Bankruptcy is Romantic: Maine Bankruptcy Court Holds That a Debtor’s Interest in Her Engagement Ring is Exempt

Recently, the Bankruptcy Court for the District of Maine held that a debtor’s interest in an engagement ring is exempt under Maine law. In re Cynthia A. Chaney, Case No. 15-20725. In that case, the debtor claimed the full value of her wedding and engagement rings, valued at $5,200, as exempt under Maine law. The Chapter 7 Trustee in the case objected, arguing that Maine law allows an exemption in jewelry up to a maximum value of $750. 

In Maine, a debtor may claim an exemption in the debtor’s “aggregate interest, not to exceed $750 in value, in jewelry primarily for personal family, or household use of the debtor or a dependent of the debtor and the debtor’s interest in a wedding ring and an engagement ring.” 14 M.R.S. §4422(4). The Trustee argued, based on legislative history and his reading of the surrounding provisions, that this language limited any exemption in any jewelry to $750 total, including wedding and engagement rings. The debtor argued that the statute created two categories of jewelry: personal jewelry with an aggregate value of $750, and a wedding ring and an engagement ring of unlimited value. 

The Bankruptcy Court found the language of the statute to be unambiguous: 

It allows debtors to protect two separate types of jewelry: (1) personal jewelry and (2) two rings connected to the institution of marriage. . . . The first category has a limit: debtors can exempt up to $750 of jewelry held primarily for personal family or household use. The second group has no limit: debtors are permitted to protect their full interest in a wedding ring and an engagement ring.

From the opinion, it is clear that in Maine a debtor can claim an exemption in two marital rings of unlimited value. Other New England states have different exemption limits for jewelry. For example, Massachusetts allows the debtor to elect either the Massachusetts state exemptions or the federal exemptions. Only the federal exemption has an exemption for jewelry—up to $1,600 in value (value adjusted on April 1, 2016). In New Hampshire, a debtor may exempt jewelry up to a value of $500. NH RSA 511:2. In New Hampshire, a debtor can also apply his or her “wildcard” exemption to protect jewelry with value above the $500 exemption.

Court Finds that Parents Convicted of Ponzi Scheme Received Value from Tuition Payments

Do parents receive something of value when they pay for their child to attend college? The Massachusetts Bankruptcy Court (Hoffman, J.) recently considered this exact question in DeGiamcomo v. Sacred Heart University, Inc., AP No. 15-01126 (August 10, 2016). In this case, after the debtor’s parents were convicted of investment fraud for operating a Ponzi scheme, a Chapter 7 trustee attempted to avoid and recover over $60,0000 in tuition payments made to an area college as fraudulent transfers under Bankruptcy Code § 548(a)(1)(B) and the Massachusetts Uniform Fraudulent Transfer Act, Mass. Gen. Laws ch. 109A. 

The trustee asserted that the “Ponzi scheme presumption” should have been applied, where, as the trustee claimed, the parents were insolvent at the time of the transfers and “received no reasonably equivalent value” from the college. The Ponzi scheme presumption is applicable where “the existence of a Ponzi scheme establishes that transfers were made with the intent to hinder, delay and defraud creditors.” Picard v. Merkin (In re Bernard L. Madoff Inv. Sec., LLC), 440 B.R. 243, 255 (Bankr. S.D.N.Y. 2010). The Court, however, rejected the trustee’s argument and applied a more narrow view of the presumption. The Court held that only transfers made in furtherance of the Ponzi scheme are subject to the presumption of fraudulent intent. Otherwise, the Court reasoned, funds spent buying groceries, payment medical bills, or supporting children would be subject to a trustee’s claw back.

Turning to the question of whether or not the debtor parents received any “value” for making tuition payments on behalf of their child, the Court noted that other jurisdictions have split on the issue: some holding that there is a “societal expectation that parents will assist” with college payments and denying attempts at a claw back, while other jurisdictions have held that tuition payments were avoidable where the parents had no legal obligation to pay the tuition. Here, the Court determined that the debtor parents did indeed receive something of value for the tuition payments other than mere “ethereal or emotional rewards.” The Court held that “[a] parent can reasonably assume that paying for a child to obtain an undergraduate degree will enhance the financial well-being of the child, which in turn will confer an economic benefit on the parent.” This “quid pro quo” was enough for the Court to deny the trustee’s attempt to claw back the tuition payments and enter summary judgment in favor of the college. 

As an interesting side note to the case, after the trustee appealed the ruling, the Bankruptcy Court Judge Hoffman filed a statement requesting direct appeal to the First Circuit. Assuming the First Circuit takes the appeal, we will see if the First Circuit agrees with the Bankruptcy Court’s analysis.