Peter David Ladd and Susan Irene Ladd

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AUTHENTICATED /
U.S. GOVERNMENT
INFORMATION |

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UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF OHIO

In Re: )
) JUDGE RICHARD L. SPEER
Peter David Ladd, Deceased )
and ) Case No. 10-34981
Susan Irene Ladd »)
)
Debtor(s) )
)
DECISION AND ORDER

This cause comes before the Court after a Hearing on the Objection of the Debtor, Susan
Ladd, to the Trustee’s Motion for Turnover. (Doc. No. 28). By way of the Motion for Turnover, the
Trustee, Ericka Parker, seeks the proceeds received by the Debtor, Mrs. Ladd, as a beneficiary on
a life insurance policy owned by her deceased husband. (Doc. No. 19). At the Hearing held on the
Debtor’s Objection for Turnover, the Court afforded the Parties the opportunity to submit briefs in |
support of their respective positions. Both of the Parties have since filed their briefs, which this
Court has now had the opportunity to review. Based upon this review, and for the reasons set forth
in this Decision, the Court finds that the Debtor’s Objection to the Trustee’s Motion for Turnover
should be Overruled.

FACTS
On July 21, 2001, the Debtors, Peter and Susan Ladd, filed a petition in this Court for relief

under Chapter 7 of the United States Bankruptcy Code. (Doc. No. 1). In their petition, the Debtors
set forth that they were domiciled in the state of Ohio. Jd.

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In re Peter and Susan Ladd
Case No. 10-34981

At the time the Debtors filed for bankruptcy relief, the Debtor, Mr. Ladd, was the owner of
a life insurance policy. An ownership interest in this policy, however, was not disclosed in the

Debtors’ bankruptcy filing; nor was the policy claimed as exempt.

In the month following the commencement of the Debtors’ bankruptcy case, Mr. Ladd passed
away. Per the terms of his life insurance policy, a check for the sum of $8,615.90 was issued to the

Debtor, Mrs. Ladd, who was named as a beneficiary under the policy.

By way of her Motion for Turnover, the Trustee, Ericka Parker, seeks to recover for the
benefit of the estate the sum of $4,346.71. This amount represents the principal of the life insurance
proceeds received by Mrs. Ladd minus an allowance made for the costs associated with Mr. Ladd’s
death, as well as an allowance made for the unused portion of the wild-card exemption allowed to

Mrs. Ladd by O.R.C. § 2329.66(A)(18). Mrs. Ladd has objected to the Trustee’s Motion, taking the

position that, because of their character, the proceeds of the life insurance policy are exempt.
DISCUSSION

The matter before the Court requires a determination as to whether the Debtor, Mrs. Ladd
(hereinafter the “Debtor”), is entitled to claim an exemption in proceeds she received as a beneficiary
under a life insurance policy. Determinations concerning the allowance of exemptions from property
of the estate are deemed to be a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). Accordingly,
in this matter, this Court has the jurisdictional authority to enter final orders and judgments. 28

U.S.C. § 157(b)(1).

When a debtor files for relief under Chapter 7 of the Bankruptcy Code, an estate is created
comprised of all interests in property held by the debtor at the commencement of the case. 11 U.S.C.
§ 541(a). A trustee is then appointed to administer the estate. 11 U.S.C. § 701. Among their duties,

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In re Peter and Susan Ladd
Case No. 10-34981

a bankruptcy trustee is required to “collect and reduce to money the property of the estate for which
such trustee serves ....” 11 U.S.C. § 704(a)(1).

These directives of the Bankruptcy Code underline a basic precept of bankruptcy law: that
a trustee only has authority to administer and liquidate assets encompassed within a debtor’s
bankruptcy estate. See, e.g., In re Parks, 255 B.R. 768, 770 (Bankr. D.Utah 2000). These
directives also impart a basic facet of bankruptcy law: Normally, an interest in property acquired by
a debtor after their bankruptcy case is filed does not become a part of the debtor’s bankruptcy estate,
thereby placing that property beyond the reach of the trustee’s authority. Concerning the latter
statement, however, certain exceptions exist. Among the exceptions, it is provided in § 541(a)(5)(C)
that property acquired by a debtor as a beneficiary under a life insurance policy within 180 days of
the filing of a bankruptcy petition becomes property of the bankruptcy estate.

In this matter, the Debtor did not contest the Trustee’s position that the life insurance
proceeds she received on account of her husband’s death became a part of her bankruptcy estate by
operation of § 541(a)(5)(C). Instead, in defense of the Trustee’s Motion for Turnover, the Debtor

contends that the life insurance proceeds are exempt property, and thus not subject to turnover.

