Jose R. Villavicencio
OPINION AND ORDER ON THE TRUSTEE‘S OBJECTIONS TO THE DEBTOR‘S CLAIMED EXEMPTIONS (Docs. 55 & 82)
I. Introduction
An individual debtor may exempt certain property from his bankruptcy estate. But to do so the debtor must have an interest in property of the kind described in the applicable exemption statute on the date he files his case. The two exemptions claimed by the debtor, Jose R. Villavicencio (“Villavicencio“), fail this basic test. Invoking Ohio‘s homestead exemption, Villavicencio
II. Jurisdiction and Constitutional Authority
The Court has jurisdiction to hear and determine this matter under
III. Background
A. The Evidentiary Record
After Myron N. Terlecky, the Chapter 7 trustee (“Trustee“), objected to the exemptions claimed by Villavicencio, the Court held a hearing on his objections and later conducted a follow-up status conference to clarify the record made at the hearing. The evidentiary record includes: (1) Villavicencio‘s hearing testimony;1 (2) the Trustee‘s Exhibits 1 through 13;2 which were admitted into evidence without objection; and (3) admissions made by Villavicencio. Villavicencio‘s admissions were made after he failed to respond to the Trustee‘s request for admissions, the Trustee filed an unopposed Motion to Deem Facts Admitted as Against Debtor (Doc. 68) (“Admissions Motion“) and the Court granted the motion (Doc. 80). The Court will refer to each fact admitted as “Admission No._.” Though not evidence, the statements made by counsel at the status conference in response to questions posed by the Court helped clarify the record made at the initial hearing. Because there was no disagreement between counsel for the parties as to the substance of the clarifying statements made at the status conference, the Court will treat those statements as stipulations of fact.
B. Procedural History and Factual Findings
On May 1, 2019 (“Petition Date“), Villavicencio filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. As of the Petition Date:
- Villavicencio was the sole member of JRV SEPIRA LLC, an Ohio limited liability company (“LLC“). Admissions Mot. at 14 (Admission No. 2);
- The LLC owned multiple parcels of real property, id. at 15 (Admission No. 6); Hr‘g Tr. at 26;
- The LLC generated income by renting the properties; Hr‘g Tr. at 33–34;
- The LLC was buying one parcel of real property located at 3339 Daglow Road, Columbus, Ohio (“Daglow Property“)
from an individual named Joseph F. Miccio on a land contract that was recorded with the Franklin County Recorder in November 2017. Admissions Mot. at 14 (Admission No. 3); Hr‘g Tr. at 14, 30; and - Villavicencio resided at the Daglow Property. Admissions Mot. at 14 (Admission No. 1).
Where did the LLC get the funds to buy the properties it owns? To answer that question, some history is in order. Villavicencio worked as an emergency-medicine physician for Premier Medical Services for several years. Hr‘g Tr. at 32. One of the employment benefits that Premier offered was an IRA to which Villavicencio contributed. Id. When Premier was bought out, on the advice of his financial advisor—Broad Financial—Villavicencio rolled over the funds in the Premier IRA to the SEP IRA. The SEP IRA was administered by Madison Trust Company, the custodian of the account. Id. at 32, 37. Villavicencio explained that “[t]here was professional management of the [SEP] IRA at Premier and [he] did not concern [him]self with it. But when [Premier was bought out], [he] wanted to be able to direct his own retirement account.” Id. at 32–33.
After establishing the SEP IRA, Villavicencio made the decision to use the funds it held to invest in real estate. So back in March 2017 Villavicencio withdrew the $243,537.67 on account at Madison Trust, and transferred some of the withdrawn funds to the LLC. Admissions Mot. at 15 (Admission Nos. 8 and 9); Hr‘g Tr. at 17–18. He deposited $199,667.91 of the funds withdrawn from the SEP IRA into a bank account at Fifth Third Bank.3 Hr‘g Tr. at 19. Villavicencio then used those funds to purchase properties in the name of the LLC. Id. at 22, 26. As of the Petition Date, there was less than $1,000 in the Fifth Third Bank account, with most of the funds having been used to purchase real estate or make payments on the land contract for the Daglow Property. Admission Motion at 15 (Admission No. 5); Status Conf. Tr. at 19.
