In re Bates, Bankruptcy No. 94-10329.

• Decision Date: 13 December 1994
• Docket Number: Bankruptcy No. 94-10329.
• Parties: In re Paul Ervin BATES, Debtor.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Maine

176 B.R. 104 (1994)

In re Paul Ervin BATES, Debtor.

Bankruptcy No. 94-10329.

United States Bankruptcy Court, D. Maine.

December 13, 1994.

Alan F. Harding, Hardings Law Offices, Presque Isle, ME, for First Citizens Bank.

Kim M. Vandermeulen, Vandermeulen, Goldman & Allen, P.A., Augusta, ME, for debtor.

Paul French.

MEMORANDUM OF DECISION

JAMES B. HAINES, Jr., Bankruptcy Judge.

Before the court are First Citizens Bank's ("First Citizens" or "the bank") objection to the debtor's exemption claim in a self-directed individual retirement account ("IRA") and the debtor's motion to avoid First Citizens' lien in the same asset. For the reasons set forth below, the bank's objection is overruled and the debtor's lien avoidance motion is, after a fashion, granted.¹

BACKGROUND

Paul E. Bates ("Bates" or "debtor") filed a voluntary Chapter 7 petition on June 29, 1994. Among his exemption claims he designated his "self-directed IRA held in First Citizens Bank stock — 500 shares approximate value $18,000.00." As of the petition date, the account was impressed with an $18,500.00 lien in favor of First Citizens. First Citizens timely objected to Bates' claimed IRA exemption. Subsequently, Bates filed a § 522(f) motion to avoid the bank's lien on the account.

FACTS

Before bankruptcy, Bates was a self-employed businessman. He established an individual retirement account in 1981. Although he initially invested in mutual funds, he later converted the IRA holdings to First Citizens stock.

Bates is a single, fifty year-old college graduate, without dependents. Although he has substantial experience in sales and management, having owned and operated several small businesses, including a bowling alley, a car dealership and a sports shop, Bates is presently unemployed and without immediate employment prospects. The IRA is the only retirement fund Bates owns. His exempt property beyond the IRA is modest.²

First Citizens obtained attachment and execution on trustee process against Prudential Securities, Inc., custodian of the IRA, well prior to Bates' bankruptcy filing.³ The bank's lien claim exceeds the estimated value of the IRA.

DISCUSSION

A. Validity and Extent of Exemption

1. Is Bates' Self-Directed IRA Exempt?

a. Burden of Proof.

As the party objecting to the debtor's exemption claim, First Citizens bears the burden of "proving that the exemptions are not properly claimed." Fed.R.Bankr.P. 4003(c). See In re Maylin, 155 B.R. 605, 614 (Bankr. D.Me.1993).

b. The Statute.

Maine has accepted the congressional invitation, extended in 11 U.S.C. § 522(b)(1), to "opt out" of § 522(d)'s federal exemption scheme. 14 M.R.S.A. § 4426. In re Maylin, 155 B.R. at 608 n. 6; In re Saturley, 149 B.R. 245, 246 n. 5 (Bankr.D.Me.1993). Thus, the question whether Bates' IRA is exempt is determined by 14 M.R.S.A. § 4422, which provides:

The following property is exempt from attachment and execution, except to the extent that it has been fraudulently conveyed by the debtor:

* * * * * *

13. Disability benefits; pensions. The debtor\'s right to receive the following:

* * * * * *

E. A payment under a stock bonus, pension, profitsharing, annuity or similar plan or contract on account of illness, disability, death, age or length of service to the extent reasonably necessary for the support of the debtor and any dependent of the debtor, unless:

(1) The plan or contract was established by or under the auspices of an insider that employed the debtor at the time the debtor\'s rights under the plan or contract arose;

(2) The payment is on account of age or length of service; and

(3) The plan or contract does not comply under the United States Internal Revenue Code of 1954, Sections 401(a), 403(a), 403(b), 408 or 409.

Maine's legislature enacted 14 M.R.S.A. § 4422 in 1981 as a component of its opt-out legislation. See 1981 Me.Laws, ch. 431 sec. 2 (amended 1985, 1989 and 1991); 14 M.R.S.A. § 4426; 11 U.S.C. § 522(b)(1). With respect to "stock bonus, pension, profitsharing, annuity or similar plans," the state exemption mirrors the Bankruptcy Code. See 11 U.S.C. § 522(d)(10)(E). Cf. In re Langley, 21 B.R. 772, 773 n. 3 (Bankr.D.Me.1982) (1981 amendment to Maine exemption statute meant to adopt federal exemptions in absence of more generous state exemptions); In re Breau, 17 B.R. 697, 698 (Bankr.D.Me. 1982) (same).

State authority addressing the scope and content of 14 M.R.S.A. § 4422(13)(E) is nonexistent. Thus, authorities interpreting its federal counterpart provide the best available guidance on that score. Cf. In re Langley, 21 B.R. at 773 n. 3 (cases interpreting 11 U.S.C. § 522(d)(6) consulted to interpret 14 M.R.S.A. § 4422(5) (tools of trade exemption)).

