In Re Baker - Amicus Brief of Nixon Peabody

8/14/2019 In Re Baker - Amicus Brief of Nixon Peabody

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No. 09-13144-HH

__________________________________________________________________

UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

__________________________________________________________________

In re: SARAH E. BAKER

Debtor.

__________________________________________

SARAH E. BAKER,

Appellant,

v.

ROBERT E. TARDIF, JR., as Chapter 7 Trustee,

Appellee.

___________________________________________/

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF FLORIDA, FORT MYERS DIVISION

_________________________________________________________________

BRIEF OF AMICUS CURIAE NIXON PEABODY LLP

IN SUPPORT OF APPELLEE AND FOR AFFIRMANCE

__________________________________________________________________

Dennis P. Waggoner

Florida Bar No. 509426Landis V. Curry III

Florida Bar No. 0469246

HILL, WARD & HENDERSON, P.A.

Suite 3700 Bank of America Plaza101 East Kennedy Boulevard

Post Office Box 2231

Tampa, Florida 33601

Telephone: (813) 221-3900

Facsimile: (813) 221-2900

Attorneys for Nixon Peabody LLP


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Sarah E. Baker v. Robert E. Tardif, No. 09-13144-HH

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CERTIFICATE OF INTERESTED PERSONS

AND CORPORATE DISCLOSURE STATEMENT

Pursuant to Eleventh Circuit Rules 26.1-1 and 29-1, Nixon Peabody LLP

states that it has no parent corporation and no publicly held corporation owns more

than ten percent (10%) of its stock, and submits the following alphabetical list of

the judges, attorneys, persons, and firms with any known interest in the outcome of

this case.

1. Baker, Sarah E. Appellant/Debtor2. Bower, Holly A. Counsel for Appellant3. Curry III, Landis V. Counsel for Amicus Curiae Nixon Peabody LLP4. duPont Builders Creditor5. Fowler White Boggs, P.A. Counsel for Creditor duPont Builders6. Hill, Ward & Henderson, P.A. Counsel for Amicus Curiae Nixon Peabody

LLP

7. Johnston, Jr., Richard Counsel for Creditor duPont Builders8. Lazzara, Richard A. United States District Court Judge9. Lovett, Robert Steven Counsel for Appellant10. Nixon Peabody LLP Amicus Curiae11. Paskay, Alexander L. United States Bankruptcy Court Judge12. Phoenix, Charles PT Counsel for Appellant13. Tardif, Jr., Robert E. Appellee and Chapter 7 Trustee14. Waggoner, Dennis P. Counsel for Amicus Curiae Nixon Peabody LLP


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Sarah E. Baker v. Robert E. Tardif, No. 09-13144-HH

C-2 of 2

I hereby certify that, except as disclosed above, I am unaware of any actual

or potential conflict of interest involving the district court judge and magistrate

judge assigned to this case, and will immediately notify the Court in writing on

learning of any such conflict.

Dated: September 2, 2009

Landis V. Curry III


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TABLE OF CONTENTS

TABLE OF CONTENTS........................................................................................... i

TABLE OF AUTHORITIES AND CITATIONS .................................................... ii

INTEREST OF AMICUS CURIAE ..........................................................................1

STATEMENT OF THE ISSUES...............................................................................1

SUMMARY OF THE ARGUMENT ........................................................................2

ARGUMENT.............................................................................................................3

I. THE LOWER COURTS CORRECTLY DETERMINED THATAPPELLANTS STATUS AS THE SOLE PARTICIPANT IN

HER PROFIT SHARING PLAN PRECLUDED EXEMPTION

UNDER SECTION 222.21..........................................................................3

II. IF APPELLANTS STATUS AS THE SOLE PARTICIPANT

DOES NOT PRELCUDE HER CLAIMED EXEMPTION, THIS

COURT SHOULD REMAND AND INSTRUCT THE

BANKRUPTCY COURT TO COMPLETE ITS EVALUATION

OF APPELLANTS PLAN. ........................................................................8

CONCLUSION........................................................................................................14

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE


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TABLE OF AUTHORITIES AND CITATIONS

Cases

Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981) ....................................6

