In re: Xiao
RULING ON APPEAL FROM BANKRUPTCY COURT ORDER
Appellant and bankruptcy debtor Jie Xiao (“Xiao“) appeals from an order by the United States Bankruptcy Court for the District of Connecticut (the “Bankruptcy Court“) sustaining appellee and Bankruptcy Trustee Ronald I. Chorches’ (the “Trustee“) objection to Xiao‘s claim that the funds in the LXEng, LLC (“LXEng“) Pension Plan (the “Plan“) were exempt from his bankruptcy estate and thus protected from his creditors. For the reasons that follow, I affirm the Bankruptcy Court‘s ruling, which found that the Plan did not satisfy the requirements for exempt retirement funds set forth in the Bankruptcy Code,
The following facts are drawn from the Bankruptcy Court‘s findings of fact, the parties’ briefs, and the joint stipulation of facts submitted in the Bankruptcy Court, and are undisputed unless otherwise noted. I set forth only those facts relevant to the present appeal.
Formation of LXEng and the Plan
Xiao and Michael Little formed LXEng in 2007. (ECF No. 1-1 (Bankruptcy Court‘s Ruling (“Ruling“)) at 5.) LXEng was an engineering consulting company that sold technology packages and services to its clients. (Id.) Xiao and Little were each initially 50% owners of LXEng. (Id.) After Little died in a plane crash on November 3, 2007, Xiao‘s wife, Xin Chen, was made a 10% owner of LXEng, and Xiao assumed 90% ownership. (Id.) Xiao became the managing member of LXEng. (Id.)
The pension plan at issue in this case was formed on December 15, 2007 with an effective date retroactive to January 1, 2007. (Ruling at 5.) At the time of the Plan‘s adoption, Xiao owned 90% of LXEng and was its managing member; the remaining 10% was owned by Chen. (Id.) Xiao signed the Plan on behalf of LXeng, the Employer and Administrator of the Plan, and Xiao and Chen were listed as the Plan‘s co-trustees. (Id.) The Plan also listed Keystone Healthcare, LLC (“Keystone“), as a “Participating Employer” under the Plan. (Id.) Keystone was a consulting company Xiao had previously established to provide consulting services in the pharmaceutical industry and in which he had a 100% stake. (Id. at 5-6.) No business relationship existed between Keystone and LXEng other than the fact that Xiao owned both companies. (Id. at 6.)
As of December 31, 2007, both Xiao and Chen were listed as “highly compensated employees” of LXEng. (Id.) For the calendar year 2007, LXEng reported to the Internal Revenue Service (“IRS“) ordinary business income of $1,341. (Id.) As of December 31, 2008, Xiao and Chen were still listed as the only two participants in the Plan, and were each 20% vested under the six-year vesting schedule. (Id.) For the calendar year 2008, LXEng reported ordinary business income of $462,747 to the IRS. (Id.) The IRS issued an opinion letter regarding the plan dated March 31, 2010, which the Bankruptcy Court found addressed only the form of the Plan. (Id.)
Several professionals were involved in the administration of the Plan. PenServ, Inc. (“PenServ“) acted as the third-party administrator of the Plan. (Id. at 7.) Michael F. Ostuni (“Ostuni“) was the president and sole owner of PenServ. (Id.) PenServ was not a fiduciary of the Plan and was unable to take any action regarding the Plan without direction from LXEng, Xiao as the owner of LXEng, or LXEng‘s advisors Llyod Cazes (“Cazes“) and Michael Caputo (“Caputo“). (Id.) Cazes was the accountant for Xiao, LXEng, Keystone, and the vast majority of Xiao‘s other United States entities. (Id.) He filed LXEng‘s 2007, 2008, 2009, and 2010 tax returns with the IRS at Xiao‘s direction. (Id.) Caputo was retained by LXEng as a financial planner. (Id.)
