Merillat

Filing 13

OPINION and ORDER re 1 Bankruptcy Appeal-AFFIRMING IN PART & REVERSING IN PART BANKRUPTCY COURT'S ORDER GRANTING TRUSTEE'S OBJECTIONS TO DEBTOR'S 2ND AMENDED EXEMPTIONS; REMANDING FOR FURTHER PROCEEDINGS; LIFTING STAY & DENYING AS MOOT MOTION FOR STAY Signed by District Judge Patrick J. Duggan. (MOre)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

CHERYL ANN MERILLAT,
Debtor,
_____________________________/
CHERYL ANN MERILLAT,

Civil Action No. 14-10896
Honorable Patrick J. Duggan

Appellant,
Bankruptcy No. 13-54410
Honorable Marci B. McIvor

v.
TIMOTHY J. MILLER,
Appellee.
_____________________________/

OPINION AND ORDER
(1) AFFIRMING IN PART AND REVERSING IN PART THE BANKRUPTCY
COURT’S ORDER GRANTING TRUSTEE’S OBJECTIONS TO DEBTOR’S SECOND
AMENDED EXEMPTIONS,
(2) REMANDING THE CASE TO THE BANKRUPTCY COURT FOR FURTHER
PROCEEDINGS,
(3) LIFTING THE STAY ENTERED ON APRIL 24, 2014,
and
(4) DENYING AS MOOT APPELLANT’S MOTION FOR STAY PENDING APPEAL
I. INTRODUCTION
This is a bankruptcy appeal. Appellant Cheryl Ann Merillat, the debtor, appeals an order
of the Bankruptcy Court for the Eastern District of Michigan disallowing her from claiming three
exemptions under 11 U.S.C. § 522(d), which enumerates specific property that is exempt from
inclusion in the bankruptcy estate and thus unreachable by creditors. Appellee Timothy J.
Miller, the bankruptcy trustee, claims that the Bankruptcy Court properly denied the exemptions
at issue.

This matter is fully briefed. Upon review of the record and briefs on appeal, the Court
concludes that oral argument would not aid the decisional process. See E.D. Mich. LR 7.1(f).
For the reasons that follow, the Court will affirm in part and reverse in part the Bankruptcy
Court’s order sustaining Appellee’s objections of the exemptions claimed by Appellant, and
remand the case for further proceedings consistent with this opinion. In addition, the Court will
lift the temporary stay imposed on April 24, 2014, and deny as moot Appellant’s motion for stay
pending appeal.
II. BACKGROUND
Appellant Cheryl Ann Merillat, the debtor in this matter, married Bryan Merillat in
February 1996. The year before their marriage, the couple was involved in a serious motorcycle
accident. Appellant, the passenger, sustained more serious injuries than did Mr. Merillat, who
was driving above the posted speed limit. Since the accident, Appellant has had more than
twenty-five major surgeries and has been unable to return to work as a tenured third-grade
teacher. Due to these circumstances, the State of Michigan granted Appellant a disability
pension.
Following the accident, the couple married, at which time Mr. Merillat promised to take
care of Appellant for the rest of her life. During their sixteen-year marriage, the couple had one
child.
The couple divorced pursuant to a judgment of divorce issued by a Michigan state court
on January 22, 2013. The judgment awards physical custody of the child, who was nine years
old at the time of the divorce, to Appellant. Dkt. 1 Page ID 191. The “spousal support” section
of the judgment reflects that “[n]either party is entitled to spousal support” and that spousal
support is “forever barred.” Id. at Page ID 193. In addition, under the “property settlement”

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section of the judgment, the marital home, located at 866 Pinecrest Drive, Dexter, Michigan
48130, was awarded to “[b]oth parties,” but Appellant was awarded “exclusive use of [the]
property . . .” Id. at Page ID 195. Also under the “property settlement” section of the judgment,
in a subsection entitled “IRA’s/Pensions/Stock Options/Investment accounts,” Appellant was
awarded a sum of $99,158.31 to be taken from various retirement accounts held by Mr. Merillat,
including a 401(k) account at AXA Equitable. The judgment states that the $99,158.31 award
was made to “equalize the parties’ IRAs.” Id. at Page ID 196. In addition, under the same
subsection of the judgment, Mr. Merillat was ordered to pay Appellant “an additional $50,000.00
as a property settlement payment.”

