No. 12-1241
(Consolidated with Case No. 12-1255)
_______________________________
IN THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
_______________________________
In re BRANDON C. CLARK and HEIDI K. HEFFRON-CLARK, Debtors
_____________________________________________________________
WILLIAM J. RAMEKER, TRUSTEE
Appellant-Trustee,
and
RESUL and ZINIJE ADILI, d/b/a KEGONSA PLAZA,
Appellant-Creditor
v.
BRANDON C. CLARK and HEIDI K. HEFFRON-CLARK,
Appellees.
____________________________________________________________________
Appeal from a Final Order of the United States District Court
for the Western District of Wisconsin
Case No. 11-C-482
Honorable Barbara B. Crabb
_____________________________________________________________________
Brief of Amicus Curiae, National Association of Bankruptcy Trustees,
In Support of Trustee-Appellant and Reversal
_____________________________________________________________________
David Leibowitz
Law Office of David Leibowitz LLC
420 W. Clayton Street
Waukegan, IL 60085-4216
(847) 249-9100
Jeffrey J. Cymrot
Sassoon & Cymrot, LLP
84 State Street, 8th Floor
Boston, MA 02109
(617) 720-0099
Donald R. Lassman
Law Offices of Donald R. Lassman
P.O. Box 920385
Needham, MA 02492
(781) 455-8400
Attorneys for the National Association
of Bankruptcy Trustees
DISCLOSURE STATEMENT PURSUANT TO
FEDERAL RULE OF APPELLATE PROCEDURE 26.1
1. The full name of every party that the attorneys represent in the case:
National Association of Bankruptcy Trustees
2. The names of all law firms whose partners or associates have appeared for
the amicus curiae in this case:
Sassoon & Cymrot, LLP
Law Offices of Donald R. Lassman
Law Offices of David P. Leibowitz LLC
3. If the party or amicus curiae is a corporation:
a. Identify amicus curiae’s parent corporation:
None.
b. List any publicly held company that owns 10% or more of the amicus
curiae’s stock:
None. National Association of Bankruptcy Trustees is a
nongovernmental corporate entity appearing as amicus curiae. It has
no parent corporation, nor does a publicly held corporation own more
than 10 per cent of its stock.
i
TABLE OF CONTENTS
DISCLOSURE STATEMENT PURSUANT TO FED. R. APP. P. 26.1…
…………………i
TABLE OF AUTHORITIES …………………………………………………………………ii
STATEMENT PURSUANT TO FED. R. APP. P. 29…
………..……………………………1
INTEREST OF NABT AS AMICUS CURIAE..…..……………..……… .. …………...…..1
SUMMARY OF ARGUMENT ....................................................................................... 2
ARGUMENT .................................................................................................................. 4
I. Introduction ............................................................................................................... 4
II. The Bankruptcy Court’s Plain Meaning Analysis and Resulting Decision were
Correct: “Retirement Funds” Has a Plain Meaning .............................................. ..6
A. The applicable rules of statutory construction instruct that the plain language
of 11 U.S.C. § 522(b)(3)(C)) governs.. ....................................................................... ..6
B. The bankruptcy court properly determined that “retirement fund” has a plain
meaning.. .................................................................................................................. ..7
C. The Supreme Court’s decisions in Hamilton v. Lanning and Ransom v. FIA
Card Servs. N.A., provide further support for the bankruptcy court’s analysis and
conclusion ................................................................................................................... .9
D. Analysis of relevant IRC provisions further supports the bankruptcy court’s
conclusion .................................................................................................................. 10
III. Congress Did Not Intend that an Inherited IRA Constitute a Retirement Fund
Entitled to Exemption Status Under § 522(b)(3)(C) and (d)(12). .......................... 13
IV. The District Court’s Textual Analysis of § 522(b)(3)(C) and (d)(12) Does Not Give
Meaning to All the Provisions’ Words and Terms. ................................................. 16
V. The Fifth Circuit’s Recent Chilton Decision Employs a Strained Statutory
Construction Analysis. ..................................................................... ………...…..19
CONCLUSION............................................................................................................. 20
……………………………..…22
Certificate of Compliance with Fed. R. App. P. 32(a)(7)…
Certificate of Service…………………..……………………………………..………………23
ii
TABLE OF AUTHORITIES
Cases
Bethlehem Steel Corp. v. Bush, 918 F.2d 1323 (7th Cir. 1990) ................................... 7
Boggs v. Boggs, 520 U.S. 833, 117 S.Ct. 1754 (1997) ................................................. 11
Chilton v. Moser (In re Chilton), No. 11-40377, slip op (5th Cir. March 12,
2012)……………………………………………………………………………………..17, 19
Clark v. Rameker, et al. (In re Clark), 2012 WL 233990 (W.D.Wis. Jan. 5,
2012)………………………………………………………………………………..…5, 15, 16
Consumer Product Safety Comm’n v. GTE Sylvania, Inc., 447 U.S. 102, 100 S.Ct.
