ROBERT KWAN, Bankruptcy Judge.
The disputes between the parties, Stephanie F. Berry ("Berry") and Jeffrey Scott Trawick ("Debtors"), and Richard K. Diamond, the Chapter 7 Trustee ("Trustee"), arising from Trustee's adversary proceeding seeking turnover of certain assets of Debtors claimed as exempt and from the contested matters of Trustee's objections in the main bankruptcy case to Debtors' amended claims of exemption for these assets on cross-motions for summary judgment came on for hearing before the undersigned United States Bankruptcy Judge on July 2 and 16, 2013. Kevin D. Meek, of the law firm of Danning, Gill, Diamond & Kollitz, L.L.P., appeared for Trustee. Mark T. Young, of the law firm of Donahoe & Young, appeared for Debtors.
Having considered the moving and opposing papers and heard the arguments of the parties, the court now issues this memorandum decision.
The facts pertaining to these disputed matters are largely undisputed.
On January 24, 2012, Debtors, who are husband and wife, filed a joint voluntary petition for relief under Chapter 7 of the Bankruptcy Code, 11 U.S.C. Richard K. Diamond was appointed as the Chapter 7 Trustee for the case.
On July 3, 2010, Berry's parents, Robert P. Berry and Roberta J. Berry, executed a trust instrument ("Trust Instrument") creating a trust called the "Robert P. Berry, Sr. and Roberta J. Berry 2010 Trust" (the "Trust") in which they were both the settlors and initial trustees pursuant to the laws of the State of North Carolina. See Trust Instrument (Trustee's Motion for Summary Judgment ("Trustee's MSJ") [AP Docket No. 9]), Exhibit 1, Article I. The Trust named Berry and her brothers,
Berry and her brothers were also named by their mother as beneficiaries of an individual retirement account that was maintained at America Financial Life and Annuity Insurance Co. under policy number R0018033 ("Inherited IRA"). Declaration of Stephanie Berry, dated April 13, 2012 ("Berry Declaration") (Trustee's MSJ, Exhibit 2), ¶ 4. The total value of the Inherited IRA is $183,000. Diamond Declaration, ¶ 5.
Both of Berry's parents died in 2011, and upon their death, equal beneficial interests in the Trust and Inherited IRA passed to Berry and her brothers. Berry Declaration, ¶¶ 2 and 4. Berry also became the Trustee of the Trust and had "all duties and powers, including any of a discretionary nature, herein granted to the original Trustees." Trust Instrument, Article XII; Declaration of Stephanie Berry, ¶ 2.
When Debtors filed their bankruptcy petition, they did not list Berry's beneficial interests in the Trust or the Inherited IRA on Schedules B and C of their original bankruptcy schedules, though they referred to the Trust as "property held for another person" on their original statement of financial affairs. Schedules B and C, filed January 24, 2012 (Trustee's MSJ, Exhibit 3); Statement of Financial Affairs (excerpt), filed January 24, 2012 (Debtors' Opposition to Trustee's MSJ, Exhibit 2).
On August 16, 2012, Trustee initiated an adversary proceeding by filing a complaint seeking (1) declaratory relief that Berry's interest in the Trust constituted property of the bankruptcy estate under 11 U.S.C. § 541(a); and (2) a judgment directing the debtors to turn over Berry's interest in the Trust to the Trustee, or the cash value thereof. Trustee's Complaint did not refer to Berry's interest in the Inherited IRA as Debtors had not then disclosed that interest on their schedules.
On March 16, 2013, Trustee filed a motion for summary judgment in the adversary proceeding against Debtors seeking declaratory relief that Berry's interests in the Trust and Inherited IRA are property of the bankruptcy estate and are not exempt and turnover of these interests to Trustee should be ordered (AP Docket No. 9).
On April 2, 2013, Debtors filed an opposition to Trustee's summary judgment motion. Debtors' Opposition to Trustee's MSJ, AP Docket No. 13. In their opposition to Trustee's summary judgment motion, Debtors contended that Berry's interest in the Trust is an exempt asset under North Carolina law because the Trust contains a spendthrift provision and contains other provisions treating the interest as exempt as a discretionary trust interest or a protective trust interest. As to Berry's interest in the Inherited IRA, Debtors contended that Trustee's Motion should be denied on procedural grounds because the adversary complaint did not include any claim as to Berry's interest in the Inherited IRA and on substantive grounds that the Inherited IRA is exempt pursuant to 11 U.S.C. § 522(b)(3)(C).