Id.

Thus, the judgment requires Mr. Merillat to pay

Appellant a total of $149,158.31 from his various retirement accounts. Id.
Two qualified domestic relations orders (QDROs) were entered by the state court to
facilitate the transfer of the above-described retirement funds from Mr. Merillat to Appellant.
Pursuant to the first QDRO, an account at AXA Equitable was established for Appellant on June
21, 2013, and which time $87,931.24 was transferred from Mr. Merillat’s AXA Equitable
account to Appellant’s account. Id. at Page ID 204.
Approximately one month later, on July 22, 2013, Appellant liquidated the AXA
Equitable account, which, at the time, had a balance of $88,057.08. A statement entitled “AXA
Equitable 401(k) Plan Confirmation of Payment,” dated July 22, 2013, provides the details
surrounding the liquidation of the account. The opening paragraph of the statement reflects that
the purpose of the statement is to “describe[] how your July 22, 2013 distribution from the AXA
Equitable 401(k) Plan was paid and provide[] you with the information you need to calculate the
taxes you may owe for the 2013 tax year.” Id. at Page ID 212. At Appellant’s direction, $22,000
of the $88,057.08 gross payment amount was rolled over into an IRA at Wells Fargo Bank. Id.

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at Page ID 212-213. After federal and state taxes were withheld, Appellant was left with a net
cash payment of $50,227.96. Id. at 212. The statement indicates that a check would be mailed
to Appellant within two days of the July 22 distribution date. Id. An earnings statement dated
July 24, 2013 was sent to Appellant confirming that federal and state taxes had been withheld
from the Appellant’s gross payment amount. Id. at Page ID 217. Appellant kept the $50,227.96
check for several months and eventually deposited it into a demand deposit account at TCF Bank
on September 23, 2013.
Again, the judgment of divorce ordered Mr. Merillat to pay Appellant a total sum of
$149,158.31 from his various retirement accounts. The first QDRO provided for the payment of
$87,931.24, leaving a remaining balance owed to Appellant of $61,227.07. A second QDRO
was issued assigning to Appellant $61,227.07 in funds held in Mr. Merillat’s AXA Equitable
pension plan. The details regarding Appellant’s recovery of this money, although outlined by the
parties in their briefs, are not relevant for the present purposes.
On July 28, 2013, Appellant filed a voluntary bankruptcy petition under Chapter 7. On
December 17, 2013, Appellant filed a second amended Schedule C listing several items of
property that she claims are exempt from the bankruptcy estate pursuant to 11 U.S.C. § 522(d).
Only two items of property are relevant for the present purposes. First, Appellant claimed that
the marital home, located at 866 Pinecrest Drive, constitutes property that is exempt from the
bankruptcy estate under either § 522(d)(10)(D), which exempts “[t]he debtor’s right to receive . .
. alimony, support, or separate maintenance,” or § 522(d)(11)(E), which exempts “a payment in
compensation of loss of future earnings of the debtor.” Second, Appellant claimed that her net
cash payment of $50,227.96 – money that originated in Mr. Merillat’s AXA Equitable 401(k)
account and was distributed via check to Appellant on July 22, 2013 – is exempt from the estate