The First Discretionary Amendment
Initially, the Plan required one year of service and the attainment of age 21 for employees to be eligible to participate in the Plan. (Id.) The beginning date for any prospective participant in the Plan was the earlier of the first day of July or the first day of January coinciding with or following the date on which the participant has met the requirements to participate in the Plan. (Id. at 7-8.) Plan participants would have their benefits vest over a six-year graded period, with 20% vesting after two years and each additional year resulting in
The Plan was amended on March 1, 2009, effective retroactively to January 1, 2009 (the “2009 Amendment“). (Id.) The Bankruptcy Court found that PenServ prepared the 2009 Amendment at the direction of LXEng and that it was a discretionary amendment elected by LXEng. (Id.) Xiao signed the 2009 Amendment on behalf of LXEng, as the Employer and Administrator of the Plan, and, with Ms. Chen, as co-trustee. (Id.) As of January 1, 2009, LXEng had eleven employees in addition to Xiao and Chen, but the Plan‘s only participants were Xiao and Chen. (Id.) The 2009 Amendment excluded from Plan participation non-owner employees who were highly compensated employees. (Id.) The 2009 Amendment also increased the years of service to become eligible for participation to two years and provided for 100% vesting immediately for all current Plan participants. (Id.) Xiao and Chen became fully vested in the Plan as a result of the 2009 Amendment, but the effect of the amendment was to extend the participation requirement for LXEng‘s remaining employees to two years. (Id. at 9.) The Bankruptcy Court found that PenServe would not have advised LXEng, or any other client, to adopt an amendment similar to the 2009 Amendment. (Id.)
The Second Discretionary Amendment
On December 15, 2009, the Plan was amended effective January 1, 2010 (“2010 Amendment“). (Id.) The 2010 Amendment froze participation in the Plan for employees who were not already participants as of January 1, 2010, as well as benefits accrual. (Id.) The practical effect of the 2010 Amendment was to exclude all then-present LXEng employees and any future LXEng employees from participating in the Plan and to prevent their accrual of benefits under the Plan, with the exceptions of Mr. Xiao and Ms. Chen. (Id.) The 2010 Amendment was offered to LXEng as an option by PenServ based upon information PenServ received from LXEng, Xiao, Cazes, and Caputo that adverse business conditions had arisen and that the Plan had become too costly. (Id. at 10.) Xiao signed the 2010 Amendment on behalf of LXEng, as the Employer and Administrator of the Plan, and, with Ms. Chen, as co-trustee. (Id.) As of January 1, 2010, Xiao and Chen were still listed as the only two participants in the Plan. (Id.) Several of LXEng‘s employees would have been participants in the Plan by 2010 or 2011 if not for the 2009 and 2010 Amendments. (Id.)
At the time of the 2010 Amendment, LXEng‘s business appears to have been growing. Its taxable income grew from $462,747 in 2008 to $989,384 in 2009 to $1,601,481 in 2010. (Id.) In 2010, LXEng recognized revenue in excess of $4 million and had received a payment of $6 million on one of its contracts. (Id.) At the same time, LXEng still had a $3 million receivable, and it had access to a $2.9 million legal reserve fund. (Id.)
The Mandatory Amendments
On January 26, 2009 and December 4, 2009, PennServ prepared amendments to the Plan pursuant to regulatory requirements, which it advised LXEng were mandatory. (Id. at 11.) PenServ was not aware whether LXEng executed these amendments, because executed copies were never provided to PenServ by LXEng. (Id.) In 2010, PenServ prepared a further amendment, pursuant to the Economic Growth and Tax Relief Reconciliation Act (“EGTRRA“). (Id.) The Plan was amended and restated as of December 15, 2011 to comply with EGTRRA. (Id. at 11.) The EGTRRA restatement of the Plan did not
LXEng Fully Funds and then Terminates the Plan
In September 2010, after the 2010 Amendment, LXEng deposited $38,849 into the Plan to fully fund the Plan for the calendar year 2009, the last year before the Plan was frozen. (Id.) At the time, the minimum funding requirement was $23,058, which LXEng had already met. Thus, Xiao was not obligated to deposit the additional $38,849 into the Plan. (Id.). Xiao authorized the $38,849 payment in a conversation with Cazes. (Id.)
