Hibernia Natl Bank v. Brown ( 1997 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 95-30700
Summary Calendar
_____________________
IN THE MATTER OF: WILLIAM DENIS BROWN,III,
Debtor.
__________________________________________
HIBERNIA NATIONAL BANK,
Appellant,
v.
WILLIAM DENIS BROWN, III,
Appellee.
_________________________________________________________________
Appeal from the United States District Court
for the Western District of Louisiana
(95-CV-357)
_________________________________________________________________
January 19, 1996
Before KING, SMITH, and BENAVIDES, Circuit Judges.
PER CURIAM:*
Hibernia National Bank ("Hibernia") appeals the district
court's affirmance of the bankruptcy court's grant of summary
judgment in favor of debtor William Denis Brown, III ("Brown").
*
Pursuant to Local Rule 47.5, the court has determined
that this opinion should not be published and is not precedent
except under the limited circumstances set forth in Local Rule
47.5.4.
Hibernia had objected to Brown's claimed exemption of his
interest in a pension plan. The summary judgment dismissed
Hibernia's objection on the grounds that, where the Internal
Revenue Service (the "IRS") had determined that the pension plan
was "qualified under the Internal Revenue Code" as required by
Louisiana law, the bankruptcy court was precluded from contesting
that determination under In re Youngblood, 29 F.3d 225 (5th Cir.
1994). We affirm.
I. BACKGROUND
Brown created the Brownland Corporation Defined Benefit
Pension Plan (the "Pension Plan") in October 1980. The IRS
issued determination letters in 1984 and 1993 indicating that the
Pension Plan was qualified under the Internal Revenue Code (the
"I.R.C."). Brown filed for Chapter 7 bankruptcy on September 21,
1993 in the United States Bankruptcy Court for the Western
District of Louisiana. Pursuant to § 522 of the Bankruptcy Code,
in his original and subsequently amended bankruptcy schedules,
Brown claimed his interest in the Pension Plan as exempt property
under Louisiana law, La. Rev. Stat. 13:3881D.
On January 21, 1994, Hibernia, a creditor and party-in-
interest,2 filed an objection to the exemption. Hibernia alleged
that Brown's interest in the Pension Plan could not be claimed as
2
Hibernia is the successor of First Commercial Bank and
assignee of its claim in the Brown bankruptcy.
2
an exemption under Louisiana law because the Pension Plan was not
tax-qualified under the I.R.C. On November 18, 1994, the
bankruptcy court ruled that our decision in Youngblood required
it to give deference to the IRS's treatment of the Pension Plan.3
Therefore, with the proviso that Hibernia retained the right to
request an IRS audit of the Pension Plan, the bankruptcy court
granted Brown's request for summary judgment and dismissed
Hibernia's objection to the exemption of Brown's interest in the
Pension Plan. On January 5, 1995, the bankruptcy court issued an
amended order that reiterated its November 18, 1994 ruling,
adding that, unless the IRS indicated to the bankruptcy trustee
its intention to audit the Pension Plan before February 7, 1995,
final judgment would be entered dismissing Hibernia's objection.
After a hearing on Hibernia's motion to extend the deadline, the
reference to the February 7, 1995 deadline was deleted by oral
ruling of the bankruptcy court on March 2, 1995.4 On April 20,
3
Three months earlier, in Youngblood, we held that,
under the Texas exemption statute, a bankruptcy court was
required to defer to the IRS's determination that a pension plan
was tax-qualified. In re Youngblood, 29 F.3d 225, 229 (5th Cir.
1994).
4
Because the bankruptcy court originally did not enter a
formal order memorializing its ruling of March 2, 1995, Brown
construed the January 5, 1995 order as interlocutory. When
Hibernia subsequently filed a Notice of Appeal, Brown charged
that Hibernia had not complied with the requirements for appeal
set forth in Rule 5 of the Federal Rules of Appellate Procedure.
Accordingly, Brown filed a motion to dismiss this appeal for lack
of jurisdiction. On September 8, 1995, however, the bankruptcy
court entered an order memorializing its March 2, 1995 ruling and
unequivocally dismissing Hibernia's objection to the exemption of
3
1995, the IRS notified Brown that it intended to audit the
Pension Plan for the years 1992 and 1993.5
In a memorandum ruling dated June 22, 1995, the United
States District Court for the Western District of Louisiana
affirmed the bankruptcy court's ruling and adopted the reasons
assigned by the bankruptcy judge. The district court declined to
distinguish this case from Youngblood on the basis of whether or
not the IRS performed an audit. Noting that "[t]he IRS has
always treated this Pension Plan as tax qualified," the district
court found no reason to reverse the bankruptcy court's ruling.
