Carr v. Arellano (In re Arellano)
524 B.R. 615
| Bankr. M.D. Penn. | 2015Background
- Debtor Jesus Arellano received a pre‑petition lump‑sum workers’ compensation settlement of $225,000 plus a $72,741.88 Medicare set‑aside (WCMSA); both were deposited in his bank accounts before filing Chapter 7.
- Debtor used settlement proceeds to buy a primary residence, a second parcel (later sold to his brother on an installment contract), and a 2005 Ford F‑150; installment payments are $1,200/month with interest.
- Debtor filed bankruptcy and claimed exemptions for the two properties, the truck, and checking‑account funds traceable to the workers’ compensation payout under 11 U.S.C. § 522(d)(11)(E).
- The Chapter 7 Trustee objected, arguing lump‑sum workers’ compensation proceeds are not exempt under § 522(d)(11)(E) (relying on In re Michael) and that the funds/properties were not reasonably necessary for support.
- Court found the WCMSA is held in trust (not estate property) and therefore not administrable by the Trustee.
- On the main exemption question, the court concluded § 522(d)(11)(E)’s plain language covers payments compensating for loss of future earnings, including lump‑sum workers’ compensation proceeds, and that the traced property was reasonably necessary for support; Trustee’s objection was overruled.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether pre‑petition lump‑sum workers’ compensation proceeds (or property traceable thereto) are exempt under 11 U.S.C. § 522(d)(11)(E) | Debtor: § 522(d)(11)(E) unambiguously exempts payments compensating for loss of future earnings, including lump sums | Trustee: § 522(d)(11)(E) is limited to tort‑type recoveries; workers’ comp belongs under § 522(d)(10) and is not covered | Court held § 522(d)(11)(E) covers payments compensating for loss of future earnings, including lump‑sum workers’ comp traceable into property; exemption available |
| Whether the Medicare set‑aside (WCMSA) is estate property and exemptible | Debtor: WCMSA was allocated for future medical care and not estate property | Trustee: WCMSA may be estate property and subject to administration | Court held WCMSA is held in trust for medical providers under Maryland law and thus is not property of the estate |
| Whether property purchased with exemptable proceeds remains exempt when converted into real/personal property | Debtor: Conversion does not defeat traceability; acquired home and modest truck are support assets | Trustee: Purchases (home, investment parcel, truck) show funds were not reasonably necessary for support | Court held converting proceeds into property does not defeat exemption; properties are traceable and reasonably necessary |
| Whether traced property is "reasonably necessary for support" | Debtor: Family income, unemployment, children, language barrier, modest payments/expenses show necessity | Trustee: Installment receipts and asset values create sufficient income/ability to pay creditors | Court held evidence (low family income, dependents, unemployment, language barrier, modest net income) supports that the traced proceeds/property are reasonably necessary for support |
Key Cases Cited
- In re Michael, 262 B.R. 296 (Bankr. M.D. Pa. 2001) (held workers’ compensation proceeds not exempt under § 522(d)(11)(E))
- In re Sanchez, 362 B.R. 342 (Bankr. W.D. Mich. 2007) (interpreting § 522(d)(11)(E) to cover lump‑sum workers’ compensation payments traceable to loss of future earnings)
- In re Holstine, 458 B.R. 392 (Bankr. E.D. Mich. 2011) (questioned the mutual exclusivity of §§ 522(d)(10) and (d)(11) and supported broader reading of (d)(11))
- Lamie v. U.S. Trustee, 540 U.S. 526 (2004) (statutory interpretation: start with plain text)
- Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1 (2000) (when statutory language is plain, courts enforce it according to its terms)