LXEng terminated the Plan effective January 15, 2011, by a resolution dated January 1, 2011. (Id.) Xiao signed the resolution as the “Principal” of LXEng and solely acknowledged receipt of the resolution on behalf of the Plan as co-trustee. (Id.) Xiao and Chen were the only participants in the Plan at the time it was terminated. (Id.) The plan was in operation for approximately four years prior to termination. (Id.)
Bankruptcy Filing and Claim of Exemption
On July 30, 2013, the Petition Date, Xiao filed for voluntary bankruptcy relief under Chapter 7 of the Bankruptcy Code. (Id. at 13.) As of the Petition Date, Xiao was the sole participant and the sole beneficiary of the Plan, as Xiao and Chen had obtained a divorce and Chen‘s interest in the Plan had been transferred to Xiao as part of the judgment of divorce. (Id.) As of December 31, 2013, the Plan had $471,951.00 in a brokerage account at Summit Equities, Inc. (Id.)
On August 7, 2013, Xiao filed Schedules A-J to supplement his bankruptcy petition. (Id.) In Schedule C, he claimed an exemption for the entirety of the Plan‘s assets pursuant to
objection to Xiao‘s amended claim of exemption. (Id.) After a two-day trial held on September
II. Legal Standard
“A district court reviews the bankruptcy court‘s conclusions of law de novo and its findings of fact under a ‘clearly erroneous’ standard.” CadleRock J.V. II, L.P. v. Beaudoin (In re Beaudoin), 388 B.R. 6, 8-9 (D. Conn. 2008) (internal quotation marks and citation omitted). Fed. R. Bankr. P. 8013 provides that “[f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.” A finding of fact is clearly erroneous within the meaning of Rule 8013 when “although there is evidence to support it, the reviewing court on the entire record is left with the definite and firm conviction that a mistake has been made.” Sherman v. Novak (In re Reilly), 245 B.R. 768, 772 (B.A.P. 2d Cir.), aff‘d without opinion, 242 F.3d 367 (2d Cir. 2000). When mixed questions of law and fact are raised on appeal, they are presumptively subject to de novo review. Id.
III. Discussion
A. The Exemption Trial and the Adversary Proceedings Were Not Improperly Consolidated
Xiao first argues that the Bankruptcy Court “substantively consolidate[d]” the exemption trial and three related adversary proceedings also before the Bankruptcy Court.3 (ECF No. 16 at 11.) In support, Xiao points to testimony by the Trustee referencing related fraudulent conveyance proceedings. (Id.; ECF No. 11 (“Trial Tr. 1“) at 12.) Xiao also points to the admission into evidence of Xiao‘s testimony from the previous adversary proceedings as well as his Rule 2004 deposition testimony. (ECF No. 16 at 9; ECF No. 28 at 2.) Xiao‘s argument that the proceedings were somehow “substantively consolidate[d]” and that the Bankruptcy Court improperly “allow[ed] the Trustee to have a fraud trial” borders on the frivolous. The Trustee referred to the related fraudulent proceedings only in passing, when describing his role as Chapter 7 Trustee. (Trial Tr. 1 at 12.) The trial and deposition transcripts Xiao appears to refer to were never admitted as full exhibits (Trial Tr. 1 at 210-11), even though they would have been admissible as statements by a party as long as they were relevant, Fed. R. Evid. 801(d)(2); Fed. R. Bankr. Proc. 9017 (“The Federal Rules of Evidence . . . apply in cases under the Code.“). It appears they were used on only two occasions for the purpose of impeachment (ECF No. 12 (“Trial Tr. 2“) at 8-10, 44-48.) Xiao points to no evidence—and the Court is aware of none—that either the passing remark by the Trustee or the use of the transcripts prejudiced him. Xiao cites no relevant legal authority to support
the “impossibility of separating the subject matters and burdens of proof” between the exemption trial and the other proceedings (ECF No. 28 at 2) is without support. His argument plainly fails.
