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In re Yerian

United States Court of Appeals, Eleventh Circuit

June 26, 2019

In re: KEITH A. YERIAN, Debtor.
v.
RICHARD B. WEBBER II, as Trustee, Plaintiff-Appellee. KEITH A. YERIAN, Defendant-Appellant,

          Appeal from the United States District Court for the Middle District of Florida D.C. Docket Nos. 6:17-cv-00459-RBD; 6:15-bkc-01720-KSJ

          Before MARCUS, GRANT, and HULL, Circuit Judges.

          GRANT, CIRCUIT JUDGE:

         Keith Yerian made some interesting choices with respect to the management of his individual retirement account. These choices included titling IRA-owned cars in his own name and his wife's name, as well as purchasing a condo in Puerto Rico with IRA funds and then using the condo for his personal travel needs. Yerian concedes that he incurred over one hundred thousand dollars in tax penalties for abusing his IRA. Ordinarily, that abuse would disqualify him from claiming the wide range of favorable treatment and exemptions typically offered to IRAs. But Yerian-now in bankruptcy proceedings-nonetheless seeks to shield the IRA from distribution to his creditors. He argues that Florida has exempted IRAs from bankruptcy administration so long as they were originally established with proper documentation. Fortunately for Yerian's creditors, and unfortunately for him, his interpretation of the text cannot be supported; he forfeited his exemption when he engaged in self-dealing transactions prohibited by the IRA's governing instruments. We therefore affirm the district court's order, which in turn upheld the bankruptcy court's decision to deny the exemption.

         I.

         A.

         When a debtor files for Chapter 7 bankruptcy, his assets become property of the bankruptcy estate, to be distributed among his creditors. See 11 U.S.C. § 541(a)(1). The debtor may, however, exempt certain types of property from the estate. 11 U.S.C. § 522(b). Exempt assets are "withdrawn from the estate (and hence from the creditors) for the benefit of the debtor." Owen v. Owen, 500 U.S. 305, 308 (1991). A Chapter 7 debtor is not required to turn over exempt assets to the trustee and can keep them after the bankruptcy case is finished. And these carve-outs are sturdy; once a debtor invokes an exemption, a "court may not refuse to honor the exemption absent a valid statutory basis for doing so." Law v. Siegel, 134 S.Ct. 1188, 1196 (2014).

         The bankruptcy code provides a list of federal exemptions, but also permits a state to opt out and replace the federal blueprint with an exemption scheme of its own. 11 U.S.C. § 522(b). Florida, as an opt-out state, has accepted that invitation to substitute its own set of exemptions. See Fla. Stat. § 222.20; In re Valone, 784 F.3d 1398, 1400 n.1 (11th Cir. 2015). One of those exemptions applies to "pension money and certain tax-exempt funds or accounts"-including IRAs-so long as a debtor meets certain statutory requirements. Fla. Stat. § 222.21. It is this exemption that we consider here.

         B.

         The relevant facts are not in dispute. In 2012, Keith Yerian opened a self-directed IRA with IRA Services Trust Company. The IRA's primary asset was an LLC through which Yerian purchased, among other things, real estate and two used cars. Yerian established this account as an IRA, "but then treated the money as his own." He used IRA funds to buy a condominium in Puerto Rico, for example, then impermissibly stayed there "for an un-IRA-related purpose." He and his wife also took title to two cars, a Smart Car and a Suburban, both purchased with IRA funds. Yerian then spent thousands of IRA dollars on car repairs, and he allowed his wife to drive the Suburban "as her vehicle."[1] He does not contest that these acts of self-dealing constituted "prohibited transactions" under the Internal Revenue Code and thus made his IRA ineligible for federal tax-exempt status as of January 1, 2014.

         On February 27, 2015, Yerian filed for Chapter 7 bankruptcy. After failing to disclose his IRA on the asset schedules originally accompanying his petition, Yerian eventually amended his filings to disclose the IRA-and also to claim a Florida-law exemption for it. Richard Webber, the bankruptcy Trustee, objected to the claim of exemption and initiated an adversary proceeding to resolve the issue.[2]After a two-day trial in late 2016, the bankruptcy court issued oral findings of fact and conclusions of law. Concluding that Florida law does not allow a debtor to claim an exemption for an IRA operated in violation of the federal tax code, the bankruptcy court issued a written order sustaining the Trustee's objection and directing the Trustee to seize the IRA on behalf of Yerian's creditors. Yerian sought review of the order denying his claim for the IRA exemption, and the district court affirmed. This appeal followed.

         II.

         In a bankruptcy appeal, this Court "sits as a second court of review and thus examines independently the factual and legal determinations of the bankruptcy court and employs the same standards of review as the district court." In re Hood, 727 F.3d 1360, 1363 (11th Cir. 2013) (internal quotation marks and citation omitted). Accordingly, we "review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo." Id. We may affirm the judgment below on any ground supported in the record. See Jackson v. Bank of Am., N.A., 898 F.3d 1348, 1356 (11th Cir. 2018).

         "Generally speaking, courts construe bankruptcy exemption statutes-both state and federal-liberally in favor of bankruptcy debtors." In re McFarland, 790 F.3d 1182, 1186 (11th Cir. 2015). The "burden is on the party objecting to exemptions to prove, by a preponderance of evidence," that the exemption cannot be claimed. Id. (citing Fed.R.Bankr.P. 4003(c)). It is therefore the Trustee's burden to prove that Yerian was not entitled to shield his IRA under Florida law.

         III.

         Yerian contends that section 222.21(2)(a)(2) of the Florida Statutes places his IRA beyond the reach of his creditors. Under that provision, a debtor may exempt from bankruptcy administration any money in "a fund or account" that is

[m]aintained in accordance with a plan or governing instrument that has been determined by the Internal Revenue Service to be exempt from taxation under s. 401(a), s. 403(a), s. 403(b), s. 408, s. 408A, s. 409, s. 414, s. 457(b), or s. 501(a) of the Internal Revenue Code of 1986, as amended, unless it has been subsequently determined that the plan or governing instrument is not exempt from taxation in a proceeding that has become final and nonappealable.

Fla. Stat. § 222.21(2)(a)(2) (footnote omitted).

         Section 408 of the Internal Revenue Code is the relevant provision in this case. That statute, among other things, sets out the requirements for an IRA to receive tax-exempt status under federal law. See 26 U.S.C. § 408. Section 408 first sets out six minimum requirements for the terms of the "written governing instrument" that legally establishes the IRA. See id. § 408(a). These requirements are important, but may read as rather arcane to the uninitiated. They range from permitting only cash contributions (and only in an amount corresponding to the limit in effect for that taxable year), to mandating particular rules relating to incidental death benefits. See id. ยง 408(a)(1)-(6). We will not belabor these requirements, however, because none of them are directly at issue ...


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