Among the schedules of assets and liabilities Villavicencio filed along with his bankruptcy petition was “Schedule C: The Property You Claim as Exempt.” Doc. 1 (Bankruptcy Pet. & Schedules) at 18. After making several amendments to this schedule, Docs. 54 and 76, Villavicencio settled on, among others, two exemptions in property described as “Madison Trust (JRV SEPIRA LLC),” which he valued at $240,000.4 Doc. 76 at 13. First, Villavicencio claimed an exemption of $240,000 under
The homestead exemption afforded by
As stated above, the Trustee objected to both exemptions. According to the Trustee, “[p]roperty of the LLC, including the Daglow [Property], is the interest of the LLC” rather than Villavicencio, and he therefore “lacks the requisite interest in the Daglow [Property] to claim” an exemption under
- “Under IRA guidelines, when an owner of an individual retirement account engages in a prohibited transaction, the account ceases being a retirement account as of the first day of the year of the prohibited transaction.”
- “As a result of using the Daglow [Property] as the Debtor‘s personal residence, the [SEP] IRA ceased being a retirement account as of January 1, 2017.”
- Thus, on the Petition Date “[t]here [was] no retirement account to which the claimed exemption may apply.”
Doc. 55 (Trustee‘s Obj.) at 3.
Villavicencio and his counsel conceded during the hearing that, in managing his SEP IRA, he violated Internal Revenue Service regulations that must be obeyed for an IRA to maintain its tax-exempt status. Hr‘g Tr. at 10, 34. Although he admitted engaging in “transactions” violative of IRS rules, id. at 34, only one such transaction was identified at the hearing. That “transaction” was Villavicencio‘s residing at the Daglow Property, one of the investment properties held—through the LLC—by the SEP IRA. Despite that violation, Villavicencio asserts that he may still exempt the SEP IRA because
IV. Legal Analysis
A. Exemptions: Purpose, Scope and the Burden of Proof
The filing of a petition for relief under the Bankruptcy Code creates a bankruptcy estate that includes “all legal or equitable interests of the debtor in property as of the commencement of the case.”
As one commentator has explained:
Exemption legislation embodies a deliberate choice of policy to prefer the social interest in providing a minimum of economic security and other benefits to debtors and their families over the economic interest to be served by assuring creditors the maximum availability of their debtor‘s property for the satisfaction of their claims.
Frank R. Kennedy, Limitation of Exemptions in Bankruptcy, 45 Iowa L. Rev. 445, 447–48 (1960). Exemptions “give . . . [] debtors a so-called ‘grub-stake’ to begin their fresh start and . . . act as a safety net, so that the debtor and his family are not completely impoverished due to creditor collection action or bankruptcy such that they become wards of the state.” In re Robinson, 292 B.R. 599, 606 (Bankr. S.D. Ohio 2003) (internal quotation marks omitted); see also Rousey v. Jacoway, 544 U.S. 320, 325 (2005) (“To help the debtor obtain a fresh start, the Bankruptcy Code permits him to withdraw from the estate certain interests in property, such as his car or home, up to certain values.” (citations omitted)).
“Individual debtors may exempt from property of the estate either: (1) the property exempt under applicable state law and federal nonbankruptcy law; or (2) the property identified in
“There is a prima facie presumption that an exemption claimed by a debtor is proper.” In re Bellisari, 554 B.R. 440, 443 (Bankr. S.D. Ohio 2016). Parties in interest, such as the Trustee, may object to a claimed exemption. The objector bears the burden of proving, by a preponderance of evidence, that the debtor is not entitled to the exemption. Id. at 443–44. If the objecting party introduces evidence sufficient to rebut the prima facie validity of the exemption, then the burden shifts to the debtor to show that the exemption is proper. Id. at 444. As to both exemptions at issue, the Trustee has met his initial burden and Villavicencio has failed to show that the exemptions are proper.
