Kellerman v. Rice (In re Kellerman)

538 B.R. 776

In Re: Barry K. and Dana M. KellermanBarry K. Kellerman and Dana M. Kellerman, Appellants

v.Randy Rice, Trustee; and Arvest Bank, Appellees

Bankruptcy No. 4:09-bk-13935

No. 4:15CV00347 JLH

United States District Court, E.D. Arkansas, Western Division.

Signed September 14, 2015

Danny R. Crabtree, Attorney at Law, Little Rock, AR, for Appellants.

Hamilton Moses Mitchell, Rice Law Office, Little Rock, AR, for Appellee, Randy Rice, Trustee.

Stephen L. Gershner, Davidson Law Firm, Ltd., Little Rock, AR, for Appellee: Arvest Bank.

MEMORANDUM OPINION

J. LEON HOLMES, UNITED STATES DISTRICT JUDGE

This is an appeal from an order of the United States Bankruptcy Court for the Eastern District of Arkansas sustaining the Trustee's and creditor Arvest Bank's objections to the debtors' claim of an exemption for Barry Kellerman's individual retirement account. The bankruptcy court found that the IRA had entered into transactions with Panther Mountain Land Development, LLC, that were prohibited by the Internal Revenue Code and therefore the Kellermans could not claim the IRA as exempt. The Kellermans elected to appeal the decision to this Court, rather than the bankruptcy appeal panel, pursuant to 28 U.S.C. § 158(a)(1).

The relevant events are not seriously in dispute and are accurately described in the bankruptcy court's opinion. Document # 6-6 at 44-57.

Prior to filing for bankruptcy protection, Barry Kellerman created the IRA, which had a reported value as of October 27, 2008, of $252,112.67. Document # 6-5 at 1. The administrator of the IRA is Entrust Mid South, LLC. Document # 6-2 at 45. The IRA is self-directed by Barry Kellerman who made all of the decisions pertinent to the issues raised in the objections. Id. at 29-30. At the commencement of their bankruptcy case, the Kellermans valued the IRA at $180,000 and claimed it as exempt under 11 U.S.C. § 522(d)(12). Document # 6-4 at 8.

Arvest and the Trustee objected to the debtors' claimed exemption in the IRA because, they contended, it was no longer exempt from taxation under the Internal Revenue Code at the commencement of the case and thus was not eligible under 11 U.S.C. § 522(d)(12). They argued that the IRA lost its exempt status in 2007 when Barry Kellerman directed the IRA to engage in prohibited transactions involving disqualified persons as defined by the Internal Revenue Code.

The transactions at issue involved the acquisition and development by the IRA and Panther Mountain of approximately four acres of real property. Barry Kellerman and his wife, Dana, each own a 50% interest in Panther Mountain. Document # 6-6 at 28. The address for Panther Mountain is the same as Barry Kellerman Construction, Inc. Document # 6-4 at 32. Barry Kellerman is also a co-debtor on a number of debts with Panther Mountain. Id. at 23.

In order to acquire and develop the four-acre tract, the IRA and Panther Mountain executed a Partnership Agreement on August 8, 2007. Document # 6-6 at 41-43. Barry Kellerman executed the Partnership Agreement on behalf of Panther Mountain. Id. at 43. Jerry O. Pearson, Jr. executed the Partnership Agreement on behalf of the IRA. Id. Barry Kellerman is the only person designated to sign partnership checks. Id. at 42. The partnership took the name Entrust Mid South LLC FBO Barry Kellerman IRA # 0605002-01 and Panther Mountain Land Development, LLC (“Entrust Partnership”). Document # 6-6 at 41.

The Partnership Agreement provided that the IRA would contribute capital by delivering the real property as a Noncash Contribution valued at $122,830.56. Id. The IRA also was supposed to contribute a cash contribution of $40,523.93 by November 30, 2007. Id. Panther Mountain's obligation was a cash contribution of $163,354.49 (an amount equal to the IRA's cash and noncash contributions) at an unspecified construction completion date. Id.

In a 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. Document # 6-6 at 37. One day later, Barry Kellerman directed the IRA to liquidate assets in the amount of $123,000. Document # 6-6 at 35-36. The Sell Letter explains the relationship between Barry Kellerman and Entrust:

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 Employee 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.

Document # 6-6 at 35. Additionally, the Sell Letter states:

I am directing you to complete this transaction as specified above. I confirm that the decision to sell 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.

