Thomas J. Tucker, United States Bankruptcy Judge.
In Clark v. Rameker, ___ U.S. ___, 134 S.Ct. 2242, 189 L.Ed.2d 157 (2014), the United States Supreme Court held that a bankruptcy debtor's interest in an inherited individual retirement account ("IRA") does not qualify as "retirement funds," under the exemption provisions of 11 U.S.C. § 522(b)(3)(C). In this case, the Court must decide whether a bankruptcy debtor's interest in accounts he received as an "alternate payee," as a result of the division of his ex-wife's retirement accounts in his divorce, can be claimed exempt as "retirement funds" under 11 U.S.C. § 522(d)(12). The Court concludes that the answer is "no." This situation is enough like that in Clark v. Rameker to compel the same result.
This case is before the Court on the objections to the Debtor's amended claim of certain exemptions, filed by the creditor Hubbard Snitchler & Parzianello PLC ("Creditor") and by the Chapter 7 Trustee (Docket # # 28, 37, the "Exemption Objections"). The Court held two hearings on the Exemption Objections, and previously entered two orders that partially resolved those objections. (See Order filed at Docket # 58 at ¶¶ 6, 7; and Order filed at Docket # 77 at ¶¶ 1, 2). This opinion addresses the unresolved issues.
This Court has subject matter jurisdiction over this bankruptcy case and this contested matter under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D.Mich.). This contested matter is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), 157(b)(2)(B), and 157(b)(2)(O). This matter also is "core" because this matter is "created or determined by a statutory provision of title 11," namely, 11 U.S.C. § 522(d)(12). See generally Allard v. Coenen (In re Trans-Industries, Inc.), 419 B.R. 21, 27 (Bankr. E.D.Mich.2009).
The key unresolved issue before the Court is whether the Debtor's interests in two specific accounts qualify for exemption as "retirement funds" under 11 U.S.C. § 522(d)(12). In a previous order, the Court listed the accounts at issue, and one other account that is no longer at issue, in framing the dispute as follows:
Of the three accounts listed in the above quotation, only the first two remain at issue. In a later order, the Court allowed the Debtor's claimed exemption, under 11 U.S.C. § 522(d)(5), in the full $9,300.00 amount of the account described as "U of M 403(b)—9,300.00." (Order filed September 3, 2014 (Docket # 77) at ¶ 1.)
The remaining dispute concerns the two accounts described in Debtor's latest amended schedules B and C as:
Debtor's latest amended Schedule C claims an exemption for the full amounts listed for these accounts, under 11 U.S.C. § 522(d)(12). The Trustee and the Creditor object to this, and argue that the § 522(d)(12) exemption does not apply to either account. They rely primarily on the United States Supreme Court's decision in Clark v. Rameker, ___ U.S. ___, 134 S.Ct. 2242, 189 L.Ed.2d 157 (2014), discussed below.
The Trustee and the Creditor bear the burden of proving that the Debtor's claimed exemptions under § 522(d)(12) "are not properly claimed." See Fed.R.Bankr.P. 4003(c); see also In re Demeter, 478 B.R. 281, 286 (Bankr.E.D.Mich. 2012); In re John, 459 B.R. 684, 689 (Bankr.E.D.Mich.2011). And the Court must construe exemptions liberally, in favor of the Debtor. See Demeter, 478 B.R. at 286; In re Hanh Hieu Dang, No. 11-10091, 473 B.R. 218, 220-21 (Bankr. W.D.Mich.2012) ("Exemptions are to be liberally construed in favor of a debtor.") (citing Menninger v. Schramm (In re Schramm), 431 B.R. 397, 400 (6th Cir. BAP 2010) and Fed.R.Bankr.P. 4003(c)).
The Court must determine Debtor's claimed exemptions as of the date he filed his bankruptcy petition. See Lawless v. Newton (In re Lawless), 591 Fed.Appx. 415, 417 (6th Cir.2014); Demeter, 478 B.R. at 286; Hanh Hieu Dang, 473 B.R. at 220-21 ("Exemptions are determined as of the filing date."); In re Buick, 237 B.R. 607, 609 (Bankr.W.D.Pa.1999) and cases cited therein (holding that a debtor's entitlement to an exemption under § 522(d)(1) is "determined as of the filing date of . . . [a bankruptcy] petition").
