Employee Benefits Committee v. Tabor

• Decision Date: 09 May 1991
• Docket Number: No. TH 90-211-C,Adv. No. 90-8009.,Bankruptcy No. TH 89-1441,TH 90-211-C
• Citation: 127 BR 194
• Parties: EMPLOYEE BENEFITS COMMITTEE and Trustee of the Lilly Employee Savings Plan v. William J. TABOR, Trustee Sharon Rose Cress. In re Sharon Rose CRESS, Debtor. William J. TABOR v. EMPLOYEE BENEFITS COMMITTEE and Trustees of the Lilly Employee Savings Plan.
• Court: U.S. District Court — Southern District of Indiana

127 B.R. 194 (1991)

EMPLOYEE BENEFITS COMMITTEE and Trustee of the Lilly Employee Savings Plan v. William J. TABOR, Trustee Sharon Rose Cress.

In re Sharon Rose CRESS, Debtor.

William J. TABOR v. EMPLOYEE BENEFITS COMMITTEE and Trustees of the Lilly Employee Savings Plan.

No. TH 90-211-C, Bankruptcy No. TH 89-1441, Adv. No. 90-8009.

United States District Court, S.D. Indiana, Indianapolis Division.

May 9, 1991.

John W. Purcell and Cynthia P. Purvis, Baker & Daniels, Indianapolis, Ind., for Employee Benefits Committee and Trustee of the Lilly Employee Sav. Plan.

William J. Tabor, Trustee pro se.

Michael T. Ellis, Terre Haute, Ind., for debtor.

Kenneth C. Meeker, U.S. Trustee, Indianapolis, Ind.

ORDER ON APPEAL FROM DECISION OF BANKRUPTCY COURT

McKINNEY, District Judge.

"The interpretation of Section 541(c)(2) of the Bankruptcy Code and its application to qualified employee benefit plans has generated considerable litigation and divergent results have been reached by the courts."

This classic understatement by Judge Altenberger in In re Sundeen, 62 B.R. 619, 619 (Bankr.C.D.Ill.1986), sets an appropriate backdrop for today's decision. The issue in this bankruptcy appeal is whether the bankruptcy court erred in holding that a savings plan subject to hardship withdrawals is part of the bankruptcy estate. The Court finds no error in the decision below.¹

The facts are not in dispute,² and are adequately set forth in the bankruptcy court's opinion, 121 B.R. 1006. Briefly, debtor Sharon Rose Cress was an employee of Eli Lilly and Co. ("Lilly"), which sponsored a § 401(k) Savings Plan ("Plan") for its employees. The Plan is qualified under § 401(a) of the Internal Revenue Code of 1986 ("IRC"), 26 U.S.C. § 1 et seq., and is a pension plan within the meaning of § 3(2) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq.

The debtor had a Participant's Account, which was comprised in part of a § 401(k) Profit Sharing Account ("Account"). Funds in this Account could be withdrawn only for "financial hardships," including medical expenses, purchase of a principal residence, tuition for post-secondary education, avoidance of eviction from or foreclosure of a mortgage on a principal residence, and funeral expenses. Employees who have worked for five or more years also may obtain the funds upon termination of employment, whether by voluntary resignation or dismissal. The present action involves the bankruptcy trustee's attempt to obtain the $2,737.86 in Cress' Account subject to hardship withdrawal, pursuant to 11 U.S.C. § 541(a)(1).

Section 541(a)(1) states that except as otherwise provided the estate is comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." The Bankruptcy Code ("Code") further provides in § 541(c)(1)(A) that "an interest of the debtor in property becomes property of the estate . . . notwithstanding any provision . . . that restricts or conditions transfer of such interest by the debtor. . . ." The general rule of § 541(c)(1)(A) is not without exception. This exception, found in § 541(c)(2), provides, "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 interpretation of "applicable nonbankruptcy law" in § 541(c)(2) is the main dispute in this action. Because the Plan falls within § 3(2) of ERISA and qualifies under § 401(a) of the IRC, it contains the required anti-alienation clause, restricting the transfer of assets.³ The appellants claim the ERISA-mandated anti-alienation clause fits within the definition of "applicable nonbankruptcy law," and therefore the $2,737.86 in Cress' Account is beyond the trustee's reach.

The bankruptcy court framed the issues as follows:

(1) whether 11 U.S.C. § 541(c)(2) applies only to traditional spendthrift trusts under state law or whether ERISA qualifies as "applicable nonbankruptcy law;"

(2) whether Ind.Code § 30-4-3-2(c) includes in its definition of spendthrift trusts any trust within the meaning of § 1002 of 29 U.S.C., qualifying under § 401(a) of the IRC and containing an anti-alienation provision pursuant to § 1056(d) of 29 U.S.C.; and

(3) whether the fiduciary obligations of the defendants and the anti-alienation clause in the plan create a bar to the court fashioning an appropriate remedy for turnover of the funds to the trustee.

These same issues arise on appeal. The bankruptcy court held that § 541(c)(2) only applies to traditional spendthrift trusts, that ERISA and IRC qualified pension plans are not automatically spendthrift trusts under Indiana law, and that no bar exists to the court fashioning an appropriate remedy for turnover of the funds. (Bankruptcy Order at 5).

