Graham, In re, 82-2477

Decision Date20 January 1984
Docket NumberNo. 82-2477,82-2477
Citation726 F.2d 1268
Parties10 Collier Bankr.Cas.2d 111, 11 Bankr.Ct.Dec. 626, Bankr. L. Rep. P 69,705, 5 Employee Benefits Ca 2573 In re Charles W. GRAHAM, Debtor. Edward F. SAMORE, Trustee, Appellee, v. Charles W. GRAHAM, Trustee of the Charles W. Graham, M.D. Ltd. Profit Sharing Plan Trust, Appellant.
CourtU.S. Court of Appeals — Eighth Circuit

Robert L. Fanter, Rodney P. Kubat, Dennis D. Ballard, Whitfield, Musgrave, Selvy, Kelly & Eddy, Des Moines, Iowa, for appellant.

Donald H. Molstad, Shuminsky, Shuminsky & Molstad, Sioux City, Iowa, for appellee.

Before BRIGHT and McMILLIAN, Circuit Judges, and NICHOL, * Senior District Judge.

McMILLIAN, Circuit Judge.

Charles W. Graham is the debtor in this Chapter 7 bankruptcy case. Graham was also the trustee of an ERISA profit sharing plan in which he has an interest. Graham now appeals from a final order of the Bankruptcy Court for the Northern District of Iowa 1 ordering him to turn over plan trust funds for inclusion in the bankruptcy estate and denying his claimed exemption. For reversal appellant argues that the anti-alienation provision in the trust instrument, required by the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. Sec. 1056(d)(1) (1976), excludes the trust funds from the bankruptcy estate under the new Bankruptcy Code, 11 U.S.C. Sec. 541(c)(2) (Supp. V 1981), or alternatively, that ERISA creates an exemption for the trust funds under Sec. 522(b)(2)(A) of the Bankruptcy Code. For the reasons discussed below, we conclude that the debtor's interest in the trust funds is property of the bankruptcy estate and that an exemption may not be claimed under 11 U.S.C. Sec. 522(b)(2)(A). Accordingly, we affirm the order of the bankruptcy court.

The debtor, Charles W. Graham, filed a voluntary Chapter 7 petition in bankruptcy on April 24, 1981. Graham was the sole stockholder, director and officer of Charles W. Graham, M.D., Ltd., a professional corporation that derived its earnings from Graham's services as a physician. In September 1970, the corporation established a profit sharing retirement plan for its employees. The plan was amended in November 1976 to meet the requirements of ERISA and to qualify for tax purposes under the Internal Revenue Code, 26 U.S.C. Sec. 401(a). The corporation had only two employees during its existence, Graham and Wayne Ryan, both of whom were participants in the ERISA plan.

Employer contributions to the trust were made for each taxable year from the corporation's net profits in the amount deemed advisable by the board of directors. Each participant was allocated that percentage of the corporation's contribution which his salary represented of the total salaries paid for that year. In addition, each participant could make voluntary contributions to the trust for his own benefit. On the date the bankruptcy petition was filed, Graham's fully vested accrued benefits under the plan were $150,000.00, attributable to corporation contributions on his behalf.

The written plan agreement provided that a participant's nonforfeitable accrued benefits would be distributed by one or more of three methods, as life annuity income, as fixed period installments, or as a lump sum payment, and that distribution would begin not later than the 60th day after the close of the plan year in which the participant reaches age 65, or terminates services with the employer. If a participant terminated employment prior to attaining age 65, it was within the sole discretion of the "Advisory Committee" whether to commence distribution of the participant's benefits after the close of that plan year, or whether to continue to hold the benefits until after the close of the Plan Year in which the participant turns 65. The Advisory Committee consisted of the corporation's board of directors. Thus, as the sole director, Graham was also the sole member of the Advisory Committee.

The plan agreement also contained the following antialienation clause: "The participant ... shall not assign or alienate any benefit provided under the Plan, and the Trustee shall not recognize any such assignment or alienation." The trustee was empowered to make a loan to a participant provided the loan was secured by the nonforfeitable portion of the participant's accrued benefit.

Ryan terminated employment with the corporation after approximately four years of service. The Advisory Committee decided not to distribute his benefits at that time, but to continue to hold them in trust until Ryan reached 65. The record does not indicate the amount of Ryan's accrued benefits.

