In Re: Susan Krebs

Opinions of the United
2008 Decisions States Court of Appeals
for the Third Circuit

5-19-2008

In Re: Susan Krebs
Precedential or Non-Precedential: Precedential

Docket No. 06-2959

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 PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 06-2959

IN RE: SUSAN MARIE KREBS,

Appellant

On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. No. 06-cv-00066E)
District Judge: Honorable Sean J. McLaughlin

Argued March 6, 2008
Before: FISHER, GREENBERG and ROTH, Circuit Judges.

(Filed: May 19, 2008)

J. Wesley Rowden (Argued)
310 Chestnut Street
Masonic Building, Suite 225
Meadville, PA 16335
Attorney for Appellant
Gary V. Skiba (Argued)
Yochim, Skiba, Johnson, Cauley & Nash
345 West 6th Street
Erie, PA 16507
Attorney for Appellee

OPINION OF THE COURT

FISHER, Circuit Judge.

This appeal requires us to revisit one of our precedents in
deciding whether a debtor’s right to receive payment from an
individual retirement account (IRA) may be exempt from the
bankruptcy estate under 11 U.S.C. § 522(d)(10)(E), even though
the debtor has not yet reached retirement age. For the reasons
that follow, we hold that an intervening Supreme Court decision
impliedly overrules our own earlier precedent. Accordingly, we
will vacate the order of the District Court relying on that
precedent and remand.

I.

Susan Marie Krebs filed a voluntary petition for
bankruptcy on September 7, 2005, when she was 58 years of
age. After the meeting of creditors, Gary V. Skiba, appellee
herein, was designated as the Chapter 7 trustee, or the person
responsible for overseeing the liquidation of the bankruptcy
estate and the distribution of the proceeds. Krebs indicated on

2
her bankruptcy schedules that she had an IRA worth $43,571.96
at Lincoln Financial Group. She also sought to exempt the IRA
under 11 U.S.C. § 522(d)(10)(E). On December 12, 2005, Skiba
filed an objection to the exemption in the United States
Bankruptcy Court for the Western District of Pennsylvania.

After a hearing, the Bankruptcy Court by order dated
March 3, 2006 sustained Skiba’s objection. Krebs timely
appealed that order to the District Court. By memorandum
opinion and order dated May 10, 2006, the District Court
affirmed, relying on precedent disallowing exemptions of
amounts in retirement plans under § 522(d)(10)(E) unless the
debtor is presently receiving those amounts without penalty, i.e.,
typically after the debtor has reached retirement age. Krebs then
filed a timely notice of appeal to this Court.1

II.

The District Court had jurisdiction under 28 U.S.C.
§ 158(a). We have jurisdiction under 28 U.S.C. § 158(d) and
exercise plenary review over conclusions of law. In re Brannon,
476 F.3d 170, 173 (3d Cir. 2007). A panel of this Court may
reevaluate the holding of a prior panel which conflicts with
intervening Supreme Court precedent. See Mennen Co. v. Atl.
Mut. Ins. Co., 147 F.3d 287, 294 n.9 (3d Cir. 1998); Reich v.
D.M. Sabia Co., 90 F.3d 854, 858 (3d Cir. 1996).

1
Krebs does not appeal, so we do not address, the District
Court’s other holding that her IRA is not excluded under 11
U.S.C. § 541(c)(2).

3
 III.

A. Our Decision in Clark

“As a general matter, upon the filing of a petition
for bankruptcy, ‘all legal or equitable interests of
the debtor in property’ become the property of the
bankruptcy estate and will be distributed to the
debtor’s creditors. [11 U.S.C.] § 541(a)(1). To
help the debtor obtain a fresh start, the
Bankruptcy Code permits him to withdraw from
the estate certain interests in property, such as his
car or home, up to certain values. See, e.g.,
§ 522(d).”