Cornell-Young Co. v. United States, 469 F.2d 1318 (5th Cir. 1972) .............. 6, 9-11

In re Blais, 220 B.R. 485, 489 (S.D. Fla. 1997) .......................................... 10-11, 13

In re Blais, No. 93-32191, 2004 WL 1067577 (Bankr. S.D. Fla. Mar. 16, 2004) ..11

In re Kimmel, 131 B.R. 223 (Bankr. S.D. Fla. 1991) ..............................................11

In re Lawrence, 235 B.R. 498 (Bankr. S.D. Fla. 1999), vacated on other grounds,

244 B.R. 868 (S.D. Fla. 2000) .............................................................................12

In re Luttge, 204 B.R. 259 (Bankr. S.D. Fla. 1997) ................................................11

In re McDonald, 100 B.R. 598 (Bankr. S.D. Fla. 1989)..........................................11

In re Plunk, 481 F.3d 302 (5th Cir. 2007) ......................................................... 12-13

In re Yates, 541 U.S. 1 (2004) ............................................................................... 5-6

Statutes

Fla. Stat. 222.21 ............................................................................................ passim

26 U.S.C. 401(a) ........................................................................................... passim

Tex. Prop. Code 42.0021 ......................................................................................12


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INTEREST OF AMICUS CURIAE

NIXON PEABODY LLP is a full service law firm, with offices in 17 cities

around the world. Nixon Peabody has an interest in this case because this Courts

decision may affect another case in which Nixon Peabody is a party. Nixon

Peabody filed a Motion for Leave to File Brief as Amicus Curiae, which, if

granted, will authorize Nixon Peabody to file this Amicus Brief pursuant to Rule

29 of the Federal Rules of Appellate Procedure.

STATEMENT OF THE ISSUES

I. Whether the United States Bankruptcy and District Courts below correctly

denied Appellant/Debtors claim that her interest in a profit sharing plan was

exempt from the claims of creditors under section 222.21 of the Florida Statutes,

because Appellant/Debtor, a self-employed individual, was the sole participant in

the profit sharing plan.

II. If Appellant/Debtors status as the sole participant does not preclude her

claimed exemption, whether this Court should instruct the bankruptcy court on

remand to evaluate any other claimed operational deficiencies in Appellants

alleged profit sharing plan.


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SUMMARY OF THE ARGUMENT

This Court should affirm the district courts order below because the lower

courts properly determined that, under section 222.21 of the Florida Statutes

(2008), Appellants interest in the profit sharing plan is not exempt from the claims

of creditors. A debtor who is a self-employed individual, such as Appellant, does

not qualify under section 222.21(2)(a) as a participant in an exempt fund when the

debtor is the sole participant and employee in an alleged profit sharing plan.

Such a plan is not operated for the benefit ofemployees (plural), and therefore does

not meet the underlying purpose for qualifying profit sharing plans as tax exempt

under the Internal Revenue Code (IRC). Consequently, any interest that a

Florida debtor has in such a plan is not exempt from the claims of his or her

creditors. However, should this Court disagree and reverse the district courts

order below, this Court should remand and instruct the bankruptcy court to further

evaluate whether Appellants profit sharing plan was maintained and operated in

accordance with the applicable provisions of the IRC.


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ARGUMENT

I. THE LOWER COURTS CORRECTLY DETERMINED THAT

APPELLANTS STATUS AS THE SOLE PARTICIPANT IN HER

PROFIT SHARING PLAN PRECLUDED EXEMPTION UNDER

SECTION 222.21.

A debtors interest in a profit sharing plan should not be exempt from the

claims of creditors when the debtor is a self-employed individual who is the sole

participant in the plan. Granting such an exemption would be contrary to the plain

language of the controlling statutes. Moreover, it would encourage Florida citizens

to create sham profit sharing plans for purposes of unjustifiably evading taxes

and the potential claims of creditors.

