Gladwell v. Reinhart , 697 Utah Adv. Rep. 43 ( 2011 )

Justice LEE,

dissenting:

T{21 Douglas Reinhart's retirement plan failed on several grounds to meet the statutory requirements for a tax-deferred Keogh plan under section 401(a) of the Internal Revenue Code. And although the IRS has established mechanisms for taxpayers to seek to correct plan defects to avoid adverse tax consequences, Reinhart never employed such mechanisms to try to bring his plan into IRS compliance. Despite these problems, the court today concludes that Reinhart's plan may be exempt from bankruptcy proceedings on the ground that it is nonetheless a plan "described in" section 401(a) for purposes of the Utah exemption statute, Utah Code Ann. § 78B-5-505(1)(a)(xiv). The court bases its conclusion on the notion that a plan that fails to qualify under section 401(a) is still deemed to be "described in" that section if it is in "substantial compliance" with its provisions.

22 I respectfully dissent. First, I see no basis in the Utah exemption statute for the "substantial compliance" standard adopted by the majority. The exemption statute speaks of plans "described in section 401(a)," id., and lacks reference to "substantial," "material," or any other limitation of the sort embraced by the court.

4 23 Second, I see no basis in the text or structure of the federal statute for distinguishing "substantial" Keogh plan requirements from insubstantial ones. Section 401(a) describes Keogh plans by setting forth their "[rlequirements for qualification," I.R.C. § 401(a) (2006 & Supp.2010). I see no non-arbitrary way for us to designate some federal requirements as "substantial" or to denigrate others as insignificant. Instead, I would read the Utah exemption provision's reference to plans "described in section 401(a)" to refer to all of the requirements of federal law. That approach seems to me to be dictated by the structure of section 401(a) itself, which enumerates all federal requirements in an undifferentiated list.

[ 24 I would resolve the interpretive question presented here on that basis, without resort to the canon of construction cited by the majority, much less the "policy considerations" that it deems instructive. Supra ¶13. The canon of interpreting exemption provisions liberally in the debtor's favor strikes me as problematic, as it states not a linguistic principle reflecting common usage or understanding, but a substantive preference for debtors over creditors.¹ Any decision to embrace such a preference is for the legislature, not the courts. Our role is to interpret and apply the policy judgment made by the legislature, not to implement one of our own choosing.

25 Some substantive canons are defensible on the ground that they reflect a longstanding, unequivocal policy preference that the legislature can be presumed to have legislated against.² The majority's preference for debtors over creditors is not such a canon. To the contrary, it's the sort of "canon" that finds a corresponding opposite elsewhere in our case law,³ as the notion of a preference for "liberal" construction of a bankruptey exemption in favor of a debtor could easily be recast as a contrary preference for a "narrow" construction of a section 401(a) tax exemption.⁴

T26 Even if the majority's canon were defensible, this would not be an appropriate case to invoke it. Substantive canons are properly implicated at the last stage of statutory construction, to resolve a virtual "tie" between the opposing constructions introduced by the parties.⁵ They have no role at the front end, as even a "liberal" construction in the debtor's favor does not condone the rejection of statutory text that cuts in favor of creditors. I find the statutory text to cut quite clearly against a 401(a) exemption for a plan that fails to comply with the requirements of federal law, and I would accordingly reject the majority's approach even if I accepted a canon favoring debtors over eredi-tors.

127 The court also roots its approach in the notion that both parties' constructions find plausible support in the "language of the exemption statute," supra ¶13, which it takes as a license to consider "relevant policy considerations" to inform its decision, supra ¶ 14. Both steps in that analysis are problematic. First, the fact that opposing parties proffer facially plausible constructions of the words of a statute can never be enough to abandon the quest for statutory meaning in favor of a subjective policy decision.⁶ In any case sufficient to command the attention of an appellate court with a discretionary docket, both sides will almost always have a plausible basis for their positions. Our role is to decide which of those competing constructions is most consistent with the language of the statute, not to fall back on our own sense of the "relevant policy considerations to determine the legislature's intent." Supra {13. So framed, the question presented in this case has a straightforward answer: Even if "described in" when read in isolation might be construed to encompass 401(a) "plans that are not technically tax qualified," supro 112, that construction is incompatible with the broader context of section 401(a) in the tax code. Section 401(a) enumerates an undifferentiated list of features of an exempt Keogh plan, and there is no reasonable basis in federal tax law for distinguishing "substantial" elements of that list from insubstantial ones.

