650 B.R. 869
Bankr. N.D. Ohio2023Background
- Debtor filed Chapter 7 on December 20, 2021 and purchased a 2017 BMW i3 on December 31, 2020 using funds traced to a pre-petition $25,000 distribution from her Heritage 401(k) (net $22,500 deposited; $19,508 used to buy the BMW).
- Debtor amended Schedule C to claim exemptions in the BMW under Ohio Rev. Code § 2329.66(A)(2) and (A)(10)(b), (c), (e); Trustee timely objected to the (A)(10) claims but withdrew objections to (A)(2) and to exemption of the Heritage 401(k) under (A)(10)(b).
- Parties stipulated that the BMW was purchased with funds traceable to the 401(k) withdrawal and that the factual record is undisputed; the remaining legal question was whether the (A)(10) exemptions apply to the car.
- Key legal questions: whether (c) or (e) apply to 401(k) funds; whether (b) protects a distribution not made on account of illness, disability, death, age, or length of service; and whether traceable exempt retirement funds retain exemption after conversion into a vehicle.
- Court decided the dispute on summary judgment (no genuine factual disputes) and applied Ohio statutory construction and precedent on traceability and liquidity of exempt funds.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Do R.C. 2329.66(A)(10)(c) or (e) apply to funds from a private employer 401(k)? | Debtor initially claimed (c)/(e) to exempt the BMW purchased with withdrawn retirement funds. | Trustee: (c) and (e) apply to IRAs/inherited IRAs, not to 401(k) plans. | Held: (c) and (e) do not apply; they cover IRAs/inherited IRAs, not 401(k) funds. |
| Does R.C. 2329.66(A)(10)(b) protect a 401(k) distribution used to buy the car where the withdrawal was not on account of illness, disability, death, age, or length of service? | Debtor: funds were "reasonably necessary for support" (statutory language) so exemption applies to the distribution and thus to the car. | Trustee: (b) requires the payment be on account of illness, disability, death, age, or length of service; the withdrawal here was not for those reasons, so (b) exemption does not apply to the payment. | Held: (b) governs 401(k) accounts but the distribution was not made on one of the statutory bases, so the (b) exemption does not protect the payment/converted asset. |
| If retirement funds were exempt in the 401(k), does that exemption trace into a car purchased with those funds? | Debtor: under Daugherty and tracing principles, traceable exempt funds retain exempt character when deposited/used, so exemption should follow into the BMW. | Trustee: tracing stops where exempt money is converted into an illiquid/permanent investment (car); liquidity/functional-purpose limit prevents evisceration of statutory exemption categories. | Held: conversion into the BMW severs the retirement exemption; exempt retirement funds do not retain exemption when converted into the vehicle in these circumstances. |
Key Cases Cited
- Daugherty v. Cent. Trust Co. of N.E. Ohio, N.A., 28 Ohio St.3d 441 (Ohio 1986) (exempt wages retain exemption when deposited in an account if source is known or reasonably traceable)
- Porter v. Aetna Cas. & Sur. Co., 370 U.S. 159 (U.S. 1962) (liquidity/availability test: deposited exempt funds retain exemption if they remain money, readily available for support)
- Stacy v. Gibson, 140 N.E.3d 196 (Ohio Ct. App. 2019) (R.C. 2329.66(A)(10)(b) applies to employer-sponsored retirement plans such as 401(k) accounts)
- In re Bresnahan, 183 B.R. 506 (Bankr. S.D. Ohio 1995) (payments from a pension may qualify as exempt payments under the statute)
- In re Alam, 359 B.R. 142 (B.A.P. 6th Cir. 2006) (applies liquidity concept when assessing whether deposited exempt funds retain exemption)