proceeds. The inconsistency between § 407 and the

Bankruptcy Code is most transparent under Chapter 13 of the Bankruptcy Code,

which was designed, in part, to expand relief under the Bankruptcy Code to social

security recipients. See United States v. Devall, 704 F.2d 1513, 1516 (11th Cir. 1983)

(reasoning, “[b]ecause it is evident that Congress anticipated social security recipients

could use Chapter 13, it follows that social security benefits are properly included in

the debtor’s Chapter 13 estate”); Toson v. United States, 18 B.R. 371, 373-75 (Bankr.

N.D. Ga. 1982) (recognizing the “conflict between Chapter 13 of the Bankruptcy

Code and the Social Security Act,” distinguishing Chapter 13 cases from bankruptcy

filings under other chapters, and concluding “enactment of the Bankruptcy Code

partially repealed the anti-assignment provisions” of the Social Security Act, 42

U.S.C. § 407). Chapter 13 also invests bankruptcy courts with the power to “order

any entity from whom the debtor receives income to pay all or any part of such

income to the trustees.” 11 U.S.C. § 1325(c). This provision also conflicts with § 407

under circumstances where a court orders the SSA to send a debtor’s social security

payments to the bankruptcy trustee. See In re Buren, 725 F.2d at 1081. 

Due to these inconsistent provisions, courts have struggled to determine when

social security proceeds should be included in a debtor’s bankruptcy estate. Some

courts have held Congress implicitly repealed 42 U.S.C. § 407 by enacting the

Bankruptcy Reform Act of 1978. See Devall, 704 F.2d at 1518; Toson, 18 B.R. at 373

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We need not consider the legislative history behind the amendment because the

language of the statute is unambiguous and clear on its face. See Owner-Operator

Indep. Drivers Ass’n v. United Van Lines, LLC, 556 F.3d 690, 693 (8th Cir. 2009)

(“In the usual case, if ‘the statute’s language is plain, the sole function of the courts

is to enforce it according to its terms,’ without reference to its legislative history.”

(quoting United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989))).

However, at least some members of Congress were concerned bankruptcy courts had

ordered the SSA to send debtors’ social security payments directly to trustees. See

H.R. Rep. No. 98-25, pt. 1, at 82-83 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 302

(“Based on the legislative history of the Bankruptcy Reform Act of 1978, some

bankruptcy courts have considered social security and SSI benefits listed by the debtor

to be income for purposes of a Chapter XIII bankruptcy and have ordered SSA in

several hundred cases to send all or part of a debtor’s benefit check to the trustee in

bankruptcy. Your committee’s bill specifically provides that social security and SSI

benefits may not be assigned notwithstanding any other provisions of law,

including . . . the ‘Bankruptcy Reform Act of 1978.’”). 

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(listing cases). The Eleventh Circuit determined, in Walker v. Treadwell (In re

Treadwell), 699 F.2d 1050, 1052 (11th Cir. 1983), that § 407 is merely an exemption

provision which the debtor must affirmatively claim. As a consequence, debtors who

elect the state and federal exemptions other than those set forth in 11 U.S.C. § 522(d)

may use 42 U.S.C. § 407 to preclude both past and future social security payments.

See Treadwell, 699 F.2d at 1052. Under the Eleventh Circuit’s interpretation, § 407

is inapplicable to those debtors who elect the exemptions set forth under 11 U.S.C.

§ 522(d). See id. This creates an unusual result because debtors choosing the

exemptions listed in § 522(d) may exempt future social security payments under 11

U.S.C. § 522(d)(10)(A), but no protection is provided to social security payments

which have already been received by the debtor. 

In 1983, Congress reacted to court decisions limiting the scope of the Social

Security Act by amending § 407. Congress added subsection (b) which states, “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.” 42 U.S.C. § 407(b).2

 This

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amendment did little to clarify the interplay between § 407 and the Bankruptcy Code,

and courts have failed to interpret the applicable provisions consistently. Compare In

re Lazin, 217 B.R. 332, 334 (Bankr. M.D. Fla. 1998) (finding 42 U.S.C. § 407 is an

exemption provision, which may be claimed, only so long as the debtor does not also

claim the exemption under 11 U.S.C. § 522(d)); with In re Frazier, 116 B.R. 675, 678-

79 (W.D. Wis. 1990) (holding 11 U.S.C. § 522(d)(10) should be interpreted as

exempting both past and future social security payments in an effort to harmonize

§ 407 with the Bankruptcy Code).

