Louis A. Scarcella, United States Bankruptcy Judge.
This matter is before the Court on the objection of the chapter 7 trustee, Andrew M. Thaler, Esq., to the exemption claimed by the debtors pursuant to 11 U.S.C. § 522(b),
The Court has jurisdiction over this matter under 28 U.S.C. § 1334(b) and the Standing Order of Reference entered by the United States District Court for the Eastern District of New York pursuant to 28 U.S.C. § 157(a), dated August 28, 1986, as amended by Order dated December 5, 2012, effective nunc pro tunc as of June 23, 2011. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B) in which final orders or judgment may be entered by this Court pursuant to 28 U.S.C. § 157(b)(1).
The Court has considered carefully the arguments of counsel and has reviewed thoroughly the parties' submissions. This Memorandum Decision and Order constitutes the Court's findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, made applicable here by Bankruptcy Rules 9014 and 7052. To the extent a finding of fact includes a conclusion of law, it is deemed a conclusion of law, and vice versa.
For the following reasons, the Court finds in favor of the debtors. Accordingly, the trustee's objection is overruled and the exemption is allowed.
The relevant facts are not in dispute. On August 3, 2018, Chubb/ACE Property and Casualty Insurance Company issued a check to Mr. Nuara in the amount of $45,623.23 pursuant to a Notice of Decision issued by the State of New York Workers' Compensation Board ("Board"). Tr. Obj. Ex. 2. The award was rendered after a hearing held on May 2, 2018 at which the Board found that Mr. Nuara suffered a permanent partial disability relating to the use of his right leg due to an accident that occurred on October 1, 2012. Tr. Obj. Ex. 1. The disability payment was for a period of 57.6 weeks starting October 1, 2012 and ending November 7, 2013 at a rate $792.07 a week. Id. Mr. Nuara' average wage for the year he worked before the work-related injury was $1,935.11 per payroll period.
On August 30, 2018, the debtors filed a chapter 7 bankruptcy petition together with required schedules and statements. [dkt. no. 1]. The debtors' schedule I (income) specifies that during the months leading up to the petition date, Mr. Nuara received disability payments from his former employer from February 2018 through June 21, 2018. Id. Schedule I explains that since Mr. Nuara is no longer employed, the long-term disability payment from his employer ended. He also received short term disability payments from New York State from January 2018 through July 2018 in the amount of $736.67 a month. Id. Additionally, he received long term disability from New York State from May 2018 to the petition date in the amount of $3,309 per month. Id. This long-term disability is his only source of income. Mr. Nuara claims he is disabled for life. Jan. 15, 2019 Hr'g Tr. ("Hr'g Tr.") at 4:2-3.
In schedule C (property claimed as exempt), the debtors claimed an $8,550 exemption under NYDCL § 282(3)(iii) for workers' compensation in an unknown amount. [dkt. no. 1]. On October 24, 2018, the trustee filed an objection to the debtors' claimed exemption arguing that the funds are not exempt under NYDCL § 282(3)(iii) nor under NYDCL § 282(2)(c). [dkt. no. 10]. The debtors amended their schedule C on November 15, 2018 to withdraw their claim for an exemption under NYDCL § 282(3)(iii). [dkt.no. 13]. They now claim that the workers' compensation award is exempt in its entirety under NYDCL § 282(2)(c), New York Workers' Compensation Law §§ 33, 218,