This appeal followed.
II. ANALYSIS
We review de novo the district court's affirmance of the
bankruptcy court's legal conclusion that the bankruptcy court was
bound by the IRS's determination. In re Southmark, Corp., 49
F.3d 1111, 1114 (5th Cir. 1995); In re Brocato, 30 F.3d 641, 642
(5th Cir. 1994). Although we benefit from the district court's
consideration of the matter, the amount of persuasive power to be
Brown's interest in the Pension Plan. Brown has since
acknowledged that any jurisdictional defects to this appeal have
been cured.
5
On July 28, 1995, the IRS notified Brown of the results
of its audit: The returns submitted for 1992 and 1993 were
accepted by the IRS; no additional taxes were assessed; and
previous determinations that the Pension Plan was tax-qualified
were not revoked.
4
assigned to the district court's conclusion is a matter of
appellate discretion. In re Briscoe Enters., Ltd., II, 994 F.2d
1160, 1163 (5th Cir.), cert. denied, 114 S. Ct. 550 (1993).
Once an action in bankruptcy is commenced, all property in
which the debtor has a legal or equitable interest becomes the
property of the bankruptcy estate. 11 U.S.C. § 541. However, a
debtor may claim as exempt any property that is exempt under
federal, state, or local law. 11 U.S.C. § 522(b). In this case,
Brown claimed an exemption for his individual interest in the
Pension Plan under La. Rev. Stats. 13:3881D and 20:33.6 These
statutes and the corresponding provision in the Bankruptcy Code,7
6
Under the heading "General exemptions from seizure,"
the Louisiana Revised Statutes provide:
The following shall be exempt from all liability
for any debt except alimony and child support: all
pensions, all proceeds of and all payments under
annuity policies or plans, all individual retirement
accounts, all Keogh plans, all simplified employee
pension plans, and all other plans qualified under
sections 401 or 408 of the Internal Revenue Code.
However, an individual retirement account, Keogh plan,
simplified employee pension plan, or other qualified
plan is only exempt to the extent that contributions
thereto were exempt from federal income taxation at the
time of the contribution, plus interest or dividends
that have accrued thereon.
La. Rev. Stat. 13:3881D(1). La. Rev. Stat. 20:33 contains
language identical to La. Rev. Stat. 13:3881D(1).
7
The Bankruptcy Code provides in pertinent part:
(d) The following property may be exempted under
subsection (b)(1) of this section:
. . . .
(10) The debtor's right to receive--
5
require pension plans to be qualified under the I.R.C. in order
to be exempt from seizure.
The bankruptcy court and the district court concluded that
Brown's Pension Plan was tax-qualified, based on their respective
readings of Youngblood. In that case, the Youngbloods sought to
exclude from their Chapter 7 bankruptcy estate the interest that
they held in an individual retirement account ("IRA"). The IRA
had accepted a rollover contribution from a defined-benefit
employee pension plan created by Mr. Youngblood in connection
with his construction company. A creditor objected to the
claimed exemption on the grounds that the pension plan was not
qualified under the I.R.C. as required under Texas law. The
bankruptcy court held that the Youngblood's pension plan was not
tax-qualified despite two IRS determination letters and an IRS
audit to the contrary. The district court affirmed the judgment
of the bankruptcy court. We concluded that, regarding the
pension plan's tax qualification, the bankruptcy and district
. . . .
(E) a payment under a stock bonus, pension,
profitsharing, annuity, or similar plan . . .
to the extent reasonably necessary for the
support of the debtor and any dependent of
the debtor, unless--
. . . .
(iii) such plan or contract does not
qualify under section 401(a), 403(a),
403(b), or 408 of the Internal Revenue
Code of 1986.
11 U.S.C. § 522(d)(10)(E)(iii).
6
courts erred in not deferring to the determination of the IRS.
Youngblood, 29 F.3d at 229.
Prior to Youngblood, in In re Goff, 706 F.2d 574 (5th Cir.
1983), abrogated on other grounds by Patterson v. Shumate, 504
U.S. 753 (1992), we suggested that courts must defer to the IRS
as to the qualification of self-employed Keogh plans under the
Employment Retirement Security Act of 1974 ("ERISA"):
Although an argument might have been made that the
debtors' plan was not qualified, . . . we must accept
for purposes of this appeal that the plan was qualified
and thus subject to ERISA anti-alienation provisions.