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under either § 522(d)(12), which exempts “[r]etirement funds to the extent that those funds are in
a fund or account that is exempt from taxation,” or the “future earnings” exemption of §
522(d)(11)(E), quoted above.
Appellee objected to these claimed exemptions. On January 21, 2014, the Bankruptcy
Court held a hearing and, from the bench, sustained each of the objections. An order followed
the next day. The Bankruptcy Court’s reasons for sustaining each objection are described in
greater detail below.
On January 26, 2014, Appellant filed a notice of appeal.
III. STANDARD OF REVIEW
The Bankruptcy Court’s findings of fact are reviewed for clear error; its conclusions of
law are reviewed de novo. In re United Producers, Inc., 526 F.3d 942, 946 (6th Cir. 2008).
IV. ANALYSIS
“When a debtor files a bankruptcy petition, all of his property becomes property of the
bankruptcy estate.” Taylor v. Freeland & Kronz, 503 U.S. 638, 642, 112 S. Ct. 1644, 1647
(1992). However, the Bankruptcy Code “allows a debtor to prevent the distribution of certain
property by claiming it as exempt.” Id.; see also Owen v. Owen, 500 U.S. 305, 308, 111 S. Ct.
1833, 1835 (1991) (“An exemption is an interest withdrawn from the estate (and hence from the
creditors) for the benefit of the debtor.”). Under 11 U.S.C. § 522(l), a debtor must file with the
bankruptcy court a list of property that he or she wishes to exempt from the bankruptcy estate.
Section 522(d) “lists 12 categories of property that a debtor may claim as exempt.” Schwab v.
Reilly, 560 U.S. 770, 782, 130 S. Ct. 2652, 2661 (2010).
The party objecting to an exemption – Appellee here – has the burden of proving that the
property claimed by the debtor should not be exempted, see Fed. R. Bankr. P. 4003(c), and

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“[e]xemptions should be liberally construed in favor of the debtor.” In re Brown, 391 B.R. 210,
at *5 (Table) (6th Cir. BAP 2008).
Appellant claims that the marital home is exempt from the bankruptcy estate as either a
right to receive alimony, support, and separate maintenance, see § 522(d)(10)(D), or as a
payment in compensation of loss the loss of future earnings. See § 522(d)(11)(E). Appellant
also claims that her $50,227.96 net cash payment from Mr. Merillat’s AXA Equitable 401(k)
retirement account is exempt as either retirement funds in a tax exempt account, see §
522(d)(12), or as a payment in compensation of loss the loss of future earnings.

See §

522(d)(11)(E).
A. Exemption for the Marital Home Under 11 U.S.C. § 522(d)(10)(D)
The Bankruptcy Court disallowed Appellant from claiming an exemption for her interest
in the real property located at 866 Pinecrest Drive, Dexter, Michigan 48130 under 11 U.S.C. §
522(d)(10)(D), which provides an exemption for “[t]he debtor’s right to receive . . . alimony,
support, or separate maintenance, to the extent reasonably necessary for the support of the debtor
and any dependent of the debtor.” As mentioned, under the “property settlement” section of the
divorce judgment, Appellant was awarded a one-half ownership interest in the property along
with “exclusive use” of the property.
In denying the exemption, the Bankruptcy Court noted from the bench that exemptions
under § 522(d)(10)(D) typically take the form of a payment of money to the debtor and that there
is no case law supporting Appellant’s attempt to claim an exemption for her interest in real
property:
This Court notes at the outset that every case discussing [§] 522(d)(10)(D) is
factually distinguishable from the instant case. In the instant case, debtor is not
trying to exempt payment of money under 11 U.S.C., Section 522(d)(10)(D).
She’s attempting to exempt her interest in the marital home. In this Court’s view,
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there is no case law which supports debtor’s attempt to exempt her interest in the
marital home under 11 U.S.C., Section 522(d)(10)(D).
Dkt. 1 at Pg. ID 124. In so holding, the Bankruptcy Court held that an award of real property
cannot, as a matter of law, constitute alimony, support, or separate maintenance for purposes of §
522(d)(10)(D):
By definition, the division of real property by way of a judgment of divorce is a
property settlement. Real property awarded pursuant to a property settlement is
not an asset which can be construed as alimony and exempted under 11 U.S.C.,
Section 522(d)(10)(E) [sic].1 In the instant case, the judgment of divorce awarded
the Pinecrest property to debtor and Mr. Merillat as joint tenants. While the
judgment of divorce did award debtor the use of the jointly owned property, the
right to use real property is not an interest which may be exempted under any
section of 11 U.S.C., Section 522(d).
Id. at Page ID 124-125.
The Bankruptcy Court’s apparent view that alimony, support, and separate maintenance,
for purposes of § 522(d)(10)(D), must take the form of a money payment and cannot take the
form of an interest in real property is erroneous. The case law reflects that alimony, support, or
separate maintenance under the Bankruptcy Code can take other forms – not just the form of a
monetary payment – and that a fact-intensive inquiry is required to determine whether the parties
intended to provide alimony, support, or separate maintenance.
For example, the bankruptcy court in In re Pylant, 467 B.R. 246 (M.D. Ga. 2012), a case
on which Appellant relies, concluded that the debtor’s obligation under a divorce settlement
agreement to provide his former spouse with a house in which to live constituted alimony for
purposes of 11 U.S.C. §§ 101(14A), 523(a)(5) and 1328(a)(2), which together provide that
alimony, maintenance, and support are “domestic support obligations” and thus nondischargeable in bankruptcy. In so holding, the court, quoting the Eleventh Circuit, reiterated
1

