Carmichael v. Osherow , 100 F.3d 375 ( 1996 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
________________________
No. 96-50013
________________________
IN THE MATTER OF DOUGLAS A. CARMICHAEL,
Debtor-Appellant
versus
RANDOLPH N. OSHEROW, TRUSTEE,
Appellee
________________________________________________
Appeal from the United States District Court
for the Western District of Texas
_________________________________________________
November 13, 1996
Before DAVIS, SMITH, and WIENER, Circuit Judges.
WIENER, Circuit Judge:
In this bankruptcy case, Debtor-Appellant Douglas Carmichael
(Debtor) appeals the decision of the district court affirming the
bankruptcy court’s order that granted Bankruptcy Trustee-Appellee
Randolph N. Osherow’s (Trustee) objection to exemption of Debtor’s
individual retirement account (IRA) from his bankruptcy estate
(estate). The issue to be decided is whether an IRA that--as all
IRAs must--gives the owner the right to receive payments after
attaining age 59-1/2, but also allows receipt of payments prior to
attaining that age upon payment of a penalty tax, is exempt from
the bankruptcy estate under §522(d)(10)(E) of the Bankruptcy Code
(Code). Concluding that IRAs are exempt under the applicable
provision,1 we reverse and render.2
I.
FACTS AND PROCEEDINGS
Debtor, an independent emergency room physician who was
diagnosed in 1995 with Multiple Sclerosis and Retinitis Pigmentosa,
a degenerative eye disorder, had established an IRA in 1991 as his
primary source of retirement funds. Provisions of the Internal
Revenue Code (IRC) permit Debtor to begin withdrawing funds from
the IRA when he attains age 59-1/2. Typically, the IRA contains no
anti-alienation provision, so Debtor may withdraw funds before
attaining that age if he pays a statutory 10% penalty tax3 and
gives written notice to the custodian as specified in the custodial
agreement.
In February 1995, Debtor filed for relief under Chapter 7 of
the Code, and the Trustee was appointed to administer the estate.
Debtor elected the federal exemptions and, pursuant to 11 U.S.C.
§522(d)(10)(E), listed as exempt from the estate the $16,323.49
held in his IRA. The Trustee filed an objection to Debtor’s
exemption, and the bankruptcy court held that Debtor’s IRA was not
exempt from the estate under 11 U.S.C. §522(d)(10)(E). The
1
The following analysis may not be applicable to some
specially tailored IRAs.
2
The finding by the bankruptcy court that the full amount of
the IRA was reasonably necessary for the support of Debtor and his
dependents was neither appealed by Trustee nor found to be clearly
erroneous by this court. Consequently, the full amount of the IRA
is exempt.
3
26 U.S.C. §72(q) (1994).
2
district court affirmed the decision of the bankruptcy court, and
Debtor timely appealed.
II.
ANALYSIS
A. STANDARD OF REVIEW
The exemption question presented here is purely an issue of
law, which we review de novo.4
B. APPLICABLE LAW
The broad language of the Code provides that the estate of the
debtor includes “all legal or equitable interests of the debtor in
property as of the commencement of the case.”5 Property initially
included in the estate may be excluded subsequently, however,
pursuant to the exemption in §522. More specifically pertinent to
our inquiry, §522(d)(10)(E) provides as follows:
(d) The following property may be exempted under section
(b)(1) of this section: . . .
(10) The debtor’s right to receive . . .
(E) a payment under a stock bonus,
pension, profitsharing, 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, unless-
(i) such plan or contract was
established by or under the auspices
of an insider that employed the
debtor at the time the debtor’s
rights under such plan or contract
arose;
(ii) such payment is on account
of age or length of service; and
(iii) such plan or contract
4
Bridges v. City of Bossier, 92 F.3d 329 (5th Cir. 1996).
5
11 U.S.C. §541(a)(1) (1994).
3
does not qualify under section
401(a), 403(a), 403(b), or 408 of
the Internal Revenue Code of 1986.
The focus of our inquiry, one which heretofore has not been decided
by this court, is whether an IRA qualifies for the §522(d)(10)(E)
exemption.6
C. SIMILAR PLAN OR CONTRACT
To qualify for the exemption under §522(d)(10)(E), the
interest in question must be “the debtor’s right to receive a
payment under a stock bonus, pension, profitsharing, annuity, or
similar plan or contract.”7 Thus it is not the plan or contract
that either is or is not exempt, but the right to receive a payment
from a plan or contract (if qualified under §522(d)(10)(E)) that
will enjoy exemption. An IRA is not a stock bonus, pension,
profitsharing, or annuity plan or contract; therefore, to qualify
for the exemption, an IRA must be a “similar plan or contract.” We
hold that for purposes of §522(d)(10)(E), an IRA is a “similar plan
or contract.”
