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TRACING FUNDS

IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO.  WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.

In re Schoerrer, 769 P.2d 1058, Colorado Supreme Court, 2/27/89  We granted certiorari to determine whether a creditor may garnish the proceeds of a student’s federally guaranteed student loan (GSL) in order to collect an antecedent business debt owed by the student. We reverse the court of appeals and hold that the use of state garnishment procedures to attach GSL funds for such purpose is clearly inconsistent with the federal  1059*1059 law governing the GSL program and thus the garnishment cannot be permitted.

In re Hildestad,  09-bk-17753-EWH, (AZ BK Court), 1/20/10It appears that the Payment was cash in the possession of Debtors at the time the petition was filed. However, as demonstrated above, a prepetition lump sum payment of social security benefits remains exempt, despite commingling with nonexempt funds. Because the cash withdrawal is reasonably traceable to exempt funds, the Payment was exempt on the petition date and remains exempt, despite any (hypothetical) postpetition use.  Accordingly, Trustee’s Motion to Compel Turnover of Assets is denied.


In re Sutton-Robinson, 4:11-bk-16753-JMM, 472 B.R. 77 (2012) Traceable funds which were erroneously transferred out of qualified individual retirement account (IRA), when brokerage firm did not act as debtor had instructed to transfer sum of only $11,459 from IRA but instead transferred entire balance of IRA to nonqualified money market account, retained their tax exempt status and could accordingly be exempted from Chapter 7 estate under Arizona exemption statute; brokerage firm promptly transferred funds back to the IRA upon discovering its mistake, with no evidence that debtor had any knowledge of or complicity in error.

Court found: 1) traceable funds which were erroneously transferred out of qualified individual retirement account (IRA), with no evidence that debtor had any knowledge of or complicity in error, retained their exempt status; 2) erroneously transferred funds that could not be accounted for and traced were included in property of Chapter 7 estate; and 3) trustee could not rely on stay provisions or unauthorized postpetition transfer statute to recapture the traceable funds. Turnover motion granted in part.