The personal exemptions granted to debtors under Minnesota law have grown antiquated in many respects, failing to take into account changes in values, technology and our collective sense of what constitutes “injury.” It’s time to refashion those laws for the realities of the 21st Century.

The rotary phone has been replaced by the smart phone. Electric cars are slowly displacing the internal combustion engine. Pacemakers and implants of all kinds have replaced blood-letting and the use of leeches in medical treatments.

Unfortunately our laws are not as efficient in keeping up with change. Society’s plasticity in generating new realities far outpaces our plodding legislative process. The result can be statutory provisions mired in pre-modern concepts, leaving Minnesotans beholden to outmoded law.

Where debt is concerned, the fishes in the net to which Shakespeare referred are found in Minnesota Statutes Sections 550.37, dealing with personal property exemptions, 550.39, Exemption of Insurance Policies and Minn. Stat. §176.175 Right to Compensation, Award. These are analogs in a digital age.

Exemptions are categories of property protected from seizure in order to satisfy or execute legal monetary judgments. The idea is enshrined in the Minnesota Constitution, which states “[a] reasonable amount of property shall be exempt from seizure or sale for the payment of any debt or liability. The amount of such exemption shall be determined by law.”1

Deficiencies exist in these statutes that should be corrected. This article will examine these issues, and suggest changes that should be considered. These issues will be examined in the context of judicial holdings analyzing the provisions of these statutes. Few Minnesota appellate cases exist. However, issues regarding exemptions arise frequently in the bankruptcy context, and there are several Bankruptcy Court for the District of Minnesota case holdings that are instructive. It should be stressed, however, that this is not a bankruptcy issue, that these issues affect Minnesotans whether they file bankruptcy or not. Think of bankruptcy as the canary in the mineshaft.

What Should be Modernized

1. MN Stat 550.37 Subd. 22 Rights of Action. This section states that “rights of action for injuries to the person of the debtor or of a relative whether or not resulting in death” are exempt.2
Case after case interprets this section narrowly, reserving the exemption for actual physical injuries. The section as it exists is narrow and lacks the flexibility to account for evolving social perception about the types of injury that are worthy of compensation and thus exemptible.

There are several examples. In re Keenan involved an exemption based on a claim for sexual abuse allegedly perpetrated by a Catholic priest. Keenan alleged that when he was 13-15 years old, the priest “engaged in unpermitted, harmful and offensive sexual contact.”3 His claim went on to state that “[a]s a direct result of the sexual abuse and sexual exploitation, Plaintiff has suffered and will continue to suffer great pain of mind and body, severe and permanent emotional distress, physical manifestations of emotional distress, embarrassment, loss of self-esteem, humiliation and psychological injuries, was prevented and will continue to be prevented from performing his normal daily activities and obtaining the full enjoyment of life, has incurred and will continue to incur expenses for medical and psychological treatment, therapy and counseling and, on information and belief, has incurred and will continue to incur loss of income and/or loss of earning capacity.”4

The Chapter 7 trustee objected to the exemption, and the bankruptcy court sided with the trustee, holding that Keenan’s recovery because of the sexual abuse was not exempt because the harm was not a physical harm.

The bankruptcy judge lamented the result, writing in a footnote:

“It is a sad thing to have to reach this conclusion. With the understanding of modern-day psychology, no one could deny that the deep psychological injuries consequent to victimization by a sexual predator are as personal, and as causative of permanent loss, as the severing of a limb, broken bones, heavy scarring, or lasting impairment of bodily mobility or organ system functioning. And, under current statute and jurisprudence, injuries of this sort are actionable and compensable in tort, as against the perpetrator and others that caused or enabled the injuries. Thus, it seems fitting for the victim to retain the economic value of legal redress for such injuries ….”

In re Crawford is further illustration of the deficiencies of 550.37 Subd. 22.5 At the time Crawford filed her Chapter 7 case, she had claims against Norwest Bank based on sexual discrimination and harassment and she attempted to exempt these claims under 550.37 Subd. 22. The Chapter 7 trustee objected to the exemption, arguing the claims were not for a “personal injury.” Crawford defended by asserting that her claims were for “injuries to the person within the meaning of the exemption statute.”

The bankruptcy judge found for the trustee, stating that Crawford’s “rights of action, for the most part, arose from federal and state statutes that were designed to remedy those harmed by discrimination.

