Court Opinion

ID: 8208023
Source: CourtListenerOpinion
Date Created: 2022-09-21 16:03:22.871168+00
Date Added: 2024-06-11T16:41:29.053762
License: Public Domain

IN THE COURT OF APPEALS OF IOWA

                                  No. 21-1904
                           Filed September 21, 2022

MUFF CORP., THOMAS P. MUFF, Individually and as Conservator for the
JOSEPH ALAN MUFF CONSERVATORSHIP,
     Plaintiffs-Appellants,

and

LAWRENCE J. MUFF, Individually and as Conservator for the JOSEPH ALAN
MUFF CONSERVATORSHIP,
     Plaintiff-Appellant,

vs.

TADD JOSHUA PAIGE,
     Defendant-Appellee.
________________________________________________________________

      Appeal from the Iowa District Court for Crawford County, Tod Deck, Judge.

      After winning summary judgment in its conversion action, the creditor-estate

appeals a ruling that the defendant-debtor’s inherited IRAs were exempt from

execution. REVERSED AND REMANDED.

      Maura Sailer of Lohman, Reitz, Sailer, Ullrich & Blazek, Denison, for

appellant.

      Justin F. Reininger of Boerner & Goldsmith Law Firm, P.C., Ida Grove, for

appellee.

      Considered by Bower, C.J., and Vaitheswaran and Tabor, JJ.
                                        2

TABOR, Judge.

       Tadd Joshua Paige stole over three-quarters of a million dollars from his

stepfather, Joseph Muff (Joe).    Paige also inherited from Muff two individual

retirement accounts (IRAs) valued at nearly $60,000.1

       Muff Corporation brought a conversion action alleging that Paige funneled

cash from his stepfather’s investments without permission and wrote checks from

the family farm accounts for his own benefit.2 The district court granted Muff’s

unresisted motion for summary judgment but denied a request to execute against

the inherited IRAs. The estate appeals that denial, arguing the inherited IRAs are

not exempt from Paige’s creditors under Iowa Code section 627.6(8)(f) (2018).

Because inherited IRAs are not “retirement investments” under the exemption

statute, we reverse and remand for further proceedings.

       I.    Facts and Prior Proceedings

       Paige’s mother was married to Muff. After she died in 2015, Muff’s physical

and mental health deteriorated. Paige lived with his stepfather. About a year after

his mother’s death, Paige started withdrawing money from Muff’s investments

without his knowledge. That deception led the State to charge Paige with multiple

thefts.3

1 One of the accounts was a simplified employee pension plan (SEP), but the
parties and the district court refer to them both as IRAs.
2 The plaintiffs included Muff Corporation, as well as Thomas and Lawrence Muff,

as conservators for Joe and as individuals. Joe died while the action was pending,
and the parties stipulated to the substitution of his estate. We will refer to the
plaintiffs collectively as Muff or the estate.
3 In a forty-five-count trial information, the Crawford County Attorney charged

Paige with felony theft and specified unlawful activity. He pleaded guilty to three
counts of first-degree theft.
                                          3

       Paige described the scheme at his guilty plea hearing:

             I called The Hartford [Core Equity Fund] and impersonated
       Joe and had them send the checks to our mutual address that I
       shared with Joe. And then when the checks arrived [by mail], I
       endorsed Joe’s name on them and deposited money into the bank.

       Meanwhile, Muff sued Paige alleging the stepson converted cash belonging

to the family corporation, the farm business, and Muff’s personal accounts. The

suit asked the district court to appoint a receiver to take control of “Paige’s” assets

because he was reportedly “quickly selling off property and has scattered property

in different locations.” Acting on that request, the court appointed George Blazek

as receiver in July 2018.       Muff died two months later, and his estate was

substituted.

       The estate moved for summary judgment, asking for $770,370.00 in

damages. Noting no resistance, the court granted the estate’s motion. Then the

court scheduled a hearing to determine the disposition of the property preserved

by the receiver. As of June 2021, the receivership held property from Paige valued

at just over $46,000.00. On top of that, the receiver intercepted two retirement

accounts that Muff had at Defiance Bank: a traditional IRA valued at $34,536.36

and an SEP plan valued at $24,143.05—both of which named Paige as a

beneficiary payable on death.

