Opinion
No. 99-80751.
August 22, 2001
OPINION
This bankruptcy case was reopened by a prior Order of this Court, entered on January 30, 2001, on the motion of OSF HEALTHCARE SYSTEMS, INC. (OSF), one of the unsecured creditors of the Debtors, OLIVERIO MUNOZ-GONZALEZ (OLIVERIO) and RUTH MARIE MUNOZ-GONZALES (RUTH) (jointly referred to as "DEBTORS"). Following entry of that Order, the DEBTORS amended their bankruptcy schedules to include a prepetition workers' compensation claim as an asset on Schedule B and to claim an exemption in the proceeds of the award on Schedule C pursuant to Section 21 of the Illinois Workers' Compensation Act. 820 ILCS 304/21. Both OSF and the Chapter 7 Trustee (TRUSTEE) filed an objection to the DEBTORS' amended claim of exemption. An evidentiary hearing was held on May 29, 2001, and the matter was taken under advisement by the Court. At issue is the DEBTORS' right to claim an exemption in an asset which they failed to properly disclose on their bankruptcy schedules, and, if the claim of exemption has not been lost, whether a workers' compensation claim is exempt under Illinois law.
The facts of this case are set forth in this Court's prior Opinion and will not be restated in detail. At the time the DEBTORS filed their Chapter 13 bankruptcy petition in March of 1999, OLIVERIO had suffered a work-related injury and had pending a workers' compensation claim against I. Erlichman Company, as well as a pending lawsuit against Thomas Roofing, stemming from an automobile accident. While the litigation involving Thomas Roofing was disclosed on the statement of financial affairs, the workers' compensation claim was not disclosed on the original petition or schedules. When the case was converted to Chapter 7 on April 22, 1999, the schedule of post-petition property filed by the DEBTORS disclosed only "Personal Injury — Exempt for $7,500.00." The DEBTORS received a discharge on July 26, 1999, and the case was closed. OSF, learning of the settlement of the workers' compensation claim, filed a motion to reopen the case on Sept. 15, 2000, which was granted by the Court. Both OSF and the TRUSTEE have objected to the DEBTORS' amended claim of exemption in the proceeds of the workers' compensation claim, though focusing on different grounds.
At the hearing, OLIVERIO, who speaks only Spanish, testifying with the aid of an interpreter, stated that he came to this country from Mexico when he was just fifteen years old. He attended elementary school in Mexico, but had no further education after arriving in the United States. OLIVERIO testified that he was injured in 1995 in a work-related accident, when a boy struck him with a knife in the neck. In 1998 he married RUTH, who speaks both Spanish and English. When the DEBTORS filed their Chapter 13 petition in the Spring of 1999, OLIVERIO communicated with his attorney through RUTH'S assistance. RUTH testified that she did not know OLIVERIO in 1995, but she was aware when the bankruptcy was filed that he would be getting money from the settlement of his workers' compensation claim. She testified that she recollected that she had told their bankruptcy attorney of the workers' compensation claim. OLIVERIO testified that the funds from the settlement were used to repay monies borrowed from family and friends, who helped support him when he was out of work.
As this Court emphasized in its prior Opinion, a debtor's duty to disclose fully and accurately all legal or equitable interests in property as of the commencement of the case, whatever their nature, on the bankruptcy schedules is paramount and absolute. Matter of Yonikus, 996 F.2d 866 (7th Cir. 1993). This duty is uncompromising and cannot be overemphasized. The integrity of the bankruptcy system depends upon a full and honest disclosure by debtors of all of their assets. If debtors could omit assets at will, with the only penalty that they had to file an amended schedule once caught, cheating would be altogether too attractive. Id. A debtor has no discretion to exclude exempt or worthless property.
As an adjunct to this duty, a debtor has the right to amend the bankruptcy schedules, including a claim of exemption, as a matter of course at any time before the case is closed. Fed.R.Bankr.Pro. 1009(a). This rule has been applied to reopened cases as well as to cases which have not yet been closed. In re Boyd, 243 B.R. 756 (N.D.Cal. 2000). Unlike the debtor's duty to disclose, however, this rule is not absolute and upon a showing that the debtor has acted in bad faith or concealed assets or that the amendment would prejudice creditors, the debtor's right to amend does not exist. Yonikus, supra. The determination of whether a debtor's omission was purposeful or detrimental to creditors is to be made based upon the particular circumstances of each case.
Relying upon the Seventh Circuit's decision in In re Yonikus, supra, the TRUSTEE contends that OLIVERIO'S claim of exemption is made in bad faith and should be denied. The TRUSTEE points to the close proximity in time between the settlement of the workers' compensation case and the filing of the Chapter 13 petition, drawing the conclusion that the DEBTORS' failure to disclose the award was intentional. The DEBTORS focus upon their disclosure of the pending personal injury claim when the case was converted to Chapter 7, in support of their position that the failure to include the workers' compensation settlement was innocent and inadvertent. It is also apparent that the DEBTORS and their attorney were not communicating clearly, which the DEBTORS attribute to OLIVERIO'S lack of fluency in English.