Finally, in divining the exemption statute's content, an over-arching principle of statutory construction applies: "Exemption statutes are to be liberally construed in favor of the debtor." In re Chiz, 142 B.R. 592, 593 (Bankr.D.Mass.1992) (quoting American Honda Finance Corporation v. Cilek (In re Cilek), 115 B.R. 974, 989 (Bankr.W.D.Wis. 1990)). See also In re Geise, 992 F.2d 651, 656 (7th Cir.1993); Wallerstedt v. Sosne (In re Wallerstedt), 930 F.2d 630, 631-32 (8th Cir.1991); NCNB Texas National Bank v. Volpe (In re Volpe), 943 F.2d 1451, 1453 (5th Cir.1991); Bartlett v. Giguere (In re Bartlett), 168 B.R. 488, 494 (Bankr.D.N.H.1994); In re Link, 172 B.R. 707, 708-09 (Bankr. D.Mass.1994); In re Maylin, 155 B.R. at 615; In re Grindal, 30 B.R. 651, 653 (Bankr.D.Me. 1983).

Bates' IRA is exempt if two questions are answered affirmatively: (1) Are individual retirement accounts within the 14 M.R.S.A. § 4422(13)(E)'s ambit? (2) If so, to what extent may we conclude that Bates' account is "reasonably necessary for his support?" The former inquiry posits a legal question; the latter a factual one. Answers follow.

c. Is an IRA Within the Exemption?

Whether IRAs are exempt under § 522(d)(10)(E) and similar state exemption statutes is an unsettled question. There is no controlling authority in the First Circuit or this district; cases from other jurisdictions are in conflict. See generally Norton Bankruptcy Law and Practice 2d § 46:17 at 46-36 n. 68 (1994).

Substantial case law holds that IRAs come within § 522(d)(10)(E) or its state law analogs. See, e.g., In re Yee, 147 B.R. 624 (Bankr.D.Mass.1992); In re Hickenbottom, 143 B.R. 931 (Bankr.W.D.Wash.1992); In re Chiz, 142 B.R. 592, 593 (Bankr.D.Mass.1992); In re Bell, 119 B.R. 783 (Bankr.D.Mont.1988) (state law incorporating § 522(d)(10)(E)); In re Staniforth, 116 B.R. 127 (Bankr.W.D.Wis. 1990) (state law); In re Cilek, 115 B.R. at 979; In re Bloom, 91 B.R. 445 (Bankr. N.D.Ohio 1988) (state law); In re Worthington, 28 B.R. 736 (Bankr.W.D.Ky.1983) (state law). Cf. In re Montavon, 52 B.R. 99 (Bankr.D.Minn.1985) (Keogh or IRA within exemption when debtor has reached statutory minimum age to withdraw funds without penalty); In re Sopkin, 57 B.R. 43 (Bankr. D.S.C.1985) (same).

There are more than a few cases to the contrary, including a Third Circuit decision and cases following in its wake. See, e.g., Clark v. O'Neill (In re Clark), 711 F.2d 21, 23 (3d Cir.1983) (Keogh plan funds not exempt unless debtor has "present right" to receive payments, as opposed to right to future payments); Velis v. Kardanis (In re Velis), 123 B.R. 497, 510 (D.N.J.) (following Clark), aff'd in part, rev'd in part, 949 F.2d 78 (3d Cir.1991); In re Heisey, 88 B.R. 47, 50-51 (Bankr.D.N.J.1988); In re Matthews, 65 B.R. 24 (Bankr.N.D.Iowa 1986); In re Innis, 62 B.R. 659, 660 (Bankr.S.D.Cal.1986); In re Pauquette, 38 B.R. 170 (Bankr.D.Vt. 1984); In re Lowe, 25 B.R. 86, 88 (Bankr. D.S.C.1982).

i. What's the "Plan"?

First Citizens argues that Bates' IRA (on which he is too young to draw without penalty) does not come within the scope of an exemption for a "stock bonus, pension, profitsharing, annuity or similar plan" providing payment on account of "illness, disability, death, age or length of service." If the IRA is to qualify as exempt, it must be a "similar plan" providing for payments on account of "age."⁴ I conclude that it is.

The Internal Revenue Code's provision for and treatment of IRAs supports the conclusion that they are sufficiently "similar" to other plans aimed to enable working taxpayers to accumulate assets during their productive years so that they might draw on them during retirement. In re Chiz, 142 B.R. at 593.⁵ The tax code extends to IRAs benefits similar to those provided pension, profitsharing and stock bonus plans, viz. deductible contributions, tax-free interest accrual and taxation as an annuity upon distribution. Id. at 592-93 (citing 26 U.S.C. §§ 219, 408(e) & 408(d)). Age restrictions on the time of distribution (e.g., penalty on early withdrawal, 26 U.S.C. § 72(q)) and age limitations on the deductibility of contributions (no deductions for IRA contributions after age 70½, 26 U.S.C. § 219) reflect legislative intent to create a program providing income to taxpayers in "advanced years." Id.

Although after age 59½ the individual may obtain the funds without penalty whether or not he is retired or disabled so that IRAs differ from retirement plans in this respect, the clear inference from these tax provisions is Congress envisioned that the funds would be accumulated during normal working years and enjoyed during normal retirement years.

Id. at 593. See In re Yee, 147 B.R. at 626; In re Staniforth, 116 B.R. at 131 (IRA is a "systematic arrangement for guaranteeing an income upon retirement according to definitely established rules"); In re Cilek, 115 B.R. at 988 (IRA "intended to function as a wage substitute at some future period") (citing Kokoszka v. Belford, 417 U.S. 642, 94 S.Ct. 2431, 41 L.Ed.2d 374 (1974)).

That a debtor has control over and (penalty notwithstanding) access to IRA assets before retirement does not defeat the exemption. Irrespective of such control, an individual retirement account is a "plan" providing a "right to...