Matter of Velis

Decision Date23 January 1991
Docket NumberCiv. A. No. 90-2217 (MTB).
Citation123 BR 497
PartiesIn the Matter of Kosta P. VELIS, Debtor.
CourtU.S. District Court — District of New Jersey



Dechert, Price & Rhoads by Robert A. White, Princeton, N.J., for appellant Kosta P. Velis.

Teich, Groh and Frost by Allen I. Gorski, Trenton, N.J., for appellee Mary Kardanis.


BARRY, District Judge.


Appellant Kosta P. Velis a/k/a Konstantin P. Velis ("debtor") filed a voluntary Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the District of New Jersey on December 18, 1986. On January 26, 1988, appellee Mary Kardanis, who holds a multi-million dollar medical malpractice judgment against the debtor, filed an objection to his claimed exemption from the bankruptcy estate of his interest in the Konstantin P. Velis Pension Plan and Trust (the "Pension Plan"), the Konstantin P. Velis Keogh Plan (the "Keogh Plan"), and the Konstantin P. Velis Individual Retirement Account (the "IRA") collectively the "Pension and Retirement Benefits", asserting that these assets were not exempt under 11 U.S.C. § 522(d)(10)(E). In response, the debtor filed a cross-motion to dismiss the objection, claiming, in relevant part, that (1) the Pension and Retirement Benefits were excluded from the estate pursuant to 11 U.S.C. § 541(c)(2); and (2) the Pension and Retirement Benefits were exempt from the estate pursuant to 11 U.S.C. § 522(d)(10)(E).

The Honorable Daniel J. Moore, in an Opinion filed October 24, 1989, held that the Pension and Retirement Benefits were neither excluded nor exempt from the bankruptcy estate. See In re Velis, 109 B.R. 64 (Bankr.D.N.J.1989). More specifically, the court found that debtor's interest in the Pension Plan and the Keogh Plan is not excluded as property of the estate based upon "Debtor's and/or an insider's influence and control over same and based on the insignificant deterrence that imposition of an early withdrawal tax has on fund dissipation." 109 B.R. at 70. The IRA was not excluded because of debtor's ability to withdraw and, thus, control the entire fund on the date the bankruptcy petition was filed. Id. at 67-68. Finally, the court found that the Pension and Retirement Benefits were not needed to sustain the basic needs of debtor and his dependents and, thus, that those funds were not exempt from the property of the estate. Id. at 72. The order reflecting this decision was filed on November 9, 1989 and entered on November 17, 1989.

Debtor filed a timely Notice of Appeal on November 27, 1989. This court has jurisdiction over the appeal pursuant to 28 U.S.C. § 158(a). For the reasons that follow, Judge Moore's decision will be affirmed in its entirety.


Debtor is a sixty-six year old orthopedic surgeon employed by Doctor Konstantin P. Velis, P.C., a medical practice operating as a professional corporation ("PC") located at 420 East 72nd Street, New York, New York. Velis Dep., October 14, 1988 ("Velis Dep. II") at 4-5; Transcript of Motion Hearing before Bankruptcy Court on October 25, 1988 ("Tr.") at 4; see Tr. at 5. He is a 100% owner of the stock in the PC and is the only doctor that it employs. Velis Dep., August 13, 1987 ("Velis Dep. I"), at 14; Tr. at 43. The PC also employs debtor's wife as an office manager, and her functions include managing the Pension Plan and the Keogh Plan. 109 B.R. at 66; Velis Dep. II at 18; Tr. at 5. Debtor has a 24 year old daughter who is a third year law student, a 21 year old daughter who recently graduated from college, and a 19 year old son who recently graduated from high school. See 109 B.R. at 66; Tr. at 5-6.

In January 1980, the PC established the Pension Plan for the benefit of debtor, his wife and two other employees. Tr. at 44 & Exh. C (Konstantin P. Velis Pension Plan and Trust Agreement). In addition, the Keogh Plan and the IRA were created in the name of debtor and a separate Individual Retirement Account was created in the name of debtor's wife (the "Barbara Velis IRA"). See Velis Dep. I at 15; Tr. at 18. It is uncontested that the Pension Plan in which debtor has vested rights, the Keogh Plan and the IRA are qualified plans because each contains language prohibiting the assignment or alienation of benefits as required by section 401(a)(13) of the Internal Revenue Code, 26 U.S.C. § 401(a)(13), and section 206(d)(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1056(d)(1). On the date debtor filed his petition, his interest in the Pension Plan was valued at $184,000.00, the Keogh Plan was valued at $162,478.00, and the IRA was valued at $9,100.00. 109 B.R. at 66; Rider to Schedule B-3(b). Debtor has claimed an exemption for the full amount of the Pension and Retirement Benefits pursuant to 11 U.S.C. § 522(d)(10)(E). Id.

