Creasy v. Coleman Furniture Corp.
| Decision Date | 01 March 1988 |
| Docket Number | Civ. A. No. 86-0272-R. |
| Citation | 83 BR 404 |
| Court | U.S. District Court — Western District of Virginia |
| Parties | Roy V. CREASY, Trustee in Bankruptcy for Coleman Furniture Company, Plaintiff, v. COLEMAN FURNITURE CORPORATION, Defendant. |
Roy V. Creasy, Roanoke, Va., Trustee for plaintiff.
Harry S. Rhodes, Roanoke, Va., for plaintiff.
James F. Douthat, Roanoke, Va., George V. Hanna, III, Charlotte, N.C., Joseph B. Shumate, Jr., Pulaski, Va., William M. Mercer-Meidinger, Inc., Richmond, Va., for defendant.
The principal question presented in this case is whether a debtor who exercised complete control over his firm's pension plan may exclude his interest in the Plan from his Chapter 7 bankruptcy estate under the "non-bankruptcy law" exclusion of 11 U.S.C. § 541(c)(2) or the "federal law" exemption of § 522(b)(2)(A). The court rules that he cannot and denies the debtor's motion to compel the firm's Chapter 7 trustee to pay him his pension interest.
I. PROCEDURAL HISTORY AND FINDINGS OF FACT
These proceedings revolve around the Coleman Furniture Corporation (CFC), a Virginia corporation, and its president and majority stockholder, Joseph B. Shumate, Jr. (Shumate), a Virginia resident, both of whom are undergoing liquidation pursuant to Chapter 7 of the bankruptcy code. See also Creasy v. Coleman Furniture Corp., 763 F.2d 656 (4th Cir.1985). Roy V. Creasy (Creasy), as Chapter 7 trustee for CFC, originally petitioned this court to employ actuaries to terminate the CFC plan in an adversary proceeding against CFC. Shumate, as a pro se intervenor, filed a motion to compel Creasy to pay him his benefits under the plan. John R. Patterson, Shumate's Chapter 7 trustee, was permitted to intervene because he also claimed ownership of Shumate's interest in the pension plan. Although Shumate also had contested the trustee's calculation of his interest in the plan, he and the trustees have agreed to settle that portion of the dispute.1 Therefore, the only issue before the court is whether to grant Shumate's motion to compel.
The CFC pension plan was created in 1964. Although the original fund documents have been amended and restated since that time, the parties have stipulated that the 1976 pension fund plan documents (plan) govern this case. The plan provides that CFC can terminate the pension fund at any time. Upon termination, the plan allowed a recipient to receive a lump fund payment instead of a life annuity. Shumate has had voting control of CFC from at least 1978 through his ownership of CFC stock and the right to vote other stock held in a voting trust. Therefore, Shumate could have terminated the plan at any time before the bankruptcy and received not only his pension interest, but any excess funds not needed to satisfy the rights of other participants. To date, all participants have made some payment arrangement with the pension except for Shumate. The plan prohibits the alienation of benefits or the transfer of plan assets for the benefit of creditors, as required by 29 U.S.C. § 1056(d)(1) (Employee Retirement Income Security Act (ERISA)) and 26 U.S.C. § 401(a)(13) (Internal Revenue Code).
Conceptually, the task at hand is easily grasped. Once a debtor files a petition in bankruptcy under Chapter 7, an estate is created. 11 U.S.C. § 541(a) (1985). The estate is comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." Id. Notwithstanding these broad provisions, a debtor may exclude certain specifically enumerated assets from the liquidation process. § 522(b). This statutory framework reveals that there are two decision points crucial to Shumate's recovery of his interest in the pension plan. First, the asset must not be included in his liquidation estate. Second, if the asset is part of the estate, he must place it within one of the exclusions. Otherwise, Shumate must deliver the asset to the trustee, § 521(4), who in turn must reduce the property to money in order to settle the claims of all creditors. § 704(1). The court begins first with the issue of whether the pension is part of Shumate's Chapter 7 estate.
Whether Shumate May Exclude His Interest From the Chapter 7 Estate through § 541(c)(2)
The bankruptcy code includes "all legal and equitable interests" in the bankrupt's estate except as specifically excluded. § 541(a). There is no doubt that a bankrupt's interest in a pension plan is a legal or equitable interest; this conclusion flows from the sweeping language and the accompanying legislative history. See McLean v. Cent. States, S. & S. Areas Pen. Fund, 762 F.2d 1204, 1206 (4th Cir.1985). The analysis must therefore focus on the statutory exclusions from the estate.
