Upon losing their employment, Richard and Betty Jo Rousey rolled over their pensions and 401(k) accounts into individual retirement accounts (IRAs). The Rouseys had trouble finding new work, which led to their inability to pay their debts. They subsequently filed for Chapter 7 bankruptcy protection in the United States Bankruptcy Court for the Western District of Arkansas. The bankruptcy trustee demanded that the Rouseys' IRAs be turned over to satisfy their debts, but the couple argued that their IRAs were exempt from the bankruptcy proceeding under 11 U.S.C. 522(d)(10)(E). This statute provides that any funds paid under a pension or similar plans or contracts on account of illness, disability, age, length of service or various other conditions may be exempt from the bankruptcy estate. The Bankruptcy Court, the Bankruptcy Appellate Panel, and the U.S. Court of Appeals for the Eighth Circuit have each held that the Rouseys' IRAs are not covered by 11 U.S.C. 522(d)(10)(E) and are thus not exempt from Chapter 7 proceedings. The Supreme Court granted certiorari to decide whether IRAs are indeed exempt from bankruptcy estates under 11 U.S.C. 522(d)(10)(E).
Questions as Framed for the Court by the Parties
Facts
The sole issue on appeal is whether the debtors' individual retirement accounts ("IRAs") are exempt from the bankruptcy estate under 11 U.S.C. 522(d)(10)(E). After their termination from Northrop Grumman, appellants Richard and Betty Jo Rousey rolled their pension and 401(k) funds from Northrop Grumman into IRA accounts, at the suggestion of their banker. The Rouseys subsequently had trouble finding new employment. With an unpaid second mortgage on their house and no funds to pay the mortgage, the couple jointly filed for Chapter 7 in the United States Bankruptcy Court for the Western District of Arkansas.
When a debtor files for Chapter 7 bankruptcy protection, the debtor's property typically becomes part of the bankruptcy estate, which the bankruptcy trustee will convert into cash to pay the debtor's creditors. However, a debtor may retain some of his property by claiming an exemption under 11 U.S.C. 522 of the Federal Bankruptcy Code. Under this exemption, the debtor may be allowed to retain payments from an investment plan or other form of income if the payments meet three requirements: (1) they are "received pursuant to a pension, annuity, or similar plan or contract;" (2) they are "on account of illness, disability, death, age, or length of service;" and (3) they are "reasonably necessary for the debtor's support or for the support of a dependent of the debtor." Rousey v. Jacoway, 347 F.3d 689, 691 (8th Cir. 2003) (explaining the requirements one must meet in order to claim an exemption under 11 U.S.C. 522(d)(10)(E) (2000).)
The Rouseys claimed that their two IRAs, totaling $55,033, met the exemption requirements. The bankruptcy trustee, however, objected to the IRA exemptions, arguing that all but approximately ten thousand dollars should be turned over in order to satisfy the couples' second mortgage. The Bankruptcy Court for the Western District of Arkansas agreed with the trustee, and the Rouseys appealed to the United States Bankruptcy Appellate Panel of the Eighth Circuit, which affirmed the Bankruptcy Court's decision. See Rousey v. Jacoway, 275 B.R. 307 (2002); Rousey v. Jacoway, 283 B.R. 265 (2002).
The Bankruptcy Appellate Panel agreed with the bankruptcy trustee that the IRAs were not exempt under 11 U.S.C. 522(d)(10)(E). The relevant portion of Section 522(d)(10)(E) provides that a debtor may claim an exemption for a payment under a pension or "similar plan or contract" on account of illness, disability, death, age or length of service, to the extent reasonably necessary for the support of the debtor. 11 U.S.C. § 522(d)(10)(E) (2000). Interpreting the exemption statute and Eighth Circuit precedent, the Appellate Panel held that the debtor's IRAs were not similar plans or contracts within the meaning of the federal exemption for payments under a pension, and that the debtor's right to payment was not due to illness, disability, death, age, or length of service within the meaning of the federal exemption.
The Rouseys sought a review of the Bankruptcy Panel's decision by the Eighth Circuit Court of Appeals. The Eighth Circuit held that, although the debtors' IRAs should be considered a "similar plan or contract" within the meaning Section 522(d)(10)(E), the IRAs nonetheless failed to be exempt because the debtor's right to payment was not triggered by "illness, disability, death, age, or length of service." Rousey, 347 F.3d at 693. Because the IRAs were readily accessible by the debtors at any time, subject only to a ten-percent withdrawal tax penalty, the Rouseys were essentially unfettered in their ability to use their IRA funds. Thus, the court reasoned, payments were not triggered by any of the qualifying factors. Id.
