IN THE UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT

Transcription

1 No (Consolidated with Case No ) IN THE UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT In re BRANDON C. CLARK and HEIDI K. HEFFRON-CLARK, Debtors WILLIAM J. RAMEKER, TRUSTEE Appellant-Trustee, and RESUL and ZINIJE ADILI, d/b/a KEGONSA PLAZA, Appellant-Creditor v. BRANDON C. CLARK and HEIDI K. HEFFRON-CLARK, Appellees. Appeal from a Final Order of the United States District Court for the Western District of Wisconsin Case No. 11-C-482 Honorable Barbara B. Crabb Brief of Amicus Curiae, National Association of Bankruptcy Trustees, In Support of Trustee-Appellant and Reversal David Leibowitz Jeffrey J. Cymrot Law Office of David Leibowitz LLC Sassoon & Cymrot, LLP 420 W. Clayton Street 84 State Street, 8 th Floor Waukegan, IL Boston, MA (847) (617) Donald R. Lassman Law Offices of Donald R. Lassman P.O. Box Needham, MA (781) Attorneys for the National Association of Bankruptcy Trustees

2 DISCLOSURE STATEMENT PURSUANT TO FEDERAL RULE OF APPELLATE PROCEDURE The full name of every party that the attorneys represent in the case: National Association of Bankruptcy Trustees 2. The names of all law firms whose partners or associates have appeared for the amicus curiae in this case: Sassoon & Cymrot, LLP Law Offices of Donald R. Lassman Law Offices of David P. Leibowitz LLC 3. If the party or amicus curiae is a corporation: a. Identify amicus curiae s parent corporation: None. b. List any publicly held company that owns 10% or more of the amicus curiae s stock: None. National Association of Bankruptcy Trustees is a nongovernmental corporate entity appearing as amicus curiae. It has no parent corporation, nor does a publicly held corporation own more than 10 per cent of its stock. i

3 TABLE OF CONTENTS DISCLOSURE STATEMENT PURSUANT TO FED. R. APP. P i TABLE OF AUTHORITIES ii STATEMENT PURSUANT TO FED. R. APP. P INTEREST OF NABT AS AMICUS CURIAE SUMMARY OF ARGUMENT... 2 ARGUMENT... 4 I. Introduction... 4 II. The Bankruptcy Court s Plain Meaning Analysis and Resulting Decision were Correct: Retirement Funds Has a Plain Meaning A. The applicable rules of statutory construction instruct that the plain language of 11 U.S.C. 522(b)(3)(C)) governs B. The bankruptcy court properly determined that retirement fund has a plain meaning C. The Supreme Court s decisions in Hamilton v. Lanning and Ransom v. FIA Card Servs. N.A., provide further support for the bankruptcy court s analysis and conclusion....9 D. Analysis of relevant IRC provisions further supports the bankruptcy court s conclusion III. Congress Did Not Intend that an Inherited IRA Constitute a Retirement Fund Entitled to Exemption Status Under 522(b)(3)(C) and (d)(12) IV. The District Court s Textual Analysis of 522(b)(3)(C) and (d)(12) Does Not Give Meaning to All the Provisions Words and Terms V. The Fifth Circuit s Recent Chilton Decision Employs a Strained Statutory Construction Analysis CONCLUSION Certificate of Compliance with Fed. R. App. P. 32(a)(7).. 22 Certificate of Service ii

4 TABLE OF AUTHORITIES Cases Bethlehem Steel Corp. v. Bush, 918 F.2d 1323 (7th Cir. 1990)... 7 Boggs v. Boggs, 520 U.S. 833, 117 S.Ct (1997) Chilton v. Moser (In re Chilton), No , slip op (5th Cir. March 12, 2012)..17, 19 Clark v. Rameker, et al. (In re Clark), 2012 WL (W.D.Wis. Jan. 5, 2012).. 5, 15, 16 Consumer Product Safety Comm n v. GTE Sylvania, Inc., 447 U.S. 102, 100 S.Ct. 2051, 64 L.Ed. 2d 766 (1980)... 6 Guidry v. Sheet Metal Workers Nat. Pension Fund, 493 U.S. 365, 110 S.Ct. 680 (1990) Hamilton v. Lanning, 560 U.S., 130 S.Ct (2010)... 9 Illinois Dept. of Public Aid v. Sullivan, 919 F.2d 428 (7th Cir. 1990)... 6 In re Carmichael, 100 F.3d 375 (5th Cir. 1996) In re Clark, 450 B.R. 858 (Bankr.W.D.Wisc. 2011)... 7, 10 In re Jarboe, 365 B.R. 717 (Bankr.S.D.Tex. 2007) Interstate Commerce Com'n v. Mr. B's Services, Ltd., 934 F.2d 117 (7th Cir. 1991). 7 Matter of Merchants Grain, Inc. By and Through Mahern, 93 F.3d 1347 (7th Cir. 1996)... 3, 4 Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367, 127 S.Ct (2007) , 7, 16 Ransom v. FIA Card Servs., N.A., 562 U.S., 131 S. Ct. 716 (2010)... 9, 10, 18 Rousey v. Jacoway, 544 U.S. 320, 325, 125 S.Ct (2005) Schwab v. Reilly, 560 U.S., 130 S. Ct. 2652, 2667 (2010)... 14, 17 United States ex rel. Fowler v. Caremark RX, L.L.C., 496 F.3d 730 (7th Cir. 2007). 7 iii

