Opinion ID: 798605
Heading Depth: 2
Heading Rank: 1

Heading: exemption of the entire keogh plan

Text: A. Background Bankruptcy Law In order to provide context for the state property law that is disputed in this case, we first lay out the basic principles of federal bankruptcy law which underlie this dispute. As soon as a debtor files a petition for bankruptcy, the bankruptcy estate begins its legal existence. 7 Some, but not all, of the debtor’s property as of the time of filing is included in that estate. 8 Retirement plans are a mixed bag — although their funds generally are not included in the estate, if the debtor and his spouse are the only participants in a retirement plan, then the plan’s funds generally are included in the estate. 9 The parties do 7 See 11 U.S.C. § 541(a) (“The commencement of a [bankruptcy case] under section 301, 302, or 303 of [the Bankruptcy Code] creates an estate. . . .”). 8 See 11 U.S.C. § 541(a)(1) (including as property of the bankruptcy estate “all legal or equitable interests of the debtor in property as of the commencement of the case” but providing for a number of excludable items in later subsections of the same section). 9 This distinction derives from 11 U.S.C. § 541(b)(7)(A)(i)(I), which excludes from the bankruptcy estate “any amount . . . withheld by an employer from the wages of employees for payment as contributions . . . to . . . an employee benefit plan that is subject to title I of [ERISA].” (continued…) 12 not dispute that Dr. Reinhart was the only participant in his Keogh plan and that its funds were includable in the bankruptcy estate. 10 Certain types of property that are nominally includable in the bankruptcy estate may be declared exempt by a debtor, thus avoiding them from claims of creditors in bankruptcy. See 11 U.S.C. § 522(b)(1). Exempt property is not part of the bankruptcy estate, even if the Bankruptcy Code otherwise provides for its inclusion. The practical (…continued) An ERISA “employee benefit plan” cannot exist without employees, and ERISA regulations exclude from the definition of “employee” the owner of a business and his spouse. See 29 CFR § 2510.3-3(c)(1) (“An individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse . . . .”); Id. § 2510.3-3(b) (“For purposes of title I of [ERISA] and this chapter, the term “employee benefit plan” shall not include any plan, fund or program, other than an apprenticeship or other training program, under which no employees are participants covered under the plan. . . . For example, a so-called “Keogh” or “H.R. 10” plan under which only partners or only a sole proprietor are participants covered under the plan will not be covered under title I. However, a Keogh plan under which one or more common law employees, in addition to the self-employed individuals, are participants covered under the plan, will be covered under title I.”). 10 One of the deficiencies in Dr. Reinhart’s plan is that he did not allow all of his employees to participate. And because Dr. Reinhart’s argument for exemption relies on the correctable nature of his plan’s defects, we might well need to at least hypothetically assume that all of his employees were participants in his plan. However, the only other employee of Dr. Reinhart’s business was his wife. So even if we attribute to her participation in the plan — as would have been required to comply with relevant provisions of the IRC — the plan’s funds would still be includible in the estate pursuant to 11 U.S.C. § 541(a), (b)(7)(A)(i)(I). 13 effect of an exemption is to allow a debtor to retain the exempted property and avoid having it used to repay creditors. In bankruptcy cases brought by Utah domiciliaries, Utah law governs whether property can be exempted from the estate created by the Bankruptcy Code. 11 See 11 U.S.C. § 522(b)(3)(A). Utah law exempts from execution by creditors “any money or other assets held for or payable to the individual [debtor]” where the debtor is “a participant or beneficiary in a retirement plan or arrangement that is described in Section 401(a) . . . [of the] Internal Revenue Code.” 12 Utah Code Ann. § 78B-5-505(1)(a)(xiv). If this statutory provision covers Dr. Reinhart’s Keogh plan, then its funds are exempt. If not, the funds are part of the bankruptcy estate. B. Clarification from the Utah Supreme Court 11 The Bankruptcy Code ordinarily allows a debtor to avail himself of an enumerated list of exemptions provided for in the Code itself. However, the Code also permits states to preclude debtors from using that list. See 11 U.S.C. § 522(b)(2). Utah has taken up Congress’s offer to establish its own exemptions and disregard the Code’s, and thus Dr. Reinhart could only exempt property as expressly provided under Utah law. See Utah Code Ann. § 78B-5-513 (“No individual may exempt from the property of the estate in any bankruptcy proceeding the property specified in [11 U.S.C. § 522(d)], except as expressly permitted under this part.”). 