Rousey v. Jacoway, 544 U.S. 320, 325 (2005). In this case,
Krebs claims that her right to receive payment from the IRA is
exempt under § 522(d)(10)(E).2

Krebs must establish three requirements for exemption:

2
Subsequent to the Rousey decision, Congress enacted the
Bankruptcy Abuse Prevention and Consumer Protection Act of
2005, Pub. L. No. 109-8, § 224, 119 Stat. 23, 64 (2005), one of
whose provisions unambiguously exempts qualifying IRA funds
with respect to bankruptcy petitions filed after October 17, 2005.
Id. § 224(a)(2)(B). This new provision, now codified at 11
U.S.C. § 522(d)(12), does not apply here, however, because
Krebs filed her bankruptcy petition on September 7, 2005, one
month before the new provision’s effective date. Thus, we (as
well as Krebs) may rely only on § 522(d)(10)(E).

4
 (1) the right to receive payment must be
“under a stock bonus, pension,
profitsharing, annuity, or similar plan or
contract”;

(2) the right to receive payment must be “on
account of illness, disability, death, age, or
length of service”; and

(3) the right to receive payment may be
exempted only “to the extent reasonably
necessary for the support of the debtor and
any dependent of the debtor.”

11 U.S.C. § 522(d)(10)(E) (with one exception not relevant
here).3

We interpreted the third requirement in In re Clark
(Clark v. O’Neill), 711 F.2d 21 (3d Cir. 1983). In Clark, Robert
H. Clark, a 43-year-old family therapist, filed a Chapter 7
petition in bankruptcy and claimed an exemption for the
$17,466 in his Keogh retirement plan. Id. at 22. Contributions

3
The parties have not argued, so we do not decide, that
there is a difference between exempting the right to receive
payment from an IRA versus exempting the IRA itself. The
Supreme Court does not appear to perceive any difference of
significance. Compare Rousey, 544 U.S. at 325 (“the right to
receive payment may be exempted”), with id. at 326 (“IRAs can
be exempted”). Hence, we, too, will assume the semantic
interchangeability and refer to exempting both in this opinion.

5
to such a plan are tax-deductible, and income tax on its earnings
is deferred until withdrawn. The right to receive payment under
the plan is triggered when a participant turns 59 ½, dies, or is
disabled. Id. If a participant receives a payment before one of
these events, he must pay a penalty tax of 10% in addition to
regular income taxes. Id.

The trustee in Clark filed an objection to the claimed
exemption, and Clark filed a complaint against the trustee
seeking a denial of the objection. In interpreting
§ 522(d)(10)(E), the bankruptcy court agreed with the trustee
that because Clark had no present right to receive payments
from the plan, his exemption claim did not fall within the literal
terms of the statutory provision. Id.

We affirmed. We first cited the following legislative
history of the exemption provisions of the Bankruptcy Code:

“The historical purpose of [] exemption laws has
been to protect a debtor from his creditors, to
provide him with the basic necessities of life so
that even if his creditors levy on all of his
nonexempt property, the debtor will not be left
destitute and a public charge. [This] purpose has
not changed.”

Id. at 23 (quoting H.R. Rep. No. 95-595, at 126 (1977), as
reprinted in 1978 U.S.C.C.A.N. 5963, 6087). Based on that
legislative history, we held: “The exemption of present Keogh
payments, to the extent they are necessary for the support of the
debtor, is consistent with this goal. The exemption of future

6
payments, however, demonstrates a concern for the debtor’s
long-term security which is absent from the statute.” Id.4

We proceeded to cite decisions from various bankruptcy
courts (we did not cite a single circuit or district court decision)
that showed that “[t]he result of denying the exemption with
respect to future payments is in accord with the caselaw.” Id.
After explaining that some of the cases were decided on other
grounds, we were left essentially with one decision on point,
Matter of Kochell, 26 B.R. 86 (Bankr. W.D. Wis. 1982), which
we characterized as “agree[ing] that the underlying purpose of
the section was to alleviate present rather than long-term need,
a condition which the 44-year old debtor, a doctor in apparent
good health, could not demonstrate.” 711 F.2d at 23.5 Beyond

4
We apparently failed to quote the rest of the paragraph
in the House Report, which evinced an intent to make
bankruptcy exemptions more generous, not less. We also made
no mention of a later portion of that same report, which
explained that § 522(d)(10) “exempts certain benefits that are
akin to future earnings of the debtor.” H.R. Rep. No. 95-595, at
362 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6318.
5
In Kochell the bankruptcy court actually conducted an
intensive factual inquiry into the debtor’s finances and found
that the “presence of [a] surplus [beyond his current living
expenses] indicates not only that the pension fund is not
necessary for the current support of the debtor, but that a
pension fund could be easily reestablished.” 26 B.R. at 87. It
is quite a stretch to turn a finding of current surplus on the facts
into a per se rule precluding exemption of all future retirement

7
the aforementioned legislative history and the Kochell case, our
opinion in Clark did not contain further reasoning to support our
per se rule that only present payments from a retirement fund
can ever meet the “reasonably necessary” requirement.

