In re Brandon C. Clark And Heidi K. Heffron–clark

• Decision Date: 10 May 2011
• Docket Number: No. 10–18035.,10–18035.
• Citation: 450 B.R. 858
• Parties: In re Brandon C. CLARK and Heidi K. Heffron–Clark, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Wisconsin

450 B.R. 858

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

No. 10–18035.

United States Bankruptcy Court, W.D. Wisconsin.

May 10, 2011.

Denis P. Bartell, Madison, WI, for Debtors.Claire Ann Resop, Von Briesen & Roper, S.C., Madison, WI, Trustee.

MEMORANDUM DECISION

ROBERT D. MARTIN, Bankruptcy Judge.

The debtors, Brandon Clark and Heidi Heffron–Clark, filed for bankruptcy on October 29, 2010. Their chapter 7 Trustee, William Rameker (“trustee”), and a judgment creditor, Resul and Zinije Adili, d/b/a Kegonsa Plaza, objected to the debtor's claim of exemption in a Pershing Beneficiary IRA. A hearing was held on February 7, 2011 at which the parties agreed to submit the matter on briefs.

The parties have stipulated to certain facts, including: The debtor, Heidi Heffron–Clark was the beneficiary of an individual retirement account (“IRA”), which was established by her mother, Ruth Heffron on August 10, 2000. Ruth Heffron passed away on September 19, 2001. On November 28, 2001, Heidi Heffron–Clark established a beneficiary individual retirement account (“Inherited IRA”), and on December 4, 2001, caused the funds from her mother's account to be distributed to the Inherited IRA. Since January 2002 the debtors have received monthly distributions from the Inherited IRA. On the debtors' Schedule C, they claim the Inherited IRA, valued at $293,338, exempt under Wis. Stat. § 815.18(3)(j), and now argue the asset is also exempt under 11 U.S.C. § 522(b)(3)(C).

A debtor's claim of exemptions is presumptively valid. See 11 U.S.C. § 522( l ) (“the property claimed as exempt is exempt” unless “a party in interest objects”). Once a party in interest objects, the burden is on the objecting party to prove, by a preponderance of the evidence, that an exemption is improperly claimed. FRBP 4003(c) (“the objecting party has the burden of proving that the exemptions are not properly claimed ...”); see also In re Yonikus, 996 F.2d 866, 873–74 (7th Cir.1993); see In re Moneer, 188 B.R. 25, 28 (Bankr.N.D.Ill.1995); see In re Ross, 210 B.R. 320, 323 (Bankr.N.D.Ill.1997). A debtor is not “required to make an affirmative showing ... that the claimed exemption [is] appropriate.” Gagne v. Bergquist, 179 B.R. 884, 885 (D.Minn.1994). But, the debtor must expressly characterize the claimed exemption within one of the exemption statutes. Id. at 885; see e.g. Matter of Patterson, 825 F.2d 1140, 1146–47 (7th Cir.1987) (for an example, if not a model, of the analysis to be given to the debtors' characterization of property claimed to be exempt). The trustee must then introduce evidence that rebuts the “prima facie effect of a claimed exemption.” In re Hollar, 79 B.R. 294, 296 (Bankr.S.D.Ohio 1987).

The Bankruptcy Code allows debtors to claim certain property as exempt, using either exemptions allowed under state law, or exemptions provided for in the Code. See 11 U.S.C. § 522(b)(1). While this choice is available for debtors in Wisconsin and in some other U.S. states, the majority of states mandate that debtors use only the exemptions provided under state law. See 11 U.S.C. § 522(b)(1) (states can “opt out” of the exemptions provided by the Bankruptcy Code); see Susan V. Kelley, Ginsberg & Martin on Bankruptcy § 6.01[C] (5th ed. 2010) (as of 2010 approximately 34 states had elected to “opt out” of the federal bankruptcy exemptions). So in 2005, Congress saw fit to add two “uniform” exemptions that all debtors could claim regardless of whether they applied federal or state exemption law in their case. 11 U.S.C. § 522(b)(3)(B) & (C); see H.Rep. No. 109–31(1), 109th Cong., 1st Sess. 63–64 (2005), U.S. Code Cong. & Admin. News 2005, p. 88, reprinted in 2005 WL 832198 (Congress sought to create a uniform exemption for retirement funds, notwithstanding a debtor's possible limitations under state law). One of the new exemptions permits a debtor to claim as exempt:

Retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408(A), 414, 457, or 501(a) of the Internal Revenue Code of 1986. See 11 U.S.C. § 522(b)(3)(C).

In addition, Congress recently added § 522(b)(4)(C), which in relevant part states:

(4) For purposes of paragraph (3)(C) and subsection (d)(12), the following shall apply:

...

(C) A direct transfer of retirement funds from 1 fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986, under section 401(a)(31) of the Internal Revenue Code of 1986, or otherwise, shall not cease to qualify for exemption under paragraph (3)(C) or subsection (d)(12) by reason of such direct transfer.

This provision, by cross-reference, expands the exemption allowed under § 522(b)(3)(C) by including retirement accounts that resulted from a “trustee to trustee” transfer. See In re Nessa, 426 B.R. 312, 315 (8th Cir. BAP 2010). Because both § 522(b)(3)(C) and § 522(b)(4)(C) apply regardless of whether the debtors claim exemptions under state or federal law, the debtors in this case may characterize their Inherited IRA as exempt under 11 U.S.C. § 522(b)(3)(C) or Wis. Stat. § 815.18(3)(j).