       In preparation for the hearing, receiver Blazek briefed this issue: are

decedent Muff’s traditional IRA and his SEP account exempt from claims by

Paige’s creditors, under Iowa Code section 627.6(8)(f)(1)(d), for IRAs established

under section 408(a) of the Internal Revenue Code?            According to Blazek’s

analysis, once received by Paige, the IRAs were no longer exempt from creditors
                                           4

because they were not “established” under section 408(a). The estate argued the

same.

        The district court read the statute differently. It held that the inherited IRAs

were exempt from execution because once they were “established” or “brought

into existence” under section 408(a), they retained that designation, even beyond

the decedent’s lifetime. The estate now appeals.

        II.    Scope and Standards of Review

        Because this case calls for interpretation of the exemption statute, we

review the district court ruling for the correction of legal error. Com. Bank v.

McGowen, 956 N.W.2d 128, 132–33 (Iowa 2021). “It is the wise policy of the law

to construe exemption statutes liberally but it is not the province or power of the

court to enlarge or extend the provisions of the legislative grant.” Iowa Methodist

Hosp. v. Long, 12 N.W.2d 171, 175 (Iowa 1943). Thus, we must keep in mind the

benefit that the legislature intended to convey through the exemptions.            See

Roberts v. Parker, 90 N.W. 744, 744 (1902). Yet our fundamental task is “to

determine the fair and ordinary meaning of the statutory language at issue.”

McGowen, 956 N.W.2d at 133. We construe words and phrases “according to the

context and the approved usage of the language.” Iowa Code § 4.1(38). If the text

is unambiguous and its meaning is clear, we can stop our inquiry. In re Est. of

Voss, 553 N.W.2d 878, 880 (Iowa 1996). But if the language is ambiguous or
                                           5

vague, we “may resort to other tools of statutory interpretation.” McGowen, 956

N.W.2d at 133 (citation omitted).

       As the debtor, Paige bears the burden to show an exemption applies. See

First Nat’l Bank v. Larson, 239 N.W. 134, 136 (1931).

       III.   Analysis

       The sole question on appeal is whether Paige, who owes Muff’s estate over

$770,000.00 in damages, may hold exempt from execution of that judgment two

IRAs that he inherited from Muff.4 To answer, we look to the exemptions for

retirement investments in Iowa Code chapter 627.

             A debtor who is a resident of this state may hold exempt from
       execution the following property:
             ....
             8. The debtor’s rights in:
             ....

4 Paige raises a preservation-of-error argument. He contends we should dismiss
this appeal because Muff makes a different argument here than in the district court.
Muff argued in the district court that Paige’s inherited IRAs were not exempt under
section 627.6(8)(f)(1)(d) because they were not “established under section 408(a)
of the Internal Revenue Code.” Paige insists that “Muff has completely abandoned
that argument” and instead couches its entire appeal on Iowa Code
section 627.6(8)(f)(2) that provides only IRAs “funded by the debtor or his
employer are exempt from execution.” Paige also emphasizes that the district
court did not rule on that argument under paragraph (2).
        In reply, Muff accuses Paige of confusing the receiver’s argument with the
position advanced by the estate. True, the receiver concentrated on the
“established under section 408(a)” language of the exemption statute. But the
estate points to a more general statement by its lawyer at the hearing contending,
“the plain language of the statute on exemptions does not include a gift to [Paige].”
The estate maintains that it is making that same argument on appeal, “merely
stating it more precisely.” Finally, the estate notes the district court did rule on the
“ultimate issue” by holding that Paige’s inherited IRAs were exempt property.
        We agree with Muff on error preservation. Granted, neither the receiver nor
the estate cited section 627.6(8)(f)(2) in the district court. But the estate’s present
discussion of that paragraph is “additional ammunition for the same argument” it
made in the district court—“not a new argument advanced on appeal.” JBS Swift
& Co. v. Ochoa, 888 N.W.2d 887, 893 (Iowa 2016).
                                          6

