Pogge v. Nothdurft et al
Filing
4
OPINION entered by Judge Sue E. Myerscough on 03/13/2015. SEE WRITTEN OPINION. The decision of the Bankruptcy Court is AFFIRMED. This case is closed. (DM, ilcd)
E-FILED
Friday, 13 March, 2015 06:17:21 PM
Clerk, U.S. District Court, ILCD
IN THE UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF ILLINOIS
SPRINGFIELD DIVISION
In re:
RONALD W. NOTHDURFT and
NANCY A. NATTERMAN-NOTHDURFT
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Debtors,
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_____________________________________
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MARIANN POGGE, Trustee,
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Appellant,
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vs.
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RONALD W. NOTHDURFT and
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NANCY A. NATTERMAN-NOTHDURFT, )
Debtors,
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Appellees.
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District Court
No. 14-3391
Appeal from:
Bankruptcy Case
No. 14-71307
Honorable Mary P.
Gorman
OPINION
SUE E. MYERSCOUGH, U.S. District Judge:
The Debtors/Appellees, Ronald W. Nothdurft and Nancy A.
Natterman-Nothdurft, claimed an exemption to funds held in a bank
account that were traceable to State of Illinois pension payments.
Appellant, Mariann Pogge, Trustee, filed an objection to the
exemption. Mary P. Gorman, the United States Chief Bankruptcy
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Judge, denied the objection and allowed the exemption. The Trustee
filed an appeal. Because the relevant statutory provision exempts a
debtor’s interest in a pension payment received and held for use of
the funds for support, the decision of the Bankruptcy Court is
AFFIRMED.
I. BACKGROUND
On July 17, 2014, the Debtors filed Chapter 7 bankruptcy.
Docket Sheet, R. 1; Voluntary Petition, R. 5. When the Debtors filed
the bankruptcy petition, a Credit Union 1 account held $8,000.
Schedule B-Personal Property, R. 19. The account consisted of
accumulated deposits from State of Illinois pension payments (which
were paid in the amount of $2,707.27 per month) and Social Security
payments (which were paid in the amount of $1,994.90 per month).
R. 57.
The Debtors claimed several exemptions on Schedule C.
Schedule C—Property Claimed as Exempt, R. 22. Among other
exemptions, the Debtors claimed an exemption to $4,000 in the
Credit Union 1 account pursuant to 735 ILCS 5/12-1006, which
provides an exemption for retirement plans. The Debtors also
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claimed a $4,000 exemption to funds in the Credit Union 1 account
pursuant to 735 ILCS 5/12-1001(g)(1),(2),(3), which provides for an
exemption for a debtor’s right to receive a Social Security benefit.
See R. 22.
On July 23, 2014, the Trustee filed objections to these two
claimed exemptions. Objection to Claims of Exemption, R. 51. The
Trustee argued that § 12-1006 applied only to assets held in a
pension or retirement plan and not to funds already received. Id.
The Trustee also argued that § 12-1001(g) applied only to a debtor’s
right to receive the Social Security benefit and not to funds already
received. Id.; see also Trustee’s Mem., R. 64 (noting that while
proceeds traceable to social security benefits are exempt under 42
U.S.C. § 407, the Debtors had not claimed an exemption under that
statute).
Following a hearing and briefing of the issues by the parties,
the Bankruptcy Court issued an Opinion denying the Trustee’s
objection to the Debtors’ claim of exemption in the pension funds but
allowing the Trustee’s objection to the Debtor’s claim of exemption in
the Social Security benefits. Opinion, R. 71-80; Order, R. 81-82.
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With regard to the Social Security benefits, the Bankruptcy Court
found that “the exemptions provided by § 12-1001(g) are limited by
the language in the statute providing that the exemption applies only
to the ‘right to receive’ the listed benefits.” Opinion, R. 73 (citing
cases). Therefore, Social Security payments received pre-petition
and held in a bank account were not exempt under § 12-1001(g). Id.
at 79 (noting that the “Debtors may well be able to claim the [Social
Security] benefits exempt under federal law, but it is up to them to
affirmatively do so”).