5 Statutes 11 U.S.C , 16, U.S.C. 522(b) U.S.C. 522(b)(2) U.S.C. 522(b)(3) U.S.C. 522(b)(3)(C)... 4, 5, 6, 7, 9, 10, 11, 14, 15, 16, 17, 18, 19, U.S.C. 522(b)(4)(C)... 13, 19, U.S.C. 522(d)... 16, U.S.C. 522(d)(3)(C) U.S.C. 522(d)(12)... 6, 13, 14, 16, 17, 18, U.S.C. 522(n)... 6, U.S.C. 541(a) U.S.C. 541(a)(5)(A) U.S.C. 704(a)(1) U.S.C. 707(b)(2)(A)(ii)(I)... 11, U.S.C U.S.C. 401(a)(9)(B)(i) U.S.C. 401(a)(9)(B)(ii) U.S.C. 401(a)(9)(B)(iv) U.S.C. 401(a)(9)(E) U.S.C U.S.C. 408(a)(16) U.S.C. 408(d)(1) U.S.C. 408(d)(3)... 5, U.S.C. 408(d)(3)(C)... 3, 8, 13, U.S.C. 408(d)(3)(C)(ii)... 5 iv

6 29 U.S.C. 1001(a)...11 Other Authorities 4 Collier on Bankruptcy (16th ed. rev. 2012) Internal Revenue Service, U.S. Dep t of the Treasury, Pub. 590 (2011)... 11, 12 Retirement Definition, Merriam-Webster.com, dictionary/retirement (last visited Mar 27, 2012) Senate Report , 1974 U.S.C.C.A.N Webster's New Unabridged Dictionary (1989) v

7 STATEMENT PURSUANT TO FEDERAL RULE OF APPELLATE PROCEDURE 29 Amicus curiae s counsel authored this brief in its entirety. No party s counsel authored this brief in whole or in part. No party or party s counsel contributed money that was intended to fund preparing or submitting this brief. No person, other than the amicus curiae, its members, or its counsel, contributed money that was intended to fund preparing or submitting this brief. INTEREST OF THE NATIONAL ASSOCIATION OF BANRKUPTCY TRUSTEES AS AMICUS CURIAE 1 The National Association of Bankruptcy Trustees ( NABT ) is a non-profit professional association formed in 1982 to address the needs of chapter 7 bankruptcy trustees throughout the country, and to promote the effectiveness of the bankruptcy system as a whole. Trustee membership is open to any trustee serving in a bankruptcy case, but NABT s voting members are primarily chapter 7 panel trustees. There are approximately 1,200 bankruptcy trustees currently receiving new cases; approximately 900 of them are NABT members. Other persons interested in the bankruptcy system may become non-voting members. Overall, NABT has approximately 1,500 members. Chapter 7 trustees participation in the federal bankruptcy system, and specifically performance of their duties under 11 U.S.C. 704, serves two fundamental polices underlying the Bankruptcy Code: providing honest debtors a 1 All parties to this appeal have consented to the filing of amicus curiae briefs. 1

8 fresh start and liquidating non-exempt assets in order to equitably distribute these proceeds among the debtor s unsecured creditors. This appeal is important to trustees because allowing a claim of exemption in an Inherited IRA does not give debtors a fresh start, but rather provides debtors with an unintended free pass. Upholding such a claim likewise defeats creditors rights to an equitable distribution from this potentially significant asset, which does not support the debtor or the debtor s spouse and dependents in retirement, as contemplated by the Code s exemption scheme. Over the past several years, this issue has been litigated in the bankruptcy and appellate courts in various jurisdictions, and therefore raises a significant issue of national importance to trustees. The NABT respectfully submits this brief as amicus curiae, in support of Appellant-Trustee, William Rameker, seeking reversal of the district court s decision which overturned the bankruptcy court s order sustaining the trustee s objection and disallowing the debtor s claim of exemption in an Inherited IRA. The Board of Directors of NABT has authorized this submission. SUMMARY OF ARGUMENT A person plans for the time she leaves employment or an occupation by holding and accumulating retirement funds in various combinations for herself, her spouse, her dependents, and her beneficiaries. This appeal addresses one such circumstance: where a mother saves funds for her own retirement in an Individual Retirement Account ( IRA ), names her adult daughter as beneficiary, and after the 2