Also on April 2, 2013, Debtors filed amended Schedules B and C (BK Docket No. 32). The amended Schedule B listed Berry's interests in the Trust and Inherited IRA as assets, but her interest in the Trust was listed as non-property of the
On April 10, 2013, Debtors filed a cross-motion for summary judgment (AP Docket No. 19). In support of their motion, Debtors made the same arguments in their opposition to Trustee's summary judgment motion. On May 7, 2013, Trustee filed an opposition to Debtors' cross-motion for summary judgment (AP Docket No. 28) as well as evidentiary objections to certain declarations filed by Debtors in support of their cross-motion for summary judgment (AP Docket Nos. 24, 25, and 27).
On May 1 and 2, 2013, Trustee filed objections to the exemptions claimed by Debtors in their amended schedules with respect to Berry's interests in the Trust (BK Docket No. 33) and Inherited IRA (BK Docket No. 37). On June 18, 2013, Debtors filed oppositions to Trustee's objections to the amended exemptions (BK Docket Nos. 48-49). On June 25, 2013, Trustee filed replies (BK Docket Nos. 50-51) and evidentiary objections to certain declarations filed in support of Debtors' oppositions (BK Docket Nos. 52-56). On May 28, 2013, Debtors filed a reply to Trustee's motion for summary judgment (AP Docket No. 35).
On July 16, 2013, a hearing was held on the parties' cross-motions for summary judgment as well as the Trustee's objections to the exemptions claimed in the Trust and Inherited IRA. The court granted leave for the parties to submit further briefing on a recently decided case, In re Bauer, 2013 WL 2661835 (Bankr.D.S.C. June 12, 2013), and took the cross-motions for summary judgment and the Trustee's objections to the amended exemptions under submission.
On July 30, 2013, Trustee filed a supplemental brief on the applicability of Bauer to this case (BK Docket No. 57). On August 13, 2013, Debtors filed a response to the supplemental brief (BK Docket No. 58) to address the arguments made by Trustee in the supplemental brief and to notify the court that the Seventh Circuit's decision in In re Clark, 714 F.3d 559 (7th Cir.2013) is still subject to review by the United States Supreme Court after the deadline to file a petition for writ of certiorari was extended to September 18, 2013 by Justice Kagan. See Declaration of Denis P. Bartell, dated August 13, 2013, ¶ 4 (BK Docket No. 58). Debtors requested that the court defer its decision on the amended claim of exemption in the Inherited IRA until the Supreme Court ruled on the petition for review in Clark, which request the court now denies.
By the adversary proceeding, Trustee seeks the turnover of Berry's interests in the Trust and the Inherited IRA, and by his objections to the amended exemptions, Trustee seeks denial of Debtors' amended claims of exemption in Berry's interest in the Inherited IRA and Trust. In defending Trustee's adversary proceeding and opposing his objections to the amended claims of exemption, Debtors seek determinations that turnover of these assets should not be ordered and that Trustee's objections to the amended claims of exemption should be overruled.
The court has jurisdiction over Trustee's adversary proceeding pursuant to 28 U.S.C. § 1334, and the claims for relief alleged in the adversary complaint arise under the Bankruptcy Code, 11 U.S.C. See Adversary Complaint ("Complaint"), ¶ 1; Answer, ¶ 1. The adversary proceeding is a
The court also has jurisdiction over the contested matters of Trustee's objections to Debtors' amended claims of exemption pursuant to 28 U.S.C. § 1334, and the claims for relief alleged in the objections arise under the Bankruptcy Code, 11 U.S.C., and are related to Debtors' bankruptcy case, No. 2:12-bk-12581 RK. See Trustee's Objections to Amended Claims of Exemption to Trust Interests and Inherited IRA; Debtors' Oppositions thereto. The contested matters are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(A), (E) and (O). Venue properly lies in this judicial district pursuant to 28 U.S.C. § 1409(a).
On or about June 4, 2013, Trustee filed objections to the declarations of Berry and Debtors' counsel, Mark T. Young, filed in support of Debtors' opposition to Trustee's summary judgment motion. The court now sustains Trustee's objections to Berry's declaration, nos. 1 and 2 and his objections to Young's declaration, nos. 1-5.
