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Argument analysis: Justices on the edge about protections for inherited retirement funds in bankrupt

As predicted in my preview, the argument in Clark v. Rameker displayed a bench giving serious consideration to both sides of the case.  The case presents a simple issue, at the intersection of bankruptcy law and retirement policy.  Among the assets exempt from the estate of a debtor in bankruptcy, Congress has with steadily increasing generosity included a wide variety of retirement funds.  This case involves a $450,000 IRA that petitioner Heidi Clark (currently in bankruptcy) 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).  Clark argues that the IRA is exempt because it was set aside for retirement (by her mother), which makes it retirement funds, and because it falls within one of the listed sections. The trustee (Rameker) argues that it is not exempt, because it is no longer retirement funds, explaining that applicable tax rules give Clark the right (and arguably the incentive) to withdraw the funds promptly.

Obviously well prepared, the Justices gave neither side much breathing room, peppering both lawyers from beginning to end with probing questions about the weak points of their position.  So only moments after Kannon Shanmugam (representing Clark) began to speak, Justice Kennedy pressed on the weakest point of Shanmugam’s position, noting that “it seems to me that you really rendered the words ‘retirement funds’ superfluous.”

Shanmugam began to offer his perspective, acknowledging that in his view “retirement funds” doesn’t independently exclude anything from the statute. But before he could articulate his statutory reading, Justice Ginsburg stepped in to ask about a “feature” of his reading she finds “disturbing”:

Congress was very careful when it crafted exemptions from the bankrupt estate, like the homestead estate.  . . . . . Is it likely that Congress would have created an exemption so large that – this one is claimed to be $300,000 – for funds that are immediately usable by the bankrupt? I mean, this big pot of money gets exempt from the creditor’s claim? It just seems incongruous, considering how narrow Congress has made the other exemptions.

Shanmugam’s answer to that problem is that the exemption is no larger for inherited IRAs than it is for several other types of accounts, including Roth IRAs, which also permit immediate withdrawals (at least of the principal).  Justice Sotomayor sparred with him on that subject for a few minutes, pointing out that the Roth IRA principal can be immediately withdrawn because it’s already been taxed, so it provides little support for his argument here.

Justice Alito followed with an exchange in which he challenged Shanmugam to justify Congress’s choice to offer better bankruptcy treatment to the inheritor of a $300,000 IRA than to the heir of $300,000.  Shanmugam got the chance to make an excellent comment here, rejecting Alito’s suggestion that the IRA inheritor would be likely to dissipate the money swiftly; Shanmugam argued that “as an empirical matter,” the beneficiary well might end up with the full inherited balance at retirement.

Justice Kagan then took her turn, suggesting that it “seems like a strange feature of a retirement fund, that you can’t add to the fund and that, moreover, you have to deplete the fund at least to a certain amount. . . . That doesn’t seem like a retirement fund in people’s natural understanding of the language.”  But, Shanmugam responded, maintaining a consistent message, the key feature is that Congress designated this a “retirement” account and that his view has the salient structural advantage of linking bankruptcy labeling to tax labeling. Still, the unpersuaded Chief Justice joined the fray, suggesting that Shanmugam’s reading would be “confusing to the normal English speaker.”

The Justices’ final response to Shanmugam position probably was captured best by a comment by Justice Ginsburg late in the argument, that he “would have, I think, an airtight case if the statute didn’t use the words “retirement funds,” but just exempted funds in an account that is exempt from taxation.

Danielle Spinelli (for the trustee Rameker) got just as focused a set of questions. In particular, Justice Breyer challenged her in detail on the apparently parallel structure of the subsections of Section 522.  Most of them mention “the debtor’s” interest in the property in question.  Pointing out that “[w]hen we got to the provision” here, it “oddly enough” does not include that qualifier, Breyer expressed doubt about a reading that implicitly limits it to “the debtor’s” retirement funds.  Although he gave her plenty of time to respond, he remained steadfastly unpersuaded.  In his oft-repeated view, the question at the core was whether funds that “were set aside for retirement . . . change their character because a different person now owns the fund,” a question “where common sense, frankly, in my case doesn’t get me anywhere.”

Offering one of his characteristic hypotheticals, Breyer wondered: “Now, if you were talking about pearl earrings, you would say they stay pearl earrings no matter who retains them. If you say retirement funds, you say, ‘but they were retirement funds.’ When did they change their nature? And at that point you have to make your argument, which I think is more complicated, but . . . he makes his argument and says ‘let’s keep this simple.’”

Joining in, Justice Kagan raised a point she found “perplexing” about Spinelli’s position:  “These are not arcane accounts. Tons and tons of people have IRAs and they die every day, and then they’re inherited IRAs. So, I mean, this is something that applies to masses of people, and it seems to me that if Congress meant to exclude these inherited IRAs, why wouldn’t it have said so? This is not like a hidden thing.”

It was my view based on the briefs alone that the case was pretty close on the statutory language, but that Rameker and Spinelli had distinctly the better side of it.  If we can glean anything from the argument, I would say that Clark and Shanmugam appear to have made up considerable ground, persuading the Justices at least that their position makes practical sense. One noteworthy aspect of the argument is the odd reticence of Justice Scalia.  In a case that presents such a clean and straightforward question of statutory interpretation, it is odd that Justice Scalia was almost entirely silent (asking only a single brief question during the closing seconds of Shanmugam’s rebuttal). The Justices well might settle into a consensus when it comes to the writing of opinions, but this is not a case in which the Justices seem to have left the oral argument with any fixed view of a proper answer.

Recommended Citation: Ronald Mann, Argument analysis: Justices on the edge about protections for inherited retirement funds in bankrupt, SCOTUSblog (Apr. 3, 2014, 9:54 AM),