              f. (1) Contributions and assets, including the accumulated
      earnings and market increases in value, in any of the plans or
      contracts as follows:
              ....
              (d) For simplified employee pension plans, self-employed
      pension plans (also known as Keogh plans or H.R. 10 plans),
      individual retirement accounts established under section 408(a) of
      the Internal Revenue Code, individual retirement annuities
      established under section 408(b) of the Internal Revenue Code,
      savings incentive matched plans for employees, salary reduction
      simplified employee pension plans (also known as SARSEPs), and
      similar plans for retirement investments authorized in the future
      under federal law, the exemption for contributions shall not exceed,
      for each tax year of contributions, the actual amount of the
      contribution deducted on the debtor’s tax return or the maximum
      amount which could be contributed to an individual retirement
      account established under section 408(a) of the Internal Revenue
      Code and deducted in the tax year of the contribution, whichever is
      less. The exemption for accumulated earnings and market increases
      in value of plans under this subparagraph division shall be limited to
      an amount determined by multiplying all the accumulated earnings
      and market increases in value by a fraction, the numerator of which
      is the total amount of exempt contributions as determined by this
      subparagraph division, and the denominator of which is the total of
      exempt and nonexempt contributions to the plan.
              ....
              (2) For purposes of this paragraph “f”, “market increases in
      value” shall include, but shall not be limited to, dividends, stock splits,
      interest, and appreciation. “Contributions” means contributions by
      the debtor and by the debtor’s employer.

Iowa Code § 627.6(8)(f)(1)(d), (2) (emphasis added).

      We then ask: did the district court wrongly determine the inherited IRAs

were exempt from execution by focusing on the phrase “established under section

408(a) of the Internal Revenue Code” in section 627.6(8)(f)(1)(d)?5 Muff says “yes”

5 The district court found that both accounts should be “treated the same” because
they were both IRAs, noting “the simplified employee pension plan in relevant
terms is merely an indication of the method by which the account was funded.”
Trouble is, section 627.6(8)(f)(1)(d) separately lists SEP plans and IRAs
“established under section 408(a) of the Internal Revenue Code.” So the court’s
reliance on that qualifying phrase would apply only to the traditional IRA.
                                         7

because the “contributions” referenced in paragraph (f) are limited to “contributions

by the debtor and by the debtor’s employer.” See id. § 627.6(8)(f)(2). In the

estate’s view, it doesn’t matter if the IRAs were established under section 408(a)

because they were not established by the debtor.

       Paige counters that Muff’s argument ignores the language after

“contributions” in section 627.6(8)(f)(1), namely, “contributions and assets,

including the accumulated earnings and market increases in value.” (Emphasis

added.) Paige ventures that “an inherited IRA is undoubtedly an ‘asset’ of the

debtor whether they contribute to it or not.” Muff replies that such a broad reading

of “assets” would render the limitation on “contributions” in paragraph (2)

meaningless “because all contributions to an IRA in the debtor’s name would

necessarily belong to the owner of the IRA.”

       As a first step in resolving this interpretive snarl, we must decide whether

the language is ambiguous. See State v. Doe, 903 N.W.2d 347, 351 (Iowa 2017).

If reasonable minds could differ as to its meaning, the statute is ambiguous and

requires us to resort to principles of construction. State v. Zacarias, 958 N.W.2d

573, 581 (Iowa 2021). We find the term “assets” in section 627.6(8)(f)(1) to be

ambiguous. On the one hand, it could simply mean property that has value. On

the other hand, paired with contributions, it could be limited to property that has

value and began as contributions from the debtor or the debtor’s employer. See

Iowa Code § 627.6(8)(f)(2).

       Having found ambiguity, we turn to the rules of statutory construction. One

of those rules is the presumption that the entire statute must be given effect. Iowa

Code § 4.4(2). On this point, we share the estate’s view that Paige’s broad reading
                                          8

of “assets” would render superfluous the limitation on “contributions” (as being from

the debtor and the debtor’s employer) in paragraph (2). Those contributions act

as seed money for the retirement investment plans. With time, those contributions

become “accumulated earnings” and, along with “market increases in value,”

amount to the debtor’s “assets” mentioned at the outset of section 627.6(8)(f)(1).

So, in context, “assets” cannot be viewed as encompassing inherited IRAs when

the original contributions did not come from the debtor or the debtor’s employer.