In the last year, no fewer than eight bankruptcy courts have decided whether an inherited IRA falls within § 522(b)(3)(C), or § 522(d)(12) ¹. See In re Chilton, 426 B.R. 612 (Bankr.E.D.Tex.2010) rev'd, 444 B.R. 548 (E.D.Tex.2011); see In re Kuchta, 434 B.R. 837, 843 (Bankr.N.D.Ohio 2010); see In re Nessa, 426 B.R. 312 (8th Cir. BAP 2010); see In re Tabor, 433 B.R. 469 (Bankr.M.D.Pa.2010); see In re Weilhammer, 2010 WL 3431465 (Bankr.S.D.Cal.2010); see In re Thiem, 443 B.R. 832 (Bankr.D.Ariz.2011); In re Mathusa, 446 B.R. 601, 2011 WL 1134680 (Bankr.M.D.Fla.2011); In re Johnson, 2011 WL 1674928 (Bankr.W.D.Wash.2011). These cases involved indistinguishable facts. See Id. Specifically, all include a debtor who inherited a family member's IRA sometime before filing bankruptcy. See Id. Upon filing bankruptcy, each debtor sought to exempt their interest in the IRA under either § 522(b)(3)(C), or § 522(d)(12).

The most cited of these cases, Nessa, was decided by the Bankruptcy Appellate Panel (“BAP”) for the Eighth Circuit. In re Nessa, 426 B.R. 312 (8th Cir. BAP 2010). In a short opinion, the BAP found that § 522(d)(12) exempted any IRA in the hands of the debtor, whether or not the IRA was established by the debtors' themselves. Id. at 314–15 (“even though the contents of the Debtor's inherited account were the Debtor's father's retirement funds, ... they remain in form and substance, ‘retirement funds.’ ”). Id. The BAP also determined that IRC § 408(e) declared the debtor's inherited IRA tax exempt. Id. at 315 ( citing 26 U.S.C. § 408(e) (“[a]ny individual retirement account is exempt from taxation.”)). Finally, the BAP cited § 522(b)(4)(C), noting that the transfer of the IRA from the decedent's account to the beneficiary debtor's account “did not destroy the debtor's ability to claim the funds exempt under § 522(d)(12).” Id. For these reasons, the BAP concluded that the debtor's claimed exemption of her inherited IRA under § 522(d)(12) was proper.

Most subsequent cases rely on the reasoning of the Eighth Circuit BAP in Nessa.² See Kuchta, 434 B.R. at 843; see Tabor, 433 B.R. at 475–76; see Weilhammer, 2010 WL 3431465, *4–5; see Thiem, 443 B.R. at 845. However, none of the cases cited control this court and most of the cases deal with much smaller dollar amounts than we must. See Chilton, 426 B.R. at 613; rev'd, 444 B.R. 548 (E.D.Tex.2011) (inherited IRA was worth $170,000); see Tabor, 433 B.R. at 470 (inherited account had estimated value of $105, 100); see Weilhammer, 2010 WL 3431465 at *1 (inherited IRA contained at least $55,000); see Thiem, 443 B.R. at 835 (value of inherited IRA was approximately $10,700). Thus an independent analysis as to whether the debtors' Inherited IRA falls within § 522(b)(3)(C) is appropriate.

For a retirement account to fall within § 522(b)(3)(C), two elements must be present—“(1) the amount the debtor seeks to exempt must be retirement funds; and (2) those retirement funds must be in an account that is exempt from taxation under 401, 403, 408, 408(A), 414, 457, or 501(a) of the Internal Revenue Code.” In re Nessa, 426 B.R. 312, 314 (8th Cir. BAP 2010). Absent evidence of a contrary intent by Congress, this court must assume that “Congress intends the words in its enactments to carry their ‘ordinary, contemporary, common meaning.’ ” Pioneer Inv. Servs. v. Brunswick Assocs., 507 U.S. 380, 389, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993) (citing Perrin v. United States, 444 U.S. 37, 42, 100 S.Ct. 311, 62 L.Ed.2d 199 (1979)). Where the Bankruptcy Code does not define a specific term, courts must “look to the ordinary meaning of [the] term.” Rousey v. Jacoway, 544 U.S. 320, 328, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005); see also U.S. v. LaBonte, 520 U.S. 751, 757, 117 S.Ct. 1673, 137 L.Ed.2d 1001 (1997) (all other interpretations of a statute “give way” to the statute's “plain meaning”); see also Perrin v. U.S., 444 U.S. 37, 42, 100 S.Ct. 311, 62 L.Ed.2d 199 (1979) (a federal court's interpretation of a statute always begins with “the language of the ... Act itself”). “Retirement funds” is not defined in the Bankruptcy Code so, we must decide if the property at issue constitutes “retirement funds” and only if it does, whether the funds are exempt from taxation under one of the enumerated Internal Revenue Code provisions.

The trustee argues that the Inherited IRA does not constitute retirement funds of the debtor (or any living person) and requests that this court look to the substance of the Inherited IRA and not to its name. The substance of the account, the trustee contends, will reflect funds that no longer hold any attributes of a traditional “retirement” account. The trustee notes that no one can make any contributions to the inherited IRA, as the debtor could to her own IRA (if ...