Summary
ruling distributed funds lost their status as exempt retirement funds when the account was liquidated and a check to the debtor was issued
Summary of this case from Brown v. BrownOpinion
Case No. 99-02153
November 24, 1999
Martin J. Martelle, MARTELLE LAW OFFICE, Boise, Idaho, for Debtors.
Lois K. Murphy, Boise, Idaho, Trustee.
MEMORANDUM DECISION
This matter comes before the Court upon the chapter 7 Trustee's objection to the Debtors' claim of exemption. Fed.R.Bankr.P. 4003(b). The matter was heard by the Court on October 19, 1999, and the parties have rested upon their submission of evidence and argument at that hearing, and upon the pleadings of record. The Court has evaluated the same, and concludes that the Trustee's objection shall be sustained. This decision constitutes the Court's findings of fact and conclusions of law. Fed.R.Bankr.P. 9014, 7052.
BACKGROUND
On August 23, 1999, Kris and Daralie Kane ("Debtors") filed a voluntary petition for relief under chapter 7, together with their schedules and statement of financial affairs, which they executed on August 12, 1999 under penalty of perjury and declared to be true and correct to the best of their knowledge.
The Debtors' petition predicted that the case would be a "no asset" chapter 7 proceeding, and the Clerk issued notice accordingly. However on September 9, the Trustee filed an interim report and requested an asset notice. Her interim report reflected receipt of $17,437.81.
"Notice of Need to File Proof of Claim Due to Recovery of Assets," Form B 204.
These funds represent the proceeds of a check dated August 23, 1999, payable to Kris Kane by Fidelity Investments. This check resulted from the liquidation and withdrawal of Mr. Kane's holdings in a 401(k) retirement account he had with his former employer, Micron. The Trustee seized the funds when Mr. Kane attempted to cash the check.
In response to question no. 11 on their statement of financial affairs, requiring a disclosure of all financial accounts or instruments which were closed, sold or otherwise transferred within the year preceding commencement of the case, the Debtors stated that there were "None."
The Micron account and the funds therein were not disclosed on schedule B(11), which requires debtors to identify and itemize all "Interests in IRA, ERISA, Keogh, or other pension or profit sharing plans." The Debtors here disclosed only stock in an Idaho Power Company retirement account held by Daralie Kane in the amount of $2,012.77.
Schedule I stated that Daralie Kane was employed by Idaho Power, and that Kris Kane was unemployed.
The Debtors on their schedule C claimed this asset as exempt pursuant to Idaho Code §§ 11-604A and 55-1011.
These funds are also not disclosed on Schedules B(1), (2), (15), (17), (20) or (33) which require itemization of cash, funds in checking or other accounts, accounts receivable, liquidated amounts owed the debtors, contingent or unliquidated claims, or "other personal property of any kind not previously listed."
There thus was no disclosure in the Debtors' August 23 filing — in any fashion — of the Micron retirement account or the Debtors' rights to these funds.
The Debtors, on September 23, filed amended schedules B, C and F. Amended schedule B(11) discloses an interest of Kris Kane in a 401(k) retirement account with an asserted value of $21,900.00. Amended schedule C claims this amount is exempt under the same Idaho Code provisions, §§ 11-604A and 55-1011, relied upon by the Debtors to exempt the Idaho Power retirement account.
This amendment was signed and filed by the Debtors' counsel without verification by the Debtors, even though Fed.R.Bankr.P. 1008 provides: "All petitions, lists, schedules, statements and amendments thereto shall be verified or contain an unsworn declaration as provided in 28 U.S.C. § 1746." (Emphasis supplied.) However, the Court finds that the position taken in this litigation by the Debtors ratifies the amendment.
Within days, the Trustee objected to this amended claim of exemption, and the matter was heard on October 19. At this hearing, Mr. Kane testified that he requested Fidelity to cash out his Micron 401(k) account, and to pay the proceeds over to him personally by check. Mr. Kane alleges that he so instructed Fidelity by phone on the afternoon of August 23. The check issued by Fidelity was dated the same day.
Mr. Kane testified that the reason that the distribution amount is less than his claimed $21,900 interest in the 401(k) account is due to the fact that Fidelity told him it was required to withhold a certain percentage of the account for taxes since the funds were being disbursed to him directly. He further testified that it was his intent to negotiate the check, and hold the funds as cash while he "studied" various retirement alternatives and determined where to invest the funds.
DISCUSSION
Idaho Code § 11-604A provides for exemption of most retirement accounts and income:
(1) It is the policy of the state of Idaho to ensure the well-being of its citizens by protecting retirement income to which they are or may become entitled. For that purpose generally and pursuant to the authority granted to the state of Idaho under 11 U.S.C. § 522(b) (2), the exemptions in this section relating to retirement benefits are provided.
. . . .
(3) The right of a person to a pension, annuity, or retirement allowance or disability allowance, or death benefits, or any optional benefit, or any other right accrued or accruing to any citizen of the state of Idaho under any employee benefit plan, and any fund created by the benefit plan or arrangement, shall be exempt from execution, attachment, garnishment, seizure, or other levy by or under any legal process whatever. . . .
