Rochester Bankruptcy Judge John C. Ninfo has ruled that Worker's Compensation disability payments are not exempt from a bankruptcy trustee if received before the filing of the bankruptcy petition. In re Widner; Western District of New York Bankruptcy # 10-20209; decision dated July 11, 2011.
In an earlier decision, In re Herald(294 BR 440, WDNY Bank. 2003), Judge Ninfo had ruled that Worker's Compensation benefits were 'disability benefits', and, therefore, could be exempted in bankruptcy under NY D&C 282 (2)( c ). In Herald, the benefits in question were payments the debtor was entitled to after filing the petition. In Widner, the question was whether the debtor could exempt $57,500 remaining from a lump sum Worker's Compensation award received before the filing of the bankruptcy. The funds had been held In a separate bank account, not commingled with any other money.
The issue is whether a bankruptcy debtor in New York can exempt funds traceable to disability benefits, or if it it just the right to receive the disability funds that is exempt. Under the Federal Exemptions of the Bankruptcy Code, the debtor may exempt "the right to receive" benefits such as disability. Federal decisions around the country limit this exemption to just that: the right to receive payment; the payment itself is not exempt so any funds on hand when a petition is filed that originated as disability payments are not exempt; only future payments, or the right to receive future payments, is exempt.
New York's bankruptcy exemptions are found in New York Debtor and Creditor Law Sections 282 and 283. As originally drafted, the New York exemption for disability benefits was identical to the federal exemption. However, in 1989 the exemption statute was amended to add a significant phrase: "the right to receive OR THE DEBTOR'S INTEREST IN" benefits was now exempt. The question is whether the additional phrase "the debtor's interest in" expanded the exemption beyond the scope of the federal exemptions, to include funds already received.
This amendment was to D&C Section 282(2), and the phrase "the right to receive or the debtor's interest in" precedes five categories of benefits: a) social security, unemployment compensation or a local public benefit; b) a veterans benefit; c) disability, illness or unemployment benefit, d) alimony, maintenance or child support; and e) retirement accounts.
Judge Ninfo concluded that the phrase "the debtor's right to receive" was "ambiguous", and needed further interpretation through examining the legislative history of the 1989 amendments. That history, according to the decision, showed that the amendment intended only to change certain court decisions which had held that retirement funds (subsection 'e' of section 292(2) wrere not exemptable once received. Judge Ninfo, therefore, concluded that the phrase "the debtor's interest in" only applied to subsection 'e' of Section 282(2), retirement funds, and does not apply to any of the other categories, including the debtor's interest in disability benefits received pre-petition. With the phrase "the debtor's interest in" effectively written out of the statute, federal cases from other jurisdictions that interpreted the federal exemption as limited to benefits not yet received applied; Mr. Widner's exemption claim was denied.
This decision has implications beyond pre-petition Worker's Compensation benefits. Presumable all funds received by a debtor prior to filing bankruptcy from any of the first four categories (a-d) in Section 282(2) would not be considered exempt under the New York exemption statute, including child support, unemployment, or disability insurance.
I have a very difficult time accepting the logic of this decision. If the intent of the legislature was only to exempt "the debtor's interest in" retirement funds, why is the phrase included at the beginning of the section, in front of all five categories of benefits?
As I see it, there is no ambiguity as to whether the New York State Legislature considers money in a bank account received from Worker's Compensation to be exempt. In 2009, the legislature amended the collection law dealing with bank account restraints and executions. New CPLR Section 5222-a(b)(4)(a) requires the following plain-language ntice be served on a judgment debtor if the debtor's bank account is restrained by a creditor:
Under state and federal law, certain types of funds cannot be taken from your bank account to pay a judgment. Such money is said to be "exempt."
DOES YOUR BANK ACCOUNT CONTAIN ANY OF THE FOLLOWING TYPES OF FUNDS?
1. Social security;
2. Social security disability (SSD);
3. Supplemental security income (SSI);
4. Public assistance (welfare);
5. Income earned while receiving SSI or public assistance;
6. Veterans benefits;
7. Unemployment insurance;
8. Payments from pensions and retirement accounts;
9. Disability benefits;
10. Income earned in the last 60 days (90% of which is exempt);
11. Workers' compensation benefits;
12. Child support;
13. Spousal support or maintenance (alimony);
14. Railroad retirement; and/or
15. Black lung benefits.
If YES, you can claim that your money is exempt and cannot be taken.
Item #11 is, of course, Worker's Compensation, the object of this decision. In fact, every item on this list, except #10, is an item contained within the five categories of D&C Section 282(2).
For more on the 2009 changes to New York Law regarding bank account restraints and executions (seizures) iof bank accounts, see my "Legislative News" page of my website. For New York's Exemptions, see my New York Exemptions website page.