Andrew Bill Santillanes and Nicole Lynn Sherer-Santillanes

MEMORANDUM OF DECISION - 1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF IDAHO
______________________________________________________
In Re:
Bankruptcy Case
ANDREW SANTILLANES 	No. 05-41250
and NICOLE SANTILLANES,
Debtors.
______________________________________________________
MEMORANDUM OF DECISION
______________________________________________________
Appearances:
Bradley E. Rice, Twin Falls, Idaho, Attorney for Debtors.
R. Sam Hopkins, Pocatello, Idaho, Chapter 7 Trustee.
Background
The Chapter 7 Trustee R. Sam Hopkins objects to Debtors’ Andrew
and Nicole Santillanes’ claim of exemption under Idaho Code § 11-207 in Mr.
Santillanes’s share savings account at his credit union. Docket Nos. 11, 12. The
Court conducted an evidentiary hearing concerning Trustee’s objection on
October 31, 2005, and thereafter took the matter under advisement. After
considering the arguments, evidence and relevant case law, the Court concludes
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MEMORANDUM OF DECISION - 2
that Debtors may exempt the money in the account. This Memorandum
constitutes the Court’s findings of fact and conclusions of law. Fed. R. Bankr. P.
7052; 9014.
Facts
Mr. Santillanes is employed by Simplot. On August 26, 1997, he
opened a “share savings account” with the Pocatello Simplot Credit Union and
began depositing funds into the account via payroll deductions. Exs. 2, 6, 9. Mr.
Santillanes applied for his first loan from the Credit Union in September 1998.
Ex. 6. At the time he applied for this loan, Mr. Santillanes’s account had a balance
of $144.86, which he testified came from his wages during the pay period at the
time. As a condition of the loan, the Credit Union required Mr. Santillanes to
increase his share account to a balance of $1,000 through continued payroll
deductions. Ex. 6. In 2000 and 2001, Mr. Santillanes borrowed additional sums
from the Credit Union to purchase two cars. These loans were secured by the cars
and by share pledge agreements. Under the terms of these loans, the Credit Union
required Mr. Santillanes to build his savings account to $7,500. Exs. 4, 6, 9. In
addition to a contribution from each of his paychecks, he was required to deposit
the entire amount of one paycheck for the two months each year he received three
biweekly paychecks. Exs. 4, 9.
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Since opening the account, Mr. Santillanes has continued to
contribute money from payroll deductions and currently has $7,500 in the account.
As noted above, the amounts on deposit serve as collateral for the Credit Union’s
loans. Under his agreement with the Credit Union, Mr. Santillanes can not
withdraw the money in his share savings account until his loans are paid in full.
Ex. 6. Mr. Santillanes owes about $17,300 on the loans. Mr. Santillanes has
never made any deposits to his savings account other than from payroll deductions
and has not made additional contributions once reaching the required balance. See
Exs. 2, 6, 9.
Disposition
A. 	Arguments.
Trustee advances three arguments to support his objection to
Debtors’ claim of exemption. First, he contends that Debtors have not shown that
the amounts on deposit in the share account are traceable to Mr. Santillanes’s
wages. Second, because the share account proceeds are pledged as collateral for
loans extended by the Credit Union, Trustee argues the character of those funds
has changed from earnings to an investment, so the exemption statute is
inapplicable. Third, Trustee points out that the purpose of Idaho Code § 11-207 is
to protect a portion of a debtor’s current earnings, not accumulated savings.
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Trustee insists that purpose will be frustrated if the exemption is allowed in this
case.
Debtors disagree with these arguments. They contend the account
deposits are all directly traceable to Mr. Santillanes’s wages, and therefore, under
this Court’s decision in In re Colling, 03.1 I.B.C.R. 58 (Bankr. D. Idaho 2003),
75% of the funds are exempt.
B. 	Exemption Standards.
In Idaho, citizens are restricted to the exemptions allowed under
state law. 11 U.S.C. § 522(b)(1); Idaho Code § 11-609. As the objecting party,
Trustee bears the burden of proof to show the exemption is not proper. Fed. R.