In the present case, Appellant claimed that her interest in a profit sharing

plan was exempt from the claims of creditors under the provisions of section

222.21(2)(a)(1), Florida Statutes (2008). Section 222.21(2)(a)(1) states:

Except as provided in paragraph (d), any money or other assets

payable to an owner, a participant, or a beneficiary from, or any

interest of any owner, participant, or beneficiary in, a fund or account

is exempt from all claims of creditors of the owner, beneficiary, or

participant if the fund or account is:

1. Maintained in accordance with a master plan, volume

submitter plan, prototype plan, or any other governing instrument that

has been preapproved by the Internal Revenue Service as exempt fromtaxation under s. 401(a), s. 403(a), s. 403(b), s. 408, s. 408A, s. 409, s.

414, s. 457(b), or s. 501(a) of the Internal Revenue Code of 1986, as

amended, unless it has been subsequently determined that the plan or

governing instrument is not exempt from taxation in a proceeding that

has become final and nonappealable;


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Appellant, a self-employed individual, asserted that her interest as a participant in

the profit sharing plan was exempt because the form of the plan had been

preapproved by the Internal Revenue Service (IRS) under 26 U.S.C. 401(a).

The bankruptcy court below correctly looked beyond the form of the plan

and rejected Appellants claimed exemption because Appellants plan is a profit

sharing plan in which [Appellant] is the only participant. (Order on Trustees

Objections to Debtors Claim of Exemption p. 3.) The court noted that Appellants

plan is contrary to the requirements for qualification under 26 U.S.C. 401(a),

which qualifies plans that are created by an employer for the exclusive benefit of

his employees. (Id. (quoting 26 U.S.C. 401(a)).) The court therefore sustained

the Trustees objection to Appellants claim of exemption for her interest in the

profit sharing plan. (Id. at 6.)

The district court affirmed. (Order Affirming p. 1.) The district court also

noted that [s]ection 401(a) specifically provides that a trust created . . . for the

exclusive benefit of . . . employees . . . shall constitute a qualified trust under this

section. (Id. at 4.) The district court then held that because the [Appellant] is

the only participant who shares in the [profit sharing] plan, the [Appellant] does

not qualify as a participant for purposes of the exemption provided by section

222.21(2)(a)(1). (Id. at 3-4.)


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In assessing the status of Appellants profit sharing plan, both the

bankruptcy court and district court appropriately relied upon the United States

Supreme Courts decision in In re Yates, 541 U.S. 1 (2004). Although the Yates

decision addressed a plans qualification under the Employee Retirement Income

Security Act (ERISA), the courts below found its reasoning instructive on the

issue of whether Appellants interest in the profit sharing plan was tax exempt

under the IRC. In Yates, the Court held that a working owner could only qualify as

a participant in a profit sharing plan for purposes of ERISA [i]f the plan covers

one or more employees other than the business owner and his or her spouse.

Yates, 541 U.S. at 6.

The courts below properly relied upon the Yates Courts rationale in

evaluating the plain language of both section 222.21(2)(a)(1) and 26 U.S.C.

401(a). Section 222.21(2)(a)(1) states that a participants interest in a fund that is

tax exempt under section 401(a) is exempt from creditors claims. Section 401(a)

states that a fund is tax exempt if it is created by an employer for the exclusive

benefit of . . . employees. It does not state that a fund is tax exempt if it is created

by an employer for the exclusive benefit of a single, self-employed employee.

Congresss use of the plural term employees in section 401(a) indicates that an

owner-employers interest in a profit sharing plan is tax exempt only if the owner-

employer participates in the plan alongside other employees, but an interest in a


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plan providing for an owner-employer as the sole participant is not. The courts

below therefore correctly relied upon Yates as persuasive authority.

Appellant argues that the bankruptcy court was required to sustain

Appellants claimed exemption under section 222.21(2)(a)(1) simply because the

IRS preapproved the form of her profit sharing plan. This argument ignores the

material requirement and primary focus of section 222.21(2)(a)(1) that a retirement

fund or account be maintained in accordance with a plan that has been

preapproved as tax exempt. Fla. Stat. 222.21(2)(a)(1) (emphasis added). In

other words, the plan and its corresponding fund or account must be operationally

compliant with the IRCs requirements for the preapproved plan, including the

requirement that the plan be created for the exclusive benefit of employees. As the

Fifth Circuit Court of Appeals stated in Cornell-Young Co. v. United States, 469

F.2d 1318, 1324 (5th Cir. 1972):

In determining whether a pension plan is for the exclusive benefit of

employees in general, all of the surrounding and attendant

circumstances and all of the details of the plan will be considered. In

making this determination, the law looks not only to the form of the

plan but also to its operation.

