08-4927 | Omnilex

Testo completo

08-4927-bk
In re Jackson:
Jackson v. Novak

UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

August Term, 2009
(Argued: November 19, 2009

Decided: January 22, 2010)
Docket No. 08-4927-bk

IN RE: RICHARD E. JACKSON
and ANGELA J. SHELTON,

Debtors,

RICHARD E. JACKSON, ANGELA SHELTON,

\- V. -
Appellants,

ANTHONY S. NOVAK, Chapter 7 Trustee,

Appellee.

Before: KEARSE, SACK, and KATZMANN, Circuit Judges.

Appeal from a judgment of the United States District Court
for the District of Connecticut, Vanessa L. Bryant, Judge,
affirming bankruptcy court order that allowed debtors, pursuant to
11 U.S.C. § 522 (d) (11) (E), to exempt from their bankruptcy estate
only $16, 550 of a settlement payment, representing the portion of
the settlement constituting post-petition earnings reasonably
necessary for support. See 394 B.R. 8 (D. Conn. 2008), affirming
376 B.R. 75 (Bankr. D. Conn. 2007) .

Affirmed.

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EDWARD P. JURKIEWICZ, Torrington,
Connecticut (Lawrence & Jurkiewicz,
Torrington, Connecticut, on the
brief) , for Appellants.

DEREK V. OATIS, Manchester, Connecticut
( Lobo & Novak, Manchester,
Connecticut, on the brief), for
Appellees.

KEARSE, Circuit Judge:

Section 522 (d) (11) (E) of the Bankruptcy Code (or "Code")
allows a debtor to exclude from the bankruptcy estate "a payment
in compensation of loss of future earnings of the debtor . . . to
the extent reasonably necessary for the support of the debtor and
any dependent of the debtor." 11 U.S.C. § 522 (d) (11) (E) . Debtors
Richard E. Jackson and Angela J. Shelton ( "Debtors") appeal from a
judgment of the United States District Court for the District of
Connecticut, Vanessa L. Bryant, Judge, affirming an order of the
United States Bankruptcy Court for the District of Connecticut,
Robert L. Krechevsky, Judge, which held that under § 522 (d) (11) (E)
Debtors were entitled to exempt from their bankruptcy estate
$16, 550 of an $83,203 payment received from Jackson's former
employer in settlement of a claim of wrongful termination of
employment, to wit, the portion of the settlement reflecting only
so much of Jackson's lost earnings after the filing of Debtors'
bankruptcy petition as were reasonably necessary for the support
of Jackson and his dependents, see In re Jackson, 376 B.R. 75
(Bankr. D. Conn. 2007) ("Jackson I"), aff'd, 394 B.R. 8 (D. Conn.

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2008) ("Jackson II"). On appeal, Debtors contend that the

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bankruptcy and district courts erred (1) in ruling that a
§ 522 (d) (11) (E) exemption is not authorized for earnings related
to the prepetition period, and (2) in calculating the amount
reasonably necessary for support. Finding no merit in Debtors'
contentions, we affirm.

# I. BACKGROUND

The relevant facts are undisputed and are set out in the
opinions of the bankruptcy court in Jackson I, 376 B.R. 75, and
the district court in Jackson II, 394 B.R. 8, familiarity with
which is assumed.

In 2001, Jackson, a medical doctor and psychiatrist, and
his wife Shelton, a Ph.D. in psychology, were employed by a
health insurance company in Connecticut (the "Company") .
Jackson's job involved reviewing patient records to ensure that
their insurance claims were medically appropriate and reviewing
appeals of coverage decisions. On March 13, 2003, the Company
closed the office in which Jackson and Shelton worked and
terminated their employment. Jackson then became an independent
contractor. In addition to doing part-time work for several other
entities, he agreed to provide services to the Company at an
hourly rate, upon its request, until March 17, 2004. The Company
stopped sending Jackson work around the end of October 2003; it
paid him a total of $98,180 for his services as an independent
contractor.

