Daley v. Mostoller (In re Daley)
- Citation:
- No. 12-6130, 2013 U.S. App. LEXIS 12138 (6th Cir. June 17, 2013)
- Tag(s):
-
- Ruling:
- The decisions of the bankruptcy court and the district court were reversed. The debtor is entitled to a statutory presumption that his IRA is tax-exempt. Though the debtor granted a lien in his IRA to Merrill Lynch, the debtor did not use his IRA to obtain credit from Merrill Lynch. “That a lien in some settings may be granted in connection with an extension of credit does not establish that any loan or other extension of credit occurred here.” The lien in question was “naked” and “stripped of any connection to a credit transaction.” An IRS advisory opinion that “[t]he mere existence of a ‘cross-collateralization agreement’ . . . does not by itself disqualify an IRA from exempt status” supports the circuit court’s conclusion. “At most, it is the actual use of such an agreement . . . that might disqualify a retirement account.” While the Department of Labor—the ultimate agency authority over IRAs—indicated that the grant of a security interest in an IRA amounts to an extension of credit, the Department’s view on the matter is now in flux and, therefore, “unavailing.”
- Procedural context:
- Appeal to the United States Court of Appeals for the Sixth Circuit, from the United States District Court for the Eastern District of Tennessee at Knoxville.
- Facts:
- Prior to filing a bankruptcy petition, the individual debtor opened an IRA with Merrill Lynch. In opening the IRA, the debtor signed a Client Relationship Agreement, in which the debtor pledged his IRA as security for any future debts to Merrill Lynch. However, the debtor never became indebted to Merrill Lynch. Two years later, the debtor filed a Chapter 7 bankruptcy petition and sought to exempt his IRA under 11 U.S.C. § 522(b)(3)(C). The trustee objected and argued that the IRA lost its tax-exempt status when the debtor pledged the IRA to Merrill Lynch as security. The bankruptcy court sustained the trustee’s objection, holding that the pledge language amounted to a “direct or indirect” “lending of money or other extension of credit,” which causes an IRA to lose tax-exempt status under 26 U.S.C. §§ 408(e)(2)(A), 4975(c)(1)(B). The district court affirmed the bankruptcy court, and the debtor appealed to the circuit court.
- Judge(s):
- Martin, Sutton, and Adams
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