Turnover is governed by 11 U.S.C. § 542(a). Generally, this provision requires entities,
including debtors, who have estate property which the trustee may use, sell, or lease, to deliver to
the trustee such property or the value thereof. 11 U.S.C. § 542(a). This requirement, however, does
not apply if the property “is of inconsequential value or benefit to the estate.” Id.

Pursuant to § 522(b), an individual debtor is entitled to exempt certain types of property from
the estate. The effect of a properly claimed exemption is to withdraw that interest from the
bankruptcy estate. Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991). By

definition, therefore, the value of any property exempted by a debtor from the estate is of no value

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In re Peter and Susan Ladd
Case No. 10-34981

or benefit to the estate, and thus not subject to a trustee’s action for turnover. See In re Montanaro,

307 B.R. 194, 199 (Bankr. E.D.Cal. 2004).

A debtor’s right to claim an exemption in bankruptcy is governed by § 522. In this matter,
the Debtor set forth in her brief to the Court that she was relying on § 522(d)(11)(c) as the basis for
exempting the proceeds she received from her husband’s life insurance policy. (Doc. No. 31). This
provision affords a debtor, who is a dependent and a beneficiary under a life insurance policy, the
right to exempt any payment received under the policy to the extent the payment is reasonably

necessary for the support of the debtor and any dependent of the debtor.

The facts presented to the Court show that, since the death of her husband, the Debtor, Mrs.
Ladd, does not have a sufficient amount of income to meet her current expenditures. The Court, thus,
has no reason to doubt that, within the meaning of § 522(d)(11)(c), the life insurance proceeds she
received on account of her husband’s death are reasonably necessary for her support. As an actual
basis to claim the proceeds exempt, however, the Debtor’s reliance on § 522(d)(11)(c) has two flaws,

one procedural, one legal.

First, as a matter of procedure, the Debtor has yet to formally amend her bankruptcy
schedules so as to claim her interest in the life insurance proceeds as exempt. This is a necessary
prerequisite. Bankruptcy Rule 4003(a) provides that a “debtor shall list the property claimed as
exempt under § 522 of the Code on the schedule of assets required to be filed by Rule 1007.” For
any claim of exemption, including a later amendment, compliance with this Rule is normally
mandatory as the listing of the exemption triggers notice requirements to any party that may be

affected by the exemption, thereby satisfying due process concerns. FED.R.BANK.P. 1007 and 1009.

In any event, the Debtor’s reliance on § 522(d)(11)(c) has no basis in law. A brief overview

of § 522 shows why. Section 522 allows a debtor a choice between two types of exemptions, with

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In re Peter and Susan Ladd
Case No. 10-34981

§ 522(b)(1) providing that a debtor may choose to base. their claim of exemptions on either

§ 522(b)(2) or § 522(b)(3).

A debtor who bases their claim of exemption on § 522(b)(2) is directed to subsection (d) for
a list of the specific property exempted. Section 522(d)(11)(c), upon which the Debtor relies for her
claim of exemption in the proceeds from her husband’s life insurance policy, is among those
exemptions set forth in this subsection. A debtor may also claim their exemptions in accordance with
§ 522(b)(3). For debtors who utilize this provision, their right to exempt property is determined in
accordance with the state law of the debtor’s domicile as well as any federal non-bankruptcy law

exemption — i.e.\those exemptions not provided in subsection (d) of § 522(b)(2).

In certain instances, however, depending on their state of residence, a debtor is limited to
utilizing § 522(b)(3) as the basis for their exemptions. Section 522(b)(2) provides that “Property
listed in this paragraph is property that is specified under subsection (d), unless the State law that is
applicable to the debtor under paragraph (3)(A) specifically does not so authorize.” This provision,
thus, affords any state the choice of opting out of the federal bankruptcy exemption scheme
contained in § 522(d). A state that chooses this option thereby restricts their residents who file for
bankruptcy reliefto the exemptions afforded under that state’s law as well as federal, non-bankruptcy

law.

The state of Ohio, disclosed by the Debtor to be her state of domicile, has elected to opt out
of the bankruptcy exemptions afforded in § 522(d). Section 2329.662 of the Ohio Revised Code
provides:

Pursuant to the “Bankruptcy Reform Act of 1978,” 92 Stat. 2549, 11

U.S.C.A. 522(b)(1), this state specifically does not authorize debtors who are

domiciled in this state to exempt the property specified in the “Bankruptcy
Reform Act of 1978,” 92 Stat. 2549, 11 U.S.C.A. 522(d).