(Emphasis added, citation omitted.)1

In this case, both the bankruptcy court and

the district court made the appropriate initial inquiry of whether the Plan qualified

for tax exempt status under 26 U.S.C. 401(a). Each court then properly

1 This Court has adopted as precedent all decisions of the former Fifth Circuit rendered prior to October 1, 1981.

Bonner v. City of Prichard, 661 F.2d 1206, 1207 (11th Cir. 1981).


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concluded that because Appellants profit sharing plan did not qualify for tax

exempt status under section 401(a), Appellants interest in the plan could not be

considered exempt from the claims of creditors under section 222.21.

Appellants argument that self-employed individuals can qualify as

employees under section 401 also misses the mark. The question under section

401(a) does not turn on whether Appellant might be considered an employee.

Rather, it turns on whether Appellant is the only employee participating in this

alleged profit sharing plan. As the bankruptcy court rightly stated: the issue of

whether or not a self-employed person would qualify to be a participant is

answered in the affirmativeprovided that he or she is not the only participantwho

shares in the benefits and the protection of the [profit sharing] plan. (Order on

Trustees Objections to Debtors Claim of Exemption p. 3 (emphasis added).)

Here, the bankruptcy court correctly determined that section 401(a), by its

own terms, affords tax exempt status only to retirement plans established for the

benefit of actual employees, and not to an owner-employer establishing a plan to

share with his or herself. Therefore, because Appellants plan was not entitled to

exemption from taxation, both lower courts correctly concluded that the Plan was

not entitled to exemption from creditors claims under section 222.21, and the

district courts order must be affirmed.


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II. IF APPELLANTS STATUS AS THE SOLE PARTICIPANT DOES

NOT PRELCUDE HER CLAIMED EXEMPTION, THIS COURT

SHOULD REMAND AND INSTRUCT THE BANKRUPTCY COURT

TO COMPLETE ITS EVALUATION OF APPELLANTS PLAN.

Should this Court determine that the Appellant can qualify as a participant

under section 222.21 despite the fact that she is the only individual participating in

her profit sharing plan, this Court should remand so that the bankruptcy court can

evaluate any other claimed operational deficiencies in Appellants alleged profit

sharing plan. As discussed above, the relevant exemption under section 222.21 is

only available if Appellant has maintained, or operated, her profit sharing plan in

compliance with the applicable provisions of the IRC that would qualify the plan

as tax exempt. The bankruptcy court below relied upon only one operational

aspect of Appellants planthat Appellant was its sole participant. The court has

not evaluated other possible operational deficiencies that the Trustee might raise

(e.g., the sponsoring entitys lack of a valid business purpose, the lack of

contributions made, or the existence of improper distributions taken) in assessing

whether the plan is properly qualified as tax exempt.

Appellant suggests that the bankruptcy court is precluded from looking

behind the pre-approved status of the plans form to determine whether the plan

was maintained in accordance with the IRC. Again, this argument ignores the

operational prerequisite to exemption under section 222.21(2)(a)(1). If Appellants


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plan has not been maintained in accordance with the IRC, Appellants interest in

the plan is not exempt from the claims of creditors under section 222.21(2)(a)(1).

Moreover, Appellants argument ignores the last clause of section

222.21(2)(a)(1), which states that an underlying fund or account is not exempt

from the claims of creditors if it has been subsequently determined that the plan

or governing instrument is not exempt from taxation in a proceeding that has

become final and nonappealable. As discussed below, bankruptcy courts

evaluating an earlier version of section 222.21 (prior to the amendments in 2005)

have routinely made this determination by evaluating whether a plan is not exempt

from taxation due to operational deficiencies. The current version of section

222.21 (as amended in 2005) does not preclude bankruptcy courts from making

that determination, and no court assessing the statute has suggested otherwise.

