Discussion of new developments in Asset Protection and related debtor-creditor issues, primarily from the viewpoint of planning for those who are concerned about unforeseen contingent liabilities, but also some news from the creditors' side as well. Hosted by Jay Adkisson and Chris Riser, authors of "Asset Protection: Concepts and Strategies" with supporting website at http://www.assetprotectionbook.com
JSC FOREIGN ECONOMIC ASSOCIATION TECHNOSTROYEXPORT, Plaintiff,
v.
INTERNATIONAL DEVELOPMENT AND TRADE SERVICES, INC., et al., Defendants.
No. 03CIV5562(JGK)(AJP)
May 1, 2006
OPINION AND ORDER
KOELTL, J.
*1 The plaintiff, JSC Foreign Economic Association Technostroyexport ("JSC"), moves for an order finding defendant Edith Reich ("Reich") in civil contempt for violation of the Court's Order of Attachment granted after oral argument on July 30, 2004 and issued on August 9, 2004 (the "Attachment Order").
I.
JSC filed this action in July 2003 seeking to hold Reich, her daughter, Brigitte Jossem ("Jossem"), and others liable for a judgment for more than $200 million entered against the defendant International Trade and Development Services, Inc. ("IDTS"). JSC's principal allegation was that IDTS was the alter ego of Reich and Jossem. On July 9, 2004, this Court signed an Order to Show Cause filed by JSC to obtain an order of attachment against Reich. Argument on JSC's motion for an order of attachment was heard on July 30, 2004, and, on August 9, 2004, this Court granted the order of attachment, up to the amount of $200,000,000, after finding that the requirements of Article 62 of the New York Civil Practice Law and Rules ("C.P.L.R.") had been satisfied. [FN1] Under Section 6212(a) of the CPLR, a party may obtain an "order of attachment upon demonstrating that (1) it has stated a claim for a money judgment; (2) it has a probability of success on the merits; (3) the defendant 'with intent to defraud his creditors or frustrate the enforcement of a judgment that might be rendered in plaintiff's favor, has assigned, disposed of, encumbered or secreted property, or removed it from the state or is about to do any of these acts;' [FN2] and (4) the amount demanded from the defendant is greater than the amount of all counterclaims known to the party seeking attachment." Bank Leumi Trust Co. of N.Y. v. Istim, Inc., 892 F.Supp. 478, 481 (S.D.N.Y.1995) (quoting N.Y. C.P.L.R. § 6201(3)).
FN1. New York law governs this action, which was brought pursuant to the Court's diversity jurisdiction under 28 U.S.C. § 1332, and New York law independently applies to the provisional remedy of attachment under Rule 64 of the Federal Rules of Civil Procedure.
FN2. C.P.L.R. R. 6212(a) requires a showing that "one or more grounds for attachment provided in section 6201 exist." For the purposes of this case, as in Bank Leumi, the relevant ground is the one quoted above, found in C.P.L.R. § 6201(3).
The Court found that JSC had offered evidence sufficient to establish each of these four requirements. In particular, the Court found that "[t]he circumstances of Reich's conduct, as documented in the record before the Court, amply support a finding that Reich has acted with actual intent to frustrate the enforcement of a judgment against her." (Tr. of Proceedings Held on July 30, 2004, at 41.) The evidence established that after restraining notices had been issued against her, Reich had shifted over a million dollars into a Merrill Lynch account in an associate's name, but under Reich's control, and that Reich had deposited funds in other accounts as well. (Id. at 41-44.)
JSC now alleges that, despite the existence of the Attachment Order, Reich has continued her efforts to frustrate enforcement of the judgment against her, [FN3] and seeks an order holding Reich in civil contempt, directing that Reich purge her contempt, and ordering that Reich be incarcerated unless she complies with the Court's order on this motion within ten days. JSC also requests that the Court cite Reich for criminal contempt and refer the matter to the United States Attorney's Office for prosecution.
FN3. As indicated, the Court concluded that JSC had shown a high likelihood of success on the merits at the time it granted JSC's motion for an order of attachment. Subsequently, the Court granted JSC's motion for summary judgment on the question of liability by Opinion and Order dated September 6, 2005. See JSC Foreign Economic Ass'n Technostroyexport v. Int'l Dev. & Trade Servs., Inc., 386 F.Supp.2d 461 (S.D.N.Y.2005). Judgment was entered against Reich and other defendants on October 21, 2005.
*2 In support of its allegations, JSC submitted the Declaration of David Dunn dated July 29, 2005 (the "Dunn Decl.") and a Memorandum of Law. Reich did not submit a formal memorandum of law, but both JSC and Reich sent correspondence relating to this motion to the Court. A hearing on the motion was held on December 9, 2005, at which the parties argued the motion but no additional evidence was presented.
II.
"A party may be held in civil contempt for failure to comply with a court order if '(1) the order the contemnor failed to comply with is clear and unambiguous, (2) the proof of noncompliance is clear and convincing, and (3) the contemnor has not diligently attempted to comply in a reasonable manner." ' Paramedics Electromedicina Comercial, Ltda. v. GE Med. Sys. Info. Techs., Inc., 369 F.3d 645, 655 (2d Cir.2004) (quoting King v. Allied Vision, Ltd., 65 F.3d 1051, 1058 (2d Cir.1995)). Applying this test, the Court makes the following findings on the basis of the record before it.
1.
With respect to the first prong of the Paramedics Electromedicina test, the Court finds that the Attachment Order was "clear and unambiguous." "A 'clear and unambiguous' order is one that is 'specific and definite enough to apprise those within its scope of the conduct that is being proscribed." ' Medallic Art Co., Ltd. v. Novus Mktg., Inc., No. 99 Civ. 502, 2003 WL 22053130, at *1 (S.D.N.Y. Sept. 2, 2003) (quoting N.Y. State Nat'l Org. for Women v. Terry, 886 F.2d 1339, 1352 (2d Cir.1988)). The Attachment Order in this case specified that "Reich, and all persons acting in concert with her who have notice of this Order, shall not cause or permit the sale, transfer or disposition of any of her assets, whether held in her name or in the name of any other person or entity...." (Attachment Order at 2.) It further provided that "no person or entity with notice of this Order shall assist defendant to sell, transfer or otherwise dispose of any of her assets, whether held in her name or in the name of any other person or entity...." (Id. at 3.) Reich's obligations under the Attachment Order were thus unmistakably clear; she was not to dispose of any of her assets herself, or enlist the assistance of any other person or entity in doing so.
2.
The Court further finds that Reich's noncompliance with the Attachment Order has been established by clear and convincing evidence. JSC has presented substantial and unrebutted evidence that Paul Russo ("Russo"), a New York-based jewelry broker, made numerous sales of jewelry, the proceeds of which were under Reich's control. This evidence is credible and establishes clearly and convincingly that Reich violated the Attachment Order by engaging Russo to dispose of assets belonging to her and subject to that order.
Reich has offered no evidence to rebut this showing. To the contrary, in a letter dated December 21, 2005, Reich admitted that she had not complied with the Attachment Order, writing that "[i]t is correct to say that I did not obey the Court's order." (Letter from Edith Reich dated Dec. 21, 2005, at 1.) Reich's letter later specifically acknowledged that "I did such a stupid thing as to hold back the attached jewelry." (Id. at 3.) Due to Reich's plain admission of guilt and the compelling evidence presented by JSC, the Court concludes that the allegations against Reich are true . [FN4]
FN4. Prior to the December 21, 2005 letter, Reich, Jossem, and Russo had each asserted the Fifth Amendment privilege against self-incrimination throughout this case.