The Court assumes that the Bankruptcy Court meant to reference § 522(d)(10)(D) and not §
522(d)(10)(E), as the latter provision does not involve alimony and was not the subject of the
Court’s discussion.
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that, in determining whether an obligation constitutes alimony or support, “‘a court cannot rely
solely on the label used by the parties [in the divorce decree],’” but instead “‘must . . . look
beyond the label to examine whether the debt actually is in the nature of support or alimony.’”
Pylant, 467 B.R. at 251 (quoting Cummings v. Cummings, 244 F.3d 1263, 1265 (11th Cir.
2001)). Focusing on the intent of the parties, the court attempted to discern whether the parties
intended for the debtor’s obligation to provide his ex-spouse with a house in which to live to
constitute alimony or support by considering the following factors, among others: (a) testimony
from the parties and their respective divorce attorneys, (b) the relative financial position of the
parties, (c) the language used in the divorce settlement agreement, (d) whether the parties treated
the obligation as alimony and support for tax purposes, (e) the number and frequency of
payments, and (f) whether the divorce settlement agreement provided for alimony/support
elsewhere in the agreement. Only after holding a trial and engaging in a detailed factual analysis
of the unique circumstances of the case did the court conclude that “the parties intended [the
debtor’s] obligation to provide [his ex-spouse] with a replacement home to function as support.”
467 B.R. at 255.
Similarly, in In re Calhoun, 715 F.2d 1103 (6th Cir. 1983), another case on which
Appellant relies, the Sixth Circuit considered whether the debtor’s assumption of five marital
debts pursuant to a separation agreement constituted alimony, maintenance, or support for
purposes of dischargeability. The bankruptcy court, relying on the fact that the separation
agreement characterized the obligation as alimony and support, held that the obligation
constituted alimony or support and was thus non-dischargeable. The Sixth Circuit reversed,
holding that “[t]he language of the parties’ (or state courts’) characterization of the loan
assumption does not control” and that, in resolving the issue, “the initial inquiry must be to

8

ascertain whether the state court or the parties to the divorce intended to create an obligation to
provide support through the assumption of the joint debts.” 715 F.2d at 1111 (emphasis in
original).
Another instructive case is In re Harbaugh, 257 B.R. 485 (E.D. Mich. 2001), a case on
which both parties rely.

The debtor there attempted to claim an exemption under §

522(d)(10)(D) for her right under the “alimony and spousal support” section of her divorce
decree to receive $48,500 from her ex-husband over a period of time. Although the obligation
was found in the “alimony and spousal support” section of her divorce decree, the Harbaugh
court did not rely solely on that label and instead engaged in a detailed analysis of the intent of
the parties, ultimately affirming the bankruptcy court’s conclusion, reached after conducting an
evidentiary hearing, that the parties intended the obligation to constitute alimony and support:
By focusing on the questions of whether divorcing parties have intended
purported alimony to be used for basic sustenance and if the amount is reasonably
necessary to achieve that purpose, the Court can bypass the formal issue of
nomenclature, look to the substance of the obligation, and, in the meantime,
uphold Congress’ intent.
257 B.R. at 491. Although one of several factors considered by the court was the fact that the
parties and the state court characterized the obligation in the divorce decree as “alimony and
spousal support,” the court considered numerous other factors – including some of the factors
considered by the Pylant court – in reaching its ultimate conclusion. See id. at 492.
As the cases discussed above illustrate, the Bankruptcy Court here did not engage in the
appropriate analysis in determining whether Appellant’s interest in the Pinecrest property
constitutes alimony, support, or separate maintenance for purposes of § 522(d)(10)(D). Instead
of considering evidence probative of the intent of the parties, the Bankruptcy Court erroneously
concluded as a matter of law that an interest in real property cannot constitute alimony, support,

