In re Ponte

1

In re Tracy Lynn Ponte, Debtor,

No. 23-10148 WJL

United States Bankruptcy Court, N.D. California, Santa Rosa Division

February 1, 2024

Hearing Held Date: December 5, 2023

Chapter 7

MEMORANDUM DECISION ON TRUSTEE'S OBJECTIONS TO DEBTOR'S CLAIMS OF EXEMPTION

WILLIAM J. LAFFERTY, III U.S. BANKRUPTCY JUDGE

I. Factual and Procedural Background

This matter came before the Court on the Chapter 7 Trustee's ("Trustee") objections (dkts. #17, #31, #48) to Debtor Tracy Lynn Ponte's ("Debtor") claims of exemption (dkts. #1, #21). On December 5, 2023, the Court held a continued hearing on the Trustee's objections then took the matter under submission. For the reasons set forth below, the Court sustains the Trustee's objections.

On March 27, 2023, Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. (Dkt. #1). In Debtor's Schedule A/B, Debtor listed the following assets: (1) "Charles Schwab retirement account bearing account number XXXX 1125 (ERISA qualified pursuant to 26 U.S.C. § 401 - not property of the estate - listed for information purposes only). Held in the name of Tracy Ponte Family Trust 2016" in the amount of $55,502.15 ("Inherited IRA"); (2) "Operating Engineers Credit Union retirement account bearing account number XXXX3331. (ERISA qualified pursuant to 26 U.S.C. § 401 - not property of the estate - listed for information purposes only)" in the amount of $80,218.51 ("Personal IRA"); (3) "[f]uture distribution from deceased father's trust. Administration is still pending. Debtor is 50% beneficiary with her sister. Sister is trustee of the trust. Believed to be less than $25,000 as there are pending claims for attorneys fees and taxes for the estate" (the "Inheritance"). (Id., Schedule A/B at 5, 7). In her initial Schedule C, Debtor claims exemptions in the Inherited IRA and the Personal IRA under 11 U.S.C. § 522(b)(3)(C), and in the Inheritance under California Code of Civil Procedure ("C.C.P.") §703.140(b)(5). (Id., Schedule C at 1-5).

On May 16, 2023, the Trustee filed an objection challenging Debtor's claim of exemptions under § 522(b)(3)(C), arguing that the Inherited IRA and the Personal IRA are not exempt under the Bankruptcy Code's exemption scheme; the Trustee also reserved the right to object to the Inheritance. (Dkt. #17). Following the Trustee's objection, Debtor filed an amended Schedule C to include claims of exemption in the Inherited IRA and the Personal IRA under CCP §703.140(b)(10)(E). (Dkt. #21).

As background, after the passing of Debtor's father in 2015, Debtor inherited her father's interest in the funds held in the Inherited IRA. (Dkts. #31 at 4, #48 at 2). Debtor attests that she has not personally made any contributions to, and since then, has elected to receive minimum annual distributions from the Inherited IRA. (Id.). As of the petition date, the Inherited IRA had an aggregate balance of $55,502.15. (Id.).

On August 29, 2022, Debtor established the Personal IRA at Operating Engineers Local No. 3 Union Federal Credit Union ("OEFCU") and indicated in her application that the initial contribution to this fund was a rollover "from a Roth IRA or eligible employer sponsored retirement plan…" (Dkt. #48 at 2-3). That same day, Debtor deposited $90,000 into two separate accounts at OEFCU-$80,000 into a traditional savings account and $10,000 into the Tracy Ponte PAS Family Trust account. (Id. at 3). Debtor then transferred the $80,000 into the Personal IRA as a "rollover contribution." (Id.). In fact, Debtor received the $90,000 as part of an equalizing payment pursuant to a marital settlement agreement executed with Debtor's ex-spouse in July 2021. (Id. at 4-5).

On July 11, 2023, the Court held a hearing on the Trustee's Objection pursuant to § 522(b)(3)(C) but declined to adjudicate the matter in light of Debtor's amended claims of exemption, which had been filed shortly before the hearing. Accordingly, the Court gave the parties an opportunity to provide supplemental briefing respecting the amended exemptions and set the matter for resolution at a continued hearing. (see Dkts. #31, #48, #50, #52). On December 5, 2023, the Court held a continued hearing and took the matter under submission.

II. Exemption Provisions

When an individual debtor files for bankruptcy, an estate is created which includes the debtor's "legal or equitable interests…in property." 11 U.S.C. § 541(a)(1). The Bankruptcy Code, however, allows a debtor to exempt from the estate limited interests in certain types of property through various exemptions found in the Bankruptcy Code or applicable state law. See Clark v. Rameker, 573 U.S. 122, 124 (2014); Rousey v. Jacoway, 544 U.S. 320, 325 (2005).