2051, 64 L.Ed. 2d 766 (1980) ...................................................................................... 6
Guidry v. Sheet Metal Workers Nat. Pension Fund, 493 U.S. 365, 110 S.Ct. 680
(1990) ........................................................................................................................ 11
Hamilton v. Lanning, 560 U.S. ___, 130 S.Ct. 2464 (2010).......................................... 9
Illinois Dept. of Public Aid v. Sullivan, 919 F.2d 428 (7th Cir. 1990) ......................... 6
In re Carmichael, 100 F.3d 375 (5th Cir. 1996).......................................................... 12
In re Clark, 450 B.R. 858 (Bankr.W.D.Wisc. 2011) ................................................ 7, 10
In re Jarboe, 365 B.R. 717 (Bankr.S.D.Tex. 2007) ..................................................... 12
Interstate Commerce Com'n v. Mr. B's Services, Ltd., 934 F.2d 117 (7th Cir. 1991) . 7
Matter of Merchants Grain, Inc. By and Through Mahern, 93 F.3d 1347 (7th Cir.
1996) ........................................................................................................................ 3, 4
Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367, 127 S.Ct. 1105 (2007) ……..
........................................................................................................................... 6, 7, 16
Ransom v. FIA Card Servs., N.A., 562 U.S. ___, 131 S. Ct. 716 (2010) ……... 9, 10, 18
Rousey v. Jacoway, 544 U.S. 320, 325, 125 S.Ct. 1561 (2005) …….. ......................... 14
Schwab v. Reilly, 560 U.S. ___, 130 S. Ct. 2652, 2667 (2010) .............................. 14, 17
United States ex rel. Fowler v. Caremark RX, L.L.C., 496 F.3d 730 (7th Cir. 2007) . 7
iii
Statutes
11 U.S.C. § 522 .............................................................................................................. 6, 16, 17
11 U.S.C. § 522(b) ..................................................................................................................... 4
11 U.S.C. § 522(b)(2) ................................................................................................................. 4
11 U.S.C. § 522(b)(3) ................................................................................................................. 4
11 U.S.C. § 522(b)(3)(C) ........................................ 4, 5, 6, 7, 9, 10, 11, 14, 15, 16, 17, 18, 19, 20
11 U.S.C. § 522(b)(4)(C) ............................................................................................... 13, 19, 20
11 U.S.C. § 522(d) .............................................................................................................. 16, 17
11 U.S.C. § 522(d)(3)(C) ...........................................................................................................13
11 U.S.C. § 522(d)(12) ............................................................................ 6, 13, 14, 16, 17, 18, 20
11 U.S.C. § 522(n) ................................................................................................................6, 18
11 U.S.C. § 541(a) ..................................................................................................................... 4
11 U.S.C. § 541(a)(5)(A) ...........................................................................................................18
11 U.S.C. § 704(a)(1) ................................................................................................................. 4
11 U.S.C. § 707(b)(2)(A)(ii)(I) ............................................................................................ 11, 18
26 U.S.C. § 1 ............................................................................................................................. 3
26 U.S.C. § 401(a)(9)(B)(i) ........................................................................................................ 5
26 U.S.C. § 401(a)(9)(B)(ii) ....................................................................................................... 5
26 U.S.C. § 401(a)(9)(B)(iv) .....................................................................................................12
26 U.S.C. § 401(a)(9)(E) ............................................................................................................ 5
26 U.S.C. § 408 ......................................................................................................................... 8
26 U.S.C. § 408(a)(16) ............................................................................................................... 8
26 U.S.C. § 408(d)(1) ................................................................................................................. 5
26 U.S.C. § 408(d)(3) ............................................................................................................5, 12
26 U.S.C. § 408(d)(3)(C) ............................................................................................. 3, 8, 13, 14
26 U.S.C. § 408(d)(3)(C)(ii) ....................................................................................................... 5
iv
29 U.S.C. § 1001(a) ..................................................................................................................11
Other Authorities
4 Collier on Bankruptcy ¶ 522.10 (16th ed. rev. 2012) .............................................. 10
Internal Revenue Service, U.S. Dep’t of the Treasury, Pub. 590 (2011) ............. 11, 12
Retirement Definition, Merriam-Webster.com, http://www.merriam-webster.com/
dictionary/retirement (last visited Mar 27, 2012) ................................................... 12
Senate Report 93-383, 1974 U.S.C.C.A.N. 4889 ......................................................... 12
Webster's New Unabridged Dictionary (1989) ........................................................... 10
v
STATEMENT PURSUANT TO FEDERAL RULE
OF APPELLATE PROCEDURE 29
Amicus curiae’s counsel authored this brief in its entirety. No party’s counsel
authored this brief in whole or in part. No party or party’s counsel contributed
money that was intended to fund preparing or submitting this brief. No person,
other than the amicus curiae, its members, or its counsel, contributed money that
was intended to fund preparing or submitting this brief.
INTEREST OF THE NATIONAL ASSOCIATION
OF BANRKUPTCY TRUSTEES AS AMICUS CURIAE1
The National Association of Bankruptcy Trustees (“NABT”) is a non-profit
professional association formed in 1982 to address the needs of chapter 7
bankruptcy trustees throughout the country, and to promote the effectiveness of the
bankruptcy system as a whole. Trustee membership is open to any trustee serving
in a bankruptcy case, but NABT’s voting members are primarily chapter 7 panel
trustees. There are approximately 1,200 bankruptcy trustees currently receiving
new cases; approximately 900 of them are NABT members. Other persons
interested in the bankruptcy system may become non-voting members. Overall,
NABT has approximately 1,500 members.