T28 The court's invocation of "relevant policy considerations," supra ¶ 13, is also troubling. I see no way to attribute to either the bankruptey code or the Utah exemption statute an unqualified "overarching purpose" of giving a "fresh start" to debtors. Supra ¶ 14. (internal quotation marks omitted) Surely both statutes have a more nuanced purpose, one that balances both the interests of debtors in starting over and the interests of creditors in protecting their property. The majority acknowledges as much in conceding a countervailing "policy interest that a debtor not use his retirement plan as a means of hiding assets from creditors." Su-pro 115. Yet once that more complex picture is acknowledged, it becomes difficult to divine any "overarching purpose" that can guide our interpretive task beyond the purpose as expressed in the precise terms of the statutory text. It is that text that should guide us, not a one-sided generalization of the statute's "purpose" contrived by the judi-clary.

129 The majority's holding is ultimately derived from its preference for the debtor's side of this policy balance at the expense of creditors. That decision is problematic for all of the reasons noted above. But even assuming a one-sided statutory purpose of preserving a debtor's fresh start, I still see no basis for the "substantial compliance" standard adopted by the majority. That standard is not at all necessary to protect the debtor from "los[ing] his entire retirement exemption because of technical violations of [section] 401(a)." Supra ¶ 16. As the majority recognizes, the IRS has set up an administrative mechanism to allow taxpayers to seek to correct operational defects in a 401(a) plan. This mechanism, the Employee Plans Compliance Resolution System (EPCRS), is the exclusive method under federal law for addressing the policy problem that motivates the court's majority in this case. As the majority acknowledges, the EPCRS allows "a retirement plan that is not technically tax qualified because of operational defects" to "retain its tax exempt status while the employer cures the defects." Supra ¶ 13. The EPCRS system is thus the answer to the majority's policy concern. Debtors like Reinhart are not consigned to the whims of technical default. They can cure such defaults through EPCRS, and by properly doing so retain their exempt status despite operational defects.

T30 It does not follow, however, that a plan whose defects are never cured under EPCRS procedures is still entitled to the benefit of the IRS's intent to allow taxpayers to avoid losing their "entire retirement savings exemption" under section 401(a). Supra ¶ 15. In fact, where a taxpayer fails to utilize the IRS's established mechanism for maintaining a tax exemption by curing statutory defects in a plan, the opposite conclusion seems evident: The plan's uncured defects are fatal under the IRS's regulatory scheme, and thus sufficient to sustain the conclusion that it is not a plan "described under 401(3)" according to federal law.

T31 Put another way, we may assume it "unlikely that the Legislature intended to take away a debtor's entire retirement savings exemption merely because the plan did not strictly comply with 401(a) by, for example, exceeding section 401(a)'s maximum contribution limit by ten dollars." Supra ¶ 15. And I agree that "the IRS does not prescribe such a harsh result," but instead "allow[s] a taxpayer to amend technical plan defects under the EPCRS with retroactive effect if the defect is not associated with tax avoidance transactions." Supra ¶ 13. But I disagree that our legislature addressed this concern by delegating to courts the task of making ad hoe distinctions between substantial defaults and insignificant ones. There is a mechanism in place for avoiding the harsh results of technical default, and a party who fails to pursue that mechanism lacks even a policy basis for complaining about his plight.

1 32 The courts are in no position to adopt our own standards dictating which federal requirements are substantial and which ones are not. If a plan fails to meet the federal requirements described in section 401(a) (as modified by the administrative mechanism of the EPCRS), that plan is not described in section 401(a) and it should be deemed not to sustain an exemption under Utah law.

1 33 The majority seeks to tie its "substan-tiality" standard to the "underlying purpose" it sees in section 401(a), supra ¶ 16, but the purpose the court identifies strikes me as incompatible with the federal 401(a) regime. I don't see how we can conclude that the IRS would endorse a plan that fails to comply with section 401(a) and is never brought into compliance under EPCRS. In such cireum-stances it seems apparent that the IRS does prescribe the result (disclaimed by the court) of "tak[ing] away" a taxpayer's 401(a) exemption. Supra ¶ 15. Such a result is not "harsh." -It is the inevitable implication of a framework of legal requirements (including an administrative mechanism for curing initial defects) that are prerequisites for a tax exemption. At some point, the failure to abide by those requirements must result in the loss of the tax exemption. Otherwise the IRS's Keogh plan "requirements" would be nothing more than gentle suggestions.

