Rousey, Richard, et ux. v. Jacoway, Jill (04/04/2005)

Questions presented: Whether individual retirement accounts (IRAs) are exempt from bankruptcy estates?

BY JORDANA JACOBS, MEDILL NEWS SERVICE

In 1999 as part of their corporate downsizing, Northrop Grumman asked Richard Rousey to take early retirement and laid off Betty Rousey. The couple had pension and 401(k) funds and six months to decide the funds' futures. A banker at a local bank suggested they roll the funds into individual retirement accounts or IRAs.

When work still became difficult to find, the two decided they needed to sell their home in Arkansas. There were two mortgages on the home and the sale of the house could only pay off the first mortgage. The second mortgage lender came after the pair for the money owed and the two were forced to file for bankruptcy in April 2001. The court appointed Jill Jacoway to serve asee of the estate.

As part of their bankruptcy filing, the Rouseys claimed portions of their two separate individual retirement accounts were exempt from the bankruptcy. Richard Rousey claimed $5,033 was exempt under 11 U.S.C 522(d)(5) and $37,882.32 exempt under 11 U.S.C 522(d)(10)(E), while Betty Rousey claimed $5,648 as exempt under 11 U.S.C. 522(d)(5) and the remainder, $6,470.16 exempt under 11 U.S.C 522(d)(10)(E).

Three months later Jacoway objected to the exemption under 522 (d)(10)(E), seeking the $37,882.32 and $6,470.16. She did not object to the other amounts being exempt.

The federal statute in question states that a debtor has the right to receive "a payment under a stock bonus, pension, profit sharing, annuity, or similar plan or contract on account of illness, disability, death, age and length of service to the extent reasonably necessary for the support of the debtor and any dependent of the debtor." Jacoway maintained that the payments of the IRA do not qualify as "a similar plan or contract" and are not collectible on account of "illness, disability, death, age or length of service."

In February 2002, the U.S. Bankruptcy Court for the Western District of Arkansas sided with theee and determined that the IRAs did not qualify as "similar plans or contracts." The court used precedents set by the Bankruptcy Appellate Panel in previous cases which set factors used to define a similar plan or contract such as if contributions were made to the annuity over time, if the investment was purchased in isolation or if others contributed, the type of returns on the investment and the extent of control the debtor has over the annuity.

In a 1993 case, Huebner v. Farmers State Bank, the 8th Circuit Bankruptcy Appellate Panel held specifically that "an IRA is not a ‘similar plan or contract’ where the debtor has unfettered discretion to withdraw from the corpus." Judge Robert Fussell used this to establish that the Rouseys’ IRA accounts could not be exempt from the bankruptcy proceedings. He wrote, "The ten percent federal tax penalty imposed on early withdrawals from an [IRA] has been described by the 8th Circuit as ‘relatively modest’ and does not constitute a restriction on the right to withdraw." Because the Rouseys could withdraw from the account, the court ruled that it could not be considered a similar plan or contract under the definition set by precedent cases.

The Rouseys appealed the bankruptcy’s court order to the Bankruptcy Appellate Panel for the 8th Circuit. In September 2002, the U.S. Bankruptcy Appellate Panel affirmed unanimously, agreeing that the ability to withdraw at any time causes the IRA to "look less like exempt retirement plans and more like non-exempt bank savings accounts with favorable tax treatment." However, in his concurrence, Judge Barry Schermer invited the 8th Circuit to revisit the issue stating that previously IRAs have been held to be exemptible by the federal appeals courts. The Rouseys appealed to the 8th Circuit Court of Appeals.

In another unanimous decision, the 8th Circuit affirmed, but only on one of the two grounds. The court agreed with the Rouseys that an IRA is a "similar plan or contract," however, still held that IRAs are not exempt from bankruptcy proceedings. Judge David Hansen wrote, "…even if these debtors’ individual retirement accounts qualify as ‘similar plans or contracts,’ in order to be eligible for exemption the payments made from them must be triggered by ‘illness, disability, death, age or length of service.’" Hansen wrote that because the Rouseys admitted to having unlimited access to the funds, payments are not triggered by any of these five factors.

In his petition to the U.S. Supreme Court, the Rouseys' attorney, T.R. Brixey, urged the Court to answer the question that "affects tens or even hundreds of thousands of individual bankruptcy petitions per year and fundamentally alters the lives of the people who file them."

Bankruptcy laws are set up by the federal government but states can opt out of the exemptions that are set up by federal law and create their own. Currently, there are states that allow for IRAs to be exempt. The ruling in the Rousey case will affect not only the people who file for bankruptcy in states that follow the federal exemptions but also the ones in the states that use their own exemptions but pattern them after federal law.

On June 7, 2004, the Court accepted review in the case, and on April 4, 2005, the Court unanimously reversed, holding that the Rouseys could exempt IRA assets from the bankruptcy estate because the IRAs fulfilled both of the "522(d)(10)(E) requirements at issue -- they confer a right to receive payment on account of age and they are similar plans or contracts to those enumerated in the bankruptcy code.

Justice Clarence Thomas wrote the Court's opinion.