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or separate maintenance under the Bankruptcy Code. However, Pylant and Calhoun – two cases
involving obligations that were not in the form of direct money payments – counsel otherwise.
And although Appellee argues that the intent of the parties is apparent from the fact that the
property interest was awarded to Appellant in the “property settlement” section of the judgment
of divorce, Calhoun and Harbaugh illustrate that the label alone is not controlling and that a factintensive analysis of other factors relating to the intent of the parties is necessary.
Accordingly, the Court must reverse the Bankruptcy Court’s decision sustaining
Appellee’s objection to Appellant’s claim of exemption for the Pinecrest property under §
522(d)(10)(D), and remand the case for further proceedings. On remand, the Bankruptcy Court
should conduct appropriate proceedings focused on discerning the intent of the parties. If the
Bankruptcy Court concludes that the parties intended for Appellant’s interest in the Pinecrest
property to constitute alimony, support, or separate maintenance, it must then consider the extent
to which the property interest is “reasonably necessary for the support of” Appellant and her
daughter. See 11 U.S.C. § 522(d)(10)(D).
B. Exemption Under 11 U.S.C. § 522(d)(12) for $50,227.96
Originating in Mr. Merillat’s 401(k) Retirement Account
The next issue is whether the Bankruptcy Court properly disallowed Appellant from
claiming an exemption in the amount of $50,227.96, comprising funds that were held in a
retirement account that was qualified under § 401(a) of the Internal Revenue Code. Appellant
claimed this exemption pursuant to 11 U.S.C. § 522(d)(12), which permits a debtor to exempt
from the bankruptcy estate “[r]etirement funds to the extent that those funds are in a fund or
account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of
the Internal Revenue Code of 1986.” Thus, for funds to be exempt under § 522(d)(12), two
requirements must be satisfied: (1) the amount must be retirement funds; and (2) the retirement
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funds must be in an account that is exempt from taxation under one of the listed sections of the
Internal Revenue Code. See In re Rice, 478 B.R. 275, 280 (E.D. Mich. 2012). Appellant’s
entitlement to the exemption is determined as of the filing of the bankruptcy petition – July 28,
2013 in the present case. See White v. Stump, 266 U.S. 310, 313, 45 S. Ct. 103, 104 (1924).
On July 22, 2013, a few days before Appellant filed her bankruptcy petition, AXA
Equitable distributed to Appellant via check the funds at issue, totaling a net cash payment of
$50,227,96. Appellant’s net payment was calculated as follows:
Gross Cash Payment
Less Direct Rollover
Less Federal Withholding
Less Michigan Withholding
Net Cash Payment

