607 B.R. 116
Bankr. E.D.N.Y.2019Background
- On May 2, 2018 the NY Workers’ Compensation Board awarded Mr. Nuara disability/workers’ compensation; Chubb/ACE issued a check for $45,623.23 on August 3, 2018.
- Debtors filed Chapter 7 on August 30, 2018; the workers’ compensation check was received prepetition but had not been cashed and was identifiable as proceeds of the award.
- Debtors amended Schedule C to claim the award as exempt under NYDCL § 282(2)(c) (disability/illness/unemployment benefit) and relevant state statutes (WCL §§ 33, 218(2); Labor Law § 595(2)).
- Chapter 7 trustee objected, arguing that NYDCL § 282(2) exempts only the right to receive future benefits (not prepetition payments) and relied primarily on In re Wydner.
- The Bankruptcy Court (Scarcella, J.) held for the debtors, overruling the trustee’s objection and allowing the exemption for the identifiable prepetition workers’ compensation payment.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a workers’ compensation payment received prepetition is exempt under NYDCL § 282(2)(c) | Trustee: Prepetition payments are not exempt; § 282(2) protects only the right to receive post‑petition benefits; follow Wydner | Debtors: § 282(2) ("the debtor’s right to receive or the debtor’s interest in…") plainly covers benefits whether paid pre‑ or post‑petition when proceeds are identifiable | Allowed: Court ruled § 282(2)(c) covers the debtor’s interest in disability/workers’ comp benefits and an identifiable prepetition check is exempt |
| Scope of the lead‑in phrase "the debtor’s interest in" — does it apply to subclauses (a)–(e) or only (e) | Trustee: Phrase ambiguous; intended only for (e) (ERISA/retirement plans); consult legislative history (Wydner) | Debtors: Plain statutory placement shows the phrase applies to all subclauses (a)–(e) | Held: Phrase is plain and applies to all subclauses; court declines to read it as limited to (e) |
| Whether NYDCL’s use of "benefit" excludes "payments" (i.e., cash received prepetition) | Trustee: "Benefit" differs from "payment"; § 282(2)(e) expressly references "payments," so (c) shouldn’t cover lump‑sum prepetition payments | Debtors: "Benefit" is broader and includes cash payments or property traceable to the benefit; restricting it would produce absurd results | Held: Rejected trustee’s narrow reading; benefit includes cash payments; Santiago‑Monteverde supports broad construction |
| Whether tracing doctrine or § 282(3) is required to exempt prepetition funds | Trustee: Tracing is available only under § 282(3); prepetition funds become ordinary cash and lose exempt status | Debtors: Here proceeds are identifiable as workers’ comp proceeds and thus traceable to the exempt benefit | Held: Court finds proceeds identifiable and exempt; also notes § 282(3)(iv) would allow a tracing claim if needed |
Key Cases Cited
- In re Wydner, 454 B.R. 565 (Bankr. W.D.N.Y. 2011) (held prepetition lump‑sum workers’ compensation not exempt under NYDCL § 282(2)(c))
- In re Herald, 294 B.R. 440 (Bankr. W.D.N.Y. 2004) (distinguished in Wydner; addressed exemption for future payments)
- Santiago‑Monteverde v. Pereira, 24 N.Y.3d 283 (N.Y. 2014) (NY Court of Appeals broadly construed "the debtor’s interest in" and "benefit," holding rent‑stabilized lease interest exempt under NYDCL § 282(2)(a))
- In re Santiago‑Monteverde, 780 F.3d 126 (2d Cir. 2015) (affirmed that debtor’s interest in rent‑stabilized lease is an exempt local public assistance benefit)
- Surace v. Danna, 248 N.Y. 18 (N.Y. 1928) (historic policy: workers’ compensation meant to substitute for wages and be protected from creditors)
- In re Crutch, 565 B.R. 36 (Bankr. E.D.N.Y. 2017) (recognized that debtors electing NY exemptions may exempt rights to receive benefits such as Social Security and pensions)
- In re Arellano, 524 B.R. 615 (Bankr. M.D. Pa. 2015) (held § 522(d) can permit exemption of prepetition lump‑sum workers’ compensation traceable to loss of future earnings)