On or about June 25, 2013, Trustee filed objections to the declarations of Berry and Debtors' bankruptcy counsel, Mark T. Young, filed in support of Debtors' opposition to Trustee's motion for an order disallowing Debtors' amended claim for exemption in the Trust. The court now sustains Trustee's objections to Berry's declaration, nos. 1-3 and his objections to Young's declaration, nos. 1-5.
On or about June 25, 2013, Trustee filed objections to the declarations of Berry, Debtors' bankruptcy counsel, Mark T. Young, and Dennis P. Bartell, counsel for debtors in In re Clark, filed in support of Debtors' opposition to Trustee's motion for an order disallowing Debtors' amended claim for exemption in the Inherited IRA. The court now sustains Trustee's objections to Berry's declaration, nos. 1-3, his objections to Young's declaration, nos. 1-5, and his objection to Bartell's declaration, no. 1.
Section 541(c)(2) of the Bankruptcy Code, 11 U.S.C., provides: "A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title." See also, Patterson v. Shumate, 504 U.S. 753, 757-758, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992) (construing 11 U.S.C. § 541(c)(2)). As the Supreme Court noted in Patterson, "[t]he natural reading of this provision entitles a debtor to exclude from property of the estate any interest in a plan or trust that contains a transfer restriction enforceable under any relevant nonbankruptcy law." 504 U.S. at 758, 112 S.Ct. 2242. As further noted in Patterson, "[t]he text contains no limitation on `applicable nonbankruptcy law' relating to the source of the law." Id.
As expressly provided in the Trust Instrument, the Trust is governed by North Carolina law. Trust Instrument, Article XV ("This trust has been accepted by the Trustees in North Carolina, and all questions pertaining to the validity and construction of this instrument and to the administration of the trust shall be determined in accordance with the laws of that State."). The settlors and original trustees of the Trust, Berry's parents, indicated in the preamble of the Trust Instrument that they were residents of Mecklenburg County, North Carolina, and subscribed to the Trust Instrument before a notary public in that state and county. Trust Instrument at 1 and 15.
Prior to 2006, North Carolina did not recognize spendthrift trusts in any way. However, in January 2006, North Carolina revised its statutory law of trusts by adopting much of the Uniform Trust Code as part of the North Carolina General Statutes ("NCGS") § 36C-1-101, et seq. Current North Carolina statutory law recognizes the enforceability of spendthrift trusts. NCGS § 36C-5-501 provides:
NCGS § 36C-5-501 (emphasis added).
Thus, under North Carolina law, a trust may protect or restrict a beneficiary's interest from the beneficiary's creditors by any of (1) a spendthrift provision; (2) a discretionary trust interest; or (3) a protective trust interest.
NCGS § 36C-5-502 provides:
NCGS § 36C-5-502.
The Official Comment to NCGS § 36C-5-502 provides, in pertinent part:
Id., Official Comment (emphasis added).
Article IX(C) of the Trust Instrument contains the type of "maximum spendthrift provision" referred to in the Official Comment, stating as follows:
Trust Instrument, Article IX(C) (emphasis added).
Thus, the Trust Instrument contains a valid spendthrift provision pursuant to NCGS § 36C-5-502 as the express language of the Trust Instrument prohibits the voluntary and involuntary transfer of a beneficiary's interest to a payment of any debt of the beneficiary.
In his summary judgment motion, Trustee argues that the spendthrift provision was ineffective under applicable state trust law and thus the restrictions on transfer of a debtor's beneficial interest in a trust are not enforceable pursuant to 11 U.S.C. § 541(c)(2) because under the Trust Instrument, Debtors have the ability to exert dominion and control over the Trust. However, in support of this argument, Trustee does not cite any case authority interpreting North Carolina law holding that such a spendthrift provision would be ineffective. Rather, Trustee cites case law interpreting the trust law of other states that has so held. Trustee's MSJ at 12-16, citing inter alia, In re Baldwin, 142 B.R. 210 (Bankr.S.D.Ohio 1992) (Ohio law); In re Lawrence, 251 B.R. 630 (S.D.Fla.2000) (Florida law); In re Witwer, 148 B.R. 930 (Bankr.C.D.Cal.1992) (Wilson, J.); In re Rolfe, 34 B.R. 159 (Bankr.N.D.Ill.1983)
Rather than parsing the case law first, the court should rely upon the usual method of statutory interpretation based on the plain language of the statute. United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241-242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989); see also, Patterson v. Shumate, 504 U.S. at 757, 112 S.Ct. 2242 ("In our view, the plain language of the Bankruptcy Code and ERISA is our determinant.") (citation omitted). In Ron Pair, the Supreme Court stated: "The task of resolving the dispute over the meaning of [a statute] begins where all such inquiries must begin: with the language of the statute itself." Id. at 241, 109 S.Ct. 1026 (citation omitted). The Supreme Court in Ron Pair in interpreting the subject statute in that case, Section 506(b) of the Bankruptcy Code, 11 U.S.C., held: "In this case it is also where the inquiry should end, for where, as here, the statute's language is plain, the sole function of the courts is to enforce it according to its terms." Id. (citation and internal quotation marks omitted); accord, Patterson v. Shumate, 504 U.S. at 759, 112 S.Ct. 2242. As discussed above, the express statutory language of the North Carolina General Statutes recognizes the validity of a spendthrift provision which complies with the terms of that language.