9 mother s death, with these substantial funds on-hand, the daughter seeks a bankruptcy discharge while claiming these unrestricted funds exempt. A decedent s funds, held in an IRA at the time of death, must be transferred to a new segregated account established by the decedent s beneficiary. Applicable tax law permits a non-spouse recipient to spread the distribution of the funds over time and to pay taxes on the funds as they are withdrawn over a period of years. The period during which withdrawal must occur is not based upon the retirement status of the non-spouse beneficiary. Funds transferred to a non-spouse beneficiary by virtue of the account holder s death lose their fundamental character as retirement funds. The Internal Revenue Code ( IRC ) 2 permits such funds to be maintained in what is specifically termed and defined in the IRC as an Inherited Individual Retirement Account ( Inherited IRA ). 3 IRC rules governing Inherited IRAs require that some distributions from an Inherited IRA begin immediately, and that additions to such accounts and rollover of such funds into an ordinary IRA are prohibited. An Inherited IRA is a creature of the IRC, specially devised to grant favorable tax treatment to a gift of funds accumulated by a donor anticipating her own retirement. After the donor s death and transfer to a non-spouse beneficiary, the resulting Inherited IRA contains proceeds or funds not intended for the beneficiary s 2 26 U.S.C. 1, et seq U.S.C. 408(d)(3)(C) 3

10 retirement. Thus, such funds do not constitute retirement funds and cannot attain exempt status as retirement funds, as that term is ascribed its ordinary meaning under 11 U.S.C. 522(b)(3)(C). 4 ARGUMENT I. Introduction A debtor commencing a bankruptcy case creates an estate comprising of all legal or equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. 541(a). Such interests extend to all property wherever located and by whomever held. Id. An individual debtor typically claims exemptions in this estate property, seeking to exclude it from property of the estate and protect it from liquidation by the trustee. See 11 U.S.C. 704(a)(1); 522 (b). A debtor may elect to take exemptions under the federal scheme in 522(b)(2), unless applicable state law prohibits such an election. 11 U.S.C. 522(b)(2). Alternatively, a debtor may elect the applicable state s exemptions pursuant to 522(b)(3) of the Bankruptcy Code. 11 U.S.C. 522(b)(3). This appeal involves the debtor s election and application of the retirement exemption provided in 522(b)(3)(C). At issue in this appeal is whether monies the debtor holds in an Inherited IRA as a result of her mother s death are exempt from the bankruptcy estate under 4 Unless otherwise specified, all statutory references are to Title 11 of the United States Code, 11 U.S.C. 101, et seq., hereinafter Code or Bankruptcy Code. 4

11 522(b)(3)(C). 5 The debtor s mother established an IRA for her own continued support upon retirement; ownership transferred to the debtor as beneficiary upon the mother s death in 2001; and the account became an Inherited IRA upon timely transfer. See Clark v. Rameker (In re Clark), 2012 WL at *6 (W.D. Wis. Jan. 5, 2012). Beginning in 2002, the debtor and her husband took monthly distributions from the Inherited IRA. Id. The debtor commenced a chapter 7 case in Id. at *3. These Inherited IRA funds were proceeds traceable to the monies previously held by the debtor s mother in the mother s IRA. The debtor claimed such property as exempt under Code 522(b)(3)(C), a provision that exempts: [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 Monies contributed to and earned on investments in individual retirement accounts are excluded from income taxation when earned. Taxation is delayed until withdrawal. 26 U.S.C. 408(d)(1). When the owner of an IRA dies with funds still in the IRA, those funds become the property of a beneficiary designated by the deceased owner. 26 U.S.C. 401(a)(9)(E). In general, the beneficiary may rollover the funds assigned to him into a new account. 26 U.S.C. 408(d)(3). However, special statutory rules apply where there are non-spouse beneficiaries; under 26 U.S.C. 408(d)(3)(C)(ii), these new accounts are referred to as inherited individual retirement accounts. Distributions from such accounts are treated differently, and must be made in accordance with the plan of distribution in place when the original owner died if distributions had commenced, or within five years if they had not. 26 U.S.C. 401(a)(9)(B)(i) and (ii). 5

