In re Fernandez, Bankruptcy No. 98-14644-9P7.
| Decision Date | 30 June 1999 |
| Docket Number | Bankruptcy No. 98-14644-9P7. |
| Citation | 236 BR 483 |
| Parties | In re Xavier J. FERNANDEZ, Debtor. |
| Court | U.S. Bankruptcy Court — Middle District of Florida |
Guillermo Ruiz, St. Petersburg, FL, for debtor.
Diane L. Jensen, Fort Myers, FL, trustee.
Alan P. Woodruff, Cape Coral, FL, Special Counsel to trustee.
Sara Kistler, Timberlake Annex, Tampa, FL, U.S. Trustee.
ORDER ON TRUSTEE'S OBJECTION TO EXEMPTIONS
THIS IS a Chapter 7 liquidation case and the matter under consideration is a challenge by Diane J. Jensen (Trustee) to the exemptions claimed by Xavier J. Fernandez (Debtor). Specifically, the Trustee challenges the Debtor's right to exempt his interest in the Xavier J. Fernandez P.A. Defined Benefit Plan (Defined Benefit Plan), the Xavier J. Fernandez P.A. Profit Sharing Plan (Profit Sharing Plan) and the Xavier J. Fernandez P.A. Money Purchase Plan (Money Purchase Plan). It is the Trustee's contention that none of the Debtor's retirement plans are subject to the Employee Retirement Income Security Act (ERISA), that the Debtor's retirement plans are not "qualified" and, therefore, they are not exempt by virtue of Fla.Stat. § 222.21(2). Thus, the Trustee contends that the assets in these Plans are subject to administration by the Trustee. At the final evidentiary hearing, the following relevant facts were established:
DEFINED BENEFIT PLAN
The Debtor is an attorney practicing through his professional corporation, Xavier J. Fernandez, P.A. (the "P.A."). In 1980, the P.A. adopted a Defined Pension Benefit Plan (the Plan). The Plan was in fact an adoption of the Datair Mass-Submitted Prototype Standardized Defined Benefit Pension Plan and Trust (Datair Prototype). (Tr's Exh. 7). The Plan was amended in 1985 and on June 1, 1995.
In this case the Profit Sharing Plan was established effective January 1, 1993, with the adoption of the Datair Mass-Submitter Prototype Defined Contribution Plan and Trust by Xavier J. Fernandez, P.A. The IRS issued a favorable Opinion Letter with respect to the Datair Mass-Submitter Prototype Defined Contribution Plan and Trust in May of 1992. The Profit Sharing Plan also received an individual favorable determination letter from the IRS in June of 1994. See Hearing Transcript at page 69. Pursuant to IRS rulings, standardized prototype plans need not be submitted for individual favorable determination letters but are entitled to rely on the IRS Opinion Letter issued to the prototype sponsor since standardized prototype plans only provide each adopting plan sponsor with limited options to vary the plan provisions (hence the term "standardized"). See IRS Rev.Proc. 89-13, as modified by Rev.Proc. 90-20, Rev.Proc. 90-21 and Rev.Proc. 92-41.
The Plan agent was the P.A., the Plan administrator was the P.A. and the Plan Trustee was the Debtor, individually. The Plan was readopted in 1993 but there was no change in the make up of the Plan. The P.A. remained the employer, the Plan Agent and Administrator, and the Debtor remained the Plan Trustee. (Tr's Exh. 8). By letters dated July 22, 1981, June 14, 1994, and March 17, 1995, the Internal Revenue Service informed the P.A. that it determined the Plan to be a qualified ERISA plan.
Sometime in early 1980, the P.A. acquired a fractional interest in a residential lot in Moorhaven, Florida with two other attorneys who received their respective fractional interests for legal services rendered by them. Thereafter, the P.A. acquired the fractional interests of the other attorneys and conveyed its full ownership interest of the lot to the Plan. In addition, in 1985, the P.A. conveyed to the Plan a lot in Cape Coral, Florida valued at $30,000 and a second lot also in Cape Coral valued at $1,500.
In 1992, the Debtor entered into an agreement with his ex-wife for the Plan to acquire a portion of raw land owned by her in Sanibel Island, Florida. Between the date of the agreement in 1992 and 1996, the Plan paid to the Debtor's ex-wife $800.00 per month. Because of some difficulty in closing the transaction, the actual conveyance to the Plan did not take place until 1996. The agreement was not formalized and reduced to writing because the Debtor felt that he could trust his ex-wife to abide by the agreement's terms. However, it is without dispute that it was ultimately conveyed formally to the Plan.
Although the record is unclear whether the real estate acquisition in 1993, a lot in Schuylerville, New York, was conveyed by him individually or by the P.A., it appears that this lot was purchased with Plan assets and the lot is owned by the Plan and not by the P.A. or by the Debtor, individually. What is clear is that the lot was acquired for the purpose of constructing a retirement residence for the Debtor.