       That contextual view is confirmed by looking to the limits placed on the

exemption amounts under paragraph (d) of section 627.6(8)(f)(1). For example,

the exemption for contributions is limited by the debtor’s tax deductions or potential

tax deductions.     And the exemption for accumulated earnings and market

increases in value is limited to the product of a multiplication exercise. Paige does

not explain how those calculations would apply to his rights in the inherited IRAs.

       And that contextual view is a natural segue to the whole-text canon. That

canon “calls on the judicial interpreter to consider the entire text, in view of its

structure and of the physical and logical relation of its many parts.” See Antonin

Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal

Texts 167 (2012). To that end, when deciding whether inherited IRAs are exempt

from judgment creditors, we must consider not only the whole text of

subsection (8)(f)(1)(d) on retirement investments, but all the general exemptions

in section 627.6.

       So, zooming out, we look to the nature of those general exemptions and the

purpose they serve. In short, “the purpose of an exemption is to prevent a debtor

from becoming destitute.” In re Irish, 311 B.R. 63, 67 (Bankr. App. 8th Cir. 2004)
                                          9

(quoting Exempt property, Black’s Law Dictionary (7th ed. 1999)).               Most

exemptions in section 627.6 fit that bill, including wearing apparel and household

goods; burial plots; life insurance policies; health aids; social security,

unemployment compensation, public assistance, veterans, or disability benefits;

alimony; a motor vehicle; tools of the trade; cash on hand or bank deposits not to

exceed $1000; and rental housing deposits.6 See Iowa Code § 627.6(4), (5)–(7),

(9), (11), (12), (14), (15). Like those listed categories, “[t]he purpose behind

exempting pension plans is to secure for the debtor a subsistence level of income

in retirement.”   See In re Pepmeyer, 273 B.R. 782, 787 (N.D. Iowa 2002)

(examining Iowa Code § 627.6(8)).

       But that same subsistence theory does not apply to inherited IRAs. Why?

Because “[i]nherited IRAs do not operate like ordinary IRAs.”               Clark v.

Rameker, 573 U.S. 122, 125 (2014). The Clark court noted four main differences:

(1) with the exception of the owner’s spouse, the owner of an inherited IRA may

not “roll over” the funds but must “hold the IRA as an inherited account”; (2) “an

individual may withdraw funds from an inherited IRA at any time, without paying a

tax penalty”; (3) in fact, the beneficiary “must either withdraw the entire balance in

the account within five years of the original owner’s death or take minimum

distributions on an annual basis”; and (4) the owner of an inherited IRA may not

contribute to the account. Id. Given those differences, “inherited IRAs represent

an opportunity for current consumption, not a fund of retirement savings.” See In

6 Other exemptions serve more sentimental or historical purposes, for example,
wedding or engagement rings; one shotgun and either one rifle or musket; and
private libraries, family bibles, and portraits. See Iowa Code § 627.6(1), (2), (3).
                                         10

re Clark, 714 F.3d 559, 562 (7th Cir. 2013). In affirming the Seventh Circuit, the

Supreme Court held that an IRA inherited by the debtor from her late mother did

not qualify as “retirement funds” under 11 U.S.C. section 522(b)(3)(C) of the

federal exemption statute. Clark, 573 U.S. at 129–30 (2014) (noting exemptions

serve important purpose of protecting debtor’s “essential needs” but exempting

inherited IRAs would be “free pass” to debtor (citation omitted)).

       Unlike the federal provision, Iowa’s exemption statute does not use the

phrase “retirement funds.” But section 627.6(8)(f)(1)(d) does reference “retirement

investments”—a similar concept. After listing SEP plans, IRAs established under

26 U.S.C. section 408(a), and other specific instruments, this subsection extends

the exemption to “similar plans for retirement investment authorized in the future

under federal law.”    Iowa Code § 627.6(8)(f)(1)(d).      That listing invokes the

associated-words canon. See Scalia & Garner, Reading Law: The Interpretation

of Legal Texts at 195 (advising that “words grouped in a list should be given related

meanings (citation omitted)). That is, to be exempt, IRAs must be retirement

investments. Inherited IRAs are not retirement investments. Cf. Clark, 573 U.S.

at 130 (“In ordinary usage, to speak of a person’s ‘retirement funds’ implies that

the funds are currently in an account set aside for retirement, not that they were

set aside for that purpose at some prior date by an entirely different person.”). Like

the Clark court interpreting federal exemptions, we determine an inherited IRA falls

outside our statute’s reference to contributions and assets set aside for retirement

by the benefactor.