Judge Becker concurred in the judgment only. He
specifically took exception to the majority’s holding
distinguishing between future payments and present payments,
“for the distinction required by the majority’s reasoning
effectively penalizes self-employed individuals for the form in
which their retirement assets are held.” 711 F.2d at 23 (Becker,
J., concurring). He explained that retirement plans created by
employers are not affected by the majority’s holding because the
assets of such plans are not included in the debtor’s estate in the
first place. Id. at 24. He also wrote that he would not rely on
the legislative history relied upon by the majority, “given the
incongruity of the result for different retirement plans.” Id.

B. The Impact of Rousey

Several of our sister courts of appeals have decided the
exemption issue contrary to Clark.6 However, we lack authority
to overrule it on that basis. Nor can we overrule it because we
are no longer persuaded by its reasoning. The basis that permits

plan payments.
6
See, e.g., In re Brucher, 243 F.3d 242, 243 (6th Cir.
2001); In re McKown, 203 F.3d 1188, 1190 (9th Cir. 2000); In
re Dubroff, 119 F.3d 75, 78 (2d Cir. 1997); In re Carmichael,
100 F.3d 375, 380 (5th Cir. 1996).

8
us to do so is the Supreme Court’s 2005 decision in Rousey, in
which the Court held that the right to receive IRA payments
“can be exempted from the bankruptcy estate pursuant to
§ 522(d)(10)(E).” 544 U.S. at 326. In Rousey, petitioners
Richard and Betty Jo Rousey sought to exempt their two IRAs,
one in each of their names, from the bankruptcy estate pursuant
to that provision. The Rousey bankruptcy court and bankruptcy
appellate panel denied the Rouseys’ exemption claim.

The Court of Appeals for the Eighth Circuit affirmed,
relying on its prior holding that IRAs do not satisfy either of the
first two requirements of § 522(d)(10)(E), i.e., that they must be
similar plans or contracts to those enumerated and that the right
to receive payment must be on account of age. See id. at 324.
In reversing the Eighth Circuit, the Supreme Court held that the
Rouseys’ IRAs satisfied both statutory requirements. Id. at 334-
35.

The IRAs at issue here and in Rousey (both of which fall
undisputedly within the meaning of section 408 of the Internal
Revenue Code, 26 U.S.C. § 408) share many of the
characteristics of the Keogh plan at issue in Clark. First, IRAs
provide for tax-deductible contributions. 26 U.S.C. §§ 219(a)
& 408(e)(1). Taxation is deferred until amounts are withdrawn.
Rousey, 544 U.S. at 323, 331-32. Withdrawals made before the
accountholder turns 59 ½ are generally subject to a 10% tax
penalty. See 26 U.S.C. § 72(t). The Supreme Court concluded
that “these features show that IRA income substitutes for wages
lost upon retirement and distinguish IRAs from typical savings
accounts.” 544 U.S. at 332.

9
 Although the precise holding in Rousey covers only the
first and second requirements of § 522(d)(10)(E), the facts in
Rousey cast doubt on Clark’s interpretation of the third
requirement. That interpretation, i.e., the per se rule we
established, is wrong because the Rouseys had not yet reached
59 ½ years of age when they filed their bankruptcy petition, so
they were not yet receiving payments (without penalty) from the
IRA they sought to exempt. The pertinent part of the Rouseys’
merits brief before the Supreme Court states:

“When they filed for bankruptcy, Richard Rousey
was fifty-seven years old and petitioner Betty Jo
Rousey was fifty-three. Their ability to replace
those funds, a substantial part of which had been
accumulated through their employer-sponsored
pension plan, and through the compounding of
funds held for many years, is non-existent.
Nothing in the language, structure, or purpose of
Section 522(d)(10)(E) suggests any reason why
the fortuity that they filed for bankruptcy in 2001
rather than the year in which they would be 59 ½
years old should determine the eligibility of their
IRAs for exemption.”