[ 34 The problems with the majority's sub-stantiality standard are not resolved by the notion that "a plan substantially complies with 401(a) if the defect is not the result of an attempt to avoid tax." Supra ¶ 16. First, the majority's subjective-intent standard is incompatible with the Internal Revenue Code, which makes 401(a) qualification turn on compliance with the standards set forth in the Internal Revenue Code, not on whether a taxpayer subjectively intends to "avoid tax." Second, the tax-avoidance question is more than a little puzzling in this context. Presumably, anyone who establishes a 401(a) Keogh plan is engaged in an "attempt to avoid tax," and thus most any adaptation or change to the plan can be deemed to have a similar purpose. Such a purpose, moreover, is entirely lawful if it complies with federal law and unlawful only if it doesn't. All of which brings us back to the key legal question, which is whether the plan is one "described in" section 401(a). It seems to me that the answer to that question has to come back to the requirements set forth by statute and informed by the EPCRS mechanism, not to the subjective question of intent to avoid taxation.

35 The court seems to acknowledge the force of this analysis in seeking to moor its "substantial compliance" standard in the EPCRS "treasury regulations underlying" section 401(a). Supra ¶ 17. But fulfillment of the EPCRS regulations cannot literally be the majority's standard unless its concession on this point is really an agreement with my dissenting view. A Keogh plan satisfies the cited EPCRS regulations if and only if the plan is actually corrected in compliance with those regulations. Unless and until a plan administrator complies with the terms and conditions prescribed in EPCRS proceedings for curing plan defects, the plan is not in compliance (substantial or otherwise) under the treasury regulations cited by the majority.

T 36 Thus, I agree that a Keogh plan that is actually corrected through the EPCRS process would be exempt as "described in" section 401(a). Supra ¶ 17. Such a plan would, at that point, be cured of any defects from the IRS's perspective and thus presumably would "be considered as satisfying the requirements" of section 401(a) nune pro tune.⁷ And the availability of such correction should fully satisfy the majority's concern that "a debtor would never be able to correct an error he discovered in his plan after his bankruptcy petition was filed." Supra ¶ 18. That concern seems specious, despite the fact that "the debtor's estate and exemptions are determined at the time the bankruptey petition is filed." Supra ¶ 18 (citing 11 U.S.C. § 541(a)(2006)). The majority's concern disappears if the cited code and regulatory provisions mean what they say-if a 401(a) plan corrected through the EPCRS mechanism is deemed compliant "for the period beginning with the earlier of the date on which there was adopted or put into effect any amendment which caused the plan to fail to satisfy" plan requirements. I.R.C. § 401(b) (2006). If an EPCRS-corrected plan is deemed to satisfy section 401(a) nune pro tunec-back to the date of any defect-then the 401(a) exemption is valid under the bankruptey code as of the "time the bankruptey petition is filed," supra 18, and concern for unfair surprise to the debtor evaporates.

137 The proceedings in the bankruptcy court could easily accommodate such a resolution. When a debtor's claimed 401(a) exemption is met with an objection identifying an operational defect in the plan, the debtor can then pursue an EPCRS correction under applicable regulations.⁸ And if and when any challenged defects are cured through the EPCRS procedure, the bankruptey court can then overrule the objection and uphold the exemption (or, if the EPCRS correction fails, sustain the objection). All of this can (and in my view should) proceed on the basis of an actual EPCRS proceeding, not a hypothetical one as the majority seems to contemplate.

T38 Instead of deeming an EPCRS-cor-rected plan as exempt, the majority adopts a standard that requires courts to speculate about whether any Keogh-plan defects at the time of a bankruptcy filing could have been cured through EPCRS procedures. I have no idea how a court is supposed to perform that speculative analysis, particularly where EPCRS corrections require compliance with remedial measures and we have no idea what those measures would be absent an actual EPCRS proceeding.⁹ Thus, although the majority understandably protests otherwise, its approach will necessarily require courts to make their own judgments about "which provisions of section 401(a) are substantial and which ones are insignificant." Supra ¶ 17. Absent an actual EPCRS proceeding, it is simply not true that "the EPCRS has already made this determination." Supra ¶ 17. That determination, rather, is made only in an actual EPCRS proceeding, and it is only such a proceeding that would tell us whether it is appropriate to ignore "technical errors" in a 401(a) plan as "insubstantial.¹⁰

139 As the majority indicates, our task in a certified case is a narrow one-to " 'answer the legal questions presented without re-solyv{ing] the underlying dispute, " supra ¶ 7 (quoting In re Kunz, 2004 UT 71, ¶ 6, 99 P.3d 793). Yet I can't help but wonder whether the answer given to the Tenth Circuit's certified question today is sufficient to provide a manageable rule of decision. The "substantial compliance" standard handed down by the court leaves much in the subjective hands of the court that applies it. I respectfully dissent because I think the Utah exemption statute leaves no room for courts to distinguish substantial 401(a) requirements from insubstantial ones. I would hold instead that a retirement plan is "deseribed in" section 401(a) only if it meets the requirements for such a plan under federal law.

