In re Pepmeyer, C01-84 MJM.

• Decision Date: 07 January 2002
• Docket Number: No. C01-84 MJM.,C01-84 MJM.
• Citation: 273 B.R. 782
• Parties: In re Robert W. PEPMEYER, Debtor.
• Court: U.S. District Court — Northern District of Iowa

273 B.R. 782

In re Robert W. PEPMEYER, Debtor.

No. C01-84 MJM.

United States District Court, N.D. Iowa, Cedar Rapids Division.

January 7, 2002.

John M. Titler, Titler & Monroe, Cedar Rapids, IA, for appellant.

Eric W. Lam, Moyer & Bergman, PLC, Cedar Rapids, IA, for appellee.

ORDER

MELLOY, District Judge.

Debtor Robert W. Pepmeyer(hereinafter Debtor) appeals an adverse decision of the United States Bankruptcy Court for the Northern District of Iowa, in which the court held that Debtor's individual retirement annuity is not an exempt asset under Iowa Code § 627.6(8)(f).This appeal comes before this court pursuant to 28 U.S.C. § 158(a).For the following reasons, the decision of the bankruptcy court is reversed.

STANDARD OF REVIEW

In reviewing the decision of a bankruptcy court, the district court acts as an appellate court.Wegner v. Grunewaldt,821 F.2d 1317, 1320(8th Cir.1987).This court reviews de novo conclusions of law made by the bankruptcy court.Fed.R.Bank.P. 8013;In re Westpointe,241 F.3d 1005, 1007(8th Cir.2001);In re Martin,140 F.3d 806, 807(8th Cir.1998)."The Bankruptcy Court's interpretation of the statute is a question of law, and when interpreting a statute, the reviewing court looks to its express language and overall purpose."In re Martin,140 F.3d at 807.The bankruptcy court's finding of fact is reviewed for clear error.Wegner,821 F.2d at 1320.

FACTS

Debtor filed a Chapter 7 petition in bankruptcy court on September 29, 2000.In that petition, Debtor claimed as exempt pursuant to Iowa Code section 627.6(8)(f) an individual retirement annuity with a current value of $31,000.00.Northwestern Mutual Life Insurance Company issued the annuity.Debtor purchased the annuity in 1994.The purchase of the individual retirement annuity was partially funded by a $2,000.00 distribution from the estate of Debtor's deceased grandmother.In addition, Debtor transferred $2,444.93 from an individual retirement account which Debtor maintained at Guaranty Bank & Trust Company.Debtor believed that the two retirement plans were identical.From 1995 to 1999, Debtor contributed $2,000.00 each year to the individual retirement annuity and has made no withdrawals from the account.The court finds no error in the Bankruptcy Court's finding of fact.

DISCUSSION

The issue before the court is whether Debtor's individual retirement annuity is exempt under Iowa Code section 627.6(8)(f), as enacted at the time of Debtor's filing a Chapter 7 petition.When Debtor filed his petition, Iowa Code section 627.6(8)(f) provided, in part, that a debtor's rights in the following may be held exempt:

Contributions and assets, including the accumulated earnings and market increases in value, in any of the plans or contracts as follows:

(1) Transfers from a retirement plan qualified under the Employee Retirement Income Security Act of 1974 (ERISA) . . . to another ERISA-qualified plan or to another pension or retirement plan authorized under federal law, as described in subparagraph (3). . . .

(3) For simplified employee pension plans, self-employed pension plans, Keogh plans (also known as H.R. 10 plans), individual retirement accounts, Roth individual retirement accounts, savings incentive matched plans for employees, salary reduction simplified employee pension plans (also known as SARSEPs), and similar plans for retirement investments authorized in the future under federal law, the exemption for contributions shall not exceed, for each tax year of contributions, the actual amount of the contribution or two thousand dollars, whichever is less.The exemption for accumulated earnings and market increases in value of plans under this subparagraph shall be limited to an amount determined by multiplying all the accumulated earnings and market increases in value by a fraction, the numerator of which is the total amount of exempt contributions as determined by this subparagraph, and the denominator of which is the total of exempt and nonexempt contributions to the plan.

Iowa Code § 627.6(8)(f)¹.The issue is whether an individual retirement annuity is covered under the term "individual retirement accounts" as that term is used in the statute.It is this court's determination that it is.

This precise issue has been appealed only once before within this circuit.In re Kemmerer,251 B.R. 50(8th Cir. BAP2000)(hereinafter Kemmerer II);In re Kemmerer,245 B.R. 335(Bankr.N.D.Iowa2000)(hereinafter Kemmerer I)².In Kemmerer I, Judge Kilburg ruled that an individual retirement annuity was exempt under Iowa Code section 627.6(8)(f).In re Kemmerer,245 B.R. at 340.The decision was appealed to an Eighth Circuit Bankruptcy Appellate Panel(BAP).In re Kemmerer,251 B.R. at 50.In reversing Judge Kilburg's ruling, the BAP concluded the Iowa Legislature did not intend to exempt an individual retirement annuity under Iowa Code § 627.6(8)(f).Id. at 54.

