Selena J Morra

UNITED STATES BANKRUPTCY COURT NOT FOR PUBLICATION
EASTERN DISTRICT OF NEW YORK
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In re
Case No. 04-81042-CEC
SELENA J. MORRA,
Chapter 7
Debtor.
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DECISION
APPEARANCES:
Richard S. Feinsilver
1 Old Country Road
Suite 125
Carle Place, NY 11514
Attorney for Debtor
Robert L. Pryor
Pryor & Mandelup LLP
675 Old Country Road
Westbury, NY 11590
Attorney for Trustee
CARLA E. CRAIG
Chief United States Bankruptcy Judge
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On October 20, 2006, the Honorable Stan Bernstein, to whom this case was then
assigned, entered an order denying the chapter 7 trustee’s objection to the debtor’s claimed
exemption of her 401(k) plan. That order was appealed, and the matter now comes before this
Court on remand from the District Court, which has instructed this Court to resolve a question
not addressed by Judge Bernstein: whether, under Rule 5205(c)(5) of New York Civil Practice
Law and Rules ("CPLR"), which limits the exemption available for a 401(k) plan under CPLR
5205(c)(1), the debtor's claimed exemption for her 401(k) plan should be disallowed on the basis
that her 401(k) contributions were fraudulent conveyances. Because CPLR 5205(c) has no
application to the debtor's 401(k) exemption, which is available to her under § 282(iii)(2)(e) of
New York Debtor & Creditor Law ("DCL"), the chapter 7 trustee's objection to the debtor's
exemption based on CPLR 5205(c) is denied.
This conclusion does not, however, resolve all fraudulent conveyance issues
relating to the debtor’s 401(k) plan. The chapter 7 trustee has commenced an adversary
proceeding, Pryor v. Morra, Adv. Pro. No. 06-08099, seeking to recover the debtor’s
contributions to her 401(k) plan as fraudulent conveyances pursuant to §§ 273, 275, 276-a, 278
and 279. In accordance with the District Court’s mandate to conduct "further proceedings
consistent with [the District Court’s] order," that adversary proceeding will be set down for a
pretrial conference to determine an appropriate schedule for the completion of discovery and for
trial.
Procedural History
This chapter 7 case was voluntarily commenced on February 23, 2004, prior to the
effective date of the 2005 amendments to the Bankruptcy Code. The debtor claimed as exempt a
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Verizon Savings and Security Plan for New York and New England under § 401(k) of the
Internal Revenue Code of 1986, as amended ("401(k) plan"), containing $23,000.
On June 7, 2006, the chapter 7 trustee (the “Trustee”) moved to disallow the debtor's
claimed exemption for the funds in the 401(k) plan. The Trustee argued that the exemption on
which the debtor relied, DCL § 282(iii)(2)(e), only exempts the right to receive payments from
the 401(k) plan, and not the assets held in the plan. The Trustee also argued that the debtor's
interest in the 401(k) plan was not exempt under DCL § 282(iii)(2)(e) because the debtor did not
have the right to payments under the plan "on account of illness, disability, death, age, or length
of service" as of the date of the commencement of the bankruptcy case. Finally, the Trustee
argued that in the event that the Court deemed CPLR § 5205(c)(1) to be applicable to the claimed
exemption, it should be disallowed pursuant to CPLR § 5205(c)(5), because, according to the
Trustee, all contributions made by the debtor to the 401(k) plan constituted fraudulent
conveyances under Article 10 of the DCL.
Judge Bernstein, before whom the Trustee's motion was heard, rejected the Trustee's
challenge to the exemption under DCL § 282(iii)(2)(e). Relying on In re Ruffo, 261 B.R. 580,
584-585 (Bankr. E.D.N.Y. 2001), Judge Bernstein held that "there is 'no meaningful distinction
between the debtors' right to receive or interest in payments under the plan and [her] interest in
the plan.' " Mem. Decision and Order dated October 20, 2006, at p.4.
Judge Bernstein also rejected the Trustee's second argument, that the 401(k) plan was not
exempt under DCL § 282(iii)(2)(e), because the debtor did not have the right as of the filing date
to receive payments "on account of illness, disability, death, age, or length of service." In so
doing, Judge Bernstein relied upon Rousey v. Jacoway, 544 U.S. 320 (2005), in which the
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Supreme Court held that the "on account of" requirement of the federal exemption statute was
satisfied by an Individual Retirement Account providing for distributions, without penalty, at the
age of 59 ½, even though the debtors in that case had the right to receive payment in other
situations as well, finding that the statute "requires that the right to payment be on account of age
- not that it be solely on account of this factor." Based on this reasoning, Judge Bernstein held
that the debtor's 401(k) satisfied the "on account of" requirement of DCL § 282(iii)(2)(e).
