Carpenter v. Ries (In Re Carpenter)
2010 U.S. App. LEXIS 15772, 614 F.3d 930, 64 Collier Bankr. Cas. 2d 831 (2010)
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Rule of Law:
The Social Security Act's anti-alienation provision, 42 U.S.C. § 407, operates as a complete exclusion of Social Security benefits from a debtor's bankruptcy estate. These funds are not subject to the operation of bankruptcy law and do not become part of the estate, regardless of the exemption scheme chosen by the debtor.
Facts:
- In March 2006, the Social Security Administration (SSA) determined that Todd Carpenter was disabled.
- In September 2007, the SSA sent Carpenter a lump sum retroactive benefit payment of $17,165.
- On November 6, 2007, Carpenter deposited the payment into a bank account and kept the funds segregated from other money.
- On January 31, 2008, Carpenter withdrew the Social Security funds in the form of a cashier's check.
- On April 3, 2008, Carpenter filed for Chapter 7 bankruptcy relief while in possession of the cashier's check.
Procedural Posture:
- Todd Carpenter filed a petition for Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the District of Minnesota.
- The bankruptcy Trustee, Charles W. Ries, objected to Carpenter's claim that his Social Security funds were exempt from the bankruptcy estate.
- The bankruptcy court (the court of first instance) sustained the Trustee's objection, ruling the funds were property of the estate.
- Carpenter, as appellant, appealed the decision to the U.S. Bankruptcy Appellate Panel for the Eighth Circuit (BAP).
- The BAP, an intermediate appellate court, reversed the bankruptcy court's decision, holding the funds were excluded from the estate by 42 U.S.C. § 407.
- The Trustee, as appellant, appealed the BAP's decision to the U.S. Court of Appeals for the Eighth Circuit.
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Issue:
Does 42 U.S.C. § 407 operate to exclude accumulated Social Security benefits from a debtor's bankruptcy estate, thereby preventing them from being subject to the operation of bankruptcy law?
Opinions:
Majority - Chief Judge Riley
Yes. 42 U.S.C. § 407 operates to exclude accumulated Social Security benefits from a debtor's bankruptcy estate. The court holds that § 407 is an exclusion provision, not an exemption, automatically and completely shielding Social Security proceeds from bankruptcy proceedings. The reasoning is based on the plain and unambiguous language of § 407(a), which states that 'none of the moneys paid... shall be subject to... the operation of any bankruptcy or insolvency law.' This is reinforced by § 407(b), a non-supersession clause added in 1983, which dictates that no other law can limit § 407 unless it does so by 'express reference to this section.' Since the Bankruptcy Code does not expressly reference § 407, its specific and absolute prohibition prevails over the Code's general provisions that define the bankruptcy estate broadly. Therefore, Social Security funds never become property of the bankruptcy estate in the first place.
Analysis:
This decision solidifies the protected status of Social Security benefits in bankruptcy within the Eighth Circuit, resolving a conflict between the Social Security Act and the Bankruptcy Code. By classifying § 407 as a total exclusion rather than a mere exemption, the court ensures these funds never enter the bankruptcy estate, providing stronger protection for debtors than the exemption framework allows. This interpretation emphasizes the power of specific statutory prohibitions, particularly those with non-supersession clauses, to override general statutory schemes like the Bankruptcy Code's broad definition of estate property. The ruling provides clarity and security for Social Security recipients facing bankruptcy.
