As an Exempt Asset, a Dog’s Value Is Priceless, Judge Collins Says

Although a dog may be the “Debtor’s priceless, faithful and loved companion,” the dog is nonetheless “property” in the eyes of the Bankruptcy Code, according to Bankruptcy Judge Daniel P. Collins of Phoenix.

Still, a dog’s status as property confers benefits on its bankrupt owner. As Judge Collins said in his November 15 opinion, the dog and pet insurance are both exempt property, even when pet insurance proceeds vastly exceed the value of the dog.

The chapter 7 debtor owned a dog and two cats. She listed them in her schedules with a collective value of $100 and claimed them as exempt. Judge Collins assumed that “the cats are worthless and the dog alone has monetary value.” (The valuation assumption did not stem from prejudice against cats, as we shall see later.)

The debtor also owned a pet insurance policy, which she listed as exempt, initially with a value of zero.

About two weeks before bankruptcy, Judge Collins said the dog “sustained internal damage, apparently from something he ate.” The dog required surgery. Facing imminent bankruptcy, the debtor could not afford to pay the veterinarian.

According to Judge Collins, a friend of the debtor provided the cash that the debtor used to pay the veterinarian before bankruptcy. After bankruptcy, the pet insurance carrier paid about $7,500, representing 90% of the cost of surgery. The debtor turned the insurance proceeds over to her friend as reimbursement.

The debtor amended her schedules to list the $7,500 of insurance proceeds as exempt. The trustee objected to exemption of the proceeds beyond the value of the dog but did not object to the exemption for the dog itself.

To arrive at the outcome, Judge Collins construed two Arizona exemption statutes. Pets and farm animals are exempt up to an aggregate value of $800. Another Arizona statute exempts “[a]ll money arising from any claim for . . . damage to . . . exempt property and all proceeds . . . of any kind arising from fire or other insurance on any [exempt] property . . . .”

Judge Collins found “no ambiguity” in the state exemption statutes and said that courts “must liberally construe a claimed exemption in favor of debtors.” The dog was exempt property, he said.

With regard to the exemption for insurance proceeds, Judge Collins said, “One could argue” that the legislature was thinking about damage to a home, car or boat. However, he said, “this statute does not limit the definition of ‘exempt property’ to such obvious properties.” Even if the statute were not “clear and unambiguous,” Judge Collins said he would liberally construe the statute to exempt pet insurance proceeds, because the dog itself was exempt.

Next, Judge Collins dealt with the question of whether the debtor could exempt insurance proceeds for more than the $100 value of the dog.

“While most rational consumers would never spend more to repair property than such property is worth, expenditures on dogs often bears no relation to the economic value of one’s beloved canine family member,” Judge Collins said. To prove the point that pet owners are not rational, the judge said that a child who leaves for college misses the family dog “far more than the parents who are picking up a six-figure tab for that student’s education.”

The $800 statutory limit refers to the value of the animals, not the amount of insurance, Judge Collins said. Therefore, the entire $7,500 was exempt, not just the $100 value of the dog.

Finally, the trustee argued that the insurance proceeds lost their exempt status when the debtor transferred the funds to her friend.

Unlike the homestead exemption, Judge Collins said that nothing in the insurance exemption statute requires deploying the “insurance proceeds in a certain way or by a given date.” Turning the insurance proceeds over to her friend did not cause the proceeds to lose their exempt status, Judge Collins said, because the funds were exempt when received, and the debtor “was free to use the funds as she pleased.”