Commerce Bank v. Robert R. McGowen ( 2021 )

IN THE SUPREME COURT OF IOWA
No. 19–1994
Submitted December 15, 2020—Filed March 12, 2021
COMMERCE BANK,
Appellee,
vs.
ROBERT R. McGOWEN,
Appellant.
Appeal from the Iowa District Court for Polk County, Coleman
McAllister, Judge.
Appeal from the district court’s order denying a debtor’s claim that
certain funds paid pursuant to a deferred compensation plan were exempt
from garnishment. REVERSED AND REMANDED.
McDonald, J., delivered the opinion of the court, in which all
participating justices joined. Appel, J., took no part in the consideration
or decision of the case.
Steven P. Wandro (argued), Kara M. Simons, and Brian J. Lalor of
Wandro & Associates, P.C., Des Moines, for appellant.
Michael S. Mather (argued) and Kelly S. Hadac of HKM, P.A.,
St. Paul, Minnesota, and Thomas J. Cahill of Cahill Law Offices, Nevada,
for appellee.
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McDONALD, Justice.
Iowa Code section 627.6(8)(e) (2019) provides a debtor may exempt
from execution “[a] payment or a portion of a payment under a pension,
annuity, or similar plan or contract on account of illness, disability, death,
age, or length of service.” The issue in this garnishment proceeding is
whether payments made to a debtor under a deferred compensation plan
fall within the scope of the statutory exemption.
I.
Commerce Bank obtained a judgment against Robert McGowen in
Minnesota in the amount of $1,500,000 plus interest. The bank then
domesticated the judgment in Polk County, Iowa. Several years after
Commerce Bank domesticated the judgment in Iowa, it caused to be issued
a writ of general execution directing the sheriff to levy on McGowen’s
employer, McGowen, Hurst, Clark & Smith, P.C. (hereinafter “the
company”). Pursuant to Iowa Code section 642.15, McGowen moved to
exempt all payments made to him under the company’s deferred
compensation plan, claiming the deferred compensation payments were
exempt under section 627.6(8)(e).
The plan at issue is a deferred compensation plan intended to be
compliant with Internal Revenue Code section 409A. According to the plan
documents, “[t]he Plan is intended to provide incentive to shareholders of
the Company to promote the growth, profitability and long-term success
of the Company.” Participation in the plan is limited to the company’s
shareholder employees. The plan provides for three types of deferred
compensation, only two of which are at issue in this appeal. According to
the plan documents, Type 1 compensation is available to all company
shareholders and is “intended to approximate the realizable value of the
Company’s receivables and unbilled work in process.” Type 2A
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compensation is limited to seven identified shareholders of the company,
including McGowen. The plan provides Type 2A compensation intended
to approximate the shareholder’s “pro-rata portion of the intangible value
of the Company’s professional practice.” It is “calculated at 80% of the
average of the Company’s prior three fiscal years’ collected fees.” Payment
of deferred compensation is triggered upon the occurrence of one of the
following events: separation from service, attainment of age sixty-seven,
disability, death, or sale of substantially all of the company’s assets.
Type 1 deferred compensation benefits are paid in thirty-six equal monthly
payments, and Type 2A deferred compensation benefits are paid in equal
monthly installments over ten years. McGowen reached age sixty-seven,
and he receives both Type 1 and Type 2A deferred compensation
payments.
Lacking any controlling authority on the issue, the parties and the
district court relied on persuasive federal precedents to interpret and apply
the statutory exemption. McGowen primarily relied on a decision from the
United States Bankruptcy Court for the Southern District of Iowa,
In re Pettit, 55 B.R. 394 (Bankr. S.D. Iowa), aff’d, 57 B.R. 362(S.D. Iowa 1985). In that case, the bankruptcy court considered whether
the debtor’s interest in a bank’s profit-sharing plan was exempt under
Iowa Code section 627.6. See id. at 395. The bankruptcy court interpreted
the statute to exempt payments that served as wage substitutes when the
debtor would likely have lower income:
It is reasonable to conclude that the state legislature, by using
the terms ‘similar plan or contract,’ intended that plans
having ‘pension’ or ‘annuity’ characteristics should be exempt.