With regard to the pension payments, the Bankruptcy Court
primarily relied upon Auto Owners Insurance v. Berkshire, 588
N.E.2d 1230 (Ill. App. Ct. 1992), which held that § 12-1006 exempts
pension payments already received, so long as the funds claimed to
be exempt remain intended for a debtor’s support. Opinion, R. 76.
This appeal followed. Only the issue of the pension payments
is challenged on appeal.
II. JURISDICTION
The Court has appellate jurisdiction over this matter pursuant
to 28 U.S.C. ' 158 (providing that district courts have jurisdiction to
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hear an appeal from a final judgment, order, or decree).
III. STANDARD OF REVIEW
This Court reviews de novo whether a debtor is entitled to a
bankruptcy exemption. Fowler v. Shadel, 400 F.3d 1016, 1017 (7th
Cir. 2005).
IV. ANALYSIS
Because Illinois has opted out of the federal exemption scheme,
the Debtors are limited to the exemptions allowed under Illinois law.
See 11 U.S.C. § 522(b) (allowing states to opt out of the federal
exemption scheme for property listed in § 522(d)); 735 ILCS
5/12-1201 (prohibiting Illinois residents from using the federal
exemptions provided in 11 U.S.C. § 522(d) except as otherwise
permitted under the laws of Illinois); In re Marriage of Logston, 469
N.E.2d 167, 173 (Ill. 1984). Illinois provides the following exemption
for retirement plans:
Exemption for retirement plans. (a) A debtor's interest in
or right, whether vested or not, to the assets held in or to
receive pensions, annuities, benefits, distributions,
refunds of contributions, or other payments under a
retirement plan is exempt from judgment, attachment,
execution, distress for rent, and seizure for the satisfaction
of debts if the plan (i) is intended in good faith to qualify as
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a retirement plan under applicable provisions of the
Internal Revenue Code of 1986, as now or hereafter
amended, [footnote omitted] or (ii) is a public employee
pension plan created under the Illinois Pension Code, as
now or hereafter amended. [Footnote omitted.]
***
(d) This Section applies to interests in retirement plans
held by debtors subject to bankruptcy, judicial,
administrative or other proceedings pending on or filed
after August 30, 1989.
735 ILCS 5/12-1006(a), (d) (emphasis added). The Trustee does not
dispute that the pension payments at issue came from a “retirement
plan” as defined by the statute See Opinion, R. 75 n.1; see also 735
ILCS 5/12-1006(b)(4) (defining “retirement plan” to include “a public
employee pension plan created under the Illinois Pension Code, as
now or hereafter amended”).
In construing this exemption statute, this Court must apply
state law. See In re Salzer, 52 F.3d 708, 711 n.3 (7th Cir. 1995)
(“The nature and extent of allowable exemptions is a matter of state
law”); In re Barker, 768 F.2d 191, 196 (7th Cir. 1985) (applying
Illinois law to question of whether a debtor can stack his exemptions).
Where, as here, the Illinois Supreme Court has not addressed the
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issue, the Court follows the decisions of intermediate appellate courts
unless there is a convincing reason to predict that the Illinois
Supreme Court would disagree with the holdings of the intermediate
appellate courts. ADT Sec. Servs., Inc. v. Lisle–Woodridge Fire
Protection Dist., 672 F.3d 492, 498 (7th Cir. 2012).
The Trustee argues that § 12-1006 does not protect the Debtors’
interest in bank account proceeds traceable to pension benefits.
The Trustee asserts that this Court should not follow the Berkshire
case relied upon by the Bankruptcy Court because there are
persuasive indications that the Illinois Supreme Court would decide
the issue differently.
As noted above, the Bankruptcy Court relied on the Second
District Appellate Court decision in Auto Owners Insurance v.
Berkshire, 588 N.E.2d 1230. In Berkshire, the defendant argued
that $696.32 in a bank account was exempt from execution under
§ 12-1006 because the funds were traceable to the proceeds of
retirement benefits. Id. at 1231. The Berkshire court examined the
language of § 12-1006 and found that the statute protects a debtor’s
interest “in the assets” and the debtor’s “right to receive” benefits and
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other payments under a retirement plan. Id. at 1232. The court
concluded:
Section 12-1006 applies to the proceeds traceable to
pension plan payments. By its very terms, it protects the
principal as well as the income or the right to receive
payments. Where the purpose of an exemption is to
protect income necessary for the support of a debtor and
his family, it makes no sense to allow the funds to be
exempt so long as the debtor cannot use them.
