In re McFarland

481 B.R. 242

In re Thomas J. McFARLAND, Debtor.

No. 11–10218.

United States Bankruptcy Court,

S.D. Georgia,

Augusta Division.

Sept. 29, 2012.

Todd Boudreaux, Shepard Plunkett Hamilton Boudreaux LLP, Evans, GA, for Debtor.

OPINION AND ORDER

SUSAN D. BARRETT, Chief Judge.

This Opinion and Order addresses the following four issues:

1. Whether payments from exempt income streams lose their exempt status under 42 U.S.C. § 407, 38 U.S.C. § 5301, or O.C.G.A. § 44–13–100(a)(2)(A)–(E) when paid to a debtor and deposited prepetition into non-exempt accounts.

2. Whether a debtor may exempt the full cash surrender value of a whole life insurance policy pursuant to O.C.G.A. § 33–25–11 or whether he is limited to the $2,000.00 exemption set forth in O.C.G.A. § 44–13–100(a)(9).

3. Whether prohibiting a debtor in bankruptcy from using the exemptions set forth in O.C.G.A. § 33–25–11 violates the equal protection clause of the Georgia Constitution, and further violates the Bankruptcy and Supremacy Clauses of the United States Constitution.

4. Whether Debtor is entitled to exempt his Hartford annuity (“Hartford Annuity”) and IRA account (“IRA”), or any portion thereof.

These are core proceedings pursuant to 28 U.S.C. § 157(b) and the Court has jurisdiction pursuant to 28 U.S.C. § 1334.

FINDINGS OF FACT

Debtor acknowledges his bankruptcy filing was precipitated by a large personal injury verdict obtained by Joylynn Hagen (“Hagen”) hours before he actually filed bankruptcy. Debtor was underinsured. He acknowledges that during the pendencyof the personal injury litigation, he began consulting with his bankruptcy attorney about a year before the verdict was rendered. Debtor's statement of financial affairs reflects a payment to Debtor's counsel in January of 2010. Dckt. No. 10, SOFA; Dckt. No. 146, Tr.2004 examination, p. 69, lines 1–25. The bankruptcy petition was filed on February 2, 2011. This order addresses Debtor's attempt to claim certain exemptions to protect various assets from the reach of his creditors, namely Ms. Hagen. Debtor acknowledges at the time the bankruptcy petition was filed, he was current with all his creditors, other than satisfying Ms. Hagen's judgment. For all intents and purposes, Ms. Hagen's claim is the only claim in this bankruptcy, as the other debts have either been reaffirmed or fully addressed.

USAA and Wachovia Accounts.

Debtor attempts to exempt the following items from the reach of his creditors: $4,000.00 deposited into a USAA money management checking account (“USAA Account”) and $3,682.04 deposited into a Wachovia account (“Wachovia Account”) pursuant to O.C.G.A. § 44–13–100(a)(2)(E).¹ (Collectively, the USAA Account and the Wachovia Account are referred to as the “Bank Accounts”.) ² Debtor also argues these funds are not property of the estate pursuant to 11 U.S.C. § 541(a) and are exempt under federal non-bankruptcy law. It is undisputed that the funds deposited into these two accounts consist exclusively of military retirement payments, Social Security benefits, Veteran's Administration disability and Georgia teacher's retirement payments, but the allocation of the sums on hand between the various sources is unclear. The accounts are regular bank accounts without any retirement-type restrictions or alienations. The issue involving these two accounts is whether such payments lost their exempt status when they were paid to Debtor and placed in Debtor's non-exempt bank accounts pre-petition.

IRA and Hartford Annuity.

Debtor attempts to exempt $150,000.00 of his Hartford Annuity and his $20,000.00 IRA. Debtor purchased the Hartford Annuity for $150,000.00 in March 2006, which is two years before the accident with Ms. Hagen. Dckt. No. 150, Tr. Hr'g 9/7/11, p. 51, lines 21–25 and p. 52, lines 1–3. The funds to purchase the Annuity came from regular monthly contributions to a mutual fund account Debtor had made since the 1980s while on active duty in the military. During the course of his active military service, military personnel were not eligible to contribute to 401(k) type plans, but he made regular after tax dollar contributions into this mutual fund purchase plan. In 2006, these funds were used to pay off a loan on a motor coach and the remaining funds were used to purchase the Hartford Annuity. The benefit amount as of March 2011 was approximately $170,000.00.

The mutual fund investment account was initially with a company USPA IRA, but it was not an IRA. Debtor transferred the money from USPA IRA to an account with Sterne Agee held at Grandview Planning Group, where his son works as a financial advisor.

