Court Opinion

ID: 4152069
Source: CourtListenerOpinion
Date Created: 2017-03-13 17:01:26.992818+00
Date Added: 2024-06-11T14:37:45.394561
License: Public Domain

FILED
                                                            MAR 10 2017
 1                         NOT FOR PUBLICATION
 2                                                      SUSAN M. SPRAUL, CLERK
                                                          U.S. BKCY. APP. PANEL
                                                          OF THE NINTH CIRCUIT
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )      BAP No. CC-16-1347-TaFC
                                   )
 6   ROSALINDA T. BUENVIAJE,       )      Bk. No. 2:16-bk-15191-VZ
                                   )
 7                  Debtor.        )
     ______________________________)
 8                                 )
     LETICIA L. CHARNETSKY;        )
 9   VICTOR C. CHARNETSKY; THE     )
     FAMILY TRUST OF VICTOR C.     )
10   CHARNETSKY AND LETICIA L.     )
     CHARNETSKY,                   )
11                                 )
                    Appellants,    )
12                                 )
     v.                            )      MEMORANDUM*
13                                 )
     ROSALINDA T. BUENVIAJE,       )
14                                 )
                    Appellee.      )
15   ______________________________)
16              Argued and Submitted on February 23, 2017
                         at Pasadena, California
17
                             Filed – March 10, 2016
18
              Appeal from the United States Bankruptcy Court
19                for the Central District of California
20      Honorable Vincent P. Zurzolo, Bankruptcy Judge, Presiding
21
     Appearances:     Eric V. Anderton of Catanzarite Law Corporation
22                    argued for appellants; Nicholas Watts Gebelt,
                      Ph.D. argued for appellee.
23
24
25
26        *
             This disposition is not appropriate for publication.
27   Although it may be cited for whatever persuasive value it may
     have (see Fed. R. App. P. 32.1), it has no precedential value.
28   See 9th Cir. BAP Rule 8024-1(c)(2).
 1   Before:     TAYLOR, FARIS, and CLEMENT,** Bankruptcy Judges.
 2
 3                               INTRODUCTION
 4        Chapter 111 debtor Rosalinda Buenviaje receives social
 5   security benefits; she deposits them into a segregated bank
 6   account.    After filing a voluntary chapter 11 petition, Debtor
 7   claimed the full amount in that bank account as exempt.         The
 8   bankruptcy court overruled Appellants’ objection to the
 9   exemption based on its interpretation of California law.         We
10   disagree with the bankruptcy court’s rationale, but we agree
11   that the objection lacks merit.       As a result, we AFFIRM.
12                                   FACTS
13        Debtor filed a voluntary chapter 11 petition.       On
14   Schedule A/B, she listed $30,000 in a Chase Bank deposit account
15   (the “SSI Account”).    On Schedule C, she claimed the full amount
16   in the SSI Account as exempt under California Code of Civil
17   Procedure (“CCP”) § 703.140(b)(10)(A).
18        Debtor’s § 341(a) creditors’ meeting was continued until
19   June 24, 2016, and a review of the entire docket indicates that
20   it concluded on that date.2    Debtor later, on July 7, 2016,
21
22        **
             The Hon. Fredrick E. Clement, United States Bankruptcy
23   Judge for the Eastern District of California, sitting by
     designation.
24
          1
             Unless otherwise indicated, all chapter and section
25   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
     All “Rule” references are to the Federal Rules of Bankruptcy
26
     Procedure.
27        2
               We exercise our discretion to take judicial notice of
28                                                        (continued...)

