In re Walter Richard Thiem And Kay A. Thiem

• Decision Date: 19 January 2011
• Docket Number: No. 4:10–bk–19279–JMM.,4:10–bk–19279–JMM.
• Citation: 443 B.R. 832
• Parties: In re Walter Richard THIEM and Kay A. Thiem, Debtors.
• Court: U.S. Bankruptcy Court — District of Arizona

443 B.R. 832

107 A.F.T.R.2d 2011-529

In re Walter Richard THIEM and Kay A. Thiem, Debtors.

No. 4:10–bk–19279–JMM.

United States Bankruptcy Court, D. Arizona.

Jan. 19, 2011.

Stephen Trezza, Tucson, AZ, for Debtors.Trudy Nowak, Rochester, NY, Chapter 7 Trustee.

MEMORANDUM DECISION

JAMES M. MARLAR, Chief Judge.

I. INTRODUCTION

In this matter of first impression, the chapter 7 trustee objects to the debtors' claimed exemption for an individual retirement account (“IRA”) that Mrs. Thiem inherited as the beneficiary of her mother's IRA prior to bankruptcy.¹ Having considered the arguments as well as the amended Schedule C and the legal memoranda, the court herein sets forth its findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052, overruling the trustee's objection and allowing the exemption in its entirety.

II. JURISDICTION

The allowance of an exemption from property of the estate is a core proceeding. The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(b) and 157(b).

III. FACTS AND PROCEDURE

Richard and Kay Thiem (the “debtors”) filed a voluntary chapter 7 petition on June 19, 2010. Mr. Thiem receives social security disability income while Mrs. Thiem is employed by the Tucson Medical Center.

In 2005, Mrs. Thiem's mother died, leaving her traditional IRA ² to the debtor and the debtor's sister, who were the beneficiaries. Within 60 days of her mother's death, $10,723.24 from the mother's IRA, representing both sisters' interests, was transferred into an “inherited” IRA entitled “Kay A. Thiem Wells Fargo # xxx6594, Marjorie Ann Dymock DECD.” Mrs. Thiem paid to her sister the sister's share of the money using the debtor's personal funds, while maintaining the original balance of funds in the IRA.

Between 2005 and the petition date, Mrs. Thiem took out only the required distributions from the inherited IRA, leaving a balance of $10,032.57 as of the petition date. Upon filing bankruptcy, the debtors claimed an exemption in the inherited IRA in the amount of $10,032.57 pursuant to Bankruptcy Code § 522(b)(3) ³ and the Arizona exemption for a retirement plan, Ariz.Rev.Stat. (“ARS”) § 33–1126(B).

The chapter 7 trustee timely objected to the claimed exemption, citing case law which construed federal exemption statutes. The debtors responded, also citing case law which interpreted federal law. Following a hearing, and while the matter was under submission, the debtors filed an amended exemption claim under § 522(b)(3), pursuant to ARS §§ 33–1126(B) and 33–1126(A)(1). The trustee then filed an amended objection, to which the debtors responded.

There is no dispute that the mother's IRA qualified as an exempt IRA. The trustee objects, however, to the debtors' assertion that the funds in the inherited IRA retained their exempt status, or are exempt under either state or federal law. The trustee also asserts that the debtors are only entitled to a $5,361.62 exemption, if any, reflecting the original amount of Mrs. Thiem's half of the inherited funds.

IV. ISSUES

1. Whether the debtors can claim an exemption in the inherited IRA under either ARS § 33–1126(B) or § 522(b)(3)(C), or both.

2. Alternatively, whether the IRA is exempt under ARS § 33–1126(A)(1) as money received by a child “upon the life” of a deceased parent.

V. DISCUSSION

Upon the filing of a bankruptcy petition, an estate is created consisting of all of the legal or equitable interests of the debtor in property as of the commencement of the case “wherever located and by whomever held.” 11 U.S.C. § 541(a)(1); In re Konnoff, 356 B.R. 201, 204 (9th Cir. BAP 2006); In re Pettit, 217 F.3d 1072, 1077 (9th Cir.2000). Certain property that is initially included in the bankruptcy estate may be removed therefrom through the exemption process. 11 U.S.C. § 522.

A claimed exemption is presumptively valid, unless a party in interest objects and that objector satisfies its burden that the exemption is improperly claimed. See In re Nicholson, 435 B.R. 622, 626 (9th Cir. BAP 2010); 11 U.S.C. § 522( l ); Fed. R. Bankr.P. 4003(c).⁴

Arizona has opted out of the federal exemption scheme provided in § 522(d). See ARS § 33–1133(B). Debtors in Arizona are only permitted the use of federal non-bankruptcy exemptions and the Arizona exemptions. Hon. W.H. Brown, L. Ahern and N. Fraas MacLean, Bankruptcy Exemption Manual, § 3.01, p. 76 (2006).

A. The available exemption statutes for an IRA

There is one relevant exception to the opt-out rule. In enacting BAPCPA, ⁵ Congress created a new class of exemptions for certain retirement funds regardless of whether the state of domicile has opted out of the federal scheme for other property.⁶ Of this class, § 522(b)(3)(c) is applicable in opt-out states and § 522(d)(12) applies in the federal exemption scheme. Id., § 2.17, p. 60–61. The two provisions are identical and provide an exemption for:

retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.

