523 B.R. 198
Bankr. D. Ariz.2014Background
- James and Kathleen Gilbraith filed Chapter 7 on April 1, 2013 and claimed $610,755.18 in a single‑employer profit‑sharing plan as exempt under 11 U.S.C. § 522(b)(3)(C).
- BMO Harris Bank objected, arguing the Plan was not a § 401(a) qualified plan on the petition date because required plan amendments (due April 30, 2010) were not timely adopted and Form 5500 annual reports were late for 2005–2012.
- Post‑petition the Debtors submitted a Voluntary Correction Program (VCP) package to the IRS, including a 2013 adoption agreement and Form 5500 filings; the IRS issued a Compliance Statement declining to revoke tax‑favored status and approving retroactive corrections.
- The parties litigated whether (a) the Plan was a qualified § 401(a) plan as of the petition date (thus presumptively exempt under § 522(b)(4)(A)), or (b) if not presumptively exempt, whether Debtors met § 522(b)(4)(B) by showing no prior adverse determination and substantial compliance (or lack of material responsibility).
- The court found the post‑petition VCP correction operated retroactively to April 30, 2010; the failure to file the 5500s was not a qualification failure; the Plan was qualified as of the petition date; the Bank failed to rebut the exemption presumption; alternatively the Plan was in substantial compliance, and Kathleen Gilbraith was not materially responsible for any noncompliance.
Issues
| Issue | Plaintiff's Argument (Debtors) | Defendant's Argument (Bank) | Held |
|---|---|---|---|
| Whether the Plan was a § 401(a) qualified plan as of the petition date | Debtors: Post‑petition VCP corrections are retroactive to April 30, 2010, making the Plan qualified on the petition date; Bryan Cave prototype opinion letters constitute favorable determinations Debtors could rely on | Bank: Required amendments were not adopted by petition date and late 5500s disqualified the Plan; opinion letters did not apply to this employer | Held: VCP corrections are retroactive; Plan was qualified on petition date and Debtors could rely on prototype opinion letters; presumption of exemption stands |
| Whether the Bank rebutted the § 522(b)(4)(A) presumption of exemption | Debtors: IRS Compliance Statement and absence of operational failures show no basis to rebut | Bank: Nonadoption of required amendments and delinquent 5500s justify rebuttal | Held: Bank failed to rebut presumption; evidence and IRS action favored Debtors |
| Whether failure to file Form 5500s disqualified the Plan or was a qualification failure | Debtors: Late 5500s at most create civil penalties; not a qualification failure; IRS did not penalize Plan | Bank: Late filings show noncompliance and support disqualification | Held: Failure to file 5500s is not a qualification failure under IRS guidance; no disqualification |
| Whether Kathleen Gilbraith may claim exemption for marital community despite husband’s alleged culpability | Debtors: Kathleen had no involvement and therefore was not materially responsible under § 522(b)(4)(B)(ii)(II) | Bank: Husband’s negligence/management culpability should defeat exemption for marital community | Held: Court found Kathleen not materially responsible; even if other grounds failed, her exemption claim stands; exemption statutes construed liberally in debtor's favor |
Key Cases Cited
- Myers v. Matley, 318 U.S. 622 (1943) (establishes the bankruptcy “snapshot” rule fixing parties’ rights as of petition date)
- In re Jacobson, 676 F.3d 1193 (9th Cir. 2012) (apply applicable law as of petition date when evaluating exemptions)
- In re Carter, 182 F.3d 1027 (9th Cir. 1999) (exemption claims are presumptively valid)
- In re Nicholson, 435 B.R. 622 (9th Cir. BAP 2010) (discusses presumption of validity for claimed exemptions)