The VBA Journal is the official publication of The Virginia Bar Association.
Issue link: http://vba.epubxp.com/i/80228
fraudulent transfers ACCOUNT ADVANTAGES Retirement accounts constitute one of the largest asset classes held by U.S. citizens.4 Tere are a number of advantages to retirement investing, the most prominent being that the compound interest, which (hopefully) accrues over the years, is (at least) partially tax-exempt.5 Another important incentive, however, that remains particularly noteworthy for members of the bar is the "asset protection" function these plans provide. Namely, certain types of retirement plans are treated as exempt from most creditors' claims under federal bankruptcy law and may receive similar treatment under state law.6 Additionally, certain types of retirement accounts are excluded from a debtor's bankruptcy estate ab initio.7 Te Employee Retirement Income Act of Security 1974 ("ERISA") offers the most extensive protection to retirement accounts. Most private employer-sponsored retirement plans, including 401(k) plans, 403(b) plans, SIMPLE plans, profit-sharing plans, and defined benefit plans, fall under ERISA's protective umbrella.8 One protection offered by ERISA is found in section 206(d)(1), which requires that all ERISA plans contain an anti- alienation provision.9 Such a provision operates to bar most creditors from attaching, garnishing, or encumbering an investor's funds held in these types of accounts.10 Another asset-protection benefit associated with ERISA plans, also known as "qualified plans," is that they are statutorily excluded from the bankruptcy estate.11 PROTECTIONS UNDER BAPCPA ERISA does not govern all retirement plans – these "nonqualified" plans include individual retirement accounts, one of the most popular types of retirement investment vehicles.12 In the context of bankruptcy, federal law offers some protection for certain nonqualified plans through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA").13 BAPCPA exempts up to $1,171,65014 of a debtor's assets held in certain nonqualified accounts. In addition, nonqualified plans usually receive some degree of protection under state law. For example, Virginia enables a debtor to exempt certain nonqualified plans outside of bankruptcy to the same extent those plans would be exempt in bankruptcy.15 Te protections of ERISA, BAPCPA, or state law notwithstanding, a debtor who uses retirement investing to fraudulently shield his or her assets from creditors' claims risks severe consequences by way of fraudulent transfer law.16 Te Bankruptcy Code and Virginia law recognize two categories of fraudulent transfers: transfers made by an insolvent debtor for inadequate consideration and transfers made by a debtor with the intent to hinder, delay, or defraud creditors.17 Retirement contributions usually cannot fall under the former category because the debtor receives proportionate consideration for each contribution – i.e., the corresponding increased value of the retirement account.18 INTENT TO HINDER, DELAY, OR DEFRAUD CREDITORS Tus, for a retirement contribution to qualify as a fraudulent transfer, it must be made with the intent to hinder, delay, or defraud the investor's creditors.19 Te difficulty in making such an argument, however, is the lack of any bright-line legal standard distinguishing contributions made for legitimate retirement planning purposes from contributions made with the intent to hinder, delay, or defraud creditors.20 Nonetheless, case law can provide some insight.21 For example, in the case of Matter of Loomer, the court held that the debtor's pre-petition retirement contributions were fraudulent transfers.22 Te key fact driving the court's holding was the debtor's decision to make retirement contributions even after defaulting on a loan agreement and franchise agreement.23 From the court's perspective, these defaults marked a point in time when the debtor knew or should have known that he could no longer fulfill his various payment obligations – thus, indicating the presence of the requisite intent to hinder, delay, or defraud creditors.24 Te reasoning in Matter of Loomer provides creditors a strategy for attacking a debtor's retirement contributions as fraudulent transfers: use discovery to construct a point in time at which the debtor's circumstances dispelled any reasonable prospect of honoring obligations to creditors. Once that point is identified, the argument follows that any of the debtor's retirement contributions made thereafter were necessarily accompanied by some intent to hinder, delay, or defraud creditors and, accordingly, are fraudulent transfers. While the effects of successfully establishing a debtor's retirement contributions as fraudulent transfers are outside the scope of this article, it is worth briefly mentioning some of the potential benefits of doing so. Most important, a debtor found to have engaged in pre-petition fraudulent transfers may be denied a bankruptcy FALL 2012 t 17