Source: https://www.all-bankruptcy.com/About/Blog-Articles/entryid/15/a-debt-to-modernity
Timestamp: 2019-04-23 02:12:04+00:00

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The personal exemptions granted to debtors under Minnesota law have grown antiquated in many respects, failing to take into account changes in values, technology and our collective sense of what constitutes “injury.” It’s time to refashion those laws for the realities of the 21st Century.
The rotary phone has been replaced by the smart phone. Electric cars are slowly displacing the internal combustion engine. Pacemakers and implants of all kinds have replaced blood-letting and the use of leeches in medical treatments.
Unfortunately our laws are not as efficient in keeping up with change. Society’s plasticity in generating new realities far outpaces our plodding legislative process. The result can be statutory provisions mired in pre-modern concepts, leaving Minnesotans beholden to outmoded law.
Where debt is concerned, the fishes in the net to which Shakespeare referred are found in Minnesota Statutes Sections 550.37, dealing with personal property exemptions, 550.39, Exemption of Insurance Policies and Minn. Stat. §176.175 Right to Compensation, Award. These are analogs in a digital age.
Deficiencies exist in these statutes that should be corrected. This article will examine these issues, and suggest changes that should be considered. These issues will be examined in the context of judicial holdings analyzing the provisions of these statutes. Few Minnesota appellate cases exist. However, issues regarding exemptions arise frequently in the bankruptcy context, and there are several Bankruptcy Court for the District of Minnesota case holdings that are instructive. It should be stressed, however, that this is not a bankruptcy issue, that these issues affect Minnesotans whether they file bankruptcy or not. Think of bankruptcy as the canary in the mineshaft.
Case after case interprets this section narrowly, reserving the exemption for actual physical injuries. The section as it exists is narrow and lacks the flexibility to account for evolving social perception about the types of injury that are worthy of compensation and thus exemptible.
The Chapter 7 trustee objected to the exemption, and the bankruptcy court sided with the trustee, holding that Keenan’s recovery because of the sexual abuse was not exempt because the harm was not a physical harm.
The bankruptcy judge found for the trustee, stating that Crawford’s “rights of action, for the most part, arose from federal and state statutes that were designed to remedy those harmed by discrimination.
Taken together, the cases of Keenan, Crawford, and Ezaki demonstrate how social judgments about the kinds of harm that merit compensation have outstripped statutory immobility. Lead-footed statutes simply cannot keep up with community evolution.
This statutory section is also deficient because of its narrow focus on protecting a “claim,” though not proceeds traceable to a claim. Christian v. Dulas, 95 F.3d 703 (8th Cir. 1996) is a federal case originating in bankruptcy court that highlights this problem.8 In Dulas, one of the married debtors had an annuity received as part of a settlement for a personal injury claim. They filed for Chapter 7 and claimed the annuity exempt under 550.37 Subd. 22. The Chapter 7 trustee objected to the claimed exemption, but the bankruptcy court found the annuity to be exempt.
Minn. Stat 550.37 Subd. 20 allows a debtor to exempt certain assets if traceable to exemptions provided under Subd. 9, Exempt Property Claims, Subd. 10, Insurance Proceeds, Subd. 11, Beneficiary associations, Subd. 15, Minor child earnings, or Subd. 24, Employee benefits. There is no distinction between these various Subd.s and Subd. 22 warranting the exclusion of personal injury proceeds from being exempted once received.
2. Minn Stat 550.37 Subd. 4 Personal Goods. Subsection b states that the “[h]ousehold furniture, household appliances, phonographs, radio and television receivers of the debtor and the debtor’s family….” are exempt up to $10,350.
In re Irwin interprets this section.9 The Chapter 7 trustee objected to the debtor’s exempting a computer and a lawnmower, advancing the position that these items “do not fall within the commonly understood definition of a household appliance” and thus are not exempt.
The bankruptcy court judge did the best she could to interpret a poorly worded statute, given rules of statutory construction. There is no reason that any other judge—in state court or in bankruptcy court—would rule any differently today.
When Lucy Young Johnson filed her Chapter 7 in 2003, she exempted $26,000 in proceeds of a workers compensation settlement she had already received using 176.175. The trustee objected, arguing that the statute protects a claim, and not proceeds received in settlement of a claim. The court agreed with the trustee.
At any rate, 175.176 has not been amended to make clear that a work comp recovery as well as a claim should be protected. Rosenbaum’s decision has little if any binding effect. The infirmity in the vocabulary of 175.176 remains.
4. Minn. Stat. 550.39 Exemption of Insurance Policies. In re Reiland interprets 550.39.12 Mary Reiland filed Chapter 7 bankruptcy in 2005. She claimed an ongoing right to receive payments under a private disability insurance policy exempt under 550.39.