Based upon the totality of the circumstances in the present case, this Court concludes that the DEBTORS did not intentionally conceal the workers' compensation claim. According to an unofficial transcript of the Section 341 meeting held upon conversion of the case, introduced by the TRUSTEE without objection, OLIVERIO and RUTH were living apart at that time. The TRUSTEE'S questions were directed to RUTH, and OLIVERIO'S participation was minimal. During that examination, the TRUSTEE noted OLIVERIO'S difficulty in communicating and the possible need for an interpreter was raised at that time. Because the DEBTORS' lawyer spoke no Spanish, the interaction between OLIVERIO and his attorney throughout these proceedings would doubtlessly have been hindered by this language barrier. The TRUSTEE'S reliance upon the 7th Circuit's decision in Yonikus is misplaced for the facts of that case are distinguishable. In Yonikus, the debtor, an Illinois State Police officer, failed to disclose both his personal injury action and his workers' compensation claim and the bankruptcy court had previously denied the debtor's discharge on the basis of fraudulent concealment of assets.
Taking a different approach, OSF argues that the DEBTORS' claim of exemption in the workers' compensation award under Section 21 of the Workers' Compensation Act (ACT), 820 ILCS 305/21, is not proper and that the DEBTORS should be required to claim an exemption pursuant to Section 12-1001 of the Code of Civil Procedure, which sets forth the general bankruptcy exemptions. Section 21 of the ACT provides, in part:
No payment, claim, award or decision under this Act shall be assignable or subject to any lien, attachment or garnishment, or be held liable in any way for any lien, debt, penalty or damages. . . .
OSF contends that this provision, containing neither the word "exempt" nor "bankruptcy," does not create an exemption and that In re McClure, 175 B.R. 21 (Bankr.N.D.Ill. 1994), holding to the contrary, was incorrectly decided. This Court disagrees.
McClure does not stand alone. In In re Lush, 213 B.R. 152 (Bankr.C.D.Ill. 1997), the parties did not dispute that the workers' compensation claim was exempt property and Judge Lessen so found. Judge Wedoff's decision in McClure, was followed by the court in In re Allard, 196 B.R. 402, 410 (Bankr.N.D.Ill. 1996), which held that the language of the Illinois tenancy by the entirety statute providing that such property "shall not be liable to be sold upon judgment," creates an exemption, concluding that "[f]airly applying the practical function of the relevant statute is more important than using some bright line test hinging upon the statute's use or non-use of the words `exempt' or `exemption' to determine whether or not a state exemption exists for purposes of. . . a bankruptcy case."
As denoted by the Supreme Court many years ago, the essence of an exemption is a "present right. . . which withdraws the property from levy and sale under judicial process." White v. Stump, 266 U.S. 310, 383, 45 S.Ct. 103, 104, 69 L.Ed. 301 (1924). In addition to the itemization of property exempt under the federal bankruptcy exemptions contained in Section 522(d), Section 522(b)(2)(A) provides that a debtor may claim as exempt "any property that is exempt under Federal law." An examination of the various federal statutes encompassed by this provision shows that the language need not contain the word "exempt" nor specifically mention bankruptcy. For instance, the provision exempting federal civil service retirement benefits provides that the benefits are "not assignable, either in law or equity. . . or subject to execution, levy, attachment, garnishment, or other legal process. . . ." 5 U.S.C. § 8346. See, also, 38 U.S.C. § 5301 (right to receive veterans benefits "shall be exempt from the claim of creditors, and shall not be liable to attachment, levy, or seizure by or under any legal or equitable process whatever, either before or after receipt by the beneficiary"). Thus, it is language which specifically prohibits involuntary attachment by collection process which makes a provision an exemption statute.
The legislative history to this provision sets forth a list of non-bankruptcy federal statutory exemptions, including those noted in the text. See, H.R. Rep. No. 595, 95th Cong. 1st Sess. 360 (1977).
That analysis under federal statutes is equally applicable to the analysis here, made under state law. Illinois has opted out of the federal exemptions. Section 12-1201 of the Illinois Code of Civil Procedure, implementing that election, provides:
In accordance with the provision of Section 522(b) of the Bankruptcy Code. . . residents of this State shall be prohibited from using the federal exemptions provided in Section 522(d) of the Bankruptcy Code of 1978 ( 11 U.S.C. § 522(d)), except as may otherwise be permitted under the laws of Illinois.
