Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca3-06-02959/USCOURTS-ca3-06-02959-0/pdf.json

Parties Involved:
Susan Marie Krebs
Appellant
Gary V. Skiba
Appellee

Document Text:

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

 

No. 06-2959

 

IN RE: SUSAN MARIE KREBS,

 Appellant

 

On Appeal from the United States District Court

for the Western District of Pennsylvania

(D.C. No. 06-cv-00066E)

District Judge: Honorable Sean J. McLaughlin

 

Argued March 6, 2008

Before: FISHER, GREENBERG and ROTH, Circuit Judges.

(Filed: May 19, 2008)

J. Wesley Rowden (Argued)

310 Chestnut Street

Masonic Building, Suite 225

Meadville, PA 16335

Attorney for Appellant

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Gary V. Skiba (Argued)

Yochim, Skiba, Johnson, Cauley & Nash

345 West 6th Street

Erie, PA 16507

Attorney for Appellee

 

OPINION OF THE COURT

 

FISHER, Circuit Judge.

This appeal requires us to revisit one of our precedents in

deciding whether a debtor’s right to receive payment from an

individual retirement account (IRA) may be exempt from the

bankruptcy estate under 11 U.S.C. § 522(d)(10)(E), even though

the debtor has not yet reached retirement age. For the reasons

that follow, we hold that an intervening Supreme Court decision

impliedly overrules our own earlier precedent. Accordingly, we

will vacate the order of the District Court relying on that

precedent and remand.

I.

Susan Marie Krebs filed a voluntary petition for

bankruptcy on September 7, 2005, when she was 58 years of

age. After the meeting of creditors, Gary V. Skiba, appellee

herein, was designated as the Chapter 7 trustee, or the person

responsible for overseeing the liquidation of the bankruptcy

estate and the distribution of the proceeds. Krebs indicated on

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Krebs does not appeal, so we do not address, the District

Court’s other holding that her IRA is not excluded under 11

U.S.C. § 541(c)(2).

3

her bankruptcy schedules that she had an IRA worth $43,571.96

at Lincoln Financial Group. She also sought to exempt the IRA

under 11 U.S.C. § 522(d)(10)(E). On December 12, 2005, Skiba

filed an objection to the exemption in the United States

Bankruptcy Court for the Western District of Pennsylvania.

After a hearing, the Bankruptcy Court by order dated

March 3, 2006 sustained Skiba’s objection. Krebs timely

appealed that order to the District Court. By memorandum

opinion and order dated May 10, 2006, the District Court

affirmed, relying on precedent disallowing exemptions of

amounts in retirement plans under § 522(d)(10)(E) unless the

debtor is presently receiving those amounts without penalty, i.e.,

typically after the debtor has reached retirement age. Krebs then

filed a timely notice of appeal to this Court.1

II.

The District Court had jurisdiction under 28 U.S.C.

§ 158(a). We have jurisdiction under 28 U.S.C. § 158(d) and

exercise plenary review over conclusions of law. In re Brannon,

476 F.3d 170, 173 (3d Cir. 2007). A panel of this Court may

reevaluate the holding of a prior panel which conflicts with

intervening Supreme Court precedent. See Mennen Co. v. Atl.

Mut. Ins. Co., 147 F.3d 287, 294 n.9 (3d Cir. 1998); Reich v.

D.M. Sabia Co., 90 F.3d 854, 858 (3d Cir. 1996).

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Subsequent to the Rousey decision, Congress enacted the

Bankruptcy Abuse Prevention and Consumer Protection Act of

2005, Pub. L. No. 109-8, § 224, 119 Stat. 23, 64 (2005), one of

whose provisions unambiguously exempts qualifying IRA funds

with respect to bankruptcy petitions filed after October 17, 2005.

Id. § 224(a)(2)(B). This new provision, now codified at 11

U.S.C. § 522(d)(12), does not apply here, however, because

Krebs filed her bankruptcy petition on September 7, 2005, one

month before the new provision’s effective date. Thus, we (as

well as Krebs) may rely only on § 522(d)(10)(E).

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III.