Judge Bernstein did not, however, address the applicability of CPLR § 5205(c)(5) to the
debtor's claimed exemption, or otherwise determine whether the debtor's contributions to her
401(k) plan constituted fraudulent conveyances. Because the Trustee's principal argument on
appeal was that the bankruptcy court erred in failing to disallow the debtor's claimed exemption
of her 401(k) plan under CPLR § 5205(5), the District Court remanded this case for resolution of
this issue.
Discussion
The State of New York has "opted out" of the federal exemption scheme, as it is entitled
to under § 522(b)(1) of the Bankruptcy Code. In New York, exemption of property from the
bankruptcy estate is governed by DCL § 282, which provides, in relevant part, as follows:
[A]n individual debtor domiciled in this state may exempt from the
property of the estate . . . only (i) personal and real property exempt
from application to the satisfaction of money judgments under
sections fifty-two hundred five and fifty-two hundred six of the
civil practice law and rules, (ii) insurance policies and annuity
contracts and the proceeds and avails thereof as provided in section
three thousand two hundred twelve of the insurance law and (iii)
the following property:
* * * * * *
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The debtor did not specify a particular subdivision of DCL § 282 as the basis for her claim of exemption.
1
In accordance with the rule of that exemptions are to be liberally construed in favor of the debtor, In re Keil, 88 F.2d
7, 8 (2d Cir. 1937); In re Rundlett, 153 B.R. 126, 130 (S.D.N.Y. 1993); In re Hunt, 250 B.R. 482, 485 (Bankr.
E.D.N.Y. 2000), this Court interprets the debtor's Schedule C to claim exemption of the debtor's 401(k) under all
applicable provisions of DCL § 282, including DCL § 282(iii)(2)(e).
2. Bankruptcy exemption for right to receive benefits. The debtor's
right to receive or the debtor's interest in . . . (e) all payments under
a stock bonus, pension, profit sharing, or similar plan or contract
on account of illness, disability, death, age, or length of service
unless (i) such plan or contract, except those qualified under
section 401, 408 or 408A of the United States Internal Revenue
Code of 1986, as amended, was established by the debtor or under
the auspices of an insider that employed the debtor at the time the
debtor's rights under such plan or contract arose, (ii) such plan is
on account of age or length of service, and (iii) such plan or
contract does not qualify under section four hundred one (a), four
hundred three (a), four hundred three (b), four hundred eight, four
hundred eight A, four hundred nine or four hundred fifty-seven of
the Internal Revenue Code of nineteen hundred eighty-six, as
amended.
N.Y. DEBT. & CRED. LAW § 282(iii)(2)(e). As Judge Gerling noted in In re Moore, 177 B.R.
437, 440 (Bankr. N.D.N.Y. 1994), this provision creates three separate sources of exemptions for
New York debtors: CPLR §§ 5205 and 5206; New York Insurance Law § 3212; and DCL §
282(iii)(1),(2) and (3).
The debtor claimed exemption of her 401(k) plan under DCL § 282. That provision
includes § 282(iii)(2)(e), which provides for exemption of "[t]he debtor's right to receive or the
debtor's interest in . . . all payments under a stock bonus, pension, profit sharing, or similar plan
or contract on account of illness, disability, death, age, or length of service." N.Y. DEBT. &
CRED. LAW § 282(iii)(2)(e).1
Separately, CPLR § 5205 permits a debtor to exempt certain types of retirement plans,
including 401(k) plans:
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1. Except as provided in paragraphs four and five of this
subdivision, all property while held in trust for a judgment debtor,
where the trust has been created by, or the fund so held in trust has
proceeded from, a person other than the judgment debtor, is
exempt from application to the satisfaction of a money judgment.
2. For purposes of this subdivision, all trusts, custodial accounts,
annuities, insurance contracts, monies, assets or interests
established as part of, and all payments from, either any trust or
plan, . which is qualified as . . . . [a] retirement or other plan
established by a corporation, which is qualified under section 401
of the United States Internal Revenue Code of 1986, as amended,
shall be considered a trust which has been created by or which has
proceeded from a person other than the judgment debtor . . . .
N.Y. DEBT. & CRED. LAW § 5205(c)(1), (2).
