Brooks, Matter of
| Citation | 844 F.2d 258 |
| Decision Date | 10 May 1988 |
| Docket Number | No. 87-1546,87-1546 |
| Parties | , Bankr. L. Rep. P 72,310 In the Matter of Jack G. BROOKS, M.D., Debtor. Jack G. BROOKS, M.D., Appellant, v. INTERFIRST BANK, FORT WORTH, et al., Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
Walker C. Friedman, Elizabeth P. Sturdivant, G. Thomas Boswell, Law, Snakard & Gambill, Ft. Worth, Tex., for appellant.
J. Robert Forshey, Susan E. Coleman, Fort Worth, Tex., for First RepublicBank.
Jared D. Giddens, Shannon Self, Oklahoma City, Okl., for Consol. Asset Management Co.
Appeal from the United States District Court for the Northern District of Texas.
Before RUBIN and POLITZ, Circuit Judges, and WALTER *, District Judge.
A medical doctor, practicing as a radiologist, filed for bankruptcy in 1985. During the bankruptcy proceedings, he attempted to exclude from the estate his interest in an Employee Retirement Income Security Act (ERISA) pension plan created by the professional association of which he is a member. The issue is whether his interest in the plan is protected from the claims of the bankrupt doctor's creditors because it is a valid spendthrift trust under Texas law. We agree with the district court and the bankruptcy court, 60 B.R. 155, that the trust is not a spendthrift trust and the doctor's interest in its assets is therefore property of the debtor's estate.
Jack G. Brooks, a doctor of medicine specializing in diagnostic radiology, practices his profession as one of 32 radiologists who are members of a Texas professional association, Radiology Associates of Fort Worth. Although Dr. Brooks has substantial income from his medical practice, he suffered losses from investments in oil, gas, and racehorses. Consequently, he filed a Chapter 11 proceeding in August, 1985, listing, among other debts, $353,000 due to Interfirst Bank of Fort Worth and $940,000 due to First National Bank and Trust Company of Oklahoma City. The Consolidated Asset Management Company replaced First National Bank and Trust in this litigation when the latter went into receivership and the Federal Deposit Insurance Corporation named Consolidated Asset Management Company as its agent and administrator. Dr. Brooks contends that his vested interest in an ERISA-qualified trust established by Radiology Associates is not an asset of his estate. Interfirst Bank and Consolidated Asset Management Company challenge this position, seeking to reach his interest in the trust.
Equity ownership in Radiology Associates is limited by law to professionals, and the 32 doctors each own one share of its common stock. In addition to the doctors, Radiology Associates employs approximately 90 persons as support personnel. The doctors who are members of Radiology Associates practice at six hospitals in the Fort Worth/Tarrant County area, the doctors at each hospital forming a cluster or group within the Association. Because of the nature of the Association's arrangements with the hospitals, which furnish all of the major equipment the doctors use, the Association has few tangible assets.
The doctors serve on a rotating basis on the Board of Directors that governs Radiology Associates. A six-member Executive Committee manages the Association, makes determinations regarding financial matters, and sets the salaries paid to the members. One doctor from each cluster is elected to the Executive Committee, membership being rotated on a periodic basis. Dr. Brooks has been a member of the Executive Committee and a Director.
At the end of the calendar year, the Executive Committee fixes the Association's budget for the next calendar year. The Executive Committee determines the Association's estimated income, its estimated expenses, and the amount left over after paying expenses. It then makes the maximum contribution allowed by the ERISA statute to the profit sharing plan: 15% of a member's compensation, not to exceed $30,000 a year, in addition to a contribution for the qualified non-medical personnel. The Committee then divides the remaining amount by the number of doctor-associates to arrive at the compensation each will receive during the next calendar year. In some years, the compensation distributed to the doctor-associates has been less than the original estimate, but the Association has contributed to the profit-sharing plan the $30,000 maximum for each doctor every year. The result of this process is that the Association distributes all of its net profit to the doctor-associates annually and has never distributed any dividends.