(4) For the purposes of this section, the term "employee benefit plan" means:
(a) Assets held, payments made, and amounts payable under a stock bonus, pension, profit-sharing, annuity, or similar plan or contract, providing benefits by reason of age, illness, disability, or length of service;
(b) Any plan or arrangement, whether funded by a trust, an annuity contract, an insurance contract, or an individual account, that is described in sections 401(a), 403(a), 403(b), 408 or 408A of the internal revenue code of 1986, as amended, or section 409 of the internal revenue code as in effect before January 1, 1984. The term "employee benefit plan" shall not include any employee benefit plan that is established or maintained for its employees by the government of the United States, by the state of Idaho or any political subdivision of the state, or by any agent or instrumentality of any of the foregoing.
(5) An employee benefit plan shall be deemed to be a spendthrift trust, regardless of the source of funds, the relationship between the beneficiary and the trustee or custodian of the plan, or the ability of the debtor to withdraw, borrow or otherwise become entitled to benefits from the plan before retirement.
This protection is in addition to that found in Idaho Code § 55-1011:
(1) Except as provided in subsection (2) of this section, any money or other assets payable to a participant or beneficiary from or any interest of any participant or beneficiary in, a retirement or profit-sharing plan that is qualified under sections 401(a), 403(a), 403(b), 408, 408A or 409 of the internal revenue code, as amended, is exempt from all claims of judgment creditors of the beneficiary or participant arising out of a negligent or otherwise wrongful act or omission of the beneficiary or participant resulting in monetary damages to the judgment creditor.
These statutory provisions compliment Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992) which establishes that funds in a properly ERISA-qualified account benefit from the "spendthrift" exclusion found in § 541(c)(2) of the Code and are therefore not property of the estate. 504 U.S. at 759-60, 112 S.Ct. at 2247-48.
The Court has assumed, for purposes of this opinion, that the Micron 401(k) account is ERISA-qualified and thus falls within Patterson and the Idaho Code provisions, though no evidence was presented by Debtors in this regard. Based upon the other findings and conclusions herein, the issue of ERISA qualification is ultimately immaterial.
Property of the estate, and a debtor's entitlement to exemptions, are both determined as of the filing of the petition for relief. Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 1835, 114 L.Ed.2d 350 (1991). See also, In re Bronner, 135 B.R. 645, 647 (9th Cir. BAP 1992); In re Parks, 96.2 I.B.C.R. 64-65 (Bankr.D.Idaho 1996).
In this case, the petition was filed at 2:59 p.m. on August 23, 1999. By virtue of their amendments to the schedules on September 29, Debtors assert as a fact the existence of the Micron account at the time the petition for relief was filed. The position they took at hearing is consistent. They contend that the Micron retirement account existed at filing, was properly exempt, and was only thereafter liquidated and converted to cash.
Indeed, counsel for the Debtors conceded at the hearing that this was their sole defense to the Trustee's objection.
Exhibit 1 admitted without objection at hearing consists of account information regarding the Micron 401(k) retirement account. This information comes from Fidelity Investments, which was apparently the plan administrator. That information was provided from Fidelity's offices in Covington, Kentucky on the Trustee's request. Mr. Kane during his testimony acknowledged that Fidelity was located in Kentucky and that it was to this office he made his telephone request for payment.
The Trustee's written objection asserted that the request to cash out the retirement account necessarily had to precede the issuance of the check by 7 to 10 days, an assertion based upon information she indicated was received from Fidelity. Then at hearing the Trustee represented, without objection, that according to Fidelity the check would have been dated and issued August 24, 1999 if Mr. Kane's request was received after 4:00 p.m. Eastern Time (2:00 p.m. Mountain Time) on August 23. At hearing, Mr. Kane testified that he called Fidelity "sometime" on the afternoon of August 23.
Pursuant to Federal Rule of Evidence 201(b)(2), the Court takes judicial notice of the fact that Covington, Kentucky is located in the Eastern Time Zone while Boise, Idaho is in the Mountain Time Zone. These facts are not subject to reasonable dispute, and are capable of accurate and ready determination to any standard U.S. map reflecting location of the two cities and time zones. Also, Mr. Kane in his testimony acknowledged the 2-hour time difference.
The bankruptcy petition was filed in Boise at 2:59 p.m., a time equivalent to 4:59 p.m. in Kentucky, on August 23. But the check issued by Fidelity is dated August 23. The documents included in Exhibit 1 concerning the account set forth a "transaction history" showing the withdrawals were made on August 23, and that the account's gains and losses were calculated on that date.
The Court concludes that Mr. Kane's request to issue the funds to him personally was necessarily made, the account liquidated, and the check in fact issued, prior to the filing of the petition for relief. To accept the Debtors' assertion, in testimony and the amended schedules, that the Micron account still existed at filing would require the Court to find that Fidelity, no earlier than 4:59 p.m. and before close of business, liquidated the account, calculated the gains and losses as well as the necessary withholding, and prepared a check for the net balance. Such a scenario is not plausible.