Trustee's position is further weakened by the express language of NCGS § 36C-5-503, which excepts the enforceability of a spendthrift provision from child support payments. See NCGS § 36C-5-503 (entitled "Exceptions to spendthrift provision"). This provision states:
NCGS § 36C-5-503. There is no indication within this statute that a spendthrift provision is unenforceable simply due to the fact that a beneficiary also serves as a trustee. The failure of the North Carolina legislature to include such an exception in NCGS § 36C-5-503 indicates that the legislature did not intend to restrict the enforceability of a spendthrift provision in that regard.
The court further notes that there is also an exception to the enforceability of a spendthrift provision in a trust in which the settlor retains a beneficial interest in NCGS § 36C-5-505 (entitled "Creditor's claim against settlor"). This provision does not apply to the case at bar because the Trust is not a self-settled trust, but it also shows the extent of the restrictions to the enforceability of a spendthrift provision expressly imposed by the North Carolina legislature.
Trustee urges that the court follow and apply to the Trust the four-factor common law test in Baldwin to determine whether a trust qualifies as a spendthrift trust: (1) the settlor of the trust is also the beneficiary of the trust; (2) the beneficiary has dominion and control of the trust; (3) the beneficiary may revoke the trust; or (4) the beneficiary has powers in the trust. Trustee's MSJ at 12-13, citing, In re Baldwin, 142 B.R. at 214, citing inter alia, In re Swanson, 873 F.2d 1121, 1124 (8th Cir. 1989) (interpreting Minnesota trust law, but also relying upon federal general common law).
For the foregoing reasons, the court concludes that Berry's interest in the Trust is protected by a valid spendthrift
NCGS § 36C-5-504(a) defines a "discretionary trust interest" as follows:
NCGS § 36C-5-504(a).
Under this provision, if a trustee also holds a beneficiary interest under a discretionary trust, the trustee's beneficial interest is also protected "if the trustee's discretion to make distributions for the trustee's own benefit is limited by an ascertainable standard." NCGS § 36C-5-504(f) (emphasis added). An "ascertainable standard" is defined as "[a] standard relating to an individual's health, education, support, or maintenance within the meaning of section 2041(b)(1)(A) or 2514(c)(1) of the Internal Revenue Code." NCGS § 36C-1-103(2) (emphasis added).
The court determines that the Trust is a discretionary trust because it does not contain any ascertainable standard relating to health, education, support or maintenance that would limit Berry's power to make distributions to herself. See NCGS § 36C-5-504(a)(2)a. Article IX of the Trust Instrument contains a list of provisions relating to the discretion of the Trustee, but states that the provisions "are not intended to limit or direct the exercise of such discretion in any way." Trust Instrument, Article IX(A). Therefore, the court concludes that because Berry's discretion as the successor trustee of the Trust to make distributions for her own benefit is not limited by an ascertainable standard, her beneficial interest in the Trust is a discretionary interest not protected from her creditors pursuant to NCGS § 36C-5-504 or § 36C-5-501(b)(2).
NCGS § 36C-5-508 defines a "protective trust interest" as follows:
NCGS § 36C-5-508.
The court determines that the Trust is a protective trust because under the Trust Instrument, it terminates an interest if a beneficiary (1) attempts to subject his/her interests to the payment of his/her debt (i.e., alienate the interest to a creditor); or (2) files for bankruptcy or otherwise becomes subject to insolvency or receivership proceedings. Article IX of the Trust Instrument provides a beneficiary's interest in the Trust terminates or becomes discretionary if the beneficiary "attempt[s] to subject such interest to the payment of any debt, liability or obligation of any such beneficiary" or "if such beneficiary shall be subject to bankruptcy, insolvency or receivership proceedings." Trust Instrument, Article IX(C).