Chapter 7 trustees’ participation in the federal bankruptcy system, and
specifically performance of their duties under 11 U.S.C. § 704, serves two
fundamental polices underlying the Bankruptcy Code: providing honest debtors a
1
All parties to this appeal have consented to the filing of amicus curiae briefs.
1
fresh start and liquidating non-exempt assets in order to equitably distribute these
proceeds among the debtor’s unsecured creditors. This appeal is important to
trustees because allowing a claim of exemption in an Inherited IRA does not give
debtors a fresh start, but rather provides debtors with an unintended free pass.
Upholding such a claim likewise defeats creditors’ rights to an equitable
distribution from this potentially significant asset, which does not support the
debtor or the debtor’s spouse and dependents in retirement, as contemplated by the
Code’s exemption scheme. Over the past several years, this issue has been litigated
in the bankruptcy and appellate courts in various jurisdictions, and therefore raises
a significant issue of national importance to trustees.
The NABT respectfully submits this brief as amicus curiae, in support of
Appellant-Trustee, William Rameker, seeking reversal of the district court’s
decision which overturned the bankruptcy court’s order sustaining the trustee’s
objection and disallowing the debtor’s claim of exemption in an Inherited IRA. The
Board of Directors of NABT has authorized this submission.
SUMMARY OF ARGUMENT
A person plans for the time she leaves employment or an occupation by holding
and accumulating retirement funds in various combinations for herself, her spouse,
her dependents, and her beneficiaries. This appeal addresses one such
circumstance: where a mother saves funds for her own retirement in an Individual
Retirement Account (“IRA”), names her adult daughter as beneficiary, and after the
2
mother’s death, with these substantial funds on-hand, the daughter seeks a
bankruptcy discharge while claiming these unrestricted funds exempt.
A decedent’s funds, held in an IRA at the time of death, must be transferred to a
new segregated account established by the decedent’s beneficiary. Applicable tax
law permits a non-spouse recipient to spread the distribution of the funds over time
and to pay taxes on the funds as they are withdrawn over a period of years. The
period during which withdrawal must occur is not based upon the retirement status
of the non-spouse beneficiary.
Funds transferred to a non-spouse beneficiary by virtue of the account holder’s
death lose their fundamental character as retirement funds. The Internal Revenue
Code (“IRC”)2 permits such funds to be maintained in what is specifically termed
and defined in the IRC as an “Inherited Individual Retirement Account” (“Inherited
IRA”).3 IRC rules governing Inherited IRAs require that some distributions from an
Inherited IRA begin immediately, and that additions to such accounts and “rollover”
of such funds into an ordinary IRA are prohibited.
An Inherited IRA is a creature of the IRC, specially devised to grant favorable
tax treatment to a gift of funds accumulated by a donor anticipating her own
retirement. After the donor’s death and transfer to a non-spouse beneficiary, the
resulting Inherited IRA contains proceeds or funds not intended for the beneficiary’s
2
3
26 U.S.C. § 1, et seq.
26 U.S.C. § 408(d)(3)(C)
3
retirement. Thus, such funds do not constitute retirement funds and cannot attain
exempt status as “retirement funds,” as that term is ascribed its ordinary meaning
under 11 U.S.C. § 522(b)(3)(C).4
ARGUMENT
I.
Introduction
A debtor commencing a bankruptcy case creates an estate comprising of “all
legal or equitable interests of the debtor in property as of the commencement of the
case.” 11 U.S.C. § 541(a). Such interests extend to all property “wherever located
and by whomever held.” Id. An individual debtor typically claims exemptions in this
estate property, seeking to exclude it from property of the estate and protect it from
liquidation by the trustee. See 11 U.S.C. § 704(a)(1); § 522 (b). A debtor may elect to
take exemptions under the federal scheme in § 522(b)(2), unless applicable state law
prohibits such an election. 11 U.S.C. § 522(b)(2). Alternatively, a debtor may elect
the applicable state’s exemptions pursuant to § 522(b)(3) of the Bankruptcy Code.
11 U.S.C. § 522(b)(3). This appeal involves the debtor’s election and application of
the retirement exemption provided in § 522(b)(3)(C).
At issue in this appeal is whether monies the debtor holds in an Inherited IRA
as a result of her mother’s death are exempt from the bankruptcy estate under
Unless otherwise specified, all statutory references are to Title 11 of the United
States Code, 11 U.S.C. § 101, et seq., hereinafter “Code” or “Bankruptcy Code.”
4
4
§ 522(b)(3)(C).5 The debtor’s mother established an IRA for her own continued
support upon retirement; ownership transferred to the debtor as beneficiary upon
the mother’s death in 2001; and the account became an Inherited IRA upon timely
transfer. See Clark v. Rameker (In re Clark), 2012 WL 233990 at *6 (W.D. Wis. Jan.
5, 2012). Beginning in 2002, the debtor and her husband took monthly distributions
from the Inherited IRA. Id. The debtor commenced a chapter 7 case in 2010. Id. at
*3.
These Inherited IRA funds were proceeds traceable to the monies previously
held by the debtor’s mother in the mother’s IRA. The debtor claimed such property
as exempt under Code § 522(b)(3)(C), a provision that exempts:
[r]etirement 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.