1 . See Marion Energy, Inc. v. KFJ Ranch P'ship, 2011 UT 50, ¶ 40, 267 P.3d 863 (Lee, J., dissenting) (noting the difference between linguistic and substantive canons and explaining that the latter ''threaten to impinge on the policymaking domain of the legislature").

2 . Id. 141

3 . See id. ¶ 46 (decrying a different substantive canon as being "precisely at odds" with another and raising concerns about arbitrariness in the face of "self-canceling 'thrust-and-parry' rules").

4 . See Ivory Homes v. Utah State Tax Comm'n, 2011 UT 54, ¶ 30, 266 P.3d 751 (applying a canon of construing tax exemption or refund statutes "narrowly against the taxpayer" on the ground that such provisions "are matters of legislative grace and should be construed in favor of the taxing entity where legislative intent is not clear"); see also id. ¶ 50 n. 18. (Durrant, J., dissenting) (criticizing the logic and application of this canon in the face of a counter-canon of interpreting tax statutes liberally in favor of the taxpayer).

5 . See id. at ¶ 31 (majority opinion) (invoking the canon of narrow construction of tax credits "in favor of the taxing entity" only "where legislative intent is not clear"); Marion Energy, 2011 UT 50, ¶ 52, 267 P.3d 863 (Lee, J., dissenting) ("[Blefore we look to [substantive canons as] sources of 'guidance' it is our duty to determine the best interpretation of the statutory text in light of its surrounding linguistic and legal context.").

6 . See Olsen v. Eagle Mountain City, 2011 UT 10, ¶ 13, 248 P.3d 465 ("The fact that the statutory language may be susceptible of multiple meanings does not render it ambiguous."); Felix Frankfurter, Some Reflections on the Reading of Statutes, 47 Colum. L.Rev. 527, 527-28 (1947) ("When we talk of statutory construction we have in mind cases in which there is a fair contest between two readings, neither of which comes without respectable title deeds. A problem in statutory construction can seriously bother courts only when there is a contest between probabilities of meaning."); see also Frank H. Easterbrook, The Role of Original Intent in Statutory Construction, 11 Harv. J.L. & Pub. Pol'y 59, 60 (1988) ("People spend the money to come to court only when it is possible to draw conflicting inferences from the words alone.").

7 . See I.R.C. § 401(b) (2006) (providing that a plan is "considered as satisfying the requirements of subsection (a)" for any period "beginning with the earlier of the date on which there was adopted or put into effect any amendment which caused the plan to fail to satisfy such requirements" if "all provisions of the plan which are necessary to satisfy such requirements are in effect" within the prescribed time "as the Secretary may designate" and "have been made effective for all purposes for the whole of such period").

8 . The majority suggests that a debtor may be "unaware that his plan failed to meet the requirements of section 401(a)" at the time of a bankruptcy filing, supra ¶ 18, but any such claim of ignorance dissipates upon the assertion of an objection (as in this case). Reinhart surely knew of the operational defects in his 401(a) plan when the trustee asserted his objection, yet he still to this date has failed to seek any correction through EPCRS procedures. To me that is telling, and it thoroughly undermines the concerns of surprise trumpeted by the majority.

9 . Rev. Proc.2006-27 § 6.02(2), 2006-22 I.R.B. 955 (''The correction should be reasonable and appropriate for the failure. Depending on the nature of the failure, there may be more than one reasonable and appropriate correction for the failure.").

10 . I do not envy the task of the federal courts in resolving this case in the wake of our decision. The defects in Reinhart's plan include his failure to cover one of his employees despite the statutory requirement of coverage for all eligible employees, I.R.C. § 401(a)(3); and Reinhart's unauthorized use of the plan to make a $10,400 contribution to fund an automobile loan for Colleen Parker, in contravention of the requirement that plan contributions be made exclusively through Charles Schwab & Co. as the Keogh plan custodian. The majority opinion gives no manageable yardstick for measuring the substan-tiality of these defects, and on the face of them I see no basis for dismissing them as insignificant. Instead of sending this case to the federal courts for a subjective evaluation of that question, I would deem Reinhart's Keogh plan exempt if and only if he corrects any defects in his plan through EPCRS procedures. Unless and until he does so, I see no legal or logical basis for deeming these and other defects insignificant, particularly in light of trial testimony that EPCRS compliance would require, at a minimum, funding of approximately $30,000 for the failure to include the missing employee in the plan.