Opinion
01-CV-0718E, (01-BK-10448K).
May 13, 2002
MEMORANDUM and ORDER
The Trustee in the above-captioned matter appeals from the August 17, 2001 decision of the United States Bankruptcy Court overruling the Trustee's objection to the Chapter 7 debtors' ("Debtors") claimed exemption of their interest in the Deferred Compensation Plan for Employees of the State of New York and Other Participating Public Jurisdictions (the "Plan"). The Bankruptcy Court found the Plan exempt under New York's Debtor and Creditor Law ["D.C.L."] § 282(2)(e). For the reasons stated herein, the Bankruptcy Court's ruling will be affirmed.
In re Maurer, 268 B.R. 339 (Bankr.W.D.N.Y. 2001); see also In re Maurer, 268 B.R. 335 (Bankr.W.D.N.Y. 2001) (related proceeding).
The Plan was established pursuant to section 5 of the State Finance Law. The Bankruptcy Court summarized the Plan in In re Johnson, 254 B.R. 786, 788 n. 1 (Bankr.W.D.N.Y. 2000) ("Johnson I"), vacated by 268 B.R. 341 (Bankr.W.D.N.Y. 2001) ("Johnson II"). Under the Plan, participants are allowed to withdraw their funds when they (1) reach the age of 70 1/2, (2) terminate their employment, or (3) experience an "unforeseeable emergency." Appellees' Br. at 9-10. On the date debtors filed their petition, however, Terri A. Maurer did not satisfy any of these conditions. Ibid. The Trustee describes the Plan as a "vehicle provided for State employees to defer income taxation on presently earned wages and to permit investment earnings to accrue (tax deferred) on the wages deposited into the Plan." Appellant's Br. at 7 (citations omitted). The Legislature created the New York State Deferred Compensation Board to administer the Plan.
This Court declines Debtors' invitation to, in reviewing the Bankruptcy Court's ruling, address the issues raised by Debtors' counsel in In re Johnson. Nonetheless, affirmation of the Bankruptcy Court's August 17, 2001 ruling, as a practical matter, resolves the appeal in In re Johnson as well, as is discussed further in a Memorandum and Order issued concurrently herewith.
In finding the Plan exempt under section 282(2)(e), the Bankruptcy Court held that the Plan is "qualified" under 26 U.S.C. § 457 via a ruling of the Internal Revenue Service and that, under In re Dubroff, 119 F.3d 75 (2d Cir. 1997), the Plan is "on account of age" within the meaning of section 282(2)(e).
This Court reviews the Bankruptcy Court's legal conclusions de novo and its findings of fact for clear error. In re Manville ProductsCorp., 896 F.2d 1384, 1388 (2d Cir. 1990) (citing Fed.R.Bankr.P. 8013). Under Rule 4003(c) of the Federal Rules of Bankruptcy Procedure, the Trustee has the burden of proof.
One of the debtors, Terri A. Maurer, is employed by the State of New York as a clerk. As such, she is permitted to defer a portion of her paycheck under the Plan, which she has done in the amount of approximately $1,000. Debtors have claimed an exemption for this amount on the ground that, inter alia, it is exempt under section 282(2)(e). The Trustee objects to this claimed exemption.
The exemption statutes at issue here are to be liberally interpreted in favor of the Debtors. In re Lowe, 252 B.R. 614, 622 (Bankr.W.D.N.Y. 2000). Under 11 U.S.C. § 522(b), States may opt out of the federal exemption scheme in favor of a State-enacted exemption scheme. New York took this route when it enacted D.C.L. §§ 282-284, which provide the relevant exemption at issue here. Section 282(2)(e) provides as follows:
"Bankruptcy exemption for right to receive benefits. The debtor's right to receive or the debtor's interest in: *** (e) all payments under a stock bonus, pension, profit sharing, or similar plan or contract on account of illness, disability, death, age, or length of service unless (i) such plan or contact, except those qualified under section 401, 408 or 408A of the United States Internal Revenue Code of 1986, as amended, was established by the debtor or under the auspices of an insider that employed the debtor at the time the debtor's rights under such plan or contract arose, (ii) such plan is on account of age or length of service, and (iii) such plan or contract does not qualify under [§§ 401(a), 403(a), 403(b), 408, 408A, 409 or 457] of the Internal Revenue Code of nineteen hundred eighty-six, as amended."
Under section 282(2)(e), the Plan is a "similar plan or contract on account of *** age." It is thus exempt under section 282(2)(e). Moreover, the Plan does not fall within the exception set forth in section 282(2)(e)(i)-(iii) (the "Exception") inasmuch as the Trustee fails to establish either subsection (i) — because the Plan was not established by the Debtors — or subsection (iii) — because the Plan qualifies under 26 U.S.C. § 457.
The Plan may also be a "pension" under section 282(2)(e), although the Court does not here address this question.
In order for the Exception to apply, all three conditions (i.e., subsections (i)-(iii)) must be satisfied. In re Bentley, 237 B.R. 10, 12 (Bankr.W.D.N.Y. 1999). Accordingly, the Exception does not apply here for two independent reasons — viz., neither subsection (i) nor (iii) has been satisfied. Debtors did not establish the Plan and thus do not satisfy subsection (i). Id. (holding that the exception provided for in section 282(2)(e) did not apply because debtor had not established the government pension plan at issue). Moreover, even if Debtors are deemed to have established the Plan, it is qualified under section 457 and thus fails to satisfy subsection (iii).