Monies contributed to and earned on investments in individual retirement
accounts are excluded from income taxation when earned. Taxation is delayed until
withdrawal. 26 U.S.C. § 408(d)(1). When the owner of an IRA dies with funds still in
the IRA, those funds become the property of a beneficiary designated by the
deceased owner. 26 U.S.C. § 401(a)(9)(E). In general, the beneficiary may “rollover”
the funds assigned to him into a new account. 26 U.S.C. § 408(d)(3). However,
special statutory rules apply where there are non-spouse beneficiaries; under 26
U.S.C. § 408(d)(3)(C)(ii), these new accounts are referred to as “inherited individual
retirement accounts.” Distributions from such accounts are treated differently, and
must be made in accordance with the plan of distribution in place when the original
owner died if distributions had commenced, or within five years if they had not. 26
U.S.C. § 401(a)(9)(B)(i) and (ii).
5
5
11 U.S.C. § 522(b)(3)(C). The federal retirement fund exemption at Code
§ 522(d)(12) contains identical language. 11 U.S.C. § 522(d)(12). See also § 522(n)
(placing monetary limits on claims of exemptions in IRAs).
The bankruptcy court determined there was a plain, unambiguous meaning for
the term “retirement funds,” as used in § 522 of the Code; whereas the district court
deemed the term ambiguous. The trustee argued that an Inherited IRA does not
constitute a debtor's retirement funds, or any living person’s retirement funds,
because its substantive attributes render it something else. The debtor countered,
observing that her mother’s IRA contained retirement funds, and that postmortem,
her Inherited IRA still contained retirement funds since § 522(b)(3)(C) does not
specify whose retirement funds a debtor may exempt.
II. The Bankruptcy Court’s Plain Meaning Analysis and Resulting Decision were
Correct: “Retirement Fund” Has a Plain Meaning.
A. The applicable rules of statutory construction instruct that the plain language
of 11 U.S.C. § 522(b)(3)(C)) governs.
In examining the statutory construction of Bankruptcy Code provisions, the goal
“is to discern the will of Congress and to apply it to the particular facts of the case.”
Illinois Dept. of Pub. Aid v. Sullivan, 919 F.2d 428, 431 (7th Cir. 1990). “[T]he
starting point for interpreting a statute is the language of the statute itself.” Matter
of Merchs. Grain, Inc. by and through Mahern, 93 F.3d 1347, 1353 (7th Cir. 1996),
quoting Consumer Prod. Safety Comm’n v. GTE Sylvania, Inc., 447 U.S. 102, 108,
100 S.Ct. 2051, 2056 (1980). If the text is unambiguous, the court should apply the
6
statutory language as read; when the statutory language is ambiguous, however,
the court should look to congressional intent when it adopted the provision. United
States ex rel. Fowler v. Caremark RX, L.L.C., 496 F.3d 730, 738 (7th Cir. 2007)
(statute needs interpretation only when ambiguous; otherwise, the statute’s plain
language governs); Interstate Commerce Comm'n v. Mr. B's Servs., Ltd.,
934 F.2d 117 (7th Cir. 1991); Bethlehem Steel Corp. v. Bush, 918 F.2d 1323, 1326
(7th Cir. 1990).
The Seventh Circuit Court of Appeals follows established rules of statutory
construction.
[A]bsent statutory definitions, we accord words and phrases their ordinary
and natural meaning and avoid rendering them meaningless, redundant,
or superfluous; we view words not in isolation but in the context of the
terms that surround them; we likewise construe statutes in the context of
the entire statutory scheme and avoid rendering statutory provisions
ambiguous, extraneous, or redundant; we favor the more reasonable
result; and we avoid construing statutes contrary to the clear intent of the
statutory scheme.
Matter of Merchs. Grain, 93 F.3d 1347, 1353-1354 (internal citations omitted).
B. The bankruptcy court properly determined that “retirement fund” has a plain
meaning.
After consulting a dictionary definition, the bankruptcy court determined that to
qualify for exemption under § 522(b)(3)(C), a debtor must hold retirement funds
anticipating withdrawing from her position or occupation, but that in this case “the
debtor’s Inherited IRA does not contain anyone’s ‘retirement funds.’” In re Clark,
450 B.R. 858, 863 (Bankr. W.D. Wis. 2011) (emphasis in original). According to the
7
bankruptcy court, the IRA’s character as a retirement fund ceased upon death of the
debtor’s mother.
In arriving at its conclusion, the bankruptcy court examined the policies
Congress sought to advance when it enacted IRC provisions governing Inherited
IRAs:
Congress sought to eliminate the adverse tax treatment to a nonspouse
beneficiary that occurred when a beneficiary received a lump sum
distribution from a decedent's IRA creating an immediate taxable event
on the entire amount distributed. From this reasoning came Congress'
broad endorsement of “inherited IRAs” as a means of deferring the tax
owed on the proceeds of a decedent's IRA over the life of the beneficiary.
