Many will remember how, close on the heels of the U.S. Supreme Court’s 2005 decision in Rousey v. Jacoway, 125 S.Ct. 1561 (2005), the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) was signed into law, providing IRAs with greater bankruptcy protection. (Read more about Rousey and BAPCPA in previous posts which you can access here.) A recent Third Circuit Court case, In Re: Krebs, finally puts to rest some confusion going on in the Third Circuit about the impact of Rousey as it pertains to pre-BAPCPA bankruptcy cases.
To give a little history, before Rousey and BAPCPA, there had been differences among the Circuits regarding whether section 522(d)(10)(E) of the Bankruptcy Code protected IRAs from creditors claims in bankruptcy. (You can read about the confusion among the Circuits in this article: Rousey and the New Retirement Funds Exemption by John Hennigan.) The Third Circuit, had in the case of Clark v. O’Neill (In re Clark), 711 F.2d 21 (3d Cir. 1983) held that money deposited in a Keogh retirement plan did not qualify for the Section 522(d)(1)(E) exemption because at the time the bankruptcy proceedings were initiated the debtor, then 43 years old, was not eligible to withdraw funds from the account without paying a ten percent penalty. Bankruptcy courts in the Third Circuit had followed this line of reasoning pre-Rousey and pre-BAPCPA, refusing to exempt amounts in an IRA when the debtor was not presently entitled to receive payments without penalty.
After Rousey in which the Supreme Court held that assets in an IRA did qualify for the exemption under section 552(d)(10)(E) as long as the amounts in question were reasonably necessary for support of the debtor and his or her dependents, bankruptcy judges in the Third Circuit continued to disagree on whether Rousey had overruled Clark, i.e. whether an IRA had to be in pay status in order to be exemptible in bankruptcy. In the recent case of In Re: Krebs (pertaining to a petition in bankruptcy filed one month before BAPCPA’s effective date), the Third Circuit settled the dispute once and for all by holding that Rousey did indeed overrule Clark and that IRAs may be exempted from the bankruptcy estate regardless of whether or not they are in pay status.
Here is what the Third Circuit had to say:
Several of our sister courts of appeals have decided the exemption issue contrary to Clark. However, we lack authority to overrule it on that basis. Nor can we overrule it because we are no longer persuaded by its reasoning. The basis that permits us to do so is the Supreme Court’s 2005 decision in Rousey, in which the Court held that the right to receive IRA payments “can be exempted from the bankruptcy estate pursuant to § 522(d)(10)(E).” 544 U.S. at 326. . .
Although the precise holding in Rousey covers only the first and second requirements of § 522(d)(10)(E), the facts in Rousey cast doubt on Clark’s interpretation of the third requirement. That interpretation, i.e., the per se rule we established, is wrong because the Rouseys had not yet reached 59 ½ years of age when they filed their bankruptcy petition, so they were not yet receiving payments (without penalty) from the IRA they sought to exempt. The pertinent part of the Rouseys’ merits brief before the Supreme Court states:
“When they filed for bankruptcy, Richard Rousey was fifty-seven years old and petitioner Betty Jo Rousey was fifty-three. Their ability to replace those funds, a substantial part of which had been accumulated through their employer-sponsored pension plan, and through the compounding of funds held for many years, is non-existent. Nothing in the language, structure, or purpose of Section 522(d)(10)(E) suggests any reason why the fortuity that they filed for bankruptcy in 2001 rather than the year in which they would be 59 ½ years old should determine the eligibility of their IRAs for exemption.”
Brief for Petitioners, Rousey, 2004 WL 1900505, at *35-36; see also Rousey v. Jacoway, 275 B.R. 307, 309, 311 (Bankr. W.D. Ark. 2002) (stating that the Rouseys would face a 10% tax penalty if they withdrew from their IRAs at that time). Moreover, it is the Rouseys’ age at time of petition filing that matters because the bankruptcy estate is created at the “commencement” of the bankruptcy case. See 11 U.S.C. §§ 301 & 541(a). The Supreme Court’s holding that IRAs may be exempted under § 522(d)(10)(E) therefore applies squarely to those debtors who have not yet reached 59 ½ years of age. Our contrary interpretation of the third requirement of § 522(d)(10)(E) in Clark thus ends up appending a sort of fourth requirement that finds no support in the statutory text and that Rousey forecloses by its facts.
See also this interesting language in footnote 3 discussing an issue that was the subject of this article: “May It Please the Court”: If I Had Been at Oral Argument in Rousey v. Jacoway: Part II by Scott Pryor:
The parties have not argued, so we do not decide, that there is a difference between exempting the right to receive payment from an IRA versus exempting the IRA itself. The Supreme Court does not appear to perceive any difference of significance. Compare Rousey, 544 U.S. at 325 (“the right to receive payment may be exempted”), with id. at 326 (“IRAs can be exempted”). Hence, we, too, will assume the semantic interchangeability and refer to exempting both in this opinion.