In re Jacobs

• Decision Date: 09 February 2023
• Docket Number: Case No. 21-10658-M
• Citation: 648 B.R. 403
• Parties: IN RE: Daimon William JACOBS, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Oklahoma

648 B.R. 403

IN RE: Daimon William JACOBS, Debtor.

Case No. 21-10658-M

United States Bankruptcy Court, N.D. Oklahoma.

Signed February 9, 2023

Ron D. Brown, Brown Law Firm PC, Tulsa, OK, for Debtor.

Patrick J. Malloy, III, Malloy Law Firm, P.C., Tulsa, OK, Trustee, Pro Se.

MEMORANDUM OPINION

TERRENCE L. MICHAEL, CHIEF UNITED STATES BANKRUPTCY JUDGE

It has long been federal and Oklahoma state policy to encourage individuals to save for retirement.¹ A major pillar of that policy has been to protect retirement funds from garnishment by creditors.² As such, both federal and state law, including their corresponding tax codes, provide multiple avenues to shelter retirement funds from creditors. That said, debtors can, and sometimes do, run afoul of the available means of protecting their retirement funds, resulting in the administration of those funds by a bankruptcy trustee. This is one such case.

Before the Court is the Trustee's Motion for Summary Judgment on Trustee's Objection to Debtor's Claim of Exemption Relative to a "401(k): Solera Bank Account ending in 0319 Balance as of 06/06/2021 $198,306.44" (the "Motion"),³ filed by Patrick J. Malloy III, the chapter 7 Trustee assigned to this case ("Trustee"); a Response filed by Daimon William Jacobs, debtor herein ("Debtor");⁴ a Reply filed by Trustee;⁵ a Supplemental Brief in Response to Court's Minute Order of 9/02/2022 filed by Trustee;⁶ and a Supplemental Brief filed by Debtor.⁷ On September 29, 2022, this matter was fully briefed and taken under advisement. The following findings of fact and conclusions of law are made pursuant to Federal Rules of Bankruptcy Procedure 7056 and 9014.

Jurisdiction

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b), and venue is proper pursuant to 28 U.S.C. § 1409.⁸ Reference to the Court of this matter is proper pursuant to 28 U.S.C. § 157(a). The determination of the extent and nature of the estate's interest in property and the allowance or disallowance of exemptions from property of the estate are core proceedings as defined in 28 U.S.C. § 157(b)(2)(A, B).

Summary Judgment Standard

The United States Court of Appeals of the Tenth Circuit has held that

Summary judgment is appropriate when "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "An issue is ‘genuine’ if there is sufficient evidence on each side so that a rational trier of fact could resolve the issue either way." Adler v. Wal–Mart Stores, Inc ., 144 F.3d 664, 670 (10th Cir. 1998). "An issue of fact is ‘material’ if under the substantive law it is essential to the proper disposition of the claim." Id . Put differently, "[t]he question ... is whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Shero v. City of Grove , 510 F.3d 1196, 1200 (10th Cir. 2007) (quotation omitted). "On summary judgment the inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion." Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (quotation omitted).⁹

The Court will apply this standard to the Motion.

Findings of Fact

Debtor filed a petition for relief under chapter 7 of the Bankruptcy Code on June 8, 2021 (the "Petition Date").¹⁰ As of the Petition Date, the Debtor was younger than age 59.¹¹ In his Schedule C filed with the Petition, Debtor claimed as exempt an account held at Solera Bank ending in #0319, with a balance of $198,306.44 as of June 6, 2021 (the "Disputed Account").¹² The Trustee filed an objection to Debtor's claimed exemption on the following bases:

1. The Disputed Account does not constitute a qualified retirement plan under Internal Revenue Service rules;

2. The retirement plan related to the Disputed Account was not properly documented under federal law;

3. Debtor does not conduct sufficient business to support a one-participant § 401(k) plan;

4. A portion of the funds in the Disputed Account came from a Roth IRA as the result of a "prohibited transaction;"

5. Debtor withdrew funds from the Disputed Account in a prohibited manner; and

6. The trust supporting the Disputed Account is a sham.¹³

On motion of the parties, the Court entered a scheduling order, after which Trustee filed the Motion.

