American Bankruptcy Institute Update

April 5, 2005

In This Issue

Highlights

Legislation Update

Rules Committee to Consider Rule for Bankruptcy Bill Today; Full Debate Put Off Until Next Week

The House Rules Committee has scheduled a meeting for 5:00 pm today to consider a rule for S. 256. However, action by the full House will have to wait until next week, as a number of members will attend Pope John Paul II’s funeral.

Grassley Looking to Move Broader Pension Bill This Year

Senate Finance Chairman Charles Grassley (R–Iowa) is revamping pension legislation, planning to reintroduce a broader version aimed at tightening pension funding rules and boosting employee retirement savings, CongressDaily reported. Work on the legislation, which will be based on Grassley’s “NESTEG” retirement bill, has picked up in the last few weeks, staffers and lobbyists said. The revised bill will include broader changes in pension funding rules than the previous version. The bill also will attempt to find middle ground in the debate over investment advice to workers and improve retirement funds for employees who do not select an investment option, the newswire reported.

Separately, the Wall Street Journal reported that as auto-industry funds for retired workers run short, the government could inherit plans. “Beyond the airline industry, the insurance program faces tremendous exposure from the auto sector,” says Bradley Belt, executive director of the PBGC, the online newspaper reported. The agency says the pension assets of auto makers and parts companies fall short of the pension promises they have made to workers by $45 billion to $50 billion—more than the $31 billion shortfall in the airline industry’s pension plans.

Insurers Urge Specter to Drop Efforts on Asbestos Measure

A prominent group of insurers yesterday told Senate Judiciary Chairman Arlen Specter (R–Pa.) that problems with asbestos legislation are “unfixable,” CongressDaily reported. In a letter, the insurers noted that business and labor stakeholders negotiating a bill have been unable to agree on details of a proposed $140 billion trust fund that would be used to compensate victims of asbestos-related illnesses. The letter urged Specter to consider a more limited approach of adopting medical criteria that victims would have to meet to be eligible to file asbestos lawsuits, or instituting “venue reform” to help control asbestos cases. “We respectfully suggest that efforts now be turned towards developing alternative legislation,” the letter states, according to the newswire. The letter was signed by 15 insurance companies, including Liberty Mutual, Nationwide, Allstate and the Chubb Corp. Specter is expected as early as this week to introduce legislation he hopes will win bipartisan support.

Supremes to Trustee: “Hands Off IRA”

by Prof. C. Scott Pryor, Associate Professor, Regent University School of Law, Virginia Beach, Va.

Four months after hearing oral arguments the Supreme Court on Monday released its unanimous decision in Rousey v. Jacoway, —U.S.—, 2005 WL 742304: IRAs are exemptible under §522(d)(10)(E).1

Richard and Betty Jo Rousey had filed chapter 7 in 2001 and claimed a federal exemption for the bulk of their IRAs. Their IRAs had been rolled over from pension plans that would have been excluded from property of the estate by Patterson v. Shumate, 504 U.S. 753 (1992). The panel trustee, Jill Jacoway, objected to the Rouseys’ exemption on two grounds. First, she argued that IRAs were not sufficiently “similar” to the four traditional pension plans enumerated in the exemption (i.e., stock bonus, pension, profit-sharing or annuity plan). Second, the trustee asserted that IRA withdrawals were not necessarily “on account of” one of five purposes permitted by the statute (i.e., illness, disability, death, age or length of service). Both of the trustee’s arguments prevailed with the bankruptcy court (In re Rousey, 275 B.R. 307 (W.D. Ark. 2002)) and the Bankruptcy Appellate Panel (Rousey v. Jacoway (In re Rousey), 283 B.R. 265 (8th Cir. B.A.P. 2002)). On appeal the Eighth Circuit agreed with only the second argument: potential payments from the IRAs were not “on account of illness, disability, death, age or length of service” because the Rouseys had “unfettered discretion to withdraw from the corpus at any time subject only to modest early withdrawal tax penalties.” Rousey v. Jacoway (In re Rousey), 347 F.3d 689, 693 (8th Cir. 2003). IRAs were simply tax-advantaged savings accounts to which the debtors had easy access “at any time for any purpose.” Id.

Writing for a unanimous Supreme Court, Justice Thomas rejected both of the trustee’s arguments. The Court concluded that payments from an IRA were “on account of” age because of the 10 percent penalty on withdrawals before age 59½, which the Court characterized as “substantial.” This 10 percent forfeiture effectively prevented the Rouseys’ access to the entire balance until they reached a particular age; therefore, the payments were “on account of age.”

