Schoonover, Fred v. Karr, Edward ( 2003 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 02-3440
In the matter of:
FRED E. SCHOONOVER,
Debtor-Appellant.
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Appeal from the United States District Court
for the Southern District of Illinois.
No. 02-CV-4069-JPG—J. Phil Gilbert, Judge.
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ARGUED MAY 19, 2003—DECIDED JUNE 9, 2003
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Before EASTERBROOK, ROVNER, and EVANS, Circuit
Judges.
EASTERBROOK, Circuit Judge. Edward Karr obtained
a $100,000 judgment in Illinois court against Fred
Schoonover. When Schoonover did not pay, Karr invoked
the judgment to garnish about $80,000 that Schoonover
had in the Bank of Herrin. Schoonover then filed a bank-
ruptcy petition and listed the $80,000 as exempt, on the
ground that the money had come from Social Security,
veterans, and disability payments. He relied on 735 ILCS
5/12-1001(g) and 12-1006, state exemption statutes that
a debtor may elect to use. See 11 U.S.C. §522(b)(2)(A). Karr
ignored the proceeding until Schoonover filed a motion to
avoid the judicial lien. See 11 U.S.C. §522(f). Karr then
objected to the claim of exemption. After an evidentiary
hearing, at which Schoonover testified that most of the
2 No. 02-3440
money had come from the sale of antiques and not from the
deposit of benefit checks, Bankruptcy Judge Meyers
concluded that the funds are not exempt under state law,
even if some of the money had a source in governmental
benefits (as Schoonover’s wife testified). The district judge
affirmed. 285 B.R. 695 (S.D. Ill. 2002).
Schoonover’s testimony that the money came from
antiques raises the question whether his claim of exemp-
tion should be classified as bankruptcy fraud. Assuredly
he is not entitled to shield these funds from creditors.
Section 12-1001(g) exempts “[t]he debtor’s right to receive”
public benefits; it has nothing to do with funds on deposit
long after their receipt and commingling with the debtor’s
other assets. Like the anti-alienation clauses in the federal
benefits statutes themselves, this law ensures that recipi-
ents enjoy the minimum monthly income provided by the
benefits laws; it does not entitle recipients to shield hoards
of cash. See Fayette County Hospital v. Reavis, 169 Ill. App.
3d 246, 250, 523 N.E.2d 693, 695 (5th Dist. 1988) (“the
Illinois legislature did not intend to exempt property
which is traceable to social security benefits . . .”). Section
12-1006 exempts an “interest in or right, whether vested or
not, to the assets held in . . . a retirement plan . . . if the
plan . . . is intended in good faith to qualify as a retirement
plan under applicable provisions of the Internal Revenue
Code . . . .” What is necessary is a trust or equivalent
arrangement segregating the assets until retirement. That
assets freely usable for current consumption may be
traced to public benefits does not make them a tax-qualified
“retirement plan” and thus does not support an exemp-
tion under §12-1006. See In re Weinhoeft, 275 F.3d 604(7th Cir. 2001); Auto Owners Insurance v. Berkshire, 225
Ill. App. 3d 695, 588 N.E.2d 1230 (2d Dist. 1992).
In this court, Schoonover disdains the language of the
statutes and disregards the opinions interpreting them. He
contends instead that the bankruptcy court erred in re-
No. 02-3440 3
quiring him to shoulder the “burden of proof”—by which he
means the burden of producing evidence about the funds’
genesis. How this could affect the outcome is a mystery.
If Schoonover had not presented his own testimony
(and that of his spouse) about the provenance of the funds,
Karr surely would have called them to the stand for that
purpose. Nothing turns on the allocation between debtor
and creditor of the risk of nonpersuasion: the dispute was
resolved on wholly legal grounds, so the burden of persua-
sion is irrelevant.
Along the way, however, Schoonover made a legal argu-
ment: that Karr waited too long before contesting the
claim of exemption. The creditors’ meeting occurred on
April 12, 2001, and from then creditors had 30 days to
object to any claim of exemption. That time may be ex-
tended only if a creditor asks for more before the 30 days
have run. See Fed. R. Bankr. P. 4003(b). Once the peri-
od expires, creditors are out of luck even if the claim of
exemption is specious. See Taylor v. Freeland & Kronz, 503
U.S. 638 (1992). Karr let the 30 days pass without action.
On August 24, 2001, Schoonover filed a motion under
§522(f) asking the bankruptcy court to avoid Karr’s lien.
Karr filed a timely answer to this motion—but by then it
was September, too late (Schoonover says) to deny that
the accounts are exempt. And if they are exempt then
the lien should be avoided. See Owen v. Owen, 500 U.S.
305 (1991).
After May 12, 2001, no unsecured creditor could have
asserted any right to payment from the funds on deposit
at the Bank of Herrin. But Karr had a judicial lien, and
though this may not have given him a security interest
in the accounts it did give him a valuable entitlement: to
wait out the bankruptcy and enforce the lien at its con-
clusion, unless the debtor asked the bankruptcy court
for relief. “[A] creditor’s right to foreclose on [a lien] sur-
vives or passes through the bankruptcy.” Johnson v. Home
4 No. 02-3440
State Bank, 501 U.S. 78, 83 (1991). Although general
unsecured creditors must take the initiative by objecting,
lienholders may wait for notice under §522(f). Once they
receive notice, lienholders litigate on the schedule appro-
priate to a proceeding under §522(f), not the schedule for
general creditors.
Taylor did not get its 30-day limit from the Bankruptcy
Code: all §522(l) says is that creditors who want dibs
on assets claimed as exempt must object, which Karr
eventually did. The deadline came from Rule 4003(b), which
deals with objections by general creditors. Motions under
§522(f) to avoid liens fall under Rule 4003(d), not Rule
4003(b)—and Rule 4003(d) does not set a 30-day schedule
but instead provides that “[a] proceeding by the debtor
to avoid a lien or other transfer of property exempt
under §522(f) of the Code shall be by motion in accord-
ance with Rule 9014.” In turn, Rule 9014 leaves deadline-
setting to the bankruptcy judge. The upshot is that lien-
holders have more time than general unsecured creditors,
a dispensation essential if lienholders are to enjoy any
chance to watch the proceedings from afar and enforce
their liens later. Just as §522(l) and Rule 4003(b) put the
onus of timely objection on general unsecured creditors,
so §522(f) and Rules 4003(d) and 9014 put the onus of
contesting a lien on debtors; the clock for lienholders runs
from the motion under §522(f) and not from the meeting
of unsecured creditors. To the extent that In re Chinosorn,
248 B.R. 324, 327-28 (N.D. Ill. 2000), reaches a different
conclusion, it is disapproved. (As far as we can tell, this
is the first appellate consideration of the question wheth-
er Rule 4003(b) and Taylor affect the time available to
lienholders.) Karr’s objection was timely.
AFFIRMED
No. 02-3440 5
A true Copy:
Teste:
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Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—6-9-03