*3 The first of Russo's sales of Reich's jewelry occurred on August 17, 2004. Paul Lubetsky ("Lubetsky"), the President and CEO of Windsor Jewelers ("Windsor"), a large New York-based jewelry wholesaler, alleges in a sworn declaration that on that date Windsor purchased a lot of jewelry from Russo, who was acting as a broker on behalf of an unidentified seller, for $135,000. (Declaration of Paul Lubetsky dated March 3, 2005 ("Lubetsky Decl.), Ex. 7 to Dunn Decl.) Payment was sent in two installments, for $35,000 and $100,000 to account number 087409 at the United Mizrahi Bank in London, an account held in the name of Herzog Fox & Neeman ("Herzog"), an Israeli law firm that has represented Reich and business entities with which she is affiliated. (Deposition of Yaakov Neeman ("Neeman Dep."), Ex. 10 to Dunn Decl., at 16-17.) Yaakov Neeman, one of the founding partners of the Herzog firm, testified at his deposition that Herzog established this and other accounts for Reich and that she had complete control over the funds deposited therein. (Neeman Dep. at 139-41, 150-52, 175-78.)
On October 13, 2004, Russo, again acting as an agent for an unidentified seller, sold a lot of jewelry to Camilla Dietz Bergeron, Ltd. ("Bergeron"), an international dealer of antique, period, and estate jewelry, for $76,000. (Ex. 11 to Dunn Decl., at 9-11.) Gus Davis ("Davis"), the President of Bergeron, testified in his deposition that Bergeron was initially instructed to wire payment to account number 5008510017 at Bank Winter & Co. in Vienna. (Deposition of Gus Davis ("Davis Dep."), Ex. 6 to Dunn Decl., at 173, 210-14; Ex. 11 to Dunn Decl. at 14.) Davis testified that, when Bergeron's bank demanded the name on the Bank Winter account prior to transferring the funds, Russo "was uncomfortable" providing a name and instead requested that the payment be sent to account number 087410 at United Mizrahi Bank in London. (Davis Dep. at 212-14; Ex. 11 to Dunn Decl. at 12-13.) This account, like account number 087409 at the same bank, was held by the Herzog firm. (Ex. 11 to Dunn Decl. at 2, 12-13; Neeman Dep. at 209-11.)
Bergeron again bought jewelry from Russo at the end of October or early in November 2004. In this transaction, seven pieces were purchased for an agreed price of $105,000. Russo requested part of that sum in cash and received $18,000 in cash from Bergeron. The wire transfer of the remaining balance was delayed, however, when Bergeron discovered that some of the pearls were plugged. (Davis Dep. at 145-48.) Russo contacted Bergeron and informed Davis that "his client was hysterical that the money had not been wired." (Davis Dep. at 147.) After Russo promised to provide additional pieces of jewelry, Bergeron wired $100,000 to account number 087410 at United Mizrahi Bank on November 1, 2004. [FN5] (Davis Dep. at 147-48; Ex. 11 to Dunn Decl. at 23-24.)
FN5. The original price agreed upon for this transaction was $105,000, but Bergeron ultimately paid a total of $118,000--$18,000 in cash and a $100,000 wire transfer--apparently because the value of the additional items provided by Russo exceeded the reduction in the value of the pearls that were plugged. (Davis Dep. at 147-48.)
Russo entered into additional transactions in November 2004. Lubetsky stated under oath that Windsor bought jewels from Russo on November 5, 2004, for $8,200 in cash, on November 9, 2004, for $18,800 in cash, and on November 29, 2004, for $9,000 in cash plus $70,000 wired to account number 087410 at United Mizrahi in London. (Lubetsky Decl. ¶¶ 3-4.) This account is corroborated by receipts and bank records. (See Ex. 2 & 3 to Lubetsky Decl.)
*4 On December 15, 2004, Russo brokered a sale of a single strand cultured pearl necklace to Verdura, a New York jewelry retailer, for $350,000. (Deposition of Edward Landrigan ("Landrigan Dep."), Ex. 13 to Dunn Decl., at 16-17; Ex. 14 to Dunn Decl.) Russo informed Verdura that his client wanted payment by a series of wire transfers over time. (Landrigan Dep. at 23.) The first wire transfer was for $100,000, again to account number 087410 at United Mizrahi Bank, about December 17, 2004. (Ex. 14 to Dunn Decl. at Verdura 2-3.) Another transfer of $60,000, to the same account, quickly followed. (Id. at Verdura 3-4.) Verdura wired $40,000 on January 6, 2005, and $60,000 on January 18, 2005, to the same account. (Id. at Verdura 6-9.) The funds from the $60,000 transfer, however, were returned to Verdura a few days later, and $60,000 was wired to a different account, account number 1161455 at Bank Sarasin in Zurich, Switzerland, because Russo's client had changed the instructions. (Id. at Verdura 9-12; Landrigan Dep. at 34-35.)
At no time did Russo specifically identify the seller on behalf of whom he negotiated these transactions. [FN6] However, in addition to Reich's admission in her December 21, 2005 letter, there is overwhelming independent evidence that he was acting as an agent for Reich. Davis testified that Russo told him that his client was the same "older woman" each time Russo sold jewelry to Bergeron. (Davis Dep. at 169-70.) It was also shown that Reich had control over the accounts to which the proceeds of the sales were wired. Neeman testified that account numbers 087409 and 087410 at United Mizrahi Bank in London, while nominally held by the Herzog firm, had been opened by Herzog as trust accounts for Reich and were under her control. (Neeman Dep. at 139-41, 150-52, 175-77, 209-11.) Moreover, there were significant transfers between August 2004 and December 2004 from account numbers 087409 and 087410 at United Mizrahi Bank, the accounts into which most of the jewelry transaction proceeds were later deposited, to various entities directly related to Reich. (Ex. 9 to Dunn Decl., at HFN 6238-40)
FN6. When Russo was asked about the identity of his client during his deposition, he invoked his Fifth Amendment privilege against self-incrimination. (Deposition of Paul Russo ("Russo Dep."), Ex. 8 to Dunn Decl., at 17-45.)
For example, Neeman testified that he followed Reich's instructions to transfer $30,000 to the Hilton Hotel, Tel Aviv, at Reich's instructions; the transfer came from account number 087409. (Neeman Dep. at 177-78; Ex. 9 to Dunn Decl., at HFN 6240.) There were also transfers totaling $200,000 from account number 087410 to the Sonnenschein firm, which was representing Reich.
Neeman further testified that Herzog opened the account at Bank Winter, the original destination of the payment for the October 13, 2004 sale to Bergeron, as a trust account to pay Reich's then-attorneys in this action. (Neeman Dep. at 397-400; Ex. 9 to Dunn Decl. at HFN 5808-09.) Payments were also made from account numbers 087409 and 087410 to Shafran Consulting, an investigative firm Reich hired in connection with this action (Ex. 9 to Dunn Decl. at HFN 6240-41; Neeman Dep. at 178), and from account number 087409 to Fermo Ghezzi, whom Reich described in writing as a "friend" (Id. at HFN 3395.) Neeman testified that he met with Ghezzi, at Reich's request, to discuss Reich's business affairs and that the payment to Ghezzi was at Reich's request. (Neeman Dep. at 87-88, 177- 78.)
