In re Lawrence

• Decision Date: 19 February 1986
• Docket Number: Bankruptcy No. 84-03177.
• Citation: 57 BR 727
• Parties: In re Byron Robert LAWRENCE, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Iowa

57 B.R. 727 (1986)

In re Byron Robert LAWRENCE, Debtor.

Bankruptcy No. 84-03177.

United States Bankruptcy Court, N.D. Iowa.

February 19, 1986.

David A. Opheim, P.C., Fort Dodge, Iowa, for debtor.

Thomas T. Tarbox, Fort Dodge, Iowa, Trustee in Bankruptcy.

MEMORANDUM OPINION

JAMES E. YACOS, Bankruptcy Judge, sitting by designation.

The question before the court is the trustee's objection to the debtor's claim of exemption under Iowa Code § 627.6(9)(e) of his "Keogh Plan" retirement rights valued at $36,000.00. More precisely, the debtor has scheduled as an asset under schedule B-2(v) his Keogh Plan as "Equitable Or Future Interest, Life Estates And Rights Or Powers Exercisable Before The Benefit Of The Debtor Other Than Those Listed In Schedule B-1" at a value of $36,000.00. The debtor then on his schedule B-4 claims the foregoing Keogh Plan as a "retirement fund" exempt under the Iowa statute cited.

Keogh Plans are retirement plans set up by self-employed individuals under the popularly named Keogh-Smathers Act, October 10, 1962, P.L. 87-792 76 Stat. 809. The statute is more formally referred to as the Self-Employed Individuals Tax Retirement Act Of 1962, 26 U.S.C. §§ 37, 62, 72, 101, 104, 105, 172, 401-405, 503, 805, 1361, 2039, 2517, 3306, 3401, 6047, 7207. See USCS Tables, Popular Names, Lawyers Co-Op Pub. Co. (1985).

Keogh Plans do not come under the separate "ERISA" system provided by the Employee Retirement Income Security Act Of 1974, 29 U.S.C. § 1001 et. seq. Under a Keogh Plan the self-employed individual may withdraw deposited funds without penalty when he or she becomes 59½ years in age, dies, or is disabled. If the funds are withdrawn before any of these events occur, the individual must pay a penalty tax of ten percent in addition to regular income taxes, and is barred from making contributions to the Plan for five years.

THE FACTS

The debtor Byron Robert Lawrence was 58 years of age at the time of the hearing on this matter on September 27, 1985. He is married and his wife is 48 years of age. They have three children who are all grown, except the youngest, who is a senior in high school. The debtor was engaged in turkey farming until two years ago but has been able to engage only in part-time harvesting work, and a small corn crop operation of twenty acres, since that time. He filed a Chapter 7 voluntary bankruptcy petition on October 22, 1984.

The debtor established his Keogh Plan in 1967 and made contributions to the same on a yearly basis until 1981. No contributions have been made since that date.

The debtor's wife is partially disabled from a automobile accident and works approximately twenty-five hours a week at minimum wage level for a phone answering service. The total annual family income is approximately $10,000.00, split evenly between the husband and wife.

The debtor has no savings other than the Keogh Plan funds. His wife has a savings account with a $5,000.00 balance stemming from the automobile accident recovery. The debtor has cash value in an insurance policy, which has been used in recent years to help make a $5,000.00 annual payment on the mortgage on the family residence. There presently is left $3,000.00 in cash value in the insurance policy.

The debtor has been a farmer all his life, has education including one year of college in agricultural subjects, but has found his age to be a problem in obtaining work for other farmers and does not have the capital or realistic financing capability to resume a full-time turkey farm operation on his own.

The debtor's wife has a heart condition which requires specialist care every three months or so in Missouri, at a cost of approximately $300.00 for each visit. She has no other assets in her own name and is dependent upon her earnings, and whatever her husband can provide, to obtain such medical treatment.

The family residence was scheduled in the debtor's bankruptcy schedules at a value of $88,000.00, with a mortgage against the same having a balance then remaining of $30,200.00. The debtor testified at the hearing that due to the current depressed agricultural land values in Iowa the present fair market value is no more than $80,000.00. The court accepts this testimony and in fact has some question as to whether the value has not dropped even below that level at the present time.

