Case report: IRAs and money judgments

We have previously noted on this page that Michigan has a statute which exempts funds held in an IRA from execution on a money judgment entered against the IRA owner. On November 1, 2011, the Michigan Court of Appeals, in the unpublished case of Vinyl Tech Window Systems, Inc. v. Blodgett, held that this statute did not protect several IRAs owned by the defendants, and ordered the release of the funds in execution on a judgment. It thus upheld the ruling of the circuit court.

In conformance with the principle that "hard cases make bad law", the circuit court's ruling and reasoning were quite clumsy and difficult to decipher. The facts of the case were particularly egregious. Blodgett, who worked for Vinyl Tech as its comptroller, had embezzled large sums of money and diverted the funds to a company owned by her husband. The circuit court entered a judgment in favor of the employer in the amount of $1.72 million against Blodgett, her husband, and his company.

The circuit court opinion indicates that the husband had created a number of IRAs through some form of trust arrangement. It appears but probably was never proven that most of the funds ending up in the IRAs originated from the embezzled funds. It also appears that the circuit court had entered an early order freezing the funds held by the defendants; it noted that the creation of the IRAs had been done in violation of its order.

In its opinion, the Court of Appeals noted an early Michigan case, Long v. Earle, 277 Mich 505, 511-512 (1936), in which the Michigan Supreme Court had held that, despite the statutory homestead exemption from execution on judgment, one cannot embezzle money, buy a homestead with the proceeds, and then try to claim the exemption.

The problem in applying the Long case here may well have been the uncertainty whether the funds used to fund the IRAs were traceable to the embezzled funds. Since the embezzlement had gone on for many years, it is likely that that had been the case, but it does not appear that the plaintiffs were able to establish that that had occurred.

Rather than accept some of the questionable rationales pronounced by the circuit court, the Court of Appeals upheld its decision based on the defendants' failure to cooperate with a number of post-trial proceedings. They did not respond to discovery requests, they failed to appear for a creditors' examination, and they tried to prevent the discovery of assets that had been transferred to relatives. As a result of this behavior, the Court ruled, they had failed to meet their burden of proof of demonstrating that they were entitled to the exemption. The order that the funds be paid over to the judgment creditors was upheld.

Full text of case (PDF)