Such an intent would further the ‘fresh start’ purpose of
exemption statutes in that ‘pension-annuity’ type
arrangements are created to fill or supplement a wage or
salary void.
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Id. at 397–98. In that light, the court reasoned a plan or contract is
“similar” to a pension or annuity if it exhibited the following: (1) a formal
plan to benefit the debtor as part of an employer–employee relationship,
(2) benefits that are similar to future earnings of the debtor like retirement
income or deferred employment income for future support, (3) someone
other than the debtor has control and access to the plan with limitations
on withdrawal or distribution to further the purpose of setting it aside for
retirement or deferred income, and (4) payment under the plan is based
upon illness, disability, death, age, or length of service. Id. at 398.
Applying the four factors to the profit-sharing plan at issue, the
bankruptcy court concluded the profit-sharing plan fell within the
statutory exemption. Id. The plan documents stated the intent of the plan
was “to provide retirement and other benefits for the sole and exclusive
benefit of the Bank’s employees.” Id. at 395. The bank contributed to the
plan on the employee’s behalf, and the employee’s interest was fully vested.
Id. The plan was managed by a trustee, and disbursement was controlled
by the trustee and a committee. Id. at 396. Participants (or their
beneficiaries) received a lump sum cash payment upon the occurrence of
a specific event: the participant’s sixtieth birthday, retirement, disability,
termination of employment, or death. Id.Commerce Bank relied on a decision from the United States
Bankruptcy Appellate Panel of the Eighth Circuit, Eilbert v. Pelican.
212 B.R. 954 (B.A.P. 8th Cir. 1997), aff’d sub nom. In re Eilbert,
162 F.3d 523 (8th Cir. 1998). In that case, the debtor was a seventy-
seven-year-old widow. See Eilbert v. Pelican, 212 B.R. at 955. “[H]er
husband, Raymond E. Eilbert, was involved in an automobile accident
with appellee David Pelican. Raymond Eilbert was killed and Pelican
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sustained severe injuries.” Id. Pelican sued Eilbert’s estate and the widow
for damages arising out of the car accident. See id. at 955–56.
Anticipating the entry of a large judgment against her, [the
widow] sought to transform her primarily non-exempt assets
into exempt property in the event she filed bankruptcy.
Accordingly, . . . the debtor used the liquidated proceeds [of
her husband’s estate] to purchase a single premium . . .
Variable Annuity Contract in the amount of $450,000.
Id. at 956. Pelican obtained a judgment against the estate and the widow,
and the widow declared bankruptcy. Id. The question presented was
whether the annuity was exempt from the bankruptcy estate. See id. at
957.
The Eilbert court held the annuity was not exempt. Id. at 960. In
reaching that conclusion, the court rejected the debtor’s contention that
the asset was per se exempt because it was an annuity, explaining that
“ ‘annuity’ is a purely generic term which refers to the method of payment
and not to the underlying nature of the asset.” Id. at 958. The court stated
the relevant question was whether the asset at issue was a “similar plan
or contract” and concluded the resolution of that question was a peculiarly
factual inquiry. Id. (quoting Iowa Code § 627.8(e)). Under the peculiar
facts of the case, the court held the annuity was not exempt. See id. at
959–60. The United States Court of Appeals for the Eighth Circuit affirmed
the bankruptcy panel opinion on somewhat different grounds. The Eighth
Circuit reasoned the payments received by Eilbert were not akin to future
earnings. See In re Eilbert, 162 F.3d at 527. “Instead, the annuity was
purchased with non-exempt, inherited assets as a prebankruptcy
planning measure by a prospective debtor who happened to have already
reached retirement age.” Id.6
The district court here found the Eilbert case more persuasive and
held McGowen’s deferred compensation payments were not exempt under
Iowa Code section 627.6(8)(e). McGowen timely filed this appeal.
II.
A.
This case presents a question of statutory interpretation, and our
review of the district court’s decision is for the correction of errors at law.
