In re Kaplan, Bankruptcy No. 93-10625S. Adv. No. 93-0507S.

CourtUnited States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania
Writing for the CourtDAVID A. SCHOLL
Citation162 BR 684
PartiesIn re Manuel KAPLAN, Debtor. FIRST OPTIONS OF CHICAGO, INC., Plaintiff, v. Manuel KAPLAN, Defendant.
Decision Date26 October 1993
Docket NumberBankruptcy No. 93-10625S. Adv. No. 93-0507S.

162 B.R. 684 (1993)

In re Manuel KAPLAN, Debtor.
Manuel KAPLAN, Defendant.

Bankruptcy No. 93-10625S. Adv. No. 93-0507S.

United States Bankruptcy Court, E.D. Pennsylvania.

October 26, 1993.

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162 BR 686
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Gary A. Rosen, Gen. Counsel, Donald L. Perelman, Special Counsel, Philadelphia, PA, for debtor

Vincent J. Marriott, III, Ballard Spahr Andrews & Ingersoll, Philadelphia, PA, Stephen P. Bedell, Timothy G. McDermott, Gardner, Carton & Douglas, Gen. Counsel, Chicago, IL, for First Options of Chicago, Inc.

Frederic Baker, Asst. U.S. Trustee, Philadelphia, PA.


DAVID A. SCHOLL, Bankruptcy Judge.


Arising out of the instant individual voluntary Chapter 11 bankruptcy case of MANUEL KAPLAN ("the Debtor"), the owner of MK Investments, Inc. ("MKI"), a business engaged in trading on the Philadelphia Stock Exchange ("the PSX"), are two unrelated but equally substantial issues, both raised by FIRST OPTIONS OF CHICAGO, INC. ("Options"), a "clearing member" of the PSX which is easily the largest secured (over $400,000) and unsecured (over $5.6 million) creditor of the Debtor. These issues are (1) an objection to the Debtor's claimed exemptions, most notably his interest in MKI's pension plan ("the Exemption Issue"); and (2) an objection to dischargeability of (ultimately) $611,300 of the Debtor's indebtedness to it ("the Dischargeability Issue").

Resolution of the Exemption Issue requires us to interpret, as matters of first impression, a recently-amended Pennsylvania statute broadening exemptions for pension plans. We conclude that the Debtor is entitled to a full exemption of benefits from MKI's plan, at least pending any subsequent determination that the plan does not meet the necessary requirements of the Internal Revenue Code, 26 U.S.C. § 1, et seq. ("the IRC"), by the Internal Revenue Service ("the IRS") within 180 days from confirmation of a plan of reorganization in this case, principally because we find that the broad Pennsylvania statutory amendment does not require rigorous analysis of whether a plan would retain an exemption previously determined allowable under the IRC by the IRS. We do sustain Options' objection to the Debtor's attempts to claim New Jersey realty exempt by application of Pennsylvania law, as opposed to significantly different and applicable New Jersey law.

Resolution of the Dischargeability Issue requires us to revisit a difficult area of the law previously addressed by this court in In re Spector, 133 B.R. 733, 739-40 (Bankr. E.D.Pa.1991), i.e., whether a certain relationship (here, that of the principal of an insolvent corporation vis-a-vis the corporation's creditors) is an express trust relationship for purposes of the "fraud or defalcation" prong of 11 U.S.C. § 523(a)(4). As in Spector, we answer this question in the negative and therefore fail to find any portion of the Debtor's obligation to Options non-dischargeable. Alternatively, we find that a release in a work-out agreement between the parties effected a novation and eliminated the potential nondischargeable nature of the Debtor's prior obligations to Options.


The Debtor filed the instant bankruptcy case on February 2, 1993. On May 20, 1993, Options raised the Exemptions Issue by filing Objections to certain exemptions claimed by the Debtor ("the Objections"). The Objections were initially listed for a hearing on June 16, 1993, which the parties agreed to continue until August 4, 1993.

In the meantime, on June 21, 1993, Options filed the above-captioned adversary proceeding attacking the dischargeability of a portion of its claim against the Debtor ("the Proceeding"). The trial of the Proceeding was also scheduled on August 4, 1993.

As a precursor to the proceedings on August 4, 1993, we received lengthy unsolicited Memoranda addressing the issue of the validity of the Debtor's claimed exemption of his pension plan from both parties on July 29, 1993 (Options), and August 2, 1993 (the Debtor). Unfortunately, our calendar of August 4, 1993, was very crowded, due to a planned vacation in the following week. The parties

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therefore agreed to continue the hearing on the Exemption Issue and the trial of the Proceeding to be heard one after the other on September 23, 1993

At a colloquy with the court and Options' counsel on August 4, 1993, the Debtor's counsel expressed an intention to file a dispositive motion in opposition to the Complaint in the Proceeding. We therefore established a schedule requiring that the dispositive motion, which ultimately took the form of a Motion to Dismiss the Complaint ("the Dismissal Motion"), and any supporting Brief, be filed by August 19, 1993, and that a reply be filed by Options on or before August 30, 1993. The Debtor was ultimately granted permission to file a counter-reply on or before September 7, 1993.

In the midst of this activity, the court, after a status conference of June 16, 1993, established September 1, 1993, as the deadline for the Debtor's filing a Plan of Reorganization and an accompanying Disclosure Statement in his main bankruptcy case. After the hearing and trial of August 4, 1993, were continued, the deadline for filing the Plan and Disclosure Statement was extended until October 29, 1993.