Therefore, the court concludes that to the extent that Berry's interest in the Trust does not terminate, it is also a discretionary interest pursuant to NCGS § 36C-5-508, and further concludes that because Berry's discretion as the successor trustee of the Trust to make distributions for her own benefit is not limited by an ascertainable standard, her beneficial interest in the Trust is a discretionary interest not protected from her creditors pursuant to NCGS § 36C-5-504 or § 36C-5-501(b)(2).
Based on the foregoing, the court determines that Berry's interest in the Trust is not property of the Debtors' bankruptcy estate because the Trust contains a valid spendthrift provision pursuant to NCGS § 36C-5-502 and is not liable to creditors pursuant to NCGS § 36C-5-501(b)(1). Therefore, because Berry's interest in the Trust is not property of the bankruptcy estate, Debtors' claimed exemption in the interest in the Trust, and Trustee's objection thereto, are moot. Moreover, because Berry's interest in the Trust is not property of the estate, it is not subject to turnover as demanded by Trustee, and thus, as to Berry's interest in the Trust, Trustee's motion for summary judgment should be denied, Debtors' cross-motion for summary judgment should be granted, and Trustee's adversary complaint should be denied and dismissed with prejudice.
On their Amended Schedule C, Debtors claimed Berry's interest in the Inherited IRA exempt pursuant to 11 USC § 522(b)(3)(C) and California Code of Civil Procedure, § 703.140(b)(10)(E). In the adversary proceeding, Trustee has moved for summary judgment with respect to Debtors' claimed exemptions in the Inherited IRA. However, in the complaint, Trustee did not plead a claim for the turnover of the funds in the Inherited IRA. See Complaint, ¶¶ 10-16.
In this circuit, a party cannot move for summary judgment if it has not given notice of the claim in the complaint. Wasco Products, Inc. v. Southwall Technologies, Inc., 435 F.3d 989, 992 (9th Cir.2006) ("[T]he necessary factual averments are required with respect to each material element
In the case at bar, Debtors did not list Berry's interest in the Inherited IRA as an asset on their bankruptcy schedules until after Trustee filed the adversary complaint. The Trustee cannot move for summary judgment with respect to Berry's interest in the Inherited IRA until such allegations are pled in an amended complaint. Thus, Trustee's motion for summary judgment in the adversary proceeding with respect to the Inherited IRA is denied on procedural grounds. Nevertheless, Debtors have filed a cross-motion for summary judgment on these issues. Moreover, the parties have raised the issue of the validity of the claim of exemption in the Inherited IRA by Trustee's Objection to Debtors' Amended Claim of Exemption in this asset. Therefore, the court may address the amended claim of exemption for Berry's interest in the Inherited IRA under 11 U.S.C. § 522(b)(3)(C) and California Code of Civil Procedure § 703.140(b)(10)(E).
California has opted out of the federal exemption scheme provided in the Bankruptcy Code. 11 U.S.C. §§ 522(b)(1), (2) and (3) and (d); Sticka v. Applebaum (In re Applebaum), 422 B.R. 684, 688 (9th Cir. BAP 2009); see also, March, Ahart and Shapiro, California Practice Guide: Bankruptcy, ¶¶ 7:2 — 7-3 at 7-1 — 7-2 (2011). Regardless of which exemption scheme is chosen, California debtors may still exempt certain retirement funds under Section 522(b)(3) of the Bankruptcy Code, 11 U.S.C. See March, Ahart and Shapiro, California Practice Guide: Bankruptcy, ¶ 7:660 at 7-72.
Section 522(b)(3) of the Bankruptcy Code, 11 U.S.C., provides, in conjunction with applicable state law, the exemption of: "(C) retirement funds to the extent those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986." 11 U.S.C. § 522(b)(3)(C) (emphasis added). Section 522(b)(4) of the Bankruptcy Code further provides:
11 U.S.C. § 522(b)(4) (emphasis added).
Thus, within the context of 11 U.S.C. § 522(b)(3)(C), there are two separate issues that must be addressed: (1) Debtors must prove that the Inherited IRA has either (a) received a favorable determination under the Internal Revenue Code ("IRC") § 7805, or (b) is in substantial compliance with the applicable requirements of the IRC; and (2) Trustee, as the objecting party, must prove that the funds within the Inherited IRA are "retirement funds" for purposes of § 522(b)(3)(C). See Mullen v. Hamlin (In re Hamlin), 465 B.R. 863, 870 (9th Cir. BAP 2012).