The trustee does not dispute that disability and workers' compensation benefits are generally exempt outside of bankruptcy and concedes that such benefits would be exempt if made payable or earned after the bankruptcy filing. However, the trustee contends that benefit payments received by a debtor prior to filing for bankruptcy are not exempt from creditors' reach in bankruptcy. The trustee urges the Court to follow In re Wydner, 454 B.R. 565 (Bankr. W.D.N.Y. 2011) where the bankruptcy court held that a workers' compensation disability payment received by a debtor before bankruptcy is not exempt under NYDCL § 282(2)(c). In Wydner, the court distinguished its prior ruling in In re Herald, 294 B.R. 440 (Bankr. W.D.N.Y. 2003) where it found that future payments of workers' compensation benefits are exempt under NYDCL § 282(2)(c). The dispute in Wydner was whether the debtor could exempt a lump sum workers' compensation award received before commencement of the bankruptcy case which was traceable to the award itself. The Wydner court said no and held that only the right to receive the payment in the future, and not the payment itself, is exempt. In so finding, the Wydner court concluded that the phrase at issue here "the debtor's interest in" rendered the text
Based on the Wydner court's reasoning, the trustee asks this Court to find that (1) the phrase "the debtor's interest in" as set forth in NYDCL § 282(2) is ambiguous, (2) the New York legislature intended the phrase "the debtor's interest in" to apply only to certain ERISA-qualified retirement plans under NYDCL § 282(2)(e) to exempt payments under those plans in bankruptcy, but did not intend to exempt "the debtor's interest in" any of the benefits set forth in NYDCL § 282(2)(a)-(d), and (3) because only a debtor's "right to receive" a benefit under NYDCL § 282(2)(c) is exempt in bankruptcy and not the benefit (i.e., the payment) itself, a workers' compensation payment that is received prepetition is not exempt.
The trustee also contends that while NYDCL § 282(3)
The debtors argue that workers' compensation and disability awards are generally exempt under Work. Comp. Law §§ 33 and 218(2) and Labor Law § 595(2). They contend that the award continues to be exempt in bankruptcy as it falls under what the debtors argue is the clear statutory language that exempts "the debtor's interest in" a disability, illness, or unemployment benefit under NYDCL § 282(2)(c). In the debtors' view, it would be contrary to the principle of giving a debtor a fresh start in bankruptcy if the very act of filing for bankruptcy would cause a debtor to lose an exemption for a workers' compensation award that she would otherwise be entitled to under applicable non-bankruptcy law. According to the debtors, to rule otherwise would be
In addition, the debtors argue that Wydner is distinguishable and its reasoning should not be followed by this Court. They point out that in Wydner the debtors used a portion of the funds received prepetition to purchase luxury items and carpeting for their home. This, the debtors contend, is simply not the case here and, in any event, Wydner is not controlling authority.
The trustee bears the burden of proving, by a preponderance of the evidence, that the debtors' claimed exemption is improper. See Fed. R. Bankr. P. 4003(c) ("In any hearing under this rule, the objecting party has the burden of proving that the exemptions are not properly claimed."); In re Bellafiore, 492 B.R. 109, 113 (Bankr. E.D.N.Y. 2013). See also Fido's Fences, Inc. v. Bordonaro, No. 15-CV-3025 (JMA), 2015 WL 7738020, at *3 (E.D.N.Y. Nov. 30, 2015) (stating that a "party objecting to a debtor's claim of an exemption bears the burden of proving, by preponderance of the evidence, that the exemption is improper"). "The burden of showing something by a preponderance of the evidence ... simply requires the trier of fact to believe that the existence of a fact is more probable than its nonexistence...." Metro. Stevedore Co. v. Rambo, 521 U.S. 121, 137 n.9, 117 S.Ct. 1953, 138 L.Ed.2d 327 (1997) (quoting Concrete Pipe and Prods. of Cal., Inc. v. Constr. Laborers Pension Trust for S. Cal., 508 U.S. 602, 622, 113 S.Ct. 2264, 124 L.Ed.2d 539 (1993)).
"The commencement of a case ... creates an estate." 11 U.S.C. § 541(a). The estate consists of the property identified in § 541(a)(1)-(7). In a chapter 7 case, the bankruptcy trustee collects and sells property of the estate, see 11 U.S.C. § 704(a)(1), and the proceeds from the sale of property of the estate are distributed in accordance with the statutory scheme set forth in § 726. Under § 522(b)(1), an individual debtor is permitted to exempt certain property from the bankruptcy estate.
