Kinlaw v. Harris

• Decision Date: 08 December 2009
• Docket Number: No. COA08-1584.,COA08-1584.
• Citation: 689 S.E.2d 428
• Parties: Michael KINLAW, Plaintiff, v. John J. HARRIS, Jr., M.D., Defendant.
• Court: North Carolina Court of Appeals

689 S.E.2d 428

Michael KINLAW, Plaintiff, v. John J. HARRIS, Jr., M.D., Defendant.

No. COA08-1584.

Court of Appeals of North Carolina.

December 8, 2009.

Appeals by Plaintiff and Defendant from order entered 21 July 2008 by Judge Gary L. Locklear in Superior Court, Robeson County. Heard in the Court of Appeals 19 August 2009.

Anderson, Johnson, Lawrence, Butler & Bock, L.L.P., Fayetteville, by Steven C. Lawrence, for Plaintiff.

McCoy Weaver Wiggins Cleveland Rose Ray, PLLC, Fayetteville, by Jim Wade Goodman, for Defendants.

McGEE, Judge.

The underlying judgment in this case was entered on 3 May 2004, in which Plaintiff was awarded $567,000.00 in compensatory and punitive damages. Defendant moved to claim certain property as exempt from Plaintiff's judgment on 9 June 2004. By order entered 16 July 2004, an assistant clerk of Robeson County Superior Court ordered that Defendant's two IRA accounts and other items not relevant to this appeal were exempt property and not subject to the 3 May 2004 judgment. Upon Plaintiff's motion, a writ of execution was issued 28 November 2005 by another assistant clerk of Robeson County Superior Court, which directed the Sheriff of Durham County to satisfy the 3 May 2004 judgment out of Defendant's personal and/or real property located in Durham County, including Defendant's two IRAs.¹ In response, Defendant filed a motion on 21 November 2007 to affirm exemption and vacate the 28 November 2005 writ of execution.

By order entered 21 July 2008, the trial court affirmed the 9 June 2004 motion to claim exempt property, stating:

By virtue of the Motion to Claim Exempt Property dated June 9, 2004 ... and the order thereon dated July 16, 2004 ..., the Subject IRAs were and are legally exempt from execution in this action, and [Defendant], subject to the other provisions in this order, retains the Subject IRAs free of the enforcement of the claims of [Plaintiff] in this action.

The trial court further declared the writ of execution and the accompanying levy against Defendant void, and it ordered Defendant's IRAs immediately released from any restrictions "placed thereon as a result of the Writ of Execution and Notice of Levy[.]" However, the trial court further ordered in relevant part that:

Should [D]efendant make any withdrawal of any funds from the Subject IRAs, the entire amount of said withdrawal shall immediately be placed in the trust account of his counsel, [or other authorized agent], and [the funds shall be administered] in accordance with the terms herein. Defendant or [Defendant's] counsel shall immediately thereafter give [P]laintiff's counsel notice of the withdrawal by the most expedient, verifiable means. Plaintiff shall then have five (5) business days from the date of such notification to file a motion or otherwise petition the Court to determine if the withdrawal funds are no longer exempt from execution.... If [P]laintiff timely makes such a motion or petition, the withdrawn funds shall remain in trust or escrow pending a determination of their exempt status, or until the parties mutually agree to release of such funds.

Both Plaintiff and Defendant appeal from the trial court's 21 July 2008 order.

I.

Defendant's sole argument on appeal is that the trial court erred by requiring Defendant to place any funds withdrawn in the future from his IRAs into escrow or other trust pending a determination by the trial court as to whether those funds retained their exempt status. We agree.

N.C. Gen.Stat. § 1C-1601 identifies property that is exempt from claims of creditors. The version of N.C. Gen.Stat. § 1C-1601 in effect for the relevant period states:

(a) Exempt property. Each individual, resident of this State, who is a debtor is entitled to retain free of the enforcement of the claims of creditors:

....

(9) Individual retirement plans as defined in the Internal Revenue Code and any plan treated in the same manner as an individual retirement plan under the Internal Revenue Code[.]

N.C. Gen.Stat. § 1C-1601(a)(9) (2005). Plaintiff admits that retirement plans as stated in N.C. Gen.Stat. § 1C-1601(a)(9). However, Plaintiff contends that N.C. Gen.Stat. § 1C-1601(a)(9) only applies to funds withdrawn after age 59 1/2, or pursuant to certain other limited exceptions. Plaintiff argues that if Defendant withdraws funds before age 59 1/2 and incurs a penalty for the withdrawal, because no exception applies, then Plaintiff should be able to access those funds to satisfy Plaintiff's judgment against Defendant. For this reason, Plaintiff argues that the trial court acted within its power by ordering that any funds withdrawn from Defendant's IRAs be held in escrow until a determination is made by the trial court as to whether the funds were withdrawn for proper purposes—i.e., purposes which would not incur any early withdrawal penalties.