       Which brings us back to the district court’s interpretation of “established

under” in Iowa’s exemption statute.       Citing the dictionary, the court defined
                                           11

“establish” as “to begin or create” or “to bring into existence.” From that definition,

the court found,

       The IRAs at issue here were unquestionably began, created, and
       brought into existence under Section 408(a). They were established
       under 408(a). Unless their designation as inherited IRAs changes
       their character in some manner that causes them to be reestablished
       or established as something different than they were during the
       decedent’s lifetime, they are exempt.

The court distinguished a Montana Supreme Court case cited by the receiver. See

In re Golz, 360 P.3d 1142, 1143 (Mont. 2015) (holding that inherited IRA was not

exempt under state statute because the legislature exempted IRAs “as defined in

26   U.S.C.     section   408(a)”    and        inherited   IRAs   were   defined    in

section 408(d)(3)(C)(ii)).7 The court determined that “defined in” (used by the

Montana legislature) carried a different meaning than “established under” (adopted

by Iowa lawmakers).

       We disagree with the district court’s interpretation.          While defining

“establish,” the court overlooked the word “under.” The phrase “established under”

refers to the source of the authorization for exempted IRAs, that is section 408(a)

of the Internal Revenue Code.8 See generally United States v. Marine Shale

7 In a similar interpretive exercise with a different result, the Rhode Island Supreme
Court decided an inherited IRA was exempt under its state statute because the
exemption extended to IRAs “as defined in the Internal Revenue Code, 26 U.S.C.
§§ 408 and 408A” with no restriction to subsection (a) of section 408. In re
Kapsinow, 220 A.3d 1231, 1234 (R.I. 2019).
8 These retirement plans were added to the exemption statute in 1999 to eliminate

perceived discrimination between the types of accounts covered. According to
legislative history, qualified plans under the federal Employee Retirement Income
Security Act, such as most employer-maintained pension plans, were exempt from
the claims of creditors. But self-employed persons using a Keogh plan or IRA as
their retirement vehicle were not similarly protected. See H.S.B. 6, 78th Gen.
Assembly, 1st Sess. (Iowa 1999).
                                        12

Processors, 81 F.3d 1329, 1356 (5th Cir. 1996) (defining phrase “established

under” in federal regulation as source of state’s authority for issuing permit). It

does not refer to the creation of Muff’s particular retirement accounts. And even if

it did, the character of the accounts did change when inherited by Paige. As

discussed above, inherited IRAs are governed by different rules. The accounts

were “retirement investments” when owned by Muff but not when passed to Paige.

See Clark, 714 F.3d at 561 (“[T]he ‘IRA’ part of ‘inherited IRA’ (as the Internal

Revenue Code uses the phrase) designates the funds’ source, not the assets’

current status . . . . [A]n inherited IRA does not have the economic attributes of a

retirement vehicle.”). The district court’s focus on the meaning of “established”—

in isolation from the rest of the exemption statute—defied the whole-text and

associated-words canons.

       In the end, when interpreting our exemption statute, we “must not

substantially depart from [its] express language” or “extend the legislative grant.”

In re Hahn, 5 B.R. 242, 244 (Bankr. S.D. Iowa 1980). Nowhere does Iowa Code

section 627.6(8)(f) mention inherited IRAs. Contra In re Kara, 573 B.R. 696, 701

(Bankr. W.D. Tex. 2017) (noting Texas statute expressly provided that “an

inherited individual retirement account . . . is exempt from attachment, execution,

and seizure for the satisfaction of debts” (citation omitted)). We cannot add an

exemption where our legislature did not do so. Because Paige did not prove the

inherited IRAs were exempt under Iowa law, we reverse the district court order and

remand to allow the estate to collect on those accounts.

       REVERSED AND REMANDED.