                                       2
 1   amended her Schedule C, but she did not amend her claim of
 2   exemption in the SSI Account in any respect.
 3        On July 26, 2016, Appellants objected to four of Debtor’s
 4   claimed exemptions, including, as relevant here, her exemption
 5   of the SSI Account.   They argued that CCP § 703.140(b)(10)(A)
 6   did not apply because it exempted only the future right to
 7   receive payments and did not exempt payments already received.
 8        Debtor, naturally, opposed.      First, she argued that nothing
 9   in CCP § 703.140(b)(10)(A) “limits its protection to the right
10   to receive future social security payments.     A debtor can exempt
11   money already received as a social security benefit.”     Second,
12   she contended that she established the SSI Account specifically
13   for use with her social security income, explained that she
14   deposited her social security income into the SSI Account, and
15   argued that on the petition date the money in the SSI Account,
16   therefore, was exempt.
17        In reply, Appellants augmented their original argument with
18   the observation that, if the California legislature had intended
19   to exempt more than future social security income, it would have
20   included language similar to that found in CCP § 703.140(b)(11).
21   That statute provides an exemption not only for the “debtor’s
22   right to receive [certain payments]” but also for “property that
23   is traceable to [the payment]”.
24        At the hearing on the exemption objections, Debtor’s
25
26        2
           (...continued)
27   documents electronically filed in the underlying bankruptcy
     case. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood),
28   293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).

                                       3
 1   counsel added a “couple of things” to his client’s opposition.
 2   Hr’g Tr. (Sept. 20, 2016) 5:12-14.      He started: “First off,
 3   counsel is correct with the – with respect to the Social
 4   Security and there is a different statute that protects
 5   prepetition paid Social Security.      It’s 42 U.S.C.
 6   Section 407(a).   And so there’s a simple solution to dealing
 7   with that.   I can simply amend Schedule C to apply that . . . .”
 8   Hr’g Tr. 5:14-19.   The bankruptcy court clarified: “Are you now
 9   abandoning the argument that 703.140(b)(10)([A]) does not
10   include Social Security benefits that have been paid?”      Hr’g Tr.
11   7:5-7.   “No,” started Debtor’s counsel, but the bankruptcy court
12   interjected: “You’re just saying there’s also a federal
13   exemption, though?”    Hr’g Tr. 7:8-10.    Debtor’s counsel agreed:
14   “Exactly.”   Hr’g Tr. 7:11.
15        After further argument, the bankruptcy court ruled on other
16   exemptions not relevant to this appeal and then turned to the
17   SSI Account objection:
18        As to the objection as to the Social Security
          benefits, again, there’s nothing in the statute that
19        limits it to benefits -- Social Security benefits that
          are to be provided or to be received, as opposed to
20        Social Security benefits that have been received, as
          well as those coming in the future. I have evidence
21        from the debtor in response to the motion that she has
          segregated her Social Security benefits and that
22        everything in that account is only Social Security
          benefits.
23
24   Hr’g Tr. 10:19–11:2.    The bankruptcy court continued: “So based
25   upon the exemption claim, there is no basis to disallow that
26   claim of exemption and the moving party cannot cite me to any
27   legal authority that supports its interpretation of the limits
28   as asserted.”   Hr’g Tr. 11:3–6.

                                        4
 1        The bankruptcy court then entered an order overruling the
 2   objection.   Appellants timely appealed.
 3                               JURISDICTION
 4        The bankruptcy court had jurisdiction under 28 U.S.C.
 5   §§ 1334 and 157(b)(2)(B).    We have jurisdiction under 28 U.S.C.
 6   § 158.
 7                                  ISSUE
 8        Whether the bankruptcy court erred in overruling
 9   Appellants’ objection and upholding Debtor’s claimed exemption
10   in the SSI Account.
11                            STANDARD OF REVIEW
12        We review de novo a debtor’s right to claim an exemption.
13   Elliot v. Weil (In re Elliot), 544 B.R. 421, 430 (9th Cir. BAP
14   2016).   We review the bankruptcy court’s factual findings for
15   clear error.   Id.   A factual finding is clearly erroneous if
16   illogical, implausible, or without support in inferences that
17   may be drawn from the facts in the record.    See
18   TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832
19   (9th Cir. 2011) (citing United States v. Hinkson, 585 F.3d 1247,
20   1262 (9th Cir. 2009) (en banc)).     And we may affirm on any basis
21   in the record.   Bill v. Brewer, 799 F.3d 1295, 1299 (9th Cir.
22   2015).
23                                DISCUSSION
24        On appeal, the parties repeat the arguments they raised
25   below, and there is no factual dispute on the key point: they
26   agree that the SSI Account contains exclusively social security
27   proceeds received before Debtor filed bankruptcy.    We adopt the
28   undisputed facts as agreed to by the parties, and we affirm but

