Lofstedt v. UBS Fin. Servs., Inc. (In re Lakeview Dev. Corp.)

• Citation: 614 B.R. 603
• Decision Date: 25 March 2020
• Docket Number: Adversary Proceeding No. 16-1197 EEB,Bankruptcy Case No. 14-16938 EEB
• Parties: IN RE: LAKEVIEW DEVELOPMENT CORPORATION, Debtor. Joli A. Lofstedt, chapter 7 trustee, Plaintiff, v. UBS Financial Services, Inc., as custodian for the benefit of David M. Summers IRA and David M. Summers Ira, Defendants.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado

614 B.R. 603

IN RE: LAKEVIEW DEVELOPMENT CORPORATION, Debtor.

Joli A. Lofstedt, chapter 7 trustee, Plaintiff,

v.UBS Financial Services, Inc., as custodian for the benefit of David M. Summers IRA and David M. Summers Ira, Defendants.

Bankruptcy Case No. 14-16938 EEB

Adversary Proceeding No. 16-1197 EEB

United States Bankruptcy Court, D. Colorado.

Signed March 25, 2020

Lakeview Development Corporation, Englewood, CO, pro se.

Aaron J. Conrardy, Littleton, CO, Daniel A. Hepner, Daniel A. Hepner P.C., Broomfield, CO, for Trustee.

ORDER GRANTING DEFENDANT'S MOTION TO DISMISS

Elizabeth E. Brown, Bankruptcy Judge

THIS MATTER is before the Court on a Motion to Dismiss, filed by the Defendant David M. Summers IRA (the "Defendant" or the "Summers IRA"). The Trustee brought this action against the Defendant and the custodian of the IRA to recover allegedly preferential payments on a promissory note. The Defendant does not deny receipt of these payments but its Motion raises several bases for dismissal. The Court will only address two of these grounds. First, the Defendant asserts that it is not a proper party to this action because it is not a legal entity separate from its owner, Mr. David M. Summers. Therefore, the Defendant argues that the Trustee should have sued Mr. Summers instead. Second, even if the Trustee were to substitute Mr. Summers as the defendant, the Defendant contends she would not be able to prevail because Mr. Summers received a discharge in his individual bankruptcy case, barring any pre-bankruptcy claims against him, including preference claims. Both issues raise questions of first impression in this district.

I. BACKGROUND

A. Lakeview's Bankruptcy

Lakeview Development Corporation ("Lakeview") acquired vacant land near Loveland, Colorado with plans to develop it into a residential subdivision. Mr. Summers, its President and largest shareholder, spearheaded this effort. But during the development phase, Lakeview ran into financial difficulties. Mr. Summers filed a chapter 11 petition on its behalf on May 20, 2014.

As a debtor in possession, Lakeview encountered strong resistance from its creditors. The court¹ held numerous contested hearings on motions to sell property, motions to assume brokerage listing agreements, motions for stay relief, Lakeview's plan and disclosure statement, motions for protective orders, motions to extend the exclusive period, motions to obtain post-petition financing, motions to change the composition of the unsecured creditors' committee, and more. With mounting administrative expenses and Lakeview's inability to confirm a plan, the committee filed a motion for the appointment of a chapter 11 trustee. Although Lakeview opposed this motion, the court granted it and, in due course, the Trustee received her appointment as Lakeview's chapter 11 trustee. Thereafter, both Lakeview and the Trustee attempted to confirm their separate reorganization plans, but with no success. Ultimately, secured creditors obtained stay relief to foreclose on the property. Then the U.S. Trustee moved for conversion, which this Court granted. The Trustee continues to represent this estate but now as its chapter 7 trustee.

In performing her duty to liquidate the estate's assets, the Trustee filed numerous adversary proceedings, including this one. In her complaint, she alleges that, on December 31, 2010, Lakeview executed a $750,000 promissory note payable to UBS Financial Services ("UBS"), as custodian for the Summers IRA. She further alleges that, on August 1, 2013, less than one year prior to its bankruptcy, Lakeview made two $75,000 interest payments (the "Transfers") on the note to UBS and/or the Summers IRA. The Trustee seeks to avoid and recover these Transfers under 11 U.S.C. §§ 547(b) and 550(a).²

B. Mr. Summers' Bankruptcy

Shortly after the Court converted Lakeview's chapter 11 case to chapter 7, and two days after the Trustee filed this adversary proceeding, Mr. Summers filed his own chapter 7 bankruptcy, Case No. 16-15359 TBM. He listed the Summers IRA, with a balance of $503,701.99, as an asset in his schedules and claimed it as fully exempt under Colo. Rev. Stat. § 13-54-102(1)(s).³ Mr. Jeffrey Hill ("Mr. Hill"), the chapter 7 trustee of Mr. Summers' estate, objected to this exemption to the extent the balance of the IRA included the two Transfers, totaling $150,000. Mr. Hill asserted that the portion of the IRA attributable to the Transfers was "tainted by fraud." After a trial before another division of this court, the court denied Mr. Hill's objection to the IRA exemption. It found no evidence of actual fraud when Mr. Summers caused Lakeview to make the Transfers. While the Summers IRA may have received preferential treatment when it received the Transfers, the court found the underlying transaction was legitimate and Lakeview received consideration through a corresponding satisfaction of antecedent debt.

