Matthew P Lombardy

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF OHIO
In re:
MATTHEW P. LOMBARDY,
Debtor.
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Case No. 11-17737
Chapter 7
Judge Arthur I. Harris
MEMORANDUM OF OPINION1
This matter is before the Court on the trustee’s objection to the debtor’s
claim of an exemption enumerated on Schedule C and amended Schedule C of the
debtor’s Chapter 7 petition. At issue is whether a Health Savings Account held by
the debtor is exempt as the equivalent of an Individual Retirement Account
(“IRA”). For the reasons that follow, the Court sustains the trustee’s objection to
the exemption as set forth on amended Schedule C and denies the debtor’s claim
of exemption. The Court finds that the Health Savings Account is not exempt
under either Ohio law or Section 522 of the Bankruptcy Code.
This Memorandum of Opinion is not intended for official publication.1
The court incorporates by reference in this paragraph and adopts as the findings and orders of this
court the document set forth below. This document was signed electronically on February 9, 2012,
which may be different from its entry on the record.
IT IS SO ORDERED.
Dated: February 9, 2012
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JURISDICTION
Objections to claims of exemptions are core proceedings under 28 U.S.C.
§ 157(b)(2)(B). The Court has jurisdiction over core proceedings under 28 U.S.C.
§§ 1334 and 157(a) and Local General Order No. 84, entered on July 16, 1984, by
the United States District Court for the Northern District of Ohio.
FACTS AND PROCEDURAL BACKGROUND
On September 7, 2011, the debtor filed a petition under Chapter 7 of the
Bankruptcy Code. On Schedule C the debtor claimed an exemption of $6,000 in a
Health Savings Account under Ohio Rev. Code § 2329.66(A)(10)(c). On October
27, 2011, the trustee, Steven Davis, filed an objection to the debtor’s claim of
exemption (Docket #12), and on November 15, 2011, the debtor filed his response
to the trustee’s objection (Docket #16). On November 22, 2011, the Court held a
hearing on the objection and response and ordered stipulations of fact to be filed
by December 13, 2011, and simultaneous briefs to be filed on January 9, 2012.
Following the briefing, the Court would take the matter under advisement.
On December 13, 2011, a Joint Stipulation of Facts was filed, in which the
debtor and the trustee stipulated that: “1. Debtor filed his Chapter 7 case on
September 7, 2011. 2. On the date of the filing, the debtor was the owner of a
Health Savings Account with Key Bank. . . . 3. The Health Savings Account had a
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balance on deposit of $7,743.37 on September 7, 2011.” (Docket #21). On
January 3, 2012, the trustee filed his brief in support of the objection to the
exemption (Docket #24). On January 6, 2012, the debtor filed an amended
Schedule C claiming that the amount of $7,743.37 in the Health Savings Account
was exempt pursuant to 11 U.S.C. § 522(b)(3)(C) as well as Ohio Rev. Code
§ 2329.66(A)(10)(c) (Docket ## 25 & 27). On January 9, 2012, the debtor filed
his brief in support of the claimed exemption, (Docket #28), and on January 11,
2012, the trustee filed his objection to the amended claim of exemption (Docket
#29). On February 7, 2012, the debtor filed a further response to the objection of
the trustee to the amended claim of exemption reiterating his position.
(Docket #31).
The debtor claims that he is entitled to the exemption under Ohio Rev. Code
§ 2329.66(A)(10)(c) and also pursuant to 11 U.S.C. § 522(b)(3)(C). The trustee
claims that the Health Savings Account is not entitled to exemption since it is not
a “retirement account,” as provided for under Ohio law, and it does not meet the
requirements of 11 U.S.C. § 522(b)(3)(C) as it is not exempt from taxation under
any of the Internal Revenue Code sections provided in Section 522.
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DISCUSSION
A. Exemptions: the Bankruptcy Code and Ohio Law
Section 541 of the Bankruptcy Code defines “property of the estate.”
