Bank of America, N.A. v. Moglia, 02-2517.

• Decision Date: 02 June 2003
• Docket Number: No. 02-2517.,02-2517.
• Citation: 330 F.3d 942
• Parties: BANK OF AMERICA, N.A., Creditor-Appellant, v. Alex D. MOGLIA, Trustee-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

330 F.3d 942

BANK OF AMERICA, N.A., Creditor-Appellant, v. Alex D. MOGLIA, Trustee-Appellee.

No. 02-2517.

United States Court of Appeals, Seventh Circuit.

Argued January 21, 2003.

Decided June 2, 2003.

Larry J. Nyhan, Sidley Austin Brown & Wood, Chicago, IL, Alan C. Geolot (argued), Sidley Austin Brown & Wood, Washington, DC, for Appellant.

Jon C. Vigano, D'Ancona & Pflaum, Chicago, IL, Steven B. Towbin (argued), Kathleen H. Klaus, Shaw, Gussis, Fishman, Glantz, Wolfson & Towbin, LLC, Chicago, IL, for Trustee-Appellee.

Robert V. Shannon, Bell, Boyd & Lloyd, Chicago, IL, for Debtor.

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

POSNER, Circuit Judge.

Outboard Marine Corporation is in Chapter 7 bankruptcy, and among its holdings are the assets, currently worth some $14 million, in what is known as a "rabbi trust." Bank of America, as the agent of Outboard's secured creditors, claims a security interest in these assets, while the trustee in bankruptcy claims them for the unsecured creditors. The security agreement on which Bank of America relies covers all Outboard's "general intangibles," a term of great breadth in commercial law, see UCC § 9-102(a)(42) and official comment 5(d), and broadly defined in the agreement as well to include besides a number of irrelevant enumerated items, "all other intangible personal property of every kind and nature." The term describes the assets of the rabbi trust, but the bankruptcy court, seconded by the district court, held that they nevertheless were not subject to the security agreement, and so ruled for the trustee. The ruling was a final, appealable order because it resolved a discrete dispute that, were it not for the continuing bankruptcy proceedings, would have been a stand-alone dispute between Bank of America and the trustee as the representative of the general creditors. In re Golant, 239 F.3d 931, 934 (7th Cir.2001); In re Rimsat, Ltd., 212 F.3d 1039, 1044 (7th Cir.2000). "A judgment does not lose its finality merely because there is uncertainty about its collectibility, corresponding to uncertainty about how many cents on the dollar the creditor will actually receive on his claim once all the bankrupt's assets are marshaled and compared with the total of allowed claims, and the priorities among those claims are determined. Thus the fact that the bankruptcy proceeding continues before the bankruptcy judge does not preclude treating an interlocutory order by him—interlocutory in the sense that it does not terminate the entire proceeding—as final for purposes of appellate review. (And if it is final for those purposes, then so is the district court's affirmance of his order.)" In re Szekely, 936 F.2d 897, 899 (7th Cir.1991).

A rabbi trust, so called because its tax treatment was first addressed in an IRS letter ruling on a trust for the benefit of a rabbi, Private Letter Ruling 8113107 (Dec. 31, 1980); see also IRS General Counsel Memorandum 39230 (Jan. 20, 1984), is a trust created by a corporation or other institution for the benefit of one or more of its executives (the rabbi, in the IRS's original ruling). See, e.g., Westport Bank & Trust Co. v. Geraghty, 90 F.3d 661, 663-64 (2d Cir.1996); Hills Stores Co. v. Bozic, 769 A.2d 88, 99 (Del.Ch.2000); Kathryn J. Kennedy, "A Primer on the Taxation of Executive Deferred Compensation Plans," 35 John Marshall L.Rev. 487, 524-27 (2002). The main reason (recited at the outset of the trust document in this case) for such a trust is that, should the control of the institution change, the new management might reduce the old executives' compensation, or even fire them; the trust, which consistent with this purpose is not funded until the change of control occurs, cushions the fall.

But as the IRS explained in the letter ruling, unless an executive's right to receive money from the trust is "subject to substantial limitations or restrictions," rather than being his to draw on at any time (making it income to him in a practical sense), the executive must include any contribution to the trust and any interest or other earnings of the trust in his gross income in the year in which the contribution was made or the interest obtained. See McAllister v. Resolution Trust Corp., 201 F.3d 570, 572-73, 575 (5th Cir.2000). The "substantial limitations or restrictions" condition was satisfied in the transaction on which the IRS ruled. The trust agreement provided that the rabbi would not receive the trust assets until he retired or otherwise ended his employment by the congregation. Until then the corpus of the trust and any interest on it would be owned by the congregation, see Maher v. Harris Trust & Savings Bank, 75 F.3d 1182, 1185 (7th Cir.1996); Goodman v. Resolution Trust Corp., 7 F.3d 1123, 1125 (4th Cir.1993), so the rabbi would have neither legal nor equitable right to the money. Cf. 26 U.S.C. § 457(f)(1)(A). And, what is key in this case, the trust instrument provided that "the assets of the trust estate shall be subject to the claims of [the congregation's] creditors as if the assets were the general assets of [the congregation]."