A. Our Decision in Clark

“As a general matter, upon the filing of a petition

for bankruptcy, ‘all legal or equitable interests of

the debtor in property’ become the property of the

bankruptcy estate and will be distributed to the

debtor’s creditors. [11 U.S.C.] § 541(a)(1). To

help the debtor obtain a fresh start, the

Bankruptcy Code permits him to withdraw from

the estate certain interests in property, such as his

car or home, up to certain values. See, e.g.,

§ 522(d).”

Rousey v. Jacoway, 544 U.S. 320, 325 (2005). In this case,

Krebs claims that her right to receive payment from the IRA is

exempt under § 522(d)(10)(E).2

Krebs must establish three requirements for exemption:

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The parties have not argued, so we do not decide, that

there is a difference between exempting the right to receive

payment from an IRA versus exempting the IRA itself. The

Supreme Court does not appear to perceive any difference of

significance. Compare Rousey, 544 U.S. at 325 (“the right to

receive payment may be exempted”), with id. at 326 (“IRAs can

be exempted”). Hence, we, too, will assume the semantic

interchangeability and refer to exempting both in this opinion.

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(1) the right to receive payment must be

“under a stock bonus, pension,

profitsharing, annuity, or similar plan or

contract”;

(2) the right to receive payment must be “on

account of illness, disability, death, age, or

length of service”; and

(3) the right to receive payment may be

exempted only “to the extent reasonably

necessary for the support of the debtor and

any dependent of the debtor.”

11 U.S.C. § 522(d)(10)(E) (with one exception not relevant

here).3

We interpreted the third requirement in In re Clark

(Clark v. O’Neill), 711 F.2d 21 (3d Cir. 1983). In Clark, Robert

H. Clark, a 43-year-old family therapist, filed a Chapter 7

petition in bankruptcy and claimed an exemption for the

$17,466 in his Keogh retirement plan. Id. at 22. Contributions

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to such a plan are tax-deductible, and income tax on its earnings

is deferred until withdrawn. The right to receive payment under

the plan is triggered when a participant turns 59 1⁄2, dies, or is

disabled. Id. If a participant receives a payment before one of

these events, he must pay a penalty tax of 10% in addition to

regular income taxes. Id.

The trustee in Clark filed an objection to the claimed

exemption, and Clark filed a complaint against the trustee

seeking a denial of the objection. In interpreting

§ 522(d)(10)(E), the bankruptcy court agreed with the trustee

that because Clark had no present right to receive payments

from the plan, his exemption claim did not fall within the literal

terms of the statutory provision. Id.

We affirmed. We first cited the following legislative

history of the exemption provisions of the Bankruptcy Code:

“The historical purpose of [] exemption laws has

been to protect a debtor from his creditors, to

provide him with the basic necessities of life so

that even if his creditors levy on all of his

nonexempt property, the debtor will not be left

destitute and a public charge. [This] purpose has

not changed.”

Id. at 23 (quoting H.R. Rep. No. 95-595, at 126 (1977), as

reprinted in 1978 U.S.C.C.A.N. 5963, 6087). Based on that

legislative history, we held: “The exemption of present Keogh

payments, to the extent they are necessary for the support of the

debtor, is consistent with this goal. The exemption of future

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We apparently failed to quote the rest of the paragraph

in the House Report, which evinced an intent to make

bankruptcy exemptions more generous, not less. We also made

no mention of a later portion of that same report, which

explained that § 522(d)(10) “exempts certain benefits that are

akin to future earnings of the debtor.” H.R. Rep. No. 95-595, at

362 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6318.

5

In Kochell the bankruptcy court actually conducted an

intensive factual inquiry into the debtor’s finances and found

that the “presence of [a] surplus [beyond his current living

expenses] indicates not only that the pension fund is not

necessary for the current support of the debtor, but that a

pension fund could be easily reestablished.” 26 B.R. at 87. It

is quite a stretch to turn a finding of current surplus on the facts

into a per se rule precluding exemption of all future retirement

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payments, however, demonstrates a concern for the debtor’s

long-term security which is absent from the statute.” Id.4

We proceeded to cite decisions from various bankruptcy

courts (we did not cite a single circuit or district court decision)

that showed that “[t]he result of denying the exemption with

respect to future payments is in accord with the caselaw.” Id.

