In re Swanson

607 B.R. 325

IN RE: Earl J. SWANSON, Jr., Debtor.

Case No. 19-80651

United States Bankruptcy Court, C.D. Illinois.

Signed October 22, 2019

Attorney for Debtor(s): Courtney Hilts, 716 Broadway, Hannibal, MO 63401 Jeana K. Reinbold, Trustee, P.O. Box 7315, Springfield, IL 62791-7315

OPINION

Thomas L. Perkins, United States Chief Bankruptcy Judge

This Chapter 7 case is before the Court for determination of whether the Debtor, Earl J. Swanson, Jr., may claim an exemption in a motor vehicle as property traceable to exempt proceeds of a personal injury settlement used to pay off a lien on the vehicle. As the applicable Illinois exemption statute for personal injury payments expressly extends the exemption to traceable property, without a condition that the exempt proceeds must be used to acquire the property, the exemption is allowable.

As disclosed in his schedules, the Debtor owns a 2011 Chevrolet 1-ton "Dually" pickup truck with 600,000 miles on it, valued at $5,000. On Schedule C, the Debtor claims the full value as exempt, utilizing the maximum exemption of $2,400 for any one motor vehicle under 735 ILCS 5/12-1001(c), and claiming the $2,600 balance exempt under 735 ILCS 5/12-1001(h)(4), which provides an exemption for:

(h) The debtor's right to receive, or property that is traceable to:

...

(4) a payment, not to exceed $15,000 in value, on account of personal bodily injury of the debtor or an individual of whom the debtor was a dependent.

The Chapter 7 Trustee, Jeana K. Reinbold, objected to the use of the personal injury payment exemption as inapplicable. According to the Debtor's Statement of Financial Affairs, he received a $15,000 personal injury settlement within a few months prior to filing his petition on May 9, 2019. In response to the Trustee's objection, the Debtor asserts that he used $3,219.42 from the settlement to make four loan payments that paid off the balance of a loan held by State Street Bank secured by a lien on the pickup truck, thereby qualifying it as property "traceable to" the exempt settlement proceeds.

The Trustee does not dispute that the Debtor used the exempt funds as indicated to pay off the lien. Rather, she points out that the pickup was purchased by the Debtor in 2014 so that the injury settlement proceeds did not enable the Debtor to acquire ownership of the pickup, which she contends is a necessary element of traceability. This is the central issue presented for resolution.

The Trustee makes an alternative argument that the Debtor has not established that paying off the secured loan balance "created any equity" in the vehicle. It is not necessary for the Court to consider whether the creation of equity is a necessary precondition to traceability in every case. Here, however, since State Street Bank's lien was the only encumbrance against the pickup, the loan payments did, in fact, increase the Debtor's equity in the vehicle, dollar for dollar, with each payment made. Therefore, the premise of the Trustee's alternative argument is incorrect as a matter of fact.¹

As the objecting party, the Trustee bears the burden to prove that the exemption is not properly claimed. See Fed. R. Bankr. Pro. 4003(c). Personal property exemption statutes are construed liberally to protect debtors. Matter of Barker, 768 F.2d 191, 196 (7th Cir. 1985).

Construction of the phrase "property that is traceable to" as used in § 12-1001(h), is a question of Illinois law. To the Court's awareness, no Illinois court has addressed whether traceability is conditioned on the debtor's use of the exempt funds to make the initial acquisition of the secondary property sought to be traced. In the absence of state court precedent, a federal court must determine the question as it predicts the Illinois Supreme Court would. Adams v. Catrambone, 359 F.3d 858, 862 (7th Cir. 2004). Courts should interpret Illinois statutes according to the plain and ordinary meaning of the language used by the legislature. People v. Donoho, 204 Ill.2d 159, 273 Ill.Dec. 116, 788 N.E.2d 707 (2003). If the statutory language is clear and unambiguous, there is no need to resort to other aids of construction. Henry v. St. John's Hospital, 138 Ill.2d 533, 541, 150 Ill.Dec. 523, 563 N.E.2d 410 (1990). "Where the language of a statute is clear and unambiguous, a court must give it effect as written, without ‘reading into it exceptions, limitations or conditions that the legislature did not express.’ " Garza v. Navistar Int. Transportation Corp., 172 Ill.2d 373, 378, 217 Ill.Dec. 260, 666 N.E.2d 1198 (1996), quoting Solich v. George & Anna Portes Cancer Prevention Center of Chicago, Inc., 158 Ill.2d 76, 83, 196 Ill.Dec. 655, 630 N.E.2d 820 (1994).

"Traceable" is not a defined term under Illinois exemption law, but the concept of tracing is captured by the colloquialism "follow the money." The most apposite dictionary definition of "trace" is "to ascertain the disposition of (as something passing from hand to hand)." Webster's Third New International Dictionary (1976). In the area of constructive trusts, traceability is established where the secondary property is proven to be in "a direct chain" from the initial funds. Sadacca v. Monhart, 128 Ill.App.3d 250, 257, 83 Ill.Dec. 463, 470 N.E.2d 589 (1984).

The Debtor relies upon In re Jackson, 95 B.R. 590 (Bankr. C.D. Ill. 1989) (Fines, J.), where the Debtor used $30,000 in exempt life insurance proceeds as a down payment on the purchase of her residence. At the time of her bankruptcy filing, the debtor's equity in the house was $16,000, of which she claimed $7,500 exempt under the homestead exemption. The issue presented to the court was whether the remaining $8,500 in equity was exempt under § 12-1001(h)(3) as "property that is traceable to" the life insurance proceeds. The court granted the exemption with little discussion about traceability.

The Trustee argues that Jackson is factually distinguishable since the debtor used the exempt life insurance proceeds to acquire ownership of the house, whereas the Debtor here already owned the pickup when he received the personal injury settlement, merely using some of the proceeds to pay off the lien on the vehicle. The Debtor replies that the exemption should be allowed as the Debtor's equity interest in the vehicle is directly traceable to the settlement proceeds. While not disputing that Judge Fines correctly applied the tracing requirement where exempt funds were used to purchase the secondary asset, the Trustee correctly points out that the Jackson decision does not speak to the issue presented here.

The parties also dispute the applicability of In re Irwin, 371 B.R. 344 (Bankr. C.D. Ill. 2007) (Gorman, J.), where the court considered whether workers' compensation proceeds, made exempt by the Illinois Workers' Compensation Act, retained their exempt status when used to pay off a lien on an automobile, where the exemption statute did not expressly extend the exemption to property traceable...