Id. at 1232-33.
The Berkshire court limited the concept of tracing, however, by
finding that if the funds are not being used for support, the funds lose
their exempt character. Id. at 1232-33 (noting that the purpose of
the exemption statute is “to protect income necessary for the support
of a debtor and his family”). Moreover, exempt funds remain exempt
if the funds retained the “quality of moneys,” meaning the funds were
not converted into an investment. Id. (noting that exempt payments
that are transformed into an investment lose their exempt status).
Because the record was not clear regarding the character of the
funds in Berkshire, the court remanded the case to the trial court to
make an additional finding on the character of the funds. Id. at
1234. The Berkshire court noted that if the funds were from a
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lump-sum distribution of the defendant’s interest in his pension
plan, the funds were not exempt because the defendant failed to roll
over the funds into another qualified plan. Id. If the funds were a
pension distribution intended for support, the funds remained
exempt so long as the funds retained the “quality of moneys” in the
checking account. Id.; see also In re Marriage of Thomas, 789
N.E.2d 821, 831 (Ill. App. Ct. 2003) (holding that § 12-1006 “protects
a debtor’s interest in proceeds traceable to pension plan payments
and a debtor’s right to receive benefits, distributions, refunds of
distributions, or other payments under a retirement plan”); In re
Ritter, 190 B.R. 323, 326-27 (Bankr. N.D. Ill. 1995) (finding that the
principle in Berkshire that § 12-1006 allows the debtor to receive
benefits and to use them as well applied to withdrawals from
qualified retirement accounts used to pay living expenses and
attorney’s fees).
The Trustee argues that the Illinois Supreme Court would not
decide the case like the appellate court did in Berkshire. In support
thereof, the Trustee points to In re Weinhoeft, 275 F.3d 604 (7th Cir.
2001) and In re Schoonover, 331 F.3d 575 (7th Cir. 2003). While
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admitting that neither case is precisely on point, the Trustee argues
that these cases illustrate that § 12-1006 is open to other reasonable
constructions. The Trustee further argues that the Illinois Supreme
Court would not allow tracing where no tracing language is included
in the statute and where the legislature explicitly included tracing
language in a related statute. Finally, the Trustee points to other
bankruptcy courts that have questioned the holding in Berkshire.
The Court finds that the Trustee has not provided a convincing
reason to predict that the Illinois Supreme Court would disagree with
Berkshire.
Under Illinois law, the primary objective in construing a statute
is to determine and give effect to the intent of the legislature. Bettis
v. Marsaglia, 23 N.E.3d 351, 356 (Ill. 2014). The best indication of
the legislature’s intent is the language of the statute, which must be
given its plain and ordinary meaning. People ex rel. Dir. of Corr. v.
Booth, 830 N.E.2d 569, 573 (Ill. 2005). The Court construes the
statute as a whole. Id. “Each word, clause, and sentence of a
statute must be given a reasonable meaning, if possible, and should
not be rendered superfluous.” Chi. Teachers Union, Local No. 1 v.
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Bd. of Educ. of City of Chi., 963 N.E.2d 918, 923 (Ill. 2012).
Here, a plain reading of the statute exempts: (1) “[a] debtor’s
interest in or right . . . to the assets held in . . . a retirement plan”; and
(2) “[a] debtor’s interest in or right . . . to receive pensions, annuities,
benefits, distributions, refunds of contributions or other payments
under a retirement plan.” See 735 ILCS 5/12-1006. The “interest
in” language can essentially be construed as a limited form of tracing.
But see Berkshire, 588 N.E.2d at 1233 (finding that “the concept of
tracing is part of Illinois law even where the exemption statute does
not specifically provide for it”). Such a construction is in keeping
with statutory construction as applied by the Illinois Supreme Court.
