FARBER

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

STEPHANIE PAULA FARBER :

: CIVIL ACTION

v. :

: NO. 22-CV-1817

LYNN E. FELDMAN, ESQUIRE, As Chapter :

7 Trustee : Bankr. No. 21-12147

MEMORANDUM OPINION

Goldberg, J. September 4, 2025

Debtor Stephanie Paula Farber, has appealed from the April 26, 2022 Opinion and Order

of United States Bankruptcy Judge Patricia Mayer sustaining the Bankruptcy Trustee’s objection

to the debtor’s claimed exemption of her IRA, thereby disallowing the exemption. The threshold

question presented to Judge Mayer was whether a traditional IRA in the debtor’s name funded

with monies from an inherited IRA was exempt from her bankruptcy estate under Section

522(d)(12) of the Bankruptcy Code. Because I find that it is not exempt, I will affirm Judge

Mayer’s decision.

FACTUAL AND PROCEDURAL BACKGROUND

On October 5, 2021, the Bankruptcy Trustee, Lynn Feldman, filed an Objection to a Claim

of Exemption filed by the debtor for an Individual Retirement Account (IRA) in her Chapter 7

proceeding. The trustee’s objection alleges that the IRA “was inherited by the debtor and was set

up on April 13, 2018,” and thus is not exempt. (Bankr. No. 21-12147, Objection to Debtor’s Claim

of Exemption, ¶ 5). Although the debtor admitted in her response to the Objection that the IRA in

question was inherited, in her brief in support of her appeal, she now submits that she did not make

a trustee-to-trustee transfer into an account in the name of her deceased father, but rather “withdrew

the funds, via rollover, and utilized them to establish her own IRA for her retirement.” (Civ. A.

No. 22-1817, Debtor’s Am. Br. in Supp. of Bankr. App., 5-6). The debtor asserts that she opened

this IRA in her name alone some two-and-a-half years before she filed the present Chapter 7 case

on August 3, 2021. (Civ. A. No. 22-1817, Debtor’s Am. Br., 3). Thus, she claims it is not an

inherited IRA and is an asset which should be exempt from distribution to her creditors by the

trustee. (Id.). (Bankr. No. 21-12147, ECF No. 20, ¶¶ 20, 24).

Following a hearing on the trustee’s objection held on February 10, 2022, Judge Mayer

took the matter under advisement and subsequently issued its Opinion and Order on April 26, 2022

sustaining the objection. (Bankr. No. 21-12147, ECF Nos. 56, 57). This appeal followed.

LEGAL STANDARDS

Under 28 U.S.C. § 158, district courts have jurisdiction to hear appeals “from final

judgments, orders, and decrees,” and discretionary jurisdiction over “appeals from other

interlocutory orders and decrees.” 28 U.S.C. § 158(a)(1), (3). In exercising its jurisdiction and

reviewing bankruptcy court orders, judgments and decrees, the district court reviews the

bankruptcy court’s findings of fact for clear error and exercises plenary review over questions of

law. Lee v. 6209 Market Street, LLC, No. 23-2454, 2024 U.S. App. LEXIS 11837 at *3 (3d Cir.

May 16, 2024) (per curiam) (citing In re Giacchi, 856 F.3d 244, 247 (3d Cir. 2017)). As part of

this process, the court must “break down mixed questions of law and fact, applying the appropriate

standard to each component.” Meridian Bank v. Alten, 958 F.2d 1226, 1229 (3d Cir. 1992). A

mixed question of law and fact is found whenever a legal precept is applied to the sum of the facts

of a case. Id. A bankruptcy court’s exercise of discretion is reviewed for abuse, In re Friedman’s,

Inc., 738 F.3d 547, 552 (3d Cir. 2013), and it abuses its discretion when its ruling rests upon an

error of law or misapplication of law to the facts of the case. In re O’Brien Envt’l Energy, Inc.,

188 F.3d 116, 122 (3d Cir. 1999).

DISCUSSION

This appeal raises a single issue: whether the Bankruptcy Court committed an error of law

in upholding the trustee’s objection to the debtor’s claim that her IRA was exempted from the

property of her bankruptcy estate.