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In the meantime, Jackson and Shelton had asserted claims
against the Company for wrongful termination of their employment.
While employed by the Company, Jackson had complained to it about
the manner in which certain health insurance claims were treated.
Jackson and Shelton, because their employment was terminated,
whereas other employees in their office were reassigned to other
Company offices, contended that the Company viewed Jackson as a
whistleblower and that the termination of their employment was
retaliation for his complaints.

## A. The Bankruptcy Proceedings

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On October 31, 2003, Jackson and Shelton filed a
bankruptcy petition under Chapter 7 of the Bankruptcy Code, see
13 11 U.S.C. §§ 701-727, reporting assets of $556,113, including
property claimed as exempt, and liabilities of $1,326,433.47. On
their schedules of income and expenses, they stated that their
combined monthly income was $10,332 and that their monthly
expenses totaled $14, 071. On their schedule of "Personal
Property, " they included their "Wrongful termination claims"
against the Company "for lost future earnings," stating that the
value of these claims was "Unknown." Jackson and Shelton also
listed these claims in their schedule of "Property Claimed as
Exempt" from inclusion in the bankruptcy estate pursuant to
§ 522 (d) (11) (E) .

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The bankruptcy court authorized the Chapter 7 Trustee to
25 retain Debtors' attorney Judith D. Meyer to pursue their claims

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against the Company, and in June 2004 the claims were settled.
In the settlement, the Company agreed to pay Jackson $130,000 "to
satisfy his claims for future lost earnings" (Settlement Agreement
1 1) , plus $5,000 for attorney's fees; Shelton agreed to abandon
her claims. Meyer stated that the settlement " [e]ssentially
'bought out' [Jackson's] contract through March, 2004,"
paying him most of what he would have earned in the one-year
period following his termination, minus the amount actually paid
to him during that period as an independent contractor. (Letter
from Judith D. Meyer to Anthony S. Novak dated February 26, 2004
("Meyer Letter"), at 1.) After deductions for taxes and
attorneys' fees, the Trustee received a net settlement payment of
$83,203.

In anticipation of the settlement, Jackson and Shelton
had amended their bankruptcy schedules to assert that the value of
their wrongful termination claims was $135, 000 and to claim that
all $135,000 was exempt under § 522 (d) (11) (E). The Trustee
objected to the amended claim of exemption, contending principally
that the entire settlement payment was compensation for Debtors'
releases of other types of claims. (See Trustee's Brief and
Memorandum of Law in Support of Trustee's Objection to Debtors'
Second Amended Claim of Exemptions at 9-13, dated August 3, 2007.)
Alternatively, the Trustee argued that even if the settlement
compensated Debtors for lost wages, some portion reflected past
wages, rather than future wages, and that any claim for past wages
had become the property of the bankruptcy estate on October 31,

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2003, the date on which the Chapter 7 petition was filed, and
could not be considered "future" wages. (See, e.g., id. at 12,
14.) He also contended that in light of the facts, inter alia,
that " [t]he Debtors retained post-petition a boat and trailer,
$6,200.00 in cash, have use of four vehicles and live in a
$435, 000. 00 house in Avon, " that " [t]he Debtor-wife holds a one-
third interest in 20 acres of land in Tennessee which she claims
has little value and no encumbrances, " and that " [b]oth Dr.
Jackson and Dr. Shelton have testified that they are both
currently working without any mental or physical disabilities or
restrictions" (id. at 17), no part of the settlement received from
the Company was necessary for the support of Debtors or their
dependents (see, e.g., id. at 16-17) .

