Opinion
No. 82-170.
October 18, 1982.
Exemptions — State Laws — Individual Retirement Accounts
In a state in which federal exemptions are not authorized, a debtor may exempt funds in an Individual Retirement Account only to the extent permitted under state law since no non-bankruptcy federal authority exists for a separate exemption. The debtors in this case had exhausted their personal property exemption, the only one available for exempting IRA funds, and so thus the funds were not exempt. See Sec. 522(b) at ¶ 9203.
Exemptions — Fraudulent Conveyances — Sale of Non-Exempt Property
The sale of non-exempt properties on the eve of bankruptcy, the proceeds of which were used to repay a legitimate obligation and to construct an addition to the debtor's homestead, does not constitute fraud on the creditors of the estate and does not impair the debtors' exemptions. See Sec. 522(b) at ¶ 9203 and Sec. 548(a) at ¶ 9540.
[Opinion of the Court]
THIS IS a Chapter 7 case and the matter under consideration is the right of Ralph C. Russell and Betty J. Russell, the Debtors, to claim benefits of the exemption laws of the State of Florida, Art. IV, § 4 of the Florida Constitution and Fla. Stat. § 222.01, et seq. The right of the Debtors to claim exemptions is challenged by the Trustee who contends first, that funds held by debtors in an Individual Retirement Account (IRA Account) do not qualify as exempt properties; second, that the use of cash proceeds obtained by the Debtors from the sale of non-exempt properties, a sale consummated on the eve of bankruptcy, constitutes fraud on the creditors of the estate. The Trustee contends, therefore, that the Debtors should not be entitled to claim as exempt either the properties acquired from the proceeds of the sale or the amount by which already exempt properties were enhanced by the expenditure of such funds. The right of the Debtors to claim the funds in the IRA account is also challenged by Russ L. Russell, a creditor.
The facts relevant to the resolution of the matter under consideration are largely undisputed and as developed at the evidentiary hearing reveals the following:
Prior to the commencement of this case Ralph C. Russell, the Debtor, was the principal stockholder and chief executive of an Ohio corporation known as Blissfield Die and Stamping, Inc. (Blissfield Die). Mrs. Russell, his wife, was also a stockholder and also served as a corporate officer of Blissfield Die. Both Debtors personally guaranteed some of the corporate obligations. As early as October 1, 1979, Blissfield Die was experiencing serious financial difficulties and by January 8, 1983 ceased all of its business operations. Faced with this dilemma, especially the possibility of legal actions against them on their personal guarantees, the Debtors sought legal advise concerning the possibility of seeking relief through bankruptcy proceedings. On February, 2. 1982 the Debtors did, in fact, file their petition for relief. It is without dispute that at the time they filed their petition, they had approximately $1,500 in each of two IRA accounts. The Debtors claimed these funds as exempt on their schedule B-4.
It further appears that in January, 1982, the Debtors sold two Mercedes Benz automobiles and realized for the equity, $25,756.43. The proceeds from this sale were used by the Debtors to repay loans they obtained earlier from an insurance company against the cash surrender value of Mr. Russel's life insurance policy. At or about the same time, the Debtors also sold 200 shares in a closely held corporation. This sale produced approximately $4,900, which was combined with $1,595 to purchase and install a heat pump and air handler unit at a cost of $6,495 in their personal residence which is claimed by them as exempt under the laws of this State, Art. X, § 4 of the Florida Constitution.
Considering first the Debtors' exemption claim of the funds held in the IRA acccounts, it is necessary to determine whether such funds are exempt under the applicable state or Federal, but non-bankruptcy law. The Debtors failed to furnish any authority to establish that the funds held in the IRA account are exempt simply because there is none. Neither the provisions of the Constitution nor any Statutes of this State provide for such separate exemption. While it is true that funds in an IRA account, just as funds in a bank account may be claimed under the personal property exemptions allowed by Fla. Const. Art. X, § 4, this exemption is subject to a $1,000 limitation and since the Debtors already exhausted their personal property exemptions, they cannot claim these funds as exempt.