Neither party has specifically addressed whether there is any evidence that the Inherited IRA (1) has received a favorable determination under Section 7805 of the IRC, or (2) is in substantial compliance with the applicable requirements of the IRC. See, Trustee's MSJ at 16-18; Debtors' MSJ at 14-16; Trustee's Objection to Amended Exemption Claim (Inherited IRA) at 4-9; Debtors' Opposition thereto at 3-8; see also, In re Hamlin, 465 B.R. at 873-874.
While a claim of exemption is presumed valid, and the party objecting to the exemption has the burden of proving that the exemption is not properly claimed by a preponderance of the evidence, 11 U.S.C. § 522(b)(4)(B) places the burden of this specific issue on the debtor. See 11 U.S.C. § 522(b)(4) (requiring "the debtor demonstrate that" (i) the retirement fund has not previously received a favorable determination under Section 7805 of the IRC from the IRS; and (ii) the retirement fund is in substantial compliance with the applicable requirements of the IRC, or if the retirement fund is not in substantial compliance with the applicable requirements of the IRC, then the debtor is not materially responsible for the failure); see also Fed. R. Bankr.P. 4003(c) (placing the burden on the objecting creditor to prove that the debtor's exemption was not properly claimed); Tyner v. Nicholson (In re Nicholson), 435 B.R. 622, 630 (9th Cir. BAP 2010).
Here, Debtors have not presented any evidence that the Inherited IRA (i) has received a favorable determination from the IRS under Section 7805 of the IRC; or (ii) otherwise substantially complies with the applicable requirements of the IRC. Therefore, Debtors have not met their burden of proof under 11 U.S.C. § 522(b)(4), and Debtors' motion for summary judgment cannot be granted without this showing.
If Debtors eventually prove that the Inherited IRA is eligible for tax exempt status under the IRC, the court will need to address the divided case law as to what constitutes "retirement funds" for purposes of 11 U.S.C. § 522(b)(4) when the debtor has inherited a retirement account from another. This split is shown by a number of published and unpublished opinions. Compare, In re Chilton, 674 F.3d 486 (5th Cir.2012) (exempt); In re Hamlin, 465 B.R. 863 (9th Cir. BAP 2012) (same); In re Nessa, 426 B.R. 312 (8th Cir. BAP 2010) (same); In re Stephenson, 2011 U.S. Dist. LEXIS 142360, 2011 WL 6152960 (E.D.Mich. Dec. 12, 2011) (same); In re Seeling, 471 B.R. 320 (Bankr. D.Mass.2012) (same); In re Bauer, 2013 Bankr.LEXIS 2449, 2013 WL 2661835 (Bankr.D.S.C. June 13, 2013) (same); In re
The majority view, which includes the Fifth Circuit and the Bankruptcy Appellate Panels of the Eighth and Ninth Circuits, holds that "retirement funds" for purposes of 11 U.S.C. § 523(b)(3)(C) and (12) "can include the funds that others had originally set aside for their retirement, as with inherited IRAs." In re Chilton, 674 F.3d at 488-489; see also, In re Hamlin, 465 B.R. at 871-873. The Ninth Circuit Bankruptcy Appellate Panel in Hamlin observed that the language of § 522(b) is not expressly limited to the "debtor's retirement funds." 465 B.R. at 871, quoting, In re Nessa, 426 B.R. at 314. To read that limitation into § 522(b) "would impermissibly limit the statute beyond its plain language." Id. The BAP in Hamlin further noted that the IRC references inherited IRAs in § 408 — "Individual retirement accounts" — and gives them the tax exempt status along with traditional IRAs (i.e., those owned by the original IRA owner). Id. at 873. Thus, according to the majority view, distinctions between inherited IRAs and traditional IRAs are irrelevant since IRC § 408(e) provides that "any individual retirement account is exempt from taxation under [IRC § 408]" (emphasis added).