Under Appellants reading of section 222.21, bankruptcy courts would be

precluded from looking beyond theform of a pre-approved retirement plan and any

favorable IRS determination letters concerning the form of the plan. The courts

would therefore be powerless to do anything other than rubber stamp the claimed

exemption, regardless of how the plan was utilized and maintained in the time

(often several years) since the IRS approved the plans form. Appellants

restrictive interpretation is directly contrary to the Fifth Circuits instruction in

Cornell-Young Co. v. United States, 469 F.2d 1318, 1324 (5th Cir. 1972), that the


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law looks not only to the form of the plan but also to its operation. Moreover,

such a rule would lead to debtors obtaining windfalls in bankruptcy proceedings by

exempting retirement plans from administration that, due to operational

deficiencies, are in fact no longer tax exempt.

United States District and Bankruptcy Courts assessing the pre-2005 version

of section 222.21 have consistently determined that analyzing a plans operations

in order to determine the plans exempt or nonexempt status is not only proper, but

required. In In re Blais, the district court for the Southern District of Florida

specifically considered whether the bankruptcy court erred in determining that the

debtors profit sharing plan was exempt under section 222.21, where the

bankruptcy court did not inquire into the actual operation of the plan. 220 B.R.

485, 486 (S.D. Fla. 1997). The trustee in Blais asserted that exemption under

section 222.21 required qualification under the IRC, which in turn meant that the

plan was not only organized in compliance with the applicable provisions of the

IRC, but was operated in compliance as well. Id. at 488. The trustee claimed

further that the bankruptcy court erred in relying only on favorable IRS

determination letters because those letters merely considered the form of the plan.

Id.

The district court agreed and, in reversing the bankruptcy courts order,

found that it was proper to look behind the favorable determination letters and


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inquire into the operational aspects of the plan because in deciding issues of tax

qualification, the law looks not only to the form of the plan, but also to its

operation. Id. at 489 (quoting Cornell-Young, 469 F.2d at 1324). The court

remanded the case back to the bankruptcy court to evaluate whether the debtors

operation of his profit sharing plan had any effect on the tax qualification of the

plan under section 401(a), stating that it was necessary for the bankruptcy court to

consider those federal tax issues in order to determine whether the debtor could

exempt his interest in the plan. Id. at 490.2

Other courts considering claimed exemptions for profit sharing and other

retirement plans under the pre-2005 version of section 222.21 have used the same

approach taken by the court in Blaisevaluating a claimed exemption by

independently considering a plans operation. See, e.g., In re McDonald, 100 B.R.

598, 600 (Bankr. S.D. Fla. 1989) (sustaining trustees objection to exemption

claimed for debtors pension plan, where evidence related to operation of plan

subsequent to issuance of favorable IRS letter indicated existence of disqualifying

events); In re Kimmel, 131 B.R. 223, 226-27 (Bankr. S.D. Fla. 1991) (overruling

trustees objection to exemption claim for pension plan after evidentiary hearing on

tax qualification of plan); In re Luttge, 204 B.R. 259, 262-63 (Bankr. S.D. Fla.

1997) (overruling trustees objection to exemption claim for SEP/IRA account,

2 On remand, the bankruptcy court determined that the plan was not entitled to exemption because the debtors

operation of the plan disregarded the applicable requirements of the IRC. In re Blais, No. 93-32191, 2004 WL

1067577 at *4 (Bankr. S.D. Fla. Mar. 16, 2004).


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where trustee presented no evidence regarding the plans qualifications under the

IRC);In re Lawrence, 235 B.R. 498, 509-10 (Bankr. S.D. Fla. 1999) (determining

that debtors plan was not compliant with the tax code based on operational

deficiencies, and was therefore not entitled to exemption under section 222.21),

vacated on other grounds, 244 B.R. 868 (S.D. Fla. 2000). Although these

decisions interpreted the pre-2005 version of section 222.21, nothing in the

language of the amended statute precludes bankruptcy courts from determining

that the plan or governing instrument is not exempt from taxation.