The Court in turn found the requisite degree of similarity between IRAs and the traditional retirement plans listed in §522(d)(10)(E) for two reasons. First, IRAs, like all of the exemptible benefits treated in §522(d)(10) generally and pension plans in particular, have one thing in common: “they provide income that substitutes for wages.” The Court found support for this conclusion in the fact that holders of IRAs must begin withdrawals at 70½ (when most holders will be retired and no longer earning wages) and because the early withdrawal penalty disappears at 59½. Second, Justice Thomas pointed to §522(d)(10)(E)(i)–(iii) where Congress excluded certain IRAs from the exemption. It would make “little sense to exclude from the exemption plans that fail to qualify under §408 [of the Internal Revenue Code], unless all plans that do qualify… including IRAs, are generally within the exemption.”

The Court did not address the more fundamental issue of whether the introductory language of §522(d)(10) (“the debtor’s right to receive… (E) a payment under….”) exempts the corpus of IRA accounts or only the stream of payments from an IRA.2 This question was not put directly to the Court given the holdings of the lower courts. But, while the Court had left open this issue in Patterson v. Shumate, 504 U.S. at 763 n.5, there can be little dispute that the Court in Rousey intended to close the door on it: “in construing [§541(c)(2) in Patterson], this Court stated that IRAs could be exempted pursuant to §522(d)(10)(E)…. We now reaffirm that statement and conclude that IRAs can be exempted from the bankruptcy estate…. ” Nor did the Court evaluate whether the exemption Rouseys’ IRAs ran afoul of the federal limit of the amount of the exemption “to the extent” that it is “reasonably necessary to support” the debtors or their dependents. Consideration of this question will presumably be left to the lower courts to work out on a case-by-case basis.

On one hand we can see that the Court’s decision in Rousey exemplifies a continuing commitment to plain meaning in statutory construction. On the other hand, we might consider whether a combination of the limiting effects of the bankruptcy reform legislation currently pending in Congress as well as the concerns about the long-term viability of Social Security may have influenced the Court’s reading of the exemption statute. The fact that the amounts of the Rouseys’ IRAs were relatively modest and would have been excluded from their estate had they still been employed likely played a role.

It is also important to remember that §522(d)(10)(E) applies only to debtors in states that have not opted out of the federal exemptions. It will have effect in the 35 states that have opted out only if their exemption statutes track federal law.3 And even in the states that permit debtors to choose the federal exemptions, debtors may find state exemptions for IRAs to be more generous.

Footnotes

  1. Bankruptcy Code §522(d) begins with the statement that the following property may be exempted under subsection (b)(1) of this section…

    (10) The debtor’s right to receive−

    1. a social security benefit, unemployment compensation, or a local public assistance benefit;
    2. a veterans’ benefit;
    3. a disability, illness, or unemployment benefit;
    4. alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;

    5. 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–
      1. 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;
      2. such payment is on account of age or length of service; and
      3. such plan or contract does not qualify under §401(a), 403(a), 403(b), or 408 of the Internal Revenue Code of 1986.
  2. Read Prof. Pryor’s articles on Rousey v. Jacoway, published in the February and March issues of the ABI Journal.

    “May It Please the Court: Answers to Questions Not Raised in Rousey v. Jacoway,” Part I and Part II. Return to Article.

  3. See C. Scott Pryor, Rock, Scissors, Paper: ERISA, The Bankruptcy Code and State Exemption Laws for Individual Retirement Accounts, 77 Am. Bankr. L.J. 65, 123–27 (2003) (listing state statutory exemptions for IRAs). Return to Article.

Consumer Bankruptcy Committee E-Newsletter Now Online

The April issue of ABI’s Consumer Bankruptcy Committee e-newsletter is available online. Read an article on dischargeability of debts based on bad checks as well as information concerning the status of the bankruptcy bill that can be accessed through the ABI bankruptcy bill news page. Learn about the committee’s scheduled panel at the 2005 Annual Spring Meeting to review the conflicting decisions that continue to emerge in connection with Bankruptcy Rule 3001 and Official Form 10 in relation to unsecured proofs of claim.

Second Annual ABI Corporate Restructuring Competition Now Online

Information about ABI’s second annual corporate restructuring competition for top business schools, to be held November 11–13, 2005 at the Kellogg School of Management,  Northwestern University, Evanston, Ill., is available online. Learn about competition details, competition rules and the case problem, and view photos from the 2004 competition.

Latest Job Postings at ABI Career Center

Check out the ABI Career Center. The Center is a one-stop site for job seekers and employers in the insolvency community. Career Center resources are available free to both employers and job seekers. New positions are featured daily. The latest listings include: