Robert E. Littlefield, Jr., United States Bankruptcy Judge.
Currently before the Court is Endurance American Insurance Company's ("Endurance") objection to the exemption claimed by Laurie A. Todd ("Debtor") in an inherited individual retirement account (the "inherited IRA"). The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 157(a), (b)(1), and (b)(2).
Janet R. DiStefano, the Debtor's mother, had two individual retirement accounts ("IRAs"). The Debtor was a beneficiary of one of her mother's IRAs.
The dispute between Endurance and the Debtor stems from the operation of Green Island Construction Group, LLC ("Green Island"). Endurance, acting as surety, issued performance and payment bonds on behalf of Green Island. To induce Endurance to issue the bonds, the Debtor, and other family members, including Burbridge, signed a written General Agreement of Indemnity to hold Endurance harmless. (ECF No. 44; Ex. A) Pursuant to the bonds, Endurance remitted substantial sums to claimants and filed an Amended Proof of Claim indicating that it has incurred a loss of $1,769,317.00 as a result of those payments, as well as accrued interest, costs, and fees.
The Debtor filed her chapter 11 case on May 20, 2015, and claimed her inherited IRA as exempt pursuant to New York Civil Practice Law and Rules ("C.P.L.R.") § 5205(c).
On March 18, 2016, the Court issued a Briefing Order and the matter became fully submitted on April 22, 2016. On April 20, 2016, Janice DiStefano, the Debtor's sister, filed an involuntary chapter 7 petition against Stanley DiStefano, Jr., an indemnitor to Endurance and brother of the Debtor, Janice DiStefano, and Burbridge. (Case No. 16-10694; ECF No. 1.) With the additional involvement of Stanley DiStefano, Janice DiStefano, and other family members, the parties agreed to return to mediation to attempt to reach a global resolution of all of the matters pending before the Court. As such, the matters were referred back to Chief Judge Cangilos-Ruiz on August 23, 2016, who entered an order conditionally approving the terms of a settlement among the parties on September 23, 2016. (ECF Nos. 135, 148.) The litigants endeavored to reduce the settlement to writing but, despite their efforts for nearly a year, were unable able to do so. After an opportunity to supplement the record, this matter once again became fully briefed on November 3, 2017.
Endurance argues that the inherited IRA: (1) is not exempt pursuant to § 5205(c)(1) as the property is not held in trust for the Debtor; (2) is not exempt pursuant to § 5205(c)(2) as the inherited IRA is not "qualified" as an IRA under 26 U.S.C. § 408;
Section 5205(c)(1) exempts from the satisfaction of a money judgment "all property while held in trust for a judgment debtor, where the trust has been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor...." If the Debtor may use funds in the account without restriction, this exemption under § 5205(c)(1) is unavailable. See Ondrey v. Brick (In re Ondrey), 1999 WL 409497, at *1, 1999 U.S. Dist. LEXIS 9287, at *3-4 (W.D.N.Y. June 15, 1999) (holding that "a trust account will not come within the exemption ... where the account holder or beneficiary may withdraw funds therefrom at will"); In re Quackenbush, 339 B.R. 845, 853 (Bankr. S.D.N.Y. 2006) (denying exemption under § 5205(c)(1) where the debtor had reached age of majority and, therefore, had no "restriction on [her] ability to use the funds in the [a]ccount for any purpose she please[d]").
Endurance has demonstrated that the inherited IRA is not exempt under § 5205(c)(1) as the Debtor maintains exclusive control over the inherited IRA. Due to the nature of inherited IRAs, the Debtor may withdraw "funds at any time, for any reason, and without penalty." In re Jarboe, 365 B.R. 717, 725 (Bankr. S.D. Tex. 2007); see also In re Marriage of Branit, 397 Ill.Dec. 107, 41 N.E.3d 518, 524 (Ill. App. Ct. 2015). In fact, the Debtor continues to withdraw funds from the inherited IRA.
Additionally, the Court rejects the Debtor's argument that the inherited IRA is exempt on the basis that it is may be considered a trust for purposes of § 408(a). The manner in which the tax code categorizes an IRA is irrelevant to the determination of whether the property is held in trust for a debtor under New York law. Indeed, the Debtor has not provided the Court with any authority for the proposition that classification as a trust by another statutory scheme establishes whether the § 5205(c)(1) trust exemption applies. For these reasons, the Debtor's argument is without merit.