*5 Finally, Russo's change of instructions to Verdura, whereby funds already wired to United Mizrahi Bank were returned and sent instead to Bank Sarasin in Zurich, came shortly after Neeman informed Reich on or about January 10, 2005, that she could no longer have control of the United Mizrahi Bank accounts because JSC had filed a suit against Herzog, Fox, and Neeman in New York state court. (Neeman Dep. at 34-35, 56-57, 400-01; Ex. 15 to Dunn Decl.)
The evidence establishes that the accounts to which the proceeds of Russo's jewelry transactions were transmitted were under Reich's control. The evidence establishes, and Reich's does not contest, that Reich engaged Russo to sell her jewelry, in clear violation of the Attachment Order, and gave Russo directives about where the payments should be sent. The Court therefore finds that Reich's noncompliance with the Attachment Order has been established by clear and convincing evidence.
3.
It is also clear that Reich " 'has not diligently attempted to comply in a reasonable manner" ' with the Attachment Order. Paramedics Electromedicina, 369 F.3d at 655. As explained above, the first sale of Reich's jewelry took place very shortly after the Attachment Order was signed. On the record before the Court, it is beyond question that repeated sales of Reich's jewelry took place and affirmative evidence indicates that Reich was aware of, and orchestrated, the transactions. The accounts to which payments, other than those made in cash, were wired were under Reich's control, and Reich ordered disbursements from those accounts to pay, among other things, attorneys who represented herself, Jossem, and IDTS in this action. The fact that Reich was aware that the funds were present in the account and made prompt use of them again indicates that she had knowledge of the transactions from which those funds were derived.
Reich is a sophisticated woman who has conducted business affairs of a very large scope for many years and she has had extensive experience with the legal system; it is impossible to conclude that Reich made a reasonably diligent effort to comply with the Attachment Order. That order specifically provided that "defendant Reich, and all persons acting in concert with her who have notice of this Order, shall not cause or permit the sale, transfer or disposition of any of her assets, whether held in her name or in the name of any other person or entity...." (Attachment Order at 2.) The order also specifically directed that "no person or entity with notice of this Order shall assist defendant to sell, transfer, or dispose of any of her assets, whether held in her name or in the name of any other person or entity." (Id. at 3.) It further provided that "Reich shall forthwith transfer or deliver all of her attachable assets, up to the amount specified in this Order ($200,000,000), to the United States Marshal for the Southern District of New York, such property specifically including (but not limited to) ... (c) ... jewelry...." (Id.) Reich's actions thus constituted three separate violations: she caused the sale of her assets; she enlisted Russo to help her "sell, dispose, or transfer ... her assets"; and she failed to deliver the jewelry in question to the United States Marshal. Reich simply could not have believed that the sale of her jewelry was in compliance with the Attachment Order. It necessarily follows that she did not make a reasonable effort to comply with that order. [FN7]
FN7. The party moving for a finding of civil contempt need not establish that the violation was willful to satisfy this final requirement. Paramedics Electromedicina, 369 F.3d at 655. Because the Court's finding that Reich did not make a reasonably diligent attempt to comply with the Attachment Order is sufficient to hold her in civil contempt, the Court need not reach the question of whether her noncompliance was willful.
* * *
*6 Reich, in her December 21, 2005 letter to the Court, defends her actions by stating that she defied the Attachment Order so she could continue to pay her attorneys, in the hope that she would not lose all of her remaining property to the plaintiff. This is not a valid defense to civil contempt. The only defenses to civil contempt are that (1) the order allegedly violated is unclear; (2) the party charged with contempt had no knowledge of the order or (3) proof of noncompliance fails to meet the clear and convincing standard of proof. Levin v. Tiber Holding Co., 277 F.3d 243, 251 (2d Cir.2002) (quoting Sacco v. Burke, 764 F.Supp. 918, 921 (S.D.N.Y.1991)). In this case, Reich does not argue that the Attachment Order was ambiguous, or that there is insufficient proof of her noncompliance. Indeed, as explained above, the Court has concluded that the Attachment Order was not ambiguous and that Reich's noncompliance has been established by clear and convincing evidence. There is also no doubt that Reich had notice of the Attachment Order's existence. Reich therefore has no valid defense to the charge of civil contempt. While unnecessary to a disposition of this motion, it should be noted that Reich never demonstrated that there should be an exception to the Attachment Order for attorneys' fees, because she never demonstrated that she was without other funds. Indeed, the disposition of the jewelry proceeds reflects payments to foreign consultants and the existence of several foreign bank accounts. A true accounting of all of Reich's assets was not possible because she asserted her Fifth Amendment privilege with respect to her financial condition.
Because all three components of the Paramedics Electromedicina test have been satisfied, and no valid defense exists, the Court finds that Reich is in civil contempt. The evidence established that a total of over $780,000, subject to the Attachment Order, was either paid to Reich in cash and not disclosed, or was wired to overseas bank accounts. In order to purge her contempt, Reich must repatriate that amount within twenty (20) days of the date of this Order. Should Reich fail to comply with this directive, JSC may apply for further sanctions, including incarceration, until such time as Reich has cured her contempt of the Court's Attachment Order. At any hearing for sanctions, Reich could attempt to show her inability to comply with the order to repatriate the funds. However, it would be Reich's burden to establish her inability "clearly, plainly, and unmistakably" to comply. Huber v. Marine Midland Bank, 51 F.3d 5, 10 (2d Cir.1995).
III.
JSC also seeks to have Reich sanctioned for criminal contempt. 18 U.S.C. § 401 authorizes a United States Court to "punish by fine or imprisonment, or both, at its discretion, such contempt of its authority ... as ... [d]isobedience or resistance to its lawful writ, process, order, rule, decree, or command." 18 U.S.C. § 401. To hold a defendant in criminal contempt, it must be proven beyond a reasonable doubt "that (1) the court entered a reasonably specific order; (2) defendant knew of that order; (3) defendant violated that order; and (4) his violation was willful." United States v. Cutler, 58 F.3d 825, 834 (2d Cir.1995). To establish the final element of willfulness, which, as explained above, need not be shown to hold a person in civil contempt, the criminal contempt must have been committed with "a specific intent to consciously disregard an order of the court." United States v. Lynch, 162 F.3d 732, 735 (2d Cir.1998) (internal quotation marks and citations omitted).
*7 Pursuant to Rule 42(a) of the Federal Rules of Criminal Procedure, punishment for criminal contempt must take place after "prosecution on notice." Fed. R. Cr. P. 42(a). "The Court must request that the contempt be prosecuted by an attorney for the government, unless the interest of justice requires the appointment of another attorney." Fed. R. Cr. P. 42(a)(2). The Court must give the alleged contemnor "notice in open court" of the prosecution, and the notice must include "the essential facts constituting the charged criminal contempt." Fed. R. Cr. P. 42(a)(1)(C). The right to a trial by jury is also guaranteed for "serious" criminal contempt allegations potentially resulting in more than six months imprisonment. Int'l Union, United Mine Workers v. Bagwell, 512 U .S. 821, 826-27 (1994); see also Fed. R. Cr. P. 42(a)(3).
On the record before the Court, there is reason to believe that Reich is in criminal contempt of the Attachment Order. The Court therefore refers this matter to the United States Attorney's Office for the Southern District of New York for investigation and, if the United States Attorney deems it appropriate, prosecution.
CONCLUSION
For the reasons stated above, the defendant Edith Reich is held in civil contempt of this Court's Attachment Order. Reich is hereby ordered to deliver to the United States Marshal in this district the sum of $785,000 within twenty days of the date of this order. Should Reich fail to comply with this order, the plaintiff may seek additional sanctions for her contempt, including but not limited to imprisonment. This matter is also hereby referred to the United States Attorney for the Southern District of New York for investigation, and possible prosecution for criminal contempt of court.
