Selena J Morra

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UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
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In re: 	Chapter 7
SELENA J. MORRA,
Case No.
Debtor. 	804-81042-288
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MEMORANDUM OF DECISION AND ORDER
Issue
The Chapter 7 trustee (trustee) filed a motion (motion) objecting to the debtor’s
claimed exemption from the bankruptcy estate on funds contained in her employee-run
401(k) pension plan (pension plan). On July 25, 2006, the debtor filed opposition to the
motion, asserting that her exemption should be allowed under New York law.
The Court held a hearing on the motion on August 24, 2006. Based on the record
of the hearing and after reviewing the supporting memoranda filed with respect to this
motion, the Court denies the motion for the reasons that follow.
Background
On February 23, 2004, the debtor, Selena Morra, filed a voluntary petition for
relief under Chapter 7. 	The debtor has an Internal Revenue Code § 401(k) plan that was
established by her employer, Verizon through Fidelity Investment. The debtor
established the plan approximately four years before the filing of the debtor’s bankruptcy
petition, and has contributed $446 each month over the past four years. The debtor
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originally listed the value of the pension plan to be $3,000. On March 1, 2004, the first
meeting of creditors was held. During this meeting, the debtor testified that the value of
the pension plan was approximately $23,000.
The trustee seeks an order denying the debtor’s claimed §401(k) plan exemption
in the amount of $23,345.54. The trustee maintains that the debtor’s interest in and right
to receive payments under the plan are not exempt because payment under a stock bonus,
pension, profit sharing, or similar plan or contract on account of illness, disability, death,
age, or length of service only exempts payments from certain plans and not the assets
held in the debtor’s pension plan. The trustee further maintains that the debtor can
withdraw funds from the plan at anytime and, therefore, the debtor’s interest under the
plan should not be exempt from the debtor’s bankruptcy estate.
The debtor opposes the motion on the ground that under New York State law,
§401(k) plans are exempt property of a debtor in bankruptcy. The debtor further asserts
that any withdrawals of funds made from the plan before retirement do not have the
effect of rendering the plan non-exempt.
Discussion
The state of New York has “opted out” of the federal exemption scheme. 11
U.S.C. § 522(b)(1). In New York, property claimed exempt from the bankruptcy estate is
governed by New York’s Debtor and Creditor Law §282 (2) (e) (NYDCL). The statute
essentially mirrors that of the federal statute and provides:
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1) the payments sought to be exempted must be under a stock
bonus, pension, profit sharing, or similar plan or contract, and 2)
the payments sought to be exempted must be on account of illness,
disability, death, age or length of service.
In bankruptcy cases, NYDCL § 282 exempts property that is exempt under
N.Y.C.P.L.R. § 52051 from being applied by anyone other than the judgment debtor to
satisfy money judgments. Dubroff v. First Nat’l Bank of Glens Falls (In re Dubroff), 119
F.3d 75, 79 (2d Cir. 1997). In In re Dubroff, the Second Circuit held that the debtor’s
retirement plan was exempt from the debtor’s bankruptcy estate.2 In Dubroff, the debtor
sought to claim as exempt funds deposited into an Individual Retirement Account under
NYDCL § 282(2) (e). In refusing to sustain the trustee’s objection to the claimed
exemption, the Second Circuit declined to follow the Bankruptcy Court’s decision
holding that IRAs were not exempt under § 282. Dubroff, 119 F.3d at 80.
In this case, the trustee first argues that the debtor’s interest in the §401(k) plan
should not be exempt under NY DCL §282 because that section only exempts the right to
payments, not the assets held in the plan. To support its argument, the trustee relies on
the Vermont Bankruptcy Court’s decision in In re Delaney, in which the court granted
the trustee’s motion to deny the debtor’s claimed exemption. This Court need not discuss
the trustee’s misplaced reliance on In re Delaney because Judge Brown’s ruling was
1 NYCPLR §5205 (c) exempts from application of a money judgment “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 an
individual retirement account under section four hundred eight or section four hundred
eight A of the United States Internal Revenue Code of 1986, as amended, a Keogh (HR-
10), retirement or other plan established by a corporation, which is qualified under
section 401 of the United States Internal Revenue Code of 1986.”
2 See In re Maurer, 268 B.R. 339 (Bankr. W.D.N.Y. 2001) (holding that the debtor’s
deferred-compensation plan was exempt from the bankruptcy estate “on account of age”).
