06/29/2017
OP 16-0709
Case Number: OP 16-0709
IN THE SUPREME COURT OF THE STATE OF MONTANA
2017 MT 162
In Re:
JOHN CHARLES GIACOMETTO,
Debtor.
APPEAL FROM: Certified Question from the United States Bankruptcy Court
for the District of Montana, Cause No. 16-60032-7
Honorable Ralph B. Kirscher, Bankruptcy Judge
COUNSEL OF RECORD:
For Appellant:
Joseph V. Womack, Waller & Womack, P.C., Billings, Montana
For Appellee:
James A. Patten, Patten, Peterman, Bekkedahl & Green, Billings, Montana
Submitted on Briefs: May 10, 2017
Decided: June 29, 2017
Filed:
__________________________________________
Clerk
Chief Justice Mike McGrath delivered the Opinion of the Court.
¶1 This is an original proceeding on a certified question from the United States
Bankruptcy Court, the Honorable Ralph B. Kirscher, Bankruptcy Judge. The certified
question is:
Whether, under Montana’s liberal construction of exemptions, Debtor may
claim an exemption in a health savings account (HSA) pursuant to
§ 25-13-608(1)(d) or (f), MCA.
We answer that question “yes,” the Debtor may claim an exemption for a health savings
account under Montana law within the constraints imposed by the statute.
¶2 The undisputed facts of this matter, supplied by the Bankruptcy Court, are as
follows:
1. The Debtor filed his Chapter 11 bankruptcy petition on January 22, 2016.
2. The case was converted to a Chapter 7 on July 22, 2016, and Joseph V. Womack
was appointed Trustee.
3. The Debtor filed an Amended Schedule A/B on August 23, 2016, detailing the
property owned at the time that the Debtor filed his bankruptcy case.
4. The Debtor answered Question No. 17 on Form 106A/B by checking “Yes”
indicating that he owned checking, savings, and other financial accounts. On Line
17.2 the Debtor listed “other financial account” “BANK OF AMERICA HEALTH
SAVINGS ACCOUNT.” The Debtor stated that the balance of the account was
$14,319.61.
5. The Debtor completed Form 106C and claimed the Bank of America Health
Savings Account exempt in the amount of $14,319.61 pursuant to § 25-13-608(1)(d)
or (f), MCA.
6. The Trustee filed a timely Objection to Claim of Exemption.
7. Debtor filed a timely response to Trustee’s Objection.
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8. To date the Debtor’s withdrawal of funds from the Health Savings Account has
been applied exclusively to qualified medical expenses and for no other purpose.
The Bankruptcy Court states that there is no appellate decision in Montana on this issue.
STANDARD OF REVIEW
¶3 The parties agree that this case presents a question of law certified to this Court
pursuant to M. R. App. P. 15(3).
DISCUSSION
¶4 Whether, under Montana’s liberal construction of exemptions, Debtor may claim
an exemption for a health savings account pursuant to § 25-13-608(1)(d) or (f),
MCA.
¶5 An estate in bankruptcy consists of all legal and equitable interests of the debtor in
property as of the date of filing. The debtor is allowed to exempt some property from the
estate, 11 U.S.C. §§ 541(a)(1) and 522, and States may “opt out” of the exemptions
provided under Federal law, as Montana has done. In re Zimmerman, et al., 2002 MT 90,
¶ 7, 309 Mont. 337, 46 P.3d 599; § 31-2-106, MCA. Article XIII, Section 5 of the Montana
Constitution requires the Legislature to enact “liberal” exemptions, and Montana courts
construe such exemptions liberally in favor of the debtor. In re Archer, 2006 MT 82, ¶ 15,
332 Mont. 1, 136 P.3d 563. The intent of the exemptions and of the principle of liberal
construction is to prevent the debtor and dependents from becoming destitute. In re Glass,
164 B.R. 759, 764 (Bankruptcy Panel, 9th Cir.). The exemptions provided by Montana
law are in Title 25, chapter 13, part 6, MCA.
¶6 Long ago this Court described the liberal application of exemptions as a “wise and
humane policy” required by the Montana Constitution, which should not be “frittered away
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by construction so as to destroy their value.” Ferguson v. Speith, 13 Mont. 487, 493, 34 P.
1020, 1021 (1893). In accordance with the Constitution, Montana case law requires that
statutory exemptions be “liberally construed in favor of debtors.” Zimmerman, ¶ 15. In
MacDonald v. Mercill, 220 Mont. 146, 714 P.2d 132 (1986) this Court liberally construed
the exemption for tools and implements necessary to carry on a trade as covering the
debtor’s backhoe and flatbed trailer. Where the Legislature has expressly included an item
in the list of statutory exemptions, it will be liberally construed in favor of the debtor to
allow it.
¶7 Section 25-13-608(1)(d), MCA, allows a judgment debtor to exempt from execution
“disability or illness benefits” while § 25-13-608(1)(f), MCA, exempts “benefits paid or
payable for medical, surgical, or hospital care to the extent that they are used or will be
used to pay for the care.” The parties have focused their arguments on § 25-13-608(1)(f),
MCA, and the issue here is whether that exemption applies to the Debtor’s health savings
account.