Congress has committed the determination of
qualification, in the first instance, to the
Commissioner of Internal Revenue, and it would
therefore be inappropriate for us to pass upon this
question.
Goff, 706 F.2d at 580 n.16.
In the instant case, based on Youngblood and Goff, the
bankruptcy court determined that it must defer to the IRS's
treatment of the Pension Plan as qualified.8 The IRS treated
Brown's Pension Plan as tax-qualified for more than ten years
and, consistent with the facts in Youngblood, the IRS issued
8
The bankruptcy court explained:
[I]n review of how the [Louisiana] state statutes want
this issue determined they clearly show, and Youngblood
clearly states, they don't want me to do it. They do
not want the state courts to do it. They, instead,
want the IRS to do it because the IRS is that entity
which determines whether or not the plans are
qualified. It [en]forces its own regulations . . . and
it does so in a timely fashion and it does so in a
uniform fashion.
7
determination letters indicating that the Pension Plan was tax-
qualified.9 Therefore, the bankruptcy court ruled that Brown's
interest in the Pension Plan was exempt from the bankruptcy
estate. The district court adopted the bankruptcy court's
rationale and affirmed its ruling.
Hibernia advances three arguments on appeal: (1) that
Youngblood is not controlling with respect to Louisiana law; (2)
that Youngblood is relevant only where the IRS has performed a
comprehensive audit; and (3) that Youngblood should be overruled
because it undermines the statutory duties of the bankruptcy
court. We address these arguments seriatim.
First, Hibernia proposes that Youngblood is not controlling
with respect to Louisiana law. Hibernia contends that it was
error for the district court to affirm the bankruptcy court's
conclusion that Youngblood applies not only to the Texas
exemption statute but to La. Rev. Stats. 13:3881D(1) and 20:33 as
well. Despite the language of the relevant Louisiana and Texas
statutes--language equivalent on its face,10 Hibernia attempts to
9
Additionally, after auditing the Pension Plan for the
years 1992 and 1993, the IRS let stand all previous
determinations that the Pension Plan was tax-qualified.
10
The Louisiana code exempts pensions, "simplified
employee pension plans, and all other plans qualified under
sections 401 or 408 of the Internal Revenue Code," from liability
for any debt. La. Rev. Stat. 13:3881D(1) (emphasis added); La.
Rev. Stat. 20:33. The Texas Property Code exempts pensions,
simplified employee pension plans, and other plans "unless the
plan . . . does not qualify under the applicable provisions of
the Internal Revenue Code of 1986." Tex. Prop. Code Ann. §
8
distinguish the Louisiana exemption statutes from Texas law on
the basis of legislative intent. As evidence that Youngblood is
inapplicable in Louisiana, Hibernia offers the concern voiced by
Representative Manuel Fernandez that a debtor might abuse the
exemption process.11 Hibernia proposes that, notwithstanding the
expertise of the IRS and the Texas legislature's deference to
that expertise, the Louisiana legislature meant to wrest the
interpretation of federal tax law from the IRS in the belief that
exemption abuse can be discerned more readily by a state court or
a bankruptcy court applying state law.
The argument that Louisiana's lawmakers believed that, in
the interest of limiting debtor abuse, it was necessary to
displace the IRS with bankruptcy courts is unconvincing.
Explicit anti-fraud provisions were included by the Legislature
42.0021(a) (emphasis added).
11
The minutes of the June 13, 1983 meeting of the
Louisiana House Committee on Civil Law and Procedure contain the
following entry:
Representative Fernandez stated that IRA's and Keogh
accounts have limitations on the tax benefits, but
there are no limitations on the amount of money that
can go into the account if you are willing to take the
tax consequences. Representative Fernandez expressed
concerns that this situation could be abused; money
could be hidden from seizure.
House Comm. on Civil Law and Procedure, 6-13-83, SB No. 324.
9
in the exemption statutes themselves.12 Moreover, shortly after
expressing his concern about debtor abuse, Representative
Fernandez acknowledged that this concern was adequately addressed
by the statutes' tax-qualification requirement;13 and, as we
stated, in Youngblood:
[T]he legislature had to know that, in applying [the
exemption statute], its own courts would be required to
look to federal tax law to determine whether a plan was
qualified under the Internal Revenue Code. The IRS,
which has been entrusted with the task of implementing
the Internal Revenue Code, has adopted extensive rules
and regulations governing income tax in general, and
the taxability of pension plans in particular. The IRS
also has a wealth of experience in the practical
application of tax laws.