B. The Plan Was Not Presumptively Exempt
Xiao next argues that the Bankruptcy Court erred in declining to apply a presumption in favor of the Plan in light of two favorable IRS opinion letters. (ECF No. 16 at 16-19; ECF No. 25-3 at 3; ECF No. 25-4 at 2.)
Xiao argues that the IRS letters establish a presumption of exemption, citing In re Pomeroy, where the Court held that a similar letter5 qualified as a favorable determination under Section 522(b)(4)(A), thus establishing a rebuttable presumption. In re Pomeroy, 2016 WL 3564378, at *11 (Bankr. E.D. Cal. June 21, 2016). Here, the Bankruptcy Court came to the opposite conclusion, relying on a series of cases finding no presumption in similar circumstances. See RES-GA Dawson, LLC v. Rogers (In re Rogers), 538 B.R. 158, 173 (Bankr. N.D. Ga. 2015) (“[A] favorable opinion letter as to the form of a prototype plan by itself is not a sufficient ‘favorable determination’ for purposes of § 522(b)(4)(A).“); In re Bauman, 2014 WL 816407, at *14 (Bankr. N.D. Ill. 2014) (“A letter of this kind, addressing only ‘form’ and not ‘operation’ does not raise the presumption under section 522(b)(4)(A).“) (citing Agin v. Daniels
(In re Daniels), 452 B.R. 335, 347 (Bankr. D. Mass. 2011), aff‘d on other grounds, 482 B.R. 1 (D. Mass. 2012), aff‘d sub nom Daniels v. Agin, 736 F.3d 70 (1st Cir. 2013)).
I need not weigh in on this disagreement, because the Bankruptcy Court also found that, in any event, the Plan was “no longer protected by [the] determination letters” (Ruling at 16), and that finding was not clearly erroneous. In coming to this conclusion, the Bankruptcy Court credited the testimony of Xiao‘s own expert, Andrew J. Fair, that an IRS letter of the type at issue here no longer applies once a plan has been amended. (Trial Tr. 2 at 131 (“[B]y amending it you‘ve changed the form. The determination letter only applies to the—what you‘ve got there. The IRS basically takes the position if you change anything in these adoption agreements or volume documents, if you make a change then it‘s no longer protected by the letter.“).) It is undisputed that the Plan was amended multiple times after the plan description approved by the IRS was submitted on January 31, 2008, including the discretionary amendments effective January 1, 2009 and January 1, 2010 (Ruling at 8, 9 (citing the parties’ joint stipulation of
C. The Plan Was Not in Substantial Compliance with IRS Requirements
Under
Xiao challenges the finding that the Plan was not in substantial compliance in several respects. He appears to argue that a plan is in substantial compliance unless the debtor uses it as his “own personal bank account” or engages in similar conduct. (ECF No. 16 at 18.) Xiao cites cases that appear to have involved such conduct. See, e.g., In re Daniels, 452 B.R. 335, 349-51 (Bankr. D. Mass. 2011). But he points to nothing in these cases that purports to limit failures of “substantial compliance” to these types of violations.8
first, to make the tax benefits of employer-sponsored plans sufficiently attractive to the tax-sensitive people who own and manage businesses so that they will decide to set up plans to capture tax benefits for themselves, and, second, to require such plans, once established, to provide meaningful benefits not only to the people who set them up, but also to lower- and moderate-income workers. The IRC effects the latter part of the strategy through a series of qualification requirements, generally referred to as the nondiscrimination rules, which require plans to cover a percentage of a firm‘s non-highly compensated employees and to provide them with benefits comparable, as a percentage of pay, to the benefits earned by the highly compensated.