After a one-day trial in 2007, the bankruptcy court
rejected the Trustee's contention that no part of the settlement
payment was exempt under § 522 (d) (11) (E). Stating that "the
settlement agreement provided compensation for the debtor's loss
of earnings for the one-year period following his termination of
employment, i.e. from March 14, 2003 through March 13, 2004,"
Jackson I, 376 B.R. at 79, the court found no support for the
Trustee's argument that all or part of the settlement was
attributable to anything other than lost earnings. However, the
court concluded, that, given the language of § 522 (d) (11) (E) , only
earnings related to the period after the filing of the bankruptcy
petition could be exempted :

Property of the estate, and a debtor's exemption
therein, is determined as of the bankruptcy petition

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date. . . . Section 522 (d) (11) (E) refers only to
post-petition loss of earnings, and the debtor may
not exempt that portion of the settlement proceeds
that provided compensation of his prepetition loss of
earnings.

Jackson I, 376 B.R. at 79

To determine what portion of the net settlement amount of
$83, 203 reflected post-petition earnings, the court prorated that
sum for the 135-day period from October 31, 2003, through March
13, 2004, i.e., the post-petition portion of the one-year period
for which the settlement compensated Jackson, and found that the
amount attributable to his loss of earnings post-petition was
$30,690. See id. In determining how much of that $30,690 was
reasonably necessary for the support of Jackson and his dependents
during the post-petition period, the court referred to numerous
factors, including Debtors' "present and anticipated living
expenses, " their "present and anticipated income from all
sources, " their "job skills, training and education" and "ability
to earn a living, " and their "other assets, including exempt
assets." Id. at 80. Noting that, according to their bankruptcy
petition schedules, Debtors' monthly expenses ($14, 071) exceeded
their monthly income ($10,332) by $3, 739, the court found that, on
an annualized basis, their shortfall totaled $44,868; for the 135
post-petition days, the shortfall was thus ($44,868 + 366 (2004
being a leap year) ) x 135, or $16, 550. Accordingly, the court
found that Jackson and Shelton were entitled to exempt only
$16, 550 of the settlement proceeds pursuant to § 522 (d) (11) (E) .
28 See id.

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B. The Ruling of the District Court

Debtors appealed to the district court, contending that
the bankruptcy court erred (a) in ruling that § 522 (d) (11) (E)
allows a debtor to exempt only post-petition loss of earnings, and
(b) in calculating the amount reasonably necessary for their
support. The district court rejected both contentions. In
upholding the bankruptcy court's interpretation of
§ 522 (d) (11) (E), the court noted that a "debtor's estate is
undeniably created as of the bankruptcy petition date," and that
"the estate consists of 'all legal or equitable interests of the
debtor in property as of the commencement of the case, '"
Jackson II, 394 B.R. at 11 & n.1 (citing 11 U.S.C. § 541 (a) and

quoting id. § 541 (a) (1) ) . The court stated that

[s]ection 522 (d) (11) (E) specifies an exemption for "a
payment in compensation of loss of future earnings of
the debtor . . . to the extent reasonably necessary
for the support of the debtor and any dependent of
the debtor." 11 U.S.C. § 522 (d) (11) (E) .

The clear and unambiguous language of the
statute creates an estate on the petition date and
allows an exemption for a loss of any future earnings
after creation of that estate. Jackson and Shelton
argue that the term "future" applies to all earnings
after the date of their termination, not the date of
the petition. Such a reading of the statute is
against its clear language. To allow an exemption
for earnings prior to the petition date would make
the statute retroactive instead of future looking.
That reading would render the operative term of the
statute -- "future" -- obsolete and defeat the statute's
purpose. Under Jackson and Shelton's interpretation,
a debtor could receive a lump sum payment in
settlement of a dispute years prior to the petition
date and still claim that amount as an exemption even
though their entitlement to the asset accrued before
the petition was filed. That cannot be correct. In

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order for the term "future" to have any meaning, the
earnings exempted must account for a period in the
future from the date the estate is created.

Jackson II, 394 B.R. at 11.

The district court also found that the bankruptcy court
correctly calculated the annualized amount reasonably necessary
for Debtors' support and properly determined that, " [p]rorated to
account for only post-petition loss of future earning, the proper
amount of the exemption is $16,550.00." Id. at 12.