12 11 U.S.C. 522(b)(3)(C). The federal retirement fund exemption at Code 522(d)(12) contains identical language. 11 U.S.C. 522(d)(12). See also 522(n) (placing monetary limits on claims of exemptions in IRAs). The bankruptcy court determined there was a plain, unambiguous meaning for the term retirement funds, as used in 522 of the Code; whereas the district court deemed the term ambiguous. The trustee argued that an Inherited IRA does not constitute a debtor's retirement funds, or any living person s retirement funds, because its substantive attributes render it something else. The debtor countered, observing that her mother s IRA contained retirement funds, and that postmortem, her Inherited IRA still contained retirement funds since 522(b)(3)(C) does not specify whose retirement funds a debtor may exempt. II. The Bankruptcy Court s Plain Meaning Analysis and Resulting Decision were Correct: Retirement Fund Has a Plain Meaning. A. The applicable rules of statutory construction instruct that the plain language of 11 U.S.C. 522(b)(3)(C)) governs. In examining the statutory construction of Bankruptcy Code provisions, the goal is to discern the will of Congress and to apply it to the particular facts of the case. Illinois Dept. of Pub. Aid v. Sullivan, 919 F.2d 428, 431 (7th Cir. 1990). [T]he starting point for interpreting a statute is the language of the statute itself. Matter of Merchs. Grain, Inc. by and through Mahern, 93 F.3d 1347, 1353 (7th Cir. 1996), quoting Consumer Prod. Safety Comm n v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S.Ct. 2051, 2056 (1980). If the text is unambiguous, the court should apply the 6

13 statutory language as read; when the statutory language is ambiguous, however, the court should look to congressional intent when it adopted the provision. United States ex rel. Fowler v. Caremark RX, L.L.C., 496 F.3d 730, 738 (7th Cir. 2007) (statute needs interpretation only when ambiguous; otherwise, the statute s plain language governs); Interstate Commerce Comm'n v. Mr. B's Servs., Ltd., 934 F.2d 117 (7th Cir. 1991); Bethlehem Steel Corp. v. Bush, 918 F.2d 1323, 1326 (7th Cir. 1990). The Seventh Circuit Court of Appeals follows established rules of statutory construction. [A]bsent statutory definitions, we accord words and phrases their ordinary and natural meaning and avoid rendering them meaningless, redundant, or superfluous; we view words not in isolation but in the context of the terms that surround them; we likewise construe statutes in the context of the entire statutory scheme and avoid rendering statutory provisions ambiguous, extraneous, or redundant; we favor the more reasonable result; and we avoid construing statutes contrary to the clear intent of the statutory scheme. Matter of Merchs. Grain, 93 F.3d 1347, (internal citations omitted). B. The bankruptcy court properly determined that retirement fund has a plain meaning. After consulting a dictionary definition, the bankruptcy court determined that to qualify for exemption under 522(b)(3)(C), a debtor must hold retirement funds anticipating withdrawing from her position or occupation, but that in this case the debtor s Inherited IRA does not contain anyone s retirement funds. In re Clark, 450 B.R. 858, 863 (Bankr. W.D. Wis. 2011) (emphasis in original). According to the 7

14 bankruptcy court, the IRA s character as a retirement fund ceased upon death of the debtor s mother. In arriving at its conclusion, the bankruptcy court examined the policies Congress sought to advance when it enacted IRC provisions governing Inherited IRAs: Congress sought to eliminate the adverse tax treatment to a nonspouse beneficiary that occurred when a beneficiary received a lump sum distribution from a decedent's IRA creating an immediate taxable event on the entire amount distributed. From this reasoning came Congress' broad endorsement of inherited IRAs as a means of deferring the tax owed on the proceeds of a decedent's IRA over the life of the beneficiary. In enacting this policy Congress set forth various rules to ensure the holder of an inherited IRA was not treated the same as a holder of an IRA. See 26 U.S.C. 408(d)(3)(C). For example, a holder of an inherited IRA cannot make contributions to the account, cannot roll the funds in the account over to their own IRA, and must begin taking monthly distributions immediately, regardless of age or employment status, from the account in accordance with the IRS distribution guidelines. See 26 U.S.C. 408(d)(3)(C); see 26 U.S.C. 408(a)(6). This treatment is different for a holder of an IRA, who cannot withdraw, without penalty, funds from their account prior to a designated retirement age, and who can make tax deferred contributions to their account for purposes of saving for their retirement. 26 U.S.C In light of these differences, it is clear that Congress did not intend for inherited IRAs to serve as retirement accounts, but rather to serve as a conduit that allows beneficiaries to defer but not avoid income tax on the distributions from an IRA that they inherit. Id. at 864 (internal citations omitted). Because the funds in the debtor s hands no longer qualified as retirement funds, as determined by plain meaning analysis and the IRC s Inherited IRA provisions, the bankruptcy court sustained the trustee s objection to the debtor s claim of exemption. The bankruptcy court correctly answered the fundamental issue of this 8

