In re Kellerman, CASE NO.: 4:09–bk–13935

531 B.R. 219

In re: Barry K. Kellerman and Dana M. Kellerman, Debtors

CASE NO.: 4:09–bk–13935

United States Bankruptcy Court, E.D. Arkansas, Little Rock Division .

Signed May 26, 2015

Danny R. Crabtree, Attorney at Law, Allison R. Gladden, James E. Smith, Jr., Williams & Anderson, PLC, James H. Penick, III, Eichenbaum Law Firm, O.C. Rusty Sparks, O.C. ‘Rusty‘ Sparks, P.A., Little Rock, AR, for Debtors.

M. Randy Rice, Rice & Associates, Little Rock, AR, Trustee.

MEMORANDUM OPINION

HONORABLE RICHARD D. TAYLOR, UNITED STATES BANKRUPTCY JUDGE

The debtors filed their voluntary Chapter 11 bankruptcy petition in the United States Bankruptcy Court, Eastern District of Arkansas, on June 3, 2009. On motion and with the debtors' consent, the court converted their case to a Chapter 7 proceeding on January 28, 2014, and appointed M. Randy Rice (“Trustee”) as trustee of the debtors' estate. The Trustee and a creditor, Arvest Bank (“Arvest”), filed symbiotic objections to the debtors' exemption of an individual retirement account (“IRA”) owned by and in the name of the joint debtor, Barry Kellerman. The objections came for hearing on April 29, 2015. At the conclusion of the evidence, the court took the matter under advisement. For the reasons stated below, the objections to the claimed exemption are sustained.

I. Jurisdiction

This court has jurisdiction over this matter under 28 U.S.C. §§ 1334 and 157. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (B). The following opinion constitutes findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052 made applicable to this proceeding under Federal Rule of Bankruptcy Procedure 9014.

II. Findings of Fact

Prior to his bankruptcy case, Barry Kellerman created the IRA, which as of October 27, 2008, had a reported value of $252,112.67. (Arvest Ex. 4, at 1.) The named administrator of the IRA is Entrust Mid South, LLC (“Entrust”). The IRA is self-directed by Barry Kellerman who made all of the decisions pertinent to the issues raised in the objections. At the commencement of their case, the debtors valued the IRA at $180,000.00 and claimed the entire fund as exempt pursuant to 11 U.S.C. § 522(d)(12). (Arvest Ex. 1, at 8.)

Arvest and the Trustee object to the debtors' claimed exemption in the IRA on the basis that it was no longer exempt from taxation under the Internal Revenue Code as of the commencement of the case and, accordingly, is not eligible for exemption under 11 U.S.C. § 522(d)(12). They allege that the IRA lost its exempt status in 2007 because Barry Kellerman directed the IRA to engage in prohibited transactions involving disqualified persons as defined by the Internal Revenue Code. At trial, the parties conceded, or tacitly recognized, that the transactions involved disqualified persons; the debtors did not argue or suggest that any of the parties involved were not disqualified persons. Thus, the remaining issue principally concerns whether the transactions were prohibited transactions as defined in 26 U.S.C. § 4975(c).

The alleged prohibited transactions involve the 2007 acquisition of approximately four acres of real property located near Maumelle, Arkansas. Panther Mountain Land Development, LLC (“Panther Mountain”) played a precipitating and integral role in the purchase. Barry Kellerman and his wife each own a 50 percent interest in Panther Mountain. (Arvest Ex. 5, at 28.) The address for Panther Mountain is the same as Barry Kellerman Construction, Inc. and is the debtors' home address. (Arvest Ex. 1, at 32.) Barry Kellerman is also a co-debtor on a number of debts with Panther Mountain. (Arvest Ex. 1, at 23.)

To effect the acquisition and development of the four-acre property, the IRA and Panther Mountain formed a partnership by executing a Partnership Agreement dated August 8, 2007. (Debtors' Ex. 2.) Barry Kellerman, executed the Partnership Agreement on behalf of Panther Mountain. (Debtors' Ex. 2, at 3.) Jerry O. Pearson, Jr. executed the Partnership Agreement on behalf of the IRA. (Debtors' Ex. 2, at 3.) Barry Kellerman is the only person specifically designated to sign partnership checks. (Debtors' Ex. 2, at 2.) The Partnership Agreement does not disclose Panther Mountain's ownership. The partnership operated under the name Entrust Mid South LLC FBO Barry Kellerman IRA # 0605002–01 and Panther Mountain Land Development, LLC (“Entrust Partnership”). (Debtors' Ex. 2, at 1.)