In enacting this policy Congress set forth various rules to ensure the
holder of an “inherited IRA” was not treated the same as a holder of an
IRA. See 26 U.S.C. § 408(d)(3)(C). For example, a holder of an “inherited
IRA” cannot make contributions to the account, cannot roll the funds in
the account over to their own IRA, and must begin taking monthly
distributions immediately, regardless of age or employment status, from
the account in accordance with the IRS distribution guidelines. See 26
U.S.C. § 408(d)(3)(C); see 26 U.S.C. § 408(a)(6). This treatment is different
for a holder of an IRA, who cannot withdraw, without penalty, funds from
their account prior to a designated retirement age, and who can make tax
deferred contributions to their account for purposes of saving for their
retirement. 26 U.S.C. § 408. In light of these differences, it is clear that
Congress did not intend for “inherited IRAs” to serve as “retirement
accounts,” but rather to serve as a conduit that allows beneficiaries to
defer but not avoid income tax on the distributions from an IRA that they
inherit.
Id. at 864 (internal citations omitted).
Because the funds in the debtor’s hands no longer qualified as retirement funds,
as determined by plain meaning analysis and the IRC’s Inherited IRA provisions,
the bankruptcy court sustained the trustee’s objection to the debtor’s claim of
exemption. The bankruptcy court correctly answered the fundamental issue of this
8
appeal: Whose retirement funds does the exemption statute protect? It did so by
properly limiting protected funds to persons holding and contributing to such
accounts for the purpose of their own retirement. Id. (debtor must hold funds
anticipating withdrawing from her position or occupation in the future for funds to
qualify as exempt under § 522(b)(3)(C)).
C. The Supreme Court’s decisions in Hamilton v. Lanning and Ransom v. FIA
Card Servs., N.A., provide further support for the bankruptcy court’s analysis
and conclusion.
The Supreme Court instructs that when interpreting Bankruptcy Code
provisions, courts should consider the structure and purposes of the Code. See
Ransom v. FIA Card Servs., N.A., 562 U.S. ___, 131 S. Ct. 716 (2010); Hamilton v.
Lanning, 560 U.S. ___ , 130 S. Ct. 2464 (2010). In these cases, the Supreme Court
expressed the importance of relying on the “text, context, and purposes” of the Code.
Ransom v. FIA Card Servs., N.A., 131 S. Ct. at 716, 726. The Supreme Court
further opined that “[w]hen terms used in a statute are undefined, we give them
their ordinary meaning.” Hamilton v. Lanning, 130 S.Ct. 2464, 2471; Ransom v. FIA
Card Servs., N.A., 131 S. Ct. at 724.
Inasmuch as the term “retirement fund” is undefined in § 522, or elsewhere in
the Code, courts must import the ordinary meaning of the term “retirement” for its
analysis. Id. The ordinary, dictionary meaning of the adjective retirement is: “of,
relating to, or designed for retired persons.” Merriam-Webster Dictionary
9
http://www.merriam-webster.com/dictionary/retirement.6 Therefore, similar to the
bankruptcy court’s reasoning, the debtor does not hold funds for her retirement, or
anyone else’s, because once inherited, these funds were no longer funds “of, relating
to, or designed for [a] retired person,” as they had been in the hands of her mother.
The plain meaning of “retirement funds” applied by the bankruptcy court
comports with the context of the Code’s underlying dual policies of a fresh start for
debtors and an equitable distribution of non-exempt property for creditors. The
purpose of § 522(b)(3)(C) is to protect the debtor’s fresh start by securing funds
needed for the debtor’s retirement. See 4 Collier on Bankruptcy ¶ 522.10 (16th ed.
rev. 2012). The bankruptcy court properly employed the ordinary meaning of the
term “retirement funds” in deciding that a debtor must hold such funds in
anticipation of withdrawing from her position or occupation, and that in the case
before it, “the debtor’s Inherited IRA does not contain anyone’s ‘retirement funds.’”
In re Clark, 450 B.R. at 863. (emphasis in original).
D. Analysis of relevant IRC provisions further supports the bankruptcy court’s
conclusion.
A review of the relevant IRC provisions relating to Inherited IRAs further
supports the bankruptcy court’s decision. Cf. Ransom v. FIA Card Servs., N.A.,
131 S. Ct. at 725 (looking to Internal Revenue Manual and IRS Revenue Collection
The noun “retirement” is defined as “the act of retiring or condition of being
retired.” Webster’s New Unabridged Dictionary (1989).
6
10
Financial Standards to interpret meaning of phrase “applicable monthly expense
amounts” in § 707(b)(2)(A)(ii)(I)).
Congress, through the IRC, prescribed a set of rules for Inherited IRAs: one
applicable to spouses and an alternate for non-spouse beneficiaries. Internal
Revenue Service, U.S. Dept. of Treasury, Publication 590: Individual Retirement
Arrangements (IRAs), p. 16. The spouse-beneficiary has the option of treating the
funds as her own by naming herself as the IRA account owner, or rolling over the
funds into her existing IRA. See id. Conversely, the non-spouse beneficiary can only
liquidate the funds or withdraw them under a prescribed distribution plan. See id.
In this regard, the non-spouse beneficiary can neither succeed to the decedent’s
retirement account nor incorporate the funds into her existing retirement plan.
Moreover, the fund is unrestricted and the non-spouse beneficiary may immediately
liquidate and utilize the funds for any purpose. In this regard, it would not serve
the Code’s exemption and fresh start policies to overlook these deficiencies in a nonspouse beneficiary’s status and make them whole for § 522(b)(3)(C) purposes.