Under § 522(b)(3)(C), a debtor can exempt "retirement funds to the extent those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code." 11 U.S.C. §§ 522(b)(3)(C), 522(d)(12). The referenced sections of the Internal Revenue Code include accounts such as traditional and Roth IRAs which are created by 26 U.S.C. 408 and 408A, respectively. See Clark, 573 U.S. at 124.

The Bankruptcy Code further provides that states can opt out of the federal exemption scheme and can provide their own forms of exemptions. See 11 U.S.C. §§ 522(b)(2), 522(b)(3)(A), 522(d). California has chosen to opt out, and has (i) included and made available to debtors a series of exemptions that are purely the creation of the California legislature (see, e.g., C.C.P. § 704.115)^[1]; and (ii) enacted a separate scheme of exemptions found in §703.140, including § (b)(10)(E) which is identical to the federal scheme under § 522(d)(10)(E), which provides in relevant part: "The debtor's right to receive … a payment under a stock bonus, pension, profitsharing, annuity, 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 and any dependent of the debtor…" See C.C.P. § 703.140(b)(10)(E).

With the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005, a debtor in opt-out states like California is not limited to the IRA exemption under state law but may also claim an exemption under § 522(b)(3)(C), subject to applicable dollar limits in § 522(n). See In re Williams, 556 B.R. 456, 460 (Bankr. C.D. Cal. 2016). Here, Debtor seeks to exempt the Inherited IRA and the Personal IRA under both 11 U.S.C. § 522(b)(3)(C) and C.C.P. § 703.140(b)(10)(E).

III. The Burden of Proof

The Trustee contends that Debtor has the burden of proving that the claimed exemptions are proper, notwithstanding the language of the Federal Rules of Bankruptcy Procedure 4003(c).^[2] (Dkt. #31 at 2-3). Rule 4003(c) allocates the burden of proof to the objecting party, whereas C.C.P. § 703.580(b) places the burden on the party claiming the exemption. (Id.). The Trustee argues that despite the apparent conflict, courts in the Ninth Circuit appear to hold that where a state exemption statute specifically allocates the burden to a particular party the bankruptcy court is required to follow the state law. (Id. at 3 (citing In re Bhangoo, 634 B.R. 80, 85 (B.A.P. 9th Cir. 2021) (holding that "the bankruptcy court is required to apply the state law burden of proof on exemptions claimed in California") (internal citations omitted); In re Diaz, 547 B.R. 329, 337 (B.A.P. 9th Cir. 2016) (concluding "where a state law exemption statute specifically allocates the burden of proof to the debtor, Rule 4003(c) does not change that allocation")). On the contrary, Debtor argues that the question of the allocation of the burden of proof in the Ninth Circuit is unclear as demonstrated by the collection of cases cited by the court in In re Pashnee, 531 B.R. 834 (Bankr. E.D. Cal. 2015). (Dkt. #50 at 4). A review of these cases indicates more properly that no court has directly disagreed with the holdings in Bhangoo and Diaz, but rather, certain opinions have suggested different outcomes for reasons not relevant in this case.

In any event, as a practical matter, the Court does not think that deciding who has the burden of proof is germane to the IRA exemption question presented because there appear to be no disputes about the facts relevant to these determinations. The questions presented are purely questions of law.

IV. The Inherited Individual Retirement Account

Traditional and Roth IRAs are federally-defined financial accounts that offer tax advantages to encourage individuals to save for retirement. 26 U.S.C. §§ 408, 408A. With respect to both types of IRAs, Congress set some limits on the creation of such accounts, and conditions pertaining to such accounts, including making certain withdrawals subject to a 10 percent penalty if taken before an accountholder reaches the age of 59 ½, to prevent individuals from using both types of IRAs merely as tax-advantaged savings vehicles. See 26 U.S.C. §§ 72(t)(1)-(2).

Debtor first claimed an exemption in the Inherited IRA solely under § 522(b)(3)(C) of the Bankruptcy Code. But after amending her Schedule C, Debtor now appears to be claiming that California law controls the analysis, and that federal cases like Clark do not alter the applicability and interpretation of California's exemption scheme. (Dkt. #50). In other words, notwithstanding Clark's holding, the Debtor asserts that the Inherited IRA is exempt as a retirement account under California law. In any event, Debtor claims an exemption in the Inherited IRA under both the federal or state exemption scheme, and as such, the Court addresses both in this memorandum.

The Court agrees with the Trustee that under a federal law analysis, the Inherited IRA is not...