However, the bankruptcy panel's decision in Kemmerer II did not settle the issue as a federal district court is not bound by the rulings of a bankruptcy appellate panel.In re Brown,239 B.R. 204, 210 n. 6(S.D.Cal.1999)(citingBank of Maui v. Estate Analysis, Inc.,904 F.2d 470, 472(9th Cir.1990)("BAP decisions cannot bind the district court themselves.")).Thus, while the bankruptcy court felt compelled to adhere to Kemmerer II in issuing the judgment below in this proceeding³, this court is not bound by the BAP's decision."As Article III courts, the district courts must always be free to decline to follow BAP decisions and to formulate their own rules within their jurisdiction."Bank of Maui v. Estate Analysis, Inc.,904 F.2d 470, 472(9th Cir.1990).For the reasons discussed below, this court respectfully exercises that privilege in this instance.

Subpart (f) of Iowa Code section 627.6(8) states the exemption exists "in any of the plans or contracts as follows," and then goes on to list in subparagraph (3)"individual retirement accounts."In this court's view, individual retirement accounts include individual retirement annuities.Clearly, in terms of the purpose of the plans, the distinction is nominal⁴.SeeIn re Moss,B.R. 465, 465-66 (Bankr.W.D.Mich.1992) 143 ("The individual retirement annuity functions similarly to the individual retirement account for the most part.The main distinction is that when the holder reaches the designated age, instead of receiving payments from the amount on deposit the proceeds are used to purchase a single premium annuity.").Both the individual retirement account and individual retirement annuity are considered individual retirement plans.26 U.S.C. § 7701(a)(37).In addition, both receive similar tax treatment under 26 U.S.C. § 408(d).As pointed out by Judge Kilburg in Kemmerer I, and by Judge Dreher in her dissent in Kemmerer II, commentators note that

an IRA has become the generic name for an individually directed and established savings program that permits individuals having earned income and their spouses to establish a personal retirement savings program. . . .There are two basic types of plans that can be described under the generic headings of IRA.These include IRAs described in Section 408(a) and individual retirement annuities described in Section 408(b).

Robert E. Madden, Tax Planning for Highly Compensated Individuals, ¶ 7.06, 7.061(2000)(cited inIn re Kemmerer,251 B.R. at 55(Dreher, J., dissenting), andIn re Kemmerer,245 B.R. at 339).

Courts have struggled with the distinction between, and characterization of, the types of plans.In In re Huebner, the distinction between an individual retirement account and an annuity was before this court to determine if the annuity at issue was exempt under Iowa Code section 627.6(8)(e).In re Huebner,141 B.R. 405, 408(N.D.Iowa1992), aff'd986 F.2d 1222(8th Cir.1993).That particular section stated, in part, that an exemption existed for a debtor's rights in "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."Iowa Code § 627.6(8)(e).The court was attempting to discern the meaning of "on account of age" as it related to the contested annuity.The Huebner court relied upon Matter of Grimes,No. 88-2554-WH(Bankr.S.D.Iowa1990), in which the Bankruptcy Court for the Southern District of Iowa"found no distinction between an IRA under § 408(a) and an individual retirement annuity under § 408(b)."In re Huebner,141 B.R. at 408(citingMatter of Grimes,No. 88-2554-WH(Bankr.S.D.Iowa1990), slip op. at 6 n. 1).In a thorough discussion of the authority interpreting the character and treatment of the two retirement plans, the Huebner court noted the inconsistent authorities on whether an annuity is deserving of treatment on par with an individual retirement account.The court concluded that it "agreed with Grimes and did not find a relevant distinction between the AAL annuities and an IRA established under 26 U.S.C. § 408(a)."Id. at 408.While classifying the annuities as non-exempt under Iowa Code section 627.6(8)(e), the Huebner court characterized the annuities as tantamount to an individual retirement account for purposes of the statute.Id.That characterization is equally applicable in the case at bar and in this court's interpretation of Iowa Code section 627.6(8)(f) as it relates to Debtor's annuity.

At a minimum, the statute is ambiguous.SeeIn re Kemmerer,251 B.R. at 58(Dreher, J., dissenting)("On balance, then, I believe the legislature intended to include individual retirement annuities within the scope of the term individual retirement accounts.");In re Kemmerer,245 B.R. at 340("The Court concludes that new paragraph (f) of sec. 627.6(8) is ambiguous on the issue of whether IRA annuities are exempt as `individual retirement accounts.'").In such a case, when...