Opinion
Bankr. No. 98-50348.
February 18, 2000
MEMORANDUM OF DECISION RE: OBJECTION TO CLAIMED EXEMPTION IN CERTAIN RETIREMENT FUNDS
The matter before the Court is the case trustee's objections to Debtor's claimed exemption of her interest in certain retirement benefits of her former spouse. This is a core proceeding under 28 U.S.C. § 157(b)(2). This memorandum of decision and accompanying order shall constitute the Court's findings and conclusions under F.R.Bankr.P. 7052. As set forth below, the Court concludes that the Trustee's objection must be sustained.
I.
Betty Ann E. Pesicka ("Debtor") filed a Chapter 7 petition. Among her scheduled assets she included "SD [South Dakota] Retirement" with no value. She declared that retirement interest exempt. She later amended her schedules to value the retirement interest at $6,046.43 and to declare that value exempt, citing S.D.C.L. § 3-12-115 as the basis for her exemption.
Trustee Dennis C. Whetzal objected to the amended exemption of the state retirement benefits on the grounds that the funds were not Debtor's retirement funds, but were only her share of her former spouse's retirement funds. As such, Trustee Whetzal argued her share did not qualify as exempt retirement funds under § 3-12-115.
As a county employee, Debtor also is a member of the South Dakota Retirement System. The Court is given to understand that the funds in this account are not at issue.
The hearing on the matter was continued several times due to a pending related state court matter, which the parties hoped would help resolve the Trustee's objection. Ultimately, the parties submitted to this Court on briefs the issue of whether § 3-12-115 protected her former spouse's retirement funds when the funds were awarded to her as part of the divorce settlement.
Debtor's former spouse is a participant in the state of South Dakota's retirement fund for state and other local government employees. At the time of their divorce, Debtor was awarded $6,046.43 to be paid when Debtor's former husband draws his retirement or reaches age 65, whichever comes first. He has not yet withdrawn the funds or reached age 65 and he has not paid Debtor the $6,046.43.
Debtor has appealed the state court's recent interpretation of the fifteen-year old divorce decree regarding the amount Debtor is owed. It does not appear that the amount finally awarded to Debtor will bear on the legal question presented herein.
II.
In the District of South Dakota, the property that a bankruptcy debtor may exempt is defined by state law. 11 U.S.C. § 522(b)(2) and S.D.C.L. § 43-45-13. A debtor's entitlement to an exemption is generally determined on the day he files his bankruptcy petition. 11 U.S.C. § 522(b)(2)(A); Mueller v. Buckley (In re Mueller), 215 B.R. 1018, 1022 (8th Cir. B.A.P. 1998) (cites therein). The value of exempt property is also generally determined on the date of the petition. In re Sherbahn, 170 B.R. 137, 140 (Bankr.N.D.Ind. 1994) (amount of exemption is controlled by value the debtor ascribes to it in the schedules); In re Dore, 124 B.R. 94, 96 (Bankr.S.D.Cal. 1991) (value of exempt property is determined at the time of filing). Exemptions are construed liberally in favor of the debtor. Wallerstedt v. Sosne (In re Wallerstedt), 930 F.2d 630, 631 (8th Cir. 1991). The objector bears the burden of proving that an exemption has not been properly claimed. Bankr. R. 4003(c).
One of South Dakota's exemption statutes provides:
The rights of a person to a benefit, return of accumulated contributions, the benefit itself, any optional benefits and any other right accrued or accruing under the provisions of this chapter and all moneys belonging to the system are hereby exempt from any state, county, municipal or other local tax and may not be subject to execution, garnishment, attachment, operation of bankruptcy or insolvency laws or any other process of law whatsoever and shall be unassignable, except as required under applicable law, including any qualified domestic relations order as defined by § 414(p) of the Internal Revenue Code of 1954, as amended and in effect on January 1, 1985, or as is otherwise specifically provided in this chapter.
S.D.C.L. § 3-12-115. The statute has been seldom interpreted. Debtor relied on In re Lummer, 219 B.R. 510 (Bankr S.D. Ill. 1998), where the court held that the debtor's interest in her former husband's monthly military retirement benefits, which she had been awarded in the divorce, was protected under Illinois law. Id. at 511-12.
One earlier Bankruptcy Court decision from this District briefly addressed the statute in holding that money in the debtors' retirement plan funded by their employer, a private business, could not be exempted under § 3-12-115, which applies only to the South Dakota Retirement System and the employees of the state and some local government entities. In re Bowen, 80 B.R. 1012, 1020 (Bankr.D.S.D. 1987) (Ecker, J.).
Trustee Whetzal classified Debtor's interest as an entitlement to $6,046.43 when Debtor's former spouse retires. As such, he argued the funds are not a protected retirement interest. He cites Sticka v. Wilbur (In re Wilbur), 126 F.3d 1218 (9th Cir. 1997), where the court held that funds awarded to the debtor in a palimony suit to reflect her equitable interest in her former companion's accumulated funds in a public employees retirement fund were not exempt under Oregon law. Id. at 1218-19. The Court of Appeals concluded that the payments to the debtor were on account of a judgment based on a property division, not her employment or services and thus were not protected under the applicable Oregon laws. Id. at 1220. Trustee Whetzal also relied on In re Mabrey, 51 B.R. 383, 384-85 (Bankr.S.D.Ohio 1985), in which the bankruptcy court held that the applicable Ohio exemption for certain retirement funds was personal to the individual whose work gave rise to the right to receive a benefit Id.
III.
The Court must look to the language of the South Dakota statute, give the words their plain meaning and effect, and determine what they require for the exemption to apply. South Dakota Subsequent Injury Fund v. Federated Mutual Insurance, Inc., ___ N.W.2d ___, slip op. at 3 (S.D. January 26, 2000). Debtor's interest is not a "benefit, return of accumulated contributions, the benefit itself, [or] any optional benefit" under § 3-12-115. Thus, the only remaining provisions of § 3-12-115 under which her interest may fall are the final phrases, "any other right accrued or accruing under the provisions of [chapter 3-12]" or moneys belonging to the system.
Clearly, Debtor's interest did not "accrue" under the provisions of S.D.C.L. ch. 3-12, which governs the South Dakota Retirement System. Her interest arose from a division of marital assets. There is no evidence that she had, by statute or regulation, an enforceable interest in her former husband's retirement funds at the time of the divorce.
There is also no evidence that her $6,046.43 is "moneys belonging to the system." Debtors' former husband's interest apparently had a definitive present value when they divorced since the state court was able to quantify it.
The Court notes that the divorce court's characterization of the funds awarded does not control whether the funds are exempt as part of the South Dakota's employees' retirement fund. Instead, it is the exemption statute itself that defines what money is and is not protected from creditors. The statute clearly limits the protection to rights that have accrued or are accruing under S.D.C.L. ch. 3-12 or moneys that belong to the retirement system itself. Since Debtor's interest in the funds arose from another source and had a definite value to her former spouse at the time of the divorce, they are not protected by § 3-12-115.
In § 3-12-115, the South Dakota Legislature specifically provided that funds in the state retirement fund could be assigned as part of domestic relations orders. This provision allowed the divorce court to create Debtor's interest. The legislature did not, however, also protect those assigned funds from creditors. Thus, an order sustaining the Trustee's objection will be entered.
The Court notes that the $6,046.43 will not come from Debtor. The asset of the bankruptcy estate is Debtor's right to receive those funds in the future. Unless other arrangements are made with Debtor's former spouse for immediate payment, Trustee Whetzal will have to wait until the interest ripens to collect the $6,046.43 or he may sell this future interest now.
So ordered this 18th day of February, 2000.