Id. Thus, violations of the provisions at issue here are far from de minimis or merely technical; rather, they concern core elements of the regulatory regime governing qualified retirement plans. Xiao‘s arguments that the compliance failures found by the Bankruptcy Court are not “substantial” are unavailing.
Xiao challenges the Bankruptcy Court‘s factual finding that there was no business necessity for freezing the Plan and then terminating it fewer than four years after it was created. (ECF No. 16 at 24-25.) IRS Regulations provide that the “abandonment of the plan for any reason other than business necessity within a few years after it has taken effect will be evidence that the plan from its inception was not a bona fide program for the exclusive benefit of employees in general. Especially will this be true if, for example, a pension plan is abandoned soon after pensions have been fully funded for persons in favor of whom discrimination is prohibited under section 401(a).”
Xiao argues, without citation, that the Bankruptcy Court erred in ignoring the testimony that “adverse conditions” existed. (ECF No. 16 at 24.) Xiao seems to be referring to his own
testimony and the testimony of his expert, Mr. Fair. But the Bankruptcy Court did not ignore this testimony; as discussed above, it found it not to be credible. Xiao also argues, without citation, that LXEng‘s tax returns demonstrate a steady decline in income from 2007 to 2009. This contradicts Xiao‘s own testimony that the company‘s income was increasing at the time, as well as the tax returns themselves, which show steadily increasing taxable income. (Trial Tr. 2 at 43; ECF No. 25-8 at 2; ECF No. 25-9 at 2; ECF No. 25-10 at 2.) Xiao also argues that the fact that LXEng entered bankruptcy two years later is evidence that adverse conditions existed in 2010. While it is true that LXEng‘s eventual bankruptcy is some evidence of the existence of business necessity in 2010, given the substantial evidence cited by the Bankruptcy Court, it is not nearly enough to leave this Court with “the definite and firm conviction that a mistake has been made.” In short, I find that the Bankruptcy Court‘s finding that there was no business necessity for terminating the Plan was not clearly erroneous.10
Xiao makes several additional, unsupported arguments. He argues, for example, that the Bankruptcy Court erred in failing to credit Ostuni‘s testimony “that the Plan was qualified on the Petition Date.” (ECF No. 16 at 17.) But Ostuni does not appear to have given any such testimony. Xiao provides no citation to the trial transcript, and the Court can identify no testimony by Ostuni providing an opinion as to whether the Plan was qualified on the Petition Date. Ostuni testified that he did not believe a plan would be disqualified simply because a mandatory amendment had not been executed. (Trial Tr. 1 at 68-69.) But the Bankruptcy Court did not rely on the alleged non-execution of the mandatory amendments in concluding that the
Plan was not substantially compliant. Thus, there is no contradiction between this testimony and the Bankruptcy Court‘s findings.
Xiao also argues, again without citation, that Ostuni testified that no disqualification notice or determination was ever received with regard to the Plan. But any such testimony is also not incompatible with the Bankruptcy Court‘s ruling. The Bankruptcy Court found that the debtor had successfully demonstrated that “no prior determination to the contrary has been made by a court or the Internal Revenue Service,”
Xiao also argues, without citation, that the Trustee erroneously argued that LXEng‘s “alleged failure to file the EGTRRA Restatement when the Plan was frozen and then terminated is what disqualified the Plan.” (ECF No. 16 at 17.) But the Bankruptcy Court did not rely on any alleged failure to file an “EGTRRA Restatement.” The Bankruptcy Court identified four areas of noncompliance in support of its ruling—violations of the permanency requirement, the minimum participation requirements, the nondiscrimination and exclusive benefit requirements, and the requirement that a plan be operated according to its terms—none of which relate to the EGTRRA restatement. In short, the Bankruptcy Court did not err in finding that the Plan was not in substantial compliance with the IRC.
D. The IRS Corrective Programs
Xiao argues that the Bankruptcy Court erred in sustaining the Trustee‘s objection despite the availability of IRS corrective programs. (ECF No. 16 at 21-24; ECF No. 28 at 5.) It is undisputed that such IRS programs exist, including the Voluntary Correction Program (“VCP“) and the Self-Correction Program. (Ruling at 24; Trial Tr. 2 at 159-60.)