See In re Marriage of Eklofe, 586 N.W.2d 357, 359 (Iowa 1998); Iowa Dep’t
of Revenue & Fin. v. Peterson, 532 N.W.2d 805, 806 (Iowa 1995); In re Est.
of Deblois, 531 N.W.2d 128, 130 (Iowa 1995). The burden is on the debtor
to show an exemption applies. See First Nat’l Bank v. Larson,
213 Iowa 468, 472, 239 N.W. 134, 136 (1931). Although the burden is on
the debtor to show an exemption applies, “[i]t is well settled that exemption
statutes must have a liberal construction.” Kelly v. Degelau,
244 Iowa 873, 875, 58 N.W.2d 374, 376 (1953). Exemption statutes must
be liberally construed to “carry[ ] out the beneficient object of the
legislation.” Frudden Lumber Co. v. Clifton, 183 N.W.2d 201, 203
(Iowa 1971) (quoting Roberts v. Parker, 117 Iowa 389, 390, 90 N.W. 744(1902)).
In questions of statutory interpretation, “[w]e do not inquire what
the legislature meant; we ask only what the statute means.” Oliver
Wendell Holmes, The Theory of Legal Interpretation, 12 Harv. L. Rev. 417,
419 (1899). We seek to determine the fair and ordinary meaning of the
statutory language at issue. See State v. Davis, 922 N.W.2d 326, 330
(Iowa 2019) (“We give words their ordinary meaning absent legislative
definition.”); In re Marshall, 805 N.W.2d 145, 158 (Iowa 2011) (“We should
give the language of the statute its fair meaning, but should not extend its
reach beyond its express terms.”).
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In determining the fair and ordinary meaning of the statutory
language at issue, we consider the language’s relationship to other
provisions of the same statute and other provisions of related statutes.
See Iowa Code § 4.1(38) (“Words and phrases shall be construed according
to the context and the approved usage of the language . . . .”); State v. Doe,
903 N.W.2d 347, 351 (Iowa 2017) (stating we consider the “relevant
language, read in the context of the entire statute”). If the “text of a statute
is plain and its meaning clear, we will not search for a meaning beyond
the express terms of the statute or resort to rules of construction.” In re
Est. of Voss, 553 N.W.2d 878, 880 (Iowa 1996); see also State v.
Richardson, 890 N.W.2d 609, 616 (Iowa 2017) (“If the language is
unambiguous, our inquiry stops there.”). If the language of the statute is
ambiguous or vague, we “may resort to other tools of statutory
interpretation.” Doe, 903 N.W.2d at 351.
In determining the fair and ordinary meaning of a statutory
exemption, we also consider persuasive federal authorities interpreting
similar provisions of the Bankruptcy Code. Iowa has opted out of the
federal exemptions allowed under the Bankruptcy Code. See 11 U.S.C.
§ 522(b)(1)–(2); Iowa Code § 627.10. However, Iowa Code section
627.6(8)(e) “was modeled on the nearly identical federal exemption found
in 11 U.S.C. § 522(d)(10)(E).” In re Eilbert, 162 F.3d at 526. When an Iowa
statute is borrowed from similar federal legislation, we “presume our
legislature intended what Congress intended.” City of Davenport v. Pub.
Emp. Rels. Bd., 264 N.W.2d 307, 313 (Iowa 1978) (en banc). Here,
Congress described the exemption at issue as one “exempt[ing] certain
benefits that are akin to future earnings of the debtor.” H.R. Rep.
No. 95–595, at 362 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 6318.
8
B.
The statute provides a debtor may exempt from execution “[a]
payment or a portion of a payment under a pension, annuity, or similar
plan or contract on account of illness, disability, death, age, or length of
service.” Iowa Code § 627.6(8)(e). The plain language of the statute makes
clear the debtor must establish two things to claim the exemption at issue.
First, the debtor must establish the payment claimed to be exempt was
made under a pension, annuity, or similar plan or contract. See id.Second, the debtor must establish the pension, annuity, or similar plan or
contract is payable or is being paid on account of illness, disability, death,
age, or length of service. See id.; Rousey v. Jacoway, 544 U.S. 320,
325–26, 125 S. Ct. 1561, 1566 (2005) (identifying these as the relevant
inquiries); In re Eilbert, 162 F.3d at 526–27 (same).
1.
We first address whether McGowen has established the deferred
compensation payments were made under a pension, annuity, or similar
plan or contract.
