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Borrower beware: Don’t pledge your retirement away

By Kathleen L. DiSanto, Bush Ross, P.A.

The Eleventh Circuit’s decision in Kearney and Surety Company of America appears to stand for the proposition that the grant of an all-asset pledge includes an individual retirement account.1 Stripped down to a basic level, the Eleventh Circuit’s conclusion seems unsurprising, at least at first blush. Indeed, such a result is entirely consistent with black-letter law and a nearly unbroken line of cases concerning the interpretation and enforcement of security interests and the availability and application of exemptions under the Florida Statutes. Nothing stops a borrower or pledgor from pledging property that would otherwise be exempt under Florida law as security for a loan or an obligation. And a security interest is enforceable between the pledgor and secured party, even if the secured party’s interest is not properly perfected. But what seems to be a very straightforward opinion by the Eleventh Circuit gives short shrift to the complex facts underlying the dispute (and the court acknowledges as much).2 A closer examination of the facts, however, reveals just how extraordinary and, perhaps, groundbreaking the Kearney Construction opinion actually is. A review of the decisions below suggests that the actual holding of the Eleventh Circuit may be that if an owner of an individual retirement account pledges that account as collateral, the claim of exemption is destroyed as to any creditor of the account owner, not just the secured party who was granted the lien in the collateral. The opinion also can be extrapolated to impose a steeper evidentiary burden on judgment debtors who wish to preserve their claim of exemption with respect to their individual retirement accounts.

The first clue that the Kearney Construction opinion is not what it seems is that the parties named in the case caption are not the pledgor and pledgee with respect to the security interest that is the subject of the opinion. The decision emanates from Travelers Casualty and Surety Company of America’s (Travelers) efforts to enforce a judgment it obtained against Bing Charles W. Kearney (Mr. Kearney), a well-known businessman and construction magnate of the Tampa Bay area. Travelers served a writ of garnishment on US-Ameribank, the institution where Mr. Kearney maintained his individual retirement account (the IRA). USAmeribank answered the writ of garnishment, indicating that it was indebted to Mr. Kearney in the total amount of $1,158,037.38, and identified a number of accounts in which Mr. Kearney had an interest, including the IRA, which had a balance in excess of $450,000.00.3 Mr. Kearney asserted that the IRA was exempt pursuant to section 222.21(2) of the Florida Statutes.

Some years prior to the entry of the Travelers judgment, Mr. Kearney obtained a line of credit from Moose Investments of Tampa LLC (Moose Investments), which was owned by Mr. Kearney’s son, yet over which Mr. Kearney himself asserted “considerable control.”4 To secure the line of credit, Mr. Kearney granted a security interest to Moose Investments of “all assets and rights of the Pledgor.”5

When Travelers sought to enforce its judgment against the IRA, Mr. Kearney took the position that he never intended to pledge the IRA as collateral for the line of credit. Mr. Kearney offered his own affidavit and an affidavit of the manager of Moose Investments to provide evidence of this fact. The Eleventh Circuit accepted the district court’s rejection of the affidavits of Mr. Kearney and the manager based on the fact that they were “self-serving … conclusory, uncorroborated, and indeed contradicted by other evidence record.”6 The other evidence in the record included the manager’s prior affidavit and filings by Mr. Kearney, both of which asserted that Moose Investments had a superior lien in the garnished funds.7 Given the evidentiary problems with the affidavits, the rejection of Mr. Kearney’s argument that he did not intend to pledge the IRA is not terribly surprising.

Mr. Kearney then argued that Moose Investments was not properly perfected as to the IRA because Moose Investments did not have possession or control over the IRA.8 Keeping in mind that the Kearney Construction opinion was written for the benefit of the parties who were well versed in the facts and the legal arguments that had been advanced in the appeal and below, the Eleventh Circuit wrote in judicial shorthand and did not elaborate on or offer any legal analysis to support its conclusion that “the critical issue [was] whether the IRA account was used as security for a loan, not whether the security interest was perfected.”9 That is why parties who may argue the Kearney Construction opinion in the future (or those who may be responding to such arguments) should analyze the decisions from the district court and the parties’ briefs to understand why the grant of the security interest by Mr. Kearney to Moose Investments was the key issue to the courts.10 As explained in the In re Roberts case, “[f]rom the clear language of the Tax Code, a pledge of funds in an IRA constitutes a distribution of the funds to the individual,” the ef-fect of which is “that the funds are no longer considered to be IRA funds and therefore, that the funds are no longer exempt.”11 However, the Roberts case does not indicate whether the lender was properly perfected as to the account, such that it had actual possession or control of the account at issue in that case. It is clear from the Kearney Construction opinion that the Eleventh Circuit did not believe it was necessary to reach the issue, as the court summarily states that “an unperfected security interest is nevertheless enforceable between the parties,” even though Travelers, who was not a party to the pledge agreement between Mr. Kearney and Moose Investments, was the party who would benefit from the pledge of the IRA. Nevertheless, it is worth noting that neither the court opinions from the Eleventh Circuit or the district court nor the parties’ briefs cite any case law specifically addressing the issue as to whether the secured party must be properly perfected for the pledge of funds in an IRA to constitute a distribution for purposes of the Tax Code or whether the distribution is completed merely upon execution of the security agreement or pledge.

