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Retirement Funds Not Exempt From Bankruptcy Estate, Available To Former Wife

Funds held in a debtor’s retirement plan are not exempt from the debtor’s bankruptcy estate and thus the debtor’s former wife can pursue her claim to half of the plan’s value. In addition, funds withdrawn from the retirement plan by the debtor and placed in a brokerage account were not exempt from the bankruptcy estate, the court said, rejecting the debtor’s argument that under the U.S. Supreme Court’s decision in Boggs v. Boggs, the uncommingled funds in the brokerage account remained protected by ERISA.

Facts. Donald Ray Carbaugh and Joan Carbaugh divorced in 1982. Under their divorce settlement, Joan was to receive 50% of Donald’s interest in his retirement plans with his employer, Hallmark Cards Corp. At the time of the divorce, three retirement plans were available at Hallmark—a pension plan, a profit sharing plan, and a thrift plan.

In 1997, Donald retired from Hallmark and received a lump sum distribution of $97,436 from the pension plan. Donald invested the distribution in a brokerage account. Donald filed for Chapter 7 bankruptcy protection in 1999. On his list of assets, Donald listed the money in his brokerage account as exempt from his bankruptcy estate. In addition, Donald listed as exempt $481,666 he held in Hallmark’s profit sharing plan. Joan filed an objection to Donald’s claimed exemptions.

Holding. A bankruptcy court determined that the funds in the brokerage account were not exempt from Donald’s bankruptcy estate. The bankruptcy court also found that the remaining money in Donald’s profit sharing plan account was not exempt. Affirming, the appellate panel rejected Donald’s argument that the funds held in his profit-sharing plan account should be afforded protection in bankruptcy based either on his vested interest in the plan or on his entitlement to a state law exemption in pension plans. Agreeing with the bankruptcy court, the appellate panel found that the funds in the profit-sharing plan were not property of Donald’s bankruptcy estate because, at the time he filed his Chapter 7 petition, the funds remained in an ERISA-qualified plan and thus were excluded from his bankruptcy estate under Section 541(c)(2) of the Bankruptcy Code.

Likewise, the appellate panel agreed with the lower court that the money held in the brokerage account was not exempt from Donald’s bankruptcy estate. In so ruling, the court rejected Donald’s argument that under the Supreme Court’s decision in Boggs, because the funds in the brokerage account were uncommingled, the funds kept their protected status under ERISA. “Nothing in Boggs suggests that uncommingled monies distributed from pension plans and placed in accounts not under the auspices of ERISA remain protected by it,” the opinion states.

The court also dismissed Donald’s contention that the money held in the brokerage account was protected by Kansas’s bankruptcy retirement exemption, which provides that “‘any money or other assets payable to a participant or beneficiary from, or any interest of any participant or beneficiary in a [qualified retirement plan] shall be exempt.’”

By Adam Hunt

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