Bankruptcy Appellate Panel Upholds IRA Assets Exclusion

A 10th U.S. Circuit Bankruptcy Appellate Panel upheld a lower court ruling that the proceeds of debtor’s rolled over benefits from an employee stock ownership plan (ESOP) are to be excluded from the debtor’s bankruptcy estate.

The bankruptcy appellate panel said a U.S. Bankruptcy Court judge in Kansas was correct in turning aside an argument by a creditor that the funds now held in an IRA should be included in the pool of the debtor’s assets used to repay debts. The lower court judge ruled—and the appellate panel agreed—that the creditor had not proven that the ESOP was improperly established or administered—a prerequisite for putting the funds into the bankruptcy estate.

According to the appellate opinion, the ESOP was established by Volo Holdings in December 2000 as a retirement benefit for its employees. On March 13, 2002, the Internal Revenue Service issued a favorable determination letter stating that the ESOP plan was properly qualified based on the information supplied by Volo.

Christopher Joseph Seferyn and Vincent Rook were the only employees of Volo to participate in the ESOP. Seferyn and Rook were each 50% owners of Volo and each owned 50% of the shares of the ESOP, the opinion said.

Seferyn liquidated the ESOP in December 2004 and rolled his funds into an IRA. Seferyn later filed for Chapter 7 bankruptcy relief and listed the IRA as exempt from his bankruptcy case.

The U.S. Bankruptcy Court for the District of Kansas denied Missouri Building’s motion for summary judgment and ruled that Seferyn’s IRA was exempt from his bankruptcy estate. Missouri Building was one of Seferyn’s creditors. As of October 14, 2005, the IRA had a value of more than $1.1 million.

Missouri Building argued the ESOP was not a qualified retirement plan because it did not comply with IRS’s Revenue Ruling 2004-4, which meant the IRA assets should be counted among the debtor’s bankruptcy estate. “The IRS issued a favorable determination letter specific to the ESOP established by Volo Holdings in its organization form at the time of creation.
Missouri Building did not present evidence that the ESOP was established and administered in any way other than the way initially approved by the IRS,” the court said.

The unpublished appellate ruling in Missouri Building LLC v. Clark (In re Seferyn), B.A.P. 10th Cir., No. KS-07-094, unpublished 5/15/08, is available here.

In 2005, the U.S. Supreme Court ruled unanimously that IRA assets can be protected under bankruptcy laws.