$88,057.08
$22,000.00–
$13,190.93–
$2,638.19–
-----------------$50,227.96

The paperwork from AXA Equitable reflects that the funds were distributed to Appellant on July
22, 2013 – six days before she filed her bankruptcy petition. The record further reflects that
Appellant held the check until September 23, 2013, at which time she deposited it into a demand
account held by Appellant at TCF Bank.
Relying mainly on In re Kane, No. 99-02153, 1999 WL 33490225 (Bankr. D. Idaho Nov.
24, 1999), Appellee argues that the funds at issue lost their status as exempt retirement funds
pursuant to § 522(d)(12) on the day the funds were distributed (July 22, 2013). Appellant
argues, relying on Barnhill v. Johnson, 503 U.S. 393, 112 S. Ct. 1386 (1992) and In re Meadows,
396 B.R. 485 (6th Cir. BAP 2008), that the status was lost on the day she cashed the check
(September 23, 2013). If Appellee is right that the funds lost their status as exempt retirement
funds on the July 22 distribution date, Appellant cannot claim an exemption under § 522(d)(12)
because the distribution preceded the bankruptcy filing. However, if Appellant is right that the
funds maintained their tax exempt status as retirement funds until the check was cashed, the
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claimed exemption is proper, as Appellant did not cash the check until after the she filed for
bankruptcy. See White, 266 U.S. at 313, 45 S. Ct. at 104 (entitlement to exemption determined
at time of bankruptcy filing).
The Bankruptcy Court adopted Appellee’s position and denied the exemption, reasoning
that the funds were distributed from the retirement account, taxed, and in the form of a check
payable to Appellant prior to the filing of her bankruptcy petition, and were thus neither
retirement funds nor funds held in a tax exempt account on that date:
[T]he two requirements for exempting funds under 11 U.S.C., Section 522(d)(12),
are that they be exempt from taxation and that the funds be in an account exempt
from taxation on the date of the filing of the petition. The check received by
debtor from AXA was not exempt from taxation. The funds distributed to debtor
had already been taxed prior to distribution. And the funds were not in a taxexempt account on the date debtor filed her petition. On the date debtor received
the funds, she could do what she pleased with the funds.
Dkt. 1 at Page ID 133. The Bankruptcy Court relied on a number of cases in support of its
decision, one of which was Kane, the principle case on which Appellee relies.
The facts of Kane are similar to the facts of the present case. The debtor in Kane
liquidated and withdrew the proceeds of his tax-exempt retirement account just before filing his
bankruptcy petition. He claimed, over the trustee’s objection, that the proceeds were exempt
from the bankruptcy estate under an Idaho exemption statute similar to § 522(d)(12). The court
held that the funds at issue lost their status as exempt retirement funds when the account was
liquidated and a check to the debtor was issued: “It is sufficient, for purposes of this decision, to
find that [the brokerage firm] must have necessarily liquidated the account and issued the check
prior to [the bankruptcy filing].” 1999 WL 33490225, at *4
In the present case, the paperwork from AXA Equitable reflects that the funds that are the
subject of Appellant’s claimed exemption were distributed on July 22, 2013, several days before

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Appellant filed for bankruptcy. See Dkt. 1 Page ID 212 (“This statement describes how your
July 22, 2013 distribution from the AXA Equitable 401(k) plan was paid and provides you with
the information you need to calculate the taxes you may owe . . .”). Further, the paperwork from
AXA Equitable, under the “Transaction Detail” section, reflects that, on the July 22 distribution
date, AXA Equitable liquidated funds totaling $88,057.08 – the amount of Appellant’s gross
cash payment – from the tax-exempt fund (“Fixed Income Fund”) in which the money was held.
See id. at Page ID 214. Finally, on the same date, the evidence indicates that AXA Equitable
deducted federal and state taxes from Appellant’s gross cash payment, and AXA Equitable sent
Appellant an earnings statement on July 24, 2013 confirming that federal and state taxes were
withheld. See id. at Page ID 212, 216. The very fact that tax was withheld on the proceeds at the
time of distribution necessarily means that the proceeds were not in a tax-exempt fund. Because
the funds that Appellant attempts to exempt under § 522(d)(12) were no longer “in” one of the
tax-exempt retirement funds listed in the statute when she filed for bankruptcy, see 11 U.S.C. §
522(d)(12), Appellant is not entitled to claim the exemption.2
Appellant argued before the Bankruptcy Court – and continues to argue before this Court
– that Barnhill and Meadows support her argument that she is entitled to an exemption in the
amount of $50,227.96 under § 522(d)(12) for the proceeds of the retirement fund at issue. The
Bankruptcy Court rejected the argument, holding that Appellant’s reliance on Barnhill and
Meadows is misplaced. From the bench, the Bankruptcy Court stated:
[Barnhill and Meadows] do not support debtor’s argument. Barnhill v. Johnson
addresses at what point in time a check becomes property of the party to whom
the check is issued for purposes of a preference recovery under 11 U.S.C., Section
2

