Res-Ga Gold, LLC v. Cherwenka (In re Cherwenka), 508 B.R. 228

Background

Debtor (age 50) filed Chapter 7 and claimed exemptions in a self-directed Pensco IRA (assets include real property; scheduled value ≈ $213k) and an AXA deferred annuity (scheduled value ≈ $441k).
RES-GA and the Chapter 7 Trustee objected to both exemptions; evidentiary hearing held; evidence limited to prepetition period; debtor made some early withdrawals from the Pensco IRA in 2012–2013.
Pensco IRA purchases were directed by Debtor (identifying properties, coordinating contractors); Pensco executed closing documents and retained formal control; Debtor received no documented compensation from the IRA for services.
Debtor sometimes caused IRA funds to be used to renovate properties; ownership of one property was disputed (Debtor testified he owned 55% and the IRA 45%); RES-GA recovered proceeds on sale to satisfy a lien.
The Annuity was funded in 2003 with two lump contributions ($250,000 and $100,000), is withdrawable (subject to tax/penalty), includes a death-benefit rider, and has not been withdrawn since funding.
Parties litigated whether (1) the Pensco IRA was disqualified under I.R.C. § 408 because of prohibited transactions under § 4975, and (2) whether the Annuity qualified as an exempt IRA/annuity under Georgia law tied to I.R.C. § 408.

Issues

Issue	Plaintiff's Argument (RES-GA/Trustee)	Defendant's Argument (Debtor)	Held
Whether Pensco IRA is disqualified under I.R.C. § 408 due to prohibited transactions (§ 4975) arising from Debtor’s services, early withdrawals, joint property ownership, or related-party work	Debtor performed services for the IRA, received indirect benefits (early withdrawals, joint ownership, daughter’s work), so transactions with a disqualified person disqualify the IRA	Debtor says he received no payment or personal benefit beyond incidental appreciation; self-directed IRAs require owner decision-making; withdrawals were taxed and routine; evidence insufficient to show prohibited transactions	Overruled objection as to Pensco IRA — Court finds RES-GA failed to prove prohibited transactions or disqualifying conduct; IRA remains exemptible under Georgia statute tied to I.R.C. § 408
Whether the AXA Annuity is a qualifying individual retirement account/annuity under I.R.C. § 408 (and thus exempt under O.C.G.A. § 44-13-100(a)(2.1)(D))	Annuity asserted non-exempt because it includes features inconsistent with retirement annuity qualification (large lump premiums, flexible withdrawal, investment-like features, possible life-insurance component)	Debtor contends the annuity was purchased as a retirement substitute and should be exempt; subjective intent and contract terms demonstrate retirement purpose	Sustained objection as to Annuity — Court holds the Annuity is disqualified under I.R.C. § 408 because 2003 contributions far exceed the statutory annual premium limits, so the annuity is not exempt under Georgia law

Key Cases Cited

Schwab v. Reilly, 560 U.S. 770 (Sup. Ct. 2010) (limitations on exemptions balance fresh-start policy against creditors’ rights)
Silliman v. Cassell, 738 S.E.2d 606 (Ga. 2013) (three-part test for annuity exemption under Georgia law: annuity; payments on account of age/illness/etc.; reasonably necessary support)
In re Michael, 339 B.R. 798 (Bankr. N.D. Ga. 2005) (annuity with flexible control and investment features may be nonexempt)
In re Bramlette, 333 B.R. 911 (Bankr. N.D. Ga. 2005) (single-contribution, withdrawable annuity not a substitute for wages; nonexempt)
In re Ludwig, 345 B.R. 310 (Bankr. D. Colo. 2006) (lump-sum annuity premium exceeding statutory limit disqualifies § 408(b) annuity)
In re Rogers, 222 B.R. 348 (Bankr. S.D. Cal. 1998) (lump-sum premium far exceeding statutory limit precludes § 408(b) status)
In re Bogue, 240 B.R. 742 (Bankr. E.D. Wis. 1999) (single premium deferred annuities exceeding annual limits do not qualify under § 408(b))
In re Hughes, 293 B.R. 528 (Bankr. M.D. Fla. 2003) (discusses prohibited transactions and IRA disqualification in bankruptcy context)