On September 13, 1993, this court entered an Order/Memorandum, reported at 1993 WL 367108 ("the Memo") denying the Dismissal Motion, but indicating that the Complaint contained certain deficiencies which Options could, at least in part, attempt to cure by filing an Amended Complaint on or before September 17, 1993, in order that an Answer could be filed thereto by the Debtor by September 22, 1993, just prior to the September 23, 1993, trial date. Options did file an Amended Complaint, confining its claim of dischargeability to $611,300 of the Debtor's obligation to it and broadening its legal claims from reliance on the "fraud or defalcation" prong of 11 U.S.C. §§ 523(a)(4) and 523(a)(6), to invocation of 11 U.S.C. § 523(a)(2)(A) as well, which this court suggested might be appropriate if certain allegations in the Complaint could be proven at trial.

This court withstood a Stipulation presented to it by the parties on September 10, 1993, seeking a continuance of the hearing and trial, and both were in fact completed by the evening of September 23, 1993. Thereafter, we issued an Order of September 24, 1993, allowing the parties until October 1, 1993, to supplement their already-substantial pre-trial submissions. Both proceeded to file two Briefs each on that day, separately addressing the Exemption Issue and the Dischargeability Issue. We are therefore at no loss of written assistance from the parties, most of which has been skillfully and comprehensively presented, in deciding this matter.

Although the protagonists in both issues are the same, there is very little, if any, overlap of facts or law pertinent to resolution of the two issues in question. We will therefore proceed to first consider the Exemption Issue and then pass to separate consideration of the Dischargeability Issue.



In his Schedule C, the Debtor elected to claim exemptions under 11 U.S.C. § 522(b)(2).1 Specific property claimed as exempt, on the designated basis of § 522(b)(2) only, included: (1) art valued at $25,000; (2) a brokerage account valued at $41,647.00; (3) two condominiums located in Atlantic City, New Jersey, valued at $40,000 and $20,000, respectively; (4) furniture valued at $45,000; and (5) the Debtor's residence

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in Penn Valley, Pennsylvania, valued at $800,000. Listed as exempt pursuant to 42 Pa.C.S. § 8124(b)(1)(ix)2 are a pension plan valued at $589,833 and an individual retirement account (an "IRA") valued at $16,311.00

Options' Objections, timely filed within thirty (30) days of the Debtor's April 20, 1993, meeting of creditors, see Federal Rule of Bankruptcy Procedure 4003(b), can be summarized as follows: (1) The Debtor's mere citation of § 522(b)(2) as a basis for many of the exemptions is not sufficiently specific; (2) the New Jersey condominiums are subject to New Jersey state exemption and entitles law, even though they are owned by the entireties with his wife and would be exempt if Pennsylvania state exemption laws applied to them; accordingly, they are not exempt from creditors of the Debtor only and can be sold by such a creditor (like Options) pursuant to 11 U.S.C. § 363(h); (3) the pension plan is not exempt under 42 P.S. § 8124(b)(1)(ix) because it has not been maintained in accordance with the IRC; (4) the pension plan may not be excluded from the Debtor's estate pursuant to 11 U.S.C. § 541(c)(2), as assumed by the Debtor; and (5) since the Debtor's wife is partially jointly liable on the Debtor's obligations to Options, the attempts to exempt the Debtor's entireties interest in his residence, furniture, art, and funds are not effective as to Options.

The record made on September 23, 1993, and the several Briefs of the parties address almost exclusively the exempt status of the pension plan. A few pages are devoted to the claims regarding the condominiums. The Debtor's reference to § 522(b)(2) as the basis for his exemptions appears sufficiently specific, although references to subsections (A) (as to the pension plan and the IRA) and subsection (B) (as to the residence, furniture, art, and funds) would have been an improvement. To the extent that Options has not abandoned same, as it appears to us that it has, we conclude that Options has failed to meet its burden of producing evidence tending to establish that any of the Debtor's exemption claims, except those relating to his pension plan and his condominiums, are improper. Cf. In re Allegheny Int'l, Inc., 954 F.2d 167, 173 (3rd Cir.1992) (the burden of producing evidence in support of an...

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1 practice notes
  • In re HSR Associates, Bankruptcy No. 93-30859.
    • United States
    • U.S. Bankruptcy Court — District of New Jersey
    • January 19, 1994
    ...309 (1990). The party seeking to have the court pierce the corporate veil has the burden of proof. Touch of Class Leasing v. Mercedes-Benz 162 BR 684 Credit, Inc., 248 N.J.Super. 426, 441, 591 A.2d 661, 669 Stanbec has not alleged any specific facts demonstrating legal or equitable fraud. T......
1 cases
  • In re HSR Associates, Bankruptcy No. 93-30859.
    • United States
    • U.S. Bankruptcy Court — District of New Jersey
    • January 19, 1994
    ...309 (1990). The party seeking to have the court pierce the corporate veil has the burden of proof. Touch of Class Leasing v. Mercedes-Benz 162 BR 684 Credit, Inc., 248 N.J.Super. 426, 441, 591 A.2d 661, 669 Stanbec has not alleged any specific facts demonstrating legal or equitable fraud. T......

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