At the time she filed her bankruptcy petition under Chapter 7 on August 3, 2021, the debtor

sought to exempt nearly all of her assets, including her IRA with Allianz (an annuity company)

from her estate, invoking the exemption listed under 11 U.S.C. § 522(d)(12):

(d) The following property may be exempted under subsection (b)(2) of this

section:

. . .

(12) Retirement funds to the extent that those funds are in a fund or account

that is exempt from taxation under . . . 26 U.S.C. § 401, 403, 408, 408A, 414,

457, or 501(a)].

Individual Retirement Accounts are governed under the Internal Revenue Code by 26

U.S.C. § 408, and are defined in subsection (a) to mean:

a trust created or organized in the United States for the exclusive benefit of an

individual or his beneficiaries, but only if the written governing instrument creating

the trust meets the following requirements:

(1) Except in the case of a rollover contribution, . . . no contribution will be

accepted unless it is in cash, and contributions will not be accepted for the

taxable year on behalf of any individual in excess of the amount in effect for

such taxable year under . . . 26 U.S.C. § 219(b)(1)(A).

(2) The trustee is a bank . . . or such other person who demonstrates to the

satisfaction of the Secretary that the manner in which such other person will

administer the trust will be consistent with the requirements of this section.

(3) No part of the trust funds will be invested in life insurance contracts.

(4) The interest of an individual in the balance in his account is nonforfeitable.

(5) The assets of the trust will not be comingled with other property except in a

common trust fund or common investment fund.

(6) Under regulations prescribed by the Secretary, rules similar to the rules of . . .

26 U.S.C. § 401(a)(9) and the incidental death benefit requirements of . . . 26

U.S.C. § 401(a) shall apply to the distribution of the entire interest of an

individual for whose benefit the trust is maintained.

Section 408 of the Code also recognizes that an IRA can be created as an annuity, which

is defined similarly in subsection (b) as:

An annuity contract, or an endowment contract (as determined under regulations

prescribed by the Secretary), issued by an insurance company which meets the

following requirements:

(1) The contract is not transferable by the owner.

(2) Under the contract –

(A) the premiums are not fixed,

(B) the annual premium on behalf of an individual will not exceed the

dollar amount in effect under . . . 26 U.S.C. § 219(b)(1)(A), and

(C) any refund of premiums will be applied before the close of the

calendar year following the year of the refund toward the payment of

future premiums or the purchase of additional benefits.

(3) Under regulations prescribed by the Secretary, rules similar to the rules of .

. . 26 U.S.C. § 401(a)(9) and the incidental death benefit requirements of . .

. 26 U.S.C. § 401(a) shall apply to the distribution of the entire interest of

the owner.

(4) The entire interest of the owner is nonforfeitable.

. . .

Here, the debtor does not necessarily disagree with the trustee’s position that an inherited

IRA is not exempted under the Bankruptcy Code, nor does she dispute that at one point she

inherited an IRA. (“Both Trustee and Debtor agree that when an individual inherits an IRA from

anyone other than their deceased spouse, they cannot treat the ‘inherited IRA’ as their own for

purposes of exemption under 11 USC § 522(d)(12). . . . The debtor did not make a trustee-to-

trustee transfer into an account in the name of her deceased father [;] [s]he withdrew the funds, via

rollover, and utilized them to establish her own IRA for her retirement.”) (Appellant’s Am. Br. in

Support of Bkrptcy. App., 5-6). Nonetheless, the debtor now seeks to establish that the IRA is

exempted because it is not the one she inherited. (“We disagree that the inherited IRA in question

can be considered property of the bankruptcy estate as the inherited IRA ceased to exist in 2018

and a new IRA was formed by Debtor, thereafter.”) (Appellant’s Am. Br. in Support of Bkrptcy.

App., 4). According to her counsel, “whatever she inherited and whatever she did, she is now

presently in a qualified IRA since 2018.” (Bankr. No. 21-12147, Hrg. Tr. 2/10/22, 9).

In response, the trustee argues that the debtor’s IRA was originally funded in an amount in

excess of the maximum allowed for annual contributions (as prescribed by 26 U.S.C. §

219(b)(1)(A)), and consequently, it is not a qualified IRA under the tax code, and therefore cannot

trigger the § 522(d)(12) exemption. (Id., 65; Trustee’s Br., 1).