In re Taylor, ___ B.R. ___, 2006 WL 1275400 (Bankr.C.D.Ill. No. 05-93559, May 9, 2006)
Summary: In this case, the debtor inherited an IRA from her aunt, and then unsuccessfully tried to claim that the IRA was exempt from creditors. The court held that an inherited IRA is not exempt. The case should be used to illustrate the need for parents to plan for asset protecting their IRA from potential creditors of their children.
United States Bankruptcy Court,
C.D. Illinois.
In re Janice J. TAYLOR, Debtor.
Bankruptcy No. 05-93559.
May 9, 2006.
Stephen K. Sheffler, Champaign, IL, for Debtor.
OPINION
GERALD D. FINES, United States Bankruptcy Judge.
This matter having come before the Court on an Objection to Debtor's Claim of Exemption Amended Schedule C filed by the Chapter 7 Trustee; the Court, having heard arguments of counsel and having reviewed written memoranda of the parties; makes the following findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
Findings of Fact
The parties to this matter have agreed that there are no disputes as to the material facts, and those facts are, in pertinent part, as follows:
1. The Debtor filed for relief under Chapter 7 of the Bankruptcy Code on September 23, 2005.
2. In Schedule B of the Debtor's Bankruptcy Petition and in two subsequent amendments thereto, the Debtor scheduled her interest in the following assets:
(a) Susan E. Thompson IRA Funds. The Debtor scheduled a 50% share in IRA funds as a co-beneficiary upon the death of her aunt, Susan Elaine Thompson. The total value of Debtor's interest as of September 30, 2005, was $196,596.11.
(b) Payable upon Death Funds. The Debtor scheduled a 50% interest in an account having a total value of $87,178.69, as of October 31, 2005, as one of the individuals that would be paid the proceeds of this account upon the death of the Debtor's aunt, Susan Elaine Thompson. Debtor's interest in this account totaled $43,632.85, as of October 31, 2005.
(c) Inter Vivos Trust, which named the Debtor as a 50% beneficiary with Debtor's interest in the trust to be distributed to the Debtor one year after the date of the death of her aunt, Susan Elaine Thompson.
(d) Life Insurance Benefits, in the amount of $558.74, payable to the Debtor on the death of Susan Elaine Thompson.
(e) Debtor's 50% Share in Distribution Under the Will of her Aunt, Susan E. Thompson, with an approximate value of $38,778.08. This value is to be distributed through the Inter Vivos Trust noted above. At the time of Debtor's Chapter 7 bankruptcy filing, her aunt, Susan Elaine Thompson, was still alive; however, Susan Elaine Thompson died as a resident of Douglas County, Illinois, on November 12, 2005. Thus, the contingent interests which the Debtor held at the time of her Chapter 7 bankruptcy filing became vested.
Conclusions of Law
While the Debtor concedes that the life insurance benefits, in the amount of $558.74, are property of the bankruptcy estate, the Debtor maintains that all of the other assets listed above are not property of her bankruptcy estate, and would be exempt, even if they were deemed to be property of her Chapter 7 bankruptcy estate. In opposition to the Debtor's position, the Chapter 7 Trustee maintains that all of the above-listed assets are property of the Debtor's bankruptcy estate and are not exempt, pursuant to the provisions of 735 ILCS 5/12-1001, et seq.
Given that the Debtor does not dispute that the life insurance proceeds are property of her bankruptcy estate and are not exemptible, the Court finds that those proceeds should be turned over to the Trustee at the earliest possible moment, and no further discussion of those proceeds is necessary. In the interest of clarity, the Court will address each of the other assets contested by the parties individually, beginning with the IRA funds, of which Debtor is a 50% beneficiary.
As for the IRA funds, the Court finds that the Debtor's interest in those funds is property of the bankruptcy estate, pursuant to 11 U.S.C. § 541(a)(1). The scope of § 541(a)(1) is broad and has been held to include all legal and equitable interests of a Debtor in property as of the commencement of a Chapter 7 case, regardless of whether the Debtor is able to transfer that interest or Debtor's creditors are able to reach it. In re Edmonds, 263 B.R. 828 (Bankr.E.D.Mich.2001); In re Knight, 164 B.R. 372 (Bankr.S.D.Fla .1994), and In re Yonikus, 996 F.2d 866 (7th Cir.1993). Also in this regard, the Court finds that the provisions of 11 U.S.C. § 541(a)(1) apply, rather than the provisions of § 541(a)(5), as asserted by the Debtor. In addition to finding that the Debtor's interest in the subject IRA funds is property of her bankruptcy estate, the Court also concludes that the Debtor's interest in said funds is not exempt. Pursuant to 735 ILCS 5/12-1006, the Internal Revenue Service treatment of an IRA is the determining factor as to whether or not the funds in said IRA shall be exempt. An inherited IRA is not exempt from being taxed as gross income pursuant to 26 U.S.C. § 408(d)(3)(C). For exemption purposes, inherited IRAs are not treated the same as IRAs having funds which the Debtor contributed to. Once an IRA has been inherited, the beneficiary may make no contributions to the account, nor may he or she roll over the inherited individual retirement account into another retirement plan. For all of these reasons, the Court finds that the IRA funds in question are not exempt under 735 ILCS 5/12-1006. See: In re Navarre, 332 B.R. 24 (M.D.Ala.2004); and In re Sims, 241 B.R. 467 (Bankr.N.D.Okla.1999).
Next, the Court turns to the Payable on Death Funds which the Debtor argues are not property of her bankruptcy estate in that the provisions of 11 U.S.C. § 541(a)(5) do not apply, so as to include these funds. While the Court agrees with Debtor's position that § 541(a)(5) does not apply, the Court finds that the Payable on Death Funds are property of the Debtor's bankruptcy estate pursuant to the provisions of 11 U.S.C. § 541(a)(1). As stated above, under the authority of the cases of Edmonds, Knight, and Yonikus, while the Debtor's interest in the Payable on Death Funds was a contingent interest at the time of her filing for bankruptcy, it was none the less an interest that is included as an asset of the Debtor's Chapter 7 estate pursuant to the sweeping language of § 541(a)(1). Given the finding that the Payable on Death Funds are property of Debtor's Chapter 7 estate, the Court must also consider whether said funds are exempt. In so doing, the Court can find no exemption under Illinois exemption law which would exempt these funds.
As for the Inter Vivos Trust established by Susan Elaine Thompson on May 14, 2003, the Debtor is named as a 50% beneficial holder with a right to distribution from the trust estate one year after the death of her aunt, Susan Elaine Thompson. Here again, the Court finds that the Debtor's interest in the Inter Vivos Trust is property of her bankruptcy estate, and, the fact that she is not eligible to receive any distribution from that trust until one year after the death of her aunt does not defeat the bankruptcy estate's interest in the trust. See: In re Smith, 189 B.R. 8 (D.C.N.D.Ill.1995); In re Knight, supra, at 374. In addition to concluding that the Debtor's interest in the Inter Vivos Trust is property of the bankruptcy estate, the Court also concludes that the Debtor's interest is not subject to any exemption cognizable under Illinois law.
Finally, the Court addresses the Debtor's interest in property that will pass by will of Susan E. Thompson, and finds that, pursuant to 11 U.S.C. § 541(a)(5), said property is property of the Debtor's bankruptcy estate. The Court makes this finding even though said property will pass through the will into the Inter Vivos Trust noted above, and will not be distributable to the Debtor until one year after the death of her aunt, Susan Elaine Thompson. This conclusion is supported by the provisions of 11 U.S.C. § 541(a)(5) and by the case law cited above. In particular, the Court finds ample support for its conclusion in the Knight case from the Southern District of Florida and in the Smith case from the Northern District of Illinois. The Court also concludes that the Debtor's interest in any property passing through her aunt's will into the trust estate and eventually to the Debtor is not exempt under Illinois law.