15 appeal: Whose retirement funds does the exemption statute protect? It did so by properly limiting protected funds to persons holding and contributing to such accounts for the purpose of their own retirement. Id. (debtor must hold funds anticipating withdrawing from her position or occupation in the future for funds to qualify as exempt under 522(b)(3)(C)). C. The Supreme Court s decisions in Hamilton v. Lanning and Ransom v. FIA Card Servs., N.A., provide further support for the bankruptcy court s analysis and conclusion. The Supreme Court instructs that when interpreting Bankruptcy Code provisions, courts should consider the structure and purposes of the Code. See Ransom v. FIA Card Servs., N.A., 562 U.S., 131 S. Ct. 716 (2010); Hamilton v. Lanning, 560 U.S., 130 S. Ct (2010). In these cases, the Supreme Court expressed the importance of relying on the text, context, and purposes of the Code. Ransom v. FIA Card Servs., N.A., 131 S. Ct. at 716, 726. The Supreme Court further opined that [w]hen terms used in a statute are undefined, we give them their ordinary meaning. Hamilton v. Lanning, 130 S.Ct. 2464, 2471; Ransom v. FIA Card Servs., N.A., 131 S. Ct. at 724. Inasmuch as the term retirement fund is undefined in 522, or elsewhere in the Code, courts must import the ordinary meaning of the term retirement for its analysis. Id. The ordinary, dictionary meaning of the adjective retirement is: of, relating to, or designed for retired persons. Merriam-Webster Dictionary 9

16 6 Therefore, similar to the bankruptcy court s reasoning, the debtor does not hold funds for her retirement, or anyone else s, because once inherited, these funds were no longer funds of, relating to, or designed for [a] retired person, as they had been in the hands of her mother. The plain meaning of retirement funds applied by the bankruptcy court comports with the context of the Code s underlying dual policies of a fresh start for debtors and an equitable distribution of non-exempt property for creditors. The purpose of 522(b)(3)(C) is to protect the debtor s fresh start by securing funds needed for the debtor s retirement. See 4 Collier on Bankruptcy (16th ed. rev. 2012). The bankruptcy court properly employed the ordinary meaning of the term retirement funds in deciding that a debtor must hold such funds in anticipation of withdrawing from her position or occupation, and that in the case before it, the debtor s Inherited IRA does not contain anyone s retirement funds. In re Clark, 450 B.R. at 863. (emphasis in original). D. Analysis of relevant IRC provisions further supports the bankruptcy court s conclusion. A review of the relevant IRC provisions relating to Inherited IRAs further supports the bankruptcy court s decision. Cf. Ransom v. FIA Card Servs., N.A., 131 S. Ct. at 725 (looking to Internal Revenue Manual and IRS Revenue Collection 6 The noun retirement is defined as the act of retiring or condition of being retired. Webster s New Unabridged Dictionary (1989). 10

17 Financial Standards to interpret meaning of phrase applicable monthly expense amounts in 707(b)(2)(A)(ii)(I)). Congress, through the IRC, prescribed a set of rules for Inherited IRAs: one applicable to spouses and an alternate for non-spouse beneficiaries. Internal Revenue Service, U.S. Dept. of Treasury, Publication 590: Individual Retirement Arrangements (IRAs), p. 16. The spouse-beneficiary has the option of treating the funds as her own by naming herself as the IRA account owner, or rolling over the funds into her existing IRA. See id. Conversely, the non-spouse beneficiary can only liquidate the funds or withdraw them under a prescribed distribution plan. See id. In this regard, the non-spouse beneficiary can neither succeed to the decedent s retirement account nor incorporate the funds into her existing retirement plan. Moreover, the fund is unrestricted and the non-spouse beneficiary may immediately liquidate and utilize the funds for any purpose. In this regard, it would not serve the Code s exemption and fresh start policies to overlook these deficiencies in a nonspouse beneficiary s status and make them whole for 522(b)(3)(C) purposes. Congress, when it enacted the Employee Retirement Security Act of 1974 ( ERISA ), found that the continued well-being and retirement income security of millions of workers, retirees, and their dependents are directly affected by [singleemployer defined benefit pension plans]. 29 U.S.C. 1001(a). ERISA s principal object, therefore,... is to protect plan participants and beneficiaries. Boggs v. Boggs, 520 U.S. 833, 845, 117 S.Ct. 1754(1997). See Guidry v. Sheet Metal Workers 11