CPLR § 5205(2) is limited by the provisions of CPLR § 5205(5):
Additions to an asset described in paragraph two of this
subdivision shall not be exempt from application to the satisfaction
of a money judgment if (i) made after the date that is ninety days
before the interposition of the claim on which such judgment was
entered, or (ii) deemed to be fraudulent conveyances under article
ten of the debtor and creditor law.
N.Y. Debt. & Cred. Law § 5205(c)(5).
CPLR § 5205(5), however, has no application to DCL § 282(iii)(2)(e), which is an
entirely separate statutory basis for exemption of property from the bankruptcy estate. The
relationship between DCL § 282(iii)(2)(e) and CPLR § 5205 was explained by the Second
Circuit in In re Dubroff, 119 F.3d 75 (2d. Cir. 1997). There, the court held that an IRA, as a plan
qualified under section 408 of the Internal Revenue Code, may be exempted under §
282(iii)(2)(e). In so doing, the Court rejected the argument that the 1994 amendment to CPLR §
5205(2), which expressly exempted IRAs from assets against which judgments may be enforced
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in New York, would be mere surplusage if § 282(iii)(2)(e) already provided for the exemption of
IRAs in bankruptcy. The court explained:
The surplusage argument fails because the amendment exempts
IRAs from a broader category of actions than the bankruptcy
actions covered by § 282. The amendment to § 5205 broadly
exempts IRAs from the reach of judgment creditors whether or not
a person has filed for bankruptcy and therefore our interpretation of
§ 282(2)(e) to exempt IRAs from the bankruptcy estate does not
render the 1994 amendment surplusage.
Dubroff v. First Nat'l Bank of Glens Falls (In re Dubroff), 119 F.3d 75, 79 (2d Cir. 1997).
Thus, DCL § 282(iii)(2)(e), though it includes provisions which overlap CPLR § 5205(2),
is an entirely separate statutory basis for exemption. CPLR § 5205(5) has no application to §
282(iii)(2)(e), and does not limit the exemption that may be claimed under that provision. In so
concluding, this Court is mindful of the ample authority that exemptions are to liberally
construed in favor of the debtor. In re Keil, 88 F.2d 7, 8 (2d Cir. 1937); In re Rundlett, 153 B.R.
126, 130 (S.D.N.Y. 1993); In re Hunt, 250 B.R. 482, 485 (Bankr. E.D.N.Y. 2000); In re McNeill,
193 B.R. 654, 659 (Bankr. E.D.N.Y. 1996); In re Moore, 177 B.R. 437, 441 (Bankr. N.D.N.Y.
1994); In re Miller, 167 B.R. 782, 783 (Bankr. S.D.N.Y. 1994).
This does not mean, however, that the Trustee cannot commence an adversary proceeding
to recover transfers made to the debtor's 401(k) as fraudulent conveyances, and in fact, such an
adversary proceeding is pending. Because the District Court directed this Court to determine
whether the debtor's contributions to her 401(k) constituted fraudulent conveyances, it is
appropriate, consistent with the District Court's mandate, for this Court to resolve that adversary
proceeding before this matter is taken up by the District Court. Accordingly, the parties are
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directed to appear for a pretrial conference in Pryor v. Morra, at which an appropriate schedule
for the completion of pretrial proceedings and for trial of this adversary proceeding will be set.
Given this conclusion, it is unnecessary, in the context of this motion, to address the
debtor's argument, made for the first time on remand, that the debtor's 401(k) is excluded from
property of the estate.
Conclusion
For the foregoing reasons, the Trustee's motion to disallow the debtor's exemption of the
401(k) plan is denied. A separate order will issue.
Dated: Brooklyn, New York
September 5, 2008
s/Carla E. Craig
CARLA E. CRAIG
Chief United States Bankruptcy Judge
Case 8-04-81042-cec Doc 55 Filed 09/05/08 Entered 09/05/08 17:27:11

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
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In re
Case No. 04-81042-CEC
SELENA J. MORRA,
Chapter 7
Debtor.
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MAILING CERTIFICATE
I, Vivian Greene, hereby affirm that on September 5, 2008 a copy of a Decision
and an Order was delivered to the parties named below by United States Postal Service first class
mail, telecommunication, facsimile or any other delivery method, as follows:
Richard S. Feinsilver
1 Old Country Road
Suite 125
Carle Place, NY 11514
Robert L. Pryor
Pryor & Mandelup LLP
675 Old Country Road
Westbury, NY 11590
Dated: Brooklyn, NY
September 5, 2008
\s\Vivian Greene
Vivian Greene
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