The only exclusion applicable to Shumate's interest in the CFC pension plan is found in § 541(c)(2) of the code: "A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title." The Fourth Circuit has interpreted the phrase "nonbankruptcy law" to mean state law. See McLean, 762 F.2d at 1207-06 (). The question then becomes whether the CFC pension trust is a valid spendthrift trust under Virginia law, which governs the plan.
Virginia recognizes spendthrift trusts. Va.Code § 55-19 (1986).2 To be valid a trust must have "a competent settlor and trustee, an ascertainable trust res and certain beneficiaries." In re Wilson, 3 B.R. 439, 442 (Bankr.W.D.Va.1980). The CFC pension plan seems to satisfy these requirements: Article VII of the plan provides for the creation of a trust fund in accordance with a trust agreement incorporated by reference in the plan; Article II defines the beneficiaries as eligible CFC employees; Article VII provides for the funding of the trust res held by the bank; the trust purpose is legal as it is a private pension plan; and Article XII contains a non-assignability provision.3 Cf. Parkinson v. Bradford Trust Co. of Boston (In re O'Brien), 50 B.R. 67 (Bankr.E.D.Va.1985) ().
However, the significant issue in this case is whether the court should deny Shumate his interest in the trust on the authority of a long line of cases which invalidate pension trusts vis-a-vis the debtor for public policy reasons when that debtor is both the settlor and beneficiary of the trust. E.g., Matter of Goff, 706 F.2d 574 (5th Cir.1983). The Fourth Circuit has adopted this precedent in McLean where it is stated: "Moreover, the pension fund in this case is not one of those which because settled and revocable by a beneficiary, may not on that account for public policy reasons be protected against the claims of the beneficiary's creditors by anti-assignment provisions." 762 F.2d at 1207. The court later restated its adoption of the doctrine citing Goff. Id. at 1208. Therefore, the court rejects the cases Shumate has cited which did not accept the doctrine, e.g., In re Ralstin, 61 B.R. 502 (Bankr.D.Kan. 1986), but reviews other cases to determine the doctrine's parameters and whether this case falls within its purview.
The Fifth Circuit in Goff seems to have been the first to best articulate the policy. In Goff, the court stated that the ERISA-qualified Keogh plan at issue could not be viewed as a spendthrift trust because the self-employed "settlors" had created what was in effect a revocable trust for their own benefit. Id. at 580-82. The court believed the provision applied to "traditional spendthrift trusts," Id. at 581, a limitation to the language specifically rejected by the Fourth Circuit. McLean, 762 F.2d at 1207 n. 1. Other courts have invalidated pension trusts vis-a-vis the debtor in the settlor-sole beneficiary context. See In re Daniel, 771 F.2d 1352 (9th Cir.1985) and In re Graham, 726 F.2d 1268 (8th Cir.1984) both of which involved physicians who were settlors/sole beneficiaries/trustees of their professional corporation's ERISA-qualified pension plans. This case presents different facts because Shumate was not the settlor of the plan, he was one of approximately 400 beneficiaries, and CFC is not a small professional corporation.
The trustee argues that the doctrine extends to the facts of this case because of the control Shumate exercised over CFC. The trustee points to In re Lichstrahl, 750 F.2d 1488 (11th Cir.1985) which involves an M.D.-controlled professional corporation with an ERISA-qualified pension plan. The court held the spendthrift trust was not valid under Florida law because the physician, the plan's major beneficiary, could control disbursements from the plan through his power of revocation. 750 F.2d at 1490. Under Florida law, this control rendered the trust invalid as such trusts were meant to protect the beneficiary not only from his creditors, but from himself. See Croom v. Ocala Plumbing & Electric Co., 62 Fla. 450, 57 So. 243 (1911); see also Nixon v. P.J. Pedone & Co. (In re Nichols), 42 B.R. 772, 776 (Bankr.M.D.Fla.1984). Although Lichstrahl's facts involve a settlor-beneficiary relationship, the case is significant for recognizing the element of control as a bar to enforcing a spendthrift provision in the bankruptcy context. At least one court has provided a good explanation of the control test:
The degree of control that the debtor may exercise over the trust assets is a crucial factor in determining the issue of inclusion in, or exclusion from, the bankruptcy estate. If the debtor\'s access to the funds is relatively unfettered, exclusion from the bankruptcy estate would create a temptation to shelter assets in a trust and withdraw them for personal use upon issuance of the bankruptcy discharge. Matter of Goff, 706 F.2d at 588. Limited control may be permitted if its...
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