Kaplan v. First Options of Chicago, Inc.
| Decision Date | 06 November 1995 |
| Docket Number | 93-6402 and 93-6622.,Civ. A. No. 93-6401 |
| Citation | 189 BR 882 |
| Parties | In re Manuel KAPLAN, Debtor, v. FIRST OPTIONS OF CHICAGO, INC. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
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Donald L. Perelman, Fine, Kaplan & Black, Philadelphia, PA, Gary A. Rosen, Connolly Epstein Chicco Foxman Engelmyer & Ewing, Philadelphia, PA, for Manuel Kaplan.
Vincent J. Marriott, III, Ballard, Spahr, Andrews & Ingersoll, Philadelphia, PA, Stephen P. Bedell, Timothy G. McDermott, Gardner, Carton & Douglas, Chicago, IL, for First Options of Chicago, Inc.
Frederic Baker, Assistant U.S. Trustee, Philadelphia, PA.
This bankruptcy appeal arises out of an October 26, 1993, order of the United States Bankruptcy Court for the Eastern District of Pennsylvania. The bankruptcy court proceeding emanated from an individual voluntary Chapter 11 filing of Manuel Kaplan ("the Debtor"), the owner of MK Investments, Inc. ("MKI").1
The appeal involves two separate issues raised by First Options of Chicago, Inc., a clearing member of the Philadelphia Stock Exchange ("PSX") and creditor of the Debtor. The first issue involves an objection to the Debtor's claimed exemptions, particularly his interest in MKI's pension plan. The second issue pertains to an objection to dischargeability of a debt in the amount of $611,300.
The bankruptcy court (Honorable David A. Scholl) held that the Debtor was entitled to a full exemption of benefits deriving from the MKI pension plan, at least pending a later disqualification by the Internal Revenue Service within 180 days after confirmation of a plan of reorganization. The bankruptcy court, however, did sustain the objection to Debtor's claimed exemption of property located in New Jersey which he owned in tenancy by the entireties.
Regarding the dischargeability issue, the court did not find any portion of Debtor's obligation to First Options non-dischargeable under the fraud or defalcation prong of 11 U.S.C. § 523(a)(4). Moreover, the court found that a valid release existed which essentially effected a novation of the liability of the Debtor to First Options stemming from any potentially non-dischargeable debt.
The October 26, 1993, bankruptcy order is a final order entered in a core proceeding under 28 U.S.C. § 157(b)(2)(E). This Court has jurisdiction over the appeal under 28 U.S.C. § 158(a).
In cases originating in the bankruptcy court, this Court occupies the first level of appellate review. It is settled law that our role is to apply a clearly erroneous standard to findings of fact, while applying a de novo standard of review to questions of law. In re Molded Acoustical Prod., Inc., 150 B.R. 608, 612 (Bankr.E.D.Pa.1993); Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102 (3d Cir.1981). In addition, mixed findings of fact and law must be separated, with the appropriate standard applied to each component. See, e.g., Resyn Corp. v. United States, 851 F.2d 660, 664 (3rd Cir.1988); In re Jersey City Medical Center, 817 F.2d 1055, 1059 (3rd Cir.1987).
With respect to the "clearly erroneous" standard, the Supreme Court has stated, "A finding is `clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948) quoted in Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573-74, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985).
Due to the complicated nature and convoluted fact pattern of the present case, it seems wise to emulate the format of the bankruptcy court opinion and address each issue separately. Accordingly, we will first review the exemption issue and then proceed to the issue of dischargeability.
The debtor is the President of MKI, which was formerly a stock options trader on the PSX. The predecessor to MKI was MK Associates, Ltd., ("MKA"), a partnership formed in 1981 in which the debtor, Manuel Kaplan, was the majority partner and Michael Becker was a minority partner. In 1984, MKA was dissolved and a subchapter S corporation, MKI, owned by both Kaplan and Becker, was formed.
Becker testified that he devoted between 300 and 350 hours per year to the trading efforts of MKI. In November of 1986, Becker terminated his interest in MKI by selling his shares of stock to Kaplan, leaving Kaplan as the sole shareholder.
As of January 1, 1984, MKA adopted a defined pension plan ("the Plan") under 401(a) of the Internal Revenue Code, (IRC), 26 U.S.C. § 401(a), effective January 1, 1984. Kaplan and Becker were the sole participants in the Plan. The Plan was drafted by Steven J. Fromm, an attorney specializing in pension and tax law.