Section 522(d)(12) is the exemption for "retirement funds" that is available to debtors electing the federal exemptions, and its wording is identical to the wording of § 522(b)(3)(C), applicable to debtors electing state-law exemptions. Section 522(d)(12) allows an exemption in "[r]etirement funds to the extent that 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."
In Clark v. Rameker, the Supreme Court considered whether a Chapter
Clark, 134 S.Ct. at 2246.
The Court then focused on how the characteristics of a traditional or Roth IRA change under the Internal Revenue Code upon inheritance after the death of the owner. The Court noted that:
Id. at 2247-48 (internal citations omitted).
Based on these three legal characteristics of inherited IRAs, the Supreme Court concluded "[f]unds held in inherited IRAs . . . constitute `a pot of money that can be freely used for current consumption,'. . . not funds objectively set aside for one's retirement." Id. at 2248. (citation omitted). As a result, the Court held that "funds held in inherited IRAs are not `retirement funds' within the meaning of § 522(b)(3)(C)'s bankruptcy exemption." Id. at 2246.
The Trustee and the Creditor argue that Clark is analogous to this case. Here the Debtor has claimed an exemption under the "retirement funds" exemption of 11 U.S.C. § 522(d)(12), of his interest in funds held in a § 401(a) account and of his interest in his ex-wife's "TIAA CREFF retirement account."
The Debtor filed this bankruptcy case on October 8, 2013. Several months earlier, the Debtor and his wife, Jacqueline Kizer, were divorced. As part of a June 19, 2013 Consent Judgment of Divorce, the Debtor was awarded a 50% interest in three "retirement accounts" owned by Ms. Kizer. In addition, the marital home was awarded to Ms. Kizer, with the Debtor to receive his share of the equity in the home, determined by agreement of the parties to be $44,000.00. (Ex. B, Docket # 67-3 at 5-6). Because Ms. Kizer did not have any available liquid assets, she agreed to use her retirement accounts to pay Mr. Kizer for his interest in the marital home.
According to the Consent Judgment, Ms. Kizer's following three retirement accounts were to be divided between the parties:
(Ex. B, Docket # 67-3 at 5).
According to an email dated August 11, 2013 from Mary V. Ade, Director of Stout Risius Ross, Inc., (Ex. A, Docket # 67-2) the value of the retirement accounts, and the amount of each of the accounts to be assigned to the Debtor, were as follows:
(1) Value of 401(a) $ 66,490.00
(2) Value of 403(b) $ 27,734.00
(3) Value of TIAA-CREF $ 40,009.00
____________
Total value of accounts $134,233.00
50% to Kelly Kizer $ 67,116.00
plus $37,0002 to Kelly Kizer for
equity in the marital home, "[g]rossed
up by 20%" 46,250.00
___________
Total amount assigned
to Kelly Kizer: $113,366.00
Before the Debtor filed this bankruptcy
For the Fidelity 401(a) plan, the QDRO (Ex. C, Docket # 67-4, at 1-5) referred to Internal Revenue Code ("IRC") §§ 401(a)(13) and 414(p) and Section § 206(d)(3)(E) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The retirement benefit plan subject to this QDRO was stated as the "University of Michigan 401(a) Retirement Plan." (Id. at 2 ¶ 1).
Under the 401(a) plan QDRO, the Debtor was labeled an "alternate payee." He was awarded 100% of the account balance as of June 19, 2013. (Id. at 2 ¶ 5). As alternate payee, the Debtor's interest in the 401(a) plan was to be payable to him in a lump sum distribution once the plan administrator determined that the QDRO actually qualified as a QDRO. (Id. at 2 ¶ 8). As the alternate payee, the Debtor was required to "include in gross income, for the tax year of receipt, all retirement benefits pursuant to the Participant's assignment of benefits[.]" (Id. at 3 ¶ 10). The Debtor was to be "treated as the sole distributee under IRC Sections 72 and 402 of any payment or distribution that is made to the Alternate Payee pursuant to the Participant's assignment of benefits[.]" (Id. at 3 ¶ 10). In addition, "the Participant's basis in the Plan, if any, will be shared proportionately by the Participant and the Alternate Payee as provided in IRC Section 72(m)(10)." (Id.).