The funds in the Disputed Account traveled far and wide to get there. In late 2019, Debtor was laid off from his employment as a result of a business merger and consolidation. At the time Debtor was laid off, he held retirement funds in an employer-sponsored "401(k) and Retirement Savings Plan" through Wells Fargo. As of September 2020, those funds were valued at $411,811.78. In September 2020, Debtor transferred his retirement funds from the Wells Fargo account into three separate E*Trade accounts: 1) $207,736.23 into an account ending in #1514, an "IRA – Rollover" account; 2) $161,952.70 into an account ending in #9522, an "IRA – Rollover" account (together, the "E*Trade Traditional IRAs"); and 3) $42,052.39 into an account ending in #0106, a "Roth IRA" account (the "E*Trade Roth IRA").

In March 2019, Debtor formed an Oklahoma limited liability company, Breakthrough Management LLC ("Breakthrough"). Debtor is the sole member and manager of Breakthrough. Breakthrough provides financial services such as bookkeeping, preparation of tax returns, compilations, and related software implementations. After being laid off from his primary employer in late 2019, Debtor considered himself "self-employed" through Breakthrough. Debtor was compensated by his clients in cash but maintained regular business records, including keeping client names and amounts paid.¹⁴ Debtor declared $7,650 in income generated through Breakthrough on his 2020 IRS Form 1040, which is also disclosed on his Statement of Financial Affairs filed with the Petition. Breakthrough generated no income in 2021 prior to the Petition Date, but generated roughly $11,000 through the remainder of 2021. No income had been generated in 2022 prior to a deposition of Debtor taken on behalf of Trustee in April. In the schedules filed with his Petition, Debtor listed his interest in Breakthrough, but did not list it as an employer on Schedule I; he described himself as "unemployed." Debtor also disclosed that he received unemployment income (presumably from the State of Oklahoma) in both 2020 and 2021.

On January 1, 2021, Breakthrough, through Debtor, created a trust to facilitate an employer-sponsored 401(k) deferred compensation profit-sharing retirement plan based on a pre-qualified plan provided by an online document preparation company (the "Solo 401k").¹⁵ Debtor's stated reason for creating the Solo 401k was to facilitate a court ordered division of assets with his former spouse.¹⁶ The purpose of the Solo 401k according to its organizing documents is as follows:

1.1.3 Purpose. This Plan and the Trust are established for the purpose of providing retirement benefits to Eligible Employees in accordance with the Plan and the Adoption Agreement. If the Employer designates the Plan as a Cash or Deferred Profit Sharing Plan (CODA) in the Adoption Agreement, the Plan is also intended to enable Eligible Employees to supplement their retirement by electing to have the Employer contribute amounts to the Plan and the Trust in lieu of payments to such Employees in cash and the Plan and the Trust are intended to satisfy the provisions of Code section 401(k).¹⁷

The Solo 401k was adopted by Debtor, signing on behalf of Breakthrough as Employer and Plan Administrator; and on behalf of himself as Trustee and Participant.¹⁸

The Solo 401k is governed by the laws of the State of Oklahoma.¹⁹ The parties dispute whether the Solo 401k is also governed by the Employee Retirement Income Security Act of 1974 ("ERISA").²⁰ The supporting documents that serve as the basis for the Solo 401k state that the plan is subject to the provisions of ERISA.²¹ Additionally, the Trustee has alleged the documents supporting the Solo 401k lack necessary language to restrict the transfer of Debtor's beneficial interest in the account. In response Debtor submitted, somewhat belatedly given its import, a copy of the Defined Contribution Plan, which includes an anti-alienation restriction at § 3.11.5, which reads:

3.11.5 Inalienability. The right of any Participant or his Beneficiary in any distribution hereunder or to any Account shall not be subject to alienation, assignment, or transfer, voluntarily or involuntarily, by operation of law or otherwise, except as may be expressly permitted herein. No Participant shall assign, transfer, or dispose of such right, nor shall any such right be subjected to attachment, execution, garnishment, sequestration, or other legal, equitable, or other process. The preceding shall also apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, unless such order is determined to be a Qualified Domestic Relations Order or any domestic relations order entered before January 1, 1985.²²

As part of the creation of the Solo 401k, Debtor opened two "Self Directed Checking" accounts with Solera Bank. In January and February 2021, Debtor caused each of the three E*Trade accounts to be moved to the Solera Bank accounts. After deducting the portion of the funds allocated to his former spouse under a divorce decree, Debtor transferred all remaining funds, consisting of the two E*Trade Traditional IRAs (the "Traditional IRA Rollover") and the E*Trade Roth IRA (the "Roth IRA Rollover"), to the Disputed Account at Solera Bank.²³

The Disputed Account is a checking account held in the name of the Solo 401k trust opened for the purpose of holding its trust assets. The Solo 401k includes a provision that allows a...