These rights of action are not ‘personal injury’ claims.”6

And finally, there is In re Ezaki.7 Ezaki was a Japanese-American whose parents were interned in a “relocation camp” during World War II, and Ezaki was born in the camp. Ezaki filed for Chapter 7 and claimed his entitlement under the Civil Liberties Act of 1988 (which entitled eligible individuals to a payment of $20,000) were exempt using MN Statute 550.37 Subd. 22. The Chapter 7 trustee objected to the exemption, stating that “the nature of the restitution does not qualify the payment for exemption under the Minnesota exemption statute” since they were not meant to redress “injuries to the person.”

The bankruptcy judge was clearly torn between concepts of equity and judicial duty. She wrote “[t]his matter is fraught with sensitive questions of public policy regarding the federal government’s admitted infringement on the civil liberties of American citizens and permanent resident aliens of Japanese ancestry. I am acutely aware of the hardship that was imposed upon such individuals and the racial prejudice that was the admitted basis for the imposition of such hardship….Given the circumstances under which the Civil Liberties Act of 1988 was enacted, an exemption of restitution payments from creditors seems just and equitable.”

But the bankruptcy court judge ruled in favor of the trustee. She stated “there is no record here of any personal injury to the debtor. The debtor’s restitution payment under the Act is meant to redress a bundle of injuries, and any particular element of personal injury is simply unidentifiable and unquantifiable. Therefore, the restitution payment cannot be said to be one for ‘injury to the person.’”

Taken together, the cases of Keenan, Crawford, and Ezaki demonstrate how social judgments about the kinds of harm that merit compensation have outstripped statutory immobility. Lead-footed statutes simply cannot keep up with community evolution.

This statutory section is also deficient because of its narrow focus on protecting a “claim,” though not proceeds traceable to a claim. Christian v. Dulas, 95 F.3d 703 (8th Cir. 1996) is a federal case originating in bankruptcy court that highlights this problem.8 In Dulas, one of the married debtors had an annuity received as part of a settlement for a personal injury claim. They filed for Chapter 7 and claimed the annuity exempt under 550.37 Subd. 22. The Chapter 7 trustee objected to the claimed exemption, but the bankruptcy court found the annuity to be exempt.

The trustee appealed to the Eighth Circuit arguing that “an annuity received in a pre-petition settlement of a personal injury claim is not an exempted personal injury right of action within the meaning of Minnesota law.”

The 8th Circuit agreed, stating that “[a]lthough the debtors had a right of action when [Mrs. Dulas] was injured, they no longer have such a right. Instead, they have proceeds from the settlement of their personal injury action….”

Minn. Stat 550.37 Subd. 20 allows a debtor to exempt certain assets if traceable to exemptions provided under Subd. 9, Exempt Property Claims, Subd. 10, Insurance Proceeds, Subd. 11, Beneficiary associations, Subd. 15, Minor child earnings, or Subd. 24, Employee benefits. There is no distinction between these various Subd.s and Subd. 22 warranting the exclusion of personal injury proceeds from being exempted once received.

2. Minn Stat 550.37 Subd. 4 Personal Goods. Subsection b states that the “[h]ousehold furniture, household appliances, phonographs, radio and television receivers of the debtor and the debtor’s family….” are exempt up to $10,350.

In re Irwin interprets this section.9 The Chapter 7 trustee objected to the debtor’s exempting a computer and a lawnmower, advancing the position that these items “do not fall within the commonly understood definition of a household appliance” and thus are not exempt.

The court observed that “The Minnesota Legislature chose the specific term ‘household appliance’ for the exemption statute. Unlike other states, which commonly use the term ‘household goods,’ Minnesota’s choice of ‘household appliance’ is a much more limited concept.’”

The judge found cases defining an appliance as a “thing used as a means to an end.” In considering exactly what an appliance is, the court stated “[t]he term brings to mind such items as refrigerators, stoves, ovens, washers and dryers, and vacuums. Typically, one does not think of a computer in the same category as a refrigerator or washer and dryer and would not expect to find them in the same department of a department store. In short, the ‘most natural and obvious meaning’ of appliance does not include a computer.”

In finding that a computer is not exempt, the court held “[a] computer, while becoming more and more commonplace in households, simply is not necessary to protect the debtor from want. And, while certainly helpful and convenient, it is not necessary to maintain ‘the decencies of life.’ Therefore, the underlying purpose of the statute does not change the outcome. The language of the statute, the rules of statutory construction, and the purpose of the statute all lead to the same conclusion: a computer is not exempt as a household appliance.”

The lawnmower, however, was found to be exempt. “The purpose of the statute, however, supports reading lawnmower into the phrase ‘household appliance.’ If the debtor is forced to relinquish the lawnmower, she would either have to purchase another one or hire someone to mow her lawn. She cannot simply go without a lawnmower as she could a computer. As such a necessity, a lawnmower easily fits into the legislature’s intent to protect the debtor from want.”