There are a few asset categories for which Minnesota has no specific exemption to protect.
1. Health Savings Accounts (HSAs). An HSA is a medical payment account owned by an individual, and linked to high deductible health insurance policies. HSAs were created in 2003 with the enactment of the Medicare Prescription Drug, Improvement, and Modernization Act.
An HSA is simply a trust account. The account beneficiary has unrestricted access to the funds. The account beneficiary may receive certain tax benefits if the beneficiary uses the funds for medical expenses, but that beneficial taxation does not make the account a health insurance plan regulated by state law. An HSA is not insurance. As the trustee aptly pointed out, an HSA is just a tax-preferred place to park money for use in paying health care expenses that are not covered by insurance.
2. A “wildcard” exemption. A wildcard exemption protects from creditors any property of whatever kind, for which there is no other specific exemption, up to a certain dollar limit. This allows a debtor to protect any asset, up to a modest limit, that he or she finds particularly important.
Examples of assets for which there is no statutory exemption would include a tax refund, or money on deposit in bank accounts. In other words, tax refunds, or money in a bank, are assets that are owned by an individual, but there is no Minnesota statutory exemption that protects them from seizure by a creditor, or for the benefit of a creditor.
Though 32 states—and federal law—provide for wildcard exemptions, “progressive” Minnesota does not. Amounts for wild-card exemptions are typically relatively restrained, usually between $5,000 and $12,000.
In an age of changing property interests, a wildcard exemption is particularly important. Until statutes catch up a wildcard exemption cold be used to protect emerging property interests such as health savings accounts.
Minnesotans have family heirlooms or may have exchanged a wedding ring before or after a wedding ceremony.
A few minor portions of 550.37 are simply so outmoded that they serve no contemporary purpose, and should be repealed.
Subd. 2 exempts “[t]he family Bible….” In this era of multiculturalism, exempting one faith’s holy writing and not another’s is incompatible with modern mores. It is remote in the extreme that a creditor would attempt to execute a judgment by seizing a Koran or a Bhagavad Gita, but the existence of the distinction is unseemly and perhaps unconstitutional.
The same argument hold true for Subd. 3, which exempts “[a] seat or pew in any house or place of public worship….” Why is a pew or seat any more worthy of creditor protection than a prayer rug?
Changing times necessitate changing the rules by which we organize society. The laws regarding exemptions in Minnesota are in some cases outmoded, in others deficient, in providing protection to needed assets. Some are simply irrelevant and should be eliminated. We need to tend to the fish in the net.
Ronald J. Lundquist has practiced exclusively in Chapter 7 and Chapter 13 bankruptcy for the past 15 years. He is a member of the Minnesota CLE Bankruptcy Institute Planning Committee and a former member of both the Rules Committee for the Bankruptcy Court of Minnesota and the Practice Committee for the Bankruptcy Court of Minnesota. His practice is located in Eagan.
1 Minnesota Constitution Article 1 Section 12.
2 This section was added to 550.37 in 1980 and has remained unchanged since then.
3 In re Keenan, 443 B.R. 169 (Bankr. D. MN 2011).
5 In re Crawford, 208 B.R. 924 (Bankr. D. MN 1994).
6 See also In re Marshall, 208 B.R. 690 (Bankr. D. MN 1997), holding that a sexual harassment claim is not exemptible under Mn Stat 550.37 subd. 22 since the statute requires a physical injury. Marshall at 691.
7 In re Ezaki, 140 B.R. 747 (Bankr. D. MN 1992).
8 Christian v. Dulas, 95 F.3d 703 (8th Cir. 1996).
9 In re Irwin 232 B.R. 151 (Bankr. D. MN 1999).
10 In re Johnson, 300 B.R. 471 (Bankr. D. MN 2003).
11 Johnson v. Iannacone 314, B.R. 779 (D Minn 2004).
14 The issue of whether the statute was constitutional or not was certified to the Minnesota Supreme Court, but was rendered moot when the parties settled, resulting in the Reiland cases being vacated. See Reiland v. Sullivan, Nos. CIV.08-923(DSD), CIV.08-924(DSD), 2008 WL 4876758 (D. Minn. Nov 12, 2008). But the statute has not been changed.
16 See 11 U.S.C. §541(b)(7)(A)(ii).
17 Two points to note here. First, Leitch used federal exemptions in his case, but his case illustrates a deficiency in state law, regardless of the exemptions he used in his case. Secondly the Minnesota State Legislature has seen fit to protect accounts established to pay medical expenses for public employees, but not HSA accounts owned by private individuals. See. MN Stat 352.98 subd 8. excepting “Health Care Savings Plans” from claims of creditors.

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