Bankr. P. 4003(c). However, once Trustee presents “sufficient evidence to rebut
the prima facie validity of the exemption, the burden shifts to a debtor to
demonstrate that the exemption is proper.” In re Nielsen, 97.4 I.B.C.R. 107, 107
(Bankr. D. Idaho 1997). It is well established that “the nature and extent of
exemptions is determined as of the date that the bankruptcy petition is filed,” In re
Moore, 269 B.R. 864, 868 (Bankr. D. Idaho 2001), and that exemption statutes are
liberally construed in favor of the debtor, In re Steinmetz, 01.1 I.B.C.R. 28, 28
(Bankr. D. Idaho 2001).
Idaho Code § 11-207 provides:
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(1) Except as provided in subsection (2) of this section,
the maximum amount of the aggregate disposable
earnings of an individual for any work week which is
subjected to garnishment shall not exceed (a) twenty-
five per cent (25%) of his disposable earnings for that
week, or (b) the amount by which his disposable
earnings for that week exceed thirty (30) times the
federal minimum hourly wage prescribed by 29
U.S.C.A. 206(a)(1) in effect at the time the earnings
are payable, whichever is less. In the case of earnings
for any pay period other than a week, the Idaho
commissioner of labor shall by regulation prescribe a
multiple of the federal minimum hourly wage
equivalent in effect to that set forth in (b) of this
subsection.
The relevant statutory definitions are follows:
For the purpose of section 11-207, Idaho Code, the
term:
1. "Earnings" means compensation paid or payable for
personal services, whether denominated as wages,
salary, commission, bonus, or otherwise, and includes
periodic payments pursuant to a pension or retirement
program.
2. "Disposable earnings" means that part of the
earnings of any individual remaining after the
deduction from those earnings of any amounts required
by law to be withheld.
3. "Garnishment" means any legal or equitable
procedure through which the earnings of any
individual are required to be withheld for payment of
any debt.
Idaho Code § 11-206.
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C. 	Under Colling, the Exemption Applies.
In In re Colling, 03.1 I.B.C.R. 48 (Bankr. D. Idaho 2003), this Court
held that the debtor could claim 75% of the money on deposit in her checking
account exempt under Idaho Code § 11-207 because those funds were directly
traceable to the debtor’s wages paid and deposited into her checking account on
the day she filed bankruptcy. In Colling, the Court relied not only upon its own
prior decisions, but also that of the Idaho Court of Appeals in Hooper v. State, 908
P.2d 1252, 1257–58 (Idaho Ct. App. 1995). There, the state court, interpreting
Idaho Code § 11-207, applied tracing principles to a prison inmate’s account to
determine if the money in the account could be exempted under Idaho Code § 11-
207. The court in Hooper denied the exemption because the inmate could not
demonstrate that all of the funds in the account were indeed directly traceable to
his personal earnings. Hooper, 908 P.2d at 1258.
Here, Trustee has not presented evidence to rebut the validity of the
exemption. Mr. Santillanes’s testimony and the other evidence in the form of
letters from the Credit Union show without contradiction that all of the deposits to
the share savings account came directly from Debtor’s wages, having been
withheld by his employer from his paychecks. While Trustee may have preferred
additional proof in the form of wage statements, in the absence of any evidence
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demonstrating otherwise, Debtors have adequately shown that the $7,500 in the
share account is all directly traceable to wages paid to Mr. Santillanes.