The IRA is a traditional individual retirement account. In accordance with the favorable tax treatment, Debtor established the IRA in the 1980s and made regular pre-tax contributions to the account. At some point, Debtor ceased making contributions, but he has never withdrawn any funds or taken any action to affect this account's classification as an IRA account. In 2006, the IRA account was rolled over to Sterne Agee where it remains.

American General Whole Life Insurance Policy.

Debtor also attempts to exempt an American General Whole Life Insurance Policy with a cash surrender value of approximately $13,455.00 pursuant to O.C.G.A. §§ 33–25–11 and 44–13–100(a)(9).³ Debtor initially failed to disclose this whole life policy in his bankruptcy schedules. He also failed to disclose the policy at this first meeting of creditors. At his first meeting of creditors he testified that he had reviewed all his life insurance policies in his safe deposit box and stated “I don't have any whole life, if that's the question. I—I have some level term but I don't know if it has any cash value or not.” Dckt. No. 144, Tr. Hr'g 3/9/11, p. 14, lines 18–22. At the first meeting of creditors, the Trustee went on to explain that term would not have any cash value generally, and the Debtor responded “Oh, I see.” Dckt. No. 144, Tr. Hr'g 3/9/11, p. 14, lines 22–24.

Then, the Debtor testified again on June 6, 2011 that he had examined all his insurance policies and they were all term policies purchased in the 1980s, and that he no longer paid any premium for it. Dckt. No. 146, Tr. Hr'g 6/6/11, pp. 38 and 67, lines 3–20 and lines 12–21. He testified that the insurance expenditure on his Schedule J was for insurance belonging to his wife and not for any insurance that belonged to him. Id. at pp. 64–65, lines 25–8.

It was not until August 22, 2011 that Debtor produced two insurance policies to the Trustee: a $125,000.00 decreasing term policy issued by Old Line Life Insurance Company of America in August 1985; and a $30,000.00 whole life policy also issued by Old Line in 1984. Debtor testified that he found the policies while examining his safe deposit box for other documents the Trustee requested in connection with transfers of real property, and he did not remember he had the policies until that time. Through inquiry with the insurance company, the Trustee discovered the term policy had been cancelled in 2005 and the whole life insurance policy has a cash value of approximately $13,445.00.

Debtor disclosed this policy to the Trustee in August 2011. Dckt. No. 147, Tr. Hr'g 8/22/11, p. 16–17, lines 17–5. Premium payments for this policy and Debtor's other policies continue to be made on this policy through Debtor's military allotment, but Debtor testified he does not regularly receive a breakdown of his allotment or of the insurance policies. Id. at pp. 17–18, lines 19–21 and 8–15; Dckt. No. 166, Tr. Hr'g 1/19/2012, p. 10, lines 18–25 and p. 11, lines 1–5. The Trustee contacted Debtor's counsel at the end of October and again in the beginning of November for cooperation in liquidating the policy. On November 16, 2011, months after disclosing the existence of the whole life policy, Debtor amended his bankruptcy schedules to disclose the whole life policy as an asset and attempt to exempt its full value.

CONCLUSIONS OF LAW

As part of the fresh start concept, the Bankruptcy Code allows debtors to exempt certain property from the bankruptcy estate. As many courts have recognized, the purpose of the exemptions is to provide a debtor with a fresh start, and as a result, exemptions are liberally construed in favor of the debtor. See In re Michael, 339 B.R. 798, 801 (Bankr.N.D.Ga.2005). The initial burden is upon the objecting party, the Trustee in this case, to establish that the exemptions are not properly claimed. SeeFed. R. Bankr.P. 4003(c). However, to the extent the amounts need to be traced to an exempt source, Debtor has the burden. See In re Rauser, 312 B.R. 461, 465 (Bankr.D.Conn.2004) (stating the debtor must trace the exempt funds); In re Pettit, 224 B.R. 834, 840 (Bankr.M.D.Fla.1998) ( “the party objecting to the exemption has the burden of proving, by a preponderance of the evidence, that the debtor is not entitled to the exemptions claimed. Once the objector has made a prima facie showing that debtor's claimed exemptions should be disallowed, the burden shifts to debtor to prove that the exemptions are legally valid.”).

Bank Accounts.

Section 522 provides:

(b) (1) Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection.

(3) Property listed in this paragraph is—

(A) subject to subsections ( o) and (p), any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition ....

11 U.S.C. § 522(b)(emphasis added). The Eleventh Circuit has noted that “[u]nder 11 U.S.C. § 522(b), a debtor filing for bankruptcy may exempt certain assets from the property of the estate available for creditors. He may either take the exemptions specified in the Code itself, 11 U.S.C. § 522(d), unless state law prohibits this option, ‘or, in the alternative,’ he may take the...