In re Karn
| Decision Date | 04 August 2014 |
| Docket Number | CASE NO. 13-62446 |
| Court | U.S. Bankruptcy Court — Northern District of Ohio |
| Parties | IN RE: GEORGE DAVID KARN AND DEBORAH ELLEN KARN Debtors. |
MEMORANDUM OF OPINION (NOT INTENDED FOR PUBLICATION)
George David Karn and Deborah Ellen Karn (collectively, "Debtors") claim a $24,387.00 bankruptcy exemption in funds derived from an individual retirement account, better known as an IRA, currently held in a business checking account. Toby L. Rosen, the chapter 13 panel trustee ("Trustee"), filed an objection to Debtors' IRA exemption. The court held a hearing on June 6, 2014, where the matter was taken under advisements. Debtors and Trustee have each filed briefs in support of their positions. The following constitutes the court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
The court has jurisdiction of this case under 28 U.S.C. § 1334 and the general order of reference dated April 4, 2012. In accordance with 28 U.S.C. § 1409, venue in this district and division is proper. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B).
This opinion is not intended for publication or citation. The availability of this opinion, in electronic or printed form, is not the result of a direct submission by the court.
Debtors operate a business known as D&D Antiques and Collectibles ("D&D") as a sole proprietorship,1 which buys and sells antiques at an antique mall in Strasburg, Ohio. To assist in the management of D&D, Debtors maintain a business checking account at First Merit Bank under the name "Deborah E. Karn DBA D&D Antiques & Collectibles" (the "D&D Account"). D&D is a profitable enterprise, generating monthly revenue of approximately $14,000.00, with monthly profits around $2,500.00. (Employee Income Rs., Oct. 4, 2013, ECF No. 4). In addition to the D&D Account, Debtors also maintain a personal checking account at Friends and Family Credit Union. D&D is Debtors' only form of employment, and along with social security income of $1,031.00 per month, Debtors' only source of income.
In August of 2013, Debtors withdrew $38,666.69 from an IRA held by Raymond James, of which $3,888.89 was removed as federal withholdings. The remaining $35,000.00 was deposited into the D&D Account on July 17, 2013. Income generated by D&D is also deposited into the D&D Account. Debtors pay expenses out of the D&D Account as well, some of which appear to be business related (payments to the State of Ohio for sales tax or to craft wholesalers), while others look like personal expenses (payments to Dairy Queen or to grocery stores). The court is unable to classify numerous other expenses as personal or business, such as payments to power and communications companies or a large number of checks without any indication of purpose. Based on the information provided, the D&D account is used for both business and personal expenses.
Debtors filed a voluntary chapter 13 bankruptcy petition on October 14, 2013. According to Debtors' bankruptcy petition, 85% of Debtors' liabilities relate to unpaid medical bills. Included within Debtors' bankruptcy petition is Schedule C, which lists the property a debtor claims as exempt from the bankruptcy process. While Debtors amended their schedules a number of times, Debtor's most recent Schedule C, filed on March 31, 2014, lists an exemption of $24,387.00 in an IRA, which Debtors argue is the amount remaining from the $35,000.00 deposit from Raymond James into the D&D Account. On April 4, 2014, Trustee objected to Debtors' claimed IRA exemption. Trustee makes three main arguments: (1) Debtors' IRA funds were improperly commingled with non-exempt funds; (2) Debtors' IRA funds were improperly used for the operations of D&D, not for Debtors' retirement; and (3) Debtors' retirement funds in the D&D account no longer qualify as an IRA under the Internal Revenue Code. Debtors contest each of Trustee's arguments.
A bankruptcy case begins when a debtor files a bankruptcy petition in a bankruptcy court. 11 U.S.C. § 301. The start of the case creates a bankruptcy estate, which contains "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). However, specific property of a debtor is excluded from the bankruptcy estate via statutorily created safe harbors known as exemptions. 11 U.S.C. § 522; In re Yost, 2014 WL 2547714, at *1 (Bankr N.D. Ohio 2014). "An exemption withdraws an interest from the bankruptcy estate, and consequently from the creditors, for the benefit of the debtors." Baumgart v. Alam (In re Alam), 359 B.R. 142, 146-47 (B.A.P. 6th Cir. 2006). The United States Bankruptcy Code ("the Code"), in a showing of deference to state rights, allows each state to choose one of three exemption options: (1) allow a debtor to elect the federal exemptions under § 522 of the Code; (2) allow a debtor to elect State law exemptions, which in Ohio are contained in O.R.C. § 2329.66; or (3) allow a debtor to choose between the federal or state exemptions. 11 U.S.C. § 522(b); In re Pursley, 2014 WL 293557, at *2 (Bankr. N.D. Ohio 2014); In re Yost, 2014 WL 2547714, at *2. The Ohio Legislature choose option two, only allowing a debtor domiciled in Ohio to use the exemptions from the Ohio Revised Code. O.R.C. § 2329.662.
