BANKRUPTCY APPEAL

The debtor, Ronald Cummings, has appealed the decision of the Bankruptcy Court for the District of Alaska that he is not entitled to discharge under Chapter 7. On March 7, 1994, this court disposed of one of the two issues presented in the appeal and ordered supplemental briefing on the other issue.⁽¹⁾ The first issues was whether Sea Lion's complaint objecting to discharge was timely such that the bankruptcy court had jurisdiction over the complaint. The court answered that question in the affirmative. The second issue was whether the bankruptcy cour's conclusion that Cummings is not entitled to a discharge is clearly erroneous. The supplemental briefing on the second issue has been received and reviewed, and the issue is now ripe for ruling.

Under § 727(a) (2) (A) of the Bankruptcy Code, a discharge shall be denied if the creditor proves the following four elements: (1) a transfer of property, (2) the property transferred was property of the debtor, (3), the transfer was made within one year of the date of the filing of the petition, and (4) the debtor had, at the time of the transfer, the intent to hinder, delay or defraud a creditor. In re Aubrey, 111 B.R. 268 (9th Cir. BAP 1990). This court reviews the bankruptcy court's findings of fact for clear error, and its conclusions of law under a de novo standard. In re Siriani, 967 F.2d 302 (9th Cir. 1992).

The transaction upon which the bankruptcy judge primarily focused in denying a discharge was the transfer of funds from Cumming's self-       3 ABR 372  directed pension account to an IRA account, which funds were then used to purchase an exempt homestead only days before he filed his Chapter 7 petition.

The parties agree that under the applicable Arizona statute (Ariz. Rev. Stat. Ann. § 33-1126(b) (1989)), any funds in a retirement plan which is qualified under 26 U.S.C. § 401 are exempt from claims of creditors. Thus, if the rollover from the pension plan to the IRA was not qualified, the subsequent transfer from the IRA to the exempt homestead improved Cumming's position on the eve of bankruptcy by shielding otherwise non-exempt assets from creditors.

One of the witnesses, Ms. Romero, testified that the attempt to rollover $35,414.26 from the pension plan to the IRA account did not qualify for IRA tax-exempt treatment because it was less than 50% of Cumming's balance in his profit sharing plan. ⁽²⁾ She calculated his balance based on the aggregate of the balance in his self-directed account and the balance in his pooled employee account.

Cummings argued in his appeal brief that it was legally incorrect to aggregate his balances in the self-directed and pooled accounts for purposes of applying the 50% rule. He contends that Romero incorrectly applied the aggregation rule of § 402(e)(4)⁽³⁾ to his transfer. Sea Lion responded that the accounts should be combined for purposes of the 50% rule, but the court was not satisfied with the analysis of either party. The court requested additional briefing on the following issue: "does the 50% test apply to the combined amounts in all of the trusts in a plan in which the transferor has an interest, or does it apply only to the amount       3 ABR 373  in the trust from which the transfer is made?" Order, March 7, 1994, Clerk's Docket No. 40.

In his supplemental brief, Cummings relies on the language in § 402(a) (5) (D) (i) (I), which provides that the balance to the credit of an employee in a qualified trust should be determined "without regard to subsection (e) (4) (C) ," the aggregation provision. Thus, he concludes, the aggregation provision relied on by Romero does not apply.⁽⁴⁾ Appellant's Supplemental Brief, Clerk's Docket No. 41 at 5.

Sea Lion asserts that both Cummings and the court have misconstrued the nature of Cummings profit sharing plan, but it apologizes for its part in creating the confusion. It contends that in fact there is only one "qualified plan" which constitutes the Cummings & Routh APC Profit Sharing Plan, and that there is only one trust within the qualified plan. Moreover, although the Plan maintains separate accounts (self-directed and pooled) for bookkeeping purposes, all funds and property deposited into any account are considered to be, and constitute, assets of the single trust estate. Therefore, the argument goes, the aggregation provision of § 402(e) has no relevance to this case since there are no multiple plans or multiple trusts to aggregate. Since the balance of Cumming's credit in the Plan included amounts in both the self-directed and pooled accounts, the 50% rule applies to the sum of those accounts.

