In re Cilek

• Decision Date: 13 April 1990
• Docket Number: Bankruptcy No. EU7-87-02102,Adv. No. 87-0276-7.
• Citation: 115 BR 974
• Parties: In re Richard W. CILEK, Rosetta K. Cilek, Debtors. AMERICAN HONDA FINANCE CORPORATION, Plaintiff, v. Richard W. CILEK and Rosetta K. Cilek, Defendants and Third-Party Plaintiffs, v. DAIRYLAND INSURANCE AGENCY, INC., Third-Party Defendant.
• Court: U.S. Bankruptcy Court — Western District of Wisconsin

115 B.R. 974 (1990)

In re Richard W. CILEK, Rosetta K. Cilek, Debtors.

AMERICAN HONDA FINANCE CORPORATION, Plaintiff, v. Richard W. CILEK and Rosetta K. Cilek, Defendants and Third-Party Plaintiffs, v. DAIRYLAND INSURANCE AGENCY, INC., Third-Party Defendant.

Bankruptcy No. EU7-87-02102, Adv. No. 87-0276-7.

United States Bankruptcy Court, W.D. Wisconsin.

April 13, 1990.

COPYRIGHT MATERIAL OMITTED

Jeffrey W. Guettinger, Eau Claire, Wis., for plaintiff.

Peter F. Herrell, Eau Claire, Wis., for defendants/third-party plaintiffs.

Randi L. Osberg, Chetek, Wis., for third-party defendant.

MEMORANDUM OPINION, FINDINGS OF FACT, AND CONCLUSIONS OF LAW

THOMAS S. UTSCHIG, Bankruptcy Judge.

PROCEDURAL POSTURE

On November 6, 1987, plaintiff American Honda Finance Corporation ("Honda Finance") filed a complaint against the defendants Richard W. Cilek and Rosetta K. Cilek ("Debtors") to except from discharge under 11 U.S.C. §§ 523(a)(4) and 523(a)(6) their claim of $10,355.00, plus interest and repossession costs.

On February 11, 1988, the Debtors filed a third-party complaint against the third-party defendant Dairyland Insurance Agency, Inc., ("Dairyland Insurance") seeking equitable subordination. On February 17, 1988, Honda Finance objected to the Debtors' claimed exemption of $17,017.56 in individual retirement annuities ("IRAs").¹ On June 28, 1988, Honda Finance filed a cross claim against the third-party defendant Dairyland Insurance for converting the proceeds from the sale of Honda Finance's collateral. On September 2, 1988, the Court ordered discovery completed by October 15, 1988. On November 1, 1988, the parties tried this adversary proceeding before the Court. On November 2, 1988, Honda Finance moved to admit new evidence of a security agreement dated August 1980. On December 1, 1988, the Court ordered the parties to submit briefs regarding the submission of new evidence.

On January 17, 1989, the Court ordered the trial to be continued to February 21, 1989, allowing Honda Finance to introduce new evidence and Dairyland Insurance to conclude its case. The Court also ordered the parties to submit briefs regarding the rights of the secured parties, Honda Finance and Dairyland Insurance, in the collateral. On February 21, 1989, the parties completed the trial in this adversary proceeding.

On May 29, 1989, the debtor, Richard Cilek (Debtor), died.

The debtors are represented by their attorney Peter F. Herrell of Jordan and Herrell; Honda Finance is represented by its attorney Jeffrey W. Guettinger of Herrick, Hart, Duchemin, Danielson & Guetinger; and Dairyland Insurance is represented by its attorney Randi L. Osberg of the Jost Law Office.

The issues presented by this matter are:

1) Whether the Debtor's IRAs are exempt under 11 U.S.C. § 522(d)(10)(E);

2) Whether the security interest of Honda Finance in the "spare parts" of Ladysmith Motors, Inc. ("Ladysmith Motors"), the Debtor's business, has priority over the security interest of Dairyland Insurance in the same collateral;

3) Whether the Debtor's failure to remit the proceeds of the sale of two motorcycles, secured to Honda Finance, creates a nondischargeable debt under 11 U.S.C. § 523(a)(6);² and

4) Whether Dairyland Insurance's control of the proceeds from the sale of Ladysmith Motors gives rise to equitable subordination under 11 U.S.C. § 510(c).

ANALYSIS

I. THE INDIVIDUAL RETIREMENT ACCOUNT

FACTS

On August 6, 1987, the Debtors filed a petition for relief with the United States Bankruptcy Court for the Western District of Wisconsin. The Debtors claimed Richard Cilek's individual retirement accounts with the National Guardian Life Insurance Company ("National Guardian") in the amount of $17,017.56 as exempt under 11 U.S.C. § 522(d)(10) and (11). On January 25, 1988, the Debtors filed an amended schedule B-4. The Debtors' amendment characterized the individual retirement accounts as annuities with National Guardian. Contrary to the Debtors' characterization, the claimed exemptions are neither annuities nor individual retirement accounts but funds held in two individual retirement annuities.³ When the Debtor reaches retirement age the funds will then be used to purchase an annuity. Accordingly, this Court shall treat the claimed exemption as individual retirement annuities and shall refer to the claimed exemption as IRAs.