THE LAW

Iowa has "opted out" of the federal exemptions granted by 11 U.S.C. § 522(d), as permitted by subsection (b)(1) of that section, and accordingly the debtor has made his claim of exemption under Iowa Code § 627.6(9)(e), which provides as follows:

A debtor who is a resident of this State may hold exempt from execution the following property. . . . (9) the debtor\'s rights in . . . (e) a payment under a pension, 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.

Neither party was able to cite any Iowa case decision, either in the federal or the state courts, construing the foregoing statute as to the question of exemption here presented. However, the court notes that the federal exemptions include a substantially equivalent exemption as provided in 11 U.S.C. § 522(d)(10)(E), reading as follows:

(d) The following property may be exempted. . . . (10) the debtor\'s right to receive. . . . (E) a payment under a stock bonus, pension, profit sharing, 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. . . .

Before discussing the case decisions construing the place of a Keogh Plan under the foregoing statutory language, it is well to emphasize what is not claimed as a basis for exemption in this case. This will narrow down substantially the examination of relevant case law. There is no contention here that the Keogh Plan funds have not become "property of the estate" pursuant to 11 U.S.C. § 541(a). There is likewise no contention that the retirement funds here in question are excluded from administration as property of the estate by the specific provision of § 541(c)(2) dealing with spendthrift trusts which are valid and enforceable under local non-bankruptcy law. Finally, there is no contention here that the Keogh Plan funds are exempted under 11 U.S.C. § 522(b)(2)(A) giving an alternative federal exemption (even in "opt out" states) where other federal non-bankruptcy law provides a basis for exemption.

Coming then to the narrow question as to whether exemption is justified in this case under the Iowa exemption statute, and its functional equivalent in 11 U.S.C. § 522(d)(10)(E), one court has held that Keogh Plans which have not yet vested in a right to payment without penalty at the time of bankruptcy are not exempt under the latter statutory provision. That court focused on the reference to "a payment" in the statutory language defining what is exempted. In re Clark, 711 F.2d 21 (3rd Cir.1983). However it has been recently held in Iowa, in a case involving a retirement fund and a profit sharing plan under the ERISA system, but directly construing Iowa statute § 627.6(9)(e) on this point, that the "payment" distinction is insufficient to bar a claim of exemption. In re Wayne Flygstad, 56 B.R. 884 (N.D.Iowa, 1986).

As stated by Bankruptcy Judge Wood in the Flygstad decision construing the Iowa statute:

The trustee interprets the statute as requiring a debtor\'s interest in a pension plan to be "in a payment mode". That is, a debtor must be actually receiving payments from the plan in order to claim an exemption. The trustee asserts that such a result obtains from the plain language of the statute. The Court reaches a different conclusion. Section 627.6(9)(e) allows an exemption for the debtor\'s "rights in a payment". To limit "rights in a payment" to current payments received is an unreasonably restrictive interpretation of the statute. The Court concurs in the decision of the District Court for the Southern District of Iowa where it recently held: "The debtors have `rights in a payment\' under the plan regardless of when the payment may be due. This is clearly contemplated by the very nature of the exemptions in Iowa Code § 627.6(9). An interest in future payments necessarily includes an interest in the present assets from which those payments will be made. The exemption therefore applies to all those assets in the fund, not just present payments due." In re Pettit, 57 B.R. 362 at p. 363 (Central Division, S.D.Iowa 1985), in affirming Matter of Pettit, 55 B.R. 394 (Bkrtcy.S.D.Iowa 1985).

I find persuasive and follow the ruling of Judge Wood on this point in the Flygstad Case. I also find persuasive the rationale given by Circuit Judge Becker, who concurred on other grounds in the result in In re Clark, supra, when he criticized the majority's use of the "payments" distinction:

The majority concludes that "the exemption of future payments . . . demonstrates a concern for the debtor\'s longterm security which is absent from the statute." I have substantial doubts that the majority has correctly assessed congressional intent, for the distinction required by the majority\'s reasoning effectively penalizes self-employed individuals for the form in which their retirement assets are held. The majority\'s holding will not affect employee pension and annuity plans created by employers, because the assets of such plans would not be included in the debtor\'s estate under section 541, and thus cannot be reached by the trustee. The assets of a Keogh plan in contrast, are clearly assets of the estate. Thus Congress\' putative lack of concern for the long-term security of the debtor works to the detriment only of self-employed debtors — a result I find inconsistent with Congress\' manifest solicitude for retirement benefits for self-employed

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