The bankruptcy court judge did the best she could to interpret a poorly worded statute, given rules of statutory construction. There is no reason that any other judge—in state court or in bankruptcy court—would rule any differently today.

3. Minn Statute 176.175 Right to Compensation, Award. In re Johnson10 deals with Minn. Stat 176.175 Subd. 2, which states “any claim for compensation owned by an injured employee or dependents is exempt from seizure or sale for the payment of any debt or liability.”

When Lucy Young Johnson filed her Chapter 7 in 2003, she exempted $26,000 in proceeds of a workers compensation settlement she had already received using 176.175. The trustee objected, arguing that the statute protects a claim, and not proceeds received in settlement of a claim. The court agreed with the trustee.

It is true that Johnson was later overruled by Federal District Court Judge James Rosenbaum.11 One admires Rosenbaum’s sleight of hand as he tries to distinguish Dulas (discussed above, by then-8th Circuit precedent) by writing “[t]he Minnesota workers’ compensation scheme is social legislation, designed as an efficient, humane and effective alternative to the tort system. It is fundamentally different from the tort recoveries considered in Dulas… . …[T]hese decisions merely reflect well-established differences between workers’ compensation and tort law.”

At any rate, 175.176 has not been amended to make clear that a work comp recovery as well as a claim should be protected. Rosenbaum’s decision has little if any binding effect. The infirmity in the vocabulary of 175.176 remains.

4. Minn. Stat. 550.39 Exemption of Insurance Policies. In re Reiland interprets 550.39.12 Mary Reiland filed Chapter 7 bankruptcy in 2005. She claimed an ongoing right to receive payments under a private disability insurance policy exempt under 550.39.

The bankruptcy trustee objected to the exemption, arguing that 550.39 violated Article I, Sec. 12 of the Minnesota Constitution, and thus could not be used to exempt the disability policy payments.13 The bankruptcy court agreed, stating “[t]his exemption statute does not feature, or incorporate, a limitation to a ‘reasonable amount’ that ‘shall be determined by law.’ Under it, the value of future payments to a beneficiary could be structured, and cumulate, without limit…. Because that violates Article I, Section 12 of the Minnesota Constitution, Minn.Stat. §550.39 may not be enforced against the trustee …

The debtor’s rights under her disability insurance policy with Mass Mutual Insurance Co. are property of her bankruptcy estate, subject to the Trustee’s administration.”
550.39 remains unchanged since this judicial interpretation, and is suspect in regard to protecting individuals receiving benefits from private disability insurance policies.14

What Should Be Added

There are a few asset categories for which Minnesota has no specific exemption to protect.

1. Health Savings Accounts (HSAs). An HSA is a medical payment account owned by an individual, and linked to high deductible health insurance policies. HSAs were created in 2003 with the enactment of the Medicare Prescription Drug, Improvement, and Modernization Act.

In re Leitch, 494 B.R. 918 (B.A.P. 8th Cir. 2013) highlights the clash between this new property right and exemption statutes that don’t keep up with changing times.15 Leitch filed a Minnesota Chapter 7 case in 2012 and asserted that $3310 he had in an HSA was not part of the bankruptcy estate under federal bankruptcy law because an HSA is “a health insurance plan regulated by State law.” Id at 920.16

The Bankruptcy Appellate Panel upheld the lower Minnesota bankruptcy court, holding for the trustee. The BAP stated:

An HSA is simply a trust account. The account beneficiary has unrestricted access to the funds. The account beneficiary may receive certain tax benefits if the beneficiary uses the funds for medical expenses, but that beneficial taxation does not make the account a health insurance plan regulated by state law. An HSA is not insurance. As the trustee aptly pointed out, an HSA is just a tax-preferred place to park money for use in paying health care expenses that are not covered by insurance.

Minnesota has no exemption to protect HSA accounts. Given an age where high deductible insurance and HSAs are increasingly common, this should be remedied.17

2. A “wildcard” exemption. A wildcard exemption protects from creditors any property of whatever kind, for which there is no other specific exemption, up to a certain dollar limit. This allows a debtor to protect any asset, up to a modest limit, that he or she finds particularly important.

Examples of assets for which there is no statutory exemption would include a tax refund, or money on deposit in bank accounts. In other words, tax refunds, or money in a bank, are assets that are owned by an individual, but there is no Minnesota statutory exemption that protects them from seizure by a creditor, or for the benefit of a creditor.

Though 32 states—and federal law—provide for wildcard exemptions, “progressive” Minnesota does not. Amounts for wild-card exemptions are typically relatively restrained, usually between $5,000 and $12,000.

