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