Congress, when it enacted the Employee Retirement Security Act of 1974
(“ERISA”), found that “the continued well-being and retirement income security of
millions of workers, retirees, and their dependents are directly affected by [singleemployer defined benefit pension plans].” 29 U.S.C. § 1001(a). ERISA’s principal
object, therefore, “. . . is to protect plan participants and beneficiaries.”Boggs v.
Boggs, 520 U.S. 833, 845, 117 S.Ct. 1754(1997). See Guidry v. Sheet Metal Workers
11
Nat.’l Pension Fund, 493 U.S. 365, 376, 110 S.Ct. 680, 687 (1990) (noting ERISA’s
anti-alienation statute, 29 U.S.C. § 1056(d)(1), prevents assigning or alienating
pension benefits due to a union official who embezzled funds and reflects “a
considered congressional policy choice, a decision to safeguard a stream of income
for pensioners (and their dependents who may be, and perhaps usually are,
blameless)”). Congress’s policy concern regarding “retirement funds” extends beyond
an employed person to her beneficiaries, which may include a spouse or dependents.
IRAs function as “substitutes for future earnings in that they are designed to
provide retirement benefits to individuals.” In re Carmichael, 100 F.3d 375, 378
(5th Cir. 1996). IRAs began as a substitute retirement savings vehicle for selfemployed persons without the option to participate in a qualified plan. See S. Rep.
No. 93-383, reprinted in 1974 U.S.C.C.A.N. 4889, 5013 -14. IRAs have since become
“a sort of universal conductor through which transfers must pass if they are to avoid
the rocks and shoals of inadvertent taxable events.” In re Carmichael, 100 F.3d at
378.
IRAs initiated by one spouse may augment the retirement funds set aside by the
surviving spouse. A surviving spouse named as beneficiary of an IRA, in general,
has three options: (1) treat the IRA as her own, with an option to roll it over to
herself; (2) treat herself as the IRA’s beneficiary; or (3) disclaim the IRA entirely.
26 U.S.C. § 401(a)(9)(B)(iv); 26 U.S.C. §408(d)(3); Internal Revenue Service, U.S.
Dep’t of the Treasury, Pub. 590 at pp. 16-17 (2011). See also In re Jarboe, 365 B.R.
12
717, 720, n.5 (Bankr. S.D. Tex. 2007). Aside from allowing the recipient to disclaim
the IRA, the IRC provides no comparable options to non-spouse beneficiaries; it
specifically excludes Inherited IRAs from rollover eligibility. 26 U.S.C.
§ 408(d)(3)(C).
Section 522(b)(4)(C) protects transfers from one tax-exempt retirement fund or
account to another. 11 U.S.C. § 522(b)(4)(C). It provides that “a direct transfer of
retirement funds from 1 fund or account that is exempt from taxation under section
. . . 408 . . . of the [IRC] . . . shall not cease to qualify for exemption under
[§ 522(d)(3)(C) or (d)(12)] by reason of such direct transfer.” Id. It follows that
§ 522(d)(3)(C) protects more than a future retiree’s right to her retirement funds; it
may also protect a beneficiary’s right to the future retiree’s retirement funds. It
does not follow, however, that § 522(d)(3)(C) protects a beneficiary’s right to a future
retiree’s retirement funds in all instances. Importantly, the provision only applies
when “retirement funds” are transferred.
Death of the holder and contributor marks the end of an IRA’s status as a
retirement fund for the decedent. While death of the holder and contributor may not
mark the end of an IRA’s status as a retirement fund for the surviving spouse, as to
a surviving non-spouse there is no doubt: once successfully transferred to a nonspouse beneficiary, the resulting Inherited IRA is not a retirement fund in any plain
sense, nor is it a retirement fund under the IRC.
13
III. Congress Did Not Intend that an Inherited IRA Constitute a Retirement Fund
Entitled to Exemption Status Under § 522(b)(3)(C) and (d)(12).
“Exemptions in bankruptcy cases are part and parcel of the fundamental
bankruptcy concept of a ‘fresh start.’” Rousey v. Jacoway, 544 U.S. 320, 325, 125
S.Ct. 1561 (2005); see also Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367,
127 S.Ct. 1105 (2007). The language of § 522(b)(3)(C) and (d)(12) does not manifest
a policy to give honest debtors a fresh start where the debtor’s account is an
Inherited IRA, which can be liquidated immediately for any purpose and is not for
the debtor’s retirement.
There is no reason to believe that Congress intended to include an Inherited IRA
in an honest debtor’s fresh start. A debtor with an Inherited IRA is neither the
account owner’s surviving spouse nor, in most instances, the account owner’s
surviving dependent.7 Since IRAs are substitutes for future earnings designed to
provide retirement benefits to individuals, a debtor who owns an Inherited IRA does
not own a retirement benefit or retirement account; she owns a beneficial gift from
someone who established the IRA for retirement but passed away before exhausting
such funds and named the debtor as beneficiary. To allow an exemption in such
cases would turn fresh starts into free passes. Cf. Schwab v. Reilly, 560 U.S. __,
By statute an Inherited IRA is transferred from a donor on her death to a nonspouse beneficiary. 26 U.S.C. § 408(d)(3)(C). A beneficiary could be a surviving
dependent, but that is not the case here. In any event, the same analysis should
apply.
