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AN E-BULLETIN
LEGAL INFORMATION INSTITUTE -- CORNELL LAW SCHOOL
lii@lii.law.cornell.edu
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The following decisions have just arrived via the LII's
direct Project HERMES feed from the Supreme Court. We apologize
for the delay in transamission.
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ROUSEY V. JACOWAY (03-1407)
Web-accessible at:
http://supct.law.cornell.edu/supct/html/03-1407.ZS.html
Argued December 1, 2004 -- Decided April 4, 2005
Opinion author: Thomas
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Several years after petitioners deposited
distributions from their pension plans into Individual
Retirement Accounts (IRAs), they filed a joint petition under
Chapter 7 of the Bankruptcy Code. They sought to shield
portions of their IRAs from their creditors by claiming them as
exempt from the bankruptcy estate under <A
HREF="/supct-cgi/get-usc-cite/11/522">11 U.S.C. sect.
522(d)(10)(E), which provides, inter alia, that a
debtor may withdraw from the estate his "right to receive
... a payment under a stock bonus, pension, profitsharing,
annuity, or similar plan or contract on account of ...
age." Respondent Jacoway, the Bankruptcy Trustee,
objected to the Rouseys' exemption and moved for turnover
of the IRAs to her. The Bankruptcy Court sustained her
objection and granted her motion, and the Bankruptcy Appellate
Panel (BAP) agreed. The Eighth Circuit affirmed, concluding
that, even if the Rouseys' IRAs were "similar plans
or contracts" to the plans specified in
sect.522(d)(10)(E), their IRAs gave them no right to receive
payment "on account of age," but were instead savings
accounts readily accessible at any time for any purpose.
Held: The Rouseys can exempt IRA
assets from the bankruptcy estate because the IRAs fulfill both
of the sect.522(d)(10)(E) requirements at issue here--they
confer a right to receive payment on account of age and they
are similar plans or contracts to those enumerated in
sect.522(d)(10)(E). Pp. 4-14.
(a) The Court
reaffirms its suggestion in Patterson v. Shumate,
504 U.S. 753,
762-763, that IRAs like the Rouseys' can be exempted
from the bankruptcy estate pursuant to sect.522(d)(10)(E).
Pp. 4-5.
(b) The
Rouseys' IRAs provide a right to payment "on account
of ... age" within sect.522(d)(10)(E)'s meaning.
The quoted phrase requires that the right to receive payment be
"because of" age. Bank of America Nat. Trust and
Sav. Assn. v. 203 North LaSalle Street Partnership,
526 U.S. 434,
450-451. This meaning comports with the common,
dictionary understanding of "on account of," and
sect.522(d)(10)(E)'s context does not suggest another
meaning. The statutes governing IRAs persuade the Court that
Jacoway is mistaken in arguing that there is no causal
connection between that right and age or any other factor
because the Rouseys' IRAs provide a right to payment on
demand. Their right to receive payment of the entire balance
is not in dispute. Because their accounts qualify as IRAs
under 26 U.S.C. sect.
408(a), they have a nonforfeitable right to the balance
held in those accounts, sect.408(a)(4). That right is
restricted by a 10 percent tax penalty on any withdrawal made
before age 59, sect.72(t). Contrary to
Jacoway's contention, this 10 percent penalty is
substantial. It applies proportionally to any amounts
withdrawn and prevents access to the 10 percent that the
Rouseys would forfeit should they withdraw early. It therefore
effectively prevents access to the entire balance in their IRAs
and limits their right to "payment" of the balance.
And because this condition is removed when the accountholder
turns age 59, the Rouseys' right to
the balance of their IRAs is a right to payment "on
account of" age. Pp. 5-8.
(c) The
Rouseys' IRAs are "similar plan[s] or
contract[s]" to the "stock bonus, pension,
profitsharing, [or] annuity ... plan[s]" listed in
sect.522(d)(10)(E). To be "similar," an IRA must be
like, though not identical to, the listed plans or contracts,
and consequently must share characteristics common to them.
Because the Bankruptcy Code does not define the listed plans,
the Court looks to their ordinary meaning. E.g., United
States v. LaBonte, 520 U.S. 751, 757.
Dictionary definitions reveal that, although the listed plans
are dissimilar to each other in some respects, their common
feature is that they provide income that substitutes for wages
earned as salary or hourly compensation. That the income the
Rouseys will derive from their IRAs is likewise income that
substitutes for wages lost upon retirement is demonstrated by
the facts that (1) regulations require distribution to begin no
later than the calendar year after the year the accountholder
turns 70; (2) taxation of IRA money is
deferred until the year in which it is distributed; (3)
withdrawals before age 59 are subject to
the 10 percent penalty; and (4) failure to take the requisite
minimum distributions results in a 50 percent tax penalty on
funds improperly remaining in the account. The Court rejects
Jacoway's argument that IRAs cannot be similar plans or
contracts because the Rouseys have complete access to them.
This argument is premised on her view that the 10 percent
penalty is modest, a premise with which the Court does not
agree.The Court also rejects Jacoway's contention that
the availability of IRA withdrawals exempt from the early
withdrawal penalty renders the Rouseys' IRAs more like
savings accounts. Sections 522(d)(10)(E)(i) through
(iii)--which preclude the debtor from using the
sect.522(d)(10)(E) exemption if an insider established his
plan or contract; the right to receive payment is on account of
age or length of service; and the plan does not qualify under
specified Internal Revenue Code sections, including the section
governing IRAs--not only suggest generally that the
Rouseys' IRAs are exempt, but also support the
Court's conclusion that they are "similar plan[s] or
contract[s]" under sect.522(d)(10)(E).
Pp. 8-14.
347 F.3d 689, reversed and remanded.
Thomas, J., delivered
the opinion for a unanimous Court.
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