There is no claim here the deferred compensation payments are
pension or annuity payments. We thus focus on the question of whether
the deferred compensation payments were made under a plan or contract
similar to a pension or annuity. “To be ‘similar,’ an [asset] must be like,
though not identical to, the specific plans or contracts listed in [the
statute], and consequently must share characteristics common to the
listed plans or contracts.” Rousey, 544 U.S. at 329, 125 S. Ct. at 1568.
The asset must “have the same ‘primary purpose’ ” as those listed in the
statute. Id.“Pension” is a well-understood term. A “pension” is “[a] regular
series of payments made to a person (or the person’s representatives or
9
beneficiaries) for past services or some type of meritorious work done.”
Pension, Black’s Law Dictionary (11th ed. 2019). A pension is also defined
as “[a] fixed sum paid regularly to a person (or to the person’s
beneficiaries), esp[ecially] by an employer as a retirement benefit.” Id. The
Supreme Court defined pension under the parallel federal exemption
statute as “a fixed sum . . . paid under given conditions to a person
following his retirement from service (as due to age or disability) or to the
surviving dependents of a person entitled to such a pension.” Rousey,
544 U.S. at 330, 125 S. Ct. at 1568–69 (quoting Webster’s Third New
International Dictionary 1671 (1981) [hereinafter Webster’s 3d]). A pension
generally is compensation deferred until a later date, typically not payable
“until a time when the beneficiary’s earning capacity is limited.” Pettit,
55 B.R. at 398.
An annuity is “[a] fixed sum of money payable periodically;
specif[ically], a particular amount of money that is paid each year to
someone, usu[ally] until death.” Annuity, Black’s Law Dictionary
(11th ed. 2019). Annuities involve a right to receive income payments over
a fixed period. Pettit, 55 B.R. at 398. An annuity is normally obtained
through employment and withdrawn during retirement or after death by
beneficiaries. Id. The Supreme Court defined an annuity as “an amount
payable yearly or at other regular intervals . . . for a certain or uncertain
period (as for years, for life, or in perpetuity).” Rousey, 544 U.S. at 330,
125 S. Ct. at 1569 (omission in original) (quoting Webster’s 3d at 88). Like
a pension, an annuity is compensation deferred into the future payable at
some later date when the recipient typically would have lower earnings.
The common features of pensions and annuities, as used in this
statute, is the deferment of compensation to a later date when it is to be
paid in periodic installments as a wage substitute. See Rousey, 544 U.S.
10at 331, 125 S. Ct. at 1569 (“The common feature of all of these plans is
that they provide income that substitutes for wages earned as salary or
hourly compensation.”); In re Foellmi, 473 B.R. 905, 909
(B.A.P. 8th Cir. 2012) (“[T]o qualify as a ‘similar plan,’ a plan must provide
income that substitutes for wages . . . .”); In re Vickers, 408 B.R. 131, 139
(Bankr. E.D. Tenn. 2009) (stating “[t]he common feature of all of these
plans is that they provide income that substitutes for wages earned as
salary or hourly compensation” (alteration in original) (quoting Rousey,
544 U.S. at 331, 125 S. Ct. at 1569)); Eilbert v. Pelican, 212 B.R. at 958(“Iowa Code § 627.6(8)(e) is primarily designed to protect those payments
which serve as wage substitutes . . . .”); Pettit, 55 B.R. at 397–98 (noting
that both pensions and annuities “are created to fill or supplement a wage
or salary void” and a similar plan or contract would create benefits “akin
to future earnings”).
