The United States Bankruptcy Court, in Alexandria, in the case of In re: Bissell, ruled that where a debtor has an IRA, an SEP and an ERISA-qualified pension plan, his exemption under Virginia Code §34-34 is computed without regard to the pension plans. The Bankruptcy Court rejected the creditor’s attempt to apply the value of the ERISA-qualified plan to the amount exempt under Virginia law, so as to wipe out the exemption for the IRA or the SEP and obtain an additional $71,538 for the bankruptcy estate.
The debtor asserted that the maximum exemption allowable under Virginia Code §34-34 for his individual retirement account and his simplified employer plan was computed without regard to his ERISA-qualified pension plan. He aggregated the value of the IRA and the SEP and applied the maximum allowable under exemption, $52,955, against this amount. He acknowledged that since the IRA and SEP have a total value of $71,538.52, the excess over the maximum allowable exemption of the IRA and SEP, $18,583.52, was not exempt under Virginia Code §34-34. The ERISA-qualified pension plan does not form a part of the computation because it, unlike the IRA and SEP, is not property of the estate.
The creditor asserted that the value of the ERISA-qualified pension plan must first be applied to the $52,955 amount exempt under Virginia Code §34-34. Since the pension plan had a value of $363,915.13, this method of computing the allowable exemption would exhaust the $52,955 exemption allowed under §34-34. There would be no exemption remaining available for the IRA or the SEP and the full value of the two accounts, $71,538.52, would be turned over to the trustee.
The Bankruptcy Court found that the creditor’s interpretation of §34-34 was contrary to the commonly accepted practice. The Bankruptcy Court ruled that the definition of “retirement plan” in Virginia Code §34-34 must be read narrowly to exclude ERISA-qualified pension plans. To hold otherwise would invoke federal preemption which would exclude ERISA-qualified pension plans in any event and possibly preempt the entire statute. It would frustrate the General Assembly’s intent to protect retirement plans.
The Bankruptcy Court ruled that the Virginia General Assembly confronted the inherent problems in using §55-19 and spendthrift trusts to protect retirement plans. It sought for the first time to comprehensively remedy the problems and to provide greater and better protection for retiree’s pension plans, in particular ERISA-qualified pension plans. The General Assembly’s chosen route was the establishment of a uniform exemption for all retirees. The Supreme Court’s subsequent decision in Patterson v. Shumate changed one of the underlying assumptions of the General Assembly by definitively holding that ERISA-qualified pension plans were not property of the bankruptcy estate. Had the General Assembly intended to adhere to the uniform exemption for retirees, it could have easily amended Virginia Code §34-34 to expressly reduce the exemption of non-ERISA-qualified pension plans, such as IRAs and SEPs, that were covered by Virginia Code §34-34 by the amount of any ERISA-qualified pension plan excluded from the bankruptcy estate or exempt from creditors in a state court proceeding. It did not. It accepted that ERISA-qualified pension plans could be reached by neither bankruptcy trustees in bankruptcy nor creditors in state court and it expanded the exemptions available based, in part, on this premise. The 1996 General Assembly protected rollover contributions. In 1999, the General Assembly added Roth IRAs. With some restrictions, the 1999 amendment also placed IRAs, SEPs, and Roth IRAs on the same footing as 401 plans and other ERISA-qualified pension plans. This partially reduced the inequality between those plans, although it did not completely eliminate it. The Bankruptcy Court ruled that the creditor’s position in this case ran counter to the expanding protections provided by the General Assembly over the last decade and the judicial role of liberal construction of exemption statutes. Its implicit construction contracts the exemption and magnifies the very inequality the General Assembly sought to minimize.
The Bankruptcy Court overruled the creditor’s objection to debtor’s claim of exemption. The amount of the exemption of the IRA and the SEP under Virginia Code §34-34 was computed without regard to the ERISA-qualified pension plan. The IRA and SEP were exempt in the aggregated amount of $52,955 plus any additional amount allowable under Virginia Code §34-4.