Courts interpreting similar statutes from other states have likewise

concluded that determining whether interest in a plan is exempt from a creditors

claims requires an analysis of the plans operation. In In re Plunk, 481 F.3d 302

(5th Cir. 2007), the Fifth Circuit Court of Appeals interpreted the Texas statutory

provision for exemption of pension plans. Much like the current version of section

222.21, the Texas statute exempts a plan if it is qualified under the IRC. Tex.

Prop. Code 42.0021. In Plunk, the debtor argued that his pension plan had been

deemed structurally qualified by the IRS under 401(a) of the IRC. 481 F.3d at

304. The bankruptcy court rejected that argument and concluded that the plan was

no longer qualified operationally due to the debtors misuse of the plans assets,

and the district court affirmed the bankruptcy courts ruling. Id. at 305.


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In affirming the lower courts decisions, the Fifth Circuit held that when

disqualifying events occur after the IRS has last determined that a plan is qualified,

a court may, under section 42.0021 of the Texas Property Code, determine that a

plan is no longer qualified based on those events. Id. at 307 (citing In re Blais,

220 B.R. 485, 489 (S.D. Fla. 1997)). The court found that several years had passed

since the IRS determined that the debtors plan was qualified, and even then, the

IRS determination considered only the plans form. Id. The court therefore

concluded that the bankruptcy court and district court were permitted to reach an

independent decision regarding the [p]lans qualified status and were not bound by

the previous IRS determination. Id.

Thus, if this Court reverses the decisions below concerning Appellants

participation as the sole employee in her profit sharing plan, this Court should

nevertheless remand with instructions so that the lower courts can further evaluate

the operational aspects of Appellants plan. Without such an assessment,

Appellant and other debtors claiming exemptions for an interest in retirement plans

might be erroneously afforded favorable treatment in bankruptcyto the detriment

of legitimate creditorsthat would not otherwise be available to the debtor outside

of bankruptcy.


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CONCLUSION

This Court should affirm the district courts order below because the lower

courts properly determined that, under section 222.21 of the Florida Statutes,

Appellants interest in her profit sharing plan is not exempt from the claims of

creditors. However, should this Court disagree and reverse the district courts

order below, this Court should remand with instructions so that the bankruptcy

court can evaluate any other claimed operational deficiencies in Appellants

alleged profit sharing plan.

Respectfully submitted,

Dennis P. Waggoner

Florida Bar No. 509426

Landis V. Curry IIIFlorida Bar No. 0469246

HILL, WARD & HENDERSON, P.A.

Suite 3700 Bank of America Plaza

101 East Kennedy Boulevard

Post Office Box 2231

Tampa, Florida 33601

Telephone: (813) 221-3900

Facsimile: (813) 221-2900

Attorneys for Nixon Peabody LLP


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CERTIFICATE OF COMPLIANCE WITH

FEDERAL RULE OF APPELLATE PROCEDURE 32(a)

1. This brief complies with the type-volume limitation of Federal Rule ofAppellate procedure 32(a)(7)(B) and 11th Circuit Rule 32-4 because this

brief contains 3,109 words, excluding the parts of the brief exempted by

Federal Rule of Appellate Procedure 32(a)(7)(B)(iii).

2. This brief complies with the typeface requirements of Federal Rule ofAppellate Procedure 32(a)(5) and the type style requirements of Federal

Rule of Appellate Procedure 32(a)(6) because this brief has been prepared in

a proportionally spaced typeface using Microsoft Office Word 2003 in 14-

point Times New Roman.

Landis V. Curry III

Attorney for Nixon Peabody LLP

Dated: September 2, 2009


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CERTIFICATE OF SERVICE

I hereby certify that a true copy of the foregoing has been furnished by

regular U.S. Mail on this 2nd day of September, 2009, to the following counsel of

record:

Charles PT Phoenix

Phoenix Law PA

12800 University Drive, Suite 260

Fort Myers, FL 33907

Attorney for Appellant

Robert E. Tardif, Jr.

2430 Shadowlawn Drive, Suite 18

Naples, FL 34112

Attorney for Appellee

______________________________

Landis V. Curry III

In Re Baker - Amicus Brief of Nixon Peabody

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