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II. DISCUSSION
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the reasons stated by the district court in Jackson II.

On appeal, Jackson and Shelton contend principally that
"the word 'future'" in § 522 (d) (11) (E) "mean [s] 'earnings after
the date of injury or loss'." (Debtors' brief on appeal at 32-
33.) They contend that "the exemption statute's only limitation
is its requirement that the recovered earnings be reasonably
necessary for the support of the debtor and his dependents, " not
that those earnings be related to the period following the filing
of the bankruptcy petition. (Id. at 29.) They also contend that
the bankruptcy court, in determining the amount reasonably
necessary for their support, miscalculated the amount of their
monthly shortfall. Based on these contentions in combination,
Debtors argue that they should have been allowed to exempt
$77, 488.08 as the amount reasonably necessary for their support.
Finding no merit in their contentions, we affirm substantially for

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A. The Meaning of "Future" in § 522 (d) (11) (E)

As an order of the district court functioning in its
capacity as an appellate court in a bankruptcy case is subject to
plenary review, we "independently review the factual
determinations and legal conclusions of the bankruptcy court, " In
re Momentum Manufacturing Corp., 25 F.3d 1132, 1136 (2d Cir. 1994)
(internal quotation marks omitted), accepting the bankruptcy
court's factual findings unless they are clearly erroneous, and
reviewing its conclusions of law de novo, see, e.g., In re Ames
Department Stores, Inc., 582 F.3d 422, 426 (2d Cir. 2009). We see
no errors in the decisions in the present case.

As a general matter, in a proceeding under Chapter 7, all
property of the bankruptcy estate, except exempt property, is
liquidated by a trustee and the resulting cash is distributed to
creditors. See generally 11 U.S.C. §§ 704 (a) (1), 726. Under this
Chapter, in the absence of specified circumstances precluding a
discharge, debtors who are individuals are released from
liability for most prepetition debts. See id. § 727. Certain
property may be exempted from the estate and thereby preserved for
the debtor's own use after his discharge from bankruptcy. See id.
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The commencement of a bankruptcy proceeding "creates [the
bankruptcy] estate." 11 U.S.C. § 541 (a). The bankruptcy estate
encompasses, with few exceptions, "all legal or equitable
interests of the debtor in property as of the commencement of the

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case, " id. § 541 (a) (1), "wherever located and by whomever held, "
id. § 541 (a) . Such interests include causes of action possessed
by the debtor at the time of filing. See, e.g., Seward v. Devine,
888 F.2d 957, 963 (2d Cir. 1989) .

Property that the debtor neither owns nor becomes entitled
to until after the filing of the Chapter 7 petition is generally
not property of the estate. For example, "earnings from services
performed by an individual debtor after the commencement of the
case" are excluded from the estate. 11 U.S.C. § 541 (a) (6) .
"Post-petition property will become property of the estate only if
it is 'sufficiently rooted in the pre-bankruptcy past. '"
Chartschlaa v. Nationwide Mutual Insurance Co., 538 F.3d 116, 122
(2d Cir. 2008) (quoting Segal v. Rochelle, 382 U.S. 375, 380
(1966), which was interpreting the Bankruptcy Act of 1898) ) ; see,
e.g., In re Bell, 225 F.3d 203, 215 (2d Cir. 2000) (" [P] roperty
acquired post-petition by the debtor does not enter the estate. ") .
Wages for services rendered by the debtor prior to the bankruptcy
filing are rooted in his pre-bankruptcy past and become property
of the estate even if paid subsequent to his bankruptcy filing.
See, e.g., In re Irish, 311 B.R. 63, 66 (B.A.P. 8th Cir. 2004)
("Wages that are earned pre-petition but that have not yet been
paid are property of the estate. 11 U.S.C. § 541 (a) (1) . . . . ") .

