Court Finds Bankruptcy Is Not a Protection of IRA Assets

February 25, 2004 ( - An ex-wife is entitled to recover proceeds from an Individual Retirement Account (IRA) withdrawal her former spouse initiated, even though the withdrawal occurred while the husband filed for bankruptcy.

>The US 1 st Circuit Court of Appeals, overturning an earlier bankruptcy court ruling, ruled the husband should restore the wife’s position she would have been in had her husband not misapplied the assets for his own use. Thus, it ruled that the husband held the IRA in a constructive trust for his wife, subject to the family court’s ultimate determination of its ownership, according to a Thompson Publishing report.

>This after a family court issued an order during the divorce proceedings of Laurie Davis and Thomas Cox in November 1998. The order held that pursuant to Maine law, a preliminary injunction barring Davis and Cox from transferring or otherwise disposing of their property. Despite this injunction, Cox made withdrawals from an IRA.

>However, on the date scheduled for the couple’s divorce hearing, Cox informed the divorce court he was filing for bankruptcy, afterwards contending his IRA was exempt from his bankruptcy estate and, as such, Davis could not through the divorce proceedings obtain any of the IRA’s assets. The divorce court rejected Cox’s contention and found it was equitable to award Davis $65,250 as a sanction against Davis for withdrawing funds from the IRA after he was preliminarily enjoined from doing so.

>To arrive at its decision, the appellate court looked to Maine’s domestic relations law and found that Davis possessed at the time of Cox’s bankruptcy an equitable interest in the IRA such that it was prevented by bankruptcy code Section 541(d) from becoming a part of Cox’s bankruptcy estate. In so ruling, the majority noted that the statutory language and scheme of Maine’s divorce law indicated the Maine legislature’s “approval of supplemental measures that a court might find reasonable and necessary to achieve the goal of safeguarding the marital estate until it can be properly divided.”

The case is Davis v. Cox, 1st Circuit, No. 02-1962.