Appellant attempts to distinguish Kane, asserting that the result in that case was “more based
upon the bad faith of the Debtors.” Reply at 6 (Dkt. 8). While Kane did involve the failure of
the debtors to disclose in their initial bankruptcy papers their interest the retirement account in
question, the decision is devoid of any suggestion that the concealment impacted the court’s
determination.
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547(e). The Supreme Court concluded that for purposes of a preference recovery,
the 90-day preference recovery period started to run on the date the creditor
negotiated the check. In Meadows the issue was whether a creditor’s presentment
of a check post-petition violated the automatic stay under 11 U.S.C., Section 362.
Neither case cited by debtor addresses the issue of whether retirement funds that
have been liquidated and paid out to a beneficiary by way of a check remain
retirement funds for purposes of 11 U.S.C., Section 522(d)(12). As noted above,
the two requirements for exempting funds under 11 U.S.C., Section 522(d)(12),
are that they be exempt from taxation and that the funds be in an account exempt
from taxation on the date of the filing of the petition. The check received by
debtor from AXA was not exempt from taxation. The funds distributed to debtor
had already been taxed prior to distribution. And the funds were not in a taxexempt account on the date debtor filed her petition. On the date debtor received
the funds, she could do what she pleased with the funds.
Dkt. 1 at Page ID 132-133.
Having reviewed Barnhill and Meadows, the Court agrees with the Bankruptcy Court’s
conclusion. In Barnhill, the Supreme Court interpreted the definition of the word “transfer,” for
purposes of the preference avoidance statute, 11 U.S.C. § 547, under which the trustee is
permitted to recover a “transfer” of property made by the debtor within ninety days before the
date on which the bankruptcy petition is filed. More specifically, the Court was tasked with
determining whether a “transfer” made by check was deemed to occur on the date the check was
honored (i.e., cashed) rather than the date on which the payee received the check. The Court
resolved the issue by examining the language of the statutory provisions defining the word
“transfer” for purposes of § 547, concluding that a transfer occurs for purposes of § 547 when the
recipient has a right to receive the thing transferred.
The statute at issue in the present case – § 522(d)(12) – does not use the word “transfer”
to define the status of retirement funds as either exempt or not exempt. Rather, the outcome here
depends on the interpretation of different statutory language, namely, whether the interest
claimed as an exemption was “in a fund or account that is exempt from taxation” at the time of
the bankruptcy filing. As discussed above, the evidence reflects that the funds at issue left the
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tax exempt fund as of the distribution date, which was before the bankruptcy filing. While the
money may not have been “transferred” on that date, the relevant inquiry here, unlike in
Barnhill, is not tied to the occurrence of a transfer.3
C. Exemption Under 11 U.S.C. § 522(d)(11)(E) for the Marital Home and
for $50,227.96 Originating in Mr. Merillat’s 401(k) Retirement Account
Appellant claimed an exemption under § 522(d)(11)(E) for her interest in the marital
home and for her net cash payment of $50,227.96, which originated in Mr. Merillat’s 401(k)
retirement account at AXA Equitable. Section 522(d)(11)(E) provides an exemption for “[t]he
debtor’s right to receive, or property that is traceable to . . . a payment in compensation of loss of
future earnings of the debtor or an individual of whom the debtor is or was a dependent, to the
extent reasonably necessary for the support of the debtor and any dependent of the debtor.”
Appellant argues that the house and the retirement funds are exempt under this provision on the
theory that both interests are payments by Mr. Merillat to compensate Appellant for what he took
away from her as a result of the motorcycle accident that occurred before the marriage – her
ability to work as a teacher. According to Appellant:
As a result of the accident which occurred prior to the Merillats’ marriage, Mrs.
Merillat became permanently disabled and is unable to work anywhere, including
in her chosen career. Mrs. Merillat was a homeowner and a single mother prior to
the accident, she had earned tenure with her school district and by now she would
have been entitled to a substantial salary and excellent benefits. All of these were
taken away by Mr. Merillat in the accident. Mr. Merillat tried to compensate the
Debtor for her loss by marrying her to take care of her, but his filing for divorce
constituted an abdication of his responsibility. The usage of the house and the
3