Finally, Mr. Kearney contended that, as a matter of law, the IRA was exempt from creditors’ reach pursuant to section 222.21(2) of the Florida Statutes,12 which provides that 100% of the value of an eligible individual retirement account is exempt.13 The Eleventh Circuit devoted an entire footnote to rejecting this argument.”14 As explained by the Eleventh Circuit, section 222.21(2)(a)(1) provides that an individual retirement account is exempt from the claims of all creditors if it is maintained in accordance with a plan or governing instrument that has been preapproved by the Internal Revenue Service as being exempt from taxation. Section 222.21(2) (a)(2), in turn, applies to individual retirement accounts that are not subject to preapproval—in that instance, the statute provides that such plan or governing instrument must be determined by the Internal Revenue Service to be exempt from taxation. Interestingly, the Eleventh Circuit did not hold that Mr. Kearney’s IRA was not a preapproved IRA under subsection 1. Rather, in rejecting Mr. Kearney’s argument that the IRA was exempt under subsection 1, the court found that Mr. Kearney did not put forward any evidence that the IRA was a preapproved individual retirement account. However, that inquiry is usually simple to resolve, based on an examination of the individual retirement account’s plan documents or governing instruments. The parties control the evidence that is placed into the record, so one wonders if the necessary evidence was offered.

Relying on its prior decision In re Yerian, the Eleventh Circuit made quick work of Mr. Kearney’s arguments under the second subsection of section 222.21(2)(a) of the Florida Statutes.15 For an individual retirement account to qualify as exempt under section 222.21(2)(a)(2), the Eleventh Circuit tasked the party claiming the exemption with providing evidence of the determination by the Internal Revenue Service that the individual retirement account is exempt.16 Mr. Kearney failed to offer any evidence that he had obtained such a determination from the Internal Revenue Service with respect to the IRA.17

It is important to recognize that the Yerian decision involved arguments under 222.21(2)(a)(2) only and a factual scenario where the individual retirement account owner treated the account as his personal piggy bank, making withdrawals to pay for a condominium in Puerto Rico and two cars.18 Yet, even under those facts, the Eleventh Circuit offered a detailed explanation as to why Yerian’s individual retirement account did not qualify for exempt status under the Internal Revenue Code. However, while the Eleventh Circuit’s ruling in Kearney Construction seems to be an extension of Yerian, it has the dangerous potential for collapsing the difference in the analysis between evaluating whether an individual retirement account that is managed by a plan or governing document that has been preapproved is exempt or whether it is exempt based on a determination by the Internal Revenue Service. Nor does the Kearney Construction opinion offer the detailed analysis provided by Yerian itself, which explains precisely why the individual retirement account in that case did not meet the requirements under section 222.21(a)(2) of the Florida Statutes.

In affirming the decision of the district court, the Eleventh Circuit concluded that Mr. Kearney’s IRA was not exempt and was subject to Travelers’ writ of garnishment. While the courts may have reached the right result, the oversimplified analysis may threaten Florida’s statutory exemption for individual retirement accounts and have the unanticipated consequence of forcing debtors to expend additional resources to meet the evidentiary burden potentially established by the Eleventh Circuit in the Kearney Construction opinion, even if the debtor is utilizing a basic individual retirement account product governed by a preapproved plan or other governing instrument.19

a This article is reprinted with permission of the Out-of-State Division of The Florida Bar. This article was previously published in the Summer 2021 edition of State-to-State.
1 795 Fed. Appx. 671 (11th Cir. 2019).
2 Id at 673 (“Because we write only for the benefit of the parties, who are already familiar with the facts, we mention only such facts as are necessary to understand our reasoning.”).
3 Kearney Constr. Co., LLC v. Travelers Cas. & Surety Co. of America, Case No. 8:09-cv-1850-T-301BM, 2017 WL 4277164, at *1 (M.D. Fla. Aug. 16, 2017) (the “Magistrate Report”). 4 Kearney Constr., 795 Fed. Appx_ at 673,11.3.
5 Id
6 Magistrate Report, at *11-12.
7 Kearney Constr, 795 Fed. Appx. at 674.

8 Id at 674-75.
9 Id at 675.
10 The first argument might well be that the Eleventh Circuit’s opinion was not selected for publication and, as an unpublished opinion, is not binding precedent on future Eleventh Circuit panels that may be presented with the same issues. While Federal Rule of Appellate Procedure 32.1 provides that a court may not prohibit or restrict the citation of federal judicial opinions designated as “unpublished” and issued on or after January 7, 2007, the use of the opinion is still governed by the local rules of the Circuit. The Eleventh Circuit Rule 36-2 states that unpublished opinions are not considered binding precedent and may be cited only as persuasive authority.
11 In re Roberts, 326 B.R 424, 426 (Bankr. S.D. Ohio 2004) (citing Lewis v. Bank of America, 343 F.3d 540, 545 (5th Cir. 2003)); see also 26 U.S.C. §§ 408(d) and (eX4).
12 Section 222.21 of the Florida Statutes was enacted in 1987 and was patterned after a Kansas statute. Dunn v. Doskocz, 590 So.2d 521, 522 (Fla. 3d DCA 1991) (“[T]he purpose of the statute is to confer on retirement plans a broad exemption from the claims of creditors.”).
13 Kearney Constr., 795 Fed. Appx_ at 674-75, n.7.
14 Id

5 Id at 674-75, n_7 (citing In re Yerian, 927 F.3d 1223, 1226 (11th Cir. 2019)).
16 Id (citing Kane v. Stewart Tilghman Fox & Bianchi, P.A., 197 So. 3d 137, 141 (Fla. 4th DCA 2016) (“[T]he party seeking an exemption from garnishment has the burden of proving entitlement to the exemption.”)).
17 Id.
18 Yerian, 927 F.3d at 1226, 1228-29 (“We start with an observation about the statute’s structure. Section 222.21 of the Florida Statutes imposes different exemption requirements on different IRAs, depending on whether and how the Internal Revenue Service has signed off on these provisions.”).
19 Proposed legislation originated by the Real Property Probate and Trust Law Section and supported by the Business Law Section’s Legislation Committee may give borrowers and judgment debtors with individual retirement accounts some hope for the future.