Civil Practice – Judgment – Execution – Exemptions – IRA – Early Withdrawals – Future Withdrawals

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Kinlaw v. Harris. (Lawyers Weekly No. 10-06-1064, 13 pp.) (Paul M. Newby, J.) (Robert H. Edmunds Jr., J., joined by Sarah Parker, Ch.J. & Patricia Timmons-Goodson, J., concurring in part & dissenting in part) Appealed from Robeson County Superior Court. (Gary L. Locklear, J.) On appeal and discretionary review from the Court of Appeals. N.C. S. Ct. Click here for the full text of the opinion.

Holding: Although IRAs are normally exempt from judgment execution, this is to protect a judgment debtor in retirement. A trial court may determine, on a withdrawal-by-withdrawal basis, whether early withdrawals from an IRA are exempt from execution.

We affirm the Court of Appeals’ holding that G.S. § 1C-1601(a)(9) exempts defendant’s IRAs from plaintiff’s judgment against defendant. However, we reverse the Court of Appeals’ vacation of the trial court’s order requiring defendant to place in escrow any funds he may withdraw from his IRAs.

Background

Plaintiff holds a $567,000 judgment against defendant; in addition, defendant owes the U.S. government $320,000 for Medicare fraud.

In an equitable distribution action, defendant’s former wife retained most of the property which was not exempt from judgment execution, while defendant kept a Beechcraft Bonanza airplane (which was sold and the proceeds applied towards the Medicare fraud claim) and most of the couple’s exempt property, including two IRAs.

In the same year in which plaintiff obtained his judgment against defendant, defendant withdrew $50,000 from one IRA and paid the entire amount to the U.S. government in partial settlement of the Medicare fraud claim.

The following year, defendant withdrew $55,555 from his other IRA. In an affidavit, defendant said that the withdrawals were used “to pay off extraordinary business and personal medical expenses” but that he has no further intention of taking any other distributions from either of his IRAs until he reaches the age when he can do so without incurring penalties.

Plaintiff maintains that defendant knowingly attempted to make himself judgment proof through his equitable distribution arrangement. Plaintiff further argues that by making the two withdrawals, defendant changed the nature of the IRAs such that they are no longer exempt accounts. Defendant contends that despite these actions, the IRAs retain their exempt status.

While the parties disagree about the protected status of the IRAs, both agreed to a mechanism to allow prior review of any future withdrawals from defendant’s IRAs.

The trial court declared the IRAs exempt, vacated a writ of execution and accompanying levy, and endorsed the implementation of the escrow arrangement proposed by the parties as described by defense counsel: “If [defendant] makes a withdrawal … from his IRA, the money immediately has to go into my trust account and it has to stay there. We must give [plaintiff’s attorney] notice as soon as possible of the withdrawal. He will then have five business days to decide whether to contest the withdrawal or seek some declaration as to the status of that withdrawn money. And then we would both agree to have that matter resolved by the Court as expeditiously as possible.”

The Court of Appeals unanimously affirmed the portion of the trial court’s order vacating plaintiff’s writ of execution and held that under G.S. § 1C-1601(a)(9), defendant’s IRAs are exempt from plaintiff’s judgment. Additionally, the majority vacated the portion of the trial court’s order requiring defendant to place any funds withdrawn from the IRAs in an escrow or other trust account for a determination of the funds’ exempt status.

The dissent noted that the purpose of § 1C-1601(a)(9) was to protect a debtor’s right to receive retirement benefits. Accordingly, the dissent stated, “To the extent that Defendant seeks to use monies from his individual retirement accounts in ways which are not consistent with the purposes sought to be accomplished by N.C. Gen. Stat. § 1C-1601(a)(9), such monies should not be protected from the claim of creditors.” The dissenting judge concluded that as case-by-case analysis is the only way to determine which withdrawals are entitled to the protection of § 1C-1601(a)(9), the trial court did not err in ordering an escrow arrangement.

Under G.S. § 1C-1601(a)(9), a debtor’s retirement plans and any other plans treated as such are exempt from execution by creditors. Plaintiff maintains that defendant’s withdrawal of funds in 2004 and 2005 amounts to treating the IRAs in a manner inconsistent with the purpose of IRAs and the protections given under § 1C-1601(a)(9). As such, plaintiff contends that defendant’s behavior invalidates the IRAs’ exempt status. While we do not conclude that such a claim would never be successful, on the facts of this case the trial court properly determined that the corpus of each of defendant’s IRAs continues to maintain its exempt status.

This case does not require us to determine whether funds removed in a particular withdrawal lose their exempt status. Rather, we must decide whether under any circumstances funds withdrawn from an IRA could lose their exempt status. Given the text of § 1C-1601(a)(9), which focuses its protection on “retirement plans,” and the reasoning employed by the dissenting judge at the Court of Appeals, we believe there may be some circumstances under which withdrawn funds are no longer exempt from execution. Because such a scenario is possible, we must now consider whether the trial court acted within its equitable power when it established an escrow arrangement to preserve the funds while it determines the exempt status of any withdrawal from defendant’s IRAs.

We hold that the trial court did not abuse its discretion in fashioning an equitable mechanism to determine the exempt status of defendant’s future withdrawals from his IRAs.

Both parties consented to the escrow arrangement ordered. It is only on appeal that defendant disputes the mechanism to which he agreed before the trial court. As such, the trial court had a reasonable basis to believe that a mechanism for monitoring the exempt status of those funds is necessary to protect the plaintiff’s judgment claim. The trial court was not only acting pursuant to its broad discretionary authority to administer an equitable remedy, but also at the request of both parties affected. When parties consent to a particular remedy, the court generally will enforce that remedy.

We hold the trial court acted correctly in declaring the corpus of each IRA to be exempt from execution and in fashioning an equitable mechanism to determine the exempt status of future withdrawals from defendant’s IRAs. Accordingly, we affirm the Court of Appeals’ decision to exempt from plaintiff’s judgment the corpus of each of defendant’s IRAs. We reverse the decision of the Court of Appeals vacating the trial court’s order requiring defendant to place in escrow any funds he may withdraw from his IRAs.

Affirmed in part; reversed in part and remanded.

Concurrence & Dissent

(Edmunds, J.) While I agree with the majority that the Court of Appeals correctly affirmed the portion of the trial court’s order finding the corpus of defendant’s IRAs exempt under G.S. § 1C-1601(a)(9), I believe that all withdrawals from an IRA are similarly exempt.

Accordingly, the parties and the trial court lacked legal authority to set up and enforce their escrow agreement.

In the context of alimony funds received by a debtor, the General Assembly permitted some receipts covered by subdivision (a)(12) to be exempt, but not others. Under the doctrine of statutory interpretation that expressio unius est exclusio alterius, because the General

Assembly differentiated the treatment of (a)(12) funds but not (a)(9) funds, it follows that all withdrawals from an IRA are exempt from creditors without qualification.

The General Assembly’s purpose in enacting § 1C-1601(a)(9) was to protect a debtor’s right to receive retirement benefits. Escrow agreements of the type employed in this case would not only subject debtors to litigation over every withdrawal from an IRA account, they would also entangle trial courts in the day-to-day supervision of those withdrawals. The substantial penalties for early withdrawals provide sufficient disincentive to discourage debtors from using an IRA as a ready source of exempt funds.

The majority’s holding both thwarts the General Assembly’s intent to exempt retirement funds and puts trial courts in the untenable position of determining which withdrawals from a debtor’s IRA represent legitimate retirement expenses. Accordingly, I respectfully dissent from that portion of the majority opinion reversing the opinion of the Court of Appeals.