                                      5
 1   not for the reasons stated by the bankruptcy court.
 2        A.   The Social Security proceeds never entered the
               bankruptcy estate.
 3
 4        A debtor is required to list all of her property in her
 5   schedules.   Hamilton v. State Farm Fire & Cas. Co., 270 F.3d
6   778, 785 (9th Cir. 2001) (“The Bankruptcy Code and Rules impose
 7   upon the bankruptcy debtors an express, affirmative duty to
 8   disclose all assets . . . .” (internal quotation marks
 9   omitted)).   And generally, “[w]hen a debtor files a Chapter 7
10   bankruptcy petition, all of the debtor’s assets become property
11   of the bankruptcy estate, see 11 U.S.C. § 541, subject to the
12   debtor’s right to reclaim certain property as ‘exempt,’
13   § 522(l).”   Schwab v. Reilly, 560 U.S. 770, 774 (2010).
14        In some cases, however, an asset — while listed on a
15   debtor’s schedules — never becomes an estate asset.       And here,
16   while the Debtor does little to advance or develop the point,
17   she argues that 42 U.S.C. § 407 protects the SSI Account from
18   inclusion in her bankruptcy estate.       In her appellate brief,
19   Debtor quotes the relevant language in 42 U.S.C. § 407(a).           And
20   at the hearing before the bankruptcy court, her counsel
21   generally argued that the statute “takes Social Security off the
22   table, period.”   Hr’g Tr. 7:13-14.      Appellants respond but fail
23   to squarely confront the issue.       Neither party cites the
24   extensive and compelling case law discussing the topic.         In
25   resolving this issue, we follow the Eighth Circuit, its BAP, and
26   numerous other persuasive authorities.
27        We hold that 42 U.S.C. § 407 “operates as a complete bar to
28   the forced inclusion of past and future social security proceeds

                                       6
 1   in the bankruptcy estate.”   Carpenter v. Ries (In re Carpenter)
 2   (“Carpenter III”), 614 F.3d 930, 936 (8th Cir. 2010).    We, thus,
 3   agree that this federal statute creates an exception to
 4   the general rule of § 541 and operates as a bar to the forced
 5   inclusion of social security proceeds, and thus the SSI Account,
 6   in the bankruptcy estate.
 7        We start with the relevant statutory texts.    Section 541
 8   provides that the bankruptcy estate is comprised of “all legal
 9   or equitable interests of the debtor in property as of the
10   commencement of the case.”   11 U.S.C. § 541(a)(1).   But
11   42 U.S.C. § 407 provides, as relevant here:
12        (a) The right of any person to any future payment
          under this subchapter shall not be transferable or
13        assignable, at law or in equity, and none of the
          moneys paid or payable or rights existing under this
14        subchapter shall be subject to execution, levy,
          attachment, garnishment, or other legal process, or to
15        the operation of any bankruptcy or insolvency law.
16        (b) No other provision of law, enacted before, on, or
          after April 20, 1983, may be construed to limit,
17        supersede, or otherwise modify the provisions of this
          section except to the extent that it does so by
18        express reference to this section.
19   42 U.S.C. § 407 (emphasis added).
20        These statutes conflict; and “courts have struggled to
21   determine when social security proceeds should be included in a
22   debtor’s bankruptcy estate.”   Carpenter III, 614 F.3d at 934
23   (citing cases).
24        The Sixth Circuit determined that the Bankruptcy Reform Act
25   of 1978 did not impliedly repeal 42 U.S.C. § 407.     Hildebrand v.
26   Soc. Sec. Admin. (In re Buren), 725 F.2d 1080, 1081 (6th Cir.
27   1984).   Accordingly, the Sixth Circuit concluded that the
28   bankruptcy court could not order the government to send social