The Trustee in this case filed a proof of claim against Mr. Summers' estate for $586,878.49, for what she described as the "[v]alue of [a]voidable [t]ransfers under 11 U.S.C. 547 and 548." Given the reference to § 548 and an obvious tie between the amount of this claim and what was then the likely balance of the Summers IRA, the Trustee apparently believed she had a basis for avoiding all transfers to the IRA under a fraudulent conveyance theory. But in her suit against the Summers IRA, she has abandoned this theory and sought only to recover the Transfers as preferential payments in the amount of $150,000. And as it turned out, the amount of the Trustee's claim against Mr. Summers' estate became irrelevant. There were no unsecured, nonexempt assets in his estate and, therefore, Mr. Hill was unable to distribute any funds to unsecured creditors. Nevertheless, Mr. Summers received a chapter 7 discharge.

II. DISCUSSION

A. The IRA is Not a Separate Legal Entity

The Defendant asserts that it is not a separate legal entity and, therefore, it cannot be sued in this action. Surprisingly, there are few reported decisions addressing this question. Wagner v. Lacy , 2013 WL 12328852, at *3 (D.N.M. Nov. 18, 2013) (observing the dearth of case law on the issue). Of those that exist, almost all the courts agree with the Defendant and hold that an individual retirement account ("IRA") is not a separate legal entity. But they reach this conclusion without providing a great deal of analysis. Nor does this Court hold out much hope of providing a satisfactory answer. That is because an IRA is somewhat of a fictional creature, existing only to provide its owner with certain tax attributes. When the IRA holds only funds or marketable securities, it seems obvious that it is merely an asset of the debtor and not a separate entity. But when it holds other types of property, whether personal property (here a promissory note) or real property, it seems that it ought to be considered a separate entity so that it has the power to sue and be sued when it comes to asserting rights in the property. But again, that is not the conclusion of most courts.

For example, in SIPC v. Bernard L. Madoff Investment Securities, LLC , 610 B.R. 197 (Bankr. S.D.N.Y. 2019), the court held that "an IRA is not a separate legal entity from its owner." Id. at 238. It reached this conclusion in the context of a larger ruling regarding who was the initial transferee of fraudulently conveyed property. The individual defendant, who owned the IRA, argued the IRA's custodian was the initial transferee. The court rejected this notion and found the custodian was a mere conduit. The owner of the IRA was the initial transferee, according to the court, because she, not the custodian, first acquired dominion and control over the transferred asset.

In Wagner v. Eberhard (In re Vaughan Co. Realtors) , 2014 WL 271632 (Bankr. D.N.M. Jan. 23, 2014), the defendant argued that, because the allegedly fraudulently transferred funds went to his IRA and not to him personally, he was only liable to the extent he received distributions from his IRA. The court rejected this reasoning as well, stating that "[a] self-directed IRA, like a savings account, is not a separate legal entity from its owner." Id. at *3. The court also observed that funds deposited into an IRA are treated as income of the individual owner under § 101(10A) because the funds are available for the owner's use. The court compared the owner's control over the funds in the IRA to that of the owner of a self-settled revocable trust in that the owner can access the assets at any time. It concluded that the defendant had access to and control over the funds in his IRA from the date the funds were deposited. "For fraudulent transfer purposes, even if not for income tax or exemption purposes, the transfer of funds by a third party to an individual's IRA has the same legal effect as if the funds were transferred directly to that individual." Id. ; see also Regions Bank v. Kaplan , 2017 WL 2868413 (M.D. Fla. April 10, 2017) ; United States v. Bailey , 2012 WL 569744, at *5 n.5 (W.D.N.C. Feb. 22, 2012) (in the context of a criminal forfeiture proceeding, the court ruled that "because an IRA is not a separate legal entity from its owner," the individual IRA beneficiaries were the true owners of the subject stock certificates).

In Brady v. Park , 445 P.3d 395 (Utah 2019), the court had to decide whether it had appellate jurisdiction over an IRA when the IRA's owner had filed a notice of appeal, but the custodian of the IRA had not. The court held that the IRA was "not a legal entity that is distinct from its owner. Rather, it is more akin to property such as a bank account." Id. at 423. Because the court had jurisdiction over the owner of the IRA, it concluded that it had jurisdiction over all of his assets, including assets held in the IRA. Id.

In Deem v. Baron , 2016 WL 8230425 (D. Utah April 14, 2016), IRA owners sued on a promissory note and a loan agreement. They named the obligors and the IRA custodian as part...