Green v. Leibowitz (In re Green)
| Docket Number | 22-cv-01402,Bankruptcy 21 B 6189 |
| Decision Date | 31 August 2023 |
| Parties | In re GORDON GREEN, Debtor. v. DAVID LEIBOWITZ, Trustee/Appellee. GORDON GREEN, Debtor/Appellant. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION AND ORDER
Before the Court is Debtor Gordon Green's appeal of the Bankruptcy Court's March 9, 2022 Ruling sustaining Trustee David Leibowitz's objection to Green's claimed exemption for a $73,200 Sun Life: Life Income Fund (the “Fund”). Having reviewed the briefs and heard from both parties in oral argument, the Court affirms the Bankruptcy Court's ruling.
Green filed for Chapter 7 bankruptcy on May 11, 2021. In his voluntary petition, Green claimed an exemption for the Fund. This Fund is a Registered Retirement Savings Plan (“RRSP”) organized under Canadian law that Green earned when he worked as a Visiting Professor at the University of Western Ontario. The Trustee filed an objection, arguing that this foreign Fund did not qualify for an exemption under Illinois law.
The Bankruptcy Court agreed with the Trustee that the Fund was not exempt from Green's bankruptcy estate. In its Order the Bankruptcy Court noted that the federal bankruptcy code exempts retirement funds that are also exempt from taxation under the Internal Revenue Code (“I.R.C.”), 26 U.S.C. §§ 401, 403, 408, 408A, 414, 457, or 501(a).[1] See 11 U.S.C. § 522(b)(3)(C) (“Section 522”). Focusing on I.R.C § 401(a), which defines “trust[s] created or organized in the United States,” the Bankruptcy Court found that the Canadian plan was not a qualified retirement plan because it was organized outside the United States. Although Green emphasized that his Fund fell under I.R.C. § 404A, which defines “qualified foreign plan[s],” the Bankruptcy Court noted that this provision only deals with the deductibility of employers' contributions to plans. The Bankruptcy Court also discussed how Section 522, which identifies tax-exempt retirement plans, did not include Section 404A. In conclusion, the Bankruptcy Court found that this Fund did not qualify for an exemption. Green timely appealed the Bankruptcy Court's decision.
Federal district courts have jurisdiction over appeals from final orders of the bankruptcy court pursuant to 28 U.S.C. § 158(a)(1). District courts review the bankruptcy court's legal conclusions de novo and factual findings for clear error. See in re Chicago Mgmt. Consulting Grp., Inc., 929 F.3d 803, 809 (7th Cir. 2019). Both a debtor's entitlement to an exemption and matters of statutory interpretation are questions of law. See in re Hernandez, 918 F.3d 563, 566 (7th Cir. 2019).
The main dispute before the Court is whether the Fund is exempt from Green's bankruptcy estate under Illinois state law. Green relied on the Illinois Bankruptcy exemption for retirement funds as the basis for his exemption. This provision states:
735 ILCS 5/12-1006 (“Section 12-1006”). Exemption statues like this one should be interpreted liberally to help protect the debtor, in re Barker, 768 F.2d 191, 196 (7th Cir. 1985), but courts should still “be mindful to avoid interpreting an exemption statute in a way not contemplated by the legislature,” In re O'Malley, 601 B.R. 629, 645 (Bankr. N.D.Ill. 2019) (internal citation omitted). The Trustee, who objects to the exemption, has the burden of proving that the debtor did not properly claim the exemption. See in re Ritter, 190 B.R. 323, 325 (Bankr. N.D.Ill. 1995).
The parties agree that the Fund does not fall within the scope of Section 12-1006(b) and is not a public employee pension plan. Therefore, this Court must consider whether the Fund was “intended in good faith to qualify as a retirement plan under applicable provisions of the Internal Revenue Code.” Section 12-1006(a)(1). Green asserts that this provision must be read broadly. He claims that while Section 12-1006(b) tracks provisions of the Internal Revenue Code, Section 12-1006(a)(1) is a catch-all term, encompassing various other provisions of the Internal Revenue Code, such as Section 404A.