Under Fed. R. Bankr. P. 4003(c), “ . . . the objecting party has the burden of proving that

an exemption was not properly claimed.” As the Third Circuit has explained:

A claimed exemption is “presumptively valid” . . . Once an exemption has been

claimed, it is the objecting party’s burden (the trustee in this case) to prove that the

exemption is not properly claimed. Initially this means that the objecting party has

the burden of production and the burden of persuasion. The objecting party must

produce evidence to rebut the presumptively valid exemption. If the objecting party

can produce evidence to rebut the presumption, the burden of production then shifts

to the debtor to come forward with unequivocal evidence to demonstrate that the

exemption is proper. The burden of persuasion, however, always rests with the

objecting party.

In re Scioli, 586 F. App’x 615, 616 (3d Cir. May 22, 2015) (citing In re Carter, 182 F.3d 1027,

1029 (9th Cir. 1999)). “To prevail, the party objecting to a claimed exemption must prove the

impropriety of the exemption by a preponderance of the evidence.” In re Davis, Civ. No. 12-919,

2013 U.S. Dist. LEXIS 2382 at *4 (W.D. Pa. Jan. 8, 2013).

It is clear “that when an individual inherits an IRA from anyone other than their deceased

spouse, they cannot treat the ‘inherited IRA’ as their own for purposes of exemption under 11

U.S.C. § 522(d)(12).” (Debtor’s Am. Br., 5). This is in keeping with the Supreme Court’s decision

in Clark v. Rameker, 573 U.S. 122 (2014), which held that “funds contained in an inherited

individual retirement account (IRA)” do not “qualify as ‘retirement funds’ within the meaning of

[the] bankruptcy exemption” set forth in 11 U.S.C. § 522(b)(3)(C), (d)(12). In so holding, the

Court found there were three legal characteristics of inherited IRAs which distinguished them from

normal traditional and Roth IRAs:

“First, the holder of an inherited IRA may never invest additional money in the

account,” thus obviating “the entire purpose of providing tax incentives for

accountholders to contribute regularly and over time to their retirement savings.”

Id., 573 U.S. at 128. “Second, holders of inherited IRAs are required to withdraw

money from such accounts, no matter how many years they may be from retirement.

. . . That the tax rules governing inherited IRAs routinely lead to their diminution

over time, regardless of their holders’ proximity to retirement, is hardly a feature

one would expect of an account set aside for retirement.” Id. “Finally, the holder

of an inherited IRA may withdraw the entire balance of the account at any time –

and for any purpose – without penalty. . . . Funds held in inherited IRAs

accordingly constitute a ‘pot of money that can be freely used for current

consumption,’ not funds objectively set aside for one’s retirement.”

Id. (quoting In re Clark, 714 F.3d 559, 561 (7th Cir. 2013)).

Here, although the debtor admitted at the bankruptcy hearing that “[t]he IRA was inherited

by the debtor and was set up on April 13, 2018,”1 her testimony seemed to contradict this

admission.

The debtor testified she opened the IRA with Allianz2 with $41,447 on April 13, 2018

using money from Wells Fargo. (Bankr. No. 21-12147, Hrg. Tr. 2/10/22, 55-56, ECF No. 55).

Prior to that, she “believed” she took a $41,000 check from a Prudential account to Wells Fargo

after getting a medallion put on it from her bank following her father’s death in December 2017.

(Id.). The debtor stated she didn’t know what type of account it was at Prudential, but she used

that check to open an IRA account in her name at Wells Fargo. (Id., 56-57). Thus, because the

IRA now at issue was rolled into the Wells Fargo account more than three years before she filed

her bankruptcy petition, she avers it is a qualified IRA which is exempt from distribution. (Id.,

64-65).

Shawn Leayman, the Allianz representative, also testified at the bankruptcy court hearing.

Leayman stated that on February 15, 2018, the debtor electronically signed paperwork to establish

a traditional IRA annuity in her own name with Allianz in the initial amount of $41,447 using

money she had at Wells Fargo. (Bankr. No. 21-12147, Hrg. Tr. 2/10/22, 21-28, ECF No. 55).