In a chapter 7 liquidation, the benefit of exemptions are easily and immediately clear, as exempt property is not liquidated to pay creditors and is instead retained by the debtor. 11 U.S.C. § 726; In re Yost, 2014 WL 5247714, at *2. In a chapter 13 reorganization, instead of a debtor's assets being liquidated to pay creditors, the debtor agrees to make monthly payments to creditors over a three to five year period. 11 U.S.C. § 1322. The size of a debtor's monthly payments are based on a number of considerations, but creditors must receive payments greater than or equal to distributions from a hypothetical chapter 7 liquidation. 11 U.S.C. § 1325(a)(4). Therefore, when an exemption removes property from a debtor's bankruptcy estate, the amount creditors would receive in a chapter 7 liquidation decreases, and consequently a debtor's chapter 13 payment floor may also be reduced. See id.
Bankruptcy exemptions were adopted to guarantee debtors a minimum standard of living after bankruptcy, or, in other words, "to ensure that debtors and their families have sufficient means to support themselves through difficult times without becoming a public charge." In re Wood, 459 B.R. 263, 269 (Bankr. S.D. Ohio 2011). Retirement account exemptions further this goal by helping to assure debtors retain sufficient assets to care for themselves, and their dependents (if any), once a debtor's health starts to fail or he reaches retirement age. In re Weaver, 98 B.R. 497, 499 (Bankr. D. Neb. 1988) (). Without retirement exemptions, the costs associated with a debtor's retirement would often fall more heavily onto the government, in essence shifting losses from creditors to taxpayers. With these factors in mind, bankruptcy courts are "[g]uided by the principal that exemptions are to be construed liberally in favor of debtors." In re Wood, 459 B.R. at 269 (internal quotation marks omitted); see also In re Wengerd, 453 B.R. 243, 246-47 (B.A.P. 6th Cir. 2011); Daugherty v.Cent. Trust Co. of Ne. Ohio, N.A., 504 N.E.2d 1100, 1103 (Ohio 1986). Therefore, when "it is possible to construe an exemption statute in ways that are both favorable and unfavorable to a debtor, then the favorable method should be chosen." In re Wood, 459 B.R. at 269 (internal quotation marks omitted).
Trustee and Debtors first disagree on the source of the $35,000.00 deposit into the D&D Account, of which Debtors' claim $24,387.00 as currently exempt. Under the Federal Rules of Bankruptcy Procedure, the party challenging an exemption bears the burden of showing the exemption is improperly claimed. Fed. R. Bankr. P. 4003. Trustee states, without analysis, that she disputes the source of the funds in the D&D Account. The court received documentary evidence showing a $38,888.89 withdrawal from Debtors' "IRA Freedom" account held with Raymond James, of which $3,888.89 was removed as federal withholdings. The court also received a D&D bank statement showing a $35,000.00 deposit from Raymond James. These documents are strong evidence that Debtors' $35,000.00 deposit into the D&D Account originated from Debtors' qualified IRA account held at Raymond James. Because Trustee has not provided any countervailing evidence, Trustee has failed to carry her burden. However, simply because an amount is derived from an exempt source does not necessarily mean the asset retains the exemption.
The Ohio Legislature, when opting out of the federal exemptions, enacted a scheme allowing debtors domiciled in Ohio to hold property included within statutorily defined categories "exempt from execution, garnishment, attachment, or sale." O.R.C. § 2329.66(A). The Ohio statute includes a number of exempt categories, such as cash on hand, vehicles, real property used as a primary residence, certain retirement accounts, and many others. Id. § 2329.66(A). The wording of the statutory exemption for IRAs is broad, protecting a debtor's "rights or interests in the assets held in, or to directly or indirectly receive any payment or benefit under, any individual retirement account." Id. § 2329.66(a)(10)(c). However, the Ohio legislature included a number of limitations on the type and amount of retirement assets that a debtor may hold exempt. Id. Specifically, the Ohio statute...
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