Harline, In re

• Decision Date: 05 December 1991
• Docket Number: No. 90-4157,90-4157
• Citation: 950 F.2d 669
• Parties: , 25 Collier Bankr.Cas.2d 1658, 22 Bankr.Ct.Dec. 608, Bankr. L. Rep. P 74,364, 14 Employee Benefits Cas. 2009 In re Wesley G. HARLINE, Debtor. David L. GLADWELL, Trustee, Plaintiff-Appellee, v. Wesley G. HARLINE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 669

950 F.2d 669

60 USLW 2390, 25 Collier Bankr.Cas.2d 1658,

22 Bankr.Ct.Dec. 608, Bankr. L. Rep. P 74,364,

14 Employee Benefits Cas. 2009

In re Wesley G. HARLINE, Debtor David L. GLADWELL, Trustee, Plaintiff-Appellee, v. Wesley G. HARLINE, Defendant-Appellant.

No. 90-4157.

United States Court of Appeals Tenth Circuit.

Dec. 5, 1991.

Paul N. Cotro-Manes, Salt Lake City, Utah, for defendant-appellant.

Mona Lyman of McKay, Burton & Thurman, Salt Lake City, Utah, for plaintiff-appellee.

Before LOGAN, MOORE and BALDOCK, Circuit Judges.

LOGAN, Circuit Judge.

This appeal involves in an unusual context an important legal issue--whether a beneficial interest in a profit sharing trust is part of a debtor's estate under 11 U.S.C. § 541 available to satisfy creditors' claims. ¹

Wesley G. Harline (Dr. Harline) filed a petition in bankruptcy for reorganization of his affairs under Chapter 11, which was later converted to a Chapter 7 proceeding. He did not list as an asset of his estate his beneficial interest in a profit sharing trust of the Weber Clinic, Inc. On discovering the existence of that interest bankruptcy trustee David L. Gladwell sued the trustee of the profit sharing trust, the Key Bank of Utah (bank trustee), to secure Dr. Harline's interest as an asset of the bankruptcy estate. Dr. Harline became an intervening defendant and carried the burden of the litigation.

The bankruptcy court granted a summary judgment motion ordering the property to be turned over to the bankruptcy estate. On appeal the district court affirmed. Dr. Harline now seeks to obtain a determination that the profit sharing plan interest is not an asset of the estate under 11 U.S.C. § 541, either because (1) it is a valid spendthrift trust under Utah law or (2) it is exempt as a qualified Employee Retirement Income Security Act (ERISA) plan. ²

The record in this case is not as fully developed as we would like. But it appears that Dr. Harline practiced medicine in association with other doctors, now deceased, doing business as the Weber Clinic. This clinic was unincorporated at the time the profit sharing trust was established in 1960, but was asserted to be an "association taxable as a corporation." Second Amendment to Weber Clinic Profit-Sharing Trust, Respondent's Ex.Add., tab 3 at 1. In 1971 the association was "transformed into a Utah professional corporation." Id. Thereafter the trust was operated as a corporate retirement plan. The record indicates that Weber Clinic, Inc. is still a professional corporation with Dr. Harline as the sole shareholder, the sole remaining beneficiary of the plan, and the sole member of its deferred compensation committee. It is unclear from the record whether the corporation has ceased making contributions to the plan. ³ The plan's sole remaining assets, held for Dr. Harline's account, are three insurance policies with cash values totalling more than $336,000. Dr. Harline asserts that the plan is "qualified" under ERISA.

I

Section 541 of the Bankruptcy Code, 11 U.S.C. § 541, includes in the bankruptcy estate essentially all beneficial ownership interests of a debtor unless the interest contains "[a] restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law." Id. § 541(c)(2) (emphasis added). A beneficial interest in an ordinary spendthrift trust would clearly qualify for the exemption if the state courts would hold that creditors could not reach the interest. See Goff v. Taylor (In re Goff), 706 F.2d 574, 581-82 (5th Cir.1983) (detailing legislative history). Several of the circuit courts that have considered § 541(c)(2)'s applicability to interests in ERISA qualified pension and profit sharing plans have declared they are excluded from the bankruptcy estate only if they qualify as valid spendthrift trusts under state law. 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); Lichstrahl v. Bankers Trust (In re Lichstrahl), 750 F.2d 1488, 1490 (11th Cir.1985); Samore v. Graham (In re Graham), 726 F.2d 1268, 1273-74 (8th Cir.1984); Goff, 706 F.2d at 580. In the instant case, the bankruptcy and district courts accepted this reading of § 541(c)(2) and focused upon whether Utah would recognize spendthrift trusts (concluding that it would) and whether Dr. Harline's interest in the profit sharing trust qualified as a spendthrift trust (concluding that it did not). Both courts ruled that Dr. Harline's interest in the trust had to be included in his bankruptcy estate.