¶8 In Archer we described the statutory exemptions:
Section 25-13-608, MCA, provides an extensive list of exemptions from
execution, including prescribed health aids, Social Security benefits,
veterans’ benefits, individual retirement accounts, maintenance and child
support, burial plots and certain types of statutory retirement system
payments. The common denominator in all these exemptions is their
specificity—all are unique types of support created for specific purposes.
Archer, ¶ 18. An HSA is an account recognized by Federal law, 26 U.S.C. § 223, and by
Montana law, §§ 15-61-201 through -205, MCA. It is funded by the Debtor and provides
the Debtor a “benefit” that may be used to pay for medical, surgical or hospital care. This
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falls within the term “benefits” in § 25-13-608(1)(f), MCA. This Court concluded that
“benefits” under that statute are those “expressly earmarked for the sole purpose of paying
medical, surgical, or hospital bills.” Archer, ¶ 19. It is plain that a debtor’s HSA provides
him with a unique benefit earmarked to pay for medical care and expenses.1
¶9 Following the constitutional and statutory considerations outlined above, we
conclude that § 25-13-608(1)(f), MCA, applies to an HSA as presented in this case, to the
extent that it is “used or will be used to pay for the care” described in the statute.
¶10 The Dissent asserts that we should follow our decision in Archer and hold that there
is no exemption for the HSA. The debtor in Archer did not seek exemption for an HSA,
but rather sought exemption for the proceeds from the sale of stock that the debtor intended
to use for medical expenses. The fund in Archer was very different from an HSA, which
is a specific account recognized by both state and federal law that provides incentives for
use of the funds for medical expenses and penalties if they are used for other purposes.
Clearly the accounts are created specifically to be “payable for medical” care. The funds
in an HSA are unique and easily distinguishable from the proceeds from a sale of shares of
stock held by the debtor, as in Archer. The Bankruptcy Court would not have certified the
present question to this Court had the issue been settled in Archer.
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We decline to apply § 15-61-202(7), MCA, so as to overcome the plain exemption
described in § 25-13-608(1)(f), MCA. That provision applies to the personal tax liability of an
account holder for withdrawals from the account. In addition, as discussed further below, that
subsection has been repealed by the Montana Legislature, Senate Bill No. 216, signed by the
Governor on May 4, 2017 (Chapter 298, Laws 2017).
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¶11 We observed in Archer that the “common denominator” in the exemptions listed in
§ 25-13-608, MCA, “is their specificity—all are unique types of support created for
specific purposes.” Archer, ¶ 18. Health Savings Accounts likewise were created for a
specific purpose: to support the payment of medical costs. The language of
§ 25-13-608(1)(f), MCA, is sufficiently descriptive of the nature of HSAs to include them
within its coverage. But unlike most of the specific exemptions listed in the statute, the
Legislature included a fact-based qualifier in subsection (1)(f), providing explicitly that
medical, surgical, or hospital benefits be exempt “to the extent they are used or will be used
to pay for the care.” This leaves open the distinct possibility that some funds set aside in
the HSA will not be exempt.
¶12 In the case of In re Joseph Berdecia-Rodriguez, 2016 Bankr. LEXIS 3582 (Bank.
D. Mont. 2016), the Bankruptcy Court reached the same conclusion. The Court determined
that the HSA is a “benefit” paid or payable to the Debtor, and that it is intended to pay for
medical, surgical or hospital care as provided in § 25-13-608(1)(f), MCA. While the
proceeds of an HSA may be used for other purposes upon payment of a statutory penalty,
the Court determined that this is accounted for in the Montana statute, which provides an
exemption only “to the extent” that the HSA funds are used for the described medical
purposes. Both federal and Montana law restrict withdrawals from HSA accounts, and
thus limit the permissible uses for the funds. Both impose penalties for other uses.
26 U.S.C. § 223; §§ 15-61-203, -205, MCA. In the present case, as in Berdecia-Rodriguez,
the Debtor has applied the HSA funds “exclusively to qualified medical expenses and for
no other purpose.” The Bankruptcy Court held that the debtor was entitled to an exemption
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for the HSA funds “so long as” he applies them to qualified medical expenses under
§ 25-13-608(1)(f), MCA.
¶13 The Bankruptcy Court’s construction of the exemption in § 25-13-608(1)(f), MCA,
furthers the established principles of Montana law, noted above, to liberally construe
specific statutory exemptions in favor of the debtor. While the funds might be used for a
non-medical purpose, such use is subject to a statutory penalty. 26 U.S.C. § 223(f)(2), (4).
Any such use would disqualify those funds from exemption and, under
Berdecia-Rodriguez, the Trustee could recover those funds from the Debtor. In addition,
under Montana law a false claim to funds in an HSA is subject to criminal penalties for
theft. Section 15-61-205, MCA. The Bankruptcy Court can impose such safeguards as it
deems prudent to monitor an exempt fund to ensure that the money is used for a proper
purpose consistent with the statutory restriction.