It is easier to determine that the Exception to section 282(e) does not apply here than it is to determine whether the exemption provided for by section 282(2)(e) applies in the first instance. Although the Bankruptcy Court found the Plan not exempt in Johnson I, the parties thereto did not raise the applicability of section 282(2)(e). Johnson I, at 793; Johnson II at 341 (finding the Plan exempt under In re Maurer). In this case, however, the parties, represented by the same counsel as were involved in In re Johnson, raised the issue whether Dubroff requires a finding that the Plan is exempt under section 282(2)(e). This Courts finds that it does.
See footnote 2, supra.
In finding the Plan exempt, the Bankruptcy Court discussed Dubroff and In re Ruffo, 261 B.R. 580 (E.D.N.Y. 2001). Dubroff holds that debtors may, pursuant to section 282(2)(e), exempt individual retirement accounts established pursuant to 26 U.S.C. § 408 ("IRA"). In arriving at this holding, the Second Circuit Court of Appeals held that section 408 is a "similar plan or contract" under section 282(2)(e) because, otherwise, subsection (iii) would be surplusage where it refers to qualification under, inter alia, section 408. In other words, if an IRA were not a "similar plan or contract" under the general rule of section 282(2)(e), there would be no need to refer to IRA's (i.e., section 408) in section 282(2)(e)(iii). In so finding, Dubroff states:
"It is plain to us that [§ 282(2)(e)(iii)] generally exempts stock bonus, pension, profit sharing, and similar plans making payments on account of age ***.
* * * * *
"It might appear at first blush that our initial task in interpreting § 282 is to determine whether an IRA is a `similar plan or contract' to a stock bonus, pension, or profit sharing plan, and thus eligible for exemption, by inquiring into whether an IRA has characteristics similar to those plans. However, if we were to do so and reach the conclusion that an IRA was not a `similar plan or contract,' § 282(2)(e)(iii) would become surplusage. The text of § 282(2)(e)(iii) can only be reconciled with the provision as a whole if an IRA that qualifies under § 408 of the [Internal Revenue Code] is a `similar plan or contract.' Put another way, if the statute excludes IRAs from exemption because they are not `similar plans or contracts,' there would be no need for the reference to § 408 of the I.R.C., the statute governing IRAs, in § 282(2)(e)(iii) and that reference would be surplusage." Dubroff, at 77-78 (emphasis added).
The Dubroff analysis was adopted in In re Ruffo, wherein the court found the deferred compensation plan for employees of the City of New York — a plan established pursuant to 26 U.S.C. § 457 — to be exempt as a "similar plan or contract" under section 282(2)(e). In re Ruffo, at 584-585 (finding that, "if the Plan qualifies under section 457 of the I.R.C., and makes payments on account of `illness, disability, death, age, or length of service,' such payments are exempt under D.C.L. § 282(2)(e)"). Furthermore, the court construed the language "on account of illness, disability, death, age or length of service" in section 282(2)(e) as modifying "payments" rather than "similar plan or contract." Id. at 587 (citing In re Lowe, at 622).
Accordingly, in order for the Plan to be exempt under section 282(2)(e), it must (1) be a "stock bonus, pension, profit sharing, or similar plan or contract," (2) involving a debtor's right to receive or interest in payments to be made "on account of illness, disability, death, age or length of service" and (3) that fails to satisfy the Exception to section 282(2)(e).
As applied here, the first prong is satisfied because section 282(2)(e)(iii) would be surplusage if section 457 plans were not deemed a "similar plan or contract." Dubroff, at 77-78. The second prong is satisfied because the Plan involves the Debtors' right to receive payments "on account of *** age." This prong is satisfied under Dubroff because, as the Bankruptcy Court found below, the "age-related provisions of § 408 of the Internal Revenue Code (governing IRAs) and § 457 (governing deferred compensation plans) do not seem to be materially different," and are thus both "on account of age" under Dubroff. The third prong is satisfied here (i.e., the Exception is inapplicable) because the Plan is qualified under section 457.
IRAs, established under section 408, generally impose tax penalties for withdrawals before age 59 1/2, whereas the deferred compensation plan at issue here, established under section 457, prohibits withdrawal of funds prior to age 70 1/2, except in certain enumerated circumstances. The Court sees no reason why section 457 plans should not be deemed plans "on account of age" when section 408 plans are deemed such under Dubroff. Indeed, debtors appear to have less ability to withdraw funds from a section 457 plan before they reach "retirement age" than they do from an IRA. Accordingly, the Second Circuit Court of Appeals appears to have construed "on account of age" to mean something akin to "having some age-related provision that affects payment." Cf. In re Maurer, at 341. The Dubroff holding on this point is not without criticism. See In re Skipper, 274 B.R. 807, 815-818 (Bankr.W.D.Ark. 2002) (criticizing Dubroff and the holdings of three other circuit courts of appeal that employed similar reasoning). The Skipper decision, however, is itself subject to criticism. The Skipper court rejected Dubroff's reasoning because it believes that Dubroff makes the language "similar contract or plan" surplusage. Id. at 817-818. Rather, Skipper interprets 11 U.S.C. § 522(d)(10)(E) — which is materially similar to section 282(2)(e) — as only intending to exempt IRAs to the extent that they are, inter alia, "similar plans or contracts" payable "on account of illness, disability, death, age or length of service." Id. at 818. It would be an odd result, however, for Congress to enact legislation that does not exempt presently existing section 408 plans, but only section 408 plans that may be drafted. Id. (noting that its interpretation has the potential for rendering IRAs in their present form "non-exemptible de facto").
In re Maurer at 340. As noted above, the Exception is also inapplicable because the Debtors did not establish the Plan, as would be required under subsection (i) of the Exception.
Accordingly, it is hereby ORDERED that the ruling of the United States Bankruptcy Court is affirmed.