7
14
130 S. Ct. 2652, 2667 (2010) (criticizing debtor’s fresh start policy argument, stating
debtor’s “approach threatens to convert a fresh start into a free pass”). Here, if the
district court’s decision is upheld, the debtor will walk away with approximately
$200,000 in funds, unencumbered by any ordinary retirement account strictures.
This is not what Congress intended when enacting the retirement account
exemption provisions.
The debtor is not the person who contributed to and held the IRA anticipating
retirement, nor was the debtor that person’s spouse or dependent. The debtor is
merely the beneficiary of tax-exempt funds the donor accumulated for her own
retirement and could have bestowed on anyone with a change in the IRA’s
beneficiary designation. Therefore, the Inherited IRA at issue in this appeal does
not contain “retirement funds” as § 522(b)(3)(C) intends such term.
In its decision, the district court recognized that its ruling could lead to
“incongruous” results, noting there was reason to question why a debtor who
obtained an inheritance in the form of an IRA could exempt it while a debtor whose
inheritance was in the form of gold bullion or stock could not. In re Clark, 2012 WL
233990 at *7. The district court leaves this result for Congress to remedy, but the
incongruity poses a statutory construction issue that the interpretation advanced
here would remedy, rather than a policy consideration calling for remedial
legislation. As this Court has opined, statutory construction should "favor the more
reasonable result; and [ ] avoid construing statutes contrary to the clear intent of
15
the statutory scheme.” Matter of Merchs. Grain, 93 F.3d 1347, 1353-1354 (internal
citations omitted).
IV. The District Court’s Textual Analysis of § 522(b)(3)(C) and (d)(12) Does Not Give
Meaning to All the Provisions’ Words and Terms.
To qualify for exemption under either § 522(b)(3)(C) or § 522(d)(12), federal
courts have held that an Inherited IRA must meet two criteria: (1) the property
interest must be a retirement fund; and (2) the property interest must be found in a
fund or account exempt from tax under one of seven enumerated provisions in the
IRC. The district court adopted this analysis. See In re Clark, 2012 WL 233990 at
*6 (“Section 522(d)(12) requires both that the funds in question be retirement funds
and that they be in an account that is exempt from tax after they have been
transferred.”)
The district court framed the issue as whether “retirement funds held in a
traditional IRA lose their character upon the death of the account owner before the
funds pass to a non-spouse beneficiary.” Id. at *5. The court determined that § 522
provided no assistance because the undefined term “retirement funds” carries an
uncertain meaning. Id. (“[t]he statute is not clear, or plain, on this point”). The
district court resolved this perceived ambiguity by examining the other subsections
in § 522(d). In every instance, save subsection (d)(12), § 522(d) refers to a debtor’s
interest in, or a debtor’s right to receive, a property interest.
[I]t is fair to infer that words excluded from a statute are excluded for a
purpose. It is a particularly persuasive inference to draw in this instance,
where the drafter omitted the same phrase [i.e., the debtor’s] from two
16
statutes, subsection (C) of § 522(b)(3) and subsection (12) of § 522(d). The
omission is particularly noteworthy in § 522(d), which has 11 other
subsections, all of which contain a specific reference to the ‘debtor’s
interest’ in certain property or ‘the debtor’s right’ to property.
Id. at *6.
The district court resolved the ambiguity by distinguishing the subject
provisions from those limiting exemptions to a “debtor’s interest,” holding that § 522
(b)(3)(C) has no such limitation and therefore permits a non-spouse to exempt an
Inherited IRA. Id. at *7. The district court’s decision aligns with the decisions
reached by most courts that have construed § 522(b)(3)(C) and (d)(12), including,
most recently, the Fifth Circuit Court of Appeals in Chilton v. Moser (In re Chilton),
No. 11-40377, slip op (5th Cir. Mar. 12, 2012) (citing cases).
The district court’s observation that § 522(d)(12) is unique because it omits the
terms “debtor’s interest” or “debtor’s right” does not advance this Court’s efforts to
interpret § 522(b)(3)(C) and (d)(12). No one disputes that an Inherited IRA
constitutes estate property or that a debtor’s exemption claim cannot exceed her
interest in such property. The issue is whether a debtor can exempt her Inherited
IRA, which turns on whether that Inherited IRA constitutes a retirement fund, not
whether the debtor has an interest in or a right to such an account. Moreover,
§ 522’s language regarding exempting a “debtor’s interest” in property up to a
certain value, as opposed to a debtor’s right to an “in-kind” exemption in the
property itself, is included for the purpose of distinguishing between exemptions
that are capped and those that exempt the property per se. See Schwab v. Reilly,
17
560 U.S. at ___, 130 S. Ct. at 2662. Regarding the case at hand, there is no question
that a retirement fund is fully exempt, subject to the express limitations set forth in
Code § 522(n).