After explaining that some of the cases were decided on other

grounds, we were left essentially with one decision on point,

Matter of Kochell, 26 B.R. 86 (Bankr. W.D. Wis. 1982), which

we characterized as “agree[ing] that the underlying purpose of

the section was to alleviate present rather than long-term need,

a condition which the 44-year old debtor, a doctor in apparent

good health, could not demonstrate.” 711 F.2d at 23.5

 Beyond

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plan payments.

6

See, e.g., In re Brucher, 243 F.3d 242, 243 (6th Cir.

2001); In re McKown, 203 F.3d 1188, 1190 (9th Cir. 2000); In

re Dubroff, 119 F.3d 75, 78 (2d Cir. 1997); In re Carmichael,

100 F.3d 375, 380 (5th Cir. 1996).

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the aforementioned legislative history and the Kochell case, our

opinion in Clark did not contain further reasoning to support our

per se rule that only present payments from a retirement fund

can ever meet the “reasonably necessary” requirement.

Judge Becker concurred in the judgment only. He

specifically took exception to the majority’s holding

distinguishing between future payments and present payments,

“for the distinction required by the majority’s reasoning

effectively penalizes self-employed individuals for the form in

which their retirement assets are held.” 711 F.2d at 23 (Becker,

J., concurring). He explained that retirement plans created by

employers are not affected by the majority’s holding because the

assets of such plans are not included in the debtor’s estate in the

first place. Id. at 24. He also wrote that he would not rely on

the legislative history relied upon by the majority, “given the

incongruity of the result for different retirement plans.” Id.

B. The Impact of Rousey

Several of our sister courts of appeals have decided the

exemption issue contrary to Clark.

6

 However, we lack authority

to overrule it on that basis. Nor can we overrule it because we

are no longer persuaded by its reasoning. The basis that permits

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us to do so is the Supreme Court’s 2005 decision in Rousey, in

which the Court held that the right to receive IRA payments

“can be exempted from the bankruptcy estate pursuant to

§ 522(d)(10)(E).” 544 U.S. at 326. In Rousey, petitioners

Richard and Betty Jo Rousey sought to exempt their two IRAs,

one in each of their names, from the bankruptcy estate pursuant

to that provision. The Rousey bankruptcy court and bankruptcy

appellate panel denied the Rouseys’ exemption claim.

The Court of Appeals for the Eighth Circuit affirmed,

relying on its prior holding that IRAs do not satisfy either of the

first two requirements of § 522(d)(10)(E), i.e., that they must be

similar plans or contracts to those enumerated and that the right

to receive payment must be on account of age. See id. at 324.

In reversing the Eighth Circuit, the Supreme Court held that the

Rouseys’ IRAs satisfied both statutory requirements. Id. at 334-

35.

The IRAs at issue here and in Rousey (both of which fall

undisputedly within the meaning of section 408 of the Internal

Revenue Code, 26 U.S.C. § 408) share many of the

characteristics of the Keogh plan at issue in Clark. First, IRAs

provide for tax-deductible contributions. 26 U.S.C. §§ 219(a)

& 408(e)(1). Taxation is deferred until amounts are withdrawn.

Rousey, 544 U.S. at 323, 331-32. Withdrawals made before the

accountholder turns 59 1⁄2 are generally subject to a 10% tax

penalty. See 26 U.S.C. § 72(t). The Supreme Court concluded

that “these features show that IRA income substitutes for wages

lost upon retirement and distinguish IRAs from typical savings

accounts.” 544 U.S. at 332.

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Although the precise holding in Rousey covers only the

first and second requirements of § 522(d)(10)(E), the facts in

Rousey cast doubt on Clark’s interpretation of the third

requirement. That interpretation, i.e., the per se rule we

established, is wrong because the Rouseys had not yet reached

59 1⁄2 years of age when they filed their bankruptcy petition, so

they were not yet receiving payments (without penalty) from the

IRA they sought to exempt. The pertinent part of the Rouseys’

merits brief before the Supreme Court states:

“When they filed for bankruptcy, Richard Rousey

was fifty-seven years old and petitioner Betty Jo

Rousey was fifty-three. Their ability to replace

those funds, a substantial part of which had been

accumulated through their employer-sponsored

pension plan, and through the compounding of

funds held for many years, is non-existent.