On June 7, 2004, the U.S. Supreme Court granted certiorari of the Rouseys' case in order to determinatively resolve the issue of whether IRAs are exempt from the bankruptcy estate pursuant to 11 U.S.C. 522(d)(10)(E).
Analysis
The Supreme Court's ruling on the issue of whether IRAs are exempt from the bankruptcy estate will prove important because the U.S. Circuit Courts of Appeal are currently split three ways regarding the matter.
The Eighth Circuit Court of Appeals has formed its own split by holding, in the Rousey case, that an IRA account is not exempt as long as the IRA's holder can access the account before the statutorily-defined age for IRA payments. The court reasoned that because the Rouseys opened their IRAs with funds rolled over from a pension plan "that had been established … as part of a long-term retirement strategy and to which contributions had been made," Congress would probably consider the IRAs a "similar plan or contract" within 11 U.S.C. 522(d)(10)(E). Rousey, 347 F.3d at 692. The court added, however, that even if the Rouseys' IRAs qualify as "similar plans or contracts," the IRAs were not given on account of "illness, disability, death, age, or length of service." Id. at 693. Citing Huebner v. Farmers State Bank, 986 F.2d 1222 (8th Cir. 1993), which dealt with an identical Iowa statute, the Eighth Circuit concluded that future payments from an IRA do not depend upon when debtors have the right to withdraw funds from the IRAs at any time, any age, with only tax penalties for early withdrawal. See Rousey, 347 F.3d at 693.
The Second, Fifth, Sixth, and Ninth Circuits, however, have interpreted 11 U.S.C. 522(d)(10)(E) to allow exemptions for payments from all IRAs. The Third Circuit has adopted a third approach: like the Eighth Circuit, it categorically denies bankrupt debtors exemptions for their IRA payments, but permits exemptions if the debtor has already reached the statutory age of 59 Ω that entitles them to payments from their IRA accounts.
Because of the unfortunate prevalence of personal bankruptcies and the growing popularity of IRAs in the U.S., the Supreme Court's ultimate ruling on the circuit split will be extremely relevant to many Americans. In 2003 alone, over one million individual Chapter 7 petitions were filed in the U.S. See America's Bankruptcy Courts: 2004 Filings. People who are self-employed and who lack access to a traditional employer pension program, or people such as the Rouseys who have "rolled over" their 401(k)s into IRAs, need to know with certainty whether or not their retirement savings will be protected.
Predictions
The Supreme Court appears likely to overturn the Eighth Circuit decision and hold that all IRA plans are exempt from the bankruptcy estate, consistent with the interpretation of the Second, Fifth, Sixth, and Ninth Circuit Courts. In the cases underlying the majority position, the IRA funds were formerly part of a pension plan and 401(k), investment options which are explicitly listed as exempt from the bankruptcy estate under 11 U.S.C. 522(d)(10)(E). (See Carchmicael v. Osherow, 100 F.3d 375 (5th Cir. 1996); Dettman v. Brucher, 243 F. 3d 242 (6th Cir. 2001); Farrar v. McKown, 203 F.3d 1188 (9th Cir. 2000).) It would seem to run contrary to legislative intent if a court refused to exempt one type of pension fund payment from the bankruptcy estate simply because the money now exists in a different form, such as a retirement account. The Eighth Circuit's use of the early withdrawal feature of the IRA to disqualify it from exemption is unreasonable, because such a withdrawal option is actually a feature of all exempted pension plans as well. The Third Circuit's position -- that anyone who had not reached the statutory age cannot exempt their IRAs from the bankruptcy estate -- has no support in legislative history, as 11 U.S.C. 522(d)(10)(E) does not make time or age-based distinctions.
The Court may also consider public policy concerns in making its decision. The goal of the bankruptcy laws in the U.S. is to allow financially insolvent individuals to restructure their debts and to obtain a new financial start, not to take away their livelihood in satisfaction of all debtors. The Rouseys worked for years to set up pension funds, and to take away the contents of these retirement plans would amount to taking away the Rouseys' means of support for their later years. It is this factor – that IRAs are, for many people nowadays, the necessary and relied-upon means for future financial support – which will likely have the most impact on the Court's decision.