18 Nat. l Pension Fund, 493 U.S. 365, 376, 110 S.Ct. 680, 687 (1990) (noting ERISA s anti-alienation statute, 29 U.S.C. 1056(d)(1), prevents assigning or alienating pension benefits due to a union official who embezzled funds and reflects a considered congressional policy choice, a decision to safeguard a stream of income for pensioners (and their dependents who may be, and perhaps usually are, blameless) ). Congress s policy concern regarding retirement funds extends beyond an employed person to her beneficiaries, which may include a spouse or dependents. IRAs function as substitutes for future earnings in that they are designed to provide retirement benefits to individuals. In re Carmichael, 100 F.3d 375, 378 (5th Cir. 1996). IRAs began as a substitute retirement savings vehicle for selfemployed persons without the option to participate in a qualified plan. See S. Rep. No , reprinted in 1974 U.S.C.C.A.N. 4889, IRAs have since become a sort of universal conductor through which transfers must pass if they are to avoid the rocks and shoals of inadvertent taxable events. In re Carmichael, 100 F.3d at 378. IRAs initiated by one spouse may augment the retirement funds set aside by the surviving spouse. A surviving spouse named as beneficiary of an IRA, in general, has three options: (1) treat the IRA as her own, with an option to roll it over to herself; (2) treat herself as the IRA s beneficiary; or (3) disclaim the IRA entirely. 26 U.S.C. 401(a)(9)(B)(iv); 26 U.S.C. 408(d)(3); Internal Revenue Service, U.S. Dep t of the Treasury, Pub. 590 at pp (2011). See also In re Jarboe, 365 B.R. 12

19 717, 720, n.5 (Bankr. S.D. Tex. 2007). Aside from allowing the recipient to disclaim the IRA, the IRC provides no comparable options to non-spouse beneficiaries; it specifically excludes Inherited IRAs from rollover eligibility. 26 U.S.C. 408(d)(3)(C). Section 522(b)(4)(C) protects transfers from one tax-exempt retirement fund or account to another. 11 U.S.C. 522(b)(4)(C). It provides that a direct transfer of retirement funds from 1 fund or account that is exempt from taxation under section of the [IRC]... shall not cease to qualify for exemption under [ 522(d)(3)(C) or (d)(12)] by reason of such direct transfer. Id. It follows that 522(d)(3)(C) protects more than a future retiree s right to her retirement funds; it may also protect a beneficiary s right to the future retiree s retirement funds. It does not follow, however, that 522(d)(3)(C) protects a beneficiary s right to a future retiree s retirement funds in all instances. Importantly, the provision only applies when retirement funds are transferred. Death of the holder and contributor marks the end of an IRA s status as a retirement fund for the decedent. While death of the holder and contributor may not mark the end of an IRA s status as a retirement fund for the surviving spouse, as to a surviving non-spouse there is no doubt: once successfully transferred to a nonspouse beneficiary, the resulting Inherited IRA is not a retirement fund in any plain sense, nor is it a retirement fund under the IRC. 13

20 III. Congress Did Not Intend that an Inherited IRA Constitute a Retirement Fund Entitled to Exemption Status Under 522(b)(3)(C) and (d)(12). Exemptions in bankruptcy cases are part and parcel of the fundamental bankruptcy concept of a fresh start. Rousey v. Jacoway, 544 U.S. 320, 325, 125 S.Ct (2005); see also Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367, 127 S.Ct (2007). The language of 522(b)(3)(C) and (d)(12) does not manifest a policy to give honest debtors a fresh start where the debtor s account is an Inherited IRA, which can be liquidated immediately for any purpose and is not for the debtor s retirement. There is no reason to believe that Congress intended to include an Inherited IRA in an honest debtor s fresh start. A debtor with an Inherited IRA is neither the account owner s surviving spouse nor, in most instances, the account owner s surviving dependent. 7 Since IRAs are substitutes for future earnings designed to provide retirement benefits to individuals, a debtor who owns an Inherited IRA does not own a retirement benefit or retirement account; she owns a beneficial gift from someone who established the IRA for retirement but passed away before exhausting such funds and named the debtor as beneficiary. To allow an exemption in such cases would turn fresh starts into free passes. Cf. Schwab v. Reilly, 560 U.S., 7 By statute an Inherited IRA is transferred from a donor on her death to a nonspouse beneficiary. 26 U.S.C. 408(d)(3)(C). A beneficiary could be a surviving dependent, but that is not the case here. In any event, the same analysis should apply. 14