In reaching that conclusion, we take guidance from the Supreme
Court’s decision in Rousey v. Jacoway. In that case, the Supreme Court
interpreted the parallel provision of the Bankruptcy Code found at
11 U.S.C. § 522(d)(10)(E). See Rousey, 544 U.S. at 322, 125 S. Ct. at 1564;
see also In re Eilbert, 162 F.3d at 526 (noting Iowa Code section 627.6(8)(e)
was modeled after the federal provision). In Rousey, the Supreme Court
held that an individual retirement account (IRA) was exempt under
11 U.S.C. § 522(d)(10)(E). 544 U.S. at 334, 125 S. Ct. at 1571. The Court
explained what makes pensions and annuities unique is the aspect of
“deferred payment.” Id. at 331, 125 S. Ct. at 1569. The Court reasoned
the common feature of the plans identified in the statute was they were
“substitutes for wages earned as salary or hourly compensation.” Id. The
Court reasoned that IRAs fell within the statutory exemption because the
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age at which the accountholder would normally withdraw funds was
retirement age. Id.We also take guidance from other courts that have also concluded
that deferred compensation plan payments are “similar” to payments made
under a pension or annuity. For example, in In re Shields, the bankruptcy
court concluded a deferred compensation plan was an exempt substitute
for wages:
Generally, a plan is a similar plan or contract if the plan’s
payments function as a substitute for wages. Other courts
have interpreted this requirement broadly and commented
that non-qualified deferred compensation plans are exempt.
See, e.g., In re Threewitt, 24 B.R. 927, 930 (D. Kan. 1982)
(addressing § 522(d)(10)(E) and stating that it “exempts the
right to receive payments necessary for support from a wide
range of sources, tax-qualified or not, including, for example,
Christmas stock bonuses paid upon 25 years of service, or
profit-sharing plans restricted to senior employees, or an
annuity purchased to provide income to a worker disabled in
an industrial accident.”). The SERP [supplemental executive
retirement plan] payments to Wallace represent compensation
that Wallace deferred into retirement and clearly function as
a substitute for wages during Wallace’s retirement years. The
court, therefore, concludes that the SERP is a deferred
compensation plan similar to the plans and contracts
enumerated in (10)(e).
586 B.R. 315, 321 (Bankr. W.D. Mo. 2018) (emphasis omitted) (citation
omitted); see also In re Lawless, 591 F. App’x 415, 417 (6th Cir. 2014) (“As
Newton now correctly concedes, Lawless’s deferred-compensation plan fits
the statute’s general language. It is a ‘pension, profitsharing, annuity, or
similar plan or contract’ payable ‘on account of death, age or length of
service.’ ” (quoting Tenn. Code Ann. § 26–2–111(1)(D))); In re Maurer,
268 B.R. 339, 340–41 (Bankr. W.D.N.Y. 2001) (holding deferred
compensation plan was exempt even though board had discretion to make
distributions before beneficiary acquired specific age), aff’d,
2002 WL 1012985 (W.D.N.Y. 2002); In re Lightbody, 240 B.R. 545, 548
12
(Bankr. E.D. Mich. 1999) (holding deferred compensation plan was
exempt).
We find the reasoning in Rousey and these cases persuasive.
Payments under a plan or contract are similar to payments under a
pension or annuity when the payments are periodic and deferred to such
time when the payments serve as wage substitutes because the recipient
is likely to have reduced wage income. See id. at 331, 125 S. Ct. at 1569(holding the IRA income substitutes for wages because withdrawal begins
“when [debtors] are likely to be retired and lack wage income”); see also
Pettit, 55 B.R. at 398 (“[B]enefits under an exempt pension plan are
generally not available until a time when the beneficiary’s earning capacity
is limited.”); John Hennigan, Rousey and the New Retirement Funds
Exemption, 13 Am. Bankr. Inst. L. Rev. 777, 791 (2005) [hereinafter
Hennigan].
The payments from McGowen’s deferred compensation plan are
similar to payments made under a pension or annuity because the
payments are deferred payments intended to serve as wage substitutes at
a time when it is expected the recipient would have decreased wage
income. The deferred compensation payments in this case are paid
regularly and periodically. See Rousey, 544 U.S. at 330, 125 S. Ct. at 1569(noting an annuity is payable at regular, periodic intervals). The payments
here also serve as a wage substitute deferred until such time it was
expected McGowen would have reduced income. Here, the deferred
compensation payments are triggered by multiple events, including the
plan participant reaching age sixty-seven, disability, death, sale of the
company, and separation from employment. All of these triggering events
commence payment at a time when the recipient is likely, although not
necessarily, to have decreased wage income. It is of no moment that
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McGowen is not actually retired. The relevant inquiry for determining
whether a payment is similar to an annuity or pension payment is the
nature of the payment and not the particular circumstances of the
individual. See id. at 331, 125 S. Ct. 1569 (noting that the relevant inquiry
is whether the payments “provide income that substitutes for wages” and
not whether they payments are retirement specific); see also Foellmi,
473 B.R. at 909 (“[A] plan must provide income that substitutes for wages,
and not necessarily as retirement or disability income.”).
