Washington Post Staff Writer
Tuesday, April 5, 2005; Page A09
The Supreme Court affirmed protections for the retirement savings of debt-strapped older workers yesterday, ruling unanimously that a bankrupt debtor's individual retirement account must generally be kept off-limits to his creditors.
In an opinion written by Justice Clarence Thomas, the court ruled that IRA assets are shielded by the same provision of the bankruptcy code that says debtors may keep a "reasonabl[e]" amount of the money they would be entitled to have under a pension, annuity or other age-based income scheme.
Though not specifically listed in a federal statute naming these exemptions, IRAs are similar to them, Thomas wrote. He added that, like a pension, an IRA is paid out on the basis of age, because the government charges a 10 percent penalty for withdrawals before age 59 1/2.
"The Supreme Court has preserved retirement savings from creditors in bankruptcy when you need the money to survive," said Thomas C. Goldstein, a Washington lawyer who represented the debtors in the case, Rousey v. Jacoway, No. 03-1407.
The ruling's impact is somewhat limited by the fact that, as of 2004, 36 states, including Maryland, had already exercised their right to create a clear exemption for IRAs for their citizens facing bankruptcy. Virginia and the District of Columbia had offered more limited protections for IRA assets.
Additionally, bankruptcy courts may still give creditors access to debtors' IRAs in cases in which the debtors are young enough to be able to rebuild their retirement savings later on, Goldstein said.
The court did, however, resolve an ambiguity created by a 2003 decision of the St. Louis-based U.S. Court of Appeals for the 8th Circuit, which -- alone among the appeals courts -- had said that IRAs were not exempt.
Goldstein said that the married couple he represented, Richard Rousey, 57, and Betty Jo Rousey, 53, exemplify beneficiaries of the court's decision. Former Northrop Grumman employees, the Rouseys had rolled over lump-sum distributions from a company pension into IRAs worth a total of about $56,000 by the time they declared Chapter 7 personal bankruptcy in 2001.
"There's no way in the world they were going to build up their retirement savings again," Goldstein said.
Jill R. Jacoway, who had been appointed the Chapter 7 trustee overseeing the Rouseys' case, had argued that because they could withdraw their IRA funds at any time and for any reason by paying a penalty, that money should not be exempt under the law.
Separately, the court announced yesterday that it will decide whether states are immune from federal efforts to make them pay money to creditors in bankruptcy proceedings.
The Constitution gives Congress the power to make "uniform law" regarding bankruptcies. The question, however, is whether that power trumps the states' right to resist lawsuits seeking monetary damages, which the Supreme Court has upheld in a series of recent cases.
At issue in Central Virginia Community College v. Katz, No. 04-885, is an attempt by the liquidating supervisor of a bankrupt Virginia bookstore to collect money owed to it by four public educational institutions in Virginia -- so that this money may, in turn, be paid to the bookstore's creditors.
The educational institutions, three community colleges and Virginia Military Institute, asserted state sovereign immunity. The U.S. Court of Appeals for the 6th Circuit, based in Cincinnati, ruled in favor of the liquidator, Bernard Katz, and the institutions appealed to the Supreme Court.
In a friend-of-the-court brief, Virginia's 49 fellow state governments asked the court to hear the case because it "could have a significant impact on the public fisc [treasury] of all the states."
The court heard a similar case last year but disposed of it on technical grounds. So it was expected that the justices would find another case in which to decide the central issue of state sovereignty.
Oral argument in the case is to take place next fall, and a ruling is expected by July 2006.