947 F.2d 419 (9th Cir. 1991), 90-15252, Pitrat v. Garlikov

Docket Nº:90-15252.
Citation:947 F.2d 419
Party Name:Claude PITRAT, Trustee, Kendrick M. Mercer, P.C., and First Interstate Leasing Service Corporation, Movants-Appellees, v. Ronald S. GARLIKOV and Reda S. Garlikov, Respondents-Appellants. Stanley W. FOGLER, Trustee, First Interstate Leasing Service Corp., and Kendrick M. Mercer, Movants-Appellees, v. Richard James FLINDALL, Respondent-Appellant.
Case Date:October 25, 1991
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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Page 419

947 F.2d 419 (9th Cir. 1991)

Claude PITRAT, Trustee, Kendrick M. Mercer, P.C., and First

Interstate Leasing Service Corporation, Movants-Appellees,

v.

Ronald S. GARLIKOV and Reda S. Garlikov, Respondents-Appellants.

Stanley W. FOGLER, Trustee, First Interstate Leasing Service

Corp., and Kendrick M. Mercer, Movants-Appellees,

v.

Richard James FLINDALL, Respondent-Appellant.

No. 90-15252.

United States Court of Appeals, Ninth Circuit

October 25, 1991

        Argued and Submitted July 16, 1991.

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[Copyrighted Material Omitted]

Page 421

        Carolyn J. Johnsen and Joseph A. Schenk, Herbert, Schenk, Johnsen & Dake, Phoenix, Ariz., for respondents-appellants.

        John Friedeman, Phoenix, Ariz., for movant-appellee Pitrat.

        Charles W. Lowe, Davis & Lowe, Phoenix, Ariz., for movant-appellee Fogler.

        Appeal from the United States District Court for the District of Arizona.

        Before CHOY and SNEED, Circuit Judges, and KELLEHER, District Judge. [*]

        CHOY, Circuit Judge:

        In this opinion we analyze federal statutes, Arizona statutes, and Arizona common law to determine the protection afforded pension plans in two Chapter 7 bankruptcy cases.

       I. Factual and Procedural Background

        Ronald S. Garlikov and James Flindall filed voluntary petitions for bankruptcy protection under Chapter 7 of the bankruptcy code on April 29, 1988. Reda S. Garlikov filed a similar petition on June 1, 1988. Ronald and Reda Garlikov (Garlikov) are husband and wife. Their cases were consolidated for joint administration.

        Garlikov and Flindall (the Bankrupts) claimed that their interests in certain pension plans were either exempt from the claims of their creditors or excludable from their bankruptcy estates. Garlikov's interest in these plans was about $1,200,000. Flindall's interest in these plans was about $1,800,000. Claude Pitrat, as the bankruptcy trustee for Garlikov, and Stanley Fogler, as the bankruptcy trustee for Flindall (trustees), objected to the Bankrupts' claims of exemption and exclusion. The bankruptcy court consolidated the Bankrupts' cases for the limited purpose of determining the status of their pension plans.

        The bankruptcy court found that the plans were subject to the claims of the Bankrupts' creditors and as a result entered partial summary judgment in favor of the trustee in Garlikov's case, and summary judgment in favor of the trustee in Flindall's case. The district court also consolidated the Bankrupts' cases for the limited purpose of considering the bankruptcy court's pension ruling and summarily affirmed the bankruptcy court's decision.

        We affirm in part and vacate and remand in part.

       II. Standard of Review

        We review a grant of summary judgment de novo to determine whether,

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viewing the evidence in the light most favorable to the nonmoving party, there are any genuine issues of material fact and whether the trial court correctly applied the relevant substantive law. Tzung v. State Farm Fire and Casualty Co., 873 F.2d 1338, 1339-40 (9th Cir.1989).

       III. Discussion

        The commencement of a Chapter 7 bankruptcy case creates an estate. Virtually all of a debtor's property becomes the property of the estate and thus subject to the claims of the debtor's creditors. 11 U.S.C. § 541. Two sections of the Bankruptcy Code, 11 U.S.C. § 522 and 11 U.S.C. § 541(c)(2), allow a debtor to retain assets which would otherwise be subject to his creditors' claims. Section 522 does this by exempting certain property from the bankruptcy estate which has entered the estate, 1 and section 541(c)(2) accomplishes this by excluding certain property from the estate--the property never enters the estate. 2 Goff v. Taylor, 706 F.2d 574, 579 (5th Cir.1983).

  1. Exclusion Pursuant to Section 541(c)(2).

            1. ERISA as Applicable Nonbankruptcy Law.

            The Bankrupts, relying on 11 U.S.C. § 541(c)(2), claim that their interests in their pension plans are excludable from the property of their bankruptcy estates. They argue that the anti-alienation and anti-assignment provisions of 29 U.S.C. § 1056(d)(1) (Employee Retirement Income Security Act (ERISA)) and 26 U.S.C. § 401(a)(13) (Internal Revenue Code (I.R.C.)), which are incorporated into their respective pension plans, 3 are transfer restrictions enforceable under "applicable nonbankruptcy law," as that term is used in section 541(c)(2) and thus enforceable against the bankruptcy trustee. The Bankrupts claim that these transfer restrictions prevent their plans from being included in the bankruptcy estate. See Forbes v. Lucas (In re Lucas), 924 F.2d 597 (6th Cir.1991) (ERISA anti-alienation provisions enforceable against bankruptcy trustee); John Hancock Mutual Life Insur. Co. v. Watson (In re Kincaid), 917 F.2d 1162, 1169 (9th Cir.1990) (Fletcher, J., concurring) (same); Anderson v. Raine (In re Moore), 907 F.2d 1476 (4th Cir.1990) (same).