This Court is not unmindful of the decision of the Circuit Court in this State which held that wages placed in an IRA account retain their wage character and thus remain exempt under § 222.11 of the Fla. Stat. First Prudential Bank v. Rolle, 45 Fla. Supp. 128 (Fla. 15th Cir. ct. 1976). The reasoning of the Rolle case is not persuasive, however, in light of the fact that the 4th District Court of Appeals of this State held that funds deposited in the bank, although originally generated as wages earned by head of household, lost their wage character upon deposit and no longer would qualify as exempt under the laws of this State. Holmes v. Blazer Financial Services, 369 So.2d 987 (Fla. 4th DCA 1979). Neither is there any support for the exemption claim that the funds are considered to either member annuities or pensions, In re Talbert, 15 B.R. 536 (Bkrtcy. W.D. La. 1981), and it has recently been held that the cash surrender value of an IRA account is not property held in a spendthrift trust and therefore excludable from the estate by virtue of § 541(c)(2). In re Howerton, 9 BCD 296 (Bkrtcy. D Tex. 1982).
There is no doubt that under the current Florida law, funds held in the IRA account are not recognized as exempt solely by virtue of the fact that they are placed in an IRA account. Lastly, neither is there any federal non-bankruptcy statute which would render funds placed in an IRA account exempt.
This leaves for consideration the question of whether the sale of non-exempt properties by the Debtor on the eve of bankruptcy and the use of the proceeds obtained from the sale to enhance the values of exempt properties is a fraudulent act which should operate as a forfeiture of the rights to exemption otherwise available to the Debtor.
It is the Trustee's contention that the Debtors' sale of their automobile and stocks and the use of the resulting proceeds to repay loans obtained from the insurance company and for the purchase of a heat pump and air handler unit were fraudulent; therefore the enhancement of the value should be forfeited and available to the estate. In support of this proposition, the Trustee cites the cases of In re Collins 19 B.R. 874 (Bky. MD Fla) and In re Reed, 11 B.R. 683 (Bky. N.D. Tex. 1981); 12 B.R. 41 (Bky. N.D. Tex. 1981). Although it is true that both cases focused on the question of the propriety of pre-petition conversions of non-exempt properties into exempt properties, it must be noted that the cases dealt either with the right of the Debtor to a discharge, or turned on the unique language of Texas law.
The first question before this Court is whether a pre-petition transfer should operate as a forfeiture of the debtors right to claim exemptions. The legislative history of § 522 leaves no doubt that Congress intended to permit Debtors to take full advantage of the exemptions available under applicable law. As stated in the House Report:
"As under current law, the Debtor will be permitted to convert non-exempted property into exempt property before filing a bankruptcy petition . . . the practice is not fraudulent as to creditors, and permits the debtor to make full use of the exemption to which he is entitled under the law. H.R. REP. NO. 95-595 95th Cong., 1st Sess. 360-1 (1977).
There is a more compelling reason to reject the Trustee's challenge to the exemption claim of the Debtor concerning the life insurance policy. The funds obtained from the liquidation of non-exempt properties by these Debtors on the eve of bankruptcy were used to repay a "loan" obtained by them against the cash surrender value of a life insurance policy. Life insurance policies are exempt in this State by virtue of Chapter 222.13 and 222.14, Fla. Stat. There is no question that repayment of a legitimate obligation prior to the commencement of a bankruptcy case even if done on the eve of the petition, is not fraudulent either under § 548 of the Code or non-bankruptcy law, e.g. Chapter 726, Fla. Stat. This being the case, it is clear that the repayment of the loan to the insurance company cannot possibly affect or impair the debtors' right to claim the cash surrender value of the policies. Therefore, even if one assumes and accepts the proposition that money obtained by the insured against the cash surrender value of a life insurance policy is, in fact, a "loan" in the conventional sense, it is of no consequence since the cash surrender value of the policy was never subject to administration by the Trustee. It makes no difference that the amount of the cash surrender value was increased by the repayment.
Concerning the purchase by the debtor of a heat pump and air handler unit it is clear that this did not involve a conversion of non-exempt property into an exempt property simply because funds were not used to purchase a homestead but merely to repair. The homestead was otherwise exempt and remains exempt under the Constitution of this State. The fact that the Debtors replaced the heat pump and air handler unit in the residence could not possibly operate as a forfeiture of their right to claim the residence exempt as homestead. It might be argued that the Debtor forfeited his right to the heat pump and air handler unit but only if one accepts the proposition that this purchase was fraudulent, and thus operating as a forfeiture of the exemption right. This Court is satisfied that neither proposition is supported either by logic or legislative history of the exemption section of the Code, § 522. There is nothing in Collins, supra or Reed, supra which requires a different conclusion. For the reasons stated, this Court is satisfied that the challenge of the Trustee on the debtors right to claim exemptions is without merit and must be rejected.