In re Hasse
| Decision Date | 02 March 2000 |
| Docket Number | Bankruptcy No. 99-80726-SSM. |
| Citation | 246 BR 247 |
| Parties | In re John Edward HASSE, Debtor. |
| Court | U.S. District Court — Virgin Islands, Bankruptcy Division |
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Robert Ross Weed, Alexandria, Virginia, for debtor.
James F. Reynolds, Odin, Feldman & Pittleman, P.C., Fairfax, VA, for Donald F. King, Chapter 7 Trustee.
The issue before the court is whether the debtor, who as a Federal employee participates in the Federal Thrift Savings Plan, may also, under the relevant Virginia exemption statute, claim an unlimited exemption in an individual retirement account ("IRA"). The controversy comes before the court on an objection by the chapter 7 trustee, Donald F. King, to the debtor's claimed exemption of the IRA.1 A hearing was held on December 14, 1999. The chapter 7 trustee was present in person, and the debtor was present by his attorney. For the reasons stated herein, the court concludes that the debtor is entitled to hold the full amount of his IRA as exempt.
The relevant facts are not disputed and may be briefly summarized. The debtor, John Edward Hasse, is employed as a curator by the Smithsonian Institution. He filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on August 20, 1999, and received a discharge on December 1, 1999. Donald F. King was appointed as trustee. Although originally scheduled for September 17, 1999, the meeting of creditors was not held and concluded until October 1, 1999. Among the assets listed on the debtor's schedules, and claimed exempt, were $191,000 in a Thrift Saving Plan, a FERS retirement annuity valued at $10,700,2 and an IRA valued at $100,000. The IRA was claimed exempt under Va.Code Ann. § 34-34.3 Virtually all of the debtor's other assets are either encumbered by liens or are exempt, with the result that the IRA is the only asset potentially available for the payment of creditor claims. On October 22, 1999, the trustee filed the objection that is currently before the court.
This court has jurisdiction of this controversy under 28 U.S.C. §§ 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. Under 28 U.S.C. § 157(b)(2)(B), this is a core proceeding in which final orders and judgments may be entered by a bankruptcy judge, subject to the right of appeal under 28 U.S.C. § 158.
Under § 541, Bankruptcy Code, the filing of a bankruptcy petition creates an "estate" composed of all legal and equitable interests of the debtor in property. An individual debtor, however, may "exempt from property of the estate"—and thus retain, free from the claims of creditors —either the property specified in § 522(d), Bankruptcy Code ("the Federal exemptions"), or, alternatively, the exemptions allowable under state law and general (nonbankruptcy) Federal law. § 522(b), Bankruptcy Code. A state is permitted, however, to "opt out" of allowing its residents to take advantage of the Federal exemptions. § 522(b)(1), Bankruptcy Code. Virginia has done precisely that. Va.Code Ann. § 34-3.1. Accordingly, residents of Virginia filing bankruptcy petitions may claim only those exemptions allowable under state law and general (nonbankruptcy) Federal law. In re Smith, 45 B.R. 100 (Bankr.E.D.Va.1984).
The state law exemptions available to Virginia residents are primarily set forth in Title 34 of the Code of Virginia. Relevant to the present controversy is Va. Code Ann. § 34-34, which provides a specific exemption for interests in a "retirement plan." The term "retirement plan" is defined as a plan, account, or arrangement that "is intended" to satisfy certain specified provisions of the Internal Revenue Code. Among these are 26 U.S.C. § 408, which governs the treatment of IRAs. Essentially, an individual may hold exempt in an IRA an amount (excluding contributions made in the two-year period preceding the claim of exemption) that would pay a benefit of $17,500 per year for life beginning at age 65. For the purpose of computing that amount, the statute includes a table setting forth, by attained age, the cost of a $1.00 annual benefit. Va.Code Ann. § 34-34(C). As an example, the table shows that the cost of a $1.00 annual benefit for a person aged 60 is $5.1150. Accordingly, the amount that could be held exempt would be $17,500 times 5.1150, or $89,512.50.4 If a debtor has more than one "retirement plan," the aggregate amount that can be held exempt from all such accounts is the amount necessary to fund a $17,500 per year annuity. Id.
