In a case handed down from the First Circuit Court of Appeals, Daniels v. Agin, last month, a debtor’s discharge in bankruptcy was removed in light of a finding of “intentional or reckless concealment “of the facts regarding his retirement account transfers.
This decision was an appeal from a hearing in the Bankruptcy Court. When the creditors filed for summary judgment against the debtor, the Bankruptcy Court decided in the creditors’ favor, resulting in this appeal to the First Circuit.
It is not clear why the debtor followed the pattern he did, however, it is clear from the findings that he failed to reveal his financial decisions and then made several attempts to mislead the trustee and the Court about his transactions. When Daniels filed for personal bankruptcy, he failed to state that he had recently moved $470,000 from a profit sharing plan into two IRAs.
Are IRAs and Profit Sharing Plans Exempt From Bankruptcy?
Aren’t profit sharing plans and IRAs exempt? They are, generally, however, in this case the debtor, Daniels, failed to maintain the profit sharing plan in compliance with the federal rules…and mislead the IRS and the Bankruptcy Court about it!
The finding was that Daniels was attempting to defraud creditors and perhaps the IRS. In fact, according to the findings by the Bankruptcy Court, Daniels took monies from a family member’s trust and put them into his own profit sharing plan. Then, when the family members sued him and won, he filed for bankruptcy. (Daniels bankruptcy was a chapter 13, converted to a chapter 11, and finally converted to a Chapter 7 no asset personal bankruptcy.) During the course of the bankruptcy he filed a motion to amend his schedules, stating that he moved the profit sharing monies into two IRA accounts. Unfortunately for Daniels, he had made that move more than seven months prior to the filing and he failed to disclose this. His motion to amend requesting permission to undertake this transfer, after it had been completed, was the most “damning” according to the Court.
However, in the course of testifying on his petition and schedules (in writing) and at three creditor’s hearings (orally), he lied and misled the Trustee and Bankruptcy Court. Based on his testimony, he had received a discharge on July 1, 2009. In the mean time, the IRS conducted an audit that made findings that would put the profit sharing plan in non-compliance with the law. That finding led the Trustee to reexamine the plan, and the fact that Daniels’ transactions, moving the monies from the profit sharing plan to IRSs were misleading.
In fact, there were eight transactions between Daniels’ profit sharing plan and him personally, or his relatives and family members, all of which would disqualify the plan from exemption. Daniels argues that because the IRS did not disqualify the plan in their audit, the plan was exempt from the US Trustee. Interestingly, the Bankruptcy Court Trustee seems to have undertaken a more rigorous examination of the transactions involved in the profit sharing account, finding significant disqualifying actions by Daniels.
Reckless Indifference
Once Daniels testimony seemed false, on multiple occasions, in writing in his Petition and Schedules, and orally in testimony at Trustee Hearings, the Court found that he acted with “reckless indifference” and entered into “a pattern of bad faith concealment [of the IRAs] that spans the entire three and a half years of [his] bankruptcy case.”
Experienced Bankruptcy Attorney
It is clear now that Daniels knew or should have known that pattern of misinforming the Trustee and the Court would result in a removal of the bankruptcy discharge. Could accurate testimony and better bankruptcy planning have prevented this result? We don’t know. We do know, however, that bankruptcy planning with an experienced bankruptcy attorney can generally solve problems that could arise.