Youngblood, 29 F.3d at 228. We are not convinced on the basis of
the legislative history offered by Hibernia that the Louisiana
legislature intended for bankruptcy courts to construe federal
12
In accord with 11 U.S.C. § 727(a)(2), each of
Louisiana's exemption statutes stipulates: "No contribution
shall be exempt if made less than one calendar year from the date
of filing for bankruptcy, whether voluntary or involuntary, or
less than one calendar year from the date writs of seizure are
filed against such account or plan." La Rev. Stat. 13:3881D(2)
(emphasis added); La. Rev. Stat. 20:33.
13
The minutes of the June 13, 1983 meeting of the
Louisiana House Committee on Civil Law and Procedure contain the
following response to Representative Fernandez's concern about
the possibility of debtor abuse:
Mr. Edward Glusman representing the Louisiana State Bar
Association . . . stated that Representative
Fernandez's problem is taken care of on page 1, line 32
of the bill [that to be exempt plans must be "qualified
under sections 401 or 408 of the Internal Revenue
Code"]. Representative Fernandez agreed.
House Comm. on Civil Law and Procedure, 6-13-83, SB No. 324.
10
tax law in opposition to an IRS determination.14 Whether or not
the Louisiana legislature was arguably more preoccupied with
debtor abuse than was the Texas legislature is not dispositive.
Second, Hibernia contends that Youngblood is relevant only
where the IRS has performed a comprehensive audit. In
Youngblood, after auditing the pension plan, the IRS did not
revoke its earlier determination that the plan was tax-qualified.
Similarly, in the instant case, the IRS ultimately audited
Brown's Pension Plan and let stand its earlier determination that
the plan was tax-qualified. However, because the IRS did not
conduct its audit prior to the filing of Brown's bankruptcy
petition, Hibernia attempts to distinguish this case from
Youngblood. The Supreme Court has pointed out that "exempt
property is determined 'on the date of the filing of the
petition.'" Owen v. Owen, 500 U.S. 305, 314 n.6 (1991) (quoting
14
Hibernia contends that bankruptcy courts are capable of
interpreting federal tax law. The issue, however, is whether the
Louisiana legislature intended for a bankruptcy court's
interpretation of federal tax law to preempt a contrary
interpretation of federal tax law advanced by the IRS. Pension
plan qualification under federal tax law is an esoteric and
complex area. The "IRS has established programs . . . designed
to correct past defects, to ensure that plans are properly
operated in the future, and to impose sanctions less severe than
outright disqualification." Youngblood, 29 F.3d at 228-29 n.4
(quoting Federal Tax Coordinator 2d ¶ T-10590 (1994)).
Particularly because the IRS can make fine distinctions--the IRS
might impose no more than a monetary penalty or may excuse
entirely an I.R.C. indiscretion that a bankruptcy court might
interpret as a disqualifying event, we find it unreasonable to
believe that the legislature intended to adopt a scheme that
supplants the informed judgment of the IRS with court-construed
disqualification.
11
11 U.S.C. § 522(b)(2)(A)). Hibernia cites Owen and several other
cases, including In re Peterson, 106 B.R. 229 (Bankr. D. Mont.
1989), overruled by In re Doss, Nos. 91-41578-007, 91-31042-007,
1991 WL 700518 (Bankr. D. Mont. 1991),15 to support its
contention that, notwithstanding the IRS determination letters to
the contrary, the Pension Plan was not tax-qualified for purposes
of exemption from Brown's bankruptcy estate. We find this
argument unavailing.
The Pension Plan itself was not altered by the 1994 IRS
audit. It did not suddenly acquire tax-qualified status
coincident with the audit. Nor did Brown's circumstances
relative to the plan's qualification change as a result of the
IRS audit. Rather, it is self-evident that on the date in 1993
when Brown filed his bankruptcy petition the Pension Plan was
already tax-qualified because the IRS had so treated the plan for
the better part of 13 years and, thereafter, when it eventually
audited the plan for the years 1992 and 1993, the IRS did not
revoke its prior determinations.
15
In Peterson, the court stated:
The date of petition is seen as the critical date for
several other determinations in a bankruptcy case. For
example, it is on that date when the debtor's rights in
exempt property are defined, despite a later change in
circumstances.
Peterson, 106 B.R. at 230.