Appellant also relies on Meadows; however, her reliance on that case is unavailing for the same
reason as is her reliance on Barnhill – both cases, unlike the present case, involve a statute that
uses the word “transfer.” Meadows held that a creditor’s post-petition presentment of a prepetition check did not violate the automatic stay, but rather effects a transfer of property of the
estate, which is subject to avoidance as a post-petition “transfer” under 11 U.S.C. § 549(a)
(authorizing trustee to avoid a post-petition “transfer of property of the estate.”). The Meadows
court followed Barnhill’s definition of the word “transfer,” holding that a transfer occurred and
that is was subject to avoidance under § 549(a).
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pension proceeds are merely enabling the Debtor to survive and support her
dependent child given the loss of Mr. Merillat’s support and Mr. Merillat’s
destruction of the Debtor’s career.
Dkt. 4 at Page ID 266.
The Bankruptcy Court rejected Appellant’s argument, explaining from the bench:
Generally, 11 U.S.C., Section 522(d)(11)(E), applies to tort recoveries, although
certain other types of lump sum payments may be exempt under 11 U.S.C.,
Section 522(d)(11)(E). These funds must be traceable to an award of
compensation made to compensate an injured party for a loss of future earnings.
****
Debtor fails to explain how [the interests are] a payment in compensation of loss
of future earnings of the debtor. [The interests were] owed to debtor as a result of
a judgment of divorce. [They are] not owed to debtor as a result of a judgment in
which debtor was awarded damages as a result of injuries which interfered with
her ability to earn a living. Debtor seems to suggest that because she and Mr.
Merillat were in a motorcycle accident in 1995, everything awarded in the 2013
judgment of divorce may be characterized as compensation for loss of future
earnings. The case law does not support such a theory.
Dkt. 1 at Page ID 128-129 (case citations omitted). This Court agrees with the Bankruptcy
Court.
Appellant’s attempt to exempt her interest in the marital home and the retirement account
money under § 522(d)(11)(E) is improper. All of the cases discussing exemptions taken under §
522(d)(11)(E) involve discrete, sum certain payments to compensate for the debtor’s loss of
future earnings that are made pursuant to some agreement, award, or judgment. See, e.g., In re
Lewis, 387 F. App’x 530 (6th Cir. 2010) (buyout payments received by debtor from former
employer in exchange for waiving right to future earnings exempt under § 522(d)(11)(E)); In re
Holstine, 458 B.R. 392 (Bankr. E.D. Mich. 2011), aff’d, No. 11-14573, 2012 WL 2891220 (E.D.
Mich. July 15, 2012) (funds traceable to a lump sum worker’s compensation redemption award
exempt under § 522(d)(11)(E)); In re Lebourdais, No. 13-50222, 2014 WL 1165803 (Bankr.

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E.D. Mich. Mar. 19, 2014) (same). Appellant cites no case, and the Court is aware of none,
suggesting that an exemption can be taken under § 522(d)(11)(E) for interests that stem from a
generalized, non-specific, undocumented promise to “take care” of someone for life. Appellant
argues that the Bankruptcy Court erred in holding that § 522(d)(11)(E) applies only to
compensation received in the nature of tort liability; however, Appellant mischaracterizes the
Bankruptcy Court’s holding.

The Bankruptcy Court merely noted that § 522(d)(11)(E)

“generally” applies to tort recoveries, but expressly acknowledged that other types of payments
may also be covered.

The Court discerns no error in the Bankruptcy Court’s analysis or

conclusion.
V. CONCLUSION
For the reasons stated above, the Court reverses the Bankruptcy Court’s holding that the
marital house is not exempt under 11 U.S.C. § 522(d)(10)(D), and remands the case for further
proceedings that are consistent with this opinion. The Court affirms the Bankruptcy Court’s
holdings that (1) the retirement funds are not exempt under 11 U.S.C. § 522(d)(12), and (2)
neither the marital house nor the retirement funds are exempt under 11 U.S.C. § 522(d)(11)(E).
In addition, the temporary stay imposed by the Court on April 24, 2014 is lifted, and Appellant’s
motion to stay the sale of the marital home pending the disposition of this appeal is denied as
moot.
SO ORDERED.
Dated: May 8, 2014

s/PATRICK J. DUGGAN
UNITED STATES DISTRICT JUDGE

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