A "Certification" (actually, an affidavit), signed by Steve Sindlinger, the "Assistant Director of the University of Michigan Benefits Office," states that the Debtor ["]as an alternate payee was not eligible to make contributions into the Fidelity accounts held by Jacqueline Kizer." (Ex. C, Doc. # 76)(emphasis added).
The TIAA-CREF Account is part of the Teachers Insurance and Annuity Association—College Retirement Equities Fund. The account is comprised of annuity contracts. For the TIAA-CREF account, the QDRO (Ex. C, Docket # 67-4, at 11-16), also referred to IRC §§ 401(a)(13) and 414(p) and § 206(d)(3)(E) of ERISA. (Id. at 12 ¶ 1).
Under the TIAA-CREF QDRO, the Debtor was labeled as an "alternate payee." (Id. at 12 ¶ 3). The Debtor was awarded:
(Id. at 12 ¶ 6). The TIAA-CREF QDRO lists several conditions for the division of the annuity contracts held in the TIAA-CREF plan, including:
(Id. at 13 ¶ 7). The TIAA-CREF QDRO also states that:
(Id. at 13 ¶ 9).
Like the 401(a) QDRO, the Debtor, as alternate payee under the TIAA-CREF QDRO, was required to "include in gross income, for the tax year of receipt, all retirement benefits pursuant to the Participant's assignment of benefits[.]" (Id. at 13 ¶ 12). The alternate payee is to be "treated as the sole distributee under IRC Sections 72 and 402 of any payment or distribution that is made to the Alternate Payee pursuant to the Participant's assignment of benefits[.]" (Id.). In addition, "the Participant's basis in the Plan, if any, will be shared proportionately by the Participant and the Alternate Payee as provided in IRC Section 72(m)(10)." (Id. at 14 ¶ 12).
A "Retirement Savings Statement" from Fidelity Investments for the period October 3, 2013 to November 4, 2013 provides details about the alternate payee account that was established in the Debtor's name. (Ex. D, Docket # 67-5). The assets in this account were from the division of Ms. Kizer's U of M 401(a) account and U of M 403(b) account. The balance as of November 4, 2013 of the U of M 401(a) account is listed as $57,463.25.
A later "Retirement Savings Statement" from Fidelity Investments, for the Debtor's account, then labeled as the "401(A) Base Plan," for the period January 1, 2014—June 30, 2014, indicates that the Debtor made a total withdrawal from the account of $58,000.00 on February 27, 2014. (Ex. G, Docket # 67-8 at 2-8). The $58,000.00 is comprised of two withdrawals: one for $34,153.40 and another for $23,846.60. The $58,000.00 withdrawal left a balance in the account as of June 30, 2014 of $815.64.
There is no evidence in the record that the Debtor incurred or paid a 10% tax penalty, or any tax penalty, when he made these withdrawals from his alternate payee 401(a) account in February 2014. And while there is evidence that Fidelity Investments withheld for ordinary income taxes, there is no evidence of any withholding for any tax penalty.
At oral argument, counsel for the Debtor asserted, without citing to any evidence in the record, that the Debtor paid a 10% tax penalty on the above withdrawal from his 401(a) account. The discussion at oral argument was this:
(Tr. of September 3, 2014 hearing (Docket # 84) at 60-63).
As a result of this discussion, the Court gave the Debtor an opportunity (and a 7-day deadline) to "file a supplement to Debtor's opposition to the Exemption Objections,
(Statement Regarding Early Withdrawal of Retirement Funds (Docket # 79)(emphasis added)).
From all of the foregoing, the Court finds and concludes that the Debtor did not, in fact, pay or incur a 10% tax penalty, or any tax penalty, when he withdrew almost all the money from his alternate payee 401(a) account in February 2014.
A July 8, 2014 letter from a "QDRO Relationship Manager" at TIAA-CREF Financial Services, to the Debtor's former divorce counsel, explained that TIAA-CREF could not "implement" the QDRO previously received for the TIAA-CREF Account for multiple reasons, which were explained in a letter dated September 3, 2013 to the Debtor's former counsel. (Ex. E, Docket # 67-6 at 1-4). (A copy of that September 3, 2013 letter is also included in Exhibit E).