The Court respectfully disagrees with Trustee’s suggestion that the
share account has somehow over time been transmuted, or that Debtors have lost
the ability to trace the money to wages, as was the case in In re Virgin, 04.2
I.B.C.R. 64 (Bankr. D. Idaho 2004). In Virgin, the Court distinguished Colling
when the debtors claimed an exemption under Idaho Code § 11-207 not in a bank
account, but in their state and federal income tax refunds, on the theory that the
refunds were withheld from wages, and so could be claimed as exempt. The Court
relied upon established case law discussing the nature of tax refunds as a return of
tax previously paid to the government, a fact which significantly distinguished the
nature of the debtors’ property interest in the funds. The Court also noted that
once paid over by the debtors to the government, the funds in Virgin were
effectively commingled with other funds. As a result, the Court held that the tax
refunds did not meet the statutory definition of disposable income and that the
debtors could no longer trace the money to wages. Virgin, 04.2 I.B.C.R. at 65.
In contrast, there is persuasive authority suggesting that exempt
funds deposited in a savings account retain their exempt character. In Porter v.
Aetna Cas. & Surety Co., 370 U.S. 159, 161 (1962) the Supreme Court considered
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an exemption claimed in veteran’s benefits under the Veterans’ Administration
Act that had been deposited in a federal savings and loan association account. The
issue there was whether the money, having been deposited into a share account,
had been converted to a “permanent investment,” and thereby lost its exempt
character as money. Porter, 370 U.S. at 160–61. The Court noted that for savings
and loan associations, the “depositor is a shareholder rather than a creditor, and his
deposits are subject to withdrawal only after a 30-day demand.” Id. at 161.
Despite the restriction upon withdrawal and the characterization of the money as
shares, the Supreme Court upheld the district court’s determination that the money
in the account could be withdrawn in the same manner as money deposited in a
checking account, and so retained its character as money. Id. at 161–62. The
exemption was therefore allowed. Id. at 162.
Similar to a savings and loan account, an individual is a “member”
of a federal credit union, and his or her deposits represent “shares” which evidence
“money or its equivalent . . . .” Federal Credit Union Act, 12 U.S.C. § 1752(5).
Absent Mr. Santillanes’s agreement pledging his shares as additional collateral to
secure the auto loans, he would be able to withdraw his “shares” in the same
manner as money on deposit in either a savings or checking account. So despite
pledging the shares as collateral, the amounts in the account have not lost their
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1 While neither party raised the issue in this case, the Court notes that, in the
context of veterans benefits in Porter, the accrual of interest on the savings deposits was
held to have no impact on the availability of the exemption. Porter, 370 U.S. at 161.
MEMORANDUM OF DECISION - 9
essential character as “monies.” Once the loans are paid in full, Mr. Santillanes
can access the funds. 1
Nor does the accumulation of the funds in the share account over
seven years change the result in this case. Trustee points to the policy of the
statute, arguing that it was designed to protect only current earnings and should
not apply to protect earnings saved over time. However, the statute defines
“earnings” as “compensation paid or payable,” and includes within such definition
“periodic payments pursuant to a pension or retirement program.” Idaho Code
§ 11-206(1) (emphasis added). In other words, the statute protects all earnings
“paid” without regard to when they were paid. Moreover, this definition of
“earnings” includes pension and retirement money, which likely frequently
includes funds withheld from pay and deposited in the pension plan over time.
These definitions amount to a clear signal that wages, even when paid to the
debtor, remain subject to exemption under the statute.
Finally, in Hooper, the Idaho Court of Appeals examined statements
concerning the inmate’s account detailing four months of deposits and
withdrawals. The court expressed no concern that the wages in the account were
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not “current wages.” While seven years is certainly longer than four months, such
amounts to a distinction without a difference, especially considering there is no
evidence the funds in the share account have ever been commingled with funds
from other sources. If the Legislature desired to place a temporal limit on the
exemption, it could have done so. It did not.
Conclusion
The amounts in Debtors’ Credit Union share account are all directly
traceable to Mr. Santillanes’ wages. Under Idaho Code § 11-207, the account
funds constitute “earnings” and are exempt, subject to the limitations set forth in
the statute. For these reasons, Trustee’s objection to Debtors’ claim of exemption
will be denied by separate order.
Dated: November 20, 2005
Honorable Jim D. Pappas
United States Bankruptcy Judge
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