B. Ohio Revised Code § 2329.66(A)(1)(b) : The Homestead Exemption
The LLC is buying the Daglow Property where Villavicencio resides through its land contract with Miccio. Villavicencio claims an exemption under
The Bankruptcy Appellate Panel for the Sixth Circuit has held that the homestead exemption is unavailable under these circumstances. In re Breece, No. 12-8018, 2013 WL 197399, at *9 (B.A.P. 6th Cir. Jan. 18, 2013). In Breece, the BAP ruled that a debtor could not claim the homestead exemption in real property owned by the debtor‘s limited liability company because the debtor did not have an interest in the real property. Id. This was because, under Ohio law, a “membership interest in a limited liability company. . . does not confer upon the member any specific interest in company property, whether personal property or real property. Such property is, instead, held and [owned] solely by the company.” Id. at *3 (internal quotation marks omitted). Other courts have come to the same conclusion: A debtor is not entitled to a homestead exemption in real property owned by a limited liability company in which he holds a membership interest. Why? Because, as the Breece court held, a debtor‘s interest in a limited liability company does not create an exemptible interest in the company‘s
Against all this authority Villavicencio pits In re Starr, 485 B.R. 835 (Bankr. N.D. Ohio 2012), arguing that the reasoning of that decision means that the “Debtor should receive the benefit of the exemption pursuant to his beneficia[l] interest” in the Daglow Property. Doc. 87 at 3. But Starr doesn‘t move the needle. That case involved real property held in a trust. And the debtor was both the trustee and one of the beneficiaries of the trust. So when the debtor filed her bankruptcy case, “her beneficial and legal interests in the Trust became property of the bankruptcy estate,” and “[a]s trustee, she held legal title to the real estate comprising part of the trust corpus[.]” Starr, 485 B.R. at 840. Villavicencio, by contrast, holds no beneficial interest or any other interest in the Daglow Property, which is owned by the LLC (or, more accurately, is being bought by the LLC). Thus, Starr is not on point. In the end, Villavicencio‘s claim of a homestead exemption under
C. Ohio Revised Code § 2329.66(A)(10)(c) : The IRA Exemption
Villavicencio‘s second exemption claim also falls short.
Individual retirement accounts are governed by
Because Villavicencio had authority and control over the management and disposition of
Villavicencio‘s use of the Daglow Property as his personal residence constituted a “prohibited transaction” under the Internal Revenue Code because it was the “use by a disqualified person of the income or assets of a plan” under
Though Villavicencio admits that he engaged in a prohibited transaction, he argues that
[a] person‘s interest in any plan, program, instrument, or device described in divisions (A)(10)(a) to (e) of this section shall be considered an exempt interest even if the plan, program, instrument, or device in question, due to an error made in good faith, failed to satisfy any criteria applicable to that plan, program, instrument, or device under the “Internal Revenue Code of 1986[.]”
There are no decisions interpreting
Unpersuaded, the Bauman court rejected the debtor‘s argument. It began by noting that “good faith under section 12-1006 is necessarily a fact-specific determination to be made on a case-by-case basis.” Id. at *15. The court then pointed out that [t]he context here alters the “good faith” analysis. A large corporate employer with hundreds of employees establishes and maintains the plan itself; the employer is in charge. An individual employee does little more than agree to participate in the plan, render services to the employer, and then accept the benefits when he retires. When the employee later tries to shield his retirement funds from creditors under section 12–1006 and it turns out the plan lost its qualification under the [Internal Revenue Code] because of some operational defect, the participant can still claim the exemption because he relied on his employer. . . .
The Bauman Venture Plan is not the pension plan of a large corporate employer, and Bauman is not one of hundreds of employees who signed a form agreeing to participate in the plan. Bauman is the sole owner and operator of the plan sponsor, Bauman Venture, as well as the trustee of the plan‘s trust. The Bauman Venture Plan came about only because Bauman himself caused it to be created. Bauman is in charge, entrusted with the Plan‘s assets. Because this case is not the ordinary one involving an employee of a large business, the “good faith” analysis changes accordingly. For someone like Bauman to satisfy the “good faith” requirement of section 12–1006, substantially more can be expected.