First, the four types of plans or contracts that are listed by
name in paragraph (d)(10)(E) as per se exempt are substitutes for
future earnings. IRAs too are substitutes for future earnings in
that they are designed to provide retirement benefits to
individuals. The age limitation on withdrawal illustrates
6
As the instant IRA qualifies under §408 of the Internal
Revenue Code, applicability of the conjunctive three part exception
to the exemption, found in §522(d)(10)(E)(i)-(iii), is not an
issue.
7
11 U.S.C. §522(d)(10)(E) (1994).
4
Congress’ intent to provide income to an individual in his advanced
years. To exempt an IRA as a “similar plan or contract,” then, is
consistent with the treatment of other deferred compensation and
retirement benefits.
Second, subparagraph (d)(10)(E)(iii) specifically denies
exemption to those “similar plans or contracts” that come within
the proscription of (d)(10)(E)(i) and (ii) and also fail to qualify
under, inter alia, IRC §408, a provision dealing exclusively with
IRAs. This express Code-section reference to IRAs in the exception
makes inescapable the conclusion that at least some--if not all--
IRAs were intended to be included in the phrase “similar plan or
contract.” Were that not so, there would be no exempt §408 plans
or contracts from which non-§408 plans or contracts could be
exceptions.
In other words, inasmuch as the phrase “similar plan or
contract” in subsection (iii)’s specific exception to the exemption
includes IRAs that do qualify, that exact phrase--“similar plan or
contract”--must likewise include qualifying IRAs in the general
exemption of paragraph (d)(10)(E). “There is a presumption that
the same words used twice in the same act have the same meaning.”8
Third, to conclude that IRAs are not exempt would be to
suggest that Congress intended to penalize self-employed
individuals for their choice of the form in which their retirement
assets are held. This result would be antithetical to Congress’
8
In re Hall, 151 B.R. 412, 425 (Bankr. W.D. Mich. 1993)(citing
2A N. SINGER, SUTHERLAND STATUTORY CONSTRUCTION §46.05 (1992)).
5
solicitude for retirement benefits for self-employed individuals.
By analogizing the treatment of IRAs to Congress’ treatment of
other retirement plans in §522(d)(10)(E), we find it more than
plausible to infer that Congress intended for IRAs to be treated
similarly for purposes of exemption. Indeed, to hold otherwise
would be to create a trap for the unwary in those frequent
instances in which funds from other exempt plans are “rolled over”
into IRAs when those other plans terminate or when employment
ceases. After all, Congress has, in the overall retirement scheme
of the IRC, selected the IRA to serve as a sort of universal
conductor through which transfers must pass if they are to avoid
the rocks and shoals of inadvertent taxable events.
Finally, exempting IRAs comports with the very policy
furthered by exemptions--providing the honest debtor with a fresh
start. More specifically, exempting IRAs furthers the policy
behind the pension exemption--protecting a debtor’s future income
stream.9 And the Code even contains a safeguard to avoid potential
abuse when it limits exemption to only such portion of the
otherwise exemptible payments that the bankruptcy court deems
necessary for the support of the debtor and any of his dependents.
D. CONTROL
We reject out of hand the Trustee’s argument that the absence
of an anti-alienation provision in the IRA destroys its
exemptibility. This argument is grounded first in the fact of
9
In re Hickenbottom, 143 B.R. 931, 933 (Bankr. W.D. Wash.
1992).
6
control by the debtor. That the debtor has control over the IRA,
penalty notwithstanding, does not destroy its exemptibility.
Control is a concept applicable to the determination of whether an
asset belongs to the estate, a determination that is made before
the question of exemption is ever reached. Once the asset is
included in the estate, the concept of control evanesces; control
is simply irrelevant to the question of exemption. Indeed, other
exempt assets, such as personal residences, remain in the debtor’s
control following a discharge.
The plain language of the subject section supports the
conclusion that control by a debtor does not destroy exemptibility.
True, to be exempt, the right to receive a payment under a “similar
plan or contract” must be “on account of illness, disability,
death, age, or length of service.”10 Yet nowhere do the words
“only” or “solely” appear. The language of the subject section
does not express a requirement that the right to receive a payment
under a “similar plan or contract” be conditioned “only” or
“solely” or “exclusively” on one of the five listed events. None
dispute that the list is exclusive and mandatory in that (1) the
right to receive payment under a “similar plan or contract” must be
triggered by at least one of the five events, and (2) the right to
receive the payment cannot be either totally unfettered or not
triggered by inter alia one of the five listed events.
