Business Transaction Newsletter – March 2017

September 7th, 2017   •   Comments Off on Business Transaction Newsletter – March 2017   

KNOW THE POWER OF EXEMPTION STATUTE

 

In the case of The Bank of Nashville vs. Charles Chipman, the exemption statute exempting IRA’s from execution, TCA §26-2-105(b) allowed a Borrower’s IRA to stay exempt from execution by the Bank of Nashville even though Mr. Chipman committed fraud against the Bank with respect to obtaining a loan.  The facts in the Chipman case were that Mr. Chipman withdrew $300,000.00 from his IRA to invest in his used car business.  A couple of months later, he borrowed $300,000.00 from the Bank of Nashville (the “Bank”) to replenish those funds.  Mr. Chipman did not repay the loan at maturity.  The Bank renewed the loan for Mr. Chipman, and when the renewal came due, Mr. Chipman did not pay then either.  The Bank sued and was granted a judgment for $300,000.00, plus interest and attorney’s fees.  After the judgment was granted, the Bank filed an Amended Complaint against Mr. Chipman alleging fraud and a number of other causes of action.  The Bank sought a constructive trust on the IRA funds that the loan was used to replenish.

 

The Trial Court ruled that Mr. Chipman obtained the renewal loan by fraud, but did not obtain the original loan by fraud.  The fraud was that Mr. Chipman misrepresented his financial position when he obtained the original loan and at the time he obtained the renewal loan.  At trial, Mr. Chipman testified that the financial information provided to obtain the loan was inaccurate.  The Trial Court found Mr. Chipman knew about the misrepresentations and allowed the loan to proceed because he was desperate to replenish his IRA in order to prevent a $90,000.00 taxable event from occurring.

 

The Court of Appeals reversed the Trial Court in part, finding that the Bank reasonably relied upon the misrepresentations by Mr. Chipman and found that Mr. Chipman committed fraud upon the Bank in obtaining the original loan.  However, the Court of Appeals did not impose a constructive trust on Mr. Chipman’s IRA funds.  The Court of Appeals pointed out that to establish a constructive trust, it must be proven that a person:  (1) obtained legal title to property in violation of some duty owed to the owner of the property; (2) obtained title to property by fraud, duress, or other equitable means; (3) made use of a confidential relationship or undue influence to obtain title to property; or (4) obtained property with notice that someone else was entitled to the property’s benefits.

 

The Bank claimed that the $300,000.00 loan proceeds were subject to a constructive trust such that Mr. Chipman never had title to the funds, but rather held the funds in trust for the Bank.  Both the Trial Court and the Court of Appeals relied on TCA §26-2-105 which exempts any funds payable to a participant in a retirement plan from “any and all claims of creditors of the participant,” except the State of Tennessee.  The Bank argued that constructive trusts can extend into exempt assets and that wrongful conduct can bar a party from asserting an exemption to stop execution or collection of a judgment.  The Court of Appeals disagreed with the Bank and wrote that the Court knew of no authority which overrides the fraud exemption cited in §26-2-105(b) under the facts of the case.

 

MY RECOMMENDATION:   Although the results in the Chipman case hardly seem fair or equitable, the powerful message from the case is to understand the power of exemption statutes.  Whether you are the person seeking to avoid a creditor, or whether you are the creditor looking for ways to collect on a debt, it is important to know how exemption statutes can have an effect on either side in a transaction such as was done in the Chipman case.

 

Yours very truly,

 

RAINEY, KIZER, REVIERE & BELL, P.L.C.

 

 

William C. Bell, Jr., Attorney at Law