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reversed by the United States District Court for the District of Vermont. In re Delaney,
258 B.R. 593 (Bankr.D.Vt. 2000), rev’d and remanded, 268 B.R. 57 (D.Vt. 2001).
A case on point is In re Ruffo, 261 B.R. 580 (Bankr. E.D.N.Y. 2001). The debtor
sought to claim the funds contributed in his deferred-compensation plan as exempt from
the bankruptcy estate. The Court, in reliance on the Second Circuit’s analysis in Dubroff,
overruled the Chapter 7 trustee’s objection to the debtor’s claimed exemption. Ruffo at
587. 	The Bankruptcy Court held that the debtor’s interest in a deferred compensation
plan was not exempt and declared that there is “no meaningful distinction between the
debtors’ right to receive or interest in payments under the plan and his interest in the
plan.” Ruffo, at 584-585.
The trustee’s second argument is that the debtor’s right to receive payment and
interest in the plan are not exempt under NYDCL § 282 because the debtor has no right
to payments “on account of illness, disability, death, age, or length of service. 	The
trustee relies on the Bankruptcy Court’s decision in In re Kleist, 114 B.R. 366, 368-369
(Bankr. N.D.N.Y. 1990), holding that when the debtor can withdraw funds from the plan
at anytime, the plan is not exempt from the bankruptcy estate. First, Kleist presents a
factually dissimilar case from the case presently before the Court; here the debtor seeks to
claim funds deposited in its employee savings plan as exempt under NYDCL §282. The
plan was entitled ‘General Electric’s Savings and Security Plan’ and contained as its
stated purpose, it was “to provide employees with an opportunity for convenient, regular,
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and substantial savings.” The Bankruptcy Court agreed that the plan, unlike the plan in
this case, was nothing more than a personal savings plan. Kleist, 114 B.R at 368.
The trustee’s position is further weakened by the United States Supreme Court’s
ruling in Rousey v. Jacoway, 544 U.S. 320, 328, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005).
In Rousey, a husband and wife filed a joint petition for Chapter 7 bankruptcy and claimed
the distributions in their IRAs as property exempt from the bankruptcy estate. The
Supreme Court held that a debtor’s right to receive payment, beginning at age 59 ½
without penalty, under an Individual Retirement Account (IRA) was the right to receive
payment because of, or “on account of,” their age, and was therefore, within the meaning
of the exemption provision of the Bankruptcy Code. Id.
The federal exemption law at issue in Rousey is 11 U.S.C. § 522(d)(10)(e), which
provides in part:
a payment under a stock bonus, pension, profit sharing, annuity, or
similar plan or contract on account of illness, disability, death, age,
or length of service, to the extent reasonably necessary for the
support of the debtor and any dependent of the debtor, unless-
(i) such plan or contract was established by 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 payment is on account of age or length of service;
and
(iii) such plan or contract does not qualify under section
401(a), 403(a), 403(b), or 408 of the Internal Revenue Code of
1986.
In overruling the trustee’s objection to the debtor’s exemption, the Court
explained that because the condition is removed when the debtor reaches a certain age,
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the right to payment of the balance in the plan is “on account of” age. Rousey, 544 U.S. at
328. The Supreme Court noted “[t]hus, that there are other circumstances in which the
Rouseys can receive payment does not change our conclusion that they have a right to
payment on account of age, … . Moreover, §522(d)(10)(e) requires that the right to
payment be on account of age—not that it be solely on account of this factor.” Rousey,
544 U.S. at 329, n.3.
The Rousey Court, in determining whether to grant the Chapter 7 Trustee’s
objection to the exemption, carefully reviewed the terms of the statute and interpreted the
language “on account of” to mean “because of.” The Court explained that this meaning
comports with both the common understanding of the phrase “on account of” as well as
Congress’ intent. Therefore, “on account of” confers on the debtor the right to receive
payments from the plan “because of” illness, disability, death, age, or length of service.”
Rousey, 544 U.S. at 326-327.
Conclusion
Based on the United States Supreme Court’s ruling in Rousey, the Second Circuit
Court of Appeal’s ruling in Dubroff and the Bankruptcy Court’s decision in Ruffo, a
debtor can claim as exempt, from its bankruptcy estate “a payment under a stock bonus,
pension, profit-sharing, annuity or similar plan or contract.” The debtor’s pension plan
satisfies this requirement and contains restrictions that limit the debtor’s ability to
withdraw funds. For these reasons, the trustee’s motion objecting to the debtor’s claimed
exemption in the §401(k) pension plan is denied.
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So Ordered.
Dated: Central Islip, New York
October 20, 2006
s/ Stan Bernstein
STAN BERNSTEIN
United States bankruptcy Judge
TO:
Peter Corey, Esq.
Pryor & Mandelup
675 Old Country Road
Westbury, NY 11590
Richard S. Feinsilver, Esq.
1 Old Country Road
Suite 125
Carle Place, NY 11514
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