In Re Cutignola
OPINION DENYING TRUSTEE’S MOTION FOR TURNOVER OF ASSETS
The chapter 7 trustee seeks turnover of an individual retirement account and homestead exemption, which were owned by debtor Elenita Cutignola, on the grounds that they passed to the bankruptcy estate upon her death post-petition. Debtor Vincent Cutignola opposes the motion, arguing that the assets retain their exempt status, having passed to him as the beneficiary of his spouse’s will. The Court finds that the homestead and retirement funds, which are inherited by a spouse, retain their exempt character. The trustee’s motion for turnover is denied.
Statement of Jurisdiction
This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a) and the Standing Order of Reference signed by Acting Chief Judge Robert J. Ward dated July 10, 1984. This is a “core proceeding” under 28 U.S.C. § 157(b)(2)(B).
Background
Debtors commenced their case on December 22, 2010, and received the chapter 7 discharge on March 30, 2011. The debtors had equity in the home in the amount of $68,000 at the time of filing. Elenita owned the couple’s home, and exempted her homestead and retirement funds (the “Funds”) worth about $82,000. It appears that Vincent did not have an ownership interest in the home at the time the case was commenced. Elenita died on January 13, 2011, leaving an estate of which Vincent is the sole bеneficiary.
The parties do not dispute that the Funds were properly exempted by Elenita; that the Funds meet a standard for exempt retirement funds under the Internal Revenue Code; or that the are held by Vincent by way of a direct transfer. The parties do not dispute that the Funds presently are held in an account exempt from taxation.
On March 18, 2011, the trustee moved for turnover of the Funds and the originаl deed and insurance policy for the debtors’ home located at 117 Spackenkill Road, Poughkeepsie. Debtor opposes the motion for turnover, arguing that the Funds are exempt pursuant to 11 U.S.C. § 522(d)(12), and that the Funds and the homestead exemption retained their exempt status when they were inherited by Vincent, Ele-nita’s beneficiary. In reply to debtor’s opposition, the trustee frames the issuе as
At the hearing on May 3, 2011, the trustee agreed that the assets were property of the estate, and properly exempted by Elenita. Both parties agreed that the debtors had been married for more than ten years and had lived in the home for many years. Both parties characterized the Funds as an individual retirement account (“IRA”). Counsel to the debtor argued that the Funds were transferred to Vincent in an automatic, spouse-to-spouse transfer, that the Funds retain their status as an IRA according to the Internal Revenue Code, that the Funds are identical to their status before Elenita died, and that if Vincent withdraws funds, the tax treatment will be the same as it would have been for Elenita. Debtor’s counsel argued that 26 U.S.C. § 408(d)(3)(C)(2) contains a significant exception to the treatment of inherited IRAs, in favor of the surviving spouse.
Discussion
11 U.S.C. § 541(a) provides:
The commencement of a case under section 301, 302 or 303 of this title creates an estate. Such estate is comprised of all the following property wherever lоcated and by whomever held:
(1) [A]ll legal or equitable interests of the debtor in property as of the commencement of the case [with certain exceptions].
* * * * (5) Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date ...
Debtors in bankruptcy may exempt certain assets from the estate, so that they will not be left so destitute that they cannot get the benefit of the fresh start.
See
11 U.S.C. § 522(b). The law governing exemptions is determined as of the date of the filing of the petition.
See In re Magness,
New York has opted out оf the federal scheme of exemptions, pursuant to New York Debtor and Creditor Law § 284. At the time the debtors filed the present case, a debtor in bankruptcy was permitted to exempt trust funds, among other personal property, and $50,000 in equity above mortgages, in property owned and occupied as a principal residence. See N.Y. C.P.L.R. §§ 5205, 5206 (McKinney 2010) (personal and real property, respectively). 1
Debtors may exempt assets acquired post-petition
The assets that constitute property of the estate are determined by federal bankruptcy law. It is important to understand the distinction between the list of the actual items the debtor is allowed to exempt, which is determined by New York law and, in this case, Bankruрtcy Code §§ 522(c)(b)(3)(C) and 522(d)(12) in effect at the time the case is filed, and the property of the estate from which the debtor may exempt assets, which does not contain such a temporal element. Bankruptcy Code § 522(b)(a) states,
“[njotwithstand-ing section 511 of this title,
an individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subseсtion.” Section 522(b)(1) does not limit itself to subsection (a)(1) of § 541, which would support the trustee’s argument that the exemptions may only be taken in property owned at the time of filing; rather, § 522(b)(1) allows a debtor to exempt property despite “section 541.” The superiority of § 522(b)(1), the right to exempt property, extends to all subsections of Bankruptcy Code § 541, including § 541(a)(l)(5)(A), which concerns property filed post-petition.
See In re Magness,
As further support of this construction, the Court notes that Federal Rule of Bankruptcy Procedure 1007(h) requires the debtor to file supplemental schedules when an interest is acquired as prоvided in Bankruptcy Code § 541(a)(5), and states, “[i]f any of the property required to be reported under this subdivision is claimed by the debtor as exempt, the debtor shall claim the exemptions in the supplemental schedule.” The Bankruptcy Rule clearly provides for the debtor claiming exemptions in property acquired post-petition.