The minority view, including the Seventh Circuit, holds that the inquiry of whether an inherited IRA contains "retirement funds" for purposes of the exemption under 11 U.S.C. § 522(b)(4) is determined as to the current owner of the funds. In re Clark, 714 F.3d 559 (7th Cir.2013). The reasoning of the minority view in Clark is that the exempt status of "retirement funds" status should be determined by whether the inherited IRA represents anyone's savings for retirement. The Seventh Circuit in Clark noted the IRC's disparate treatment between IRAs inherited by a spouse and IRAs inherited by a non-spouse. Id. at 560-561. That is, if a spouse inherited the IRA, then the funds remain "retirement funds" because the spouse cannot withdraw any of the money before age 59½ without paying a penalty tax and must start withdrawals no later than the year in which the survivor reaches age 70½. Id. In other words, the IRA remains for the spouse's retirement. Id. In contrast, if the IRA is inherited by a non-spouse, then the funds are not "retirement funds" because the IRA becomes merely a "time-limited tax deferral vehicle" from which the non-spouse beneficiary must make mandatory distributions that are entirely unrelated to the non-spouse's retirement. Id. at 560. Since the IRA is not for the non-spouse's retirement or anyone else's retirement (as the original owner
As between the two approaches, the minority view espoused by the Seventh Circuit has much to commend itself as that approach may better serve the function of the exemption limiting it to those who actually saved the funds for retirement. However, this restrictive approach entirely relies upon a court's interpretation of the term "retirement funds" rather than the express language of the statute. That is, the minority interpretation of the statutory language is not based on the plain language of the statute, but appears to be based on the court's own policy considerations. This approach is a general departure from the usual method of statutory interpretation based on the plain language of the statute as discussed above. United States v. Ron Pair Enterprises, Inc., 489 U.S. at 241-242, 109 S.Ct. 1026 cited in, In re Nessa, 426 B.R. at 314 (interpreting parallel provision in 11 U.S.C. § 522(b)(12)). As noted above, in Ron Pair, the Supreme Court stated, "The task of resolving the dispute over the meaning of [a statute] begins where all such inquiries must begin: with the language of the statute itself." Id. at 241, 109 S.Ct. 1026 (citation omitted). The Supreme Court in Ron Pair, in interpreting the subject statute in that case, Section 506(b) of the Bankruptcy Code, 11 U.S.C., stated, "In this case it is also where the inquiry should end, for where, as here, the statute's language is plain, the sole function of the courts is to enforce it according to its terms." Id. (citation and internal quotation marks omitted). Moreover, as the Supreme Court further stated in Ron Pair, "[t]he plain meaning of legislation should be conclusive, except in the rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.... In such cases, the intention of the drafters, rather than the strict language, controls." Id. at 242, 109 S.Ct. 1026 (citation omitted). However, as the Supreme Court also stated in Ron Pair, "as long as the statutory scheme is coherent and consistent, there generally is no need for a court to inquire beyond the plain language of the statute." Id. at 240-241, 109 S.Ct. 1026.
As the Fifth Circuit in Chilton stated, the analysis should be begin with "whether the funds in an inherited IRA are `retirement funds' as that phrase is used" in the statute. 674 F.3d at 488 (interpreting 11 U.S.C. § 522(d)(12), which has identical language to 11 U.S.C. § 522(b)(3)(C)); see also, In re Bauer, 2013 WL 2661835, at *1 n. 2 (explaining that 11 U.S.C. §§ 522(b)(3)(C) and (12) are identical exemptions, one for the so-called "opt out" states and the other for the remaining states). As further noted in Chilton, "[t]he phrase `retirement funds' is not defined in the Bankruptcy Code." Id. Thus, "[t]o interpret statutory language," according to the Fifth Circuit in Chilton, "we must begin with its plain meaning." Id., citing, Connecticut National Bank v. Germain, 503 U.S. 249, 253-254, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992). As noted in Chilton, "`[R]etirement' is defined as `withdrawal from office, active service, or business'; `fund' is defined as `a sum of money or other resources the principal or interest of which is set apart for a specific objective or activity.'" 674 F.3d at 489, citing, Webster's Third New International Dictionary at 921, 1939 (1993).
In analyzing the plain meaning of the phrase "retirement funds," the Fifth Circuit in Chilton stated:
674 F.3d at 489. This court concludes that the same rationale applies to the identical exemption set forth in 11 U.S.C. § 522(b)(3)(C). In re Bauer, 2013 WL 2661835, at *1-2 and n. 2; see also, In re Hamlin, 465 B.R. at 870-873.