21 130 S. Ct. 2652, 2667 (2010) (criticizing debtor s fresh start policy argument, stating debtor s approach threatens to convert a fresh start into a free pass ). Here, if the district court s decision is upheld, the debtor will walk away with approximately $200,000 in funds, unencumbered by any ordinary retirement account strictures. This is not what Congress intended when enacting the retirement account exemption provisions. The debtor is not the person who contributed to and held the IRA anticipating retirement, nor was the debtor that person s spouse or dependent. The debtor is merely the beneficiary of tax-exempt funds the donor accumulated for her own retirement and could have bestowed on anyone with a change in the IRA s beneficiary designation. Therefore, the Inherited IRA at issue in this appeal does not contain retirement funds as 522(b)(3)(C) intends such term. In its decision, the district court recognized that its ruling could lead to incongruous results, noting there was reason to question why a debtor who obtained an inheritance in the form of an IRA could exempt it while a debtor whose inheritance was in the form of gold bullion or stock could not. In re Clark, 2012 WL at *7. The district court leaves this result for Congress to remedy, but the incongruity poses a statutory construction issue that the interpretation advanced here would remedy, rather than a policy consideration calling for remedial legislation. As this Court has opined, statutory construction should "favor the more reasonable result; and [ ] avoid construing statutes contrary to the clear intent of 15

22 the statutory scheme. Matter of Merchs. Grain, 93 F.3d 1347, (internal citations omitted). IV. The District Court s Textual Analysis of 522(b)(3)(C) and (d)(12) Does Not Give Meaning to All the Provisions Words and Terms. To qualify for exemption under either 522(b)(3)(C) or 522(d)(12), federal courts have held that an Inherited IRA must meet two criteria: (1) the property interest must be a retirement fund; and (2) the property interest must be found in a fund or account exempt from tax under one of seven enumerated provisions in the IRC. The district court adopted this analysis. See In re Clark, 2012 WL at *6 ( Section 522(d)(12) requires both that the funds in question be retirement funds and that they be in an account that is exempt from tax after they have been transferred. ) The district court framed the issue as whether retirement funds held in a traditional IRA lose their character upon the death of the account owner before the funds pass to a non-spouse beneficiary. Id. at *5. The court determined that 522 provided no assistance because the undefined term retirement funds carries an uncertain meaning. Id. ( [t]he statute is not clear, or plain, on this point ). The district court resolved this perceived ambiguity by examining the other subsections in 522(d). In every instance, save subsection (d)(12), 522(d) refers to a debtor s interest in, or a debtor s right to receive, a property interest. [I]t is fair to infer that words excluded from a statute are excluded for a purpose. It is a particularly persuasive inference to draw in this instance, where the drafter omitted the same phrase [i.e., the debtor s] from two 16

23 statutes, subsection (C) of 522(b)(3) and subsection (12) of 522(d). The omission is particularly noteworthy in 522(d), which has 11 other subsections, all of which contain a specific reference to the debtor s interest in certain property or the debtor s right to property. Id. at *6. The district court resolved the ambiguity by distinguishing the subject provisions from those limiting exemptions to a debtor s interest, holding that 522 (b)(3)(c) has no such limitation and therefore permits a non-spouse to exempt an Inherited IRA. Id. at *7. The district court s decision aligns with the decisions reached by most courts that have construed 522(b)(3)(C) and (d)(12), including, most recently, the Fifth Circuit Court of Appeals in Chilton v. Moser (In re Chilton), No , slip op (5th Cir. Mar. 12, 2012) (citing cases). The district court s observation that 522(d)(12) is unique because it omits the terms debtor s interest or debtor s right does not advance this Court s efforts to interpret 522(b)(3)(C) and (d)(12). No one disputes that an Inherited IRA constitutes estate property or that a debtor s exemption claim cannot exceed her interest in such property. The issue is whether a debtor can exempt her Inherited IRA, which turns on whether that Inherited IRA constitutes a retirement fund, not whether the debtor has an interest in or a right to such an account. Moreover, 522 s language regarding exempting a debtor s interest in property up to a certain value, as opposed to a debtor s right to an in-kind exemption in the property itself, is included for the purpose of distinguishing between exemptions that are capped and those that exempt the property per se. See Schwab v. Reilly, 17

