By Michael L. Moskowitz and Melissa A. Guseynov
In 2013 the Supreme Court held that funds held in an inherited non-spousal IRA were not exempt under Section 522 of the Bankruptcy Code. You can read our blog article on Clark v. Rameker here. However, in a New Jersey bankruptcy court decision handed down last month, Bankruptcy Judge Christine M. Gravelle held that an inherited IRA is not property of the debtor’s bankruptcy estate, regardless of whether it would be characterized as an exempt asset under the Bankruptcy Code. In re Norris, 2016 WL 2989234 (Bankr. D.N.J. May 20, 2016).
In Norris, debtor inherited an IRA from her stepmother five months prior to filing a chapter 7 bankruptcy petition. The debtor listed the IRA in her schedules and claimed it was both exempt and not an asset of the estate. The chapter 7 trustee objected, citing to Clark v. Rameker, claiming the IRA was an estate asset and not exempt.
The Court initially noted the filing of a bankruptcy petition creates an estate of all of the debtor’s interests in property, with certain exceptions, including a “beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law.” 11 U.S.C. §541(c)(2). Judge Gravelle explained there was a New Jersey statute which specifically excludes from a bankruptcy estate “any property held in a qualifying trust and any distributions from a qualifying trust.” N.J. Stat. Ann. § 25:2-1(b). The New Jersey statute defines a “qualifying trust” as one created and maintained pursuant to federal law, including Section 408 of the Internal Revenue Code. 26 U.S.C. §408.
Although the Third Circuit previously held in In re Yuhas that the New Jersey statute excludes IRAs from becoming estate property, Judge Gravelle noted that the Yuhas court did not analyze whether the statute would specifically exclude inherited IRAs. In re Yuhas, 104 F.3d 612 (3rd Cir. 1997). Judge Gravelle also examined In re Andolino, which held that an inherited IRA was a qualifying trust and not property of a debtor’s bankruptcy estate. In re Andolino, 525 B.R. 588 (Bankr. D.N.J. 2015).
The Court opined that Rameker was of “limited applicability,” as it dealt with a claimed exemption, and not whether an inherited IRA constitutes property of the debtor’s bankruptcy estate. Although the Court acknowledged that its ruling conflicted with the “significant policy concerns” outlined by Justice Sotomayor in Rameker, Judge Gravelle concluded that “stare decisis provides instruction for interpretation of the Statute as set forth herein.”
Although the Supreme Court’s decision in Clark v. Rameker resolved the split among the Circuit courts, the gaping state law loophole at issue in Norris protected debtor’s inherited IRA from creditors in her chapter 7 case. Weltman & Moskowitz will continue to follow and report on this issue and keep our clients and colleagues informed on the developing impact to debtors and creditors alike.
About Weltman & Moskowitz, LLP, A New York and New Jersey Business, Bankruptcy, and Creditors’ Rights Law Firm:
Founded in 1987, Weltman & Moskowitz, LLP is a highly regarded business law firm concentrating on creditors’ rights, bankruptcy, foreclosure, and business litigation. Michael L. Moskowitz, a partner with the firm, focuses his practice on business and bankruptcy litigation, as well as creditor’s rights, foreclosure, adversary proceeding litigation, corporate counseling, M&A, and transactional matters. Michael can be reached at (212) 684-7800, (201)794-7500 or mlm@weltmosk.com. Melissa Guseynov is an associate of the firm.