If the drafters of these Code provisions intended a tax-exempt account, built-up
by a decedent for retirement but then transferred to a non-spouse beneficiary upon
death, to be exempt, they could have manifested such intent by wording the statute
with certainty. Legislative drafters could have included in § 522(b)(3)(C) and (d)(12)
a specific reference to Inherited IRAs, but they did not.8 Had the drafters intended
no distinction between tax-exempt funds that are also exempt from the bankruptcy
estate, they could have eliminated the word “retirement” in § 522(b)(3)(C) and
(d)(12) to allow these subsections to exempt any “funds to the extent that those
funds are in a fund or account that is exempt from taxation.” Despite the ability and
opportunity to have done so, Congress did not include Inherited IRAs – nonretirement accounts specially defined under the IRC for the sole purpose of
affording these account holders tax-exempt treatment – in these exemption
provisions. Congressional intent is therefore manifest by exclusion of Inherited
IRAs from § 522(b)(3)(C) and (d)(12). Cf. Ransom v. FIA Card Services, N.A.,
Congressional drafters’ mindfulness of inherited property in bankruptcy cases is
manifested in the provision making property inherited by a debtor within 180 days
of the filing of a bankruptcy petition estate property. 11 U.S.C. § 541(a)(5)(A).
8
18
131 S.Ct. at 724 (Congress could have omitted the term “applicable” from
§ 707(b)(2)(A)(ii)(I) if it intended a different result).
The district court’s determination that the Bankruptcy Code does not
distinguish between an Inherited IRA and a debtor-funded IRA renders the term
“retirement” meaningless. The district court’s statutory construction thus violates
common principals of statutory construction because it does not give effect to all
words and terms in § 522(b)(3)(C).
V. The Fifth Circuit’s Recent Chilton Decision Employs a Strained Statutory
Construction Analysis.
In In re Chilton, the Fifth Circuit Court of Appeals found a plain meaning in
§ 522(d)(12):
The plain meaning of the statutory language refers to money that was “set
apart” for retirement. Thus the defining characteristic of “retirement
funds” is the purpose they are “set apart” for, not what happens after they
are “set apart.”
In re Chilton, slip op. at *5. The Fifth Circuit found support in § 522(b)(4)(C), which
in its view provides that a “direct transfer of ‘retirement funds’ does not alter their
status as ‘retirement funds.’” Id. Finding no cause to interpret the statutory
language differently from the plain meaning it assigned, the court held that an
Inherited IRA contains “retirement funds” as the phrase is used in § 522(b)(3)(C).
While the Fifth Circuit Court of Appeals and the bankruptcy court both found
plain meaning in the term “retirement funds,” they reached opposite conclusions
about what that meaning was. The Fifth Circuit, through its analysis, determined
19
that the defining characteristic of retirement funds does not change when
transferred into an Inherited IRA. The bankruptcy court, in this case, interpreted
the plain meaning otherwise, observing that only the person holding and
contributing to an IRA can hold such funds for the purpose of retirement.
The exemption provisions at issue, § 522(d)(3)(C), (d)(4)(C), and (d)(12), exempt
retirement funds, not funds. Because the recipient of an Inherited IRA receives
funds from her deceased donor, without any distribution restrictions relating to her
retirement,9 she does not receive “retirement funds.” The Fifth Circuit’s statutory
construction likewise violates common principals of statutory construction. It does
not give effect to all words and terms in § 522(b)(3)(C).
CONCLUSION
For the reasons cited herein, Amicus Curiae, the National Association of
Bankruptcy Trustees, respectfully requests that the district court’s decision be
reversed and the bankruptcy court’s order reinstated and affirmed.
Any restrictions regarding distributions under an Inherited IRA are for the sole
purpose of enabling the account holder to obtain favorable tax treatment specially
designed for such non-spouse beneficiary.
9
20
Respectfully submitted,
National Association of
Bankruptcy Trustees,
By its counsel,
/s/Jeffrey J. Cymrot
Jeffrey J. Cymrot
Sassoon & Cymrot, LLP
84 State Street
Boston, MA 02109
(617) 720-0099
/s/ Donald R. Lassman
Donald R. Lassman
Law Offices of Donald R. Lassman
P.O. Box 920385
Needham, MA 02492
(781) 455-8400
/s/ David Leibowitz
Law Office of David Leibowitz LLC
420 W. Clayton Street
Waukegan, IL 60085-4216
(847) 249-9100
21
CERTIFICATE OF COMPLIANCE WITH FED. R. APP. P. 32(A)(7)
Certificate of Compliance with Type-Volume Limitation,
Typeface Requirements, and Type Style Requirements
1. This brief complies with the type-volume limitation of Fed. R. App. P. 32(a)(7)(B)
because:
this brief contains 5,148 words, excluding the parts of the brief exempted by Fed. R. App.
P. 32(a)(7)(B)(iii).
2. This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and
the type style requirements of Fed. R. App. P. 32(a)(6) because:
this brief has been prepared in a proportionally spaced typeface using Microsoft
Word 2007 in 12 point Century font. Footnotes were also set in 12 point Century
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/s/ David P. Leibowitz
Attorney for Amicus Curiae
National Association of Bankruptcy Trustees
22
CERTIFICATE OF SERVICE
I hereby certify that on March ____, 2012, I electronically filed the foregoing
document with the United States Court of Appeals for the Seventh Circuit using the
CM/ECF system. I certify that the following parties or their counsel of record are
registered as ECF Filers and that they will be served by the CM/ECF system:
Denis Bartel
Roger Sage
Signed under penalties of perjury on March ____, 2012.
/s/ David P. Leibowitz
Attorney for Amicus Curiae
National Association of Bankruptcy Trustees
23