Subject to a few specifically enumerated exceptions, the estate consists of all legal
and equitable interests in property a debtor has at the commencement of a
Chapter 7 case. See 11 U.S.C. § 541. However, the Bankruptcy Code allows a
debtor to claim certain property as exempt. See 11 U.S.C. § 522. A state may
adopt the federal exemptions contained in Section 522, or create its own
exemption framework. Id. Ohio has opted out of the federal exemptions. See
Ohio Rev. Code § 2329.662. Therefore, any property that a debtor domiciled in
Ohio seeks to exempt must fall within an exemption authorized under Ohio law or
nonfederal bankruptcy law.
Even though Ohio has opted out of the exemptions provided by the
Bankruptcy Code, it is still within the power of Congress to preempt state court
exemptions. Storer v. French (In re Storer), 58 F.3d 1125, 1128-29 (6th Cir.
1995); In re Malsch, 400 B.R. 584, 591 (Bankr. N.D. Ohio 2008). By way of the
enactment of BAPCPA in 2005, Congress exercised this prerogative, creating a2
BAPCPA is the acronym for the Congressional Act entitled the2
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Public Law
109-8, 119 Stat. 23.
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category of exemption rights that may be exercised by a debtor even if the debtor’s
state has opted out of the federal exemption scheme. 4 Collier on Bankruptcy
¶ 522.10[8] (Alan N. Resnick & Henry J. Sommer eds.,16th ed.). Pursuant to
Section 522(b)(3)(C), it is provided that, notwithstanding state law, a debtor may
exempt “retirement funds to the extent that those funds are in a fund or account
that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or
501(a) of the Internal Revenue Code of 1986.” Malsch, 400 B.R. at 592.
“The principal purpose of the Bankruptcy Code is to grant a fresh start to
the honest but unfortunate debtor.” Marrama v. Citizens Bank of Mass.,
549 U.S. 365, 367, 127 S. Ct. 1105, 1107 (2007) (internal quotations and citations
omitted). Exemptions further this policy goal by allowing a debtor to protect
property which is necessary for the survival of both the debtor and the debtor’s
family. As such, exemptions are to be construed liberally in favor of the debtor.
See Daugherty v. Cent. Trust Co. of Northeastern Ohio, N.A., 28 Ohio St.3d 441,
447, 504 N.E.2d 1100, 1104-05 (1986). A party objecting to the debtor’s claim of
exemptions “has the burden of proving that the exemptions are not properly
claimed.” Fed. R. Bankr. P. 4003(c). In support of this burden, the trustee has
raised arguments regarding the debtor’s right to claim his Health Savings Account
as exempt under both Ohio Rev. Code § 2329.66 and 11 U.S.C. § 522.
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B. Ohio Revised Code § 2329.66(A)(10)(c) and 11 U.S.C. § 522(b)(3)(C)
The first issue to address is whether the debtor’s claim of exemption is
permitted under Ohio Rev. Code § 2329.66(A)(10)(c). This section provides:
(c) Except for any portion of the assets that were deposited for the
purpose of evading the payment of any debt and except as provided in
sections 3119.80, 3119.81, 3121.02, 3121.03, and 3123.06 of the
Revised Code, the person’s right in the assets held in, or to receive
any payment under, any individual retirement account, individual
retirement annuity, “Roth IRA,” or education individual retirement
account that provides benefits by reason of illness, disability, death,
or age, to the extent that the assets, payments, or benefits described in
division (A)(10)(c) of this section are attributable to any of the
following:
(i) Contributions of the person that were less than or equal to the
applicable limits on deductible contributions to an individual
retirement account or individual retirement annuity in the year that
the contributions were made, whether or not the person was eligible
to deduct the contributions on the person’s federal tax return for the
year in which the contributions were made;
(ii) Contributions of the person that were less than or equal to the
applicable limits on contributions to a Roth IRA or education
individual retirement account in the year that the contributions were
made;
(iii) Contributions of the person that are within the applicable limits
on rollover contributions under subsections 219, 402(c), 403(a)(4),
403(b)(8), 408(b), 408(d)(3), 408A(c)(3)(B), 408A(d)(3), and
530(d)(5) of the “Internal Revenue Code of 1986,” 100 Stat. 2085, 26
U.S.C.A. 1, as amended.
In addition, the debtor claims that the Health Savings Account exemption is
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permitted under 11 U.S.C. § 522(b)(3)(C), which provides, in pertinent part:
(C) retirement funds to the extent that those funds are in a fund or
account that is exempt from taxation under section 401, 403, 408,
408A, 414, 457 or 501(a) of the Internal Revenue Code of 1986.