In conclusion, the Court finds that all of the assets which the Debtor has scheduled in her Second Amendment to Schedule B are assets of her bankruptcy estate, and, as such, they would be administered by the Trustee. In addition, the Court finds that the Trustee's Objection to Debtor's Claim of Exemption Amended Schedule C should be allowed, and that the Court is unable to conclude that any exemptions afforded to the Debtor under Illinois law are applicable to the subject assets.
IT IS SO ORDERED.
ORDER
For the reasons set forth in an Opinion entered on this day of May 2006;
IT IS HEREBY ORDERED that:
A. Objection to Debtor's Claim of Exemption Amended Schedule C filed by the Chapter 7 Trustee is ALLOWED; and,
B. The assets scheduled by the Debtor on her Second Amendment to Schedule B are determined to be property of the Debtor's bankruptcy estate, and, as such, should be made available to the Chapter 7 Trustee for administration in Debtor's bankruptcy estate.
In re Orgeron, ___ B.R. ___, 2006 WL 335438 (Bankr.W.D.Mo. No. 05-63826, Feb. 2, 2006)
Summary: This case illustrates that contributions to an IRA made with the intention of protecting it from creditors and within three years (because of Missouri fraudulent transfer law) of the date of the filing of the bankruptcy petition were not exempt and would be available to creditors. This case shows that one should not make contributions to an IRA for the stated purpose of defeating creditors or pre-bankruptcy planning. Theoretically, it calls into question whether a rollover contribution made for the stated purpose of gaining the exemption would be available to creditors.
United States Bankruptcy Court,
W.D. Missouri.
In re: Rorie Joseph ORGERON, Sr., and Rose Herty Orgeron, Debtors.
No. 05-63826.
Feb. 2, 2006.
Kenneth P. Reynolds, Reynolds, Gold & Grosser, Springfield, MO, for Debtors.
ORDER SUSTAINING TRUSTEE'S OBJECTION TO EXEMPTIONS IN INDIVIDUAL RETIREMENT ACCOUNTS AND WITHDRAWING OBJECTION TO HOMESTEAD EXEMPTION
FEDERMAN, Bankruptcy J.
*1 The Chapter 7 Trustee filed an Objection to the Debtors' claimed exemptions in their homestead and four Individual Retirement Accounts. At the hearing on the Objection, the Trustee announced that he was withdrawing his Objection as to the homestead. He maintained his Objection to exemptions claimed in the IRAs, however, on the ground that the Debtors had each deposited $3,375 into the IRAs within thirty days before filing their bankruptcy petition and that such deposits were fraudulent under § 513.430.1(10)(f) of the Missouri Statutes. [FN1]
FN1. Mo.Rev.Stat. § 513.430.1(10)(f).
According to the testimony of Debtor Rorie Orgeron, the Debtors had established four IRAs through employment or other contributions prior to 2002 or 2003. Since that time, however, the Debtors had not made any contributions to their retirement because Mr. Orgeron's current employer does not participate in an employee retirement plan and Mrs. Orgeron is unemployed.
The Debtors filed their voluntary bankruptcy petition on October 12, 2005. In their Schedules, the Debtors claimed exemptions in the four IRAs totaling $30,236.08. The Trustee objected to those exemptions to the extent that the Debtors had deposited a combined total of $6,750 into two of those IRA accounts within thirty days prior to filing their bankruptcy petition.
With regard to the recent deposits into the IRAs, Mr. Orgeron testified that, in 2003, the Debtors sold a coin collection and that they received checks totaling over $28,000 from the sale of the coins at that time. The Debtors held on to the checks, without cashing or depositing them, until the summer of 2005. After consulting with a bankruptcy attorney in the summer of 2005, they cashed the checks. The Debtors used some of those funds to pay bills and for other items, and, within thirty days before they filed their bankruptcy petition, the Debtors each deposited $3,375 from the coin sale proceeds into the existing IRAs described above. Mr. Orgeron further testified that they made the deposits because he and his wife were 52 and 53 years old and that the IRAs were their only means for retirement, other than social security benefits. He said he and his wife, in effect, viewed the uncashed checks, in part, as a form of savings for retirement. He candidly testified that the recent deposits into the IRAs were made as part of their "bankruptcy planning" after consulting with a bankruptcy attorney.
The Bankruptcy Code permits a state to opt out of the federal bankruptcy scheme. [FN2] The State of Missouri has exercised this option. [FN3] Section 513.430.1(10)(f) of the Missouri Statutes provides, in pertinent part, that a debtor is permitted to claim an exemption in such person's right to receive:
FN2. 11 U.S.C. § 522(b)(1).
FN3. Mo.Rev.Stat. § 513.427 (2002).
(f) Any money or assets, payable to a participant or beneficiary from, or any interest of any participant or beneficiary in, a retirement plan or profit-sharing plan that is qualified under Section 401(a), 403(a), 403(b), 408, 408A or 409 of the Internal Revenue Code of 1986, as amended, except as provided in this paragraph....
*2 If proceedings under Title 11 of the United States Code are commenced by or against such person, no amount of funds shall be exempt in such proceedings under any such plan, contract, or trust which is fraudulent as defined in section 456.630, RSMo, and for the period such person participated within three years prior to the commencement of such proceedings. For the purposes of this section, when the fraudulently conveyed funds are recovered and after, such funds shall be deducted and then treated as though the funds had never been contributed to the plan, contract, or trust. [FN4]
FN4. Mo.Rev.Stat. § 513.430.1(10)(f).
In other words, in a bankruptcy case, a debtor is not entitled to claim an exemption in funds deposited into an otherwise exempt retirement account if the debtor's deposit of such funds into the account is "fraudulent" as defined in § 456.630. [FN5] Unfortunately, § 456.630, which was part of the statutory scheme relating to trusts and estates of decedents, was repealed in 2004, but § 513.430.1(10)(f) was not correspondingly modified to reflect a change in definition of "fraudulent." Nevertheless, I find that the language contained in § 456.630 remains helpful in this context.
FN5. Mo.Rev.Stat. § 456.630 (1992).
Subsection (10)(f) was added to the Missouri exemption statute in 1992, simultaneously with an amendment to § 456.630 (relating to trusts) which was amended to include the definition for "fraudulent." [FN6] The 1992 amendment to § 456.630 provided that, for purposes of determining whether a party transferred funds to a spendthrift trust fraudulently as to a creditor:
FN6. Sections 513.430.1(10)(f) and 456.630 were part of Senate Bill 447, which were enacted "for the purpose of changing the disposition of certain property in bankruptcy proceedings." See S.B. 447, 86th Gen. Ass., 2nd Reg. Sess. (Mo.1992).
"Fraud" includes the transfer of funds ... (a) [w]ith the intent to hinder, delay, or prevent the creditor from collecting a lawful debt; (b) [w]hen such party was, or shortly before he became, insolvent; (c) [w]hen such party was not paying his debts as they became due; or (d) [w]hile any creditor lawsuit was pending against such party. [FN7]
FN7. Mo.Rev.Stat. § 456.630 (1992).
