Uncashed Retirement Loan Check Not Exempt

Posted by NCBRC - June 29, 2020

The debtor’s uncashed loan check from her retirement account was property of the estate and was not exempt under section 522(d)(12). Ostrander v. Brown (In re Brown), No. 19-24 (B.A.P. 1st Cir. May 21, 2020).

Prior to filing her bankruptcy petition, the debtor received, but did not cash, an $18,000 check representing a loan from her retirement account. The chapter 7 trustee sought turnover of the check. The bankruptcy court denied the turnover motion finding that, because the funds were from an exempt retirement account and the debtor had not yet cashed the check, the check was likewise exempt.

On appeal, the Bankruptcy Appellate Panel for the First Circuit looked to section 542(a), which provides that a person in possession or control of estate property that the trustee may either sell or that the debtor may exempt and that is not inconsequential, must turn that property over to the bankruptcy estate. The panel then turned to whether the check was property of the estate under section 541, broadly reading the provision to include “every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative.”

Section 541(c)(2), however, excludes from the bankruptcy estate property that is nontransferable under non-bankruptcy law, such as funds in an ERISA account. Notwithstanding this exception, the panel concluded that the check was property of the estate based on three conclusions. First, once retirement funds are distributed they are no longer subject to the anti-alienation provision. Second the bankruptcy court’s decision was based on a finding that the check was exempt: a finding that necessarily incorporates a finding that the check was estate property. Third, the debtor did not argue on appeal that the check was not estate property. Therefore, the panel concluded that the first hurdle for turnover had been cleared.

The panel turned to whether the check was exempt under section 522(d)(12) which creates an exemption for funds in a retirement account. If no party objects to a claimed exemption within 30 days after the conclusion of the 341 meeting of creditors as provided under Rule 4003(b), the exemption is deemed valid. Here, the trustee never formally objected to the debtor’s claimed exemption. Nonetheless, the panel found the trustee’s turnover motion served the same purpose as it alerted the debtor to the fact that her exemption was under attack. With respect to the timing of that objection, the panel found that even though the trustee filed the motion more than 30 days after the first 341 meeting of creditors, the meeting was adjourned several times and did not conclude until after the trustee filed the motion. Therefore, the motion constituted a timely objection to the exemption. Furthermore, the debtor’s failure to raise the issue of timely objection constituted waiver of the issue.

The panel next addressed whether the debtor had a valid exemption in the check and found that she did not. Section 522(d)(12) requires that for retirement funds to be exempt, they must be in an account that is exempt. Once the funds are distributed, they lose their exempt status unless they are placed in another exempt account within 60 days. The panel found that because the debtor retained the check and did not place it in another exempt account within 60 days, the funds lost their exempt status. It disagreed with the bankruptcy court’s conclusion that because the check was not cashed, the funds were still in the original retirement account, finding instead, that at the time of the bankruptcy petition, the debtor’s interest in the funds was established whether she had negotiated the check or not.

The panel reversed and remanded.

Brown 1st Cir BAP May 2020

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