Recent Exemption Cases
IRAs | Workers Compensation Settlements | Marital Liens | Res Judicata

Individual Retirement Accounts

Rousey v. Jacoway (In re Rousey), 125 S.Ct. 1561 (2005)

Background: Chapter 7 Debtors had two individual retirement accounts (IRAs) which were established with funds rolled over from pension plans with their former employer. Debtors claimed the IRAs exempt under 11 U.S.C. §522(d)(10)(E). Trustee objected to these claimed exemptions and moved for turnover. The Bankruptcy Court (W.D.Ark.) sustained the objection and granted the turnover motion. Debtors appealed, and the Bankruptcy Appellate Panel affirmed, holding that the IRAs were not “similar plans or contracts” to those specifically listed in the exemption statute, and that the Debtors’ right to payment under the IRAs were not triggered by “illness, disability, death, age, or length of service.” Rousey v. Jacoway (In re Rousey), 283 B.R. 265 (B.A.P. 8th Cir. 2002). Debtors appealed. The Eighth Circuit Court of Appeals affirmed, holding that although the Debtors’ IRAs could be regarded as “similar plans or contracts” under the exemption statute, the Debtors’ right to payment under the IRAs was not on account of illness, disability, death, age, or length of service, and the IRAs were therefore not exempt. Debtors again appealed.

Holding: Reversed. The Supreme Court found that Debtors’ IRAs conferred a right to payment on account of age, and that the IRAs were similar plans or contracts to those enumerated in §522(d)(10)(E).

• Debtors’ IRAs provide a right to payment on account of age. The tax penalties for early withdrawals from IRAs are substantial, and restrict Debtors’ right to payment on the balance of their IRAs.
• Debtors’ IRAs are similar to the plans or contracts listed in §522(d)(10)(E) because they share the common feature of providing income that substitutes for wages earned as salary or hourly compensation.

Clark v. Lindquist, 683 NW2d 784 (Minn. 2004)

Background: Debtor owned a qualified individual retirement annuity (IRA) valued at $107,500. The IRA was originally funded by Debtor’s rollover of his 401K at the time he retired. The IRA allowed Debtor to withdraw funds at any time, up to the full principal amount of the annuity, less a surrender charge and tax penalties for removing funds prior to age 59 ½. Debtor claimed the IRA as exempt under Minn. Stat. §550.37, subd. 24, and the Chapter 7 bankruptcy trustee objected. The bankruptcy court disallowed the exemption. Debtor appealed to the U.S. District Court for the District of Minnesota, and moved for certification of the question as to the extent to which IRAs are exempt from a debtor’s estate under Minnesota law. The federal court granted the motion and certified the question to the Minnesota Supreme Court.

Holding: An IRA (Individual Retirement Account or Individual Retirement Annuity) as defined by the Internal Revenue Code §408 “is exempt property under Minn. Stat. §550.37, subd. 24, as limited by the terms of subdivision 24(a) to an indexed present value and sums reasonably necessary for the support of the debtor and the debtor’s spouse or dependents.”

• Minnesota expressly exempts funds in IRAs.
• The legislature intended to exempt retirement income “so as to insure that debtors, despite their debts, will nevertheless have reasonable means to support themselves and their dependents without at the same time allowing them to shield assets over and above those necessary to support themselves and their dependents.
• The amount of the exemption under Minn. Stat. §550.37, subd. 24 is the indexed present value amount, which is exempt without regard to need, plus any additional amount which may be reasonably necessary for the support of the debtor and the debtor’s spouse or dependents.
• Debtor’s access to the IRA funds is not completely unfettered, because any claimed exemptions on amounts surpassing the indexed present value are allowed only to the extent that they are reasonably necessary for the support of the debtor and the debtor’s spouse or dependents. Additionally, the exemption statute aggregates all plans that fall under its purview, so that debtors may not shield large amounts from creditors by spreading retirement income over several accounts.

Workers Compensation Settlements

In re Johnson, 03-CV-6202 (D. Minn. August 23, 2004) (Rosenbaum, C.J.)

Background: Chapter 7 Debtor claimed the proceeds of a lump sum workers compensation settlement as exempt under Minn.Stat. § 176.175. Trustee objected on the grounds that Minn. Stat. § 176.175, subd. 2 provides an exemption for a “claim for compensation owned by an injured employee or dependent,” but does not provide an exemption for the actual proceeds from the settlement of such a claim. The Bankruptcy Court sustained the Trustee’s objection, holding that Minn. Stat. §176.175 does not provide an exemption for the proceeds of a workers compensation settlement. See In re Johnson, 300 B.R. 471 (Bankr.D.Minn. 2003). The Debtor appealed.

Holding: The District Court reversed, holding that a workers’ compensation lump sum settlement is exempt pursuant to Minn. Stat. § 176.175, subd. 2.