As noted above, under § 522(b)(1), the debtors elected to exempt from property of the estate property that is exempt under applicable New York State and federal non-bankruptcy law, see debtors' schedule C (property claimed as exempt); § 522(b)(3). Specifically, the debtors claimed that the workers' compensation benefit received by Mr. Nuara prepetition is exempt under NYDCL § 282(2)(c), Work. Comp. Law §§ 33, 218(2), and Labor Law § 595(2).
Under the applicable New York State law, workers' compensation benefits are
Work. Comp. Law § 33.
Similarly, Work. Comp. Law § 218(2) relating to disability benefits provides as follows:
Work. Comp. Law § 218(2).
Likewise, Labor Law § 595(2) provides that "benefits shall not be assigned, pledged, released or commuted and shall be exempt from all claims of creditors and from levy, execution, and attachment, or other remedy for recovery or collection of a debt. This exemption may not be waived." Labor Law § 595(2).
The public policy behind protecting disability and workers' compensation awards from the reach of creditors is a long standing one.
Surace v. Danna, 248 N.Y. 18, 21, 161 N.E. 315 (1928) (finding workers' compensation award deposited into an account is exempt under Work. Comp. Law § 33 from all claims of creditors and from levy, execution and attachment or other remedy for recovery or collection of a debt and reasoning that if the exemption only protects a benefit from the pursuit of creditors before the award reaches the judgment debtor, then the exemption would be "next to futile.").
When a debtor files for bankruptcy in New York and elects to claim exemptions under New York and federal non-bankruptcy law, the applicable state exemptions are set forth in NYDCL §§ 282 and 283. NYDCL § 282(2), relied upon by the debtors and at issue in this case, provides in relevant part:
NYDCL § 282(2).
With this statutory and legal framework in mind, the Court now turns to the present dispute which derives from the parties' conflicting interpretation of the language in NYDCL § 282(2), particularly the phrase "the debtor's interest in" and its application to subclauses (a) through (e).
The question before the Court is whether the phrase "the debtor's interest in" as it is used in NYDCL § 282(2) applies to subclauses (a) through (e) or does it apply only to subclause (e)? The trustee contends that the phrase is limited to subclause (e), and the debtors' claimed exemption under subclause (c) must be disallowed. To support his position, the trustee cites to a single authority, the Wydner decision. The trustee argues, relying on Wydner, that the phrase "the debtor's interest in" renders the statutory text ambiguous and that this Court should, as did the Wydner court, consult legislative history for assistance in interpreting the statutory language. In contrast, the debtors assert that the trustee's attempt to limit the application of the phrase "the debtor's interest in" to subclause (e) is contrary to the clear terms of the statute.
In addition, the trustee contends that even if the phrase "the debtor's interest in" includes workers' compensation benefits under subclause (c), the claimed exemption should not be allowed because a distinction must be drawn between the term "payment" as used in subclause (e) and the term "benefit" as used in subclause (c). The debtors disagree and again argue that such a reading ignores the plain and unambiguous language of the statute. For reasons discussed below, both of the trustee's arguments are rejected.
The "first step in interpreting a statute is to determine whether the language at issue has a plain and unambiguous meaning with regard to the particular dispute in the case." Robinson v. Shell Oil Co., 519 U.S. 337, 340, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997). "A statute generally `should be enforced according to its plain and unambiguous meaning.'" Greathouse v. JHS Sec. Inc., 784 F.3d 105, 111 (2d Cir. 2015) (quoting United States v. Livecchi, 711 F.3d 345, 351 (2d Cir. 2013)). "In evaluating ambiguity we look to the statutory scheme as a whole and place the particular provision within the context of that statute."