But it is “hornbook bankruptcy law that a debtor‘s exemptions are determined as of the time of the filing of his petition.” In re Cunningham, 354 B.R. 547, 553 (D. Mass. 2006); see also In re Richey, 2011 WL 4485900, at *10 (B.A.P. 9th Cir. Aug. 8, 2011) (“[The] proper date for determining whether [an] exemption exists is the petition date.” (citing Owen v. Owen, 500 U.S. 305, 314 n.6 (1991))). “This means the Court must ‘focus only on the law and facts as they exist on the date of filing the petition.” In re Cunningham, 354 B.R. at 553 (quoting In re Peterson, 897 F.2d 935, 937 (8th Cir. 1990)). As discussed above, the Bankruptcy Court properly found that the Plan was not in substantial compliance with the relevant regulations as of the Petition Date. Xiao‘s argument that this finding was erroneous due to the mere availability of corrective programs with potentially retroactive effect is unversuasive.
Xiao relies on two cases where the Court retroactively credited post-petition participation in IRS corrective programs. In Richey, the Bankruptcy Appellate Panel affirmed the Bankruptcy Court‘s order directing the debtor to participate in the VCP and its subsequent retroactive crediting of the resulting IRS compliance letter. In re Richey, 2011 WL 4485900 at *11. Noting that there was neither controlling nor even persuasive authority on the matter, the Panel nonetheless concluded that the Bankruptcy Court did not run afoul of the rule that the existence of exemptions is determined on the date of the petition, because “on the date of the petition, [the] Richeys possessed a right under federal tax law to participate in the VCP and seek a determination from the IRS on whether or not the Plans were qualified on their termination dates, and to cure any defects potentially disqualifying the Plans to bring them back into IRC compliance with a retroactive effect.” Id. Similarly, in Galbraith, the Bankruptcy Court, relying on Richey, credited the debtors’ post-petition participation in the VCP and recognized the retroactive effect of the associated corrective
But the circumstances in Gilbraith and Richey differ from the present case in several critical respects. First, in both cases, the compliance failures were less serious than the ones at issue here. In Gilbraith, for example, the debtors had failed to timely execute required amendments. Id. at 203, 206. The Bankruptcy Court described this compliance failure as an “apparently minor Plan Document Failure.” Id. at 207. In fact, the Gilbraith Court went so far as to say that “[e]ven if the Plan had not received a favorable determination,” the debtors would have been entitled to the exemption anyway, because the “Plan was in substantial compliance with the IRC.” Id. at 209. Here, on the other hand, the Bankruptcy Court properly found that the Plan was not in substantial compliance with the IRC, as there were “substantial violations of the core qualifications for a retirement plan.”11 (Ruling at 24 (internal quotation marks omitted).)
Second, in both Richey and Galbraith, the debtors had already participated in the corrective program and had received a favorable determination from the IRS; in Galbraith, the debtors had applied to participate in the program only seven weeks after the petition was filed. In re Galbraith, 523 B.R. at 200. The question before the Court was whether such a determination should be applied retroactively for the purposes of the Bankruptcy Code. By contrast, Xiao has never sought to participate in any corrective program and seems to argue that the mere possibility of future participation in such a program precludes any finding that the Plan was not in substantial compliance with the IRC. To accept Xiao‘s argument would represent a
significant, open-ended extension of Richey and Galbraith, neither of which is binding on me. Given that Richey and Galbraith are already arguably in tension with the basic rule that exemptions are determined as of the petition date, I decline the invitation to, not only adopt, but dramatically extend their holdings. Doing so here would mean that, regardless of the extent of a Plan‘s non-compliance and the debtor‘s fault, the Plan would always be exempt from creditors as long as the debtor expressed an intent—even five years into a bankruptcy and after an adverse finding by the Court—to participate in an IRS compliance program in the hope of obtaining the agency‘s blessing. See Voluntary Compliance Program (VCP) – General Description, IRS, http://www.irs.gov/retirement-plans/voluntary-correction-program-general-description (last visited Sept. 30, 2019) (“6. If we can‘t agree on a reasonable and appropriate correction, then we don‘t issue a compliance statement . . . .“). The test for exemption set forth in the Code would become practically superfluous.