Leayman did not know where the debtor got the money to fund the Allianz IRA, and while he was

aware of the death of her father, he did not know how the money was titled at Wells Fargo. He

explained:

1 See Trustee’s Objection to Debtor’s Claim of Exemption, ¶ 5 ECF No. 20 and Debtor’s Response

thereto, ¶ 5, ECF No. 23 in Bankr. No. 21-12147.

2 It appears from the testimony of Shawn Leayman, the Allianz representative who set up the

Debtor’s traditional IRA, that the IRA at issue is an IRA annuity. (Bankr. No. 21-12147, Hrg. Tr.

2/10/22, 14-15, ECF No. 55).

When she came to me she had money at Wells Fargo that she wanted to put into

this vehicle and when we talked about it, I didn’t see anything that would have told

me that it was an inherited IRA in my professional opinion at the time because,

again, you cannot place an inherited IRA into Stephanie Farber’s name. So my

professional opinion is that at Wells Fargo this was an IRA that was moved over to

us in Stephanie Farber’s name and it came over in like fashion, meaning it was an

IRA in her name there.

(Id., 28-29).

Leayman was further questioned as follows:

Q. So the inherited IRA was at Wells Fargo?

A. Again, I’m making an assumption of that, right? If –

Q. Okay. I don’t want you to assume. I only want you to testify (sic) things

about which you have personal knowledge.

A. Okay. The knowledge I have is that it was an IRA at Wells Fargo in her

name that was moved over to me in the similar fashion.

Q. And it was your understanding, from speaking with her, that the source of

that IRA was an inheritance from her father who had passed away?

A. Yes.

. . .

Q. So this was death benefit proceeds from life insurance or an annuity?

A. Yes.

Q. And that described the source of the funds?

A. Correct.

Q. Did she have something to show you that, did she have a statement or

anything like that?

A. I’m going off of memory from back then, I reached out to Allianz as well,

and we have on file that it was sent from Wells Fargo to us and we sent to the

transfer paperwork to them. The important part of that is, is that the only way that

that transfer could have been completed would be that that was in Stephanie

Farber’s name. It would have been rejected otherwise.

(Id., 29-30).

. . .

Q. And transfer paperwork, what does that consist of? I don’t see anything in

here that would indicate transfer.

A. So transfer paperwork is something that gets sent over to Allianz that’s

outside of the application. That gets sent to Allianz, then sent to Wells Fargo, and

again, this is what I was referencing. Those transfer paperwork would have been

rejected when received at Wells Fargo if it would have been an inherited IRA or an

IRA in her father’s name. Obviously, the name wouldn’t have matched, they’d

have said we have an account here for Stephanie Farber we cannot move in her

father’s name.

Q. If she was the recipient of an inheritance from her father in the amount of

$44,000, could she have put that into an IRA?

A. If she inherited 44 – well there’s IRA stipulations, right? So a person could

only put so much in a year, that being $7,000, so to answer the question, that answer

would be, no.

(Id., 31).

The trustee presented an expert witness, Charles Persing, a Certified Public Accountant

who is certified in financial forensics and is a Certified Fraud Examiner, Insolvency and

Restructuring Advisor, and Certified Valuation Analyst. (Id., 40). Mr. Persing testified that based

on the information he was provided regarding how this annuity contract was created, it was his

opinion that the Allianz IRA annuity was not a qualified IRA as of the date of the debtor’s petition

because “if this was a death benefit annuity that was not hers, and either in her father’s IRA or just

a death benefit that came directly to her outside of an IRA, she could not start a new IRA with

$41,000.” (Id., 44-49, 51, 53).

After hearing this evidence, Judge Mayer concluded the IRA was not inherited but was not

exempt. I must review Judge Mayer’s findings of fact for clear error and exercise plenary review

over questions of law. Under the clearly erroneous standard of review, “‘a finding is ‘clearly

erroneous’ when although there is evidence to support it, the reviewing court on the entire evidence

is left with the definite and firm conviction that a mistake has been committed.’” Alimbaev v.

