In re: KEITH A. YERIAN, Debtor. KEITH A. YERIAN, Defendant-Appellant, versus RICHARD B. WEBBER II, as Trustee, Plaintiff-Appellee.
No. 18-10944
United States Court of Appeals, Eleventh Circuit
June 26, 2019
D.C. Docket Nos. 6:17-cv-00459-RBD; 6:15-bkc-01720-KSJ [PUBLISH]
Appeal from the United States District Court for the Middle District of Florida
(June 26, 2019)
Before MARCUS, GRANT, and HULL, Circuit Judges.
Keith Yerian made some interesting choices with respect to the management of his individual retirement account. These choices included titling IRA-owned cars in his own name and his wife‘s name, as well as purchasing a condo in Puerto Rico with IRA funds and then using the condo for his personal travel needs. Yerian concedes that he incurred over one hundred thousand dollars in tax penalties for abusing his IRA. Ordinarily, that abuse would disqualify him from claiming the wide range of favorable treatment and exemptions typically offered to IRAs. But Yerian—now in bankruptcy proceedings—nonetheless seeks to shield the IRA from distribution to his creditors. He argues that Florida has exempted IRAs from bankruptcy administration so long as they were originally established with proper documentation. Fortunately for Yerian‘s creditors, and unfortunately for him, his interpretation of the text cannot be supported; he forfeited his exemption when he engaged in self-dealing transactions prohibited by the IRA‘s governing instruments. We therefore affirm the district court‘s order, which in turn upheld the bankruptcy court‘s decision to deny the exemption.
I.
A.
When a debtor files for Chapter 7 bankruptcy, his assets become property of the bankruptcy estate, to be distributed among his creditors. See
The bankruptcy code provides a list of federal exemptions, but also permits a state to opt out and replace the federal blueprint with an exemption scheme of its own.
B.
The relevant facts are not in dispute. In 2012, Keith Yerian opened a self-directed IRA with IRA Services Trust Company. The IRA‘s primary asset was an LLC through which Yerian purchased, among other things, real estate and two used cars. Yerian established this account as an IRA, “but then treated the money as his own.” He used IRA funds to buy a condominium in Puerto Rico, for example, then impermissibly stayed there “for an un-IRA-related purpose.” He and his wife also took title to two cars, a Smart Car and a Suburban, both purchased with IRA funds. Yerian then spent thousands of IRA dollars on car repairs, and he allowed his wife to drive the Suburban “as her vehicle.”1 He does not contest that these acts of self-dealing constituted “prohibited transactions” under the Internal Revenue Code and thus made his IRA ineligible for federal tax-exempt status as of January 1, 2014.
On February 27, 2015, Yerian filed for Chapter 7 bankruptcy. After failing to disclose his IRA on the asset schedules originally accompanying his petition, Yerian eventually amended his filings to disclose the IRA—and also to claim a Florida-law exemption for it. Richard Webber, the bankruptcy Trustee, objected to the claim of exemption and initiated an adversary proceeding to resolve the issue.2 After a two-day trial in late 2016, the bankruptcy court issued oral findings of fact and conclusions of law. Concluding that Florida law does not allow a debtor to claim an exemption for an IRA operated in violation of the federal tax code, the bankruptcy court issued a written order sustaining the Trustee‘s objection and directing the Trustee to seize the IRA on behalf of Yerian‘s creditors. Yerian sought review of the order
II.
In a bankruptcy appeal, this Court “sits as a second court of review and thus examines independently the factual and legal determinations of the bankruptcy court and employs the same standards of review as the district court.” In re Hood, 727 F.3d 1360, 1363 (11th Cir. 2013) (internal quotation marks and citation omitted). Accordingly, we “review the bankruptcy court‘s findings of fact for clear error and its conclusions of law de novo.” Id. We may affirm the judgment below on any ground supported in the record. See Jackson v. Bank of Am., N.A., 898 F.3d 1348, 1356 (11th Cir. 2018).
“Generally speaking, courts construe bankruptcy exemption statutes—both state and federal—liberally in favor of bankruptcy debtors.” In re McFarland, 790 F.3d 1182, 1186 (11th Cir. 2015). The “burden is on the party objecting to exemptions to prove, by a preponderance of evidence,” that the exemption cannot be claimed. Id. (citing
III.
Yerian contends that section
[m]aintained in accordance with a plan or governing instrument that has been determined by the Internal Revenue Service to be exempt from taxation under s. 401(a), s. 403(a), s. 403(b), s. 408, s. 408A, s. 409, s. 414, s. 457(b), or s. 501(a) of the Internal Revenue Code of 1986, as amended, unless it has been subsequently determined that the plan or governing instrument is not exempt from taxation in a proceeding that has become final and nonappealable.
Section 408 of the Internal Revenue Code is the relevant provision in this case. That statute, among other things, sets out the requirements for an IRA to receive tax-exempt status under federal law. See
Section 408 also sets out rules for how an IRA must be operated in order to keep its tax-exempt status. One way an IRA can lose its tax-exempt status is for the IRA owner to engage in “prohibited transactions“—a category that includes “abuses” placing the plan at risk of loss before retirement, as well as various acts of “self-dealing.”
Turning to the conduct in this case, Yerian does not contest that he engaged in prohibited transactions—for instance, taking title to the IRA‘s car and staying in the IRA‘s condominium—and that when he did so, his IRA lost its tax-exempt status under § 408. Nevertheless, Yerian argues that his IRA is still creditor exempt under section
We start with an observation about the statute‘s structure. Section
We are tasked with interpreting only section
- The IRA‘s plan or governing instrument was initially “determined by the [IRS] to be exempt from taxation” under § 408;
- Over time, the IRA has been “maintained in accordance with” that plan or governing instrument; and
- No final and nonappealable proceeding has “subsequently determined” that the plan or governing instrument is no longer exempt from taxation under § 408.
