Source: https://www.losangelesbankruptcylawyerblawg.com/category/exempt-property/
Timestamp: 2019-04-22 22:56:14+00:00

Document:
A debtor moved to dismiss her Chapter 7 bankruptcy case after the trustee sought to use half of a $5,000 monthly payment she received from her ex-spouse to pay creditors. The trustee claimed that half of the monthly payment, which was the debtor’s only reported source of income, was actually an asset under the terms of the divorce decree and was therefore part of the bankruptcy estate. The bankruptcy court granted the motion and dismissed the case. The Bankruptcy Appellate Panel (BAP) reversed, finding that dismissal of the case would prejudice the creditors. In re Grossman, No. NV-13-1325, memorandum (BAP 9th Cir., Feb. 4, 2014) (PDF file).
The central issue for the debtor was whether $2,500 of the $5,000 payment she received every month from her former spouse was spousal maintenance, which is an exempt form of income under bankruptcy law, or part of her share of the marital estate, which is a non-exempt asset. The settlement agreement between the debtor and her former spouse stated that she was entitled to $390,000 from the former spouse. He paid her $30,000 upon signing the agreement and began making monthly payments of $2,500 on February 1, 2005. This is known as an “equalization payment.” The full amount should be paid by 2017. He sends her an additional $2,500 per month, which all parties in the bankruptcy agree is spousal maintenance.
A bankruptcy judge in California considered a Chapter 7 trustee’s objection to a debtor’s exemption claim. The debtor claimed that a large retirement account was exempt from Chapter 7 liquidation under California law. The court identified two factual questions, but found that it first had to address a legal question: who has the burden of proof in an objection to an exemption claimed under state law? The court ultimately ruled that, while the objecting party usually has the burden of proof under federal law, the debtor bears this burden for exemptions under California law. It set the case for an evidentiary hearing on the exemption. In re Pashenee, No. 14-30386-5-7, opinion (Bankr. E.D. Cal., Jun. 8, 2015).
The debtor filed a Chapter 7 bankruptcy petition in October 2014. She claimed an individual retirement account (IRA) with a balance in excess of $380,000 as exempt in her schedules. She cited a provision of California law that states that payments from a pension, annuity, “or similar plan or contract on account of illness, disability, death, age, or length of service,” are exempt in a bankruptcy proceeding, with some exceptions, to the extent that payments are “reasonably necessary for the support of the debtor” and the debtor’s dependents. Cal. Code Civ. P. § 703.140(b)(10)(E).
The Chapter 7 trustee objected to the exemption and alleged that the debtor is required to prove that the IRA qualifies for an exemption and that the amount of the claimed exemption is “reasonably necessary” as stated in the statute. The trustee argued that the debtor has the burden of proof under state law. Cal. Code Civ. P. § 703.580(b). The debtor, citing federal bankruptcy rules, claimed that the trustee, as the objecting party, has the burden of proving that the debtor’s claimed exemptions are improper. Fed. R. Bankr. P. 4003(c). The court determined that it must resolve the burden of proof question before considering the exemption itself.
A married couple claimed exemptions in several annuity contracts in their Chapter 7 bankruptcy case. The trustee objected under state law, arguing that the debtors were only allowed to exempt a maximum of $250 in monthly payments from the annuities. The court disagreed, finding that state law gives it the authority to exempt the total amount of the annuity payments. In re Nichols, No. 14-60974-7, mem. dec. (Bankr. D. Mont., Jan. 12, 2015). Although the court applied Montana law in reaching its decision, California law has similar provisions that apply in bankruptcy cases.
The debtors filed for Chapter 7 bankruptcy in August 2014. They stated that the husband is retired and the wife is unemployed, and that they have total monthly income of just over $3,000. The monthly expenses listed in the debtors’ Schedule J was reportedly only $3.96 less than their stated income. The debtors’ income came from social security, VA disability, and five annuity contracts, according to the court. The husband inherited six annuity contracts from his mother. Their original monthly payment amount was $1,442.98. At the time of the bankruptcy court’s order, only five of the annuity contracts remained. One of them will continue payments for the husband’s lifetime, and the other three will continue payments until January 2016.
The trustee objected to the debtors’ claimed exemption of the annuity contracts, citing a state law provision that limits this sort of exemption to $250. Mont. Code § 33-15-514(1)(b). The trustee conceded that $250 of the monthly annuity payments were subject to exemption, but she argued that the remainder were not. She also claimed that a provision increasing the exemption amount to $350, found in § 33-15-415(1)(c), did not apply because the annuity contracts were the property of the bankruptcy estate. The trustee argued in the alternative that the husband’s monthly social security and VA income were greater than his one-half share of the debtors’ monthly expenses, and that the court therefore should not allow exemption of more than $250 of the annuity payments.
The U.S. Supreme Court ruled against the trustee in a Chapter 7 case who had obtained a bankruptcy court’s leave to pay attorney’s fees, incurred as a result of fraud by the debtor, from the debtor’s exempt assets. Law v. Siegel, No. 12-5196, slip op. (Sup. Ct., Mar. 4, 2014). While a court may impose other sanctions on a debtor for fraud and other misconduct, the court held that use of exempt assets in such a situation exceeds a bankruptcy court’s discretionary authority under 11 U.S.C. § 105(a).
The debtor filed a Chapter 7 bankruptcy petition in 2004. He listed a house with a value of $363,348 as his only asset, and claimed the $75,000 of that value was exempt under California law. Cal. Civ. Proc. Code § 704.730(a)(1). He also identified two liens encumbering the house held by Washington Mutual Bank for $147,156.52 and Lin’s Mortgage and Associates for $156,929.04. Since the sum of the two liens exceeded the claimed value of the house, the debtor alleged that the house had no equity.

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