Because the underlying facts are not in dispute, the only question is whether the bankruptcy court erred in its application of the law. Conclusions of law made by the bankruptcy court are reviewed de novo. United States v. Mississippi Valley Generating Co., 364 U.S. 520, 526, 81 S.Ct. 294, 297, 5 L.Ed.2d 268 (1961); In re Excalibur Auto Corp., 859 F.2d 454, 457, n. 3 (7th Cir.1988); In re Longardner & Associates, Inc., 855 F.2d 455, 459 (7th Cir.1988), cert. denied, 489 U.S. 1015, 109 S.Ct. 1130, 103 L.Ed.2d 191 (1989). Jurisdiction is proper pursuant to 28 U.S.C. § 158(a).

A. "Applicable Nonbankruptcy Law" Under § 541(c)(2)

In a thoughtful, 16-page opinion, Judge Dees of the bankruptcy court referenced "a long line of well-reasoned cases" in holding the term "applicable nonbankruptcy law" refers only to traditional state spendthrift trusts. (Bankruptcy Order at 9). Though the Seventh Circuit Court of Appeals has not spoken on this issue, the bankruptcy court's decision is in agreement with the vast majority of cases which have faced this problematic interpretation of § 541(c)(2).

Since the bankruptcy court issued its order, however, the Sixth Circuit decided In re Lucas, 924 F.2d 597 (6th Cir.1991), which held the term "applicable nonbankruptcy law" applies to all nonbankruptcy law, state and federal, and therefore includes ERISA. Accord, In re Idalski, 123 B.R. 222 (Bankr.E.D.Mich.1991) (also decided after the court below issued its Order).

Thus, the Sixth Circuit's decision in Lucas is in agreement with the Fourth Circuit's decision In re Moore, 907 F.2d 1476 (4th 1990), and a few district and bankruptcy court opinions in holding the language of § 541(c)(2) includes ERISA. The appellants contend Lucas is strong evidence of a new wave of judicial thought in this area. While Lucas does not overshadow the substantial body of contrary authority, it nevertheless suggests this Court should carefully scrutinize the issue.⁴

Close inspection reveals that courts actually have interpreted the language of § 541(c)(2) in three ways. As Judge Altenberger observed in Sundeen, 62 B.R. at 619-620:

A small number of courts have held that the words "applicable nonbankruptcy law" include other nonbankruptcy federal law such as ERISA, and that all ERISA qualified pension plans are therefore excluded from becoming property of the bankruptcy estate. A greater number of courts have rejected this approach, relying upon the legislative history of Section 541(c)(2), which indicates that Congress intended to exclude only traditional spendthrift trusts created under state law. Under this line of cases, the amount of control the debtor has over the pension fund is determinative of whether it qualifies as a spendthrift trust.

Other courts have taken yet a third view, concluding that all qualified pension plans are a part of the bankruptcy estate.

(citations omitted).⁵

The bankruptcy court, noting the absence of relevant Seventh Circuit appellate authority on point, found primary guidance in In re Goff, 706 F.2d 574 (5th Cir.1983) (reaffirmed in In re Brooks, 844 F.2d 258, 261 (5th Cir.1988). Goff follows the majority view (option two set forth in Sundeen) that § 541(c)(2) excludes only traditional state spendthrift trusts, and that each pension trust must be examined to determine whether it qualifies as a spendthrift trust under that state's law.

Specifically, the Goff court stated:

Although a given state\'s nonbankruptcy law of spendthrift trusts might afford protection to a particular pension trust, it is clear in the immediate case that appellant\'s self-settled trust did not constitute a spendthrift trust entitled to exclusion under relevant state law.

Id. at 580. Thus, under Goff an ERISA plan may in fact avoid bankruptcy attack provided state spendthrift trust guidelines are followed.

The Goff decision was based primarily on three factors: (1) the legislative history of § 541(c)(2); (2) the overall congressional scheme embodied in the Code; and (3) the relationship and effect upon ERISA of the intent of the Code. Id. at 581. Citing these factors, the Goff court came to the "inexorable conclusion that Section 541(c)(2)'s reference to `applicable nonbankruptcy law' was an acknowledgement of traditional state spendthrift trust law, and not of ERISA." Id.

Other Courts of Appeal following the majority approach set forth in Goff are Regan v. Ross, 691 F.2d 81 (2d Cir.1982); In re Graham, 726 F.2d 1268 (8th Cir. 1984); In re Daniel, 771 F.2d 1352 (9th Cir.1985), cert. denied, 475 U.S. 1016, 106 S.Ct. 1199, 89 L.Ed.2d 313 (1986); and In re Lichstrahl, 750 F.2d 1488 (11th Cir.1985). Many district and bankruptcy courts have followed in step. See, e.g., In re Gribben, 84 B.R. 494 (S.D.Ohio 1988); In re McIntosh, 116 B.R. 277 (Bankr.N.D.Okl.1990).

The bankruptcy court noted, but declined to follow, the contrary holding of In re Moore, 907 F.2d 1476 (4th Cir.1990). (Bankruptcy Order at 8, n. 7). The Moore court held the term "applicable nonbankruptcy law" is not limited to state spendthrift law. Id. at 1477. In so doing, the court stated:

`Applicable nonbankruptcy law\' means

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