Woman May Pursue Claim of IRA Exclusion in Bankruptcy

October 16, 2006 (PLANSPONSOR.com) - The Bankruptcy Appellate Panel for the Ninth Circuit has ruled that a woman whose claims that an individual retirement account (IRA) was exempt from the bankruptcy estate were denied, may now pursue her claim that the IRA was not property of the estate.

At issue before the panel was whether denial of Susan Cogliano’s claims of exemption of the IRA created an issue of preclusion barring her from now asserting that the IRA she established with money from her ex-husband’s pension was not property of the estate. Cogliano argued that, even though she amended her schedule of personal property twice expressly to claim the exemption of the IRA, she had not needed to since the IRA was not property of the estate under Section 541 of the bankruptcy code.

In its opinion the appellate panel noted that, in denying her first amended exemption claim, the bankruptcy court did not analyze whether the IRA was a qualified plan which is exempt if it meets the requirements of California law. The court appeared to have based its denial on the alleged concealment of the IRA by Cogliano. However, according to the appellate panel, it was never determined that Cogliano concealed the IRA.

“As there has been no showing that the property of the estate issue was in fact litigated, there is no issue preclusion,” the opinion said. The appellate panel remanded the proceedings back to the lower court for determination of whether on her bankruptcy petition date, the funds Cogliano recovered from her ex-husband were in a plan or trust subject to an enforceable restraint on transfer or alienation, and thus excludable from the bankruptcy estate.

The appellate panel determined there was an issue of preclusion on the exemption of the IRA from the bankruptcy estate if it is found to be property of the estate. Since Cogliano did not appeal the previous findings that the IRA is not exempt, if the bankruptcy court finds that the IRA is property of the estate, its findings that it is not exempt will hold.

Cogliano filed her bankruptcy petition three years after her divorce. The divorce decree allowed for Cogliano to receive a portion of her ex-husband’s pension assets in monthly payments or in a lump sum if he chose a lump-sum payment of benefits. Cogliano’s schedule of personal property included the monthly pension payments though she had not yet received any.

Following her grant of discharge in bankruptcy, Cogliano learned her ex-husband had retired and received a lump-sum distribution of benefits. She filed a court motion to enforce the divorce decree and received her half of his benefits, which she placed in an IRA.

Upon learning of the IRA, the bankruptcy trustee filed a claim that the IRA be turned over, saying that Cogliano hid the assets. Cogliano was ordered to turn over the IRA, but twice filed amended schedules of personal property claiming exemption. Both claims were denied. Cogliano then pursued a claim that the IRA was not property of the bankruptcy estate, which the lower court said could not be pursued on the issue of preclusion.

The case is Cogliano v. Anderson.