Military Payments Aren’t Property of Bankruptcy Estate

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By Diane Davis

Voluntary separation incentive payments an Army officer received from the Department of Defense to separate from active military duty are excluded from his bankruptcy estate, the U.S. Bankruptcy Court for the Southern District of Illinois held Jan. 23 ( In re Hewitt , 2017 BL 18726, Bankr. S.D. Ill., No. 16-30375, 1/23/17 ).

The payments are “earnings from services performed by an individual debtor after the commencement of the case” under Bankruptcy Code Section 541(a)(6), Judge Laura K. Grandy wrote.

Debtor Scott R. Hewitt was released from active military duty in 1992, and awarded annual voluntary separation incentive payments of $13,985 through 2020. He was then assigned to the Ready Reserve and later transferred to the Retired Reserve. Members of the Retired Reserve are subject to recall to active duty in time of war or of national emergency.

The debtor relied on In re Haynes, 679 F.2d 718 (7th Cir. 1982), cert. denied, Miller v. Haynes, 459 U.S. 970 (1982), which held that the pay of a military retiree wasn’t part of the bankruptcy estate because it was conditioned on his obligation to perform certain military duties if called upon to do so ( seeBloomberg Law: Bankruptcy Treatise, pt. II, ch. 69 (D. Michael Lynn et al. eds., 2016)).

The trustee contended that the debtor in Haynes wasn’t required to perform the same or similar acts that the debtor had to perform.

Haynes remains binding precedent in the Seventh Circuit and applies to the facts in this case, the court said.

After Haynes became a retired member of the Regular Navy, he could be recalled to active duty in time of war or national emergency and remained subjected to the Uniform Code of Military Justice, the court said. Based on the ongoing nature of these obligations, military retirement pay was actually reduced compensation for reduced current services, the court said.

David D. Farrell, and JD Graham PC represented the debtor.

Frazier Law Office LLC represented Trustee Dana Sue Frazier.

To contact the reporter on this story: Diane Davis in Washington, D.C. at DDavis@bna.com

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

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