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Argument preview: Scope of protections for retirement funds in bankruptcy squarely at issue

Clark v. Rameker is the kind of case every judge should love.  It presents a clean and straightforward question of statutory interpretation, with no looming shadow of oppressive media scrutiny.  The briefs on both sides are lucid and persuasive. And the parties even agree on what the question is.  How often can the Justices sit down to something as well laid out as that!

The issue is a simple one, at the intersection of bankruptcy law and retirement policy.  Among the assets exempt from the estate of a debtor in bankruptcy (a topic familiar to the Justices from the Court’s decision earlier this month in Law v. Siegel), Congress has with steadily increasing generosity included a wide variety of retirement funds.  [These are the provisions Justice Scalia described in Law as “mind-numbingly detailed.”] The specific question in this case is whether those provisions exempt the $450,000 IRA that petitioner Heidi Clark inherited upon the death of her mother.  If the IRA is exempt, she can keep the IRA and use it for support after her bankruptcy; if it is not exempt, the bankruptcy court will take it and use it to pay creditors.

The relevant statute is Bankruptcy Code § 522(b)(3)(C), which exempts “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under [seven listed sections] of the Internal Revenue Code.” The parties agree that the inherited IRA is exempt from taxation under one of those sections.  The sole issue in dispute is whether the inherited IRA constitutes “retirement funds” for purposes of paragraph (C).  Both sides shelter in the mantle of the plain language.  Arguing for Clark, Kannon Shanmugam of Williams & Connelly contends that the inherited IRA remains retirement funds because they were set aside for retirement into the identified account and remain in that account. That argument is textually plausible, straightforward, and produces an objective and easily administrable regime.

For respondent William Rameker (the trustee in Clark’s bankruptcy), WilmerHale’s Danielle Spinelli wisely shifts ground from the rather loose policy-based analysis of the court below and presents a much cleaner textual argument.  Specifically, Rameker argues that funds held in an inherited IRA are not “retirement funds” because an inherited IRA does not have the attributes of other tax-exempt retirement funds. As Rameker points out, there is no tax penalty if Ms. Clark withdraws all of the funds from the IRA immediately; all of the other funds would be subject to penalties if they were immediately liquidated.  Similarly, under applicable rules of the Tax Code, Ms. Clark cannot leave the funds in the IRA until her retirement.  Rather, she must choose either to liquidate the entire account within five years or start an immediate schedule of annual withdrawals designed to steadily dissipate the fund.

Like Clark’s argument, Rameker’s argument is textually plausible, straightforward, and produces an objective and easily administrable regime. To Rameker’s advantage, however, Clark’s argument does seem to give the words “retirement funds” little or no substantial content. So on my reading, Rameker probably has a slight advantage based on textual arguments alone.

More or less in equipoise on the text, Clark and Rameker also join issue on the purposes of the exemption.  Clark persuasively shows a steady congressional pattern of broadening exemptions for retirement funds, with a view to ensuring that the bankruptcy process leaves untouched funds set aside for retirement.  Given that history, there is every reason to read the exemption broadly, as including, in substance, everything in the list of tax-exempting sections. On his side, Rameker can counter that the statute evidences a plain intent to have bankruptcy outcomes depend on the lines of demarcation established by the tax code.  Because the tax code treats the inherited IRA so differently from traditional retirement funds, it produces a more coherent regime reading across the entire United States Code to use that as the line of demarcation defining “retirement funds” in the Bankruptcy Code.

If there is a point on which either party seems to get the upper hand, it is Rameker’s discussion of the Court’s 2005 decision in Rousey v. Jacoway.  In that case (decided while Congress was in the process of adopting the exemption at issue here), the Court held that a traditional IRA was exempt under an exemption for payments received “on account of … age.” The Court’s interpretation of that provision looked to attributes of the IRA much like the provisions on which Rameker relies in his argument here to explain the parallel term “retirement” – for example, tax penalties for withdrawal before age fifty-nine and a half, and the ability to hold funds to retirement.  Clark deftly points out the ambiguity in Rameker’s argument, which cannot specify what would happen if a fund had more than one, but not all, of those attributes.

As I suggested at the beginning of this post, the arguments in this case are skillfully presented and closely balanced.  The Justices easily could write an opinion favoring either party.  So this well might be one of those cases in which the argument could tip the balance either way.  Having said that, it is my experience that in cases about the bankruptcy discharge, a tie generally goes to the creditors.  Recalling Justice Alito’s outraged reaction at oral argument to the $75,000 exemption at issue in Law v. Siegel, it is reasonable to think that the $450,000 fund at issue here will render some of the Justices inclined to look for a reason to deny an exemption, and Rameker has made it pretty easy for them to find one.

Recommended Citation: Ronald Mann, Argument preview: Scope of protections for retirement funds in bankruptcy squarely at issue, SCOTUSblog (Mar. 19, 2014, 10:42 AM),