Id. at *16.
According to the Bauman court, the debtor operated the Bauman Venture Plan in the way he did “not from any wrongful intent, but because he knew no better.” Id. at *18. The problem, the court said, was that the debtor “knew no better because he never tried to know better,” and “[i]nattention will not do. When a debtor is not only a pension plan participant but also the owner of the plan sponsor and the trustee of the trust, he must try to become familiar with the [Internal Revenue Code‘s] requirements and try to comply with them.” Id. The court found that remaining “blissfully ignorant . . . with complete indifference” to the governing law could not constitute good faith. Id.
The Bauman court‘s reasoning is persuasive. Savings statutes like
Having concluded that
In the Coward Adversary Proceeding, the plaintiff sought a determination that a judgment entered against Villavicencio by the Franklin County Common Pleas Court in the amount of $1,900,000 in punitive damages is nondischargeable as a debt for willful and malicious injury under
- Villavicencio had been a physician before losing his license;
- The plaintiffs in the Coward Adversary Proceeding are representatives of the estate of an individual (“Decedent“) who had been a patient of Villavicencio; and
- Villavicencio “[t]hrough the improper prescribing of lethal doses of narcotics and failure to monitor Decedent‘s medications to avoid a lethal intoxication of various prescribed medications . . . caused the death of Decedent through reckless actions and willful misconduct.”
Coward Adversary Proceeding, Adv. Pro. 19-2097, Doc. 2 (Amended Complaint) at 3–4. And in the McDermott Adversary Proceeding, the United States Trustee sought a global denial of Villavicencio‘s discharge, alleging, among other things, that he failed to disclose assets in his bankruptcy schedules and made false oaths. Adv. Pro. 19-2140, Doc. 1 (Complaint) at 4–7. In both adversary proceedings, the parties entered into a stipulation and agreed order waiving and denying Villavicencio‘s discharge under
All of this shows that Villavicencio is guilty of serious misconduct. None of it, however, establishes that Villavicencio engaged in the transaction prohibited by the Internal Revenue Code—living at the Daglow Property—in bad faith or to defraud creditors. In fact, if Villavicencio had not withdrawn cash from his SEP IRA at Madison Trust, then his funds would have remained exempt. And as already discussed, it seems that Villavicencio‘s decision to live at the Daglow Property did not stem from some nefarious scheme, but instead from his failure to become familiar with the IRS rules governing individual retirement accounts. Still, in the words of the Bauman court, “inattention will not do” when a debtor seeks the protections afforded by a good-faith savings clause in a state exemption statute. Bauman, 2014 WL 816407, at *18. The Court therefore need not determine that Villavicencio‘s “prohibited transaction” (residing in the Daglow Property) was undertaken to defraud creditors or otherwise constituted bad-faith misconduct. It suffices to say that Villavicencio acted with complete indifference to the IRS rules governing the tax-exempt status of IRAs when he chose to live at the Daglow Property. Thus, by engaging in a transaction prohibited by
This result squares with the view that
V. Conclusion
For all these reasons, the Trustee‘s objections are SUSTAINED, and Villavicencio‘s exemptions claimed under both
IT IS SO ORDERED.
Copies to:
Herbert N. Strayer, Jr., Attorney for the Debtor (electronically)
Myron N. Terlecky, Chapter 7 Trustee (electronically)
John E. Hoffman, Jr.
United States Bankruptcy Judge
Notes
(B) On April 1, 2010, and on the first day of April in each third calendar year after 2010, the Ohio judicial conference shall adjust each dollar amount set forth in this section to reflect any increase in the consumer price index for all urban consumers, as published by the United States department of labor, or, if that index is no longer published, a generally available comparable index, for the three-year period ending on the thirty-first day of December of the preceding year.