The Trustee argues that Berkshire should not have inferred a
tracing provision in § 12-1006 where the statute did not contain such
a provision and where the legislature explicitly used tracing language
in other related statutes. The Trustee points to the statutory
language in 735 ILCS 12-1001(h), which, like § 12-1006, is part of
Article XII, Part 10 of the Illinois Code of Civil Procedure entitled
“Exemption of Personal Property.” In § 12-1001(h), the legislature
exempted a “debtor’s right to receive, or property that is traceable to”
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certain types of property, including awards under the crime victim’s
reparation statute. 735 ILCS 5/12-1001(h). The Trustee argues
that when language is included in one section of a statute and
omitted in another section of the same statute, it is presumed that
the legislature acted intentionally. Trustee Brief, p. 6 (d/e 2), citing
People v. Edwards, 969 N.E.2d 829, 837 (Ill. 2012).
The Trustee is correct that § 12-1006 does not use the term
“traceable” while § 12-1001(h) does use that term. However,
§ 12-1006 uses the term “interest in,” and § 12-1001(h) does not
contain such term. A court must, if possible, give a reasonable
meaning to each word. To ignore the “interest in” language in
§ 12-1006 and to construe that language in the same manner as the
“right to receive” language would render the “interest in” language
superfluous. The “interest in” language must mean something.
This Court agrees with the Bankruptcy Court’s conclusion that the
“interest in” language is not limited to the Debtors’ future interest in
pension payments (like the “right to receive” language does) but
includes the Debtors’ current interest in the pension payments they
received from the State of Illinois. See Opinion, R. 79.
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The Court also finds the federal cases cited by the Trustee are
distinguishable. The Trustee cites In re Weinhoeft, 275 F.3d 604
(7th Cir. 2001), and In re Schoonover, 331 F.3d 575 (7th Cir. 2003),
for the proposition that § 12-1006 is open to a reasonable
construction different than the construction made in Berkshire. In
In re Weinhoeft, the Seventh Circuit noted that § 12-1006 covered
two kinds of entitlements: “rights ‘to the assets held in’ pension
plans, and rights to ‘receive pensions . . . under a retirement plan.’”
Id. at 605 (emphasis in original). After citing § 12-1006, the Seventh
Circuit found that the assets in question were not retirement funds at
all. Id. at 605-606 (involving funds from the settlement of a
wrongful-discharge suit). The Seventh Circuit did not even consider
whether pre-petition pension payments held in a bank account are
exempt under § 12-1006. See also In re Schoonover, 331 F.3d 575,
577 (7th Cir. 2003) (finding that § 12-1006 did not apply because the
funds were not derived from a retirement plan). Therefore, the
Seventh Circuit has not had the opportunity to construe the “interest
in” language.
The Trustee also cites In re Holtermann, No. 98-83986, 1999
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WL 33582613, at *4 (Bankr. C.D. Ill. June 21, 1999) (involving money
received upon surrender of a life insurance policy and disagreeing
with Berkshire’s position that tracing applied where the statute is
“silent on whether the exemption extends to proceeds or other
substituted property”) and In re Lee, 514 B.R. 578 (Bankr. C.D. Ill.
2014) (noting the criticism of Berkshire by judicial decisions that
recognize that the legislature distinguishes between exempting a
right to receive a benefit and exempting a payment after distribution).
However, neither case addressed the “interest in” language or
specifically held that Berkshire is no longer good law. Therefore,
these cases do not persuade the Court that the Illinois Supreme
Court would decide the case differently than Berkshire.
The Court recognizes that the different treatment under Illinois
law for funds traceable to Social Security benefits and funds
traceable to pension benefits is inconsistent. However, absent some
affirmative indication that Illinois intended to treat funds traceable to
pension benefits exactly the same as funds traceable to Social
Security benefits, and in light of the different language used in both
statutes, the Court concludes that a distinction was intended.
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In accordance with Berkshire, the Court finds that the Debtors
have an “interest in” the pension payments received pre-petition and
held in a bank account for use for their current support.1 Therefore,
the funds are exempt under § 12-1006.
V. CONCLUSION
For the reasons stated, the decision of the Bankruptcy Court is
AFFIRMED. This case is closed.
ENTER: March 13, 2015
FOR THE COURT:
s/Sue E. Myerscough
SUE E. MYERSCOUGH
UNITED STATE DISTRICT JUDGE
1 As the Bankruptcy Court noted, the Trustee did not claim that the Debtors
were holding the funds for investment or that the funds were intended to be used
for anything other than current support. Opinion, R. 76 n.2.
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