Based on this language, and absent a different definition for "fraudulent" after the repeal of § 456.630, I find that, under § 513.430.1(10)(f), a debtor may not claim an exemption in otherwise exempt retirement funds if the debtor deposited those funds into the retirement account within three years prior to filing for bankruptcy protection, and the deposits were made with the intent to hinder, delay, or prevent the creditor from collecting a lawful debt; or when such party was, or shortly before he became, insolvent; or when such party was not paying his debts as they became due; or while any creditor lawsuit was pending against the debtor. To put it simply, contributions to retirement accounts made in contemplation of bankruptcy are not exempt. Such funds are to be treated "as though the funds had never been contributed to the [retirement] plan." [FN8]
FN8. Mo.Rev.Stat. § 513.430.1(10)(f).
As stated above, the Debtors in this case frankly admit that they made the disputed deposits into their retirement accounts in contemplation of filing their bankruptcy case, which fits within the definition of fraud discussed above. Because the deposits were "fraudulent" under § 513.430.1(10)(f), they are not exempt.
*3 Accordingly, the Trustee's Objection to the exemptions claimed in the IRAs is SUSTAINED to the extent of the $6,750 in deposits made in contemplation of filing their bankruptcy petition. In all other respects, however, the Debtors' claimed exemptions in their retirement funds are ALLOWED. The Trustee's Objection to the exemption claimed in the Debtor's homestead is WITHDRAWN.
Summary: Bankruptcy court held that debtor's funds that were rolled over from an ESOP in which the debtor was a participant to an IRA would be protected from creditors, since the funds were exempt from creditors when they were in the ESOP.
United States Bankruptcy Court, S.D. Florida.
In re Francis Joseph KANE, Debtor.
No. 05-31145BKC-SHF
Jan. 4, 2006.
Michael R. Bakst, West Palm Beach, FL, for trustee. John F. Longley, Esq., Port St. Lucie, FL, for debtor.
ORDER OVERRULING OBJECTION TO CLAIMED EXEMPTIONS
STEVEN H. FRIEDMAN, Bankruptcy Judge.
THIS CAUSE came on to be heard on July 26, 2005, upon the Trustee's Objection to Amended Claimed Exemptions and Application for Turnover ("Objection to Claimed Exemptions") (C.P. 17), filed by Michael R. Bakst, Chapter 7 Trustee ("Trustee"). By way of his Objection to Claimed Exemptions, the Trustee objects to the Debtor's claimed exemptions as to his individual retirement account maintained with SmithBarney citigroup under Account No. 431- 66730-13, in the approximate amount of $178,000.00. The Court, having considered the Objection to Claimed Exemptions, together with the evidence adduced at the July 26, 2005 hearing, the argument of counsel, and for the reasons set forth below, overrules the Trustee's Objection to Claimed Exemptions, and determines the entirety of the funds held in the Debtor's IRA is exempt.
JURISDICTION
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334(b) and Bankruptcy Rule 9014.
BACKGROUND
The instant controversy emanates from the Debtor's filing of his voluntary chapter 7 petition on March 18, 2005. Contemporaneously, the Debtor filed his bankruptcy schedules, and under Schedule C--Property Claimed as Exempt, listed his individual retirement account ("IRA") maintained with SmithBarney citigroup ("SmithBarney") in the amount of $178,000. As his authority supporting his claim of exemption for his IRA, the Debtor cited Florida Statutes § 222.21. Subparagraph (2)(a) of this statute provides an exemption from claims of creditors for funds maintained in a retirement or pension plan which has been pre-approved by the Internal Revenue Service as exempt from taxation. The Trustee filed his initial objection to claimed exemptions on May 20, 2005 (C.P. 5), contending that the $178,000.00 maintained in the Smith Barney IRA was derived from funds received by the Debtor pursuant to his employee stock ownership plan maintained through his former employer, the Carey Winston Company of Chevy Chase, Maryland. On June 29, 2005, the Debtor filed his Amendment to Schedules (C.P. 13), whereby the Debtor amended his Schedule C--Property Claimed as Exempt. With regard to the Debtor's claimed exemption relating to his individual retirement account, the Debtor amended Schedule C-- Property Claimed as Exempt, again claiming his SmithBarney IRA to be exempt, but providing, as his authority for the claimed exemption:
11 U.S.C. § 541(c)(2) and Fla. Stat. § 222.21.
In response, the Trustee filed his pending Objection to Claimed Exemptions, again asserting that the funds maintained in the Debtor's IRA were generated through his employee stock ownership plan ("ESOP") deriving from his employment with Carey Winston Company. More specifically, it is the Trustee's position that the Debtor's transfer of funds from his ESOP into his IRA represents a transfer of a non-exempt asset into a form of investment (an individual retirement account) which otherwise would be exempt. By virtue of the referenced transfer, the Trustee contends that the Debtor's IRA "lost its exemption status" (C.P. 17--¶ 5).
It is uncontroverted that the Debtor was employed by the Carey Winston Company, a mortgage brokerage firm, from 1962 through 1982, when the Debtor terminated his employment. Throughout the term of his employment, the Debtor was a "Participant" in the Carey Winston Company Employee Stock Ownership Plan (Debtor's Ex. A). The ESOP was administered by a Committee consisting of at least two members, membership of which was designated by the Plan Administrator (Debtor's Ex. A--Section 5.1) [FN1]. The ESOP provided for the maintenance of separate accounts for each participant (Debtor's Ex. A--¶ 9.1). Any right of a Participant to benefits under ESOP was not subject to voluntary or involuntary transfer or assignment (Debtor's Ex. A--¶ 17.1), and a Participant would be entitled to receive Retirement Benefits only upon a Participant's attainment of his Retirement Date (Debtor's Ex. A--¶ 11). Of particular relevance, the "Retirement Date" of a Participant "...shall mean the later to occur of (i) the date a Participant attains age 65, or (ii) the fifth anniversary of the date the Participant became a Participant...." (Debtor's Ex. A--¶ 2.34). Pursuant to the terms of the ESOP, Participants were neither required nor permitted to make contributions toward their respective ESOP accounts (Debtor's Ex. A--¶ 6.2).
FN1. There is no evidence or contention that the Debtor managed or controlled any aspect of the investment of funds in his ESOP.
On June 22, 2001, almost twenty years after the Debtor had concluded his employment with The Carey Winston Company, the Debtor requested a $25,000 loan from his former employer, then known as Transwestern Carey Winston, to be collateralized by the accumulated value in his ESOP (Debtor's Ex. F). As of the date of his request, the Debtor was 62 years old. Notwithstanding the fact that the Debtor's benefits under his ESOP were fully vested (Debtor's Ex. A--¶ 14.1), his loan request was rejected by Transwestern Commercial Services, the Plan Administrator for The Carey Winston Company Employee Stock Ownership Plan (Debtor's Ex. G--pg. 1). Thereafter, on August 26, 2004, and after having attained his 65th birthday, the Debtor submitted his Distribution Election for his ESOP (Debtor's Ex. G--pg. 2). On or about September 24, 2004, the checks totaling $162,190.21 were issued by or on account of the ESOP (Debtor's Ex. G-- pgs. 3, 4 and 8). Simultaneously, the funds were rolled over and transferred into the Debtor's IRA account maintained with SmithBarney (Debtor's Ex. G--pg. 9; Debtor's Ex. H; Trustee's Ex. 11). An examination of Debtor's Exhibits G and H, and Trustee's Exhibit 11, reveals that all of the proceeds from the rollover of the Debtor's Carey Winston Company ESOP were transferred into the Debtor's IRA.