            In Daniel v. Security Pac. Nat'l Bank (In re Daniel), 771 F.2d 1352, 1360 (9th Cir.1985), cert. denied, 475 U.S. 1016, 106 S.Ct. 1199, 89 L.Ed.2d 313 (1986), a panel of this court held:

    [T]he phrase 'applicable non-bankruptcy law' in 11 U.S.C. § 541(c)(2) was intended to be a narrow reference to state 'spendthrift trust' law and not a broad reference to all other laws, including ERISA and IRC, which prohibit alienation. Therefore, the ERISA and IRC anti-alienation provisions in debtor[']s pension and profit sharing plan does [sic] not create a Federal non-bankruptcy exclusion under 11 U.S.C. § 541(c)(2).

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            The Bankrupts recognize that their argument requires reversal of Daniel. They direct us to several recent Supreme Court decisions which they argue suggest Daniel should be reversed. See Guidry v. Sheet Metal Workers Nat'l Pension Fund, 493 U.S. 365, 110 S.Ct. 680, 107 L.Ed.2d 782 (1990) (ERISA prohibitions against assignment and alienation of pension benefits prohibit imposition of constructive trust); United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (creditor in bankruptcy proceeding entitled to post-petition interest on nonconsensual over secured claim); Mackey v. Lanier Collection Agency & Service, Inc., 486 U.S. 825, 108 S.Ct. 2182, 100 L.Ed.2d 836 (1988) (ERISA pre-empts state law which relates to ERISA-covered plans).

            We have reviewed these decisions and are convinced that we are bound by Daniel. Cf. Kincaid, 917 F.2d at 1166 (no Supreme Court case contradicts Daniel's holding that ERISA trusts must look to state spendthrift law for protection in bankruptcy).

            2. The Plans as Spendthrift Trusts.

            The Bankrupts claim that the bankruptcy court erred in finding that their plans should be included in the property of their bankruptcy estates because the plans qualify as spendthrift trusts under Arizona law. 4 They claim that the bankruptcy court did not have sufficient facts before it to conclude that they were the settlors of their plans or that there were insufficient restrictions on their control over the plans. See generally, Restatement (Second) of Trusts §§ 153, 156 (1957).

            The trustee in Garlikov's case claims that the following facts entitle him to summary judgment that Garlikov's plans were not spendthrift trusts under Arizona law. 5 Garlikov owns 100% of Ronald S. Garlikov, Inc. (RSG), the settlor of the RSG, Inc. plan, in which Garlikov's interest is about $1,000,000. Dr. Garlikov is one of six participants in the plan. Dr. Garlikov is also a trustee of the plan and has taken loans totaling $50,000 from the plan. Dr. Garlikov owns 50% of Southwest Eye Surgeons, Ltd. (SES), the settlor of the SES, Ltd. plan, in which Garlikov's interest is $150,000. Dr. Garlikov is a trustee of the plan and has the power to write checks on the plan.

            The trustee in Flindall's case claims that the following facts entitle him to summary judgment that Flindall's plans were not spendthrift trusts under Arizona law. Flindall is the president and sole shareholder of Retinal Consultants of Arizona, Ltd. (RCA), the settlor of the RCA plan, in which Flindall's interest is about $100,000. Flindall is the sole trustee of the RCA plan and has taken a loan of $47,000 from the plan. Flindall is the president of and owns 50% of the stock of Southwest Retina Vitreous Consultants, Ltd., (SRVC), the settlor of the SRVC plan, in which Flindall's interest is about $1,200,000. Flindall is the sole trustee of the plan and has taken a loan of $47,000 from the plan. Flindall also loaned $280,000 from the plan to Garlikov. Flindall is the sole trustee of the Southwest Retinal Consultants, Ltd. plan, in which his interest is about $500,000. He has taken a loan of $47,000 from the plan.

            The trustees did not include the documents which established the plans in their motions for summary judgment. Thus the record in this case does not indicate what the terms of the plans are.

    1. Applicable Law

              The Bankrupts agree with the trustees that, at the time of their bankruptcies, Arizona had no spendthrift trust statute which applied to them. 6 The parties also agree

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      that Arizona courts will look to the Restatements of the Law where there is no authority to the contrary. Litchfield v. Nolden (In re Fitzsimmons), 896 F.2d 373, 375 (9th Cir.1990).

    2. Analysis

              Generally the assets of a debtor are reachable by his creditors. This rule is based on two principles. The first is an intuitive moral notion that persons should be required, when they have the funds, to pay their debts. The second is that it will be too costly for sellers to investigate all seemingly affluent buyers to see if their assets are protected against creditors. Thus the spendthrift...

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