Insights

From the Top In Brief

From the Top In Brief

In its fourth bankruptcy-related ruling of the 2013-14, the U.S. Supreme Court handed down its decision on June 12 in Clark v. Ramaker, 2014 BL 162980 (June 12, 2014).  In Clark, the Court considered whether an inherited individual retirement account (“IRA”) is exempt from a bankruptcy estate under section 522(b)(3)(C) of the Bankruptcy Code, which exempts “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation” under certain provisions of the Internal Revenue Code.  In 2013, the Seventh Circuit Court of Appeals ruled that an IRA an individual debtor inherited from her mother was not exempt from the debtor’s bankruptcy estate.  See Clark v. Rameker, 714 F.3d 559 (7th Cir. 2013), cert. granted, 134 S. Ct. 678 (2013).  The Seventh Circuit ruling conflicted with a Fifth Circuit decision (Chilton v. Moser (In re Chilton), 674 F.3d 486 (5th Cir. 2012)), and the Supreme Court granted certiorari in Clark on November 26, 2013 to resolve the circuit split.

Writing for a unanimous Supreme Court, Justice Sonya Sotomayor explained that inherited IRAs do not have the same characteristics as other types of IRAs, such as traditional and Roth IRAs, established by a debtor and are not designed for retirement.  Traditional and Roth IRAs established by debtors, she wrote, are designed to allow debtor account owners to accumulate funds “to ensure that debtors will be able to meet their basic needs during their retirement years.”  The funds may not be withdrawn without penalty until an account owner reaches retirement age.  By contrast, the holder of an inherited IRA account: (i) may never invest additional funds in the account; (ii) must withdraw money from the account either annually or in a lump sum, regardless of the holder’s age or proximity to retirement; and (iii) may withdraw the entire balance of the account at any time—and for any purpose—without penalty.

Justice Sotomayor agreed with the Seventh Circuit’s observation that an inherited IRA constitutes “a pot of money that can be freely used for current consumption.”  Because of this important distinction, the Supreme Court affirmed the decision below, ruling that funds held in an inherited IRA do not qualify as “retirement funds” that are exempt from an account holder’s estate under section 522(b)(3)(C) of the Bankruptcy Code.

A discussion of the Supreme Court’s third bankruptcy ruling of 2014 (Executive Benefits Insur. Agency v. Arkison, 2014 BL 158582 (June 9, 2014)) can be found elsewhere in this edition of the Business Restructuring Review.  The two prior Supreme Court bankruptcy-related rulings in 2014 are briefly discussed here.

On July 1, 2014, the Court granted certiorari in Wellness Int'l Network Ltd. v. Sharif, No. 13-935, 2014 BL 182626 (July 1, 2014), where the Court will be asked once again to decide whether Article III of the U.S. Constitution permits the exercise of the judicial power of the U.S. by a bankruptcy court on the basis of litigant consent—a question that the Court left unanswered in its recent ruling in Executive Benefits Ins. Agency v. Arkison.

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