706 F.2d 574 (5th Cir. 1983), 82-1015, Matter of Goff

Docket Nº:82-1015.
Citation:706 F.2d 574
Party Name:4 Employee Benefits Ca 1653 In the Matter of Elbert Wayne GOFF and Wife, Gloria Jane Schadoer Goff, Debtors. Elbert Wayne GOFF and Wife, Gloria Jane Schadoer Goff, Appellants, v. Vince TAYLOR, Trustee in Bankruptcy, et al., Appellees.
Case Date:June 06, 1983
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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706 F.2d 574 (5th Cir. 1983)

4 Employee Benefits Ca 1653

In the Matter of Elbert Wayne GOFF and Wife, Gloria Jane

Schadoer Goff, Debtors.

Elbert Wayne GOFF and Wife, Gloria Jane Schadoer Goff, Appellants,


Vince TAYLOR, Trustee in Bankruptcy, et al., Appellees.

No. 82-1015.

United States Court of Appeals, Fifth Circuit

June 6, 1983

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[Copyrighted Material Omitted]

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William C. Davidson, Jr., Austin, Tex., for appellants.

Robert W. Swanson, Austin, Tex., for Vince Taylor, Trustee.

Adrian Overstreet, Mark T. Mitchell, Austin, Tex., for Creditor's Committee.

Appeal from the United States Bankruptcy Court for the Western District of Texas.

Before JOHNSON, WILLIAMS and JOLLY, Circuit Judges.

JERRE S. WILLIAMS, Circuit Judge.

This appeal is from a final order of the Bankruptcy Court for the Western District of Texas. 1 It presents a new facet of the question whether, and under what circumstances, a bankrupt's pension trust may be exempt from the "property of the estate" subject to the reach of the trustee in bankruptcy on behalf of the bankrupt's creditors. Debtors, Elbert Wayne Goff and Gloria Jane Schadoer Goff, seek refuge for their self-employed retirement (Keogh) plans 2 under Section 541(c)(2) of the new Bankruptcy Code, 3 which exempts property subject to restrictions on alienation which are enforceable "under applicable nonbankruptcy law." The Goffs argue that this reference to "applicable nonbankruptcy law" was intended to reach broadly by encompassing restrictions on transfer recognized in other federal statutory law as well as traditional state trust law. Their argument presents a question of first impression to this Court. The contention is that Section 541(c)(2) exempts all pension trusts which are qualified under the Employee Retirement Income Security Act of 1974 (ERISA), 4 because of ERISA's restrictions

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on assignment and alienation of qualified trusts. 26 U.S.C. Sec. 401(a)(13); 29 U.S.C. Sec. 1056(d)(1). For the reasons set out below, we conclude that Congress did not intend Section 541(c)(2) to have the extensive reach urged by appellant-debtors and that ERISA's anti-alienation provisions do not operate by their own force to shelter pension funds in bankruptcy.

Debtors, husband and wife, filed a voluntary joint petition in bankruptcy, under Chapter 7 of the Code, on March 20, 1980. Pursuant to Section 522(b)(2)(A), 11 U.S.C. Sec. 522(b)(2)(A), they elected to avail themselves of the state rather than the federal (11 U.S.C. Sec. 522(d)) bankruptcy exemptions, presumably because of the high equity value of their homestead which could be retained under Texas law but not the federal law. Tex.Stat.Ann. art. 3833, 3836 (Vernon 1966 & Supp.1982-1983). 5

The subjects of this appeal are the Goffs' self-employed retirement trusts (Keogh Plan), administered by City National Bank pursuant to an ERISA-qualified pension plan. 6 At the time of the proceedings below, the Keogh trusts were valued at over $90,000, including a $2,878 contribution made by the Goffs only three days prior to declaration of bankruptcy.

The trust agreement provided:


Neither the assets nor the benefits provided hereunder shall be subject to alienation, anticipation, assignment, garnishment, attachment, execution or levy of any kind, and any attempt to cause such benefits to be so subjected shall not be recognized, except to such extent as may be required by law.

No withdrawals were ever made although the trust agreement arguably granted Dr. Goff the right to withdraw funds prematurely, i.e., prior to either retirement, sale or termination of his business, or death, subject only to the ten percent tax penalty exacted by the Internal Revenue Code, 26 U.S.C. Sec. 72(m)(5). The Goffs excluded these Keogh trusts from the "property of the estate" to be relinquished in bankruptcy. 11 U.S.C. Sec. 541.

After the creditors' committee opposed a compromise proposed by the trustee in bankruptcy, 7 the bankruptcy court entered its Memorandum Order and Opinion from which this appeal was taken. The court denied the trustee's application to compromise, and held that the corpus of both trusts were to be considered "property of the estate," as they were not subject to the exclusion contained in Section 541(c)(2) of the Code, 11 U.S.C. Sec. 541(c)(2), as property subject to restrictions on alienation enforceable under "applicable nonbankruptcy law." We agree. Our examination of the Bankruptcy Code's provisions and of discernible congressional intent reveals that applicable nonbankruptcy law was intended as a narrow reference to state "spendthrift trust" law and not as a broad reference to all other law, both federal and state, including ERISA.