In an age of changing property interests, a wildcard exemption is particularly important. Until statutes catch up a wildcard exemption cold be used to protect emerging property interests such as health savings accounts.

3. A jewelry exemption. Minnesota has no specific exemption to protect jewelry. The closest Minnesota comes is 550.37 subd. 4c, which protects “[t]he debtor’s aggregate interest, not exceeding $2,817.50 in value, in wedding rings or other religious or culturally recognized symbols of marriage exchanged between the debtor and spouse at the time of the marriage and in the debtor’s possession.”
Many states have jewelry exemptions, and federal law contains a jewelry exemption. A modest general jewelry exemption should replace the awkwardly worded wedding ring exemption. Many

Minnesotans have family heirlooms or may have exchanged a wedding ring before or after a wedding ceremony.

What Should be Repealed

A few minor portions of 550.37 are simply so outmoded that they serve no contemporary purpose, and should be repealed.

Subd. 2 exempts “[t]he family Bible….” In this era of multiculturalism, exempting one faith’s holy writing and not another’s is incompatible with modern mores. It is remote in the extreme that a creditor would attempt to execute a judgment by seizing a Koran or a Bhagavad Gita, but the existence of the distinction is unseemly and perhaps unconstitutional.

The same argument hold true for Subd. 3, which exempts “[a] seat or pew in any house or place of public worship….” Why is a pew or seat any more worthy of creditor protection than a prayer rug?

Changing times necessitate changing the rules by which we organize society. The laws regarding exemptions in Minnesota are in some cases outmoded, in others deficient, in providing protection to needed assets. Some are simply irrelevant and should be eliminated. We need to tend to the fish in the net.

Ronald J. Lundquist has practiced exclusively in Chapter 7 and Chapter 13 bankruptcy for the past 15 years. He is a member of the Minnesota CLE Bankruptcy Institute Planning Committee and a former member of both the Rules Committee for the Bankruptcy Court of Minnesota and the Practice Committee for the Bankruptcy Court of Minnesota. His practice is located in Eagan.

1 Minnesota Constitution Article 1 Section 12.
2 This section was added to 550.37 in 1980 and has remained unchanged since then.
3 In re Keenan, 443 B.R. 169 (Bankr. D. MN 2011).
4 Keenan was originally filed as a bankruptcy case using state exemptions, and then was amended to federal exemptions. Minnesota allows bankruptcy filers to choose state or federal exemptions. The analysis would be same however, since the federal personal injury exemption statute is worded almost the same as the Minnesota personal injury statute. It is found at 11 USC Sec 522(d)(11)(D) and states … a payment, not to exceed $22,975.00 on account of personal bodily injury ….”
5 In re Crawford, 208 B.R. 924 (Bankr. D. MN 1994).
6 See also In re Marshall, 208 B.R. 690 (Bankr. D. MN 1997), holding that a sexual harassment claim is not exemptible under Mn Stat 550.37 subd. 22 since the statute requires a physical injury. Marshall at 691.
7 In re Ezaki, 140 B.R. 747 (Bankr. D. MN 1992).
8 Christian v. Dulas, 95 F.3d 703 (8th Cir. 1996).
9 In re Irwin 232 B.R. 151 (Bankr. D. MN 1999).
10 In re Johnson, 300 B.R. 471 (Bankr. D. MN 2003).
11 Johnson v. Iannacone 314, B.R. 779 (D Minn 2004).
12 In re Reiland, 377 B.R. 232 (Bankr. D. MN 2007)
13 The Minnesota Constitution states that “A reasonable amount of property shall be exempt from seizure or sale for the payment of any debt or liability. The amount of such exemption shall be determined by law.”
14 The issue of whether the statute was constitutional or not was certified to the Minnesota Supreme Court, but was rendered moot when the parties settled, resulting in the Reiland cases being vacated. See Reiland v. Sullivan, Nos. CIV.08-923(DSD), CIV.08-924(DSD), 2008 WL 4876758 (D. Minn. Nov 12, 2008). But the statute has not been changed.
15 In re Leitch, 494 B.R. 918 (B.A.P. 8th Cir. 2013)
16 See 11 U.S.C. §541(b)(7)(A)(ii).
17 Two points to note here. First, Leitch used federal exemptions in his case, but his case illustrates a deficiency in state law, regardless of the exemptions he used in his case. Secondly the Minnesota State Legislature has seen fit to protect accounts established to pay medical expenses for public employees, but not HSA accounts owned by private individuals. See. MN Stat 352.98 subd 8. excepting “Health Care Savings Plans” from claims of creditors.