Ch. 7 Debtor Can Exempt $2M Inherited Pension in Calif.

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By Daniel Gill

Aug. 22 — An unemployed, ill woman was able to claim a $2 million dollar pension she inherited from her father as exempt from administration in her Chapter 7 bankruptcy case, a bankruptcy court in California held Aug. 19 ( In re Williams, 2016 BL 270495, Bankr. C.D. Cal., No. 1:15-BK-11232-MT, 8/19/16 ).

Judge Maureen A. Tighe of the U.S. Bankruptcy Court for the Central District of California filed an amended memorandum of decision overruling the Chapter 7 trustee's objection to the woman's claim of exemption. The court distinguished the inherited pension from an inherited individual retirement account (IRA), which could not be claimed as exempt.

After Susanne Renee Williams filed a Chapter 7 bankruptcy case on April 9, 2015, she filed schedules in which she claimed an exemption in a California Public Employees Retirement System (CalPERS) pension she inherited from her deceased father.

In Chapter 7 bankruptcy, a debtor's nonexempt assets are liquidated by a trustee, and the proceeds are distributed to creditors. State and federal law determine what property a Chapter 7 debtor can claim as exempt — that property is not included in the bankruptcy estate and remains outside of the reach and control of the Chapter 7 trustee and the debtor's creditors.

The debtor claimed the pension exempt under Section §703.140(b)(10)(E) of California's Code of Civil Procedure. That statute allows an exemption for a debtor's right to receive a “payment under a stock bonus, pension, profit sharing, annuity, or similar plan or contract on account of illness, disability, death, age or length of service, to the extent reasonably necessary for the support of the debtor....”

Chapter 7 trustee Diane C. Weil objected to the claimed exemption.

As there was apparently no dispute that the monthly payments of about $2,200 were the debtor's only income and were reasonably necessary for her support, the crux of the dispute, the court explained, was “whether or not the right to receive payment must be on account of Debtor's own illness, disability, death, age or length of service.”

The court said, “Trustee's insistence that the statute should be construed to mean ‘ own illness, disability, age or service' would necessarily lead to the absurd implication that the statute includes ‘own death' as a basis for the exemption.”

The court noted that “exemptions are to be interpreted liberally and in the debtor's favor whenever possible,” and concluded that the reference to “death” in the exemption statute necessarily means the exemption must apply to the beneficiary of the payments due upon death.

The court acknowledged that inherited IRAs aren't exempt and distinguished those from the inherited pension. Aside from the plain language allowing for the exemption of a pension payable upon death, the court also noted that inherited IRAs can be taken in a lump sum and can't be rolled over into the beneficiary's own IRA. The debtor had no right to demand a lump sum payment of the CalPERS pension, and instead could only collect the monthly payments.

Michael F. Chekian, Los Angeles, represented the debtor. The trustee was represented by Carmela Pagay, Levene Neale Bender Yoo & Brill, Los Angeles.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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