Cummings has filed a reply to the appellee's supplemental brief in which he takes the position that there were three trusts under the Cummings & Routh Plan: the pooled trust, as well as separate trusts for the self-directed accounts of both Routh and Cummings. In support of this assertion, Cummings refers to the testimony of his accountant, who stated that Cummings and Routh had exclusive and sole control over their respective self-directed accounts, while both of their signatures as trustees were required for release of funds from the pooled account.

      3 ABR 374 

A review of the plan and trust documents supports Sea Lions position. Relevant documents in the record include Trial Exhibit (TR) 2, Cummings & Routh Profit Sharing Trust Agreement; TR 3, Cummings & Routh APC Profit Sharing Plan; TR 4, Summary Plan Description; and TR 6, Cummings & Routh, Profit Sharing Plan Retirement Equity Act Amendment. As Sea Lion amply points out on pages 4-9 of its supplemental brief, these documents do not create multiple trusts or multiple pension plans. All references in these documents are to a single plan and a single trust.

Implicit in the bankruptcy court's denial of discharge is the legal conclusion that there was one trust corpus from which Cummings attempted a rollover to the IRA, and thence to the exempt homestead. Cummings has not shown this conclusion to be erroneous. ⁽⁵⁾ Therefore, the effect of the 50% rule and applicable Arizona statute is that when Cummings transferred the funds from the pension plan to the IRA, they were no longer exempt from creditors. When the same money was invested in an exempt homestead only days later (and on the eve of Cumming's bankruptcy petition), that transfer could form the basis for denial of discharge if it was made with intent to hinder or delay his creditors.

The bankruptcy court found ample evidence that Cummings acted with such intent, and it outlined its findings at pages 2-85 through 2-88 of the trial transcript. Cummings testified that he believed the transaction was proper and that he based this belief on the advice of his accountant. The court did not find this testimony credible in light of Cumming's experience and sophistication in financial matters. The court also based its finding of fraudulent intent upon the circumstances surrounding nondisclosure of other debts and transactions in his bankruptcy schedules. Cummings has not shown that these findings are clearly erroneous.

For the above reasons, the bankruptcy courts denial of discharge is affirmed.

DATED at Anchorage, Alaska, this 2nd day of May, 1994.

H. Russell Holland
United States District Judge

N O T E S:

      3 ABR 371  1. Clerk's Docket No. 40.

      3 ABR 372  2. 26 U.S.C. §402(a) (5) (D) (i) (I) provides that the tax-free status conferred by § 402(a) (5) (A) applies to a distribution from a plan only if such distribution is of an amount equal to at least 50% of the balance to the credit of the employee in a qualified trust.

      3 ABR 372  3. 26 U.S.C. § 402(e)(4) provides in substance that for purposes of determining the balance to the credit of an employee:   (1) multiple trusts which are part of a single plan are treated as a single trust, (2) multiple pension plans maintained by the employer are treated as a single plan, (3) multiple profit-sharing plans maintained by the employer are treated as a single plan, and (4) multiple stock bonus plans maintained by the employer are treated as a single plan.

      3 ABR 373  4. Romero, however, never actually referred to the aggregation provision of 402(e) in her testimony. She merely stated that "the amount of that partial rollover to qualify for tax-free treatment, the amount of that partial rollover has to be at least 50% of the total aggregate outstanding balance of the participant's accounts in all profit sharing plans at that point." Trial Transcript, 1-65. Cumming's assumption that she was applying the aggregation provision of 402(e) is not necessarily correct.

      3 ABR 374  5. It has not been shown that there are any clearly erroneous findings of fact with respect to this legal conclusion.