Brief for Petitioners, Rousey, 2004 WL 1900505, at *35-36; see
also Rousey v. Jacoway, 275 B.R. 307, 309, 311 (Bankr. W.D.
Ark. 2002) (stating that the Rouseys would face a 10% tax
penalty if they withdrew from their IRAs at that time).
Moreover, it is the Rouseys’ age at time of petition filing that
matters because the bankruptcy estate is created at the
“commencement” of the bankruptcy case. See 11 U.S.C. §§ 301

10
& 541(a). The Supreme Court’s holding that IRAs may be
exempted under § 522(d)(10)(E) therefore applies squarely to
those debtors who have not yet reached 59 ½ years of age. Our
contrary interpretation of the third requirement of
§ 522(d)(10)(E) in Clark thus ends up appending a sort of fourth
requirement that finds no support in the statutory text and that
Rousey forecloses by its facts.

Although the district and bankruptcy courts in our Circuit
have split with respect to Rousey’s effect on Clark, we are
persuaded by the reasoning of those courts that have decided the
question the way we do today. For example, the United States
District Court for the Middle District of Pennsylvania correctly
identified the polar opposite approaches to statutory
interpretation in Rousey and Clark. See In re Wiggins, 341 B.R.
506, 512 (M.D. Pa. 2006). Whereas Clark narrowed allowable
exemptions based on what the majority perceived as the
Bankruptcy Code’s limited purpose of maintaining the debtor’s
immediate financial security, Rousey focused only on the Code’s
plain language, which asks whether an item sought to be
exempted is “similar” to “a stock bonus, pension, profitsharing,
[or] annuity,” that is, whether the item provides income that
substitutes for wages. Id. Other than the three requirements
imposed by the plain language, “[n]o other limitation is
imposed, and no higher purpose of the Bankruptcy Code is
invoked.” Id. The Supreme Court did not treat as dispositive
the factor essential to our per se rule: whether the plan or
contract provides for immediate payments or deferred payments.
We agree with Wiggins that Rousey’s approach to construing
§ 522(d)(10)(E) diverges significantly from our approach in
Clark, which further undermines Clark’s per se rule.

11
 Finally, we are unable to determine whether Krebs’ right
to receive payment from the IRA in fact meets the third
requirement of § 522(d)(10)(E) without the now-overruled Clark
gloss, as neither the District Court nor the Bankruptcy Court
engaged in the factual inquiry necessary to determine whether
an IRA is “reasonably necessary” to support a debtor and her
dependents. See, e.g., In re Booth, 331 B.R. 233, 236-37
(Bankr. W.D. Pa. 2005) (enumerating eleven factors to consider
for the factual inquiry); In re Bogart, 157 B.R. 345, 347 (Bankr.
N.D. Ohio 1993). Nor does the record indicate whether the
entire amount of $43,571.96 may be “reasonably necessary,” or
only a portion thereof. Because the “to the extent” language in
the third requirement of § 522(d)(10)(E) may limit the amount
actually exempted in any particular case, it is possible that only
some portion of the IRA should be exempted. See, e.g., In re
Fulton, 240 B.R. 854, 870, 876-77 (Bankr. W.D. Pa. 1999).
Accordingly, we will remand.

IV.

Our conclusions are as follows. It is undisputed that
Krebs’ IRA meets the first two requirements of 11 U.S.C.
§ 522(d)(10)(E). Further, Rousey impliedly overrules Clark, so
Krebs’ right to receive payment from her IRA may be exempt
from the bankruptcy estate under § 522(d)(10)(E) even though
she has not yet reached 59 ½ years of age. Accordingly, we will
vacate the order of the District Court and remand for
consideration – without Clark posing any obstacle – of whether
Krebs establishes the third requirement of § 522(d)(10)(E), that
is, whether and to what extent her right to receive payment

12
under the IRA is reasonably necessary to support her and her
dependents.

13