Clark v. Rameker (In re Clark)

• Decision Date: 05 January 2012
• Docket Number: No. 11–cv–482–bbc.,11–cv–482–bbc.
• Citation: 466 B.R. 135,109 A.F.T.R.2d 2012
• Parties: In re Brandon C. CLARK and Heidi K. Heffron–Clark, Debtors.Brandon C. Clark and Heidi K. Heffron–Clark, Appellants, v. William J. Rameker, Trustee, and Resul and Zinije Adili, d/b/a Kegonsa Plaza, Appellees.
• Court: U.S. District Court — Western District of Washington

109 A.F.T.R.2d 2012-733

466 B.R. 135

In re Brandon C. CLARK and Heidi K. Heffron–Clark, Debtors.Brandon C. Clark and Heidi K. Heffron–Clark, Appellants,

v.William J. Rameker, Trustee, and Resul and Zinije Adili, d/b/a Kegonsa Plaza, Appellees.

No. 11–cv–482–bbc.

United States District Court, W.D. Wisconsin.

Jan. 5, 2012.

Denis P. Bartell, Sean Michael Murphy, Dewitt Ross & Stevens S.C., Madison, WI, for Appellants.

William J. Rameker, Erin A. West, Murphy Desmond SC, Roger Alan Sage, Attorney Roger Sage, Madison, WI, for Appellees.

OPINION AND ORDER

BARBARA B. CRABB, District Judge.

This appeal from a final decision of the bankruptcy court raises the question whether Inherited Individual Retirement Accounts qualify for exemption from a bankruptcy estate under the Bankruptcy Code. (Inherited IRAs hold funds inherited from persons who established Individual Retirement Accounts for their own use and died before depleting the funds in those accounts.) Bankruptcy Judge Robert Martin concluded in this case that these accounts do not qualify for exemption. With one exception, every other court to consider the question under federal law has reached the contrary conclusion. The question is an open one in this circuit.

Although Judge Martin analyzed the case in his usual thoughtful manner, I am not persuaded to adopt his conclusion. I conclude instead that the bankruptcy trustee has not met his burden of showing that Heidi Heffron–Clark's Inherited IRA may not be exempted from the appellant's bankruptcy estate.

RECORD FACTS

In August of 2000, Ruth Heffron established an individual retirement account and named appellant Heidi Heffron–Clark, her daughter, as the sole beneficiary. Ruth Heffron died on September 19, 2001. Heffron–Clark established a Beneficiary Individual Retirement Account (commonly referred to as an Inherited IRA) in November 2001 and caused the remaining balance of her mother's account to be distributed to the Inherited IRA in December 2001. Beginning in 2002, Heffron–Clark and her husband, appellant Brandon Clark, took monthly distributions from the Inherited IRA, although neither was retired. (To make things easier for the reader, I will refer to the Clarks as the debtors and use “trustee” to refer to both the trustee and the Adilis.)

On October 28, 2010, the debtors filed a chapter 7 bankruptcy petition. Initially, they claimed the Inherited IRA as exempt under state law (Wis.Stat. § 815.18(3)(j)), but they amended their schedules later to claim it as exempt under federal law (11 U.S.C. § 522(b)(3)(C)) as well. Appellees William Rameker, the bankruptcy trustee, and Resul and Zinije Adili, d/b/a Kegonsa Plaza, a judgment creditor, objected to the debtors' exemption for the Inherited IRA, which was valued at the time at $293,338. Their objection was upheld on May 10, 2011, when the bankruptcy court ruled in their favor, denying the exemption under both federal and state law. On this appeal, appellants challenge only the bankruptcy court's ruling regarding the federal exemption under 11 U.S.C. § 522(b)(3)(C). Dkt. # 2, at 1–2.

OPINION

A. Background

When a debtor files for bankruptcy, “all legal or equitable interests of the debtor in property” become part of the bankruptcy estate. 11 U.S.C. § 541(a)(1). A debtor may then place certain types of property beyond the reach of creditors to help her make a fresh start with an appropriate standard of living. 11 U.S.C. § 522(b)(1); Rousey v. Jacoway, 544 U.S. 320, 325, 327, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005) (holding under previous version of § 522(d) that exemptions are designed to help debtors make fresh start and that petitioners could exempt their individual retirement accounts under § 522(d)(10)(E)). A debtor may elect to claim exemptions under § 522(d) of the Bankruptcy Code or, in the alternative, under state and federal non-bankruptcy law. Id. The Code also permits states to opt out of the substantive federal exemptions, in which case debtors domiciled in those states may not claim the exemptions under § 522(d). Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991).

