MINNESOTA COURT OF APPEALS DECISION BROADENS EXEMPTION FOR DEBTORS
In Russell's AmericInn, LLC v. Eagle General Contractors, LLC, --- N.W.2d ---, 2009 WL 2928544 (Minn. Ct. App. Sept. 15, 2009), the Minnesota Court of Appeals held, for the first time in a Minnesota state appellate decision, that the exemption from garnishment and attachment applicable to individual retirement accounts, Roth IRAs, and the other accounts identified in Minn. Stat. § 550.37, subd. 24(a) applies to all funds, regardless of whether or not the original source of those funds was employment or self-employment.
For many years, courts have struggled with the question of whether funds not derived from employment activity qualify for the exemption available under Minn. Stat. § 550.37, subd. 24(a). That subdivision identifies the following property as exempt from attachment, garnishment, or sale by creditors:
Subd. 24 Employee benefits
(a) The debtor’s right to receive present or future payments, or payments received by the debtor, under a stock bonus, pension, profit sharing, annuity, individual retirement account, Roth IRA, individual retirement annuity, simplified employee pension, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent of the debtor’s aggregate interest under all plans and contracts up to a present value of $30,000 [now $63,000] and additional amounts under all the plans and contracts to the extent reasonably necessary for the support of the debtor and any spouse or dependant of the debtor.
Debtors seeking to protect their assets have frequently asserted that this exemption applies to each of the numerous types of accounts identified in this subdivision regardless of the original source of the funds in those accounts. Aggressive creditors, on the other hand, have argued that because this subdivision contains the heading "Employee benefits" it applies only to funds derived from employment or self-employment and the burden of proving that the funds qualify for the exemption falls upon the debtor. Creditors have in some instances succeeded with this argument. See, e.g., In re Raymond, 71 B.R. 628, 630 (Bankr. D. Minn. 1987); In re Schuette, 58 B.R. 417, 421 (Bankr. D. Minn. 1986). Until very recently, no Minnesota state appellate decision squarely addressed the application of this exemption.
However, in Russell's AmericInn, the Minnesota Court of Appeals rejected the arguments relied upon by creditors: "We conclude that the express language of subdivision 24(a) is void of any reference, let alone requirement, that funds be derived as a result of employment." The court further held that it is "inappropriate to use the heading as an indication of legislative intent" to limit the exemption only to employment-related funds.
What the Russell’s AmericInn Decision Means for Lenders and Creditors
Lenders and other creditors, particularly those obtaining personal guaranties, should take note of the Russell’s AmericInn decision and its expansion of the exemption of accounts from attachment and garnishment. Absent further appellate review of this decision or legislative action, debtors can now place money outside the reach of creditors by placing non-employment-related funds into IRAs, Roth IRAs and the other accounts identified in Minn. Stat. § 550.37, subd. 24(a).
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