A

Utah has never directly approved of the spendthrift trust. Dr. Harline has moved to certify this issue to the Utah Supreme Court. Following our review of the Utah cases that do address spendthrift trusts, we are satisfied that Utah would follow the vast majority of courts which recognize traditional state law spendthrift trusts and would adopt the views of those courts as to the characteristics required to create such a trust. Therefore, we deny the motion to certify this issue.

The Utah Supreme Court apparently first considered spendthrift trusts in Cronquist v. Utah State Agricultural College, 114 Utah 426, 201 P.2d 280 (1949). Looking to authority from other jurisdictions, the court discussed their characteristics and requirements. The court held that the trust before it was not a spendthrift trust because it contained none of the traditional spendthrift trust provisions and the language of the trust failed to indicate in any way that the settlor intended to create a spendthrift trust. Id. 201 P.2d at 284. The court then said, "[t]his opinion is not to be construed as a holding by implication that spendthrift trusts are valid in Utah to any extent. As to that question, we express no opinion. It must await an occasion where a spendthrift trust was intended to be created." Id. at 285.

Nonetheless, there are strong indications that Utah would recognize spendthrift trusts. For example, in Leach v. Anderson, 535 P.2d 1241 (Utah 1975), the Utah Supreme Court, in reviewing an alleged spendthrift trust that was invalidated as violating Utah Code Ann. § 25-1-11, which makes conveyances in trust for the use of the settlor void as to his existing or subsequent creditors, stated:

"It is not to be supposed that that statute was intended to limit or interfere with other traditional and beneficial uses of trusts. That a trustor can deal generally with his property as he desires we have no doubt; and this includes placing it in an irrevocable trust, beyond his own power to reclaim, or to sell or alienate it; and may include a so-called 'spendthrift trust' provision to safeguard against improvident dissipation thereof."

Id. at 1243. See also Territorial Sav. & Loan Ass'n v. Baird, 781 P.2d 452, 456-57 (Utah App.1989). Two Utah bankruptcy court decisions, In re Martin, 115 B.R. 311, 316 (Bankr.D.Utah 1990), and In re Kerr, 65 B.R. 739, 745 (Bankr.D.Utah 1986), conclude that Utah would follow the traditional view of spendthrift trusts. Id. at 316.

B

"Traditionally, there are three requirements for a spendthrift trust: (1) the settlor may not be a beneficiary of the trust plan, (2) the trust must contain a clause barring any beneficiary from voluntarily or involuntarily transferring his interest in the trust, and (3) the debtor-beneficiary must have no present dominion or control over the trust corpus." Williams v. Board of Pensions of the Church of God, Inc. (In re Tomer), 117 B.R. 391, 394 (Bankr.S.D.Ill.1990); see Restatement (2d) Trusts §§ 153, 156 (1959). The district court concluded that the Weber Clinic trust was not a spendthrift trust because it determined that the trust was self-settled and that, as the single member of the trust's deferred compensation committee and the sole shareholder of the corporation, Dr. Harline had "complete dominion" over the trust property, following Lichstrahl, 750 F.2d at 1490. I R. tab 5 at 7.

We agree with the district court that the trust, on the particular facts before us, does not qualify as a spendthrift trust. We need not decide the questions of whether Dr. Harline is the settlor either because the trust was established before the Weber Clinic was incorporated or because Utah would disregard the corporate entity. See In re Velis, 123 B.R. 497, 509 (D.N.J.1991) (court cannot disregard corporate entity simply because debtor is sole shareholder). Like the Lichstrahl court, we believe Dr. Harline's power as the only officer, director, and shareholder of the Weber Clinic, Inc. to amend or terminate the plan is fatal to spendthrift status, particularly when he already is beyond the plan's normal retirement age and is sole member of the deferred compensation committee. Dr. Harline could take his interest in the plan without penalty and continue to practice medicine, either as a corporate employee or after dissolving the corporation. As we read the plan documents, although amendments have introduced ambiguities, Dr. Harline, having attained the age of fifty-five may request the committee (consisting of himself alone) to pay him his accumulated trust fund interest while continuing his employment. See The Weber Clinic Profit-Sharing Trust Agreement, Respondent's Ex.Add., tab 1 at 6; see also id. tab 2 at 1, 3, and tab 5 at 2.

II

A

Our conclusion that Utah state courts would not consider Dr. Harline's interest in the profit sharing trust as a valid spendthrift trust does not resolve the appeal. In his appellate brief Dr. Harline asks us to find "whether an ERISA qualified plan" is includable in his bankruptcy estate under 11 U.S.C. § 541. Appellant's Opening Brief at 2.

The bankruptcy trustee argues that this issue was not raised below and hence is not properly before us. We do not agree. We apparently do not have in the appellate record everything filed in the bankruptcy court, but the seventh issue raised in the designation...