Although the IRA and Panther Mountain each possessed a 50 percent interest, the Partnership Agreement called for the IRA to deliver the real property as a “Noncash Contribution[ ]” valued at $122,830.56. (Debtors' Ex. 2.) The IRA was also called upon to make a “Cash Contribution[ ]” of $40,523.93 by November 30, 2007. (Debtors' Ex. 2.) Panther Mountain's sole obligation was a cash contribution of $163,354.49—an amount equal to the IRA's cash and non-cash contribution values—at an unspecified “construction completion” date. (Debtors' Ex. 2.) Neither party introduced testimony or evidence that Panther Mountain ever partially or fully made its cash contribution. (Arvest Ex. 5, at 17.)

Exactly one day after the formation of the Entrust Partnership, Barry Kellerman directed the IRA to liquidate assets in the amount of $123,000. (Arvest Ex. 6.) His August 9, 2007 Sell Direction Letter (“Sell Letter”) illuminates the relationship between Barry Kellerman, the beneficiary of the IRA, and Entrust, the plan administrator, and contradicts the debtor's assertion that the administrator sanctioned or approved of the transaction as consistent with the IRA's tax exempt status. Specifically, the Sell Letter makes Entrust's role clear, stating:

I understand that my account is self-directed and that Entrust ... will not review the merits, legitimacy, appropriateness and/or suitability of any investment in general, including, but not limited to, any investigation and/or due diligence prior to selling any investment, or in connection with my account in particular.... I understand that neither the Administrator nor the Custodian determine whether this investment is acceptable under the Employment Retirement Income Securities Act (ERISA), the Internal Revenue Code (IRC), or any applicable federal, state, or local laws, including securities laws. I understand that it is my responsibility to review any investments to ensure compliance with these requirements.

(Arvest Ex. 6, at 1.) Further,

I am directing you to complete this transaction as specified above. I confirm that the decision to sell this asset is in accordance with the rules of my account, and I agree to hold harmless and without liability the Administrator and/or Custodian of my account under the foregoing hold harmless provision.

(Arvest Ex. 6, at 2.) By a separate Buy Direction Letter dated August 8, 2007, Barry Kellerman directed Entrust to buy the four-acre tract through Standard Abstract & Title Co. for a purchase price of $122,830.56. (Arvest Ex. 6, at 3.) Terms contained in the Buy Direction Letter mirror the exculpatory and disclaimer language found in the Sell Letter.

The purchase of the four-acre tract also took place on August 8, 2007. Barry Kellerman made the decision to purchase the four acres. The purchase took place principally to complement and assist in the development of two nearby tracts of approximately 80 and 120 acres owned by Panther Mountain. While the four-acre tract could be independently developed, controlling it substantially assisted in the development of the other Panther Mountain properties. The IRA funded the entire purchase price. (Arvest Ex. 3.) The Warranty Deed from Maumelle Development, LLC, dated August 8, 2007, did not convey the property to the Entrust Partnership; rather, the seller conveyed the tract to the IRA and Panther Mountain with each owning an undivided one-half interest. (Arvest Ex. 2.) This undivided one-half interest is the sole remaining asset in the IRA. Confusingly, the IRA's October 27, 2008 Account Statement reflects the full value of the real estate as an asset of the IRA without reference to its divided interest. (Arvest Ex. 4, at 1.)

The IRA's contributions did not end with the property purchase. On December 5, 2007, the IRA, as a “Business Expense,” paid $40,523.93 to develop the property; Barry Kellerman characterized this amount as design and engineering expenses. (Arvest Ex. 4, at 4.) The IRA paid an additional “Business Expense” of $411.82 on October 15, 2008. (Arvest Ex. 4, at 4.) On his individual bankruptcy schedules, Barry Kellerman shows distributions from the IRA of $12,349.99 in 2009, $124,100.74 in 2008, but none in 2007. (Arvest Ex. 1, at 28.)

Panther Mountain filed its own Chapter 11 bankruptcy on September 20, 2009, shortly after the Kellermans commenced their bankruptcy proceeding on June 3, 2009. (Arvest Ex. 5.) On its schedules, Panther Mountain lists both the Kellermans and the IRA as unsecured creditors. (Arvest Ex. 5, at 17–18.) Specifically, two debts are reflected as owed to the IRA: (1) $163,000.00 with the claim described as “50% Interest in new entity,” and (2) $7,891.96 with the claim described as “Loans from B Kellerman IRA to PMLD, LLC.” (Arvest Ex. 5, at 4, 11, 17–18.) Barry Kellerman's testimony regarding the $7,891.96 debt was unclear. He alternatively characterized it as money that he and his wife paid personally for Panther Mountain or money that did, in fact, come from the IRA. As stated, it is scheduled as a debt to the IRA and not as a debt to the Kellermans.

III. Discussion

The Trustee and Arvest object to the debtors' use of 11 U.S.C. § 522(d)(12) to exempt the IRA. Subsection 522(d)(12) provides that “[t]he following property may be exempted under subsection (b)(2) of this section .... (12) [r]etirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” 11 U.S.C. § 522(d)(12) (2014).

A. Burden...