¶14 We note that the Montana Legislature in its last session also amended § 25-13-608,
MCA. Senate Bill No. 216, signed by the Governor on May 4, 2017 (Ch. 298, Laws of
2017). That legislation specifically adds contributions to certain health or medical savings
accounts to the list of exemptions a judgment debtor is allowed to exclude from execution.
That enactment provides much more clarification of how and under what circumstances an
HSA will be exempt, and it will supersede the applicability of § 25-13-608(1)(f), MCA, to
such accounts. We construe the existing language of the statute for application to this case,
which arose before the recent amendment.
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CONCLUSION
¶15 We hold that a Debtor may claim an exemption for a health savings account (HSA)
pursuant to § 25-13-608(1)(f), MCA, to the extent that it is “used or will be used to pay for
the care” described in the statute.
/S/ MIKE McGRATH
We Concur:
/S/ MICHAEL E WHEAT
/S/ LAURIE McKINNON
/S/ BETH BAKER
/S/ JAMES JEREMIAH SHEA
/S/ DIRK M. SANDEFUR
Justice Jim Rice, dissenting.
¶16 In Archer, virtually the same arguments were made as here. Archer suffered from
significant, ongoing medical expenses. The proceeds from a sales contract he held were
“used exclusively to pay for [Archer’s] end-of-life medical, surgical or hospital care and
medications.” Archer, ¶ 6. Like Giacometto argues here, Archer argued that the proceeds
should be exempted under § 25-13-608(1)(f), MCA, “to the extent those proceeds are used
for [his] medical care,” and because “exemption statutes must be liberally construed.”
Archer, ¶¶ 9, 14.
¶17 We rejected those arguments, and held that the term “benefits” under
§ 25-13-608(1)(f), MCA, “includes only those payments to a debtor which are expressly
earmarked for the sole purpose of paying medical, surgical or hospital bills.” Archer, ¶ 19
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(emphasis added). Because there were “no contractual restrictions” on Archer’s use of the
proceeds that would prohibit him from using the funds for something other than the “sole
purpose” of medical costs, we held that the proceeds could not be exempted under
§ 25-13-608(1)(f), MCA. We also noted that the principle of liberal construction of
bankruptcy exemptions “may not disregard plain legislative mandate.” Archer, ¶ 15.
¶18 The Court plows much ground in an effort to distinguish the HSA here from the
contract in Archer, but misses the most salient point: that the account holder of an HSA is
no more required to spend the funds on medical care than the contract holder was in Archer.
Quite simply, the funds in an HSA are not “expressly earmarked for the sole purpose” of
medical costs. Archer, ¶ 19. Indeed, the Court’s emphasis on the State and Federal
regulation of the account is mere window-dressing because it is nonetheless
expressly permissible for Giacometto to use the account for any purpose of his choosing.
See § 15-61-203(1), MCA (an account holder “may withdraw money from the individual’s
medical care savings account for any purpose other than an eligible medical expense . . . .”).
The true distinguishing point between the Court’s decision and our decision in Archer is
that the account here has “health” in its title, while the contract in Archer did not.
¶19 The account holder’s ability to spend the funds in the HSA for any purpose
necessitates the adoption of a new rule by the Court for later “disqualification” of the
exemption if the money is spent for other purposes. Such “disqualification” could require
the bankruptcy trustee to chase down debtors years after cases have closed, when the trustee
discovers that the HSAs have “lost” their exempt status. The Court has, in effect, legislated
a special process for administration of an exemption, one that could be elongated over
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many years. This should be a legislative call. “‘In the construction of a statute, the office
of the judge is simply to ascertain and declare what is in terms or in substance contained
therein, not to insert what has been omitted or to omit what has been inserted.’ Section
1-2-101, MCA.” In re Golz, 2015 MT 318, ¶ 13, 381 Mont. 385, 360 P.3d 1142 (holding
that inherited IRAs are not exempt from the bankruptcy estate).
¶20 Busy with its own legislating, the Court overlooks the obvious implication of the
real Legislature’s recent enactment of SB 216 in the 2017 Legislative Session. The bill
was entitled “An Act Exempting . . . Medical Savings Accounts from Bankruptcy,” creating
for the first time an exemption for HSAs. As we are to presume “that the Legislature does
not pass meaningless or useless legislation,” Lucas Ranch, Inc. v. Mont. Dep’t of Revenue,
2015 MT 115, ¶ 15, 379 Mont. 28, 347 P.3d 1249, the effect of the legislation was to change
the prior status of HSAs. This effect is confirmed by SB 216’s corresponding repeal of §
15-61-202(7), MCA, which, as the Trustee notes, was a prior statutory indication that such
accounts would not be considered exempt in a bankruptcy proceeding. The repeal of this
section was necessary to make HSAs exempt in bankruptcy proceedings.
¶21 Based upon our precedent interpreting the subject statutes, I would answer the
question in the negative.
/S/ JIM RICE
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