Opinion
4:01CV3313
May 3, 2002
MEMORANDUM AND ORDER ON DEBTORS' APPEAL FROM BANKRUPTCY COURT'S ORDER SUSTAINING TRUSTEE'S OBJECTION
The debtors, Kenneth and Ann Dasher, appeal the bankruptcy court's decision sustaining the trustee's objection to their claim of exemption. The Honorable Timothy J. Mahoney, United States Bankruptcy Judge for the District of Nebraska, concluded that a pickup purchased pre-petition with the proceeds from the debtor Kenneth Dasher's pension plan was not an exempt asset. After carefully reviewing the record before me, I will affirm the decision of the bankruptcy court and dismiss the debtors' appeal.
Background
The debtor Kenneth Dasher was employed by the Lincoln Public Schools (hereinafter LPS) as a janitor from August 7, 1979, to December 29, 2000. Aff. of Vicki L. Frey ¶ 3 (filing 7, Ex. 2). Through this employment, Mr. Dasher accumulated a retirement pension under the provisions of the Nebraska School Employees Retirement Act. Id. ¶ 2; see Neb. Rev. Stat. Ann. §§ 79-901 to 79-977.03. On March 12, 2001, Mr. Dasher withdrew his entire pension in the gross amount of $37,845.18. Aff. of Vicki L. Frey ¶ 5 Ex. A (filing 7, Ex. 2); Aff. of Kenneth Dasher at Ex. B (filing 7, Ex. 1). On March 26, 2001, Mr. Dasher received a check in the amount of $29,177.27, representing the cash amount due after the deduction of taxes, and deposited all but $2,000 of this check into his checking account. Aff. of Kenneth Dasher ¶ 2 Ex. A, E (filing 7, Ex. 1); see Aff. of Vicki L. Frey ¶¶ 6, 7. Later that same day, Mr. Dasher, without consulting his bankruptcy counsel, used the proceeds of his pension fund to purchase a 2001 Ford F-150 pickup and maintenance plan for $20,747.00. Aff. of Kenneth Dasher ¶ 4 Ex. C, D, E (filing 7, Ex. 1). Mr. Dasher also used these proceeds to pay sales and personal property tax, and licencing and registration fees in the amount of $1,491.28. Id. ¶ 4 Ex. E, F.
In his affidavit, Mr. Dasher explains that he purchased the pickup because "[it] was his belief after talking to a social security representative, that such a purchase would assist him in qualifying for SSI benefits under Federal Social Security Law, by placing the exempt funds into property not utilized in the asset-based determination of entitlement to such funds." Aff. of Kenneth Dasher ¶ 4 (filing 7, Ex. 1).
On April 23, 2001, Kenneth and Ann Dasher filed jointly for Chapter 7 bankruptcy. Bankr. 1. In their original schedules, which were prepared and signed before Mr. Dasher purchased the pickup, the debtors listed the LPS pension on Schedule B. Id. at Schedule B; see also Aff. of Kenneth Dasher ¶ 1 (filing 7, Ex. 1). The debtors claimed this pension as exempt under § 25-1563.01 and § 84-1324 of the Nebraska Code. Bankr. 1 at Schedule C. On June 28, 2001, the debtors amended Schedule B to include the pickup and reduce the value of the LPS pension. Bankr. 5 at Amended Schedule B. The debtors also amended Schedule C to claim the pickup as exempt. Id. at Amended Schedule C. The Chapter 7 Trustee objected to this exemption, the debtors resisted the objection, and a hearing was held on August 20, 2001. Bankr. 7, 10, 25.
"Bankr. ___" refers to the Docket Entry on the docket sheet maintained by the Clerk of the Bankruptcy Court for the debtors' bankruptcy case, designated as Case No. BK01-41109.
The debtors later amended Schedules C and G to (1) claim the pickup as exempt under § 79-948 of the Nebraska Code, rather than § 84-1324; and (2) include the maintenance plan as an executory contract. See Bankr. 16, 17.
In a memorandum filed on October 17, 2001, the bankruptcy court concluded that (1) Mr. Dasher's interest in the LPS pension plan and its proceeds would not have been property of the bankruptcy estate; (2) Mr. Dasher converted the pension proceeds into personal property (i.e., the pickup) that was property of the estate; and (3) the pickup was not an exempt asset. Bankr. 19 at 2-3. Thus, the court entered an order sustaining the trustee's objection. Bankr. 18.
