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TRACING OF FUNDS IN BANKRUPTCY

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In re Sutton-Robinson, 4-11-bk-16753-JJM (Az BK court, 3/19/12)  The chapter 7 trustee (“Trustee”) objected (ECF No. 37) to a claimed exemption in an investment account, which allegedly held IRA assets. Those assets were then put back into the IRA, postpetition. Trustee also asserted that the transfer was a violation of the automatic stay and was void.  Debtor responded that these were traceable exempt funds that had been erroneously transferred to the nonexempt account by her brokerage firm, RBC Capital Markets, LLC (“RBC”). RBC had then corrected its error, on the books, by transferring the assets back into Debtor’s IRA.  CONCLUSION: Debtor to turn over $6,492.12 to Trustee; disbursing $59,756.27 ($49,756.27 plus the $10,000 damages reserve = $59,756.27) to Debtor as her exempt property; and dismissing the pending adversary proceeding.

In re Hildestad, 09-bk-17733-EWH (Az BK Court, 1/20/10) Trustee, Warfield, argues that Debtors’ lost exemption for Social Security funds when they withdrew it from the bank account and had cash when case was filed.  Debtors try to dismiss case when they discover the problem.

Case law:

Furthermore, a prepetition lump sum payment of a social security disability benefit is exempt. In re Radford, 265 B.R. 827 (Bankr.W.D.Mo.2000). Indeed, a Chapter 7 debtor is not required to claim exemption in order to retain prepetition social security disability benefits, where the debtor’s state has “opted-out” of federal exemptions. In re Barron, 85 B.R. 603 (Bankr.N.D.Ala.1988).

The deposit of exempt funds in a bank account does not affect a debtor’s exemption, nor does it change the exempt character of the funds, so long as the source of the exempt funds is reasonably traceable. In re Hanson, 41 B.R. 775 (Bankr.D.N.D.1984); Matthews v. Lewis, 617 S.W.2d 43 (Ky.1981). If it is impossible to separate out exempt from nonexempt funds, the rule is that an exemption cannot lie. Foreacre, 358 B.R. at 393 (homestead sale proceeds commingled with nonexempt and exempt funds, transferred to separate accounts, and withdrawn for living expenses over the course of several months lost exempt status as they were no longer “identifiable”); Matter of McCafferty, 81 B.R. 99 (Bankr.M.D.Fla.1987).

Specifically, social security benefits commingled in an account with nonexempt funds retain their exempt status. In re Moore, 214 B.R. 628 (Bankr.D.Kan.1997); NCNB Financial Services, Inc. v. Shumate, 829 F.Supp. 178 (W.D.Va.1993), aff’d, 45 F.3d 427 (4th Cir.1994); Hatfield v. Christopher, 841 S.W.2d 761 (Mo.Ct.App.W.D.1992); see also In re Frazier, 116 B.R. 675 (Bankr.W.D.Wis.1990) (social security benefits commingled with other exempt funds remain exempt) (emphasis added).

CONCLUSION: The Payment is exempt. Accordingly, Trustee’s Motion to Compel Turnover of Assets is denied. Additionally, cause exists for dismissal of the case, and as such, Debtors’ Motion to Dismiss is granted. Orders consistent with this Memorandum Decision will be entered this date.