                                     7
 1   security benefits directly to a chapter 13 trustee.       Id.
 2   at 1087.   The Eighth Circuit, in accord with the Eighth Circuit
 3   BAP, came to a similar conclusion in the chapter 7 context; it
 4   affirmed the BAP’s determination that a chapter 7 debtor’s
 5   social security proceeds “must be excluded from the bankruptcy
 6   estate pursuant to 42 U.S.C. § 407 and may be retained by the
 7   debtor.”   Carpenter III, 614 F.3d at 933.3
 8        We agree.    Section 407 of Title 42 is unqualified: “It
 9   explicitly demands that no past or future social security
10   payments may be subject to the operation of any bankruptcy law.”
11   Carpenter III, 614 F.3d at 936.       Further, 42 U.S.C. § 407(b)
12   provides that only laws expressly referring to it may limit its
13   application.     And, as the Eighth Circuit BAP explained, “no
14   provision in the Bankruptcy Code makes express reference to
15
16
          3
             We do not find the Eleventh Circuit’s Walker v.
17   Treadwell (In re Treadwell), 699 F.2d 1050 (11th Cir. 1983),
18   decision compelling. Carpenter III, 614 F.3d at 935; Carpenter
     v. Ries (In re Carpenter) (“Carpenter II”), 408 B.R. 244, 248-49
19   (8th Cir. BAP 2009) (distinguishing Treadwell on the facts);
     In re Radford, 265 B.R. 827, 830 (Bankr. W.D. Mo. 2000). Even
20   if we did find Treadwell persuasive, it would not apply to this
21   case. The Eleventh Circuit reasoned that 42 U.S.C. § 407 was
     essentially an exemption:
22
          This analysis of section 522 illustrates that the
23        exemption from the operation of the bankruptcy law
24        provided by 42 U.S.C.A. § 407 is not absolute. If a
          debtor chooses the Bankruptcy Code exemptions, he
25        gives up the protection of section 407, freeing
          accumulated social security benefits for the
26        satisfaction of creditors.
27
     In re Treadwell, 699 F.2d at 1052.       California debtors may not
28   claim the federal exemptions.

                                       8
 1   [42 U.S.C.] § 407 . . . .”     Carpenter II, 408 B.R. at 248.   See
 2   also 4 Collier on Bankruptcy ¶ 522.09[10][a] n.76 (Alan N.
 3   Resnick & Henry J. Sommer, eds., 16th ed. 2010) (“Congress
 4   amended 42 U.S.C. § 407 to clarify that the inalienability of
 5   Social Security benefits was not repealed by the Bankruptcy
 6   Code, so that such benefits should not even become part of the
 7   bankruptcy estate.    Social Security benefits are protected by
 8   42 U.S.C. § 407 even after they have been received and placed in
 9   a bank account.” (citation omitted)).
10        Appellants contend that Debtor waived her ability to claim
11   a 42 U.S.C. § 407 exemption because she did not assert it in her
12   schedules.   We disagree.    If 42 U.S.C. § 407 applies, as we hold
13   it does, then the social security benefits are excluded from and
14   never enter the estate.     A debtor claims exemptions in estate
15   property.    Debtor, thus, did not need to assert a “42 U.S.C.
16   § 407 exemption” in the SSI Account.     See In re Franklin,
17   506 B.R. 765, 776 (Bankr. C.D. Ill. 2014) (“It follows that
18   since a debtor's right to receive future social security
19   benefits and proceeds traceable to benefits already paid do not
20   become property of the bankruptcy estate, there is no need to
21   claim them as exempt, as the exemption process applies only to
22   property of the estate.”).     42 U.S.C. § 407 creates an exclusion
23   — not an exemption.
24        Appellants’ reliance on In re Varney, 449 B.R. 411 (Bankr.
25   D. Idaho 2011) (Pappas, J), is not persuasive; the case is
26   legally and factually distinguishable.
27        First, although Varney discusses social security disability
28   benefits, it does not consider the effect of 42 U.S.C. § 407.