On August 13, 1986, debtor and his wife entered into an agreement to purchase 857 shares of 420 East 72nd Street Tenants Corporation, representing an ownership interest in the two cooperative apartment units ("Co-ops") from which debtor conducts his medical practice (but in which he does not reside), for $775,000.00 and tendered a deposit of $77,500.00 from funds realized from the sale of a house in Seabright, New Jersey. 109 B.R. at 66; Velis Dep. I at 8, 15; Velis Dep. II at 35; Tr. at Exh. B (Order filed October 5, 1987 at ¶ 2). Debtor and his wife had obtained a financing commitment from Carteret Savings Bank for $620,000.00 toward the balance of the purchase price, but this commitment was withdrawn soon after appellee Kardanis won a $3.7 million medical malpractice judgment against debtor.1 109 B.R. at 66; Velis Dep. I at 35; Order filed October 5, 1987 at ¶ 4. Less than two months after the October 1986 malpractice judgment, the Chapter 11 petition was filed. The closing date on the sale of the Co-ops was adjourned until March 3, 1987 conditioned upon payment of an additional deposit of $222,500.00 by December 31, 1986. 109 B.R. at 66; Order filed October 5, 1987 at ¶ 4.

Having been unable to obtain financing from an institutional lender, debtor and his wife, without authorization of the Bankruptcy Court, withdrew $222,500.00 from the Pension Plan on or about December 30, 1986, and used that sum to make the deposit in a timely manner. 109 B.R. at 66; Velis Dep. I at 9, 12. Thereafter, debtor and his wife again withdrew without authorization from the Pension and Retirement Benefits to satisfy the balance of the purchase price at the closing, at which time they acquired title to the Co-ops as individuals. Velis Dep. I at 7; Velis Dep. II at 33; Tr. at 32; see Velis Dep. II at 35-36. In total, debtor and his wife withdrew $467,605.46 from the Pension Plan, $156,514.34 from the Keogh Plan, and $9,100.75 from the IRA, depleting those accounts; $33,713.07 from the Barbara Velis IRA, and approximately $33,500.00 from the PC. 109 B.R. at 66; Velis Dep. II at 35; Order filed October 5, 1987 at ¶ 7. At the time of the withdrawals, neither debtor nor his wife executed any form of promissory note, security agreement, mortgage or assignment of proprietary leases. See Velis Dep. I at 17. The Bankruptcy Court, by Order filed October 5, 1987, validated the financing of the balance of the purchase price from the Pension and Retirement Benefits in accordance with the terms and conditions of the Master Promissory Note and the Loan and Security Agreement without prejudice to the rights of the United States Trustee and/or appellee Kardanis to assert that the Pension and Retirement Benefits constitute property of debtor's estate. That order is not challenged here.

The combined gross income of debtor and his wife in 1987 was $330,000.00. Tr. at 31. Currently, debtor's income is $84,000.00 per year while his wife's income is $70,000.00 per year. 109 B.R. at 66; Velis Dep. I at 22; Velis Dep. II at 5, 19; Tr. at 20, 21. Although debtor anticipates that Bronx Lebanon Hospital, the hospital at which he sees patients and has operating privileges, will reduce his surgical sessions from one per week to one every two weeks due to his advancing age, such a reduction will amount to no lost income because his salary of approximately $15,000.00 per year from the hospital as well as his earnings from patient treatment at the hospital are deposited in the Pension Plan fund.2 Velis Dep. I at 19-20; Tr. at 27, 39. The anticipated reduction in surgical sessions will only affect the Pension Plan fund to the extent that there will be a slight decrease in the already negligible Medicaid compensation from treatment of indigent patients. See Velis Dep. I at 20. Moreover, there is no indication that debtor's income from his Manhattan practice will decline in the near future and, indeed, debtor intends to continue working at least until his son has completed college. Id. at 22-23; Velis Dep. II at 44-45; Tr. at 20, 28, 30. Debtor's wife is only fifty years old and is capable of earning $70,000.00 per year regardless of whether she is employed by the PC. Tr. at 42; see Tr. at 5. In addition to income from employment, debtor and his wife are paid rent by the PC for the Co-ops in an amount between $2,000.00 and $3,000.00 per month which, like the hospital income, is placed in the Pension Plan fund. Velis Dep. II at 23-24; Tr. at 21.

Aside from the Co-ops, the most substantial asset of debtor and his wife is equity of approximately $400,000.00 in the marital home. See Schedule A-2. Separate and apart from debtor's Pension and Retirement Benefits is his wife's unspecified interest in the Pension Plan as well as the $33,713.07 from the Barbara Velis IRA which was borrowed to finance the purchase of the Co-ops. Velis Dep. II at 20; Tr. at 18-19. Debtor's wife also has a savings account with a balance below $25,000.00, although debtor himself has no unencumbered bank accounts. Velis Dep. I at 23-24; Velis Dep. II at 20, 21. Furthermore, debtor's wife owns a 1985 190...

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