Title: Bartlett Cooperative Ass'n v. Patton

State: kansas

Issuer: Kansas Supreme Court

Document:

239 Kan. 628 (1986)
722 P.2d 551
BARTLETT COOPERATIVE ASSOCIATION, Appellant,
v.
RON PATTON, Appellee, and COFFEYVILLE STATE BANK, Garnishee.
No. 58,679

Supreme Court of Kansas.
Opinion filed July 18, 1986.
Morris D. Hildreth, of Becker, Hildreth, Eastman, Gossard, Bell and Hassenplug, of Coffeyville, argued the cause and was on the briefs for appellant.
Edward W. Dosh, of Parsons, argued the cause and was on the brief for appellee.
The opinion of the court was delivered by
McFARLAND, J.:
Plaintiff Bartlett Cooperative Association obtained a judgment against defendant Ron Patton. In attempting to collect the judgment, plaintiff garnished defendant's Individual Retirement Account (IRA) in the Coffeyville State Bank. The district court held the IRA was exempt from garnishment under federal law. Plaintiff appeals from this determination.
The first issue is procedural in nature. Plaintiff contends defendant did not timely raise the defense of exemption. The trial court's findings of fact relative to the mechanics of the garnishment are not challenged and are as follows:
Garnishment is governed by the provisions of Article 7 of the Kansas Code of Civil Procedure, K.S.A. 60-701 et seq. It is defined as "either (1) a form of or an aid to attachment, or (2) in lieu of or in aid of execution." K.S.A. 60-714.
Under K.S.A. 60-716, an order of garnishment to aid in the enforcement of a judgment may be obtained against the property of the debtor. The order of garnishment is served on the garnishee, together with two copies of the answer form for the garnishee. K.S.A. 60-717(b). Within ten days of service, the garnishee must file an answer. The answer essentially sets out what of the debtor's property the garnishee has under its control. K.S.A. 60-718(a).
The provision of the Code which is in issue in this case is K.S.A. 60-718(c), which comes into play after the garnishee's answer has been filed. That section states, in pertinent part:
The appellant contends the court erred in considering the appellee's response because it constituted a reply under K.S.A. 60-718(c) and was filed thirteen days after the garnishee's answer. The appellee counters that he did not file a "reply" because he was not denying that the garnishee had his property, rather, he was claiming that the property was exempt from *630 garnishment. He also argues that even if bound by the 10-day limit he had three extra days because "service" was by mail. K.S.A. 60-206(c).
K.S.A. 60-720 is titled "trial." Paragraph (c) provides as follows:
Nowhere does the statute set out an explicit procedure for raising this defense. However, K.S.A. 60-724 explicitly provides that "[n]o judgment shall be rendered in garnishment by reason of the garnishee['s] ... (3) holding moneys or property exempt by law, or the proceeds therefrom."
We conclude the question of exemption was timely raised. The response of the defendant did not controvert any statement contained in the garnishee's answer. Clearly, K.S.A. 60-718(c) does not cover all issues in a garnishment proceeding. A third party claiming ownership in the garnished moneys is not controlled by the statute. The defense of exemption is designated in K.S.A. 60-720 as a defense in addition to any controverting of statements made in the garnishee's answer. The ten-day requirement in K.S.A. 60-718(c) is not applicable to the claim of exemption herein.
We turn now to the merits. Did the district court err in holding that federal law prohibits garnishment of an IRA?
Inasmuch as IRA's have been a fact of life for a number of years, it would be logical to assume this issue would involve a substantial body of case law. Such is not the situation.
In 1974, Congress reacted to the national concern over abuses affecting the stability and accountability of employee benefit plans by the passage of the Employee Retirement Income Security Act of 1974 (ERISA) (88 Stat. 832), codified as 29 U.S.C. § 1001 et seq. (1982). The purpose of ERISA is stated in 29 U.S.C. § 1001 (1982) as follows:
"Congressional findings and declaration of policy.
The thrust of ERISA is to protect employees' rights in employee benefit plans arising from their employment  whether controlled by employers or labor unions. In such plans, an *632 employee is one of a herd with no real control over his or her interest in the fund or access to information on its management. Funds paid into such plans by employers are generally not taxable to the employee at the time of contribution. This placed the working person not covered by such a plan at a distinct disadvantage if he or she sought to develop a private pension plan for his or her benefit; hence, the birth of the Individual Retirement Account (IRA) in ERISA for working persons not covered by an employee pension plan.
An IRA gives the owner one of the tax advantages of an employer funded pension fund (contributions are not taxed when placed in the account). However, the need for the safeguards set forth in 29 U.S.C. § 1001 applicable to employee benefit plans is absent. The owner of an IRA individually contracts for the IRA and retains much control over it. He or she can secure return of the invested funds prior to retirement by paying a penalty for early withdrawal and, of course, income taxes on the funds. Federal law specifically requires that tax-qualified employee pensions, profit-sharing, and stock bonus plans contain an anti-alienation clause. I.R.C. § 401(a)(13) (1982). (For convenience, further citations to federal law where applicable shall be to the Internal Revenue Code rather than ERISA.) An employee under an employee benefit plan might easily be bilked out of what, to him or her, appears to be some vague contingent future interest in the employee benefit plan  hence a need for the anti-alienation provision. Effective in 1982, the Economic Recovery Act of 1981 permitted all working people to establish IRA's, regardless of whether or not they were covered by employee benefit plans. IRA's are established under I.R.C. § 408 (1982) and I.R.C. § 408 contains no similar anti-alienation provision. Had Congress believed federal interest required a like provision in IRA's it could have inserted such provision. That it did not do so is significant. Appellee herein would give an IRA under I.R.C. § 408 a ride on the coattails of employee benefit plans under I.R.C. § 401 as far as anti-alienation is concerned. We do not believe that was the Congressional intent.
It is true that early withdrawal of an IRA subjects the owner to payment of a penalty  so does early withdrawal of a certificate of deposit (CD). Additionally, early withdrawal subjects the owner of the IRA to additional tax liability for the year in question. But *633 this does not imply any Congressional intent to prohibit garnishment of IRA's. We conclude that garnishment of IRA's is not precluded by federal law. For a more in-depth discussion of the applicable federal law see Lohwater, Who Can Attach Your IRA, 4 Nat'l L.J. No. 32, 22 (April 19, 1982). The Lohwater article, likewise, concludes federal law does not remove IRA's from the reach of creditors.
Appellee concedes that the garnishment herein is not contrary to Kansas law and that an exemption for the IRA must be found in federal law. Normally, we would not discuss state law under this circumstance. However, this opinion would be misleading if we did not mention certain 1986 amendments (addition of sections [b], [c], and [d]) to K.S.A. 60-2308 contained in Substitute for House Bill No. 2522 (L. 1986, ch. 220, § 1), which provides in part:
Inasmuch as the garnishment herein was filed prior to the time periods contained in section (d), these amendments do not apply to the case before us. However, it should be noted section (b) does exempt, inter alia, an I.R.C. § 408 retirement plan which is an IRA.
We conclude the district court erred in concluding the IRA herein was exempt from garnishment under federal law.
The judgment is affirmed in part, reversed in part, and remanded for further proceedings.