12
Furthermore, the determinative issue in Youngblood was
whether the IRS had made a determination regarding the
qualification of the Youngblood's pension trust, not whether the
IRS had conducted a comprehensive audit. We are not prepared to
restrict the ruling in Youngblood to that limited category of
pension plans that have been audited by the IRS. In Youngblood,
we stated that "[w]e do not believe that the legislature wanted
to adopt a scheme that invites frequent, unseemly, conflicting
decisions between the state court or bankruptcy court, and the
IRS, such as occurred in this case." Youngblood, 29 F.2d at 229.
Where the IRS has not audited a pension plan but has determined
that the plan is tax-qualified and has treated it as such, the
likelihood of conflicting decisions is no less substantial and no
less troublesome.
Finally, Hibernia argues that Youngblood should be overruled
because it undermines the statutory duties of the bankruptcy
court. Citing 28 U.S.C. § 157,16 as well as § 505 of the
16
28 U.S.C. § 157(b) provides in pertinent part:
(b)(1) Bankruptcy judges may hear and determine all
cases under title 11 and all core proceedings under
title 11 . . .
(2) Core proceedings include . . .
. . .
(B) allowance or disallowance of claims against
the estate or exemptions from property of the estate,
and . . .
28 U.S.C. § 157(b).
13
Bankruptcy Code,17 inter alia, Hibernia contends that Youngblood
improperly limits bankruptcy courts' specific grant of
jurisdiction regarding exemption issues. We disagree.
As permitted under the Bankruptcy Code, Louisiana has chosen
to "opt out" of the opportunity to allow its debtors to use the
"laundry list" of exemptions enumerated under subsection (d) of
11 U.S.C. § 522.18 Instead, Louisiana has created its own
exemption scheme, pursuant to authority recognized by the
Bankruptcy Code. 11 U.S.C. § 522(b). What is at issue in this
17
Under the title "Determination of tax liability," the
Bankruptcy Code provides in relevant part:
(a)(1) Except as provided in paragraph (2) of this
subsection, the court may determine the amount or
legality of any tax, any fine or penalty relating to a
tax, or any addition to tax, whether or not previously
assessed, whether or not paid, and whether or not
contested before and adjudicated by a judicial or
administrative tribunal of competent jurisdiction.
(2) The court may not so determine--
(A) the amount or legality of a tax, fine,
penalty, or addition to tax if such amount or
legality was contested before and adjudicated
by a judicial or administrative tribunal of
competent jurisdiction before the commencement
of the case under this title; or . . .
11 U.S.C. § 505(a).
18
The Louisiana legislature has provided that only
"property and income which is exempt under the laws of the state
of Louisiana and under federal laws other than Subsection (d) of
Section 522 of [] Title 11 of the United States Code," shall be
exempt from the property of a bankruptcy estate. La. Rev. Stat.
13:3881B(1).
14
case is the interpretation of those Louisiana statutes setting
forth Louisiana's chosen exemption scheme. The authority of the
bankruptcy court to adjudicate tax liability, for example, is of
little consequence to the construction of these state statutes,
particularly--as in this case--where the IRS has not asserted a
claim against the Pension Plan for additional taxes. We do not
find the ability of a bankruptcy court to fulfill its statutory
duties diminished in any meaningful way by deference to the IRS
on matters of tax qualification under a state statute.
Consistent with the reasoning in Youngblood, we conclude
that, for purposes of exempting Brown's interest in the
bankruptcy estate, the Pension Plan was tax-qualified. The Texas
and Louisiana legislatures employed comparable language in
drafting their respective exemption statutes, and, as we
explained, with regard to Texas law, in Youngblood:
We are persuaded that the legislature intended for its
own courts (or bankruptcy courts applying Texas law) to
defer to the IRS in determining whether a retirement
plan is "qualified" under the Internal Revenue Code.
We see no reason that the legislature would want its
courts, which are inexperienced in federal tax matters,
to second-guess the IRS in such a complex, specialized
area. We find it much more reasonable to assume that
the legislature contemplated creating an exemption from
seizure for a debtor's retirement funds that could be
simply and readily determined by referring to the
federal tax treatment of those funds.
Youngblood, 29 F.3d at 229. We are not convinced that the
lawmakers of Louisiana were any less interested than those of
Texas in providing an exemption that may be applied simply and
15
readily. The bankruptcy court properly deferred to the IRS's
determination that Brown's Pension Plan was tax-qualified.
Therefore, it was not error for the bankruptcy court to dismiss
Hibernia's objection to Brown's claimed exemption of the plan
from the bankruptcy estate. The district court properly affirmed
this dismissal.
III. CONCLUSION
For the reasons stated above, we AFFIRM the judgment of the
district court.
16