The question of whether an inherited IRA is exempt under § 5205(c)(2) is a
§ 5205(c)(2) (emphasis added). Courts in New York have generally declined to extend this exemption to accounts which are not specifically included within the statute. See In re Iacono, 120 B.R. 691, 695 (Bankr. E.D.N.Y. 1990). Therefore, in order for an inherited IRA to be exempt, the account must be "qualified as an individual retirement account under section four hundred eight ... of the United States Internal Revenue Code of 1986...." § 5205(c)(2).
A court's "[s]tatutory analysis begins with the plain meaning of a statute." Nat. Res. Def. Council v. Muszynski, 268 F.3d 91, 98 (2d Cir. 2001). "`If the statutory terms are unambiguous, [the court's] review generally ends and the statute is construed according to the plain meaning of its words.'" Elliott Assocs., L.P. v. Banco de la Nacion, 194 F.3d 363, 371 (2d Cir. 1999) (quoting Greenery Rehab. Grp., Inc. v. Hammon, 150 F.3d 226, 231 (2d Cir. 1998)). On the other hand, if a term of the statute is ambiguous, the court may rely on "[l]egislative history and other tools of interpretation...." Elliott, 194 F.3d at 371 (quotations omitted). "A statute is ambiguous if its terms are `susceptible to two or more reasonable meanings.'" Rabin v. Wilson-Coker, 362 F.3d 190, 196 (2d Cir. 2004) (quoting Muszynski, 268 F.3d at 98). Whether a statute is ambiguous is determined "by examining its language, the context in which the language is used, and the broader context of the statute as a whole." Rabin, 362 F.3d at 196 (quoting Freier v. Westinghouse Elec. Corp., 303 F.3d 176, 197 (2d Cir. 2002)).
Section 5205(c)(2) exempts any trust or plan "which is qualified as an individual retirement account under [§ 408]," but neither the word "qualified" nor the term "individual retirement account" is defined within § 5205. Since § 5205 specifically refers to § 408, the Court must also look to the applicable sections of the Internal Revenue Code for guidance. Although no relevant subsection of § 408 uses the word "qualified," § 408(a) states "the term `individual retirement account' means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets [six] requirements...."
While § 408(a) defines IRA, the Court must consider the broader context of the statute to determine the meaning of "qualified" as it is not defined in either statute. See City of N.Y. v. Beretta U.S.A. Corp., 524 F.3d 384, 400-01 (2d Cir. 2008) ("The meaning of the term `applicable' must be determined here by reading that term in the context of the surrounding language and of the statute as a whole."). In this regard, a trust satisfying § 408(a)'s requirements is entitled to special treatment under the tax code. For example, an individual contributing to his or her IRA may deduct the contribution from his or her taxable income. See 26 U.S.C. § 219(a). Additionally, income earned on property in an IRA is not taxed, and, instead, only distributions from an IRA are taxed as income. See 26 U.S.C. §§ 408(d), (e).
When § 5205 is read in the context of not only § 408 but the Internal Revenue Code more broadly, the use of the word "qualified" renders the phrase "qualified as an individual retirement account under [§ 408]" susceptible to two or more reasonable interpretations. See Muszynski, 268 F.3d at 97-99 (finding the term "total maximum
On the other hand, considering that inherited IRAs do not receive the same tax benefits as traditional IRAs, "qualified" could be read to refer only to IRAs which "qualify" for all of the tax benefits available for an IRA. If tax treatment is the measure for "qualified" status, the exemption may not apply as inherited IRAs are treated differently from traditional IRAs. Thus, the Court concludes the phrase "qualified as an individual retirement account" is ambiguous and additional analysis is necessary to discern the intent of § 5205(c)(2).
Since § 5205(c)(2) is ambiguous, this Court may "look to legislative history as a means of determining [legislative] intent." Freier, 303 F.3d at 197. The focus during this analysis is on "the broader context and primary purpose of the statute." Elliott, 194 F.3d at 371 (internal quotations omitted). Additionally, this Court must remain "cognizant of the Supreme Court's admonition that `statutes should be interpreted to avoid untenable distinctions and unreasonable results whenever possible.'" Id. (quoting Am. Tobacco Co. v. Patterson, 456 U.S. 63, 71, 102 S.Ct. 1534, 71 L.Ed.2d 748 (1982)).