                                       9
 1   Cf. In re Welsh, 465 B.R. 843, 859–60 (9th Cir. BAP 2012)
 2   (Pappas, J., dissenting) (“That 42 U.S.C. § 407(a) may place
 3   Social Security benefits out of the reach of, for example, a
 4   hungry chapter 7 bankruptcy trustee trying to assemble funds to
 5   distribute to creditors is no justification to disregard the
 6   existence of such income in judging a debtor’s good faith in
 7   proposing a particular plan under chapter 13.”).    Its emphasis
 8   on the need for disclosure and claim of exemption in even
 9   “unquestionably exempt” estate assets does not aid Appellants
10   where the SSI Account was not an estate asset.
11        Second, factually, it involved a debtor who failed to
12   schedule or exempt an interest in the social security benefits
13   until after the chapter 7 trustee brought a turnover motion.
14 449 B.R. at 415.   Here, Debtor disclosed the SSI Account at case
15   initiation.   Debtor was required to schedule the SSI Account; it
16   was her asset even if not an asset of the estate.
17   In re Franklin, 506 B.R. at 776 (“[N]otwithstanding the
18   exclusionary effect of § 407, debtors are still required to
19   disclose social security proceeds and their right to receive
20   future benefits in their schedule of personal property.    The
21   disclosure requirement, by itself, does not subject such
22   benefits to the operation of the bankruptcy laws.” (citation
23   omitted)).
24        Appellants also argue that the funds lost their status as
25   social security payments when Debtor deposited them into an
26   account jointly in the name of her son.   Debtor counters that
27   they waived this argument on appeal by failing to raise it
28   before the bankruptcy court.   Appellants do not say that they

                                     10
 1   raised it below (they did not), but they contend that we may
 2   consider a pure question of law and that Debtor does not dispute
 3   that the account is a joint account.4    They further suggest that
 4   we may consider it in connection with Debtor’s 42 U.S.C. § 407
 5   argument.    We disagree.   Central to the bankruptcy court’s
 6   decision was a finding that the funds in the account were social
 7   security benefits: “I have evidence from the debtor in response
 8   to the motion that she has segregated her Social Security
 9   benefits and that everything in that account is only Social
10   Security benefits.”    Hr’g Tr. 10:24-11:2.   Appellants’ “purely
11   legal” point could thus undercut the bankruptcy court’s factual
12   findings.5   We thus decline to consider the argument because it
13   was raised for the first time on appeal.      See Kaass Law v. Wells
14   Fargo Bank, N.A., 799 F.3d 1290, 1293 (9th Cir. 2015).
15        Given the above, the social security proceeds never became
16   estate property; Debtor did not need to exempt them; and,
17
          4
18           By a separate motion submitted simultaneously with their
     reply, Appellants ask us to take judicial notice of Debtor’s
19   son’s bankruptcy petition. We grant the motion and take
     judicial notice of the filing of the petition, but not the truth
20
     of any facts asserted in it. Cf. Lee v. City of L.A., 250 F.3d
21   668, 690 (9th Cir. 2001).
          5
22           In Carpenter II, the Eighth Circuit BAP discussed when
     social security benefits lose the protection of 42 U.S.C.
23   § 407(a). 408 B.R. at 247–49 (considering Philpott v. Essex
24   County Welfare Board, 409 U.S. 413 (1973), and In re Treadwell).
     Here, the proceeds are in cash form and still available to
25   Debtor. If Appellants believe Debtor’s son has rights to the
     SSI Account, they may raise the matter in his bankruptcy case.
26   See id. at 249 (“It only makes sense that when the recipient of
27   social security benefits chooses to give away or spend those
     funds, such funds lose the protection of § 407 in the hands of
28   the person to whom they are paid.”).