As to the first requirement, the record does not indicate whether Yerian ever obtained an IRS determination that his IRA‘s governing instrument satisfied § 408. But it is the Trustee who must demonstrate that an exemption is inapplicable, and the Trustee has not challenged the exemption on that ground. See McFarland, 790 F.3d at 1186. We reiterate, however, that different subsections of section
The third requirement—that no final and nonappealable proceeding has declared that Yerian‘s IRA is no longer tax-exempt—is satisfied as well. It is settled law that a “claim of exemption is to be determined as of the petition date.” In re Fodor, 339 B.R. 519, 521 (Bankr. M.D. Fla. 2006). And it is clear from the record before us that, prior to Yerian‘s bankruptcy petition date, no final and nonappealable proceeding—before the IRS or any court—had determined that his IRA‘s governing instrument was no longer exempt under the tax code.5
Accordingly, Yerian‘s claim for exemption turns on whether the second requirement is satisfied—that is, whether his IRA was “maintained in accordance with” the “plan or governing instrument” that the IRS had determined was exempt from taxation under § 408‘s requirements.6
This will often be a distinction without a difference where (as we will see is the case here) the IRA owner engages in behavior that turns out to be prohibited by both the governing instrument and the tax code. But it is “the duty of the court to give effect, if possible, to every clause and word of a statute.” In re Failla, 838 F.3d 1170, 1175 (11th Cir. 2016) (quoting Montclair v. Ramsdell, 107 U.S. 147, 152 (1883)). Moreover, the distinction drawn by Florida law can be a meaningful one. We provide a few examples to highlight the practical implications of our statutory reading, as well as to properly direct our own inquiry.
On the one hand, federal laws governing retirement accounts change frequently, meaning that amendments to the tax code may require changes to a retirement plan‘s terms. The Tax Reform Act of 1986, for example, required employers to remove a formerly “common” type of “benefit formula” from their pension plans by January 1, 1989. See Scott v. Admin. Comm. of the Allstate Agents Pension Plan, 113 F.3d 1193, 1195 (11th Cir. 1997). If a pensioner‘s employer had refused to change its plan and continued to dole out improper benefits, the pensioner would have been a participant in a fund maintained in accordance with its own plan or governing instruments, but not maintained in accordance with § 401(a) of the Internal Revenue Code. The Florida exemption statute would likely allow such a pensioner to shield his retirement fund from creditors, even though the fund was not maintained in compliance with the tax code—at least until it was “subsequently determined” that the governing instrument was not exempt.
Conversely, because an IRA‘s plan or governing instrument may contain requirements that go beyond the law, an IRA could be operated in a way that satisfies the tax code, yet violates additional restrictions set out in its own governing instruments. For example, “IRAs are, as a statutory matter, permitted to hold real property.” Dabney v. Comm‘r, 107 T.C.M. (CCH) 1535, at *4 (2014). But an IRA custodian is not required to offer “the option to invest IRA funds in any asset that is not prohibited by statute,” and has “the power to prohibit the purchase and holding of real property” through the terms of the governing instrument. Id. (emphasis added). In other words, IRA governing instruments can impose
Our sole task, then, is to determine whether Yerian maintained his IRA in accordance with its own plan or governing instruments. The parties have identified as the governing instruments of this IRA two contracts between Yerian and IRA Services Trust Company: a Traditional IRA Agreement, and an IRA LLC Agreement.7 The Trustee argues that Yerian violated the terms of the latter document, and we agree. The IRA LLC Agreement was the contract under which IRA Services Trust Company permitted Yerian to make his own IRA investments through an LLC. The Agreement, which Yerian signed on June 1, 2012, contained the following language: “I acknowledge that I have not and will not engage in any prohibited transactions within my retirement account or its asset holdings.” The Agreement further stated, in bold: ”A prohibited transaction is a transaction between a plan (the LLC) and a disqualified person that is prohibited by law.” It explained that a prohibited transaction included any “act of a fiduciary by which plan income or assets are used for his or her own interest,” and any “transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person.” A “disqualified person,” in turn, explicitly included “the owner” of the IRA as well as the owner‘s “spouse.”
Yerian admits that he engaged in self-dealing transactions “prohibited by law.” Yerian used the condominium in Puerto Rico, an asset of the IRA LLC, for his own benefit. He and his wife took title to two cars purchased by the IRA LLC, and even drove one of them as a personal vehicle. It is plain to us that Yerian violated the express terms of the IRA LLC Agreement. Based on these facts, it is similarly plain that he failed to maintain his IRA in accordance with its governing instrument—and as a consequence forfeited his creditor exemption under section
Yerian tries to avoid the statute‘s “maintained in accordance with” requirement, but his efforts are in vain. First, Yerian argues that every section
Finally, as the analysis in this opinion shows, our decision is not guided by the Trustee‘s argument that it would be “absurd” or “inconsistent with the principles behind the bankruptcy code” for Florida law to have the effect of shielding even some IRAs operated in violation of federal tax law. This Court applies an “exacting standard for finding absurdity,” CBS Inc. v. PrimeTime 24 Joint Venture, 245 F.3d 1217, 1228 (11th Cir. 2001), lest we impose “the policy predilections of judges” on legitimate legislative choices, Merritt v. Dillard Paper Co., 120 F.3d 1181, 1188 (11th Cir. 1997). And in any event, Congress has specifically authorized states to craft their own creditor exemptions—which may be as generous or as austere as the state deems appropriate. See
IV.
Yerian failed to maintain his IRA in accordance with its governing instruments, which explicitly prohibited the acts of self-dealing he engaged in with his IRA funds. As a consequence, he is not entitled to claim a creditor exemption for his IRA under section