The word "creditors" is not defined either in the IRS's letter ruling or in the trust agreement in this case; but a "Model Rabbi Trust" agreement approved by the IRS states that the assets of the trust are subject to the claims of the settlor's "general creditors," Rev. Proc. 92-64, 1992-2 C.B. 422 (July 28, 1992), a term invariably used to refer to a debtor's unsecured creditors. See, e.g., United States v. Munsey Trust Co., 332 U.S. 234, 240, 108 Ct.Cl. 765, 67 S.Ct. 1599, 91 L.Ed. 2022 (1947); Dewsnup v. Timm, 502 U.S. 410, 431-32, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) (dissenting opinion); In re Merchants Grain, Inc., 93 F.3d 1347, 1352 (7th Cir.1996); United States v. One-Sixth Share, 326 F.3d 36, 44 (1st Cir.2003); United States v. Watkins, 320 F.3d 1279, 1283 (11th Cir.2003); United States v. $20,193.39 U.S. Currency, 16 F.3d 344, 346 (9th Cir.1994); Douglas G. Baird, The Elements of Bankruptcy 12, 101, 154, (3d ed.2001). The cases assume rather than hold that "general creditor" means "unsecured creditor," but what else could it mean? What work does "general" do unless to distinguish unsecured from secured creditors? Bank of America has no answer to that question.

Outboard is conceded to have established a bona fide rabbi trust, so that its contributions to the trust and the income that those contributions generated were not includible in the executives' gross income. Therefore, if the validity of a rabbi trust depends on its assets' being reserved for the employer's unsecured creditors, we can stop right here and affirm; the Bank of America, as a secured creditor, would have no right to the assets—otherwise the trust's beneficiaries would not have received the favorable tax treatment accorded the beneficiaries of a rabbi trust, and they did receive it. But it is uncertain whether such a reservation actually is essential to the favorable tax treatment of a rabbi trust. All that the tax law requires is that there be substantial limitations on the beneficiaries' access to the trust assets, and a reservation of the assets in the event of bankruptcy to both the secured and the unsecured creditors of the settlor, rather than to the unsecured creditors, might well be thought substantial. For the reservation would keep those assets, most of them at any rate, out of the beneficiaries' hands—though this is provided that the limitation were coupled with a limitation on the beneficiaries' having free access to the assets of the trust before they leave their employment with the grantor. Without such a limitation, the reservation of creditors' rights would be illusory—the beneficiaries would pull the money out of the trust as soon as insolvency loomed on the horizon—and indeed the trust's assets might well be taxable as income to the beneficiaries. But we recall that, consistent with this concern, the assets of the rabbi trust were owned by the congregation until the rabbi's employment ended.

We say that a limitation to all, rather than just to the unsecured, creditors "might be" rather than "would be" substantial enough to satisfy the Internal Revenue Service because executives often are creditors of their firm; if they were secured creditors and their security interest embraced the assets of the trust, their claims to those assets would be superior to those of the firm's unsecured creditors, which would tend to make the limitation that is fundamental to the favorable tax treatment of the rabbi trust—that the creditors have a superior claim to the beneficiaries—illusory. But the trust instrument in this case took care of that concern by providing that Outboard's executives could not obtain a security interest in the trust's assets.

Even if the executives would not have sacrificed their favorable tax treatment had the trust instrument reserved the assets of the trust for all the company's creditors, secured and unsecured alike, in the event of bankruptcy, the instrument did not do this; it reserved those assets for the unsecured creditors. It states (we italicize the key terms) that the "Trust Corpus ... shall remain at all times subject to the claims of the general creditors of [Outboard]. Accordingly, [Outboard] shall not create a security interest in the Trust Corpus in favor of the Executives, the Participants [a term that apparently refers to retired executives] or any creditor." In the event of insolvency, the trustee "will deliver the entire amount of the Trust Corpus only as a court of competent jurisdiction, or duly appointed receiver or other person authorized to act by such court, may direct to make the Trust Corpus available to satisfy the claims of the Company's general creditors."

This couldn't be clearer: secured creditors have no claim to the trust assets. And judges usually interpret written contracts (the instrument creating the rabbi trust in this case was an...