• A district court reviews a bankruptcy court’s legal conclusions de novo.
• Lump sum payments of workers’ compensation benefits achieve the Workers’ Compensation Act’s statutory objective of delivering benefits quickly, efficiently and at a reasonable cost.
• The legislative intent and statutory context of the Workers’ Compensation Act suggest that the word “claim” in Minn. Stat § 176.175, subd. 2 includes lump sum benefits.
• The word “claim” holds a different meaning in the workers’ compensation context than in the context of the tort system.

Marital Liens

Keller v. Johnson (In re Johnson), 375 F.3d 668 (8th Cir. 2004)

Background: Divorced Chapter 13 debtor held a lien interest in the marital residence occupied by debtor’s former wife and their minor child. The lien was awarded pursuant to a divorce decree. Debtor claimed this lien as exempt under the Bankruptcy Code’s homestead exemption, which provides in pertinent part that a debtor may exempt “the debtor’s aggregate interest … in real property or personal property that the debtor or a dependent of the debtor uses as a residence.” 11 U.S.C. § 522(d)(1). The Chapter 13 Trustee objected to the claim of exemption, arguing that under Minnesota law a lien is personal property, and the debtor’s child does not reside in the personal property, which is the lien. The Bankruptcy Court overruled the objection, and the BAP affirmed the Bankruptcy Court, holding that the Debtor’s lien in his former marital residence constituted an “aggregate interest” in real property, within the Bankruptcy Code’s homestead exemption. The Trustee again appealed.

Holding: The Eighth Circuit reversed, holding that the Debtor’s lien in the marital residence did not rise to the level of a homestead exemption under 11 U.S.C. § 522(d)(1).

• The Bankruptcy Code does not specify whether a lien arising from a dissolution decree is a mere charge against property, or, instead, an interest in property, so state law must be referred to for guidance.
• Minnesota law defines a lien as a charge upon land for the payment of a debt. Thus, under Minnesota law, a lien arising out of a dissolution decree is merely a collateral for debt. This collateral is considered personal property, and not an interest in real property.
• The debtor’s lien does not qualify as an exemption under 11 U.S.C. § 522(d)(1) for two reasons. “First, although the debtor’s lien is a personal property interest under Minnesota law, neither the debtor nor his dependent uses the lien as a residence. Second, the debtor has no ownership or possessory interest in the residence. We do not believe the debtor’s mere collateral interest in the residence rises to the level of a homestead right under 11 U.S.C. § 522(d)(1).”

Res Judicata

Ladd v. Ries, 450 F.3d 751 (8th Cir. 2006)
Background: Chapter 7 Debtors reside on approximately 127 contiguous acres of farmland and earn rental income from agricultural operations on the land. Debtors claimed the property exempt under 11 U.S.C. § 522(d)(1). The Trustee filed an objection to the claimed homestead exemption, and Debtors did not respond to the objection or appear at the hearing. The court entered an order sustaining the Trustee’s objection and disallowing the Debtors’ homestead exemption. Approximately 15 months after entry of this order, the Debtors filed an amended schedule, claiming the 127 acres exempt under the Minnesota homestead exemption. The Trustee objected to the amended claim of exemption. At the hearing thereon, the Debtors explained that they did not respond to the Trustee’s objections to the federal homestead exemption because they thought they had an absolute right to amend their schedules pursuant to Federal Rule of Bankruptcy Procedure 1009(a). The court sustained the Trustee’s objection, holding that res judicata barred hearing the issue of state homestead exemption where the issue of federal homestead exemption was previously adjudicated. Debtors appealed, and the B.A.P. for the 8th Circuit affirmed. Debtors appealed to the Eighth Circuit Court of Appeals.

Holding: The Eighth Circuit reversed the B.A.P. decision, stating that the bankruptcy court abused its discretion in not allowing the debtors to amend their schedules to claim the Minnesota homestead exemption.

• Res judicata does not bar a hearing on the issue of state homestead exemption, because it does not involve the same nucleus of facts as the federal homestead exemption. Under federal law, the focus is on value; under Minnesota law, the focus is on acreage.
• Bankruptcy forms do not allow for pleading alternative theories for exemptions, and “[r]equiring an already cash-strapped debtor to litigate an exemption simply for the purpose of raising the alternative theory makes little sense, especially when the debtor can accomplish the same result by amending pursuant to Rule 1009.”
• Bankruptcy Rule 1009 allows liberal amendment to bankruptcy schedules in the absence of bad faith or prejudice to creditors.
• Maximization of exemptions, particularly the homestead exemption, is a fundamental policy of the Bankruptcy Code.

RELATED CASES: A ruling on a debtor’s prior exemption claim precludes the debtor from raising a different substantive basis for exempting the same asset. See In re Walls, 249 B.R. 506 (Bankr. D. Minn. 2000); In re Marshall, 224 B.R. 399 (Bankr. D. Minn. 1998).

-Content reviewed weekly | Contact Editor-