A review of the legislative history establishes that the purpose of § 5205(c)(2) is to protect individuals' accounts established for their retirement. In the 1980s, several bankruptcy courts held that various retirement accounts were not exempt. See In re Brooks, 844 F.2d 258, 264 (5th Cir. 1988)
In 1989, the legislature passed two amendments, Chapters 84 and 280, to § 5205(c)(2) and related statutes. The Memorandum in Support of Chapter 84 indicates that the purpose of the amendment is "[t]o make the protection of IRAs of qualified retirement plans explicit in order to avoid potential disqualification by bankruptcy judges...." Memorandum in Support, S. 3567; A. 5753, Chapter 84 (1989).
Consistent with this reasoning, § 5205(c)(2) was amended in 1994 to specifically include IRAs. See Iacono, 120 B.R. at 695 (holding that IRAs were not exempt because the legislature had chosen not to specifically include IRAs in its 1989 amendment of § 5205(c)(2)). As with the 1989 amendments, the purpose of the 1994 amendment was to "provide protection to individuals who establish IRA accounts for their retirement." N.Y. State Senate Introducer's Memorandum in Support, S. 4244-A; A. 6806-A (1994).
The question becomes whether reading "qualified" to include inherited IRAs would be consistent with the legislature's intent to protect individuals' savings for retirement. The funds within inherited IRAs are traceable only to the decedents that established the IRAs. Branit, 397 Ill.Dec. 107, 41 N.E.3d at 524; In re Taylor, 2006 WL 1275400, at *2, 2006 Bankr. LEXIS 755, at *5 (Bankr. C.D. Ill. May 9, 2006). Since inherited IRA holders cannot contribute to the accounts, inherited IRAs may not be used to actively save money for retirement. Moreover, the funds in inherited IRAs may be accessed at any time without penalty. Jarboe, 365 B.R. at 725; Branit, 397 Ill.Dec. 107, 41 N.E.3d at 524 (holding that an inherited IRA "is merely a discretionary fund, no different from a checking account"); In re Klipsch, 435 B.R. 586, 589 (Bankr. S.D. Ind. 2010) ("Inherited IRAs are liquid assets that the beneficiary may
For all of these reasons, exempting funds that have not been saved by individuals for their retirement would be fundamentally inconsistent with the statute's purpose and would not alleviate the legislature's concerns regarding relocation. Therefore, the word "qualified" cannot be read to mean any trust which meets the requirements of § 408(a) as such a reading would result in inherited IRAs being exempt. See Beretta, 524 F.3d at 400-01 ("[W]here ... examination of [a] statute as a whole demonstrates that a party's interpretation would lead to absurd or futile results ... plainly at variance with the policy of the legislation as a whole, that interpretation should be rejected.") (quotations omitted). Instead, "qualified" should be read in a manner consistent with the statute's purpose — to include only accounts which receive the same tax treatment as accounts established by individuals for their retirement, rendering inherited IRAs not exempt. While the Court is cognizant that exemptions are to be liberally construed in favor of the debtor, reaching any other conclusion would expand the exemption directly against the intent of the legislature. Cf. In re Keil, 88 F.2d 7, 8 (2d Cir. 1937); In re Moore, 177 B.R. 437, 441 (Bankr. N.D.N.Y. 1994).
If the New York legislature intended to exempt inherited IRAs it could have, like other state legislatures, specifically provided for inherited IRAs in the statute.
The Debtor largely relies on In re Andolino, 525 B.R. 588 (Bankr. D.N.J. 2015) to argue that the inherited IRA is exempt under New York law. In that case, the court held that an inherited IRA was not property of the estate because it constituted a "qualifying trust" pursuant to New Jersey's exemption statute. Id. at 594. The
The Debtor argues that the inherited IRA must be excluded from property of the estate pursuant to § 541(c)(2) on the ground that it is a § 5205(c)(3) spendthrift trust. However, for the Debtor to succeed, the inherited IRA must fall within § 5205(c)(2) to be considered a § 5205(c)(3) spendthrift trust. This argument fails since the Court has already concluded that the inherited IRA does not fall within § 5205(c)(2). Similarly, to the extent that it can be said that the Debtor argues that the inherited IRA is excluded from the estate as a trust under § 5205(c)(1), the Debtor also does not prevail as the Court has ruled that the inherited IRA is not a § 5205(c)(1) trust. For all of these reasons, the inherited IRA is not excluded from property of the estate pursuant to § 541(c)(2).
For all of the foregoing reasons, the Debtor's exemption of her inherited IRA is disallowed and the inherited IRA is property of the estate.
It is SO ORDERED.