Caselaw amply supports the conclusion that the debtor’s right to exempt property extends to property acquired post-petition. In
Connelly v. Roach,
The Court is similarly guided by
In re Martinez,
The Court holds that the estate’s interest in property acquired post-petition is subject to the debtor’s right to exempt property. The plain language of the Bankruptcy Code and Rules clearly indicate that the estate’s right to property acquired post-petition is subject to the debtor’s rights to exemptions.
See
Bankruptcy Code § 522(b)(a); Fed. R. Bankr.P. 1007(h). The trustee’s proffered authority of
In re Wisotzke,
The Court disagrees with the reasoning of
Wisotzke,
and declines to follow it in the matter at bar. Among other distinguishing facts, the bankruptcy court in
Wisotzke
considered a home of which an
in rem
foreclosure sale had been held, to satisfy outstanding property taxes, and debtor had delayed in administering his parents’ estate. None of those circumstances are present in the matter at bar; the house has not been sold at a tax foreclosure, no priority tax claims are listed on the schedules, and Elenita Cutignola died recently. Further,
In re de Kleinman,
In the matter at bar, Vincent Cutignola may take the homestead exemption. Debtor’s counsel represented on the record of the hearing that the debtors had been married for mаny years, and had dwelled in the home as their principal residence for many years. Vincent acquired the homestead from Elenita upon her death post-petition. He may take the allowed exemptions in this asset, because the property in which exemptions are allowed is not limited to property owned by the debtor at the time the ease is commenced. Section 541 is subject to § 522, and § 522 does not contain a temporal limitation. See also Connelly, Martinez, Wilson, supra. The trustee’s motion for turnover of the deed and insurance policy is denied.
In the alternative, the trustee’s motion is denied, because the homestead exemption continues after the owner’s death for the benefit of the surviving spouse. N.Y. C.P.L.R. § 5206(b). In
In re Costello,
of the filing survives her death and may be claimed by her husband as surviving spouse, not as the representative of her estate.” Id. Elenita’s homestead exemption was not extinguished upon her death; rather it passed to her husband by operation of N.Y. C.P.L.R. § 5206(b).
A debtor may exempt an IBA inherited from a spouse post-petition
The Court considers whether a debtor may exempt retirement funds inherited from a spouse, post-petition, and holds that he may exempt the funds, pursuant to the foregoing authority and that of
In re Nessa,
In contrast, in
In re Kuchta,
Retirement funds may be exempted when inherited post-petition. In
In re Notargiacomo,
The Court finds the reasoning of
Notargiacomo, Nessa
and its progeny to be more persuasive than the contrary authority cited by the trustee. The language of Bankruptcy Code §§ 522(b)(3)(C) and 522(d)(12) is identical and the Court applies the analysis of § 522(d)(12) to § 522(b)(3)(C).
See also
522(b)(4)(C). As
Conclusion
The property that a debtor may exempt from the estate is not limited to assets owned at the time the case was filed. See Bankruptcy Code §§ 522(b), 541; Fed. R. Bankr.P. 1007(h). Vinсent Cutignola may take the homestead exemption in the home inherited from his wife post-petition, and may exempt the Funds. An ownership interest sufficient to support a homestead exemption passed to Vincent upon Eleni-ta’s death, and it is undisputed that the Funds are retirement funds, located in an account exempt from taxation under the Internal Revenue Code, and arrived at that location by way of direct transfer. The trustee’s motion is denied.
Counsel to debtor shall submit an order.
Notes
. N.Y. C.P.L.R. § 5205(c) broadly exempts trusts from judgments:
Trust exemption. 1. Except as provided in paragraphs four and five of this subdivision, all property while held in trust for a judgment debtor, where the trust has been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor, is exempt from application to the satisfaction of а money judgment. 2. For purposes of this subdivision, all trusts, custodial accounts, annuities, insurance contracts, monies, assets or interests established as part of, and all payments from, either any trust or plan, which is qualified as an individual retirement account under section four hundred eight or section four hundred eight A of the United States Internal Revenue Code of 1986, as amended, a Keogh (HR-10), retirement or other plan established by a corporation, which is qualified under section 401 of the United States Internal Revenue Code of 1986, as amended, or created as a result of rollovers from such plans pursuant to sections 402(a)(5), 403(a)(4), 408(d)(3) or 408A of the Internal Revenue Code of 1986, as amended, or a plan that satisfies the requirements of section 457 of the Internal Revenue Code of 1986, as amended, shallbe considered a trust which hаs been created by or which has proceeded from a person other than the judgment debtor, even though such judgment debtor is (i) in the case of an individual retirement account plan, an individual who is the settlor of and depositor to such account plan, or (ii) a self-employed individual, or (iii) a partner of the entity sponsoring the Keogh (HR-10) plan, or (iv) a shareholder of the corporation sponsoring the retirement or other plan or (v) a participant in a section 457 plan, (emphasis added).