                                       11
 1   correspondingly, Appellants’ objection to Debtor’s exemption had
 2   no legal import.    The bankruptcy court thus reached the proper
 3   result in overruling Appellants’ exemption objection.
 4        B.   Any error in the bankruptcy court’s decision was
               harmless.
 5
 6        Although we do not reach them, we acknowledge two
 7   intertwined issues that go to the propriety of the bankruptcy
 8   court’s decision on the merits.    First, Appellants’ contention
 9   that CCP § 703.140(b)(10)(A) does not exempt proceeds traceable
10   to social security payments is apt.    We find persuasive their
11   argument regarding the contrast of its language (exempting the
12   “right to receive”) with the language of CCP § 703.140(b)(11)
13   (exempting the debtor’s “right to receive, or property that is
14   traceable to”).    The difference in the statutory language
15   suggests that one exemption applies only to present or future
16   income while another includes an asset traceable to the proceeds
17   of prior distributions.    We acknowledge that California law is
18   silent on this point, but we are aided by cases analyzing the
19   identical language in the federal exemptions.    See Carpenter II,
20 408 B.R. at 249; In re Panza, 219 B.R. 95, 98 (Bankr. W.D. Pa.
21   1998); In re Williams, 181 B.R. 298, 301 (Bankr. W.D. Mich.
22   1995) (“It appears that Congress intended not to exempt
23   traceable assets under § 522(d)(10) because it did not
24   explicitly do so.    The fact that such language is contained in
25   § 522(d)(11) underscores that Congress knew how to include
26   traceable assets in § 522(d)(10) had it desired to do so.”);
27   In re Treadwell, 699 F.2d at 1052.     The California legislature
28   also knew how to make clear that traceable assets are included

                                       12
 1   as exempt; it did so in CCP § 703.140(b)(11), but it did not do
 2   so in CCP § 703.140(b)(10).   That said, we need not and do not
 3   definitively decide this matter.
 4         Second and on the other hand, if we are incorrect in our
 5   determination that exemption of the SSI Account was unnecessary
 6   because it was not an asset of the estate but are correct that
 7   the bankruptcy court misapplied CCP § 703.140(b)(10), the
 8   bankruptcy court’s overruling Appellants’ exemption objection
 9   could be harmless error because the objection in the SSI Account
10   appears to be untimely.
11        Rule 4003 both directs debtors to list their § 522
12   exemptions on their schedules and outlines claim objection
13   procedures.   In order for an objection to an exemption to be
14   timely, it must be filed within 30 days after the creditors’
15   meeting held under § 341(a) is concluded or within 30 days after
16   any amendment to the list or supplemental schedules is filed,
17   whichever is later.   Fed. R. Bankr. P. 4003(b)(1).   Here, the
18   § 341(a) meeting likely concluded on June 24, and Appellants
19   filed their objection on July 27, 2016, 32 days later.    Debtor’s
20   July 7, 2016 amendment did not restart the objection period as
21   to the SSI Account because that claim of exemption was not
22   modified.   Bernard v. Coyne (In re Bernard), 40 F.3d 1028, 1032
23   (9th Cir. 1994) (new 30-day objection period runs “only with
24   respect to the exemptions added via the amendment”).
25        Unless a party in interest objects, a debtor’s claimed
26   exemption “is exempt.”    11 U.S.C. § 522(l).   This has been
27   referred to as an “exemption by default.”   Heintz v. Carey
28   (In re Heintz), 198 B.R. 581, 583 (9th Cir. BAP 1996).    Thus,

                                      13
 1   through exemption, assets leave the estate and are no longer
 2   subject to creditors’ claims.    Owen v. Owen, 500 U.S. 305, 308
 3   (1991); 11 U.S.C. § 522(c).    Here, the timing of the objection
 4   to exemption may have the same impact as our determination under
 5   42 U.S.C. § 407; at the time of objection, the SSI Account was
 6   not an estate asset.
 7        At oral argument, Debtor’s counsel stated that they saw the
 8   timeliness issue but decided not to raise it; nor did they raise
 9   it in their appellate briefs.    Given our decision above, we need
10   not decide whether § 522(l) and Rule 4003(b) limit our ability
11   to review the merits of an untimely exemption objection even
12   when the debtor fails to raise timeliness.
13                                 CONCLUSION
14        Based on the foregoing, we AFFIRM.
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