489 B.R. 731
Bankr. E.D. Tenn.2013Background
- Trustee objects to debtor's exemption of two IRAs under 11 U.S.C. § 522(d)(12).
- Debtor contends both IRAs are exempt; Trustee alleges a prohibited transaction voids exemption.
- Debtor's applications incorporated a customer agreement granting a security interest to broker/dealer to secure any indebtedness.
- The court must decide whether the lien provisions create a prohibited transaction under 26 U.S.C. § 4975(c)(1).
- Court considers whether the lien language conflicts with ERISA or the IRC and whether retroactive language saves the exemption.
- Court concludes the lien provisions do not create a prohibited transaction and exemptions remain valid.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did the lien provisions constitute a prohibited transaction? | Farinash says the lien secures debt and triggers § 4975(c)(1)(B). | James argues language permits dissolution of lien if conflicts with ERISA/IRC; no actual debt or enforcement | No prohibited transaction; exemptions preserved. |
| Is there a presumption of exemption due to favorable IRS determination and can it be rebutted? | Trustee can rebut presumed exemption if noncompliant. | Debtor's IRA forms meet IRC § 408; presumption applies and may be preserved. | Presumption of exemption stands; no rebuttal shown given facts and IRS guidance. |
| Is the In re Daley line of cases binding or distinguishable in this context? | Daley holds lien grants destroy exemption even absent enforcement. | Daley is distinguishable due to contract language ensuring ERP/IRC compliance. | Not bound by Daley; distinguishable; exemptions remain. |
| Does the presence of ERISA/IRC conflict-limitation in the lien provisions affect enforceability? | Lien would be enforceable and cause prohibited transaction if effective. | Lien provisions explicitly state they do not apply where ERISA/IRC conflicts exist. | Conflict-language defeats enforcement; no prohibited transaction. |
| Did IRS announcements regarding cross-collateralization affect outcome? | IRS guidance supports Daley-like result against exemption. | IRS announcements indicate temporary relief and no action while guidance pending. | IRS announcements support preservation of exemption; not to defeat it here. |
Key Cases Cited
- In re Daley, 459 B.R. 270 (Bankr.E.D.Tenn.2011) (lien grant can trigger prohibited transaction eliminating exemption)
- In re Daley, No. 3:11-cv-565 (E.D. Tenn. Sept. 17, 2012) (E.D. Tenn.2012) (affirmed Daley reasoning on prohibited transaction; district court)
- Taylor v. Freeland & Kronz, 503 U.S. 638 (U.S. 1992) (presumption of exemption; standard for tax-related relief)
- In re Chapman, 424 B.R. 823 (Bankr.E.D.Tenn.2010) (exemption analysis and default rules for § 522 exemptions)
- Sutton-Robinson, 472 B.R. 77 (Bankr.D.Ariz.2012) (ERISA/IRC considerations in exemption disputes)