Defendant argues that, because N.C. Gen.Stat. § 1C-1601(a)(9) exempts his IRAs from Plaintiff's judgment against him, Plaintiff is not entitled to any funds currently held in Defendant's IRAs, and the trial court erred in ordering a process to make a determination concerning whether Plaintiff is entitled, pursuant to the 3 May 2004 judgment, to any potential funds Defendant withdraws from his IRAs. This issue is one of first impression in this State.

Exemption statutes are to be interpreted liberally. Accordingly, based on: (1) the enactment of legislation in 1995 to protect a debtor's retirement income from the claims of creditors; ... and (4) the policy that exemption statutes are to be interpreted liberally, the Court concludes that the North Carolina General Assembly's purpose in enacting N.C. Gen.Stat. § 1C-1601(a)(9) was to protect a debtor's right to receive retirement benefits[.] Rather than give a blanket exemption to all "retirement" plans, the General Assembly limited the exemption to any retirement tool that was "treated in the same manner as an individual retirement plan under the Internal Revenue Code." In so doing, the General Assembly prohibited debtors from labeling an ordinary savings account as an individual retirement plan and thereby shielding that asset from the reach of creditors under the charade that the exemption statute applied.

In re Grubbs, 325 B.R. 151, 154-55 (Bankr. M.D.N.C.2005) (internal citation omitted); see also Elmwood v. Elmwood, 295 N.C. 168, 185, 244 S.E.2d 668, 678 (1978); In re Laughinghouse, 44 B.R. 789, 791 (Bankr.E.D.N.C. 1984) ("The courts have held that the exemption laws in North Carolina must be liberally construed in favor of the debtor."), Abrogated on different issue by In re Pinner, 146 B.R. 659 (Bankr.E.D.N.C.1992).

II.

In Rousey v. Jacoway, 544 U.S. 320, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005), the United States Supreme Court reasoned:

The statutes governing IRAs persuade us that [the petitioners'] right to payment from IRAs is causally connected to their age. Their right to receive payment of the entire balance is not in dispute. Because their accounts qualify as IRAs under 26 U.S.C. § 408(a) (2000 ed. and Supp. II) [26 U.S.C.S. § 408(a)], the [petitioners] have a nonforfeitable right to the balance held in those accounts, § 408(a)(4). That right is restricted by a 10-percent tax penalty that applies to withdrawals from IRAs made before the accountholder turns 59 1/2. Contrary to [the respondent's] contention, this tax penalty is substantial. The deterrent to early withdrawal it creates suggests that Congress designed it to preclude early access to IRAs. The low rates of early withdrawals are consistent with the notion that this penalty substantially deters early withdrawals from such accounts. Because the 10-percent penalty applies proportionally to any amounts withdrawn, it prevents access to the 10-percent that the [petitioners] would forfeit should they withdraw early, and thus it effectively prevents access to the entire balance in their IRAs. It therefore limits the [petitioners'] right to "payment" of the balance of their IRAs. And because this condition is removed when the accountholder turns age 59 1/2, the [petitioners'] right to the balance of their IRAs is a right to payment "on account of" age. The [petitioners] no more have an unrestricted right to payment of the balance in their IRAs than a contracting party has an unrestricted right to breach a contract simply because the price of doing so is the payment of damages.

Rousey, 544 U.S. at 327-28, 125 S.Ct. at 1566-67, 161 L.Ed.2d at 571-72 (footnotes omitted). Following the reasoning of Rousey, we hold that Defendant's right to withdraw funds from his IRAs is not "unrestricted," and thus his IRAs are not analogous to checking accounts or other non-restricted accounts. Grubbs, 325 B.R. at 155.

The statute pertaining to exemptions from judgments, N.C. Gen.Stat. § 1C-1601 (a)(9), references the Internal Revenue Code only as it pertains to the definition of retirement plans: "Individual retirement plans as defined in the Internal Revenue Code and any plan treated in the same manner as an individual retirement plan under the Internal Revenue Code[.]" There is no dispute that Defendant's IRAs fall within this definition. N.C. Gen.Stat. § 1C-1601(a)(9) does not indicate that any other provisions of federal law may be consulted in determining whether Defendant's IRAs, or the funds contained within, are exempt from Plaintiff's judgment. Defendant argues that only North Carolina law should apply. Plaintiff does not answer Defendant's argument on this point. We hold that, because N.C. Gen.Stat. § 1C-1601(a)(9) only references the Internal Revenue Code to clarify what retirement accounts are covered by the creditor exemption, North Carolina law governs the resolution of this issue. See In re Coppola, 419 F.3d 323, 329 (5th Cir.Tex.2005); In re Rayl, 299 B.R. 465, 467 (Bankr.S.D.Ohio 2003).

Because this is an issue of first impression, however, we look for guidance to decisions from other jurisdictions. In In re Brucher, 243...