Under these well-established principles of statutory interpretation, the Court turns first to the text of the statute to determine whether it is plain on its face. If so, the Court's job is straightforward—there is no need to go beyond the words of an unambiguous statute. See Raila, 355 F.3d at 120 ("[s]tatutory construction begins with the plain text, and, `where the statutory language provides a clear answer, it ends there as well'") (quoting Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 438, 119 S.Ct. 755, 142 L.Ed.2d 881 (1999)).
The phrase "the debtor's interest in" in NYDCL § 282(2) is placed immediately before subclauses (a) through (e). It's placement immediately before subclauses (a) through (e) evidences that it applies to each subclause. The trustee acknowledges that a plain reading of NYDCL § 282(2) renders the phrase "the debtor's interest in" applicable to all subclauses that immediately follow. Hr'g Tr. at 13:5-7. Nevertheless, the trustee argues that NYDCL § 282(2) should be interpreted as follows:
(proposed modified language emphasized).
In sum, the trustee argues that the statute should be construed so that the language "the debtor's interest in" applies solely to subclause (e) and urges the Court to follow Wydner and conclude that "the debtor's interest in" the proceeds of a workers' compensation award received prepetition is not exempt under NYDCL § 282(2). The Court declines to do so. The Wydner court found the phrase "the debtor's interest in" to be ambiguous and looked beyond the statute to the legislative history to discern its purpose. In so doing, the Wydner court concluded that the phrase "the debtor's interest in" applied only to the exemption for ERISA-qualified retirement plans under NYDCL § 282(2)(e). The Wydner court reasoned that the amendments made in 1989 to NYDCL § 282(2) ("1989 Amendments"), which included placing the phrase "the debtor's interest in" as the lead-in to subclauses (a)-(e), was designed to address treatment of ERISA-qualified retirement plans under subclause (e), and nothing more. As such, the Wydner court found that the addition of the phrase "the debtor's interest in" to NYDCL § 282(2) in the same set of amendments that dealt with retirement plans only related to subclause (e) to the exclusion of other subclauses in NYDCL § 282(2). 454 B.R. at 573.
The Court disagrees with the Wydner court's conclusion that the applicable statute is ambiguous and that its meaning must be gleaned from the legislative history. The statute in question is neither ambiguous nor contradictory. Rather, it is plain on its face, and there is no need for the Court to go beyond the text and consider legislative history. In NYDCL 282(2), the lead-in phrase "the debtor's interest in" is followed by five subclauses, (a) through (e). Each subclause is mutually exclusive and is deemed to have equal weight. The plain reading of the statute denotes that the phrase "the debtor's interest in" applies equally to each of the subclauses that follow without differentiation, and not just to one particular subclause. Nothing in NYDCL § 282(2) indicates that "the debtor's interest in" should apply only to subclause (e), to wit, ERISA-qualified retirement plans. In short, the trustee asks this Court to rewrite the statute, which is neither silent nor unclear on the question at issue, so that the phrase "the debtor's interest in" applies solely to NYDCL § 282(2)(e) to the exclusion of subclauses (a)-(d), or place the phrase closer to NYDCL § 282(2)(e) as opposed to having it stand as the lead-in to all subclauses. Under familiar principles of statutory interpretation, that is not the function of a court when called upon to construe a term or phrase in a statute that is plain and unambiguous on its face. "[W]hen the statute's language is plain, the sole function of the courts — at least where the disposition required by the text is not absurd — is to enforce it according to its terms." Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) (internal quotations and citation omitted). The trustee's reading unreasonably restricts application of NYDCL § 282(2) and defeats the purpose of the statute. Additionally, the outcome advocated by the trustee undermines the distinct social policies of why we have exemption laws in the first place and countermands the protection given a debtor entitled to a disability benefit. In the trustee's view, workers' compensation benefits paid in installments, i.e., as an income stream, are exempt under NYDCL
Because the text of the statute is precise and directly addresses the threshold issue presented to the Court, resort to the legislative history
Although the trustee's argument conflicts with the plain meaning of the statute, he nevertheless contends that the Court should be guided not by the plain meaning of NYDCL § 282(2), but rather by § 522(d)(10).