24 560 U.S. at, 130 S. Ct. at Regarding the case at hand, there is no question that a retirement fund is fully exempt, subject to the express limitations set forth in Code 522(n). If the drafters of these Code provisions intended a tax-exempt account, built-up by a decedent for retirement but then transferred to a non-spouse beneficiary upon death, to be exempt, they could have manifested such intent by wording the statute with certainty. Legislative drafters could have included in 522(b)(3)(C) and (d)(12) a specific reference to Inherited IRAs, but they did not. 8 Had the drafters intended no distinction between tax-exempt funds that are also exempt from the bankruptcy estate, they could have eliminated the word retirement in 522(b)(3)(C) and (d)(12) to allow these subsections to exempt any funds to the extent that those funds are in a fund or account that is exempt from taxation. Despite the ability and opportunity to have done so, Congress did not include Inherited IRAs nonretirement accounts specially defined under the IRC for the sole purpose of affording these account holders tax-exempt treatment in these exemption provisions. Congressional intent is therefore manifest by exclusion of Inherited IRAs from 522(b)(3)(C) and (d)(12). Cf. Ransom v. FIA Card Services, N.A., 8 Congressional drafters mindfulness of inherited property in bankruptcy cases is manifested in the provision making property inherited by a debtor within 180 days of the filing of a bankruptcy petition estate property. 11 U.S.C. 541(a)(5)(A). 18

25 131 S.Ct. at 724 (Congress could have omitted the term applicable from 707(b)(2)(A)(ii)(I) if it intended a different result). The district court s determination that the Bankruptcy Code does not distinguish between an Inherited IRA and a debtor-funded IRA renders the term retirement meaningless. The district court s statutory construction thus violates common principals of statutory construction because it does not give effect to all words and terms in 522(b)(3)(C). V. The Fifth Circuit s Recent Chilton Decision Employs a Strained Statutory Construction Analysis. In In re Chilton, the Fifth Circuit Court of Appeals found a plain meaning in 522(d)(12): The plain meaning of the statutory language refers to money that was set apart for retirement. Thus the defining characteristic of retirement funds is the purpose they are set apart for, not what happens after they are set apart. In re Chilton, slip op. at *5. The Fifth Circuit found support in 522(b)(4)(C), which in its view provides that a direct transfer of retirement funds does not alter their status as retirement funds. Id. Finding no cause to interpret the statutory language differently from the plain meaning it assigned, the court held that an Inherited IRA contains retirement funds as the phrase is used in 522(b)(3)(C). While the Fifth Circuit Court of Appeals and the bankruptcy court both found plain meaning in the term retirement funds, they reached opposite conclusions about what that meaning was. The Fifth Circuit, through its analysis, determined 19

26 that the defining characteristic of retirement funds does not change when transferred into an Inherited IRA. The bankruptcy court, in this case, interpreted the plain meaning otherwise, observing that only the person holding and contributing to an IRA can hold such funds for the purpose of retirement. The exemption provisions at issue, 522(d)(3)(C), (d)(4)(c), and (d)(12), exempt retirement funds, not funds. Because the recipient of an Inherited IRA receives funds from her deceased donor, without any distribution restrictions relating to her retirement, 9 she does not receive retirement funds. The Fifth Circuit s statutory construction likewise violates common principals of statutory construction. It does not give effect to all words and terms in 522(b)(3)(C). CONCLUSION For the reasons cited herein, Amicus Curiae, the National Association of Bankruptcy Trustees, respectfully requests that the district court s decision be reversed and the bankruptcy court s order reinstated and affirmed. 9 Any restrictions regarding distributions under an Inherited IRA are for the sole purpose of enabling the account holder to obtain favorable tax treatment specially designed for such non-spouse beneficiary. 20

27 Respectfully submitted, National Association of Bankruptcy Trustees, By its counsel, /s/jeffrey J. Cymrot Jeffrey J. Cymrot Sassoon & Cymrot, LLP 84 State Street Boston, MA (617) /s/ Donald R. Lassman Donald R. Lassman Law Offices of Donald R. Lassman P.O. Box Needham, MA (781) /s/ David Leibowitz Law Office of David Leibowitz LLC 420 W. Clayton Street Waukegan, IL (847)

28 CERTIFICATE OF COMPLIANCE WITH FED. R. APP. P. 32(A)(7) Certificate of Compliance with Type-Volume Limitation, Typeface Requirements, and Type Style Requirements 1. This brief complies with the type-volume limitation of Fed. R. App. P. 32(a)(7)(B) because: this brief contains 5,148 words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii). 2. This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because: this brief has been prepared in a proportionally spaced typeface using Microsoft Word 2007 in 12 point Century font. Footnotes were also set in 12 point Century font. /s/ David P. Leibowitz Attorney for Amicus Curiae National Association of Bankruptcy Trustees 22

29 CERTIFICATE OF SERVICE I hereby certify that on March, 2012, I electronically filed the foregoing document with the United States Court of Appeals for the Seventh Circuit using the CM/ECF system. I certify that the following parties or their counsel of record are registered as ECF Filers and that they will be served by the CM/ECF system: Denis Bartel Roger Sage Signed under penalties of perjury on March, /s/ David P. Leibowitz Attorney for Amicus Curiae National Association of Bankruptcy Trustees 23