Bankr. W.D.N.C.: In re Mergentime- Transferred Social Security Benefits

Summary:

Ms. Mergentime received $62,417.80 as a lump sum payment for retroactive Social Security benefits, approximately 4 months after filing her Chapter 7 bankruptcy. She had not disclosed those potential funds in her petition. Pursuant to her equitable distribution agreement, she paid half of those funds to her ex-husband. The Trustee sought to recovery those transferred funds and to deny Ms. Mergentime’s discharge, arguing that even though those funds would have been fully protected, the transfer to her ex-husband changed the nature of those funds such that they were no longer protected.

The bankruptcy court rejected this argument as the Social Security benefits were not, pursuant to 42 U.S.C. § 407, even an asset of the estate and, while it scolded Ms. Mergentime for not disclosing the asset “so that other parties can make their own evaluations”, claiming the funds as exempt was not necessary. As to the transfer to the ex-husband, the bankruptcy court opined that while the Trustee could bring an action under 11 U.S.C. § 549, to be successful the Trustee would “have to show that by some form of legal alchemy the funds transferred to debtor’s ex-husband created estate property.” This would be similar to showing that the use of Social Security benefits for paying for food or medicine allowed recovery from groceries and pharmacies.

Commentary:

Harris Teeter and CVS should be worried that this opinion will be used by Trustees as an encouragement to bring avoidance actions against them also.

For a copy of the opinion, please see:

Bronikowski- Employment Bonus is an Expectation of Payment not Contingent Interest

About

1. Bachelor of Arts degree in English Literature from Washington University, 1993. 2. Juris Doctor degree from George Washington University, 1996. Admissions to Practice of Law: North Carolina Bar, 1996. Federal District Courts for the Eastern and Middle Districts of North Carolina. Specialty Certification: North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy. Areas of Practice: Practice limited to consumer and business debtor bankruptcy law, 1998 to present. Memberships: National Association of Consumer Bankruptcy Attorneys (NACBA). North Carolina Academy of Trial Lawyers (NCATL). North Carolina Bar Association, Bankruptcy Section. Lectures prepared and presented: North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court - C.Y.A. Forms to Help 'Gird They Loins'; 2001. Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002. NACBA National Convention; Topic: Efficient Office Practices; 2003. NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004. Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004. Positions held: NACBA National Convention; Convention Chair; 2008. NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008. NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007. NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007. NACBA, Member of National Board of Directors, 2006 to present. NCATL, Chair of the Bankruptcy Section, 2003 to 2007. NACBA, Chair of the North Carolina Section, 2003 to 2007. NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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