Standard of Review
When a bankruptcy court's order is appealed, "the district court acts as an appellate court and reviews the bankruptcy court's legal determinations de novo and findings of fact for clear error." Rine Rine Auctioneers, Inc. v. Meyers, 74 F.3d 848, 851 (8th Cir. 1996) (citing Wegner v. Grunewaldt, 821 F.2d 1317, 1320 (8th Cir. 1987)); see also Fed.R.Bankr.P. 8013 (2002) (factual findings are examined under the clearly erroneous standard).
Analysis
The debtors first argue that the pickup is an exempt asset under the Nebraska Code. See Neb. Rev. Stat. § 25-15,105 (opting out of the federal exemptions and stating that "the personal exemptions provided under Nebraska statutes and the Nebraska Constitution" will apply in bankruptcy cases filed in Nebraska). In support of their exemption argument, the debtors first refer to § 79-948 of the Code, which provides as follows:
The right of a person to an annuity, an allowance, or any optional benefit under the School Employees Retirement Act, any other right accrued or accruing to any person or persons under such act, the various funds and accounts created thereby, and all the money, investments, and income thereof shall be exempt from any state, county, municipal, or other local tax, shall not be subject to execution, garnishment, attachment, the operation of bankruptcy or insolvency laws, or any other process of law whatsoever, and shall not be assignable except to the extent that such annuity, allowance, or benefit is subject to a qualified domestic relations order under the Spousal Pension Rights Act.
Neb. Rev. Stat. § 79-948. The debtors also rely on § 25-1563.01, which exempts, "[t]o the extent reasonably necessary for the support of the debtor and any dependent of the debtor, an interest held under a stock bonus, pension, profit-sharing, or similar plan or contract payable on account of illness, disability, death, age, or length of service. . . ." Id. § 25-1563.01. According to the debtors, the proceeds of the pension plan would be exempt under either of these statutes, and thus the pickup, which was purchased with funds that can be traced to the proceeds, should also be exempt under these provisions.
In addressing the debtors' exemption argument, the bankruptcy court first noted that there were no Nebraska cases on point. See Sholdan v. Dietz, 217 F.3d 1006, 1008 (8th Cir. 2000) ("The scope of a state-created exemption is determined by state law." (citation omitted)). The court then cited extensively to In re Burchard, 214 B.R. 494 (Bankr.D.Neb. 1997), a case in which the debtor used his exempt personal injury claim proceeds to buy personal property. On appeal, the debtors challenge the court's reliance on Burchard, arguing that the Burchard court overlooked two Nebraska Supreme Court decisions that are "directly on point." Br. of the Appellants [hereinafter Debtors' Brief] at 9. According to the debtors, Dargan v. Williams, 91 N.W. 862 (Neb. 1902), and Derby v. Weyrich, 8 Neb. 174 (1879), demonstrate that "[f]or well over one hundred years, the law in this jurisdiction has been that property purchased with exempt funds is also exempt." Id. I am not persuaded.
The debtors brought both of these cases to the bankruptcy court's attention in their Brief in Support of Claimed Exemption, which was filed on September 10, 2001.
In Dargan, the debtor used his exempt pension funds to discharge a mortgage on his personal property. Dargan, 91 N.W. at 862-63. The plaintiff then received, inter alia, livestock "in exchange for property covered by said mortgage," as well as livestock representing the "increase" of such property. Id. The court agreed with the debtor that the property subject to the discharged mortgage was exempt from execution. Id. at 863. The court also agreed that "the increase of property purchased with pension money" and "property received in exchange" for property purchased with pension money were exempt. Id. In doing so, the court considered the following exemption language: "There shall be exempt to every resident of Nebraska, who became disabled in the United States service as a soldier, all pension money, hereafter secured, and all property hereafter purchased and improved exclusively therewith, not exceeding two thousand dollars in value." Dargan, 91 N.W. at 862 (citing § 531b of the Code of Civil Procedure) (emphasis supplied). According to the court, this language demonstrated that "one of the objects of the statute is to protect the investment of pension money by its owner." Id. at 863; see also id. ("The obvious intention of the statute is to exempt such money, and the property in which it is invested, within the prescribed limits, from seizure on execution."). As the court noted, "[o]ne man will invest his pension money in real estate, and depend on its rise in value for the returns on his investment," and "[a]nother man invests his pension money in live stock, and depends for his returns on the increase of that stock." Id. In either case, the court concluded, such "returns" were protected from the claims of creditors under the above provision.
By contrast, I note that neither § 25-1563.01 nor § 79-948 specifically extends protection beyond the pension fund itself.