The parties disagree as to whether there is a realistic prospect of successful corrective action; the Bankruptcy Court appears to have concluded that such efforts would likely be futile. (Ruling at 24.) The parties also dispute the significance of Xiao‘s failure to take any steps toward corrective action thus far. Xiao appears to claim that he should not be faulted for failing to take corrective action in the five
E. Xiao Was Materially Responsible for the Substantial Compliance Failure
Even if a Plan is not in “substantial compliance” with the IRC, the Plan may still be exempt if “the debtor is not materially responsible for that failure.”
It is undisputed that Xiao was the CEO of LXEng, that he “ran the company,” and that he made the “business decisions” throughout the relevant time period. (Trial Tr. 2 at 14-15.) LXEng was, in turn, the Plan Administrator. It is also undisputed that Xiao was the co-trustee of the Plan, along with Ms. Chen, and signed each of the three one-page documents that form much of the basis of the violations found by the Bankruptcy Court—the 2009 and 2010 discretionary amendments and the 2011 termination (ECF No. 25-5 at 2; ECF No. 25-6 at 2; ECF No. 25-7 at 2). Ostuni‘s testimony that it was Xiao and LXEng, and not PenServ, that had final decision-making authority on whether to adopt an amendment (Trial Tr. 1 at 56) was unrebutted. Ostuni also testified that PenServ would not have advised a client to adopt an amendment like the 2009 Amendment (id. at 50), which effectively prevented any employees other than Xiao and his wife from qualifying for the Plan (id. at 117).
The fact that it is undisputed that Xiao had virtually plenary authority over the Plan as the owner and CEO of LXEng and as co-trustee of the Plan, coupled with the fact that the Bankruptcy Court properly found that the Plan was unlawfully constructed and manipulated to benefit Xiao and his then wife to the exclusion of LXEng‘s other employees, raises a strong inference that Xiao was not only “materially” responsible, but primarily responsible, for the compliance failures that so benefited his interests. Given that it was Xiao‘s burden to show he was not materially responsible for the compliance failures, he faced an uphill climb in defeating this inference. He has failed to carry his burden.
Xiao testified that he delegated managing the Plan to his financial advisor, Caputo, his accountant, Cazes, and PenServ. (Trial Tr. 2 at 19.) He testified that he knew very little about the workings of the Plan (id. at 19), and simply followed the recommendations and instructions of his team (id. at 20). (See also ECF No. 16 at 20 (“PenServ together with [LXEng‘s] financial advisor and the CPA made the material decisions relative to the Plan. Debtor was consulted . . . maybe about four times a year with regard to the Plan.“).) But the Bankruptcy Court generally found Xiao‘s testimony “evasive and seemingly rehearsed” and his credibility “strained” (Ruling at 3)—a finding to which this Court owes deference. In light
In short, where, as here, the debtor had sole control of the plan sponsor and administrator and final authority over decisions related to the plan, and where, as here, the compliance failures so clearly worked to the debtor‘s benefit, to the exclusion of other employees, the debtor faces a heavy burden in showing he was not materially responsible for the compliance failures. Xiao has plainly failed to meet this burden. Conclusory claims that the debtor‘s agents, and not the debtor himself, were responsible for the compliance failures simply will not do.
IV. Conclusion
For the reasons set forth above, the ruling of the Bankruptcy Court is AFFIRMED. The Clerk is directed to close the case.
IT IS SO ORDERED.
/s/
Michael P. Shea, U.S.D.J.
Dated: Hartford, Connecticut
September 30, 2019