Atty. Gen’l of the United States, 872 F.3d 188, 195 (3d Cir. 2017) (quoting United States v.

Gypsum Co., 333 U.S. 364, 395 (1948)). “‘Where there are two permissible views of the evidence,

the factfinder’s choice between them cannot be clearly erroneous,’ and where the disputed finding

of fact is a credibility finding, ‘even greater deference’ is owed, ‘for only the factfinder can be

aware of the variations in demeanor and tone of voice that bear so heavily on the listener’s

understanding of and belief in what is said.’” Id. (quoting Anderson v. City of Bessemer, 470 U.S.

564, 573 (1985)). In other words, the clearly erroneous standard “does not entitle a reviewing

court to reverse the finding of the trier of fact simply because it is convinced that it would have

decided the case differently.” Id. Plenary review requires the court to review legal questions

without giving deference to the bankruptcy court’s assessment or interpretation. United States v.

Caraballo, 88 F.4th 239, 243 (3d Cir. 2023).

After hearing and observing the witnesses’ testimony in the hearing, Judge Mayer found

Shawn Leayman’s testimony to lack probative value given that he did not know where the money

in question came from to establish the Allianz IRA. Conversely, Judge Mayer accepted the

testimony of the Trustee’s expert witness Charles Persing, CPA, that because he was unaware of

any pre-existing IRA in the debtor’s name alone, the most she could have contributed to establish

a valid IRA in 2018 was $6,000 to $7,000. (Bankr. No. 21-12147, 4/26/22 Opinion, 5-6). These

conclusions are far from “clearly erroneous.”

Judge Mayer noted the debtor testified that when her father died in December 2017, he had

an account at Prudential Life Insurance in which he left her an interest, she did not know what type

of account it was, but after securing a medallion signature from Wells Fargo (her bank), she

received a $41,000 check that she took to Wells Fargo and used those funds to set up an IRA in

her own name. (Id., at 6, citing Hrg. Tr. at 55-57). She then rolled the Wells Fargo IRA into the

Allianz IRA annuity. (Id.).

Based upon this testimony, Judge Mayer found that the debtor was not seeking to exempt

an inherited IRA, but this did not mean that it was properly exempted. Rather, the evidence

“call[ed] into question the tax-exempt status of the original IRA at Wells Fargo” such that “[i]f

that account is not tax-exempt, then neither is the individual retirement annuity at Allianz [and]

[t]hat would likewise mean that the annuity is not exempt from the bankruptcy estate.” (Id.).

In resolving that issue, Judge Mayer purposely looked to 26 U.S.C. § 408(b)(2)(B), under which

an IRA annuity’s validity is premised upon the limitation of the annual premium on behalf of an

individual. To be valid, that premium cannot exceed the dollar amount in effect under 26 U.S.C.

§ 219(b)(1)(A). For taxpayers of Farber’s age (52) in 2018, that amount was $6,500, including

“catch-up contributions.” (Id. at 7-9). By the debtor’s own admission, she took the entire $41,000

which she received from Prudential and used it to open an account or IRA at Wells Fargo. Even

crediting the debtor’s belief that the Wells Fargo account was indeed an IRA, $41,000 was well in

excess of the maximum premium amount allowable in 2018 for contribution to an IRA, and thus

even if it was designated as an IRA, it was invalid. I therefore find no error in Judge Mayer’s

finding on this issue.

The trustee also argued that in opening the Wells Fargo IRA in an amount which exceeded

the maximum annual contribution limit, the debtor engaged in a “prohibited transaction” under

IRC § 408 which disqualified the account from tax exempt status and rendered it “nothing more

than a cash account which she may not exempt from the bankruptcy estate.” (Id., at 10 (citing Hrg.

Tr. 2/10/22, at 64). Under § 408(e)(1), “[a]ny individual retirement account is exempt from

taxation under this subtitle [26 U.S.C. § 1 et. seq.] unless such account has ceased to be an

individual retirement account by reason of paragraph (2) or (3). . . .” Paragraph 2, in turn provides

in relevant part:

(A) In general. If, during any taxable year of the individual for whose benefit any

individual retirement account is established, that individual or beneficiary

engages in any transaction prohibited by . . . 26 U.S.C. § 4975 with respect to

such account, such account ceases to be an individual retirement account as of

the first day of such taxable year. . . .