In distinguishing Dargan, the trustee first notes that the character of the property at issue in that case (i.e., the "increase of property" and "exchanged" property) was similar in nature to the property that was exempt (i.e., the property "purchased" via the discharge of the mortgage). Thus, the trustee asserts, the Dargan pensioner "simply attempted to protect the investment of his pension money. . . ." Brief of the Appellee [hereinafter Trustee's Brief] at 6. By contrast, the trustee notes, the debtors in this case "neither purchased nor invested in property that was similar in nature to their exempt pension plan." Id. "In other words," the trustee explains, "the Debtors did not simply convert their exempt Pension Plan into a similar investment plan; instead, the Pension Plan was used to purchase personal property," which did not retain the pension plan's exempt status. I agree with the trustee's assessment. Thus, I am not convinced that the Nebraska Supreme Court would interpret Dargan as broadly as the debtors have. See, e.g., Burchard, 214 B.R. at 495 (recognizing that the interpretation of exemption statutes "is a question of state law which [the] court must decide in the manner which it concludes the issue would be resolved by the Nebraska Supreme Court").
As noted above, the debtors contend that the Burchard court also overlooked the case of Derby v. Weyrich. In Derby, the debtor traded his exempt land for a tract of land that he placed in his wife's name. Derby, 8 Neb. at 175. According to the debtor, he obtained the tract "for the express purpose of making the same a homestead" for his family. Id. In rejecting the creditor's fraudulent conveyance argument, the Derby court concluded that the tract was exempt from execution. Id. at 176-77. According to the court, the creditor's right "to have the land sold and applied to the payment of his debt, if he have any, must be founded upon his right to the fund with which it was purchased." Id. at 177. Thus, since the creditor had no right to the land used as consideration in the transaction, the creditor had no right to execute on the tract held in the name of the debtor's wife. Id.
According to the debtors, Derby also demonstrates that in Nebraska, the general rule is "that property purchased with exempt funds is also exempt." Debtors' Brief at 9. It seems to me, however, that the Nebraska Supreme Court would decline to read Derby so broadly. As the trustee notes in his brief, Derby, like Dargan, is distinguishable in that the character of the property at issue (i.e., land) was similar in nature to the property that was exempt (i.e., land). See Trustee's Brief at 5 ("Not only are Dargan and Derby not bankruptcy cases, each case dealt with using exempt property to obtain property that actually maintained the character of the original exempt property." (emphasis supplied)). In addition, I note that although not specified in the opinion, Derby presumably dealt with the homestead exemption. Since at least 1879, the year the Derby case was decided, the Nebraska Legislature has expressly protected the proceeds from the sale of a homestead, like the homestead itself, from legal process for a period of time after the sale. See Neb. Rev. Stat. § 40-116; see also Hoy v. Anderson, 58 N.W. 125, 126 (Neb. 1894) (referring to § 16 of the "homestead law," a precursor to § 40-116, which exempted homestead proceeds for six months). Even if a parallel provision was not at issue in Derby, I am not persuaded that the Nebraska Supreme Court would extend the language quoted above to all exemptions in the context of a bankruptcy proceeding. Indeed, it seems more likely that the court would limit this language to the context in which it arose. Accordingly, I agree with the trustee that neither Dargan nor Derby undermines the Burchard court's analysis.
In sustaining the trustee's objection, the bankruptcy court concluded that "[t]he rationale of Burchard is applicable to the factual situation in this case." Bankr. 19 at 3. While recognizing that Burchard is not controlling authority, I am inclined to agree. The debtor in Burchard had used the proceeds of his personal injury claim to purchase a motorcycle and a pickup. Burchard, 214 B.R. at 495. The Burchard court concluded that the funds lost their exempt status when they were converted into tangible personal property, based on the following factors.
First, the court noted that the relevant exemption statute, § 25-1563.02, is "silent on its face" as to whether it applies to property purchased with exempt proceeds. Id. at 496. Here, too, both of the statutes cited by the debtors are silent as to this issue. According to the Burchard court: "The natural inference from silence is that the exemption expires when the exempt funds are used to purchase non-exempt assets. Absent exemption laws, all property is subject to the claims of creditors." Id. I see no reason to disagree with this conclusion.
Next, the court observed that the "Nebraska legislature is aware of the question of whether an exemption extends to the proceeds of exempt property." Id. By way of example, the court referred to § 40-116, which, as noted above, specifically protects homestead proceeds for six months. See Neb. Rev. Stat. § 40-116. Thus, the court concluded, the legislature's treatment of homestead proceeds suggests that the lack of similar protections in other exemption statutes was purposeful. See id. Again, I see no reason to disagree with this conclusion.