On April 21, 1981, three days before Graham filed for bankruptcy, the discretionary distribution provision of the ERISA plan was amended at a special meeting of the board of directors to provide that benefits under the plan were not payable to a participant except upon total disability or attainment of the age of 65. On April 24, 1981, the date of the petition in bankruptcy, Graham terminated his employment with the corporation, and on June 21, 1981, he resigned from the positions of officer and director. On July 10, 1981, the bankruptcy trustee was elected sole director of the corporation and, in that capacity, rescinded the April 21 amendment to the distribution provision, retroactive to April 24, 1981.

The bankruptcy trustee then filed a complaint against Graham, as trustee of the corporation's ERISA plan, requesting the bankruptcy court to order the turnover of the debtor's accrued benefits under the plan for inclusion in the bankruptcy estate. On October 18, 1982, the bankruptcy court issued its order, with findings of fact and conclusions of law, holding that Graham's interest in the funds was nonexempt property of the estate and ordering its turnover. In re Graham, 24 B.R. 305 (Bkrtcy.N.D.Iowa 1982).

Graham's first point on appeal is that his interest in the pension plan created by his employer was excluded from his bankruptcy estate under Sec. 541(c)(2) of the Bankruptcy Code as a property interest subject to a restriction on alienation "enforceable under applicable nonbankruptcy law." 11 U.S.C. Sec. 541(c)(2).

The filing of a Chapter 7 bankruptcy petition creates an estate comprised of "all legal and equitable interests of the debtor in property as of the commencement of the case." Id. Sec. 541(a)(1). The legislative history of this section clearly establishes Congressional intent that the bankruptcy estate be as all-encompassing as the language indicates.

The scope of the paragraph is broad. It includes all kinds of property, including tangible and intangible property, causes of action ... and all other forms of property specified in Section 70(a) of the Bankruptcy Act.... [I]t includes as property of the estate all property of the debtor, even that needed for a fresh start.

S.Rep. No. 989, 95th Cong., 2d Sess. 823, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5868; H.R.Rep. No. 595, 95th Cong., 1st Sess. 367-68 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 6322-24.

An exception to this broad definition of the estate is set forth in paragraph (c) of Sec. 541. Section 541(c)(1) provides generally that restrictions on the transfer of the debtor's interest in property will not prevent inclusion of such a property interest in the estate. Subparagraph (2) states the following exception to this rule: "A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title." 11 U.S.C. Sec. 541(c)(2).

Graham argues that "applicable nonbankruptcy law" includes ERISA which has been construed as precluding garnishment of benefits under a qualified plan by a general creditor of a plan beneficiary. See General Motors Corp. v. Buha, 623 F.2d 455 (6th Cir.1980) (Buha); Commercial Mortgage Insurance, Inc. v. Citizens National Bank, 526 F.Supp. 510 (N.D.Tex.1981) (Commercial Mortgage ). Thus, Graham argues, the anti-alienation clause in the plan, required by ERISA, 29 U.S.C. Sec. 1056(d)(1), is a restriction on the transfer of his interest in the trust funds which would be enforceable against general creditors under nonbankruptcy law, and is therefore enforceable against the bankruptcy trustee.

The change in the scope of property of the estate effectuated by the new Bankruptcy Code, the legislative history of Sec. 541(c)(2), the exemption provisions of the Code and the preemption provision of ERISA all convince us that Congress did not intend "applicable nonbankruptcy law" to include ERISA. Rather, Congress only intended by Sec. 541(c)(2) to preserve the status traditional spendthrift trusts, as recognized by state law, enjoyed under the old Bankruptcy Act.

In general terms, a spendthrift trust is one in which the right of the beneficiary to future payments of income or capital cannot be voluntarily transferred by the beneficiary or reached by his or her creditors. There is a conflict of authority among the states on the question of the validity of such trusts and on the extent to which a beneficiary's right to future income and principal can be protected. See 2 A. Scott, The Law of Trusts Sec. 151 (3d ed. 1967); G. Bogert, Handbook of the Law of Trusts Sec. 40 (5th ed. 1973).

Under the old Bankruptcy Act, property of the estate was defined in terms of its transferability or leviability. Section 70(a)(5) of the old Act provided that the trustee of the estate was vested by operation of law with the title of the bankrupt in "property ... which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him, or otherwise seized, impounded, or sequestered." 11 U.S.C. Sec. 110(a)(5) (repealed 1978). Exempt property constituted one class of property which expressly did not pass to the trustee.

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