Third, if called upon to rule whether a workers' compensation payment received in a lump sum prepetition may properly be claimed as exempt under § 522(d), this Court would comfortably find that a workers' compensation payment received as a lump sum prepetition can qualify for the exemption permitted under § 522(d)(11)(E)
This Court agrees with the well-reasoned approach taken by the courts in Holstine and Arellano and, in light of the purpose of workers' compensation statutes, perceives the injustice of allowing workers' compensation awards paid over time to be exempt yet denying the exemption for an award received in a lump sum.
Additionally, the Court notes that NYDCL § 282(3)(iv) mirrors § 522(d)(11)(E) so that even if the Court were to accept the trustee's argument that the phrase "the debtor's interest in" was intended to apply solely to subclause (e) of NYDCL § 282(2), the debtors may further amend schedule C (property claimed as exempt) and claim the prepetition workers' compensation award as exempt under the more limited exemption provided by NYDCL § 282(3)(iv), subject to any objection the trustee may have.
In construing NYDCL § 282(2)(c) and permitting the debtors' claimed exemption, the Court does not write on a blank slate. Notwithstanding the ruling in Wydner, other courts in the Second Circuit have since considered whether the lead-in phrase "the debtor's interest in" applies to other subclauses of NYDCL § 282(2). The New York Court of Appeals and the United States Court of Appeals for the Second Circuit found that "the debtor's interest in" a rent stabilized lease is exempt as a public assistance benefit under NYDCL § 282(2)(a). The trustee in Santiago-Monteverde v. Pereira (In re Santiago-Monteverde), 466 B.R. 621 (Bankr. S.D.N.Y. 2012), sought to accept an offer to purchase the debtor's rent-stabilized lease from the owner of the apartment building where the debtor resided. The bankruptcy court found that "all of the items listed in section 282(2) are payments of one sort or another that a debtor has the right to receive or in which the debtor has an interest", Id., 466 B.R. at 623-24, but the benefit of paying below market rent was not a "public assistance benefit" entitled to any exemption.
The Second Circuit stated that "[u]nder New York law, a debtor may exempt, among other things, her `right to receive or ... interest in ... a social security benefit, unemployment compensation, or a local public assistance benefit.'" In re Santiago-Monteverde, 747 F.3d 153, 156 (2d Cir. 2014) (quoting NYDCL § 282(2)). Given the significance of the issue with respect to landlords and tenants, and the absence of authority concerning the impact of NYDCL § 282(2) on rent stabilized leases, the Second Circuit certified to the New York Court of Appeals the question of "[w]hether a debtor-tenant possesses a property interest in the protected value of her rent-stabilized lease that may be exempted from her bankruptcy estate pursuant to New York State Debtor and Creditor Law Section 282(2) as a `local public assistance benefit'?". Id., at 159.
The New York Court of Appeals noted that NYDCL § 282(2) exempts, among other things, "[t]he debtor's right to receive or the debtor's interest in: (a) a social security benefit, unemployment compensation or a local public assistance benefit". In re Santiago-Monteverde, 24 N.Y.3d at 289, (2)). 998 N.Y.S.2d 144, 22 N.E.3d 1012. Looking at the rent stabilization regulatory scheme and the purpose and effect of the program, the New York court held that a tenant's rights under a rent stabilized lease are a local public assistance benefit. Moreover, "mindful that exemptions statutes are to be construed liberally in favor of debtors", Id., at 292, 998 N.Y.S.2d 144, 22 N.E.3d 1012 (citing In re Miller, 167 B.R. 782, 783, (Bankr. S.D.N.Y. 1994)), the court held that NYDCL § 282(2) "exempts a debtor's interest in a rent-stabilized lease". Id.