I.R.C. § 404A deals with “[d]eduction[s] for certain foreign deferred compensation plans.” Under Section 404A(e), the Internal Revenue Code defines what constitutes a “qualified foreign plan” for the purpose of these deductions. Green argues that because the Code defines qualified foreign plans, it recognizes that foreign retirement plans exist. This, to Green, is sufficient to show that plans falling within this provision, like the Fund, are “intended in good faith to qualify as a retirement plan under the applicable provisions of the Internal Revenue Code.” The Trustee does not dispute that the plan is a qualified foreign plan but contends that any fund governed by this provision is not a qualified retirement plan under the Internal Revenue Code.
As the Trustee maintained in oral argument, no court has found that a foreign plan qualifies as a retirement plan under the Internal Revenue Code-both parties have only pointed to one case that considered a similar issue, and while this case discusses Canadian retirement plans, it does not mention Section 404A at all. See in re Ondrey, 227 B.R. 211 (Bankr. W.D.N.Y. 1998). Thus, how to interpret Section 404A, and specifically how to interpret it within the Illinois bankruptcy code, is a novel issue.
Courts in this Circuit that have considered whether supposed retirement accounts fall within Section 12-1006(a)(i)'s reach have found that only tax-qualified retirement plans under the Internal Revenue Code are exempt. See, e.g., in re West, 507 B.R. 252, 259 (Bankr. N.D.Ill. 2014) (“To qualify for the Illinois exemption, the retirement plan . . . must come within the Internal Revenue Code provisions for tax-qualified retirement plans.”); in re O'Malley, 601 B.R. at 646 (); in re Weinhoeft, 275 F.3d 604, 606 (7th Cir. 2001) (discussing that 5/12-1006 includes “only tax qualified plans”). The question then remains: is a plan under Section 404A a tax-qualified retirement plan?
Attempting to show that Section 404A “qualified foreign plans” are not tax-qualified retirement plans, the Trustee focuses on the Illinois appellate court decision In re Marriage of Branit, 41 N.E.3d 518, 397 Ill.Dec. 107 (1st Dist. 2015) and maintains that this decision showed that “tax-qualified” retirement plans are those identified in Section 522. The Br'anit court considered a different issue: whether Inherited Individual Retirement Accounts (“IRAs”) are “retirement plans.” The Br'anitcourt explained “[t]he fact that the Illinois legislature intended section 12-1006 to be used in bankruptcy cases indicates that it was meant to be the Illinois equivalent of section 522 of the Bankruptcy Code.” Id. at 523. Green argues this only means that the statutes have the same purpose, to protect retirement accounts, not that courts should interpret Section 12-1006 the same as it would Section 552. The Court agrees that the Branit court analogized the purpose of these exemptions-to set aside funds for the purpose of retirement-and thus finds that the Trustee interprets Branit too narrowly when he maintains that Branit specifically instructed courts to interpret Section 12-1006 consistently with Section 522.
Instead, the Court finds another case cited by the Trustee, In re Jokiel, 453 B.R. 743 (Bankr. N.D.Ill. 2011) more instructive. There, the bankruptcy court considered whether a supplemental retirement plan qualified as a “retirement plan” under the Illinois statute. The Court found that “the Illinois exemption only applies to retirement plans that are intended to qualify for one or more [forms of preferred tax treatment.” Id. at 747. As for why the Illinois statute was written broadly and does not identify specific Internal Revenue Code provisions like Section 522 of the Federal Bankruptcy Code, the Court determined that Illinois legislators drafted their statute with broader language to account for the fact that the Internal Revenue Code frequently changes. Id. at 749.
This analysis reiterates how plans must be tax-qualified retirement plans to fall within the Illinois exemption, but also suggests why it is useful to consider the Federal Bankruptcy Code when determining which Internal Revenue Code provisions cover such plans.
Green nevertheless maintains that a plan under Section 404A is one of these tax-qualified retirement plans, pointing to Wittman v. Koenig, 831 F.3d 416 (7th Cir. 2016). But Wittman discussed Wisconsin's exemption statute which does...
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