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A. "Property of the Estate"

The Bankruptcy Code was intended to create a more uniform and comprehensive scope to "property of the estate" which is subject to the reach of debtors' creditors than had previously existed under the old Bankruptcy Act. 8 Under Section 70(a) of the earlier Act, 9 the inclusion of an asset within the estate varied in accordance with (1) an individual examination of the legal nature of the asset (2) in light of the purposes of the Bankruptcy Act. This two part test reflected the dual and often conflicting policies woven into the Act. These policies were to secure for the benefit of creditors everything of value the bankrupt might possess in alienable or leviable form, but to permit a bankrupt to accumulate new wealth after the date of his petition and to allow him an unencumbered fresh start. Relying upon these competing considerations, the Supreme Court developed a rule that where property "is sufficiently rooted in pre-bankruptcy past and so little entangled with the bankrupts' ability to make an unencumbered fresh start ... it should be regarded as 'property' [of the estate]." Segal v. Rochelle, 382 U.S. 375, 380, 86 S.Ct. 511, 515, 15 L.Ed.2d 428 (1966). See Kokoszka v. Belford, 417 U.S. 642, 646, 94 S.Ct. 2431, 2434, 41 L.Ed.2d 374 (1974) ("[T]he crucial analytical key [is] not ... an abstract articulation of the statute's purpose, but ... an analysis of the nature of the asset involved in light of those principles"); Lines v. Frederick, 400 U.S. 18, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970); Nunnally v. Nunnally, 506 F.2d 1024 (5th Cir.1975) (finding that Navy retirement benefits, under applicable Texas law, were "property" in the bankruptcy estate). See also Lockwood v. Exchange Bank, 190 U.S. 294, 23 S.Ct. 751, 47 L.Ed. 1061 (1903).

The enactment of the Bankruptcy Code undertook to obviate this analytical conundrum. Under Section 541 of the Code, all property in which a debtor has a "legal or equitable interest" at the time of bankruptcy comes into the estate, 11 U.S.C. Sec. 541(a)(1). This is so "notwithstanding any provision [except as recognized in subsection (2) ] that restricts or conditions transfer of such interest by the debtor." Id. Sec. 541(c)(1)(A). The sweeping scope of this automatic inclusion was intended to remedy much of the old Act's perceived deficiencies: "[The Act was] a complicated melange of references to State law, and [did] little to further the bankruptcy policy of distribution of the debtor's property to his creditor in satisfaction of his debts." H.R.Rep. No. 95-595, 95th Cong., 2d Sess. 175 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6136. See S.Rep. No. 95-989, 95th Cong., 2d Sess. 82, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5868. 10

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B. Exemption and Exclusions

Of relevance to the question posed herein, two sections of the Code--Sections 522 and 541(c)(2)--permit a debtor to retain certain assets which would otherwise remain subject to the reach of his creditors. The property exempted pursuant to Section 522 initially enters the estate, and is subsequently excluded pursuant to the section's provisions. By contrast, Section 541(c)(2) property never enters the estate.

1. Section 522: Exemptions

Section 522(b) permits a bankrupt a choice between a "federal" or "state" exemption system. 11 The debtor may elect to exempt either as the "federal" exemption the property set out in subsection (d) of Section 522 of the Code, or as the "state" exemptions the property specified as exempted under the law of his domicile, plus property exempted by "Federal law, other than subsection (d)." 12 The election choice of federal versus state exemptions is the debtor's to make. 13 The choice, obviously, will hinge upon the debtor's individual assessment of which exemption system would permit him to retain a larger share of his assets. This decision, in turn, will often depend upon the type of property held by the debtor, as state exemptions may vary in kind as well as degree from the federal bankruptcy exemptions.

In the immediate case, debtors selected the state exemption option, which does not provide in terms at least a partial exemption for Keogh plans as does the federal exemption. Under Section 522(d)(10)(E), 11 U.S.C. Sec. 522(d)(10)(E), a debtor who elects the federal exemption may exempt his "right to receive a payment under a ... pension ... plan ... to the extent reasonably necessary for the support of the debtor and any dependent of the debtor," unless the plan demonstrates three disqualifying characteristics. 14 The Goffs' plans did not

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contain the disqualifying characteristics and would have been covered by Section 522(d)(10)(E) to the extent "reasonably necessary" for the Goffs' support. 15

2. Section 541(c)(2): Exclusion

The second relevant code provision, Section 541(c)(2), is the focus of the immediate dispute. The claim of the Goffs is raised solely under this provision. Section 541(c)(1)(A) provides, with one caveat, that "any provision" "that restricts or conditions transfer" of property by the debtor is ineffective in bankruptcy to keep the property from...

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