“Now, even if some states may not allow retirement plans to be exempted from the reach of creditors, Congress has made this exemption available to all debtors by placing the language in section 522(b)(3)(c) to eliminate the opt-out.” Id. at 62. This new category of exemption rights “may be exercised by the debtor even if the debtor's state has opted out of the federal exemption scheme.” 4 Collier on Bankruptcy ¶ 522.10[9] at 522–90 (16th ed. 2010); In re Patrick, 411 B.R. 659, 663–64 (Bankr.C.D.Cal.2008) (a § 522(b)(3)(c) election can be used in opt-out states such as California).

Congress' intent was “to expand the protection for tax-favored retirement plans or arrangements that may not be already protected under [§ ] 541(c)(2) pursuant to Patterson v. Shumate ... or other state or Federal Law.” HR Rep. No. 31, 109th Cong., 1st Sess. 224 (2005). In addition, such retirement fund may be claimed exempt even if it is only in “substantial compliance with” applicable requirements of the IRC, or if not, if the debtor can claim that he or she is not materially responsible for such failure of compliance. Id.; 11 U.S.C. § 522(b)(4)(A)–(B).

The debtor's exemption rights under § 522(b)(3)(C) also apply to certain direct (trustee-to-trustee) transfers, providing that funds so transferred “shall not cease to qualify for exemption under paragraph (3)(c) or subsection (d)(12) by reason of such direct transfer.” 11 U.S.C. § 522(b)(4)(C). In addition, the exemption rights continue to apply “to any distribution that qualifies as an eligible rollover distribution within the meaning of section 402(c) of the Internal Revenue Code, or an amount that is a distribution from a fund or account exempt from taxation under section ... 408 ... of the Internal Revenue Code, and is deposited to the extent allowed in such a fund or account not later than 60 days after the distribution of such amount.” 4 Collier on Bankruptcy, supra ¶ 522.10[9] at 522–91; 11 U.S.C. § 522(b)(4)(D).

In this case, both parties have also supported their arguments for and against exemption with the new federal exemption law. Therefore, the court deems the exemptions as also claimed under § 522(b)(3)(C), including the provisions of § 522(b)(4), and this court may compare those statutes and look to case law which construes them.⁷

Under either federal or state law, exemptions are to be liberally construed in favor of the debtor who claims the exemption. In re Arrol, 170 F.3d 934, 937 (9th Cir.1999); Gardenhire v. Glasser, 26 Ariz. 503, 503, 226 P. 911, 912 (1924); In re Herrscher, 121 B.R. 29, 31 (Bankr.D.Ariz.1989) ( citing ARS § 1–211(B) (“Statutes shall be liberally construed to effect their objects and promote justice.”)). The exemption laws in Arizona “were not created merely for the purpose of conferring a privilege on a debtor, but to shelter the family and thereby benefit the state.” In re Hummel, 440 B.R. 814, 820 (9th Cir. BAP 2010) (quoting In re Foreacre, 358 B.R. 384, 390 (Bankr.D.Ariz.2006)). The statutory language may not be reduced or enlarged nor “tortured” in order to grant an exemption that the respective legislature did not intend to create. See id.; In re DeHaan, 275 B.R. 375 (Bankr.D.Idaho 2002).

In interpreting a statute, the plain language of a statute is determinative under federal law. Patterson v. Shumate, 504 U.S. 753, 757, 112 S.Ct. 2242, 2246, 119 L.Ed.2d 519 (1992). Likewise, the Arizona courts have instructed how to interpret their statutes:

When interpreting a statute, we must first look to its language, the “best and most reliable index” of its meaning. Unless the legislature clearly expresses an intent to give a term a special meaning, we give the words used in statutes their plain and ordinary meaning. In determining the ordinary meaning of a word, we may refer to an established and widely used dictionary.

State v. Mahaney, 193 Ariz. 566, 568, 975 P.2d 156, 158 (Ct.App.1999) (citations omitted).

The debtors claimed an exemption under ARS § 33–1126(B), which provides, in pertinent part:

B. Any money or other assets payable to a participant in or beneficiary of, or any interest of any participant or beneficiary in, a retirement plan under § 401(a), 403(a), 403(b), 408, 408A or 409 or a deferred compensation plan under § 457 of the United States internal revenue code [sic] of 1986, as amended ... shall be exempt from any and all claims of creditors of the beneficiary or participant.

ARS § 33–1126(B) (2010 Thomas Reuters) (footnote omitted).

This statute is similar to § 522(b)(3)(C) and § 522(d)(12). The meaning of a state exemption is controlled by the applicable state law, and a bankruptcy court is bound by the state's construction of its statute. In re Palidora, 310 B.R. 164, 165–66 & n. 4 (Bankr.D.Ariz.2004) (citing In re Goldman, 70 F.3d 1028, 1029 (9th Cir.1995)). Neither case law nor the legislative history reveal any useful...