In Re Leahy
MEMORANDUM OF DECISION Ovеrruling Trustee’s Objections To Debtors’ Claim of Exemption in 403(B) Plan and Denying Trustee’s Turnover Demand
The issue presented in this case is straightforward: are contributions that Debtor Jean Leahy made to her 403(b) employee retirement plan excluded from property of the bankruptcy estate? Based upon the clear language of the statute, the Court finds that funds in a 403(b) account are excluded from the bankruptcy estate and hence need not be exempted. Therefore, the Court overrules the Trustee’s objections to the Debtors’ claim of exemptions and denies his demand for turnover.
Facts and Procedural History
Because the Debtors’ statement of facts is undisputed, the Court adopts them, as follows:
1. Jean Leahy is a nurse who has bеen employed for 34 years at Northwestern Medical Center, a not-for-profit hospital in St. Albans, Vermont. Mrs. Leahy has participated since November 1995 in the hospital-sponsored retirement plan[-] a tax-deferred annuity under section 403(b) of the Internal Revenue Code. She contributes approximately 15% of her pay to her retirement plan and did not increase that proportion in the year preceding the bankruptcy filing. The plan is funded entirely by her; her emрloyer does not match her contributions. Her contributions have always remained below the tax-exemptible limits.
2. On December 8, 2006, Dennis P. Le-ahy and Jean A. Leahy filed for bankruptcy protection under Chapter 7, the majority of their obligatiоns being business debt stemming from Dennis Leahy’s business, Leahy Transport, a sole proprietorship. The Trustee exercised his strong-arm powers to seize the International truck which was the principal asset of the business and the sole source of income. The business is now defunct and Dennis Le-ahy is employed part-time by the Postal Service as a rural mail carrier. He is not eligible to participate in the Postal Service retirement plan.
3. Dennis Leahy is 61 years of age. His wife is 54. Other than the 403(b) account in question (estimated at $117,000-128,000) they have only $20,143 in retirement assets. They owe $114,109 on their house.
4. On April 18, 2007, Trustee filed an Objection to Debtors’ Third Amended Claim of Exemptions, asserting that Jean Leahy’s contributions to her 403(b) account made within one year of filing are not exempt under 12 V.SA. § 2470(16).
5. In response, Debtors filed Second Amended Schedule B — Personal Property and Fourth Amended Schedule C — Property Claimed as Exempt. The investment growth portion of the account is listed as an asset in the schedules, but no contributions are included in the asset value, as they are excluded from the bankruptcy estate under the provisions of11 U.S.C. § 541(b)(7)(A)(i)(III) . The claim of exemption of the growth portion under 12 V.S.A. § 2470(16) has not been objected tо by the Trustee.
(doc. # 78).
The chapter 7 Trustee has provided further detail about the Schedules filed by the Debtors, and the procedural history underlying the issue in this case:
Since the filing of the original Schedule C the Debtors have amended their claim of еxemptions from the originally filed federal exemptions, to a mixed use of state and federal exemptions on or about December 21, 2006 (the First Amended Schedule C); to a mixed use of state and federal exemptions on or about Fеbruary 16, 2007 (the Second Amended Schedule C); to a use of only state exemptions on or about March 8, 2007 (the Third Amended Schedule C); and to a revised use of state exemptions on May 7, 2007 (the Fourth Amended Schedule C); with an order to file a revised Fourth Amended Schedule C on May 25, 2007.
Under the Third Amended Schedule C, the Debtors had asserted their claim of exemptions under11 U.S.C. § 522(b)(3) as incorporating Vermont law under 12 V.S.A. § 2740(16) with respect to the retirement account as follows: Retirement 403(b) Met Life-$117,370.32.
The Fourth Amended Schedule C instead exempts only an estimated “$40,490-$49,662” under 12 V.S.A. § 2740(16), despite the full account value of over $120,000.00. The Debtor instead references11 U.S.C. § 541(b)(7)(B)(i)(III) to state that the remainder of the account, or approximately $78,713.54, is excluded from the estate as being contributions made by Jean Leahy through her employer to the 403(b) plan.
(doc. # 79).
Discussion
Generally, a bankruptcy estate consists of “all legal or equitable interests of the debtor in property as of the commencement of the case.”
(b) Property of the estate does not include—
* * *
(7) any amount—
(A) withheld by an employer from the wages of employees for payment as contributions—
(i) to—
(III) a tax-deferred annuity under section 403(b) of the Internal Revenue Code of 1986
(A) received by an employer from employees for payment as contributions—
(i) to—
(III) a tax-deferred annuity under section 403(b) of the Internal Revenue Code of 1986.
The Trustee argues that the language of
These cases speak with one voice in concluding that, pursuant to
The same logic applies in the instant case. There is no dispute that the plan to which Mrs. Leahy has contributеd is a tax-deferred annuity under § 403(b) of the Internal Revenue Code and that her contributions have been within the permissible contribution limits. Reading the unambiguous language of
The Trustee’s second argument — that BAPCPA “could not possibly exclude from the bankruptcy estate unlimited contributions to a debtor’s account” has some merit, but not in the context suggested by the Trustee. He refers to 12 V.S.A. § 2740(16), which “excludes from the unlimited account protection, those contributions made within the year prior to a bankruptcy filing.” (doc. # 79). But this state statute — which refers to “exemptions” from attachment and execution, not “exclusions” — is not relevant to interpretation of the federal statute. Rather, the critical and applicable limitation is “the limits legally permitted by [her 403(b) ] plan[ ],”
In re Johnson,
It follows, then, that if property is excluded from the bankruptcy estate, the Court need not determine whether such property may be exempt under 12 V.S.A. § 2740(16). “Exemptions come into play only when property is included in the bankruptcy estate and is sought to be used to satisfy the claims of creditors; by definition,
excluded
property never forms part of the bankruptcy estate and thus need not be tested for exempt status.”
In re Sewell,
Some cases and commentators have remarked on the broad sweep of
[Ujnlike the provisions of § 707(b)(2) and § 1325(b)(2) or (3),§ 541(b)(7) does not modify excluded contributions based on reasonableness or necessity.... The Code simply contains no requirement that contributions to a retirement account be “reasonable or necessary.” Perhaps more accurately, Congress has determined that contributions to a qualified retirement account are, by their very nature, reasonable and necessary. By providing for a debtor’s eventual retirement, retiremеnt contributions become part of a debtor’s fresh start.
Id. at 864-65.
Conclusion
Although the Court appreciates the Trustee’s point that the outcome in this case seems at odds with the thrust of BAPCPA, such a result is nevertheless required by the plain language of the statute. Based on the foregoing, the Court denies the Trustee’s motion for turnover and overrules his objections.