In re Acarregui

Citations: 572 B.R. 247; 2017 Bankr. LEXIS 1473Docket: Bankruptcy Case No. 16-00839-JDP

Court: United States Bankruptcy Court, D. Idaho; May 31, 2017; Us Bankruptcy; United States Bankruptcy Court

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Debtor Julie Acarregui filed for bankruptcy, claiming exemptions for funds in three college savings accounts under Idaho Code 11-604A, while Trustee Janine Reynard objected to these claims. The bankruptcy court held a hearing on April 4, 2017, where parties presented stipulations and oral arguments. They agreed that deposits and earnings in these accounts before June 17, 2015, are excluded from the estate under 11 U.S.C. § 541(b)(6). However, the funds deposited between June 27, 2015, and June 27, 2016, totaling $6,504.04, are deemed property of the estate. Acarregui contended these funds are exempt under Idaho law, but the Trustee argued that the accounts were not established under the Idaho College Savings Program (IDEAL). The parties clarified that the accounts were created under Virginia’s program. The court's analysis revolves around whether Acarregui’s interest in these funds qualifies for exemption under Idaho Code 11-604A, marking a unique legal question in the district. The court concludes that the funds in question are not exempt based on the applicable law.

When a bankruptcy petition is filed, all legal and equitable interests of the debtor automatically flow into a bankruptcy estate, as defined by 11 U.S.C. § 541(a). However, certain property interests are excluded from this estate under § 541(b), notably to promote college savings while protecting creditors from abusive practices. Specifically, § 541(b)(6) exempts funds contributed to college savings accounts under a qualified State tuition program, as outlined in the Internal Revenue Code, if contributed within 365 days before the bankruptcy filing. In this case, the parties have agreed that most funds in the debtor's college savings accounts are excluded from the estate, with only $6,504.04 attributable to recent contributions and earnings being included.

Additionally, the bankruptcy code allows debtors to protect certain property through exemptions. Idaho has opted out of the federal exemption scheme, permitting the debtor to claim exemptions only under Idaho law and those listed in § 522(b)(3). The debtor asserts that her non-excluded interest in the college savings accounts is exempt under Idaho Code § 11-604A, which protects pensions and similar benefits, including certain college savings accounts defined as employee benefit plans.

The dispute between the parties centers on the interpretation of § 11-604A(4)(b), which refers specifically to college savings programs established under Idaho's IDEAL program. The trustee contends that only accounts under this program qualify for exemption. Conversely, the debtor argues for a broader interpretation, asserting that the exemption should extend to her accounts, which were established under Virginia law, to avoid an unfair result where similar accounts are treated differently based solely on their state of establishment.

Interpretation of Idaho Code 11-604A mandates that the Court adhere to the Supreme Court of Idaho's standard, which emphasizes the examination of the statute's literal wording. If the language is clear and unambiguous, it is applied as written without further construction; ambiguity arises only when reasonable interpretations differ. In Idaho, exemption statutes favor liberal construction for debtors, but this does not permit distortion of statutory language. 

The Court analyzed the exemption statute concerning "a college savings program" and concluded that it only applies to accounts under the IDEAL program, as the phrase is clearly defined by the subsequent language in the statute. The debtor's argument that 'described' should include similar programs was rejected; while the debtor pointed out that the financial institution holding the funds is authorized in Idaho, this interpretation would overlook other statutory requirements specific to the IDEAL program. The IDEAL program board, established under Idaho Code 33-5402, has defined essential rules for account management, including application processes, fees, and beneficiary changes, which are also critical to determine account eligibility for exemption.

The provisions indicate that the 'college savings program' referenced in Idaho Code 11-604A(4)(b) pertains exclusively to the IDEAL program under Idaho Code chapter 54, title 33, excluding any other state programs, such as the Virginia program. Since the Debtor's accounts do not fall under the IDEAL program, the funds in those accounts that are not part of the estate are not exempt from creditors. Legislative history reinforces this interpretation, with the 2001 Senate Bill 1118 clarifying that college savings plans were not adequately covered in prior legislation and affirming that the amended statute explicitly includes only the IDEAL program. The Court emphasizes that the amendment occurred shortly after the IDEAL program's enactment, suggesting the Legislature's intent was to specifically exempt accounts from this program, rather than a broader interpretation including other 529-compliant accounts. The Debtor's argument against this interpretation, claiming it leads to an absurd result by protecting IDEAL accounts while exposing similar out-of-state accounts, is noted but ultimately rejected by the Court.

The Idaho Supreme Court generally avoids statutory interpretations that lead to absurd or harsh outcomes, but the Court's interpretation of the exemption statute in question is not seen as such. The Idaho Legislature intended to protect college savings accounts under the IDEAL program specifically, which is not inherently unreasonable. The Legislature's choice to favor these accounts suggests an effort to promote the program’s success and maintain local control. The decision not to broadly exempt all qualified college savings programs, such as those referenced under the Internal Revenue Code, indicates a deliberate legislative intent. 

Regarding the motion to compel abandonment of college savings accounts, the Court stated that abandonment should be an exception, particularly when property is not burdensome or lacks value to the estate. The Debtor failed to demonstrate that her nonexempt interest in these accounts was burdensome. Consequently, the college savings accounts, valued at $6,504.04 plus any post-petition dividends and capital gains, remain part of the bankruptcy estate and are not exempt. The Court will deny the Debtor’s motion to compel abandonment. Additionally, earlier claims of exemption by the Debtor were amended, and the creditor, Meridián CenterCall, L.L.C., filed objections to these claims. A separate order will be issued to document the Court's conclusions and findings.

On March 15, 2017, the creditor indicated it would no longer participate in the contested matter involving the Debtor's exemptions and has since taken no further action. The case In re McFarland involved an account under the IDEAL program, where the issue was whether the debtor needed to be the account's beneficiary for an exemption claim. In contrast, In re Bourguignon dealt with a college savings account under New Mexico law, which the debtors did not claim as exempt; thus, the court only considered its status as property of the estate. The federal guidelines for qualified tuition programs, established under 26 U.S.C. 529, are relevant, and Idaho Code 33-5403(6) mandates IDEAL program compliance with IRC 529. Notably, while IRC 529 was enacted in 1996, the corresponding Idaho statutes were added later, in 2000 and 2001. The Debtor's argument is questioned, as account applications reveal she opened them while residing in Idaho. The court notes that only part of the college savings account funds are considered property of the bankruptcy estate and cautions against cashing in these accounts due to potential tax implications. The court encourages exploring alternatives that would allow the Debtor to compensate the estate from other sources while keeping the accounts intact and expresses a willingness to approve reasonable solutions to balance the parties' interests.