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In re Peter and Susan Ladd
Case No. 10-34981

Accordingly, even assuming that the proceeds the Debtor received from her husband’s life insurance
policy would qualify as an exempt asset within the meaning of § 522(d)(11)(c), the Debtor is not

entitled to use this provision to claim the policy as exempt.

Notwithstanding, even giving the Debtor the benefit of the doubt, and applying Ohio
exemption law, does nothing to change the overall result. Under Ohio law, an individual debtor
seeking to exempt an interest concerning a life insurance policy is required to look to O.R.C.
§ 2329.66(A)(6)(b). The breadth of this provision, however, does reach to a debtor, such as Mrs.
Ladd, who seeks as a beneficiary to exempt proceeds received under a spouse’s life insurance policy.

This was the result recently reached by this Court in Jn re Kudela, 427 B.R. 643 (Bankr. N.D.Ohio
2010).

In In re Kudela, the debtor’s husband owned a life insurance policy that listed the debtor as
the beneficiary. Prior to the time she filed her bankruptcy case, the debtor’s husband died, and the
debtor received proceeds under the life insurance policy. In her bankruptcy, the debtor claimed the
proceeds as exempt pursuant to O.R.C. § 2329.66(A)(6)(b)

Section 2329.66(A)(6)(b) provides an exemption for a “person’s interest in contracts of life
or endowment insurance or annuities, as exempted by section 3911.10 of the Revised Code[.]”
Looking then to the plain meaning of § 3911.10, which limits the breadth of the exemptible interest
to the “insured person,” the Court denied the debtor’s claim of exemption because she was the

beneficiary and not the person insured. In sum, the Court stated:

...O.R.C. § 2329.66(A)(6)(b) and § 3911.10 do not confer upon the Debtor
the right to claim as exempt the proceeds she received as a beneficiary on the
policy insured on the life of her husband. This is not to say that the Debtor,
being a widow 80 years of age, does not present a sympathetic situation.
However, this Court is not free to create an exemption where none exists. As

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In re Peter and Susan Ladd
Case No. 10-34981

such, the insurance proceeds held by the Debtor are subject, as estate assets,
to administration by the Trustee.

Inre Kudela, 427 B.R. at 650.

The Court can see no reason why the result should not be the same in this case. Both the legal
issue and the facts before the Court are almost identical, with the salient issue in both this case and
in In re Kudela being this: Whether proceeds received by a debtor-beneficiary from a spouse’s life
insurance policy are exempt assets. On this issue, other recent precedent further supports this Court’s
conclusion. In In re Schramm, 431 B.R. 397 (6" Cir. B.A.P. 2010), the Bankruptcy Appellate Panel
for the Sixth Circuit, citing with approval this Court decision in Jn re Kudela, held that the debtor
was not entitled to claim the proceeds of her husband's life insurance policies as exempt pursuant

to § 2329.66(A)(6)(b) and § 3911.10 of the Ohio Revised Code.

In conclusion, the Debtor has no legal basis to claim an exemption in the proceeds she
received from her deceased husband’s life insurance policy. Foremost, the Debtor, as a resident of
the state of Ohio, is precluded, by law, from claiming an exemption under any provision of § 522(d),
including 522(d)(11)(c) upon which she relied as the bases for her claim of exemption in the life
insurance proceeds. Second, Ohio law, O.R.C. § 2329.66(A)(6)(b), does not afford the Debtor the

right to claim the insurance proceeds as exempt.

In reaching the conclusions found herein, the Court has considered all of the evidence,
exhibits and arguments of counsel, regardless of whether or not they are specifically referred to in

this Decision.

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In re Peter and Susan Ladd»
Case No. 10-34981

Accordingly, it is

ORDERED that Motion of the Trustee, Ericka Parker, for Turnover, be, and is hereby,
GRANTED.

IT IS FURTHER ORDERED that the Debtor, Susan Ladd, immediately turn over to the
Trustee the sum of $4,346.17.

Dated: January 27, 2011

Richard peer
United States
Bankruptcy Judge

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CERTIFICATE OF SERVICE

Copies were mailed this 27" day of January, 2011, to the following parties:

Ericka S Parker
232 10th St
Toledo, OH 43604

Susan [rene Ladd
614 Louisana Ave
Bryan, OH 43506

Paul H. Duggan
1426 E High St
Bryan, OH 43506

Office of the U.S. Trustee
201 Superior Ave, E, #441
Cleveland, OH 44114

/s/ Robert C.W. Birmingham
Deputy Clerk, U.S. Bankruptcy Court

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