Although Congress has generally given latitude to the states regarding exemptions, it enacted a uniform exemption for tax-favored retirement funds that applies even if a debtor selects non-bankruptcy law or lives in a state that has opted out of federal exemptions. H.R.Rep. No. 109–31(I) (2005), reprinted in 2005 U.S.C.C.A.N. 88, 132. Both 11 U.S.C. § 522(d)(12) (the state provision) and § 522(b)(3)(C) (the federal provision) provide an exemption for “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation” under certain sections of the Internal Revenue Code of 1986, including § 408. Thus, property is exempt under these provisions if (1) it qualifies as “retirement funds” and (2) the funds are in a fund or account that is tax-exempt under IRC §§ 401 (pension, profit-sharing and stock bonus plans), 403 (employee annuities), 408 (IRAs), 408A (Roth IRAs), 414 (employee benefit plans), 457 (deferred compensation plans for states and local government and non-profits), or 501(a) (trusts qualifying as exempt organizations).

The parties dispute whether Inherited IRAs of the kind held by appellants satisfy either requirement for exemption. Because a debtor's claim of exemption is presumptively valid, the trustee has the burden to prove by a preponderance of the evidence that the bankruptcy laws do not permit the debtors to claim the Inherited IRA as exempt. 11 U.S.C. § 522( l ); Fed. R. Bankr.P. 4003(c). To do this, he has to show either that Heffron–Clark's Inherited IRA does not include retirement funds or that it is not tax-exempt under the applicable provisions of the Internal Revenue Code.

One point should be cleared up at the outset. The debtors have objected to what they view as the bankruptcy court's statement that the size of the Inherited IRA in this case was an additional reason to undertake an independent interpretation of § 522(b)(3)(C), instead of simply adopting the reasoning of prior cases. I doubt this is what the bankruptcy court meant, but the comment is irrelevant. Like this court, the bankruptcy court has an independent obligation to interpret the statute in the absence of controlling authority, whatever the size of the account.

B. Individual Retirement Accounts

The traditional IRA is designed to give individuals an incentive to save for retirement. Income tax is deferred on any contributions made to the IRA and on income earned on those assets until they are withdrawn. 26 U.S.C. § 219(a); 26 U.S.C. § 408(e)(1). To promote the preservation of the assets until retirement, the law subjects any assets withdrawn before the account holder turns 59 1/2 to a ten percent penalty. 26 U.S.C. § 408(d)(1) (cross-referencing 26 U.S.C. § 72); Rousey, 544 U.S. at 327–29, 332–33, 125 S.Ct. 1561 (describing limited exceptions to early distribution penalty). To insure that the funds are used for retirement, the holder of the account must begin taking minimum required distributions no later than the year in which he reaches 70 1/2. 26 U.S.C. § 408(b).

A spouse inheriting a traditional IRA may elect to treat the account as his own retirement account, roll over the funds into his own IRA or be treated as a non-spouse beneficiary. 26 U.S.C. § 408(d)(3); 26 U.S.C. § 401(a)(9)(B); 26 C.F.R. 1.408–8, Q–5. Beneficiaries who choose one of the first two options may make tax-deferred contributions to the account, but their use of the funds is subject to the same restrictions that were in place when the deceased spouse owned the account and that are designed to protect retirement savings in traditional IRAs and insure that the funds are used during retirement.

A variation of the traditional IRA comes into existence when a beneficiary such as Heffron–Clark inherits the assets of an IRA from someone other than her spouse and puts the assets in an Inherited IRA. The beneficiary cannot treat the account as her own retirement account or roll over the inherited funds into her own IRA. 26 U.S.C. § 408(d)(3)(C)(i) & (ii). She must set up the account and maintain it in the name of the deceased IRA owner for the benefit of the beneficiary. 26 U.S.C. § 402(c)(11)(A); IRS Publication 590 at 20 (2006). She may not make contributions to the Inherited IRA and must begin taking distributions immediately, without regard to her age or employment status. 26 U.S.C. § 401(a)(9)(B). She may withdraw the entire amount immediately; if she does not, she must either withdraw all the funds from the account within five years or take annual minimum distributions over her lifetime. This extension of time enables the beneficiary to reduce the income tax liability she might face if she took the money in one lump sum distribution.

In addition to these IRAs, certain accounts established by employers or associations of employees may qualify for treatment as IRAs, 26 U.S.C. § 408(c), as may Roth accounts. 26 U.S.C. § 408A(a). None of these are at issue in this case.

C. Exempting Inherited IRAs from Bankruptcy Estate

1. The meaning of the term “retirement funds”a. The bankruptcy court's interpretation of the term

The bankruptcy judge began his analysis of the question in this case with the plain meaning of the term “retirement funds,” as used in 11 U.S.C. § 522(c)(3)(C). As he noted, the general presumption is that “ ‘Congress intends the words in its enactments to carry their ordinary, contemporary, common meaning.’ ” In re Clark, 450 B.R. 858, 862 (Bankr.W.D.Wis.2011) (quoting Pioneer Investment Services Co. v. Brunswick Associates Ltd. Partnership, 507 U.S. 380, 388, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993)).

The Bankruptcy Code does not define retirement funds, so the bankruptcy judge looked to the dictionary definition. Merriam Webster's Ninth New Collegiate Dictionary, 1007 (9th ed. 1986), defines retirement as “withdrawal from one's position or occupation...