In re Bauman, 11 B 32418
| Decision Date | 04 March 2014 |
| Docket Number | No. 11 B 32418,11 B 32418 |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In re: DANIEL BAUMAN, Debtor. |
This matter is before the court for ruling after an evidentiary hearing on the objection of BankFinancial, FSB ("Bank Financial") to the exemption that debtor Daniel Bauman ("Bauman") claimed in the assets of the Bauman Venture Corporation Pension Plan and Trust (the "Bauman Venture Plan"). Bauman claimed the exemption under section 12-1006(a) of the Illinois Code of Civil Procedure, which exempts a debtor's interest in assets held in a "retirement plan." See 735 ILCS 5/12-1006(a)(2010).
For the following reasons - constituting the court's findings of fact and conclusions of law pursuant to Bankruptcy Rules 7052 and 9014(c), Fed. R. Bank. P. 7052, 9014(c) - Bauman's interest in the assets of the Bauman Venture Plan is not exempt. BankFinancial's objection will be sustained and the claim of exemption disallowed.
The court has subject matter over this case pursuant to 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). An objection to a debtor's claim of exemption is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). In re DeMarco, 491 B.R.236, 239 (Bankr. W.D. Term. 2013). The bankruptcy court is therefore empowered to enter a final judgment. 28 U.S.C. § 157(b).
The evidence at the hearing showed the following.2 Bauman is 76 years old. (Tr. at 248). Before his retirement in 2010 (id. at 69), Bauman was an active entrepreneur with considerable business acumen (see id, at 17-31). He owned a number of closely-held companies that operated various types of businesses. (Id.).
Bauman started one of his companies, Bauman Mortgage Corp. ("Bauman Mortgage") in 1974. (Tr. at 18). Bauman Mortgage was in the business of making loans to residential "rehabbers" who could not qualify for loans from banks. (Id. at 18-19). Unlike its rehabber clients, Bauman Mortgage could qualify for bank loans. (Id. at 19). Bauman Mortgage borrowed from banks at particular interest rates and then lent the borrowed funds to the rehabbers at higher rates, making money from the interest-rate spread. (Id.).
One of the banks from which Bauman Mortgage borrowed money was BankFinancial. (Id.). Bauman is individually indebted to BankFinancial either as a co-debtor on BankFinancial loans to Bauman Mortgage or as a guarantor of Bauman Mortgage's obligations. (Id. at 225; B. Ex. 1 at 15). According to BankFinancial, Bauman's debt stands at $1,822,863.34. (See Claim No. 3-2).
When Bauman Mortgage was incorporated, Bauman and his wife Roberta owned all the shares. (Tr. at 21). After Roberta's death, Bauman became the sole shareholder. (Id. at 21, 217). Bauman himself operated Bauman Mortgage; he "did the deals," sometimes five or ten at a time. (Id. at 252). Throughout its existence, Bauman was Bauman Mortgage's only employee. (See id. at 21).
About six years after he started Bauman Mortgage, Bauman formed Bauman Venture Corp. ("Bauman Venture"). (Id. at 20). Bauman was Bauman Venture's sole shareholder. (Id. at 217, 232). The company was in the consulting business, rendering services to Bauman Mortgage and other Bauman companies. (Tr. at 20, 69, 98). Just as Bauman was the only employee of Bauman Mortgage, he was the only employee of Bauman Venture and the only consultant performing services. (Id. at 20-21, 70, 254-55). The nature of those services was not disclosed; Bauman Venture's accountant, David Gilfand ("Gilfand"), described them as Bauman Venture simply "putting in its two cents on occasion" for a fee. (Id. at 222).3
Bauman testified that he never received compensation from Bauman Venture in a form reportable on a Form W-2 - that is, wages, salaries, or tips. (Id. at 97, 256, 290). Fie did not know whether he received a Form 1099 showing other types of income. (Id. at 97). Bauman explained that he did not know because it was his practice simply to "take money out [of the company] as [he] . . . needed it." (Id.). At the end of the year, he said, he would tell Gilfand the amounts withdrawn, and "then . . . [Gilfand] would do whatever magic he does." (Id.).
In describing his "magic," Gilfand disagreed that Bauman "never" received a salary fromBauman Venture. (Id. at 210). Gilfand attributed Bauman's belief that he received no W-2 income to his "being a layman [who] . . . would [not] understand the word salary because probably wages means something that was being paid to him on a weekly, monthly, or quarterly basis." (Id. at 210). Gilfand explained that Bauman was the "chief cook and bottle washer" at Bauman Venture (id. at 221), and as a small business owner he could "do whatever the heck he want[ed]" (id. at 232). According to Gilfand, Bauman could keep money in the till as retained earnings, take money out as a salary, or make a contribution to a pension plan at his discretion, in part because there is no basis under the Internal Revenue Code ("IRC") to challenge the salary of someone running a closely-held corporation. (Id. at 232-33).