Section 522 (b) of the Code provides, with exceptions not
pertinent here, that " [n]otwithstanding section 541" -- which states
that the estate encompasses all property of the debtor at the time
of the filing of the bankruptcy petition -- "an individual debtor

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may exempt from property of the estate
property that is
specified under subsection (d) ," 11 U.S.C. §§ 522 (b) (1) and (2).
Subsection (d) of § 522 provides, in pertinent part, as follows :

(d) The following property may be exempted under
subsection (b) (2) of this section:

(11) The debtor's right to receive, or
property that is traceable to --

(E) a payment in compensation of loss
of future earnings of the debtor . . . to
the extent reasonably necessary for the
support of the debtor and any dependent of
the debtor.

11 U.S.C. § 522 (d) (11) (E) (emphasis added). In sum, § 541 was
designed to bring "anything of value that the debtors have into
the estate, " and § 522 was designed to "permit an individual
debtor to take out of the estate that property that is necessary
for a fresh start and for the support of himself and his
dependents." H.R. Rep. No. 95-595, at 176 (1977), reprinted in
1978 U.S.C.C.A.N. 5963, 6136.

Given the design and goals of these provisions of the
Code, we conclude that the bankruptcy and district courts properly
interpreted "future" in § 522 (d) (11) (E) as looking forward from
the date of the bankruptcy filing, not from some prior point in
time, and hence correctly interpreted "loss of future earnings" in
that section as referring to lost earnings for post-petition
periods and not for periods prior to the filing of the bankruptcy
petition.

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In support of the contrary conclusion, Debtors cite three
bankruptcy court cases, none of which discusses the scope of
§ 522 (d) (11) (E) 's use of the word "future." See In re Lowery,
No. 05-13536, 2007 Bankr. LEXIS 3729 (Bankr. N.D. Ga. Sept. 24,
2007) (determining that state statute paralleling § 522 (d) (11) (E)
encompasses the lost future earnings portion of a tort award for
personal injuries) ; In re Claude, 206 B.R. 374, 381 (Bankr. W.D.
Pa. 1997) (noting that an evidentiary hearing would be necessary
as the court was "unable to determine from the record how much of
the [tort damages] award may have been for loss of earnings") ; and
In re Bova, 205 B.R. 467, 477 (Bankr. E.D. Pa. 1997) (interpreting
a settlement with respect to an insurance policy that "provided
coverage for the insured's 'work loss' and 'income loss expenses'
incurred over the insured's lifetime"). In any event, to the
extent that any of the rulings in these cases may have been based
on the assumption that "future earnings" in § 522 (d) (11) (E)
encompasses earnings for services attributable to prepetition
periods, we are not bound by them and we disagree with such an
assumption.

Debtors' contention that all of Jackson's earnings
following the termination of his employment may be exempted under
§ 522 (d) (11) (E) because they would be termed future earnings under
tort law is unpersuasive given the different purposes of tort law
and bankruptcy law. See generally Segal, 382 U.S. at 379
(regardless of classifications for other purposes, the bankruptcy
laws' "own purposes must ultimately govern" the meaning of

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"property" for bankruptcy purposes). Debtors' contention that
"future earnings" means simply any earnings for a period following
the termination of their employment, even for a period prior to
their filing for bankruptcy, is inconsistent with the treatment of
earnings provided for in § 541 (a) (6) which, as noted above,
excludes from the estate only such earnings as were for "services
performed by an individual debtor after the commencement of the
case" (emphasis added) .