It further appears that in 1995, the Debtor borrowed $50,000 from the Plan for the purchase of his primary residence in Redington Beach, Florida. The loan was amortized over thirty years with an annual interest rate of 6 percent. The Debtor made no loan payments to the Plan. When the Debtor sold his Redington Beach home, he received two checks, one in the amount of $49,438.31, representing the principal balance on his loan and the second check in the amount of $6,423, representing accrued payments and interest owed by the Debtor to the Plan. The Debtor endorsed the $49,438.31 check to the Bank which had financed the purchase of his current residence in Ft. Myers, which is owned with his wife as tenants by the entireties and paid the accrued interest on the loan borrowed from the fund in the amount of $6,423.82. The Ft. Myers residence was originally purchased by the wife in December, 1997, and when the Debtor made the payment to the fund on the accrued interest, the wife conveyed an interest to the Debtor in the property which was then owned by them as tenants by the entireties. Although it is not clear from this record, this residence is apparently a security for the loan the Debtor obtained from the Plan which is still outstanding and unpaid.
Subsequent to the filing of his Voluntary Petition, the Debtor withdrew $2,700 from the Defined Benefit Plan without authority from this Court. The total value of the assets of the Plan as of 1996 was $286,000 and the total liabilities were $286,697.
The next claim of exemption involves the Debtor's Profit Sharing Plan established by the P.A. in 1993. (Trustee's Exh. 9). It was an adoption again of the Datair Mass-Submitted Prototype Standardized Defined Benefit Pension Plan and Trust. The Profit Sharing Plan also received an individual Favorable Determination Letter from the IRS June 1994. It appears that the total contributions to the Profit Sharing Plan was $5,500 in 1993, $7,500 in 1994, and an assignment by the P.A. of its interest in common stock in Clinicorp which the P.A. received in lieu of payment of a fee in 1994. Although it is contended by the Debtor that there were participants in the Profit Sharing Plan, just like in the Defined Benefit Plan, there is no evidence in this record that at least since 1994, there were any participants in the Profit Sharing Plan other than the Debtor.
The Money Purchase Plan was established on January 1, 1994, pursuant to the Prototype. (Trustee's Exh. 11). Although the Money Purchase Plan required an annual contribution of 10 percent of the Debtor's compensation, it appears that the amount of the contribution is discretionary. The only contributions made to the Money Purchase Plan were in 1994 and 1995 and no contributions were made thereafter. The Money Purchase Plan did not receive a Favorable Opinion Letter from the IRS but the Debtor relies on the Favorable Opinion Letter issued by the IRS concerning the Prototype in 1992.
Basically, these are the relevant facts established at the final evidentiary hearing.
It is the Trustee's contention that none of the Debtor's plans are subject to ERISA and, therefore, cannot be claimed as exempt under this statute. In addition, the Trustee contends that the Plans do not qualify because they are not conducted in conformity with the requirements of ERISA.
In opposition to the relief sought by the Trustee, the Debtor contends that (1) the Trustee has no standing to seek a determination of the qualification of the Plans; (2) the Plans are "exempt from the claims of creditors in a bankruptcy proceeding" (sic); (3) the Plans are ERISA qualified and, therefore, the funds in the Plans are exempt by virtue of Fla.Stat. § 222.21.
Although the matter before this Court is presented by an Objection to a Claim of Exemption by the Debtor and the exemption is claimed under Fla.Stat. § 222.21, it is imperative to consider first whether the property claimed as exempt is or is not property of the estate. This is so because the Debtor can only claim properties as exempt which are properties of the Debtor's estate under Section 522(b). Ordinarily, this is a non-issue except when the property claimed as exempt is the Debtor's interest in a defined pension benefit plan or any profit sharing plan under Sections 401(a), 403(b), 408 or 409 of the Internal Revenue Code.
Prior to 1992 the courts generally held that Section 541(c)(2) Bankruptcy Code, which excludes properties from the estate if the restriction on the transfer of the beneficial interest of the debtor was enforceable under applicable non-bankruptcy law and applied only to the traditional common law spendthrift trusts. Thus, most courts held that properties in a ERISA qualified plan, especially in the typical self-settled trusts set up by professionals, doctors and lawyers, were not excluded from the estate and were subject to administration. See e.g. Matter of Goff, 706 F.2d 574 (5th Cir.1983); In re Lichstrahl, 750 F.2d 1488 (11th Cir.1985); In re Graham, 726 F.2d 1268 (8th Cir.1984); In re Dyke, 943 F.2d 1435 (5th Cir.1991); In re Daniel, 771 F.2d 1352 (9th Cir.1985) cert. denied ...
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