The IRS issued a favorable tax qualification letter which MKA received on May 21, 1985. The letter stated, however, that "continued qualification of the plan will depend on its effect in operation under its present form."2 In 1984, MKI superseded MKA as the sponsor of the Plan and on September 2, 1986, MKI received a second favorable qualification letter. Once again, the letter conditioned continued qualification on the plan's effect in operation under its present form. From the outset, Kaplan and Becker were the sole participants in the Plan, since MKI had no other employees.
On November 30, 1987, following the stock market crash of October, 1987, the Plan was frozen. Since that date, no additional benefits have accrued to the participants and no additional contributions have been made by MKI. Kaplan, however, continued to have annual actuarial reviews of the Plan done, and filed all required tax returns for it.
In July, 1989, about two and one half years after Becker terminated his interest in the company, Becker withdrew from the Plan. Becker received a payment of $203,985, which purportedly represented the amount of his accrued benefits to that date.
On February 2, 1993, the debtor elected to file a voluntary petition under chapter 11 of the bankruptcy code. In his schedule C, Kaplan claimed exemptions under 11 U.S.C. § 522(b)(2).3 Specific property designated exempt under § 522(b)(2)(B) 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 in Penn Valley, Pennsylvania, valued at $800,000.
Under § 522(b)(2)(A), the debtor asserted that the following property was exempt pursuant to 42 Pa.C.S. § 8124(b)(1)(ix): a pension plan valued at $589,833 and an individual account valued at $16,311.00.4
First Options filed objections to the debtor's claimed exemptions within the thirty day time period specified in Federal Rule of Bankruptcy Procedure 4003(b).
In ruling on First Options objections, the bankruptcy court first determined that it was not precluded from adjudicating tax issues. The court then analyzed the pension plan, observing that under Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992), the debtor's interest in an "ERISA-qualified" pension plan which contains the antialienation language required by Section 206(d)(1) of ERISA, 29 U.S.C. § 1056(d), may be excluded from the debtor's estate under Section 541(c)(2) of the Bankruptcy Code.
In denying in part and granting in part First Options' objections, the bankruptcy court determined that the MKI plan was likely not an ERISA-qualified plan because neither Becker or Kaplan, the sole participants of the plan, were ever employees of MKI as that term is defined under ERISA. Nevertheless, the court held that the debtor's interest in the Plan was exempt under § 8124(b)(1)(ix) of the Pennsylvania statute, barring a subsequent determination of disqualification by the IRS. The court upheld First Options' objection to exemption of the New Jersey property.
We begin our analysis of the bankruptcy court's decision by focusing on whether the pension plan is exempt, as claimed by the debtor and as determined by the bankruptcy court or is part of the bankruptcy estate.
The filing of a petition in bankruptcy creates an estate consisting of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). The legislative history of § 541 indicates that this provision was intended to be interpreted in broad scope. United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05, 103 S.Ct. 2309, 2313-14, 76 L.Ed.2d 515 (1983) (citing, S.Rep. No. 95-989, p. 82 (1978); H.R.Rep. 95-595 pp. 367-368 (1977), U.S.Code Cong. and Admin.News 1978, pp. 5787-5868, 6323-24.)
A debtor's interest in a pension plan constitutes "property of the estate" unless the interest is exempted or excluded from the estate. 11 U.S.C.A. § 522(b)(1), 541(a)(1), (c)(2).5 Under § 522(b)(1) of the bankruptcy code, a debtor may claim as exempt any property that is exempt under federal, state, or local law.
Under the bankruptcy code a debtor is entitled to choose between certain statutory exemptions specifically enumerated under § 522(d) (the "federal exemptions"), or exemptions provided generally under state or local law of the debtor's domicile (the ).6
Any party who objects to the exemptions claimed by the debtor bears the burden of proving that the exemptions should be denied. Bankruptcy Rule 4003(c).
Our initial inquiry focuses on whether the Pension Plan in which the debtor claimed an exemption is qualified under ERISA and thereby may be excluded from the bankruptcy estate under § 541. See, Patterson v. Shumate, 504 U.S. 753, 112 S.Ct....
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