Acceptance of Debtors' interpretation of § 522 (d) (11) (E)
would also lead to results that we think would be absurd. Thus,
Debtors in their brief on appeal argued that § 522 (d) (11) (E)
allows a debtor "to exempt compensation for lost earnings which
accrued years prior to the petition date" (Debtors' brief on
appeal at 32) , and at oral argument took the position that an
unspent portion of a "payment in compensation of loss of future
earnings that was received 30 years before the filing of a
petition" could be claimed as exempt. Such an interpretation,
permitting the discharge of individual debtors' prepetition debts
while allowing them to exempt from the estate moneys earned while
incurring those debts, would create a windfall for the debtor,
albeit limited by the reasonably-necessary-for-support
restriction. We cannot conclude that this is what Congress
intended. We affirm the rulings of the district and bankruptcy
courts that "future earnings" in § 522 (d) (11) (E) does not
encompass earnings attributable to the period prior to the
debtor's filing of the bankruptcy petition.

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B. The Amount of the Settlement Representing Post-Petition
Earnings "Reasonably Necessary for . . . Support"

The bankruptcy court found that the settlement payment
made by the Company was compensation for Jackson's loss of
earnings for the year March 14, 2003, through March 13, 2004.
This finding of fact is supported by the record (see, e.g., Meyer
Letter at 1 (the Company "essentially . . . 'bought out' Jackson's
contract through March, 2004") ), and is not clearly erroneous.
Nor are we persuaded the court erred in finding that $30,690 of
the settlement was attributable to the post-petition period, which
it calculated by prorating the $83,203, received by the Trustee
with respect to that year, for the 135 post-petition days from
October 31, 2003, through March 13, 2004.

Finally, as described in Part I.A. above, in determining
what portion of the $30,690 in future earnings was "reasonably
necessary for the support" of Jackson and his dependents,
11 U.S.C. § 522 (d) (11) (E), the bankruptcy court considered the
appropriate factors as to Debtors' needs, including their present
and anticipated expenses, their assets, their "present and
anticipated income from all sources," their training and
education, and their "ability to earn a living," noting that
" [t]he debtor and his wife are well-educated and their lack of
employment is likely to be short-lived", Jackson I, 376 B.R. at
80. Using the figures supplied by Debtors' on their monthly
income and expense schedules, the court subtracted $10, 332
(income) from $14, 071 (expenses) and found that Debtors' expenses

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exceeded their income by $3,739 per month; for the 135 post-
petition days, that shortfall added up to $16,550. We see no
error in the factors considered by the court or in its arithmetic
calculation.

In contending that the "reasonably necessary" amount was
miscalculated, Debtors argue that, instead of using the $10,332
monthly income figure reported on their income schedule -- which
included the $98, 180 that Jackson had earned from the Company from
March through October 2003 -- the court should have attributed the
$98, 180 not to the months in which it was earned but rather to the
entire year covered by the Settlement Agreement. If spread over
12 months, instead of the approximately 7/2 months in which it was
earned, Debtors argue that their net monthly income was not
$10, 332 but $7, 613, and that their monthly shortfall was thus not
$3,739 but $6,457.34. If the bankruptcy court had used the
latter figure with respect to the 135 post-petition days, Debtors
would have been entitled to exempt $28,581.67, rather than
$16,550.

In support of the argument that the $98,180 earned by
Jackson for services he rendered prior to the bankruptcy filing
should have been divided by 12 rather than by the number of months
in which that sum was earned, Debtors state that the bankruptcy
court was required to consider Debtors' "actual income over the
entire one-year settlement period." (Debtors' brief on appeal
at 41.)
Even assuming this is so, Debtors provided the court
with no evidence from which to determine that "actual income."

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While acknowledging that Jackson "testified that he was doing
other work part-time" (id. at 41 n.16), Debtors state that "there
is no evidence in the record which reflects the amount he earned"

(id.). Given the absence of such evidence, we cannot say that it
was error for the court to calculate Debtors' monthly shortfall by
relying on the dollar amount stated by Debtors in the income
schedule they filed in the bankruptcy proceeding.

# CONCLUSION

We have considered all of Debtors' contentions on this
appeal and have found them to be without merit. The judgment of
the district court, affirming the decision of the bankruptcy
court, is affirmed.

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August Term, 2009 Argued: November 19, 2009 Decided: January 22, 2010 Docket No.… v. -

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