Aside from contributions to the plan for his benefit, the Association paid Dr. Brooks these amounts for the calendar years 1982 through 1985:
Year Amount
1982 $224,250
1983 249,197
1984 228,072
1985 242,000
Dr. Brooks's vested interest in the plan on December 31, 1984, was $495,139.52. The vested balance as of December 31, 1985, was $645,123.09.
Interfirst Bank, one of Dr. Brooks's creditors, is trustee for the profit-sharing plan, which is administered by an Advisory Committee composed of five doctor-associates. As is the case with other Association committees, each doctor serves on the Advisory Committee in turn. The plan requires that contributions be used "for the exclusive benefit of the Participants and their beneficiaries," forbidding any reversion to the Association "under any circumstances." The plan permits each participant to direct the trustee to invest contributions for his account in any of a number of mutual investment plans maintained by the trustee. A doctor-participant may also direct that contributions on his behalf go to pay premiums on a life insurance policy, but Dr. Brooks has never chosen this option. If a participant terminates his employment with the Association after he has been employed for three years, he is entitled to receive "the entire amount then standing to his credit" in the account.
The Profit-Sharing Plan may direct the trustee to make a loan to any participant "upon such terms as the Committee deems appropriate in an amount not exceeding a certain percentage of the amount then to the credit of his account." Loans are reserved for "hardship cases": If the participant presents evidence that the loan is "clearly necessary," he may borrow, for example, to pay medical expenses arising out of an accident or illness, to meet his family's educational needs, or to finance home improvements or mortgage retirement.
Bankruptcy Code Sec. 541 defines property of the bankruptcy estate as including, inter alia, "all legal or equitable interests of the debtor in property as of the commencement of the case," 1 but not property that is subject to "[a] restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law." 2
In Matter of Goff 3 we held that "Congress intended by its reference to 'applicable nonbankruptcy law' to exempt from the estate only those 'spendthrift trusts' traditionally beyond the reach of creditors under state law." We determined that, although ERISA-qualified plans must contain anti-alienation provisions, 4 such provisions do not of their own force shelter pension funds from inclusion in the bankruptcy estate and we set forth some of the tests for determining whether ERISA-plan funds are excluded. Unless the debtor elects to claim the federal exemptions, as the Bankruptcy Code permits, 5 the question is whether the funds in the ERISA plan are protected from creditors under the law of the state that governs the trust, 6 here Texas.
Looking to Texas law in Goff, as we must here, we concluded that, if a settlor creates a trust for his own benefit, his creditors may reach the trust despite the settlor's effort to shelter that interest by inserting a spendthrift clause in the trust document. 7 The Texas Property Code provides:
If the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest does not prevent his creditors from satisfying claims from his interest in the trust estate. 8
The Texas rule is consistent with the general American rule, as set forth in Sec. 156 of the Restatement of Trusts, Second. 9 Holding self-settled Keogh plans not excluded, we referred in Goff to the settlors' powers to withdraw the assets of the trust while attempting to insulate those assets from their creditors and the ability of the debtors "immediately after discharge of all debts [to] withdraw such funds for their own benefit." 10
After our decision in Goff, Texas amended its property code, effective September 1, 1987, to exempt the assets of all plans qualified under federal tax law. 11 The statute does not, however, purport to be retroactive, so we look to Texas law as it stood in August, 1985, to determine the character of Dr. Brooks's interest in the ERISA trust.
In essence, Dr. Brooks's argument is simple: he is but one of 32 doctors who are members of the Association; he has only one of 32 votes in electing members of its Board; the Association established the profit-sharing plan before he joined its ranks; he does not determine the amount of the annual contributions to the plan; he is not therefore its settlor; and, if he is not the settlor, the trust created pursuant to the plan is a spendthrift trust, excluded from the assets of his bankruptcy estate and insulated from the claims of his creditors.
The parties cite no Texas case and we have found none addressing the question whether a member of a professional association may shield from his creditors his interest in an ERISA plan established by the association. Dr. Brooks, however, seeks to have us deduce a rule from cases he considers similar. He cites Hines v. Sands 12 for the proposition that an employer may establish a valid spendthrift trust for an employee even if the employee is allowed limited access to the trust, for instance through borrowing. ...
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