The Court cannot, under the evidence provided, establish exactly when the request to Fidelity was made, or exactly when on August 23 the account was liquidated and the check was issued. The finding that the request was made and the check issued prior to filing is obviously consistent with the representations made by the Trustee concerning Fidelity's business practices, but does not require reliance on those factual assertions. It is sufficient, for purposes of this decision, to find that Fidelity must have necessarily liquidated the account and issued the check prior to 4:59 p.m. Eastern Time on August 23.
Therefore, the Court finds and concludes at the time the petition for relief was filed, the Debtors no longer had a Micron 401(k) account, as the same had been liquidated at Mr. Kane's instruction. The Debtors' argument that Mr. Kane's Micron 401(k) account existed and was either properly exempt under the Idaho Code or not property of the estate at all under Patterson, must fail.
Though not asserted by the Debtors (because it would be inconsistent with their contention that the account was intact as of filing), the Court has also considered whether there is an exemption available for the proceeds of a retirement account terminated or liquidated pre-petition.
The Court agrees with the Trustee that In re Lowe, 97.1 I.B.C.R. 24 (Bankr.D.Idaho 1997) has previously rejected that proposition. In Lowe, the Debtor held, on the date of filing, a certificate of deposit which represented a lump sum payment of funds to Debtor of her interest in an employee pension plan which had been terminated. The Debtor claimed those funds as exempt under Idaho Code § 11-604A. The Court sustained the Trustee's objection to the claim of exemption finding that when the funds were distributed, they lost both protection under Patterson and § 541(c)(2), and were not exempt under Idaho Code § 11-604A. Id. The Court further held:
Debtor argues, however, that even if the funds represented by the CD are not otherwise exempt, the funds should retain their former protected status because they are proceeds from a qualified plan. The statute does not, however, protect funds solely because at one time they were on deposit in a qualified plan. To qualify as exempt, the funds must either continue in an employee benefit plan or be paid to Debtor on account of one of the statutory conditions.
97.1 I.B.C.R. at 25 (emphasis in original.)
It is relatively clear that the Debtors "intended" to rollover the funds (or at least some part of them) into a protected retirement vehicle. This was the intent voiced by Mr. Kane at hearing, and is reflected in his pre-hearing affidavit. Unfortunately, an intention to make property exempt does not, standing alone, accomplish that goal.
Mr. Kane's affidavit of October 15, 1999, states "[I]t was my intent to receive the funds and to roll most or all of said funds over into a new IRA account, due to the fact that I am no longer employed at Micron." Affidavit, p. 1, 5 (emphasis added.)
The Debtors could have protected these retirement funds. They could have held them in the Micron 401(k) account until after the bankruptcy was filed and after validation of a Patterson exclusion or an exemption under the Idaho Code. Alternatively, they could have accomplished a proper roll over of the funds pre-bankruptcy into a protected retirement vehicle within the ambit of the Idaho Code exemptions. See, Lowe, 97.1 I.B.C.R. at 25 ("Debtor could have protected her funds had she merely deposited them in a qualified plan.") Instead, they elected to cash out the retirement account. This action not only triggered tax liability and the requirement of Fidelity to withhold a portion of the funds, their election also meant that the funds were no longer exempt. The Debtors' decision to hold these funds in cash while investigating possible retirement alternatives, and the timing of their actions, were certainly ill-advised.
A debtor's election on how to handle his or her assets may unintentionally waive protections otherwise provided by the Code or state law. Accord, Lares v. West One Bank (In re Lares), 188 F.3d 1166 (9th Cir. 1999) (debtor elected to place proceeds of sale of exempt homestead into an account with a creditor bank, thus making those funds subject to that bank's right of setoff). As in Lowe and Lares, the Debtors here did not avail themselves of asset protection which might otherwise have been available. But the Court cannot "judicially create an exemption where none exists." Lowe, 97.1 I.B.C.R. at 25.
The Trustee's objection will be sustained, and the claimed exemption disallowed.
While the exemption issue has been resolved, another matter deserves comment. The schedules and statements were executed by the Debtors on August 12 (and by their counsel on August 18), significantly in advance of the August 23 filing. Those schedules do not disclose any interest whatsoever in the Micron retirement account or the funds in that account (even though Mrs. Kane's much smaller retirement account is disclosed.) A very serious issue is raised when Debtors verify, under penalty of perjury, the accuracy of schedules and statements which omit any disclosure of or reference to $21,900.00 of their assets. Still, despite the Court's concerns on this score, determining the ramifications and consequences of such conduct is not required in today disposing of the Trustee's objection to the claim of exemption.
CONCLUSION
Upon the evidence presented and the foregoing analysis of the authorities applicable to the matter, the Trustee's objection to the claim of exemption is SUSTAINED and the exemption will be DISALLOWED. The Trustee shall submit a form of order accordingly.
Dated this 24th day of November, 1999.