The debtor states in his brief in support of the exemption that the “definition
of a Health Savings Account . . . and an Individual Retirement Account . . . are
substantially the same and therefore provide equivalent protections and benefits.”
Brief in Support at 1 (“Br. in Sup.”) (Docket #28). He further states that a Health
Savings Account is defined under Section 223(d) of the Tax Code and an IRA is
defined under Section 408(a) of the Tax Code. Br. in Sup. at 2. He cites to
26 U.S.C. § 223(d) and 26 U.S.C. § 408(d) and points out that the statutes defining
the two entities have many similarities. He further states that “[c]learly, it was
Congress’ intent to make a Health Savings Account a retirement account as
defined in 26 U.S.C. § 408(d).” Br. in Sup. at 4. He concludes that a “Health
Savings Account” and an “Individual Retirement Account” are so similar that they
should be given the same treatment under Ohio law and the Bankruptcy Code.
Br. in Sup. at 4-5.
The trustee objects stating that a Health Savings Account is not a retirement
account exempt under Ohio Rev. Code § 2329.66. Brief in Support of Obj. at 2
(Docket #24). He also states that a Health Savings Account is treated for tax
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purposes under 26 U.S.C. § 223(d), and therefore does not fall under any of the
provisions of 11 U.S.C. § 522. Obj. to Am. Claim at 1 (Docket #29).
The Court first notes that the debtor’s argument violates a fundamental tenet
of statutory construction: that is, that all the words of a statute should be given
meaning. The debtor asks the Court to accept his interpretation which essentially
reads the word “retirement” out of the phrases “retirement account,” “retirement
annuity,” “Roth IRA,” “education individual retirement account,” and “retirement
funds” as used in Ohio Rev. Code § 2329.66 and 11 U.S.C. § 522.
When engaged in the task of statutory interpretation, courts must “presume
that the legislature says in a statute what it means and means in a statute what it
says there.” State ex rel. Lee v. Karnes, 103 Ohio St.3d 559, 564, 817 N.E.2d 76,
81 (2004) (internal citation omitted), citing BedRoc Ltd., LLC v. United States,
541 U.S. 176, 124 S. Ct. 1587 (2004). For this purpose, when construing Ohio
statutes, Ohio law mandates that “[w]ords and phrases shall be read in context and
construed according to the rules of grammar and common usage.”
Ohio Rev. Code § 1.42.
In addition, the court should decline to construe a “provision[] . . . nugatory,
‘thereby offending the well-settled rule that all parts of a statute, if possible, are to
be given effect.’ ” Fidelity Fed. Sav. & Loan Ass’n v. de la Cuesta, 458 U.S. 141,
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163, 102 S. Ct. 3014, 3027 (1982) (quoting American Textile Mfrs. Institute, Inc.
v. Donovan, 452 U.S. 490, 513, 101 S. Ct. 2478, 2492 (1981)). The Court
assumes that, absent any contrary definition, “Congress intends the words in its
enactments to carry ‘their ordinary, contemporary, common meaning.’ ” Pioneer
Investment Services v. Brunswick Associates, 507 U.S. 380, 388, 113 S. Ct. 1489,
1495 (1993) (quoting Perrin v. United States, 444 U.S. 37, 42, 100 S. Ct. 311, 314
(1979)). Only if the term is ambiguous should the Court proceed beyond the
language as written. United States v. Ron Pair Enterprises, 489 U.S. 235, 241,
109 S. Ct. 1026, 1030 (1989). However, the words of a statute are not to be read
in isolation when determining whether a term is ambiguous since “[s]tatutory
construction . . . is a holistic endeavor.” United Sav. Ass’n of Tex. v. Timbers of
Inwood Forest Associates, Ltd., 484 U.S. 365, 371, 108 S. Ct. 626, 630 (1988).
“Interpretation of a word or a phrase depends upon reading the whole statutory
text, considering the purpose and context of the statute, and consulting any
precedents or authorities that inform the analysis.” Dolan v. United States Postal
Service, 546 U.S. 481, 486, 126 S. Ct. 1252, 1257 (2006).
Applying these standards to this case, the Court looks to 11 U.S.C.