An entirely separate question, however, is whether
exemptibility is destroyed if, despite the right to receive the
10
11 U.S.C. §522(d)(10)(E) (1994).
7
payment being triggered by one or more of the five listed events,
such right can be triggered as well by some additional event,
occurrence, or status that is not listed. Simply stated, the
Trustee’s argument is that the presence of such an additional
factor somehow blocks or destroys exemptibility despite the
presence of one of the five requisite events. We disagree: As
long as the right to receive a payment under a plan or contract can
be triggered by one or more of the five listed events, and is
therefore exemptible, the fact that payments can also be triggered
by some additional factor--or absence of some additional factor--
cannot destroy exemptibility. Once one (or more) of the listed
events is found to apply, it (or they) need not be the sole
prerequisite to all rights to receive payment. Neither need the
listed event (or events) block the right to receive payment under
some other situation.
Additionally, the rule of ejusdem generis requires inclusion
of IRAs in the phrase “similar plan or contract” by general (if not
perfect) analogy to the four specified plans or contracts that are
per se exemptible, with or without an anti-alienation requirement.
Proof of this is found in an important feature of profitsharing
plans, one of the foursome of nominate plans or contracts which are
per se exemptible under paragraph (d)(10)(E): Profitsharing plans
contain provisions that entitle participants to receive payments on
account of one or more of the five listed triggering events, but
also permit participants to withdraw up to the entire amount upon
payment of a penalty. No philosophical or economic distinction
8
that would preclude an IRA’s exemptibility can be drawn between
relevant features of profitsharing plans and similar features of
IRAs.
In the instant case, Debtor’s right to receive a payment from
the IRA is statutorily triggered by his attaining age 59-1/2 years;
yet surely the additional fact that he may receive payments from
the IRA at an earlier age by incurring a 10% penalty tax and
furnishing notice to the custodian cannot destroy the IRA’s
exemptibility. Both events--attaining age 59-1/2 and paying the
penalty tax--are statutorily applicable to any IRA, even if by
inadvertence the account document should omit those provisions.
That here Debtor did not elect to include the purely optional term
of anti-alienation is of no significance whatsoever.
E. PRESENT RIGHT TO RECEIVE
Given the Trustee’s obfuscation of the issue by arguing the
question of “present payments,” it is helpful to recognize the
distinction between a debtor’s right to receive a payment presently
(the Trustee’s contention) and a debtor’s “right to receive . . .
a payment” (the plain words of the section) which includes both (1)
a debtor’s presently vested right to receive a payment in the
future and (2) a debtor’s right to receive a payment “presently,”
“currently,” or “immediately.” We decline the Trustee’s invitation
to read into the subject section of the Code a restriction to the
right to receive payments presently, to the exclusion of a present
right to receive payments in the future. The language of the
section does not include words like “presently,” “currently,” or
9
“immediately.” Indeed, to infer such would be to exclude from
consideration all deferred compensation and retirement accounts
that have not yet ripened to current payment status. Again, that
which is exempt is the right to receive payments, whether future or
present, not merely the current receipt of payments.
F. TO THE EXTENT REASONABLY NECESSARY
The subject section of the Code expressly limits the exempt
right to receive payments “to the extent reasonably necessary for
the support of the debtor and any dependent of the debtor.”11
Determination of the quantum that is needed for support is
entrusted to the sound discretion of the bankruptcy court. The
bankruptcy court’s authority and obligation to determine the extent
to which funds are necessary for the support of the debtor and his
dependents work as a safeguard to prevent debtors from stashing
away assets in fraud of creditors, thereby ensuring that the
proverbial shield cannot be used as a sword.
G. NO CONFLICT WITH PRECEDENT IN OTHER CIRCUITS
Our decision to hold this IRA and ones like it exemptible does
not create a circuit split, particularly not with the Third Circuit
as the Trustee urges. That circuit’s decision in In re Clark12 held
that a debtor’s Keogh or H.R. 10 retirement plan was not exempt
under the subject Code section. But H.R. 10 plans no longer exist.
Therefore, the Clark precedent is obsolete, so no actual conflict
can be created with that decision. Neither does our decision
11
11 U.S.C. §522(d)(10)(E) (1994).
12
711 F.2d 21 (3d Cir. 1983).
10
conflict with the Third Circuit’s holding in Velis v. Kardanis13
which deals solely with the “to the extent reasonably necessary”
limitation in the context of a debtor who is already more than 59-
1/2 years old, and which therefore cannot be read to extend Clark
to IRAs.
III.
CONCLUSION
For the foregoing reasons, the district court’s decision to
affirm the bankruptcy court’s grant of Trustee’s objection to the
exemption is reversed, and judgment is rendered holding Debtor’s
IRA to be exempt.
REVERSED and RENDERED.
13
949 F.2d 78 (3d Cir. 1991).
11