735 ILCS 5/12-1201. While differing from the Bankruptcy Code provision specifically providing that a debtor may claim any other exemptions provided by federal law, this provision does not limit a debtor's exemptions to those set forth in Section 12-1001 of the Code of Civil Procedure which contains the general personal property exemptions. Nor does Section 12-1001 provide that it is exclusive and it has not been so interpreted. Courts in Illinois have not limited debtors to the specific statutory exemptions of homestead and of personal property, but have recognized various similar remedial provisions which constitute specific exemptions under different legislative enactments. See, State Bank of Antioch v. Nelson, 132 Ill. App.3d 120, 477 N.E.2d 77, 87 Ill.Dec. 476 (2d Dist. 1985); See, also, In re Simpson, 115 B.R. 142 (Bankr.C.D.Ill. 1988); In re Sanders, 1991 WL 378167 (S.D.Ill. 1991). Section 21 of the ACT is one such remedial provision and protects the award from "attachment, garnishment or be[ing] held liable in any way for any lien, [or] debt," clearly fitting within the standard for an exemption set forth by the Supreme Court.
OSF'S assertion that it is unlikely that the Illinois legislature intended for Section 21 of the ACT to provide for an enhanced exemption in bankruptcy and that the DEBTORS should be required to claim the workers' compensation benefits exempt under the general personal property exemption as either a personal injury settlement or as disability benefits, does not withstand scrutiny. Contrary to OSF'S assertion, the intent of the workers' compensation statute supports the result reached by this Court. The first Workmen's Compensation law was enacted in 1911. Its purpose is to provide financial protection to workers and their dependents from accidental injuries sustained in the workplace. Whitehead v. AM Intern., Inc., 860 F. Supp. 1280 (N.D.Ill. 1994). The ACT provides employees with efficient remedies without the need to establish an employer's negligence and fixes the employer's liability and protects it from common law suits by employees. Meerbrey v. Marshall Field and Co., Inc., 139 Ill.2d 455, 564 N.E.2d 1222, 151 Ill. Dec. 560 (1990). The benefits provided by the ACT are not excessive and provide only for a minimum income for the employee and any dependents, to meet their basic needs, and the ACT is designed to protect those benefits from the claims of the employee's creditors.
The TRUSTEE also contends that even if a workers' compensation claim is exempt, the DEBTORS received the funds prior to the date the case was converted to Chapter 7 and that the claim of exemption is not proper because the funds may have been commingled and have not been shown to be traceable to the settlement. What the TRUSTEE overlooks is that the debtor's right to claim an exemption is determined on the date that the bankruptcy is filed, not the date that the case is converted. In re Alexander, 236 F.3d 431 (8th Cir. 2001); In re Sandoval, 103 F.3d 20 (5th Cir. 1997). On the date the Chapter 13 petition was filed, the negotiated settlement had not been paid over to OLIVERIO and the TRUSTEE'S argument concerning traceability is without merit.
While there did exist some controversy as to whether it is the date of filing or the date of conversion when a case is filed as a Chapter 13 and later converted to Chapter 7, Section 348 of the Bankruptcy Code was amended by the Bankruptcy Reform Act of 1994 to provide that the estate in a converted case consists only of property of the estate as of the original filing date that remains in the possession of the debtor on the date that the case is converted. 11 U.S.C. § 348(f)(1)(A). As the court in In re Sandoval, 103 F.3d 20 (5th Cir. 1997) notes, the legislative history explains that the amendment was intended to overrule In re Lybrook, 951 F.2d 136 (7th Cir. 1991).
Based upon a finding that the DEBTORS did not fraudulently conceal OLIVERIO'S workers' compensation claim, the TRUSTEE'S objection to the amended claim of exemption should be denied. Because workers' compensation claims and their proceeds are entirely exempt under Illinois law, OSF'S objection to the amended claim of exemption should be denied. In so holding, this Court notes with disconcertion that this is the second opinion issued by this Court, after holding four hearings. The amount of time spent by the TRUSTEE, OSF, and this Court is very unfortunate and only underscores the importance of a full and complete disclosure in the first instance. While the DEBTORS have prevailed here, based upon facts which are well out of the ordinary, a debtor not so hampered may well forfeit the right to exempt an undisclosed asset from the bankruptcy estate.
By denying the objections, the Court does not mean to imply that they were improperly raised. The DEBTORS were required to disclose the workers' compensation claim on their original schedules and their failure to do so is narrowly excusable only because of OLIVERIO'S difficulty with the English language.
Given this Court's disposition of the objections to the DEBTORS' amended claim of exemption, this Court need not rule upon OSF'S request for an administrative claim. Its motion shall be denied as moot.
This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
ORDER
For the reasons set forth in an Opinion filed this day, IT IS HEREBY ORDERED that:
1. The objection filed by OSF HEALTHCARE SYSTEMS, INC. to the DEBTORS' amended claim of exemption is DENIED;
2. The objection filed by the TRUSTEE to the DEBTORS' amended claim of exemption is DENIED; and 3. The motion filed by OSF HEALTHCARE SYSTEMS, INC. for an administrative claim is DENIED as moot.