The gravamen of the Debtor's argument is that the $162,190.21 transferred from his ESOP into his IRA account constituted assets held in a spendthrift trust. By claiming that the proceeds derived from the ESOP are exempt pursuant to 11 U.S.C. § 541(c)(2), the Debtor effectively contends that such proceeds ("rollover proceeds") were held in a spendthrift trust. Section 541(c)(2) provides:
A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable in a case under this title.
As noted in Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992), "[t]he natural reading of the provision entitles the debtor to exclude from property of the estate any interest in a plan or trust that contains a transfer restriction enforceable under any relevant nonbankruptcy law". Typically, in this Circuit, the cited reference to "applicable non- bankruptcy law" invokes state spendthrift trust law. In re Brown, 303 F.3d 1261 (11th Cir.2002); rehearing denied 67 Fed.Appx. 590 (11th Cir.2002).
Under Florida law, the purpose of a spendthrift trust is to protect the beneficiary not only from himself, but also from his creditors. Croom v. Ocala Plumbing & Electric Co., 62 Fla. 460, 57 So. 243 (1911); In re Spears, 121 B.R. 896 (Bankr.M.D.Fla.1990). Sub judice, at the hearing on the Objection to Claimed Exemptions, the Trustee placed considerable reliance upon the decisions of In re Spears, 121 B.R. 896 (Bankr.M.D.Fla.1990) and In re Nichols, 42 B.R. 772 (Bankr.M.D.Fla.1984). The Trustee's reliance upon Spears and Nichols is misplaced. In Spears, the debtor was able to reach his vested interest under the employee stock ownership plan by reaching age 55 and after ten years of service to his employer, and was entitled to receive his full vested interest upon termination of his employment. Unlike Spears, Mr. Kane had no right or ability to reach his vested interest in his ESOP by terminating his employment prior to attaining retirement age. Indeed, his request to borrow $25,000 against the proceeds held pursuant to his ESOP was denied. As to the Trustee's reliance upon Nichols, the instant Debtor, unlike the debtor in Nichols, could not compel a distribution of any portion of his vested interest in his employee stock ownership plan, and also, was unable to borrow against his employee stock ownership plan interest.
Since the Debtor's interest in his ESOP meets the requisite for a spendthrift trust under Florida law, such interest is excluded from the instant bankruptcy estate. See, In re Brown, supra. at 1265. As the Debtor's ESOP proceeds did not constitute property of this estate, his rollover of the proceeds into his SmithBarney IRA did not vitiate the exempt nature of his individual retirement account. Accordingly, the Trustee's Objection to Amended Claimed Exemptions and Application for Turnover is overruled.
Aebig v. Cox, 2006 WL 1360504 (Mich.App. No. 258505, May 18, 2006) (not published).
Summary: This case deals with a self-directed IRA, where the debtor's IRA leased real property to a corporation of which his wife was the sole shareholder. The court held that the real property was not exempt from collection.
Gretchen COX and Terry Cox, Defendants/Counter-Plaintiffs/Cross-Defendants-Appellants.
Docket No. 258505.
May 18, 2006.
Grand Traverse Circuit Court; LC No. 02-022039-CK
Before: SAWYER, P.J., and KELLY and DAVIS, JJ.
PER CURIAM.
Defendants appeal from a garnishment order entered against real property (the property) formerly held by defendant Terry Cox's Individual Retirement Account (the IRA). We affirm.
This case arose out of a February 20, 2003, judgment plaintiff obtained against defendants, on which plaintiff attempted to collect. After numerous attempts to reach defendants' assets, on March 26, 2004, plaintiff moved to satisfy her judgment by executing on real property owned by the IRA. Plaintiff argued that the IRA had ceased to be an IRA pursuant to 26 USC 408(e)(2)(A) because defendant Terry Cox had improperly leased the property to Mr. Bear's Lair, a Subchapter-S corporation, 26 USC 1361(a), solely owned by defendant Gretchen Cox, Terry Cox's wife. On June 2, 2004, the trial court issued a garnishment order, finding that the IRA had entered into a "prohibited transaction" under 26 USC 4975(c)(1)(A). However, upon learning that defendants had filed for bankruptcy in the meantime, the trial court stayed that order. The United States Bankruptcy Court lifted its stay on September 15, 2004, and the trial court reinstated its garnishment order on September 27, 2004. Defendants appeal.
Defendants first argue that the circuit court lacked subject matter jurisdiction over plaintiff's motion to aid in execution of the property. We disagree. We review whether a court has subject matter jurisdiction de novo. Davis v. Dep't of Corrections, 251 Mich.App 372, 374; 651 NW2d 486 (2002). We also review de novo issues of statutory interpretation. ISB Sales Co v. Dave's Cakes, 258 Mich.App 520, 526; 672 NW2d 181 (2003). Unless implicitly or explicitly precluded by Congress, state courts are presumed competent to exercise subject-matter jurisdiction over federal-law claims. Office Planning Group, Inc v Baraga-Houghton-Keweenaw Child Dev Bd, 472 Mich. 479, 493; 697 NW2d 871 (2005).
Defendants first argue that 29 USC 1132 of the Employee Retirement Security Income Act (ERISA) vests exclusive jurisdiction with the federal courts to determine whether Terry Cox's self-directed IRA was terminated by a prohibited transaction. Under § 1132(e)(1), jurisdiction is prescribed as follows:
(1) Except for actions under subsection (a)(1)(B) of this section, the district courts of the United States shall have exclusive jurisdiction of civil actions under this subchapter brought by the Secretary or by a participant, beneficiary, fiduciary, or any person referred to in section 1021(f)(1) of this title. State courts of competent jurisdiction and district courts of the United States shall have concurrent jurisdiction of actions under paragraphs (1)(B) and (7) of subsection (a) of this section. [Emphasis added.]
"This subchapter" refers to subchapter I, 29 USC 1001-1191c, so § 1132(e)(1) generally provides that federal district courts have exclusive jurisdiction over civil actions brought under those sections. However, plaintiff brought this action in state court under state law, asserting breach of contract, fraud, misrepresentation, and violation of the Michigan Consumer Protection Act, MCL 445.901 et seq. Therefore, 29 USC 1132(e)(1) does not divest the circuit court of jurisdiction over the subject matter in this action.
Defendants also claim that 26 USC 7476 provides the United States Tax Court with exclusive jurisdiction over this matter. However, plaintiff never sought declaratory relief under that section. Because plaintiff is not "a petitioner who is the employer, the plan administrator, an employee who has qualified under regulations prescribed by the Secretary as an interested party for purposes of pursuing administrative remedies within the Internal Revenue Service, or the Pension Benefit Guaranty Corporation," 26 USC 7476(b)(1), plaintiff did not have standing to sue under that section. In the absence of any other indication that Congress intended to confine jurisdiction to the federal courts, we conclude that the circuit court had jurisdiction in this matter.
Defendants then argue that the circuit court erred in concluding that Mr. Bear's Lair was a "disqualified person" under 26 USC 4975(e)(2), making the lease at issue a prohibited transaction under § 4975(c)(1)(A). We disagree.
Generally, an IRA is exempt from executions to collect on a judgment. MCL 600.6023(1)(k). However, under 26 USC 408(e)(2)(A) of the Internal Revenue Code, an IRA ceases to be an IRA as follows:
If, during any taxable year of the individual for whose benefit any individual retirement account is established, that individual or his beneficiary engages in any transaction prohibited by [26 USC 4975] with respect to such account, such account ceases to be an individual retirement account as of the first day of such taxable year.