In light of the New York Court of Appeals' decision, the Second Circuit held that the "[debtor]'s interest in her rent-stabilized lease is a local public benefit within the meaning of DCL § 282[2](a). As a result, she is allowed to claim it as an exemption from her bankruptcy estate." In re Santiago-Monteverde, 780 F.3d 126, 128 (2d Cir. 2015) (reversing District Court decision and remanding for further proceedings consistent with the Second Circuit decision).
Similarly, the bankruptcy court in In re Crutch, 565 B.R. 36 (Bankr. E.D.N.Y. 2017), stated that New York "permits a debtor to exempt from property of the estate the right to receive certain benefits, including `the debtor's interest in [NYDCL § 282(2)](a) a Social Security benefit,' and, with exceptions not relevant here, `all payments under a stock bonus, pension, profit sharing, or similar plan or contract on account of illness, disability, death, age, or length of service.'" 565 B.R. at 38. While the court cited to NYDCL § 282(2)(e), it also referenced the exemption permitted for "the debtor's interest in" a social security benefit under NYDCL § 282(2)(a), noting that "debtors electing the New York exemption scheme can exempt their right to receive benefits from a pension plan and a Social Security benefit." Id.
While acknowledging the decision and rationale of Crutch, the trustee argues that it prohibits the debtors from tracing the workers' compensation award as being derived from a right to receive such award, which the trustee contends is the limit of the exemption under NYDCL § 282(2). Tracing, he argues, is available only with respect to personal property exempt under NYDCL § 282(3) which specifically sets
Lastly, the trustee argues that even if the Court were to find that the phrase "the debtor's interest in" applies to subclause (c) and permits an exemption for a disability, illness, or unemployment benefit, the terms "benefit" and "payment" are mutually exclusive and NYDCL § 282(2)(c) exempts only a disability, illness, or unemployment "benefit" whereas an exemption for a "payment" appears only in NYDCL § 282(2)(e). This argument by the trustee is likewise unavailing. Such a reading of "benefit" is too narrow and unsupported by the precedent in this Circuit. The bankruptcy court in Santiago-Monteverde noted that all items listed in NYDCL § 282(2) "are payments of one sort or another that debtor has a right to receive or in which the debtor has an interest. The natural inference is that the section only seeks to exempt certain kinds of qualifying payments." 466 B.R. at 623-24. The New York Court of Appeals took an even broader approach in finding that "benefits" is broader in scope than "payments".
Santiago-Monteverde, 24 N.Y.3d at 290, 998 N.Y.S.2d 144, 22 N.E.3d 1012. Hence, a disability, illness or unemployment benefit that is exemptible under NYDCL § 282(2)(c) covers both cash and non-cash benefits. Additionally, accepting the trustee's argument that the terms "benefit" and a "payment" are mutually exclusive goes beyond NYDCL § 282(c) as it would mean that payments received by a debtor prepetition by reason of "a social security benefit" as set forth in NYDCL § 282(2)(a) or "a veterans' benefit" as set forth in NYDCL § 282(2)(b) are not exemptible. Such an interpretation of the relevant statutory text leads to an absurd result, and is contrary to the broad social policy of providing such benefits in the first place.
In light of the Santiago-Monteverde decisions by the New York Court of Appeals and the Second Circuit and Crutch, and the plain reading of the statutory text at issue, the Court finds that "the debtor's interest in" certain personal property set forth in NYDCL § 282(2) is not, as the trustee asserts, limited to ERISA-qualified retirement plans under NYDCL
The Court has considered all the arguments raised by the parties. To the extent not specifically addressed, the arguments are either moot or without merit. For the foregoing reasons, the Court overrules the trustee's objection to the debtors' claimed exemption. The exemption for the workers' compensation award as set forth in amended schedule C (property claimed as exempt) to the debtors' bankruptcy petition is allowed.
So ordered.