In addition, as previously discussed, the modern version of the statute at issue in Dargan v. Williams specifically exempts not only the pension money of disabled soldiers and sailors, but also "all property hereafter purchased and improved exclusively therewith, not exceeding two thousand dollars in value. . . ." Neb. Rev. Stat. § 25-1559.
Finally, the court referred to the Nebraska legislature's long-standing and well-known reluctance to expand the statutory exemption scheme. See id. (citing Oliver B. Pollak David G. Hicks, " Please, Sir, I Want Some More" -Loopholes, Austerity and the Cost of Living-Nebraska Exemption Policy Revisited, 73 Neb. L. Rev. 298, 301 (1994)). More specifically, the court noted that § 25-1556 had only recently been amended to exempt up to $2,400 in one motor vehicle used by the debtor in connection with his or her "principal trade or business." Neb. Rev. Stat. § 25-1556 (amended in 1997); see Burchard, 214 B.R. at 496 ("The recent legislation providing a modest exemption for a motor vehicle typifies the great hesitance the Nebraska legislature has had in liberalizing exemption laws."). The amendment apparently marked the first time that the Nebraska legislature has explicitly allowed an exemption for a motor vehicle. See Burchard, 214 B.R. at 496. Given this factor, the court concluded that, under the circumstances of the case, "the Nebraska Supreme Court would not construe § 25-1563.02 to permit the exemption of a motorcycle and a truck." Id. This factor also leads me to conclude that the Nebraska Supreme Court would deny the exemption of a new $21,000 pickup under the provisions cited by the debtors.
While recognizing that "exemption statutes are to be liberally construed to effectuate their statutory purpose," the factors outlined above suggest that the Nebraska legislature did not intend to extend the protections of either § 25-1563.01 or § 79-948 to personal property purchased with pension funds. In re Weaver, 98 B.R. 497, 498 (Bankr.D.Neb. 1988) (citing In re Welbourne, 63 B.R. 23, 25-26 (Bankr.D.Neb. 1986); In re Estate of Grassman, 158 N.W.2d 673, 676 (Neb. 1968); Hawley v. Arnold, 288 N.W. 823 (Neb. 1939); Richard F. Duncan , Through the Trapdoor Darkly: Nebraska Exemption Policy and the Bankruptcy Reform Act of 1978, 60 Neb. L. Rev. 219, 241, 252 (1981)). It seems to me that the Nebraska Supreme Court would find the above considerations persuasive, and that it would not interpret these provisions as extending exempt status to the pickup purchased by the debtors. I therefore agree with the bankruptcy court that "under the circumstances presented in this case, the pickup truck purchased pre-petition entirely with proceeds from the debtor's pension plan is not an exempt asset." Bankr. 19 at 3.
The debtors also contend that as a general rule, "the proceeds of pension funds are not treated like proceeds of other exempt property." Debtors' Brief at 10. In support of their assertion, the debtors refer me to an excerpt from a 1967 volume of American Jurisprudence. See id. (citing 31 Am. Jur.2d Exemptions § 97 (1967)). I, however, am persuaded that the Nebraska Supreme Court would be more inclined to adopt the Burchard analysis, particularly in light of the debtors' admission that the section to which they refer is not reprinted in more recent editions of the publication.
Finally, the debtors also question whether the pickup is property of the bankruptcy estate. If it is not, the debtors note, "no exemption need be claimed." Debtors' Brief at 14. As discussed above, the bankruptcy court concluded that Mr. Dasher's interest in the LPS pension plan and its proceeds would not have been property of the debtors' bankruptcy estate. See Bankr. 19 at 2. The debtors suggest that the pickup, which was purchased with those proceeds just prior to filing, should also be excluded from the bankruptcy estate. Nevertheless, the debtors admit that they "have found no cases which deal with the conversion of non-estate property into . . . what would otherwise clearly be estate property." Debtors' Brief at 14. The debtors also comment that "[s]ince the definition of estate property is extremely broad, it would seem this argument is very weak. . . ." Id. In light of these concessions, and the lack of argument, it appears to me that the debtors have effectively abandoned this ground for appeal.
IT IS ORDERED that the Memorandum and separate Order of the bankruptcy court sustaining the trustee's objection, Bankr. 18, 19, are affirmed. The debtors' appeal is dismissed.