Another letter dated July 30, 2014, again from a QDRO Relationship Manager at TIAA-CREF Financial Services, states that once an acceptable qualified domestic relations order has been issued for Ms. Kizer's TIAA-CREF accounts, the Debtor "will then be awarded funds as an alternate payee. At that point, he will receive his own TIAA-CREF accounts
As of the bankruptcy petition date, and also as of the hearing dates, no alternative payee account(s) had yet been established in the Debtor's name for the TIAA-CREF account.
The parties have not cited any cases discussing whether the Supreme Court's reasoning and holding in Clark applies to alternate payee retirement accounts received by a debtor in a divorce. And the Court is not aware of any such cases.
The Court must consider the applicability, in this case, of the three factors cited by the Supreme Court in Clark, to support its holding that funds in an inherited IRA are not "retirement funds" under 11 U.S.C. § 522(b)(3)(C).
The first such Clark factor is whether the Debtor may invest additional money in the accounts he received (or is to receive) from his divorce—the 401(a) account and the TIAA-CREF account (sometimes referred to below as the "Debtor's alternate payee accounts"). The Court finds that, like the owner of the inherited IRA in Clark, the Debtor in this case "may never
The second Clark factor is whether the Debtor is required to withdraw money from the accounts at issue at or by any particular time sooner than retirement age, or "no matter how many years [he] may be from retirement," like the owner of an inherited IRA is required to do. See Clark, 134 S.Ct. at 2247. The Trustee and the Creditor have failed to demonstrate, with any evidence or legal authority, that this is so for the Debtor's alternate payee accounts. Creditor's counsel and the Trustee's counsel both conceded during oral argument that this second Clark factor is not present in this case. (Tr. of September 3, 2014 hearing (Docket # 84) at 14, 53). So this Clark factor is not present in this case.
The third Clark factor is whether the Debtor "may withdraw the entire balance of the account[s] at any time—for any purpose—without penalty," such as the 10% tax penalty that applies to "a withdrawal from a traditional or Roth IRA prior to the age of 59 ½ . . . subject to narrow exceptions." Clark, 134 S.Ct. at 2247. The Court finds that the Debtor could withdraw the entire balance of his alternate payee accounts "at any time—for any purpose—without penalty" as could the debtor with an inherited IRA in Clark. See 26 U.S.C. § 72(t)(2)(C). And as discussed in Part III.C.3.a of this opinion, the Debtor did in fact withdraw almost the entire balance of his alternate payee 401(a) account in February 2014, without paying any 10% tax penalty.
Thus, two of the three Clark factors—the first and the third factors—apply to the Debtor's alternate payee accounts at issue in this case. Nothing in the Supreme Court's opinion in Clark suggests that all three factors must be present before a court may conclude that a given account is not "retirement funds." And the Court concludes that the two factors that are present here should be given more weight that the absent (second) Clark factor. This is especially so with respect to the third factor, that the Debtor could withdraw and spend the entire balance of his alternate payee accounts at any time, without a 10% tax penalty or any other tax penalty. This factor especially, but also when combined with the first Clark factor, demonstrates that, like the funds at issue in Clark, the funds at issue in this case "constitute `a pot of money that can be freely used for current consumption,'. . . not funds objectively set aside for one's retirement." Clark, 134 S.Ct. at 2248 (citation omitted).
Thus, the funds at issue in this case cannot be considered "retirement funds" within the meaning of the § 522(d)(12) exemption.
The Court concludes that it is not necessary to address other arguments made by the parties. These include the following.
First, the Debtor's counsel has suggested that whether or not the § 522(d)(12) exemption applies to the Debtor's alternate payee accounts, those accounts can be exempted under § 522(d)(10)(E). The Court will not address such suggestion, however, because in his most recent amended Schedule C, the Debtor has not claimed any exemption under § 522(d)(10)(E).
Because the Court is disallowing the Debtor's § 522(d)(12) exemption on other grounds, stated above, the Court need not address this argument.
Third and finally, the Trustee and the Creditor argue that even if the Debtor's alternate payee accounts could otherwise be considered "retirement funds" under Clark, the portion of those funds that represent Ms. Kizer's payment to the Debtor for his share of the equity in the marital home should not be considered "retirement funds." Again, the Court's ruling today makes it unnecessary to reach the merits of this argument.
For the reasons stated in this opinion, the Court will enter an order sustaining the objections to exemption, and disallowing the Debtor's claimed exemptions under 11 U.S.C. § 522(d)(12).
