In re O’Malley: Bankruptcy Exemptions, Pension Plans, and Section 409A

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Gregory W. Mitchell

Gregory W. Mitchell



Gregory Mitchell joins Freeman Law to lead its bankruptcy practice. Mr. Mitchell is a native of the Dallas area, graduating from Southern Methodist University with a Bachelor’s Degree in Economics in 1991 and with his J.D. in 1994. In 1995, he obtained an LL.M. in Taxation from New York University. Mr. Mitchell currently directs the SMU Dedman School of Law’s federal taxpayer clinic. Mr. Mitchell’s background in tax makes him a natural fit for Freeman Law.

Prior to joining Freeman Law, Mr. Mitchell was the managing partner of The Mitchell Law Firm, L.P., a small firm he started in 2004, where he ran a diverse practice primarily focused on bankruptcy, tax and related litigation matters.

Prior to starting his own firm, Mr. Mitchell served as a Partner and General Counsel with Tax Automation, L.P., a national tax consulting firm. Mr. Mitchell was previously the National Director of Tax Technology at Ryan & Company, a national tax consulting practice, as well as a Senior Manager with KPMG, a “Big Four” accounting firm.

This post covers the recent case of In re O’Malley, 127 AFTR 2d 2021-XXXX (DC IL) (March 2, 2021).


In this case, the Debtor failed to disclose a retirement plan in his initial bankruptcy schedules in a case originally filed in March, 2013.  At the creditor meeting, the Debtor disclosed the existence of an interest in a MetLife defined benefit pension plan, and committed to amending his schedules to include that interest.  Subsequently, the Debtor did in fact amend his schedules to list a single “Met Life Defined Benefit Pension Plan” of “Unknown” value and proceeded to claim 100% of its value as exempt from the estate under an Illinois law that protects pension benefits.  Following the conclusion of the creditor meeting, neither the Trustee nor any creditor objected to the exemption claimed by Mr. O’Malley for the pension plan disclosed in the amended schedules.

As it turns out, the Debtor participated in not one, but two MetLife plans established under separate plan documents.  The first was the “Metropolitan Life Retirement Plan for United States Employees,” (the “Traditional Plan”), and the second was the “MetLife Auxiliary Pension Plan,” (the “Auxiliary Plan”), which was completely unfunded and entirely separate from the Traditional Plan.  The former was designed to comply with ERISA restrictions and Internal Revenue Code provisions governing tax-qualified pension plans, while the latter was designed to avoid restrictions imposed by ERISA and provide deferred compensation above the levels eligible for tax-qualified status.  The Auxiliary Plan instead was designed to comply with § 409A of the IRC, 26 U.S.C. § 409A, which imposes certain requirements on nonqualified deferred compensation plans.

O’Malley was to start receiving benefits under the Auxiliary Plan on August 1, 2015, while his bankruptcy case remained pending.  Approximately three months prior to that, the Debtor had received certain distribution options, which generally determined how much O’Malley would receive in his lifetime versus how much his beneficiaries would receive upon his death.  O’Malley chose the option that provided the largest benefit to his beneficiary – Zellmer, whom he had married in June, 2015.  However, O’Malley had not sought bankruptcy court approval to make the election available under the Auxiliary Plan.  In July, 2016, MetLife received a “turnover letter” from the Trustee claiming the Auxiliary Plan benefits for the bankruptcy estate.  By that time, however, the Auxiliary Plan had paid out at least $47,000.00 in benefits to Zellmer.  The Trustee demanded return of those benefits paid to Zellmer; both the Debtor and Zellmer refused, leading to the filing of the adversary that forms the basis of this case.

In the adversary proceeding, the Trustee asserted that O’Malley’s interest in the Auxiliary Plan was property of the bankruptcy estate and that all its proceeds should be returned to the estate.  The Trustee also sought to nullify O’Malley’s election of the 100% contingent survivor annuity (that benefited Zellmer) and to elect an alternate distribution that would maximize the value of the Auxiliary Plan to O’Malley and hence to the estate.  Both parties moved for summary judgment.  However, while the summary judgments were pending, on May 10, 2019, Mr. O’Malley died.

On May 23, 2019, the bankruptcy Court issued its opinion.  The court ruled that because O’Malley failed to disclose the Auxiliary Plan on his Schedule C, the Trustee did not waive her challenge to the Plan’s exemption from the estate. 601 B.R. at 640. The court then ruled that the Auxiliary Plan in fact was not exempt and thus passed into the estate. Id. at 648-49. The court also held that the Trustee was entitled to avoid O’Malley’s election of the 100% contingent survivor annuity. 601 B.R. at 653-54. However, agreeing in part with MetLife (who, other than arguing this issue, was neutral throughout the adversary), the court held that the Auxiliary Plan’s terms precluded the Trustee from affirmatively making a new election, and therefore that the Plan would revert to the default 50% contingent survivor annuity.

In the meantime, during and after the Bankruptcy Court issued its summary judgment ruling, some negotiations had occurred whereby the Trustee sought to enter into a compromise with Zellmer that involved the Bankruptcy Court essentially undoing its summary judgment ruling that had already been entered.  O’Malley’s death had changed the economic analysis of the case, and it became in the Trustee’s best interests (and the interests of the estate) that Zellmer obtain the 100% contingent survivor annuity.  It was going to allow her to fund a settlement with the Trustee, while also receiving a larger annuity payment for the rest of her life.  MetLife objected to the attempted settlement and attempt to undo the Bankruptcy court’s ruling because it would be left having to fund a larger payout than it would have under the Court’s original summary judgment ruling.  Ultimately, the Bankruptcy Court refused to alter its summary judgment ruling, and both sides (the Trustee and the Debtor) appealed.

On appeal, the District Court refused to disturb the Bankruptcy Court’s ruling.  The District Court affirmed the Bankruptcy Court’s rationale for refusing to approve of the compromise between the Trustee and the Debtor – namely, that her decision had already been rendered.  The District Court further refused to overturn the Bankruptcy Court’s ruling that the Debtor had not claimed the Auxiliary Plan as exempt in his bankruptcy schedules.   Finally, the District Court refused to modify the Bankruptcy Court’s ruling that the default 50% contingent survivor annuity prevailed, thereby precluding Zellmer’s claim to the higher-payout 100% option.

This case can provide numerous takeaways, but the most obvious is the absolute necessity for a Debtor and their counsel to review a Debtor’s claim of exemptions in a bankruptcy case.  In this case, the Debtor’s failure to properly claim an exemption that was available to him cost his beneficiary tens, maybe even hundreds, of thousands of dollars over her lifetime.


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