2.
We next consider whether McGowen’s deferred compensation plan
payments are “on account of illness, disability, death, age, or length of
service” as required by Iowa Code section 627.6(8)(e). In a similar
provision in the federal bankruptcy code, “on account of” is interpreted to
mean “because of.” See Rousey, 544 U.S. at 326, 125 S. Ct. at 1566 (“This
meaning comports with the common understanding of ‘on account of.’ ”).
“Thus, ‘on account of’ . . . requires that the right to receive payment be
‘because of’ illness, disability, death, age, or length of service.” Id. at
326–27, 125 S. Ct. at 1566; see also Pettit, 55 B.R. at 398 (holding that
“[t]he distribution events are related to age, disability, death or length of
service”).
We conclude McGowen’s deferred compensation plan payments
were on account of illness, disability, death, age, or length of service within
the meaning of the statute. According to the plan documents, the right to
receive payments was triggered by one of five events: separation from the
company, sale of substantially all the company’s assets, death, disability,
or attainment of age sixty-seven. Three of the five payment-triggering
events—disability, death, and attaining the age of sixty-seven—are
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explicitly covered by the statute. Generally speaking, the deferred
compensation payments were “on account” of qualifying triggering events.
The fact that the plan contains additional triggering events not
explicitly set forth in the statute does not change our conclusion that the
payments here are exempt. See Lightbody, 240 B.R. at 548 (holding
payment under deferred compensation plan exempt and stating “the fact
that payments can be obtained for reasons other than those specifically
listed, does not affect the exemptibility of the plan”). Sale of the company
or the company’s assets is a singular event largely outside McGowen’s
unilateral control. See Eilbert v. Pelican, 212 B.R. at 958 (holding “on
account of” to be “a factual inquiry into the amount of control the debtor
exercised over the . . . timing of the payments”). And separation of
employment is an unlikely option due to the significant penalty upon those
separating from employment. Specifically, the plan document provides
participants forfeit the right to deferred compensation upon working as an
accountant elsewhere. It is unlikely a participant would separate from
employment merely to obtain access to deferred compensation benefits
because to do so would require a significant loss of wage income due to
the noncompetition provision. See, e.g., In re Eilbert, 162 F.3d at 528(focusing the inquiry on whether the debtor had “unfettered discretion” on
the timing of payments); In re Hutton, 893 F.2d 1010, 1011–12
(8th Cir. 1990) (holding a plan was exempt even though debtor could
request early withdrawal upon showing a financial hardship);
In re Lilienthal, 72 B.R. 277, 279 (S.D. Iowa 1987) (holding withdrawal
penalty of up to seven percent is not insubstantial and, therefore, annuity
qualifies for exemption).
More important, we need not speculate on whether the deferred
compensation payments here are on account of age. This case is not a
15
case, as in Rousey, in which the creditor is trying to levy on the corpus of
an asset and we must determine whether the debtor might hypothetically
have access to plan assets or payments. Here, the payments are already
being made. McGowen began receiving Type 1 and Type 2A deferred
compensation payments when he reached age sixty-seven. The payments
at issue here are thus paid “because of” McGowen’s age as required by
Iowa Code section 627.6(8)(e). It is not of consequence that the payments
could have been triggered for other reasons, such as sale of the company,
because in this case the payments actually were triggered by age. See
Hennigan, 13 Am. Bankr. Inst. L. Rev. at 792 (“Trigger events are
designated to preserve retirement savings for ‘future’ use by discouraging
un-triggered withdrawals, not necessarily eliminating them completely.”).
III.
Given the liberal construction afforded exemption statutes, we hold
McGowen’s deferred compensation plan benefits paid upon him attaining
age sixty-seven are exempt under Iowa Code section 627.6(8)(e). The
deferred compensation payments paid under the plan are a substitute for
wages and similar to payments made under a pension or annuity.
REVERSED AND REMANDED.
All justices concur except Appel, J., who takes no part.