At issue in this case is the impact of the Virginia General Assembly's decision to amend
Va.Code Ann. § 34-34 in 19995 by adding subsection H:
As noted, § 408 of the Internal Revenue Code governs IRA's. The thrust of the amendment is to give a debtor who has no other tax-qualified retirement plan the right to an unlimited IRA exemption but to deny the unlimited exemption to a person who is covered by such a plan. Although there is no formal legislative history, the reason why the General Assembly might have wished to confer such a benefit is not difficult to imagine. Employees who participate in a retirement plan governed by the Employee Retirement Income Security Act of 1974 ("ERISA") are able, under the Supreme Court's holding in Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992), to protect the entire value of their retirement in bankruptcy.6 By giving a person who is not covered by an ERISA-qualified plan the right to an unlimited IRA exemption, such a person would be put on an equal footing with an employee who is a participant in an ERISA-qualified plan.
Although the general intent of the amendment seems clear enough, the actual wording presents a difficult problem of interpretation. The literal language of the amendment gives a right to an unlimited IRA exemption unless the debtor is a participant in (1) a "retirement plan" that is (2) "established pursuant to" certain specified section of the Internal Revenue Code, among them § 401. However, as will be discussed, a Federal Thrift Savings Plan account—while it is similar to, and for tax purposes is treated exactly like, a private employer 401(k) plan—is nevertheless not subject to all the regulations governing § 401(k) plans. The question is therefore whether, for the purpose of applying § 34-34(H), a Thrift Savings Plan account should be treated as a "retirement plan established pursuant to" § 401 of the Internal Revenue Code. If so, the debtor is not entitled to a further exemption for his IRA; otherwise, he may exempt it in full.
The court is thus squarely confronted with the task of construing the language of Va.Code Ann. § 34-34(H). The rule in Virginia is that "where the language of a statute is free from ambiguity, its plain meaning is to be accepted." Portsmouth v. Chesapeake, 205 Va. 259, 269, 136 S.E.2d 817, 825 (1964). Only when the words of the statute are not clear is the "legislative intent to be gathered from the occasion and necessity of the law, . . . the causes which moved the Legislature to enact it." Ambrogi v. Koontz, 224 Va. 381, 386-87, 297 S.E.2d 660, 662 (1982). With respect to exemption statutes, the court must apply the plain meaning of the statute, and in particular, may not enlarge a statutory exemption and read into it an exemption the legislature did not intend to create. See Tignor v. Parkinson (In re Tignor), 729 F.2d 977, 981 (4th Cir.1984) (citing Goldburg Co. v. Salyer, 188 Va. 573, 582, 50 S.E.2d 272, 277 (1948)). On the other hand, the court must liberally interpret the Virginia exemption statutes in favor of the debtor, with any doubts to be resolved in favor of allowing the exemption. See Tignor, 729 F.2d at 981 (); In re Hayes, 119 B.R. 86, 88 (Bankr.E.D.Va.1990) (Shelley, J.) (); In re Perry, 6 B.R. 263, 264 (Bankr. W.D.Va.1980) (Pearson, J.); In re Williams, 3 B.R. 244, 246 (Bankr.E.D.Va. 1980) (Shelley, J.).
As noted, before the debtor's participation in the Thrift Savings Plan can disqualify him from the unlimited IRA exemption, the court must find that it is (1) a "retirement plan" that is (2) "established pursuant to" § 401 of the Internal Revenue Code. The term "retirement plan" is defined by Va.Code Ann. § 34-34(A) as a "plan, account, or arrangement that is intended to satisfy the requirements" of certain Internal Revenue Code provisions, among them 26 U.S.C. § 401.
The Thrift Savings Plan is a tax-deferred retirement savings plan for Federal civilian employees established under the Federal Employees' Retirement System Act of 1986, 5 U.S.C. §§ 8401 et seq. The specific provisions governing the Thrift Savings Plan are set forth at 5 U.S.C. §§ 8432-8440. As an information pamphlet for Federal employees explains, the Thrift Savings Plan "offers Federal civilian employees the same type of savings and tax benefits that many private corporations offer their employees under so-called `401(k)' plans." Summary of the Thrift Savings Plan for Federal...
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