STATUTES

11 U.S.C. § 522(d)(10)(E) states:

(d) The following property may be exempted under subsection (b)(1) of this section:

* * * * * *

(10) The debtor\'s right to receive —

* * * * * *

(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 —

(i) such 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 such plan or contract arose;

(ii) such payment is on account of age or length of service; and

(iii) such plan or contract does not qualify under section 401(a), 403(a), 403(b), 408, or 409 of the Internal Revenue Code of 1954 (26 U.S.C. 401(a), 403(a), 403(b), 408, or 409).

DISCUSSION

Honda Finance argues that the Debtor's IRAs are not exempt as a matter of law because the Debtor is not presently receiving payments and the Debtor has the power to withdraw funds at any time. In the alternative, Honda Finance argues that the Debtor's IRAs are not reasonably necessary for the Debtors' support.

Courts denying exemptions for IRAs under 11 U.S.C. § 522(d)(10)(E) argue that IRAs are not exempt because: 1) the debtor has "no present rights to receive payments," In re Heisey, 88 B.R. 47 at 51 (Bankr.D.N.J.1988); 2) IRAs are not "similar plans" because the debtor has control of the funds, In re Pauquette, 38 B.R. 170 (Bankr.D.Vt.1984); 3) IRA benefits are not paid "on account of illness, disability, death, age, or length of service," In re Fichter, 45 B.R. 534 (Bankr.N.D.Ohio 1984); and 4) IRA payments are not "reasonably necessary for the support of the debtor," Matter of Kochell, 26 B.R. 86 (Bankr.W.D.Wis.1982).

THE DEBTOR'S RIGHT TO RECEIVE A PAYMENT

In In re Heisey, supra, the court followed the reasoning of the Third Circuit Court of Appeals in In re Clark, 711 F.2d 21 (3d Cir.1983) and held that an IRA is property of the estate under 11 U.S.C. § 541(a), and is not exempt under 11 U.S.C. § 522(d)(10)(E). 88 B.R. at 51. In In re Clark, the Court of Appeals denied the debtor's exemption of a $17,466.00 Keogh retirement plan under 11 U.S.C. § 522(d)(10)(E) because the debtor had no present right to payment under the retirement plan. 711 F.2d at 23. The Court of Appeals reasoned:

The general purpose of the exemption provisions of the Bankruptcy Code is to give debtors a fresh start. As noted in the House Report on H.R. 8200:

The historical purpose of exemption laws has been to protect a debtor from his creditors, to provide him with the basic necessities of life so that even if his creditors levy on all of his nonexempt property, the debtor will not be left destitute and a public charge. This purpose has not changed. . . .

H.R.Rep. No. 595, 95th Cong., 1st Sess. 126 (1977) reprinted in 1978 U.S.Code Cong. & Ad.News, 5787, 5963, 6087. The exemption of present Keogh payments, to the extent they are necessary for the support of the debtor, is consistent with this goal. The exemption of future payments, however, demonstrates a concern for the debtor\'s long term security which is absent from the statute.

Id. For support, the Court of Appeals in Clark cited In re Mendenhall, 4 B.R. 127 (Bankr.D.Or.1980), In re Richard Dale Clark, 18 B.R. 824 (Bankr.E.D.Tenn.1982), and Matter of Kochell, 26 B.R. 86 (Bankr. W.D.Wis.1982).

This Court finds no support in the cases cited by the Court of Appeals in Clark for a rule which denies exemptions under 11 U.S.C. § 522(d)(10)(E) unless the debtor is receiving payments at the time of filing. In re Mendenhall, supra, was decided under the Bankruptcy Act; In re Richard Dale Clark, supra, was decided under the Tennessee exemption statute; and Matter of Kochell, supra, was decided on the basis that the pension plans in question were not reasonably necessary for the support of the debtor.

Unlike the Court of Appeals in Clark, this Court finds ample concern for the Debtor's long term security in the statute, the legislative history and the decisions of other courts. Both the subject of the statute (i.e., stock bonuses, pensions, profitsharing plans and annuities) and the purpose of the statute (i.e., exemptions for the basic necessities) look to the future. Even the legislative history speaks of the future when it states: "Paragraph (10) exempts certain benefits that are akin to future earnings of the debtor." H.R.Rep. No. 595, 95th Cong., 1st Sess. 362 (1977), U.S. Code Cong. & Admin.News 1978, pp. 5787, 6318.⁴ Other courts have also found that Congress intended to look to the debtor's future needs as well as the debtor's current needs. In re Miller, 33 B.R. 549 (Bankr.D. Minn.1983); In re Sheridan, 38 B.R. 52 (Bankr.D.Vt.1983); In re Flygstad, 56 B.R. 884 (Bankr.N.D.Iowa 1986); In re Grant, 40 B.R. 612 (Bankr.N.D.Tex.1984); and Matter of Boon, 90 B.R. 988 (Bankr.W.D. Mo.1987).

While the present-tense wording of the statute may lead some courts to conclude that a debtor must presently be receiving pension payments to qualify for an exemption under 11 U.S.C. § 522(d)(10)(E), this Court believes that such an inference is not based upon the plain meaning of the statute. 11 U.S.C. § 522(d)(10)(E) does not explicitly require the debtor to begin receiving payments at the time the petition is filed. In fact, with the language "right to receive a payment under a stock bonus, pension, profitsharing, annuity, or similar plan" (emphasis added), 11 U.S.C. § 522(d)(10)(E) explicitly leaves the timing of payments...