“Prohibited transactions” are defined in Section 4975(c) as meaning “any direct or indirect” –

(A) sale or exchange, or leasing, of any property between a plan and a disqualified

person;

(B) lending of money or other extension of credit between a plan and a disqualified

person;

(C) furnishing of goods, services, or facilities between a plan and a disqualified

person;

(D) transfer to, or use by or for the benefit of, a disqualified person of the income

or assets of a plan;

(E) act by a disqualified person who is a fiduciary whereby he deals with the

income or assets of a plan in his own interest or for his own account; or

(F) receipt of any consideration for his own personal account by any disqualified

person who is a fiduciary from any party dealing with the plan in connection

with a transaction involving the income or assets of the plan.

In applying the foregoing criteria to this case, Judge Mayer found that the debtor’s only

alleged wrongdoing was her contribution of too much money into her own IRA account, and thus

she did not engage in a prohibited transaction under § 4975. The record in this matter is in accord

and I once again agree with the bankruptcy judge’s factual findings and legal conclusions on this

point.

Finally, to determine whether the debtor’s Allianz IRA annuity qualified as “a fund or

account that is exempt from taxation under . . . section 408,” and was thereby exempted from the

bankruptcy estate under 11 U.S.C. § 522(b)(2), Judge Mayer examined the tax consequences under

the Internal Revenue Code of contributing more than the prescribed annual amounts to an IRA. In

so doing and after determining that Section 4973 of the IRC, 26 U.S.C. § 4973(a)(3), imposes a

6% annual tax “of the amount of the excess contributions to such individual’s accounts or

annuities,” Judge Mayer found that notwithstanding that it may have been originally created at

Wells Fargo and subsequently “rolled over” to Allianz several years before the filing of the

bankruptcy petition, the IRA in question could never qualify as an IRA for exemption purposes

under the bankruptcy code because “the excess contribution gave rise to tax liability and precluded

the tax-exempt status of the account beyond the $6,500.00 limit.” (Id., at 16). “Neither the rollover

of the annuity nor the passage of time affected this status,” and “by definition then, the Debtor’s

current IRA is not tax exempt.” (Id.) (citing Mangan v. Brainard, 652 B.R. 1, 10 (Bankr. Conn.

2023) (“Because funds contributed in excess of the yearly limit are not exempt from taxation under

§ 408(a), they cannot be exempted by a bankruptcy debtor under § 522(d)(12).”); In re Cherwenka,

508 B.R. 228, 241 (Bankr. N.D. Ga. 2014) (annuity held disqualified from tax exempt status where

the debtor’s 2003 contributions in the amounts of $250,000 and $100,000 greatly exceeded the

statutorily prescribed limit of $3,000 for that year); In re Ludwig, 345 B.R. 310, 317 (Bankr. D.

Colo. 2006) (Debtor’s claimed exemption for annuity disallowed in part because annuity exceeded

annual contribution limit); In re Rogers, 222 B.R. 348, 350 (Bankr. S.D. Cal. 1998) (holding lump

sum premium payment for debtor’s annuity contract “far exceeded” former $2,000 annual limit)).

In view of the language of Section 522(d)(12), providing that retirement funds may be

exempted only “to the extent that those funds are in a fund or account that is exempt from taxation

. . . under 26 U.S.C. §§ 401, 403, 408, 408A. 414, 457, or 501(a),” and given that the Wells Fargo

IRA, if it in fact was an IRA, could not have been opened in an amount in excess of $6,500 in

2018, I agree with Judge Mayer’s ruling that it was not a “qualified” or tax exempt IRA. Thus,

even giving the benefit of the doubt to the debtor that she “rolled over” an IRA at Wells Fargo into

the Allianz IRA annuity on April 13, 2018, that rollover did nothing to render any of the funds in

that annuity validly exempt from taxation or from her bankruptcy estate.

For all of the above reasons, I will affirm the April 26, 2022 Order of the Bankruptcy Court,

and uphold the disallowance of the debtor’s Allianz IRA.

An appropriate Order follows.