Baker, Matter of

• Decision Date: 04 June 1997
• Docket Number: No. 96-3685,96-3685
• Citation: 114 F.3d 636
• Parties: , 37 Collier Bankr.Cas.2d 1711, Bankr. L. Rep. P 77,388, 21 Employee Benefits Cas. 1124, Pens. Plan Guide (CCH) P 23934K In the Matter of Jerome D. BAKER, Debtor. Appeal of LaSALLE BANK NI.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 636

114 F.3d 636

65 USLW 2815, 37 Collier Bankr.Cas.2d 1711,

Bankr. L. Rep. P 77,388,

21 Employee Benefits Cas. 1124,

Pens. Plan Guide (CCH) P 23934K

In the Matter of Jerome D. BAKER, Debtor.

Appeal of LaSALLE BANK NI.

No. 96-3685.

United States Court of Appeals,

Seventh Circuit.

Argued April 8, 1997.

Decided May 19, 1997.

As Amended on Denial of Rehearing June 4, 1997.

Robert Boehm, Konstantinos Armiros (argued), Boehm, Pearlstein & Bright, Chicago, IL, for Appellant.

Eugene Crane, David K. Welch (argued), Arthur G. Simon, Dannen, Crane, Heyman & Simon, Chicago, IL, for Debtor-Appellee.

Before EASTERBROOK, KANNE, and DIANE P. WOOD, Circuit Judges.

EASTERBROOK, Circuit Judge.

Jerome Baker and his family operated Bakco Data, Inc., which had a profit-sharing pension plan. When the firm encountered financial difficulties, Baker and three of his children borrowed from the plan and used the money as working capital for Bakco. Some of the checks were written directly to Bakco. The loans were not properly documented and exceeded permissible levels; the borrowers did not attempt to repay the loans; but at least disbursements did not exceed the borrowers' vested balances and did not compromise other participants' accounts. Throwing good money after bad did not work; Bakco is defunct and Baker landed in bankruptcy. The question we must decide is whether the irregular transactions mean that the funds remaining in Baker's pension account are unsheltered by ERISA's anti-alienation rule, 29 U.S.C. § 1056(d)(1). LaSalle Bank, Baker's largest creditor, asked the bankruptcy court to include Baker's pension wealth in his bankruptcy estate. Relying on Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992), Chief Bankruptcy Judge Schwartz demurred. 195 B.R. 386 (1996). District Judge Zagel affirmed, adopting Judge Schwartz's opinion, and this further appeal is within our jurisdiction under 28 U.S.C. § 158(d). In re Barker, 768 F.2d 191, 192-94 (7th Cir.1985). Barker construes former 28 U.S.C. § 1293(b), but the same principles govern under § 158. See In re Jones, 768 F.2d 923, 925 n. 3 (7th Cir.1985).

Section 541(c)(2) of the Bankruptcy Code of 1978, 11 U.S.C. § 541(c)(2), excludes from the debtor's estate any property that is held in trust and subject to a restriction on transfer under "applicable nonbankruptcy law". This language keeps out of the estate (and therefore out of creditors' hands) property in which the debtor owns the trust's beneficial interest, but subject to a spendthrift clause or some equivalent that prevents the debtor from converting a stream of future payments into a capital sum for current consumption. Patterson held that a pension trust subject to ERISA's anti-alienation rule is like a spendthrift trust under state law, and that "applicable nonbankruptcy law" includes federal statutes as well as state law. Judge Schwartz assumed that if Bakco's plan was "ERISA-qualified" (a term we discuss below), then the balance of Baker's account is outside the bankruptcy estate given § 541(c)(2) and Patterson. It is not clear to us that this is so. Patterson holds that ERISA counts as "applicable nonbankruptcy law," not that all the full balances in all ERISA-qualified plans are necessarily protected from creditors. Sometimes the employee is entitled to invade the principal of a defined-contribution plan for his own purposes--to take a loan that can be converted to a withdrawal by failure to repay, or to accelerate disbursement directly, as many plans provide once the employee reaches a specified age. Cf. In re Kochell, 804 F.2d 84 (7th Cir.1986) (discussing individual retirement accounts). We do not read Patterson to say that money readily available to participants for current consumption necessarily is unavailable to repay debts. See Douglas G. Baird, The Elements of Bankruptcy 44-45 (rev. ed.1993). But because the Bank does not argue, and the record does not suggest, that Baker lawfully could have withdrawn any of the funds remaining in his account at the time the bankruptcy case began, we do not pursue the question.

