In re Caslavka
| Decision Date | 24 February 1995 |
| Docket Number | Bankruptcy No. 93-10188LC. |
| Citation | 179 BR 141 |
| Parties | In re Warren L. CASLAVKA, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Iowa |
Joseph A. Peiffer, Cedar Rapids, IA, for debtor.
Morris L. Eckhart, Milroy and Eckhart, Vinton, IA, for Creditor Terra Intern., Inc.
Harry R. Terpstra, Trustee, Cedar Rapids, IA.
On November 7, 1994, the above-captioned matter came on for trial pursuant to assignment. Attorney Joe Peiffer represented Debtor Warren Caslavka. Attorney Morris Eckhart represented Creditor Terra International, Inc. Harry Terpstra appeared as Trustee. The matters before the Court are: (1) Terra International's Objections to Statement of Intention, Statement of Affairs, Summary of Schedules and Schedules A-J; and (2) Trustee's Objections to Property Claimed Exempt by Debtor. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A, B).
Debtor claims three annuities exempt under Iowa Code sec. 627.6(8)(e). The parties' Joint Pretrial Statement narrows the objections by Terra International and Trustee to whether these annuities are exempt under that statute. Additionally, Debtor claims that the annuities are excluded from property of the estate pursuant to 11 U.S.C. § 541(c)(2).
Debtor is 73 years old and has health problems. He retired from his family-operated business, Cas Feed Store, Inc., in June 1986 at age 64. From that time until September 1990, Debtor received monthly payments from the Cas Feed Store, Inc. Profit Sharing Plan and Trust which was an ERISA-qualified plan. He had made contributions to the Plan as well as to a predecessor Pension Plan since 1971. In the fall of 1990 at age 69, Debtor purchased three annuities ("Annuities") which qualify as Individual Retirement Annuities under 26 U.S.C. § 408(b).
Debtor sold his business to his son upon retirement. Serious issues of mismanagement and wasting of business assets soon arose. Debtor ultimately decided to rollover the funds from the Profit Sharing Plan and Trust because of concerns that the Plan would be involuntarily terminated by his son, Lon Caslavka, and the funds used for other purposes. To preserve his only source of retirement revenue, Debtor terminated his interest in the Profit Sharing Plan in the fall of 1990. The funds were rolled over to these Annuities by a check from the Plan endorsed by the Plan Trustee, Lon Caslavka, for deposit directly to Jackson National Life which issued the Annuities to Debtor. The Plan was formally terminated by corporate resolution on June 26, 1991 to be effective September 30, 1991.
None of Debtor's three Annuities states that they are payable on account of illness, disability, death, age or length of service. Debtor's right to receive payments under the Annuities does not depend on his reaching any specified age. He was already retirement age and receiving retirement payments from the Profit Sharing Plan when he purchased the Annuities. Debtor began receiving payments from two of the Annuities when he was 69 and from the third when he was 70 years old. One of the Annuities provided for immediate payments. The other two provided various payment options and rights of withdrawals. Debtor has selected a payment option under each of the Annuities. The amounts of annuity payments from two of the Annuities are based in part on Debtor's age and gender.
Debtor argues that the Annuities are exempt under Iowa Code sec. 627.6(8)(e). In the alternative, Debtor claims that the Annuities are not property of the estate pursuant to 11 U.S.C. § 541(c)(2). Terra International and Trustee assert that Debtor's unrestricted access to the Annuities makes them nonexempt and includable as property of the estate.
PROPERTY OF THE ESTATE, § 541(c)(2)
Before addressing the exemption issue, the Court must determine whether the property in dispute is property of the bankruptcy estate. Property of the debtor's estate is broadly defined in § 541 to include all the debtor's interests in property. However, § 541(c)(2) makes the following exception:
A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.
The U.S. Supreme Court holds that a debtor's interest in an ERISA-qualified pension plan may be excluded from property of the bankruptcy estate pursuant to § 541(c)(2). Patterson v. Shumate, 504 U.S. 753, 764-66, 112 S.Ct. 2242, 2250, 119 L.Ed.2d 519 (1992). The Court found that the plain language of § 541(c)(2) requires the conclusion that "applicable nonbankruptcy law" refers not only to state spendthrift law but also to ERISA requirements. Id. at 757-58, 112 S.Ct. at 2246. Both ERISA and coordinate sections of the Internal Revenue Code (29 U.S.C. § 1056(d)(1) and 26 U.S.C. § 401(a)(13), respectively) impose restrictions on the transfer of a debtor's interest in a qualified plan. These restrictions are "enforceable" as required by § 541(c)(2). See In re Kunkle, No. 93-60077LW, slip op. at 4, 1993 WL 767974 (Bankr.N.D. Iowa June 4, 1993).