Nothing in the language, structure, or purpose of

Section 522(d)(10)(E) suggests any reason why

the fortuity that they filed for bankruptcy in 2001

rather than the year in which they would be 59 1⁄2

years old should determine the eligibility of their

IRAs for exemption.”

Brief for Petitioners, Rousey, 2004 WL 1900505, at *35-36; see

also Rousey v. Jacoway, 275 B.R. 307, 309, 311 (Bankr. W.D.

Ark. 2002) (stating that the Rouseys would face a 10% tax

penalty if they withdrew from their IRAs at that time).

Moreover, it is the Rouseys’ age at time of petition filing that

matters because the bankruptcy estate is created at the

“commencement” of the bankruptcy case. See 11 U.S.C. §§ 301

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& 541(a). The Supreme Court’s holding that IRAs may be

exempted under § 522(d)(10)(E) therefore applies squarely to

those debtors who have not yet reached 59 1⁄2 years of age. Our

contrary interpretation of the third requirement of

§ 522(d)(10)(E) in Clark thus ends up appending a sort of fourth

requirement that finds no support in the statutory text and that

Rousey forecloses by its facts.

Although the district and bankruptcy courts in our Circuit

have split with respect to Rousey’s effect on Clark, we are

persuaded by the reasoning of those courts that have decided the

question the way we do today. For example, the United States

District Court for the Middle District of Pennsylvania correctly

identified the polar opposite approaches to statutory

interpretation in Rousey and Clark. See In re Wiggins, 341 B.R.

506, 512 (M.D. Pa. 2006). Whereas Clark narrowed allowable

exemptions based on what the majority perceived as the

Bankruptcy Code’s limited purpose of maintaining the debtor’s

immediate financial security, Rousey focused only on the Code’s

plain language, which asks whether an item sought to be

exempted is “similar” to “a stock bonus, pension, profitsharing,

[or] annuity,” that is, whether the item provides income that

substitutes for wages. Id. Other than the three requirements

imposed by the plain language, “[n]o other limitation is

imposed, and no higher purpose of the Bankruptcy Code is

invoked.” Id. The Supreme Court did not treat as dispositive

the factor essential to our per se rule: whether the plan or

contract provides for immediate payments or deferred payments.

We agree with Wiggins that Rousey’s approach to construing

§ 522(d)(10)(E) diverges significantly from our approach in

Clark, which further undermines Clark’s per se rule.

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Finally, we are unable to determine whether Krebs’ right

to receive payment from the IRA in fact meets the third

requirement of § 522(d)(10)(E) without the now-overruled Clark

gloss, as neither the District Court nor the Bankruptcy Court

engaged in the factual inquiry necessary to determine whether

an IRA is “reasonably necessary” to support a debtor and her

dependents. See, e.g., In re Booth, 331 B.R. 233, 236-37

(Bankr. W.D. Pa. 2005) (enumerating eleven factors to consider

for the factual inquiry); In re Bogart, 157 B.R. 345, 347 (Bankr.

N.D. Ohio 1993). Nor does the record indicate whether the

entire amount of $43,571.96 may be “reasonably necessary,” or

only a portion thereof. Because the “to the extent” language in

the third requirement of § 522(d)(10)(E) may limit the amount

actually exempted in any particular case, it is possible that only

some portion of the IRA should be exempted. See, e.g., In re

Fulton, 240 B.R. 854, 870, 876-77 (Bankr. W.D. Pa. 1999).

Accordingly, we will remand.

IV.

Our conclusions are as follows. It is undisputed that

Krebs’ IRA meets the first two requirements of 11 U.S.C.

§ 522(d)(10)(E). Further, Rousey impliedly overrules Clark, so

Krebs’ right to receive payment from her IRA may be exempt

from the bankruptcy estate under § 522(d)(10)(E) even though

she has not yet reached 59 1⁄2 years of age. Accordingly, we will

vacate the order of the District Court and remand for

consideration – without Clark posing any obstacle – of whether

Krebs establishes the third requirement of § 522(d)(10)(E), that

is, whether and to what extent her right to receive payment

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under the IRA is reasonably necessary to support her and her

dependents.

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