12 Utah’s exemption statute exempts plans “described in” other IRC provisions, but we list only § 401(a) here for simplicity’s sake. Dr. Reinhart does not argue that his Keogh plan might be “described in” any of the other listed provisions. 14 Having elucidated Utah property law’s impact on this dispute, we are left with a simple enough question: Under Utah law, is Dr. Reinhart’s Keogh plan “described in” § 401(a) of the Internal Revenue Code? Our initial deliberation led us to ask for the assistance of the Utah Supreme Court in interpreting Utah’s exemption statute. Pursuant to Tenth Circuit Rule 27.1 and Utah Rule of Appellate Procedure 41, we certified a question of state law to the Utah Supreme Court, asking whether, under Utah law, a retirement plan is “described in” a provision of the IRC even if it does not comply with each of the technical requirements listed in the terms of that provision. Gladwell v. Reinhart (In re Reinhart), 362 F. App’x 919, 920 (10th Cir. 2010) (per curiam) (unpublished). The Utah Supreme Court told us that as long as a retirement plan “substantially complies” with § 401(a)’s requirements, it is covered by the Utah exemption statute. Gladwell v. Reinhart (In re Reinhart), 267 P.3d 895, 899 (Utah 2011). The court explained that it need not decide “which provisions of section 401(a) are substantial and which ones are insignificant because the EPCRS has already made this determination,” elaborating on its statement by noting that a plan in substantial compliance with § 401(a) “can be corrected.” Id. at 899-900. Thus, a plain reading of the Utah Supreme Court’s directive gives us an objective standard: A plan is in substantial compliance with § 401(a) if its defects fall within the scope of those that can be corrected with the IRS’s EPCRS system. 15 C. Application of Utah Law to Dr. Reinhart’s Keogh Plan Our resolution of this issue, then, comes down to one key question: Were the Keogh plan defects correctable through the EPCRS system? The Trustee’s expert, Mr. Lloyd, indicated that they all were at least potentially correctable under EPCRS. And the bankruptcy court found Mr. Lloyd to be a credible witness. However, the bankruptcy judge himself never made an explicit finding that the operational defects in the Keogh plan could be corrected pursuant to EPCRS. The judge’s statement of his understanding of Mr. Lloyd’s testimony on this point preceded his legal conclusion that the Keogh plan was eligible for exemption: “Mr. Lloyd further testified that the -- all of these operational failures were remedial [sic], however.” Aplt. App’x at 47. We cannot make sense of the judge’s statement. “Remedial” has no logical application to an operational failure or defect. Nothing in Mr. Lloyd’s testimony indicates that anything about the plan’s operational failures had to do with “providing a remedy” or “means of obtaining redress” for anything at all. Black’s Law Dictionary 1407 (9th ed. 2009). We see two possibilities: (1) the bankruptcy judge meant to say “remediable” (i.e. “[c]apable of being remedied, esp[ecially] by law,” Black’s Law Dictionary 1407 (9th ed. 2009)) rather than “remedial”; or (2) the bankruptcy judge’s statement was mistranscribed. While we are inclined to conclude that the judge did or meant to say “remediable,” we need not rely on that intuition, because the bankruptcy court’s factual finding that Mr. 16 Lloyd was a credible witness allows us to conclude that each Keogh plan defect was correctable under EPCRS. Cf. Medina v. City and County of Denver, 960 F.2d 1493, 1495 n.1 (10th Cir. 1992) (“We are free to affirm a district court decision on any grounds for which there is a record sufficient to permit conclusions of law, even grounds not relied upon by the district court.”) (alterations and quotations omitted). When asked if the defects in Dr. Reinhart’s Keogh plan were correctable under EPCRS, Mr. Lloyd responded, “I don’t believe that errors here are errors that would fall outside the parameters of the [EPCRS] program.” 