Thus, the majority of the courts which have opined on the issue have held that the plain language of the statute controls and that the statute does not contain any restriction of the exemption to the original owners of the funds. See, e.g., In re Chilton, 674 F.3d at 488-489, citing, Connecticut National Bank v. Germain, 503 U.S. at 253-254, 112 S.Ct. 1146; In re Hamlin, 465 B.R. at 871, citing, Patterson v. Shumate, 504 U.S. at 757, 112 S.Ct. 2242; In re Nessa, 426 B.R. at 314-315, citing, United States v. Ron Pair Enterprises, 489 U.S. at 241, 109 S.Ct. 1026. The court agrees with the majority view that this is not a situation that the literal application of the statute will defeat the intent of the drafters. Id. If Congress intended to limit § 522(b)(3)(C) to the "debtor's retirement funds," it certainly knew how to do so. Id.; see also, e.g., 11 U.S.C. § 522(b)(3)(B) (exempting "any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy law" (emphasis added)).
The court therefore concludes that the funds of the Inherited IRA in the hands of Berry, who along with her brothers are not the original owners of the funds, may be considered retirement funds qualifying for exempt status based on the plain language of 11 U.S.C. § 522(b)(3). Thus, Trustee's motion for summary judgment that such funds in Berry's hands may never be considered exempt should be denied. However, the court cannot grant Debtors' cross-motion for summary judgment because they have not yet established that the funds are tax exempt under the IRC to qualify as exempt funds under 11 U.S.C. 522(b)(3).
California Code of Civil Procedure, § 703.140(b)(10)(E) provides that a bankrupt debtor may exempt:
California Code of Civil Procedure, § 703.140(b)(10)(E).
The Ninth Circuit held that Section 703.140(b)(10)(E) covers IRAs in general. In re McKown, 203 F.3d 1188, 1190 (9th Cir.2000) (holding that an IRA is a "similar plan or contract" for purposes of Section 703.140(b)(10)(E)). The Supreme Court reached a similar conclusion when interpreting materially identical language in the federal exemption, 11 U.S.C. § 522(d)(10)(E). Rousey v. Jacoway, 544 U.S. 320, 326-29, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005) (holding that an IRA is a "similar plan or contract on account of... age" for purposes of 11 U.S.C. § 522(d)(10)(E)).
However, with respect to an inherited IRA, a growing trend of courts from other jurisdictions interpreting similar language has held that an inherited IRA is not exempt because it is not on account of a debtor's age for the following reasons: (i) an inherited IRA requires immediate distributions unrelated to the debtor's age; (ii) the beneficiary may make no contributions to the account; (iii) the beneficiary may not roll the funds over into another retirement plan; and (iv) none of the other factors (illness, disability, death, length or service) apply to inherited IRAs. Thus, because an inherited IRA is not on account of a debtor's age (or any other listed factor), inherited IRAs are not exempt from the debtor's bankruptcy estate under 11 U.S.C. § 522(D)(10)(e). In re Kirchen, 344 B.R. 908 (Bankr.E.D.Wis. 2006); In re Taylor, 2006 WL 1275400 (Bankr.C.D.Ill.2006); In re Navarre, 332 B.R. 24 (Bankr.M.D.Ala.2004); In re Sims, 241 B.R. 467 (Bankr.N.D.Okla.1999); see also, In re Jarboe, 365 B.R. 717, 721 (Bankr.S.D.Tex.2007) (noting the trend). Furthermore, at least one bankruptcy court has held that an inherited IRA was not exempt under California Code of Civil Procedure, § 703.140(b)(10)(E), if the funds therein were not being used for the debtor's "retirement needs." In re Greenfield, 289 B.R. 146, 150 (Bankr.S.D.Cal. 2003).
After review of the applicable law, this court agrees with the logic of the above-described trend in the case law and holds that an inherited IRA is not exempt under California Code of Civil Procedure, § 703.140(b)(10)(E) because it is not a "similar plan or contract on account of illness, disability, death, age, or length of service." Therefore, Trustee's objection to Debtors' claimed exemption of Berry's interest in the Inherited IRA pursuant to California Code of Civil Procedure § 703.140(b)(10)(E) is sustained.
For the foregoing reasons, the court rules as follows:
A separate order consistent with this memorandum decision will be issued concurrently herewith.
IT IS SO ORDERED.