A "prohibited transaction" under 26 USC 4975(c)(1)(A) means, in relevant part, "any direct or indirect ... sale or exchange, or leasing, of any property between a plan and a disqualified person." The parties do not dispute that the IRA was a "plan" for the purposes of the Internal Revenue Code. 26 USC 4975(e)(1). Therefore, the question is whether the lease with Mr. Bear's Lair constituted a transaction with "a disqualified person."
There is no dispute that Gretchen Cox, personally, would be "a disqualified person" because she is "a member of the family" under § 4975(e)(2)(F), the definition of which includes a spouse. 26 USC 4975(e)(6). However, the transaction was between the IRA and the corporation. Even where one individual is the sole owner of all stock in a Subchapter-S corporation, the corporation must ordinarily be respected as a distinct entity in the absence of a subversion of justice or other overriding public policy. Rymal v. Baergen, 262 Mich.App 274, 293; 686 NW2d 241 (2004); Ross v. Auto Club Group, 269 Mich.App 356, 361; ___ NW2d ___ (2006). We do not now address whether the circumstances of this case warrant piercing the corporate veil.
Therefore, most of the list of "disqualified persons" could not apply because they refer to individuals. The only possible disqualification is listed under 26 USC 4975(e)(2)(G) as follows:
a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of--
(i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation,
(ii) the capital interest or profits interest of such partnership, or
(iii) the beneficial interest of such trust or estate,
is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C), (D), or (E).
Again, Gretchen Cox owned more than 50 percent of all stock in Mr. Bear's Lair, so if she is a person listed under § 4975(e)(2)(A) through (E), the corporation that she owns would be a "disqualified person" without any need to pierce the corporate veil.
Further, § 4975(e)(2)(G) includes direct or indirect ownership. Under § 4975(e)(4), "indirect stockholdings which would be taken into account under [26 USC 267(c) ]" are included for the purposes of § 4975(e)(2)(G)(i). Among other provisions, 26 USC 267(c)(2) states that "[a]n individual shall be considered as owning the stock owned, directly or indirectly, by or for his family ." By operation of 26 USC §§ 267(c)(2), 4975(e)(2)(F), and 4975(e)(4), Terry Cox must be considered an indirect owner for the purposes of 26 USC 4975(e)(2)(G). Therefore, if either Gretchen or Terry Cox qualify under § 4975(e)(2)(A) through (E), the corporation would be a "disqualified person."
The IRA was a self-directed IRA that Terry Cox managed and controlled. Therefore, Terry Cox was a "fiduciary" of the IRA as defined by § 4975(e)(3), including anyone who "exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets" or who "has any discretionary authority or discretionary responsibility in the administration of such plan." A fiduciary is a "disqualified person" by operation of § 4975(e)(2)(A). Therefore, Terry Cox's indirect ownership of Mr. Bear's Lair, as a person described in subparagraph (A), renders the corporation a "disqualified person" under subparagraph (G).
Defendants finally argue that the trial court erred by failing to consider the possibility of a good faith exception to finding the transaction prohibited, as they allege is permitted under 26 USC 4975(c)(2) of the Internal Revenue Code and 29 USC 1108 of the Employee Retirement Income Security Program (ERISA). We disagree. The latter section is inapplicable because there is no issue here regarding transactions prohibited by ERISA. The former section unambiguously provides that only the Secretary of the Treasury [FN1] has the authority to grant an exception, and even then "only after consultation and coordination with the Secretary of Labor," who has already denied defendants an exception. The trial court has jurisdiction to determine whether a prohibited transaction took place, but it has no jurisdiction to consider granting an exception.
FN1. Or the Secretary's delegate. 26 USC 7701(a)(11)(B).
U.S. v. Townley, Slip Copy, 2006 WL 1345248 (9th Cir. No. No. 04-35767, May 17, 2006), case below (E.D.Wash. No. CV-02-00384-RHW, July 29, 2004).
A couple made transfers of property to a trust at a time that they had no current creditors, for the stated purpose of protecting their assets against the claims of future unknown creditors. When later they had incurred a federal tax liability, the court held that the fact that they had done asset protection planning to defeat the claims of future unknown creditors was enough to satisfy the actual intent element of the Washington fraudulent transfer laws as to the IRS.
The court also held that the trust to which the couple transferred their assets was in fact their nominee and alter ego, where the couple made no rent payments to the trust while continuing to live in the home that had been transferred, and where the affairs of the trust and the couple were so liquid and intertwined as to be indistinguishable.
FACTS
The Townleys had owned their personal residence since 1977. In 1990, the couple borrowed against the equity in their personal residence to purchase an interest in investment property.
In 1995, the Townleys created the Beaver Valley Trust and conveyed their personal residence and interest in the investment property into this new trust. Although the Beaver Valley Trust has an independent trustee and their children were the beneficiaries, the Townleys were made the "Trust Managers" for an indefinite period and given the power to handle all trust affairs. Of course, they still lived in their personal residence, but did not pay any rent to the trust or even make the utility payments.
By 2000, the Townley had gotten themselves into tax trouble and had been assessed nearly $175,000 in unpaid taxes, interest and penalties.
In 2001, the Townleys filed for bankruptcy to attempt to wash out their federal tax liability. Although the Townleys' objection to the IRS's claim was denied, the Townleys were given a discharge and the bankruptcy trustee reported that there was no unsecured property available for distribution.
The IRS then filed suit in U.S. District Court to reduce the federal tax assessments to judgment, set aside the transfers to the Beaver Valley Trust as fraudulent, and to foreclose on the federal tax liens.
The Townleys claimed that they did not make the transfers to defraud the IRS, since the IRS was not even their creditor at the time. Instead, they created and transferred property into the Beaver Valley trust to protect their assets from unknown future creditors. Mr. Townley testified that he was concerned about potential "lawsuits from the exposure we had from liability from troubled boys in the State of Washington."
The District Court held that since the Townleys transferred their property to the Beaver Valley Trust before the IRS became a creditor, they would be considered a future creditor of the Townleys under Washington law.
Far from exculpating the Townleys from a fraudulent transfer, the District Court held that their admission that they made the transfers to protect against unknown future creditors was a veritable confession of their actual intent to hinder, delay or defraud all creditors, including the IRS:
"[The Townleys] assert that no 'hypothetical future judgment creditor' exists, nor did one ever exist. * * * [The Townleys fail] to realize that the IRS is such a creditor. Under [the Townleys'] reasoning, the Washington Uniform Fraudulent Transfer Act would never protect future creditors. A close reading of § 19.40.041, however, demonstrates that this section provides protections to both present and future creditors."
"Section 19.40.041 states:
"(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (1) With actual intent to hinder, delay, or defraud any creditor of the debtor." [Emphasis in original].
"If this statute is read by inserting the players in this case, it would read as follows: A transfer made or obligation incurred by the Townleys (debtor) is fraudulent as to the United States (a creditor), if the Townleys made the transfer or incurred the obligation with actual intent to hinder, delay, or defraud any potential plaintiffs who may have a cause of action (any creditor) against the Townleys (debtor). Mr. Townley's statement that he wanted to protect his assets from any potential 'lawsuits from the exposure we had liability from troubled boys in the State of Washington' represents direct evidence of his intent to defraud one of his potential future creditors, which is prohibited by § 19.40.041(a)."
The District Court then noted that in addition to satisfying the actual intent test, the Badges of Fraud that constructively prove the Townleys' intent to defraud creditors were also satisfied by their admissions:
"Here, [the Townleys] have not filed any affidavits in which they denounce any intent to defraud. Nor have they filed any affidavit testimony of other witnesses that would suppo