Patterson states its holding this way: "a debtor's interest in an ERISA-qualified pension plan may be excluded from the property of the bankruptcy estate pursuant to § 541(c)(2)". 504 U.S. at 765, 112 S.Ct. at 2250 What is an "ERISA-qualified" plan? The term does not appear in the statute, and its provenance is mysterious. Some plans are tax-qualified, a term of art meaning that contributions to the plan are deductible at the corporate level and not taxed to the employee until the plan distributes benefits. Taxation has nothing to do with the question at hand, however. Most likely, the Court used "ERISA-qualified" to mean "covered by Subchapter I of ERISA". Not all pension plans need contain an anti-alienation clause. See 29 U.S.C. § 1003(b). Early in its opinion the Court referred to "the anti-alienation provision required for qualification under § 206(d)(1) of ERISA, 29 U.S.C. § 1056(d)(1)". 504 U.S. at 755, 112 S.Ct. at 2244. Understanding "ERISA-qualified" to mean nothing more complex than "containing the anti-alienation clause required by § 206(d)(1) of ERISA" makes the phrase mesh with the topic of the opinion: whether ERISA is "applicable nonbankruptcy law". (Perhaps the term "ERISA-qualified" has some significance elsewhere in the law; our discussion of its scope applies only to the question whether a creditor can reach funds in bankruptcy.)

Subchapter I of ERISA covers every "employee benefit plan" established by an employer engaged in interstate commerce with five exceptions. 29 U.S.C. § 1003(a) (coverage), § 1003(b) (exceptions). Bakco's profit-sharing plan was an "employee pension benefit plan" within the meaning of 29 U.S.C. § 1002(2)(A) because it provides for deferred and retirement income, and under the definition in § 1002(3) an "employee pension benefit plan" is also an "employee benefit plan". Bakco was engaged in interstate commerce, and none of the five exceptions applies, so ERISA covers the plan--which contains a proper anti-alienation clause. All of this is common ground between the parties. It follows that § 541(c)(2) of the Bankruptcy Code excludes the plan's value from Baker's estate in bankruptcy.

LaSalle Bank observes that a trust can be an "employee pension benefit plan" only if it provides retirement income or deferred compensation "to employees", § 1002(2)(A)(i), and the Bank insists that Baker is an "employer" rather than an "employee" because he owned a majority of Bakco Data's stock. A sole proprietor cannot participate in an ERISA pension plan, see Giardono v. Jones, 867 F.2d 409, 411-12 (7th Cir.1989), because then person and business are identical. Bakco was not a proprietorship, and its corporate existence must be respected. In re Deist Forest Products, Inc., 850 F.2d 340 (7th Cir.1988). Baker the person, and Bakco Data the corporation, are separate legal entities. Bakco Data was the "employer" and Baker the "employee." To the extent In re Kaplan v. First Options of Chicago, Inc., 189 B.R. 882 (E.D.Pa.1995), and In re Hall, 151 B.R. 412 (Bankr.W.D.Mich.1993), hold otherwise, we disapprove those decisions. Many closely held corporations insist that employees own stock (as do a few large corporations, such as United Air Lines); this does not prevent ERISA from regulating their pension plans. LaSalle Bank does not argue that disregard of the corporation's existence would be justified under standard veil-piercing principles. See Sea-Land Services, Inc. v. Pepper Source, 941 F.2d 519 (7th Cir.1991). Although the Department of Labor has issued a regulation stating that a corporation's sole owner is not an "employee" for the purpose of activating Subchapter I of ERISA, see 29 C.F.R. § 2510.3-3(c)(1), Baker was not...