It is probable that the ERISA-qualified Profit Sharing Plan which was the source of the funds deposited in Debtor's Annuities would have been excludable under § 541(c)(2). As noted above, these Annuities qualify as IRAs. However, IRAs have no enforceable restrictions under any nonbankruptcy law. Velis v. Kardanis, 949 F.2d 78, 82 (3d Cir.1991). Therefore, IRAs are includable as property of the estate under § 541(c). Id. Once a debtor gains unrestricted access to funds in an ERISA-qualified plan, such funds do not qualify as a spendthrift trust under § 541(c)(2) and thus are not excludable from the estate. In re Reid, 139 B.R. 19, 21 (Bankr.S.D.Cal.1992) ().
This Court concludes that Debtor's Annuities are includable as property of his bankruptcy estate. They contain no restrictions on transfer and are not subject to ERISA requirements. See Patterson, 504 U.S. at 762-64, 112 S.Ct. at 2249. When Debtor gained unrestricted access to the Profit Sharing Plan funds, they lost their status as ERISA-qualified such that § 541(c)(2) no longer applies.
EXEMPT AS PAYMENT "ON ACCOUNT OF AGE", SEC. 627.6(8)(e)
Debtor argues that even if the Annuities are property of the estate, they are exempt under Iowa Code sec. 627.6(8)(e). That section provides that a debtor may hold exempt from execution rights in:
A payment or a portion of a payment under a pension, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service. . . .
The Court must determine whether the Annuities are exempt regardless of their being funded by the Profit Sharing Plan. If the answer is no, the Court must determine whether the Annuities are exempt because they were funded by the Plan. That inquiry requires consideration of whether the lump sum distribution from the Plan was exempt and, if so, whether the proceeds of that lump sum in the Annuities are now exempt.
These determinations are made with a view toward the general rule that courts should construe exemption statutes liberally in favor of the debtor in light of the purposes of the exemption. In re Wallerstedt, 930 F.2d 630, 631 (8th Cir.1991); Chariton Feed & Grain, Inc. v. Kinser, 794 F.2d 1329, 1331 (8th Cir.1986) (applying Iowa law); Frudden Lumber Co. v. Clifton, 183 N.W.2d 201, 203 (Iowa 1971). The exemption of payments under a pension or similar plan is intended to protect payments which function as wage substitutes after retirement, to support the basic requirements of life at a time when the debtor's earning capacity is limited. In re Pettit, 55 B.R. 394, 398 (Bankr.S.D.Iowa), aff'd, 57 B.R. 362 (S.D.Iowa 1985).
The Eighth Circuit Court of Appeals has addressed the applicability of Iowa Code sec. 627.6(8)(e) to IRAs. In In re Huebner, 986 F.2d 1222, 1225 (8th Cir.), cert. denied, ___ U.S. ___, 114 S.Ct. 272, 126 L.Ed.2d 223 (1993), the court stated that the debtor's present right to receive payments from an IRA annuity did not depend on "illness, disability, death, age, or length of service." The court agreed with the District Court's conclusion that the debtor's access to and complete control over the timing of the annuity payments mean that the payments are not "on account of" age or length of service. Id. Therefore, the court held that the IRAs were not exempt. Id.
Mr. Huebner was 64 when he filed for bankruptcy and intended to begin receiving monthly payments when he turned 65. Id. at 1224. The court stated: "No payments have been made under Huebner's annuity contracts; rather, he is seeking to exempt the entire annuity corpus from which future payments will be made." Id. Mr. Huebner had personally purchased the IRAs several years prior to filing for bankruptcy. In re Huebner, 141 B.R. 405, 406 (N.D.Iowa 1992), aff'd, 986 F.2d 1222 (8th Cir.1993). Except for tax penalties for withdrawals prior to age 59½, Mr. Huebner had unrestricted access to the IRA funds. Huebner, 986 F.2d at 1225. The court stated that the IRA was essentially a bank savings account with favorable tax treatment. Id.
This Court in In re Matthews, 65 B.R. 24 (Bankr.N.D.Iowa 1986) (Melloy, J.), and In re Eggink, No. X89-01622S (Bankr.N.D.Iowa Jan. 30, 1990) (Edmonds, J.), also held that IRAs are not exempt under sec. 627.6(8)(e). The Court focused on the amount of control the debtor had over the annuity and whether access to the funds was restricted as to age, length of service, etc. Matthews, 65 B.R. at 26; Eggink, slip op. at 5. Both the debtors in these cases were under age 59½ and were not yet receiving payments. In Matthews, Judge Melloy specifically refrained from deciding whether a debtor over the age of 59½ would be entitled to claim IRAs exempt. Matthews, 65 B.R. at 26 n. 1.
Thus, IRAs are generally not exempt in Iowa under ...
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