§ 522 (b)(3)(C) and Ohio Rev. Code § 2329.66(A)(10)(c) in determining the plain
meaning of “retirement funds” (as found in 11 U.S.C. § 522(b)(3)(C)), and
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“retirement account,” “retirement annuity,” “Roth IRA,” and “education individual
retirement account” (as found in Ohio Rev. Code § 2329.66(A)(10)(c)). The
common thread in all the relevant phrases is “retirement.” Although neither the
Bankruptcy Code nor Ohio exemption law define “retirement,” the term generally
is defined as “[t]ermination of one’s own employment or career, esp. upon
reaching a certain age . . . .” Black’s Law Dictionary 1431 (9th ed. 2009).
Although the debtor is to be commended for setting up a Health Savings Account
at a time when the cost of health care is so volatile, the word “retirement” does not
appear in the phrase “Health Savings Account.” The phrase “Health Savings
Account” cannot reasonably be understood to authorize the exemption of an
account or plan which can be used by the recipient without regard to age or
retirement status. Pursuant to 26 U.S.C. § 223(f)(1) “[a]ny amount paid or
distributed out of a Health Savings Account which is used exclusively to pay
qualified medical expenses of any account beneficiary shall not be included in
gross income.” The statute does not put any limitation on when, or at what age,
those distributions may, or must, be made. See 26 U.S.C. § 223. In contrast,
distributions made from retirement plans before the age of 59 1/2 are subject to a
tax of 10% of the amount included in gross income, to which only several
exceptions apply. See 26 U.S.C. § 72(t)(1) & (t)(2)(i).
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In addition, it is clear that neither the state of Ohio nor Congress intended to
make a Health Savings Account a “retirement account.” A Health Savings
Account’s tax status is governed by 26 U.S.C. § 223(d). Ohio Rev. Code
§ 2329.66(A)(10)(c)(iii) lists the subsections of the Internal Revenue Code which
are applicable to that exemption, and Section 223(d) of the IRS Code does not
appear in that list. In addition, 11 U.S.C. § 522(b)(3)(C) also lists “retirement
funds” which can be exempted. Again, Section 223(d) does not appear on the list.
Effective September 30, 2008, the Ohio state legislature caused significant
changes to be made to Ohio’s exemption law, 2008 Ohio Laws File 122
(Sub.S.B.281), and IRC Section 223(d) was not added to the list of tax exempt
sections included in Section 2329.66(A)(10)(c). See In re Stanger, 385 B.R. 758
(Bankr. D. Idaho 2008) (holding that the debtors’ Health Savings Account did not
fall within any of the Idaho exemptions, and noting that although other states had
amended their statutes to specifically exempt Health Savings Accounts, Idaho had
not followed suit). In addition, Bankruptcy Code Section 522 has not been
expanded to include Section 223(b).
Although the debtor correctly argues that some provisions of the Internal
Revenue Code providing for Health Savings Accounts and Individual Retirement
Accounts are similar, and that exemptions are to be construed liberally, the Ohio
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Supreme Court has spoken on these matters:
[E]ven a liberal construction of R.C. § 2329.66 does not give us
license to enlarge this statute or strain its meaning. We have made it
clear that . . . [b]y ‘liberal construction’ is not meant that words and
phrases shall be given an unnatural meaning, or that the meaning
shall be . . . expanded to meet a particular state of facts. . . . [W]e are
not free, in interpreting this statute, simply to rewrite it on grounds
we are thereby improving the law.
Daugherty, 28 Ohio St.3d at 447, 504 N.E.2d at 1105 (internal citations omitted).
Accord In re Schramm, 431 B.R. 397, 403 (6th Cir. BAP 2010) (following
Daugherty and declining to extend Ohio exemption statute to exempt insurance
proceeds from beneficiary’s own creditors). Neither 11 U.S.C. § 522 nor
Ohio Rev. Code § 2329.66 permits the debtor to exempt funds held in a Health
Savings Account.
CONCLUSION
For the foregoing reasons, the Court sustains the trustee’s objection to
exemption and denies the debtor’s claim of exemption. The debtor’s funds held in
a Health Savings Account are not exempt under either Ohio exemption law or
Section 522 of the Bankruptcy Code.
IT IS SO ORDERED.
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