13 Aplt. App’x at 229. Therefore, under the 13 Mr. Gladwell makes an additional argument in his supplemental brief that bears mentioning. He claims that Mr. Lloyd offered no testimony about one of the operational defects — specifically, the fact that Dr. Reinhart’s employer (i.e. the PC) neither established nor maintained the Keogh plan as of the petition date. It follows, Mr. Gladwell argues, that Mr. Lloyd could not have opined on the correctability of that particular defect. Aplt. Supp. Br. at 9 (“As to the fifth [defect] (i.e. the failure of the Debtor’s plan to be established and maintained by his employer on the petition date), Mr. Lloyd did not testify.”). This contention is belied by the record. Mr. Lloyd identified and described the five plan defects listed in Part I.B, supra, including the fact that the PC did not administer the Keogh plan. Aplt. App’x at 214 (“So what we have is this sort of unusual situation where the professional corporation is acting as the sponsor of a plan that it has not formally adopted. That’s again, technically, another disqualifying event with respect to the plan.”) (testimony of Mr. Lloyd). Shortly after describing in some detail each of the plan’s defects, Mr. Lloyd opined that the “errors here” fell within the broad scope of EPCRS. Aplt. App’x at 229. Thus, we disagree that Mr. Lloyd did not testify about this defect, and reject Dr. Reinhart’s argument which relies on that faulty premise. 17 standard set forth by the Utah Supreme Court, we hold that Dr. Reinhart’s Keogh plan was “described in” IRC § 401(a). To be sure, the record reflects that Dr. Reinhart never actually used — or even tried to use — the EPCRS system. 14 But the Utah Supreme Court has given us its interpretation of Utah law, and told us that a plan is exempt if it “can be corrected.” Reinhart, 267 P.3d at 899-900. As of the date the bankruptcy petition was filed, Dr. Reinhart’s plan suffered from deficiencies which could, at least theoretically, be corrected using EPCRS. While it might make good policy to require a debtor to actually make some effort to use the EPCRS system before allowing them to exempt their retirement plan from creditors, Utah has not seen fit to include that requirement as a prerequisite to exemption. 15 We recognize that this inviting standard makes Utah citizens’ retirement plans exempt from creditors with minimal (if any) regard to their actual compliance with IRS 14 At oral argument before the Utah Supreme Court, Dr. Reinhart’s counsel acknowledged Dr. Reinhart had made a strategic decision to avoid the EPCRS system in hopes of letting the clock run out on the period within which the IRS could institute an action challenging the tax qualification of the Keogh plan. See Aplt. Supp. App’x at 14. 15 The Utah Supreme Court observed: “[T]he fact that a debtor's retirement plan fails to meet the requirements of section 401(a) at the time he files for bankruptcy does not necessarily mean that the debtor never intends to amend his plan to comply with those requirements.” Reinhart, 267 P.3d at 900. Despite this observation, we see no indication in the court’s opinion requiring any actual efforts to use EPCRS in order to satisfy the substantial compliance standard. 18 provisions. EPCRS is inherently a flexible system, and does not include a definitive list of correctable errors. Naturally, then, the scope of errors that might fall within its reach is quite vast. Thus, anyone who superficially labels a set of savings as a “retirement plan” will typically have a persuasive argument that they could correct that plan with EPCRS, therefore permitting exemption of those savings. But the standard of theoretical correctability is one that the Utah legislature has established, and one that only the Utah legislature can change. If our intuition is correct, and Utah residents can use the exemption statute to shield almost anything they label (whether artificially or genuinely) a “retirement plan,” creditors may hesitate to lend to Utah borrowers who might avoid repayment through this broad exemption statute. 16 However, such a policy concern is one for the Utah legislature to address, not a court — and most certainly not a federal court tasked with applying the rigors of Utah law. Applying Utah law, we hold that funds in Dr. Reinhart’s Keogh plan were exempt from inclusion in the bankruptcy estate.