Document # 6-6 at 36. The 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 closed on August 8, 2007. Document # 6-4 at 42-43. An effect of the purchase was to provide sewer access to nearby tracts of approximately 80 and 120 acres owned by Panther Mountain. Document # 6-2 at 36-40. While the four-acre tract could be independently developed, controlling it therefore substantially assisted in the development of the other Panther Mountain properties. Id. The IRA funded the entire purchase price. Document # 6-6 at 35-37 and Document # 6-5 at 3-4. The Warranty Deed from Maumelle Development, LLC dated August 8, 2007, did not convey the property to the Entrust Partnership; rather, the deed conveyed the tract to the IRA and Panther Mountain with each owning an undivided one-half interest. Document # 6-4 at 42-43. The one-half interest is the sole remaining asset in the IRA. Document # 6-2 at 20. The IRA's October 27, 2008, Account Statement reflects the purchase of the real estate as a purchase of an asset of the IRA without reference to its divided interest. Document # 6-5 at 4.

On December 5, 2007, the IRA, as a “Business Expense,” paid $40,523.93 to develop the property. Id. Barry Kellerman described this expenditure as design and engineering expenses. Document # 6-2 at 26. The IRA paid an additional “Business Expense” of $411.82 on October 15, 2008. Document # 6-5 at 4. On his individual bankruptcy schedules, Barry Kellerman shows distributions from the IRA of $12,349.99 in 2009 and $124,100.74 in 2008 but none in 2007. Document # 6-4 at 28.

Shortly after the Kellermans commenced their bankruptcy proceeding on June 30, 2009, Panther Mountain filed its own Chapter 11 bankruptcy on September 20, 2009. Document # 6-6 at 1-34. On its schedules, Panther Mountain lists both the Kellermans and the IRA as unsecured creditors. Id. at 17-18. 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.” Id. As the bankruptcy court stated, Barry Kellerman's testimony regarding the $7,891.96 debt was unclear. Kellerman alternatively characterized that debt as money that he and his wife paid personally for Panther Mountain or money that did, in fact, come from the IRA. Document # 6-2 at 27-28. It is scheduled as a debt to the IRA and not a debt to the Kellermans.

The bankruptcy court found that the IRA engaged in prohibited transactions that caused it to lose its tax exempt status. Document # 6-6 at 57. First, the bankruptcy court found that Panther Mountain used the IRA as a lending source for the purchase price and development of the four-acre tract of land in violation of subsection 4975(c)(1)(B). Document # 6-6 at 55-56. Secondly, the bankruptcy court found that Barry Kellerman transferred or used the IRA's assets for the benefit of disqualified persons and as a fiduciary dealt with the IRA's assets for his own interest in violation of subsections 4975(c)(1)(D) and (E). Alternatively, the bankruptcy court found that Barry Kellerman dealt with the income as assets of the IRA as a fiduciary for his own interest in violation of subsection 4975(c)(1)(E). Accordingly, the bankruptcy court concluded the debtors could not claim any interest in the IRA as exempt under 11 U.S.C. § 522(d)(12) of the United States Bankruptcy Code. Id. at 57.

This Court reviews the bankruptcy court's findings of fact for clear error and its legal conclusions de novo. Fix v. First State Bank of Roscoe, 559 F.3d 803, 808 (8th Cir.2009). “A finding is clearly erroneous when although there is evidence to support it, the reviewing court on the entire evidence is left the definite and firm conviction that a mistake has been committed.” Tri – County Credit Union v. Leuang (In re Leuang), 211 B.R. 908, 909 (8th Cir. BAP 1997) (citations omitted). “The allowance or disallowance of a claim of exemption is subject to de novo review.” Drenttel v. Jensen – Carter (In re Drenttel), 309 B.R. 320, 322 (8th Cir. BAP 2004).

Upon filing bankruptcy, all legal or equitable interest of the debtor in property becomes property of the bankruptcy estate subject to claims by creditors. Res – Ga Gold, LLC v. Cherwenka (In re Cherwenka), 508 B.R. 228, 234 (Bankr.N.D.Ga.2014) (citing 11 U.S.C. § 541(a)(1) ). Certain interests may be exempted from the bankruptcy estate. Id. A debtor's claim of exemption is “presumptively valid.” Danduran v. Kaler (In re Danduran), 657 F.3d 749, 754 (8th Cir.2011) (citing Stephens v....