D. Proper Resolution

The Sixth Circuit, in In re Buren, 725 F.2d at 1085-87, conducted a thorough

analysis of the impact of § 407 on the Bankruptcy Code. In re Buren involved seven

consolidated cases in which debtors receiving social security disability payments filed

voluntary petitions under Chapter 13. See id. at 1081. In each case, the debtor

informed the bankruptcy court the social security benefits constituted regular income,

as required to qualify for Chapter 13. See id. The bankruptcy court ordered the

government to send the social security benefits directly to the trustee, and on appeal,

the district court affirmed. See id. The Sixth Circuit reversed, concluding § 407

“specifically prevents judicial intrusion into the benefit payment process,” and

“Chapter 13 was never intended to allow bankruptcy courts to compel the [SSA] to

pay debtor’s social security benefits directly to the trustee.” Id. at 1086, 1087. The

Sixth Circuit noted the Bankruptcy Code explicitly repealed and modified numerous

statutory provisions, yet failed to include § 407 in the list of those provisions. See id.

at 1085, 1087. The Sixth Circuit criticized the district court’s finding that to interpret

§ 407 to prohibit the taking of social security proceeds would “[r]emove[] social

security recipients from the purview of Chapter 13.” Id. at 1085 (quoting In re Buren,

6 B.R. 744, 749 (M.D. Tenn. 1980)). The appellate court reasoned that § 407 “leaves

unimpaired Congress’ desire to open Chapter 13 to social security recipients,”

because, “[a]s a practical matter, a willing debtor can simply sign his check over to the

trustee.” Id. at 1086; see also Combustion Fed. Credit Union v. Barron (In re Barron),

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85 B.R. 603, 607 (Bankr. N.D. Ala. 1988) (“The removal of the court’s power to

enforce a benefits deduction order against the [SSA] does not prevent a debtor from

consummating a successful plan of reorganization under [Chapter 13], under which

the debtor would make payments to the trustee.”). 

Although Carpenter’s case here involves a Chapter 7 bankruptcy, as opposed

to a Chapter 13 bankruptcy, we believe In re Buren is instructive. As recognized by

the Sixth Circuit, § 407 does not contain any qualifying language. It explicitly

demands that no past or future social security payments may be subject to the

operation of any bankruptcy law. See 42 U.S.C. § 407(a). Section 407 also instructs

that it is not to be limited by any other provision of law, without express reference to

§ 407. See id. § 407(b). If we were to hold, as the bankruptcy court did in this case,

that § 407 is a mere exemption which may not be claimed if the debtor instead elects

the exemptions set forth in 11 U.S.C. § 522(d), then we would also be interpreting

§ 407 contrary to the express language of § 407, saying the scope of § 407’s

protection is limited. See In re Barron, 85 B.R. at 606. “This interpretation of the

intent of Congress is untenable because the language of the statute expresses an intent

that social security benefits are to be encapsulated with a total shield from the

bankruptcy laws.” Id. 

We therefore hold, in accord with the BAP’s decision, that § 407 operates as

a complete bar to the forced inclusion of past and future social security proceeds in

the bankruptcy estate. See Carpenter II, 408 B.R. at 246-49; see also In re Buren, 725

F.2d at 1086 (noting “social security payments only become part of a debtor’s estate

if he chooses to include them”). We conclude § 407 must be read as an exclusion

provision, which automatically and completely excludes social security proceeds from

the bankruptcy estate, and not as an exemption provision which must be claimed by

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We recognize it is not easy to reconcile our interpretation of § 407 with the

provision in the Bankruptcy Code which states that a debtor may elect to exempt

“[t]he debtor’s right to receive . . . a social security benefit, unemployment

compensation, or a local public assistance benefit.” 11 U.S.C. § 522(d)(10)(A). As

discussed above, there is no way to construe § 407 in a manner which would not

conflict with the Bankruptcy Code. The bankruptcy court in In re Barron, 85 B.R. at

606, dismissed the discrepancy, reasoning “the addition of subsection (b) to the antiassignment statute (42 U.S.C. § 407) by the 1983 amendment, is the later expression

of the will of Congress.” The Sixth Circuit observed “sections 522(b)(2)(A) and

522(d)(10) are hortatory reaffirmations of the uncontested fact that social security

payments only become part of a debtor’s estate if [the debtor] chooses to include

them.” In re Buren, 725 F.2d at 1086. Further, the Supreme Court has found these

exemptions should not be deemed “surplusage” if the exemption provision excludes

a broader category of interests than those which are excluded from the bankruptcy

estate altogether. See Patterson v. Shumate, 504 U.S. 753, 762-63 (1992).

Section 522(d)(10)(A) clearly exempts more than just social security payments from

the SSA, and therefore, is not necessarily inconsistent with our interpretation of the

proper application of the statutes.

4

Such a holding does not deny social security recipients the opportunity to file

for relief under Chapter 13 of the Bankruptcy Code. 

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the debtor.3

 See 42 U.S.C. § 407; 4 Alan N. Resnick & Henry J. Sommer, Collier on

Bankruptcy ¶ 522.09[10][a] n.76 (16th ed. 2010) (“Congress amended 42 U.S.C.

§ 407 to clarify that the inalienability of Social Security benefits was not repealed by

the Bankruptcy Code, so that such benefits should not even become part of the

bankruptcy estate.”).4

III. CONCLUSION

We affirm the judgment of the BAP reversing the bankruptcy court.

______________________________

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