Rather than receive a salary at regular intervals, Gilfand asserted, Bauman took draws throughout the year. (Id. at 194-95). At year-end, the draws were totaled and then "grossed-up" to include withholding for state and federal taxes, social security, and similar obligations. (Id. at 195, 214-15). Gilfand would instruct Bauman to issue himself a check from Bauman Venture in the grossed-up amount and endorse the check back to Bauman Venture to pay for the draws. (Id. at 195). A W-2 was issued to Bauman reporting the grossed-up amount as salary. (Id. at 214-15).
But no W-2s were introduced into evidence, nor was there any other documentary evidence that this year-end process actually occurred. Gilfand conceded that the process he described took place in the "earlier years, . . . the late '70s, '80s." (Id. at 215). For his part, Bauman remembered the year-end meetings but confessed he "never paid much attention" at them "because I did what they told me to do anyhow." (Id. at 275). Bauman testified that he never saw a W-2 and did not believe any were ever issued. (Id. at 290-91). Notwithstanding Gilfand's testimony, then, the evidence, especially the absence of documentary evidence to thecontrary, showed that Bauman received no salary from Bauman Venture from 1987 to the present.4
Bauman Venture never had annual revenues of more than $100,000, and in some years its revenues were less than $50,000. (Id. at 221-223). Its historical revenues paled in comparison with the revenues of Bauman Mortgage. (Id. at 221). Recent corporate tax returns of both entities reveal the extent of the disparity. (See B. Exs. 13, 14). In 2006, 2007, 2008, and 2009, Bauman Mortgage's income was $423,154, $344,577, $164,011, and $100,687, respectively. (B. Ex. 13 at 2003, 1986, 1967, 1947). Bauman Venture did not produce a tax return for 2006, but in 2007, 2008, and 2009, it earned $14,600, $5,000, and $0, respectively. (B. Ex. 14 at 1898, 1880, 1862). Bauman Venture reported no annual income in 2010 and 2012. (Id. at 1831, 1846).
In the late 1970s, Bauman sought advice from Gilfand about establishing a retirement plan for Bauman Mortgage. (Tr. at 189, 191). Gilfand consulted with an actuarial firm concerning private pension plans with the goal of finding one that would be advantageous to both Bauman and Bauman Mortgage. (Id. at 189). With the actuary's assistance, Gilfandrecommended a plan to Bauman that he accepted on Bauman Mortgage's behalf. (Id. at 189). The actuary then prepared the plan for Gilfand and Bauman's review. (Id.).
In March 1979, Bauman Mortgage as employer-sponsor, and Bauman and his wife as trustees, entered into the Bauman Mortgage Corp. Retirement Plan and Trust Agreement, effective May 1, 1978 (the "Bauman Mortgage Plan").5 (B. Ex. 2 at 389-486, 494; Tr. at 44-45). The original version of the Bauman Mortgage Plan was later amended and restated, but none of the restatements or amendments are in the record.6 (Tr. at 132-133). As the only employee of Bauman Mortgage, Bauman was the only participant in the Bauman Mortgage Plan. (Id. at 36; B. Ex. 2 at 397).
In 1980, Bauman consulted Gilfand about having Bauman Venture adopt its own pension plan. (Tr. at 189). Gilfand turned to the actuary who had prepared the Bauman Mortgage Plan. (Id.). Bauman Venture as employer-sponsor adopted the Bauman Venture Plan. (Tr. at 32, 36; see B. Ex. 3 at 33). As with the Bauman Mortgage Plan, Bauman and his wife were trustees of the trust, and Bauman was the only participant. (Tr. at 32, 36). The original 1980 version of thePlan is not in evidence, nor are any of the restatements or amendments from 1980 to 2003. The sole pre-petition version of the Plan in evidence is an amended and restated Bauman Venture Plan dated September 15, 2003 (B. Ex. 3 at 18-101), along with amendments to the 2003 version from 2007, 2009, and 2011 (id. at 104-112).7
On March 22, 2012, Bauman Venture adopted a restated Bauman Venture Plan, effective December 1, 2011. (Id. at 113-241). The 2011 version of the Bauman Venture Plan consists of three documents that together make up the plan; (i) a "volume submitter" adoption agreement (the "Adoption Agreement") (id. at 113-146); (ii) a "volume submitter" trust document (id. at 147-159); and (iii) a "volume submitter" plan (the "Volume Submitter Plan") (id. at 160-241).
No witness explained why a component of the 2011 Bauman Venture Plan is a "volume submitter" plan. A "volume submitter plan" is a form retirement plan prepared and submitted to the IRS by a firm that certifies it has at least thirty employer-clients reasonably expected to adopt the form plan. Rev. Proc. 2011-49, 2011-44 I.R.B. 608 § 13. The IRS reviews the form plan to decide whether it complies with the IRC. Once the IRS issues a "determination letter"...
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