In re Adams, 03-8011.

• Decision Date: 10 December 2003
• Docket Number: No. 03-8011.,03-8011.
• Citation: 302 B.R. 535
• Parties: In re Raymond L. ADAMS and Janet M. Adams, Debtors. Susan L. Rhiel, Trustee, Appellant, v. Raymond L. and Janet M. Adams, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

302 B.R. 535

In re Raymond L. ADAMS and Janet M. Adams, Debtors Susan L. Rhiel, Trustee, Appellant, v. Raymond L. and Janet M. Adams, Appellees.

No. 03-8011.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Argued August 6, 2003.

Decided and Filed December 10, 2003.

COPYRIGHT MATERIAL OMITTED

Susan L. Rhiel, Rhiel & Associates Co., Columbus, OH, for Appellant.

Eleanor Beavers Haynes, Columbus, OH, Mark Ditullio, on brief, Columbus, OH, for Appellees.

Before BODOH, COOK, and LATTA, Bankruptcy Appellate Panel Judges.

OPINION

COOK, Bankruptcy Judge.

This case is before us on the bankruptcy Trustee's appeal from a ruling of the bankruptcy court that the Debtors, Mr. and Mrs. Raymond Adams, were the beneficiaries of trusts with enforceable transfer restrictions such that their beneficial interests in those trusts were excluded from their bankruptcy estate under 11 U.S.C. § 541(c)(2). Because we conclude that the Debtors failed to carry their burdens of proof that they were beneficiaries of trusts within the meaning of 11 U.S.C. § 541(c)(2), we REVERSE the bankruptcy court's order and REMAND the case for further proceedings.

I. ISSUES ON APPEAL

The principal issue in this case is whether the bankruptcy court erred when it concluded that the Debtors' § 403(b) annuity plans constitute trusts within the meaning of 11 U.S.C. § 541(c)(2).

II. JURISDICTION AND SCOPE OF REVIEW

The panel has jurisdiction to decide this appeal under 28 U.S.C. § 158(a)(1) because the United States District Court for the Southern District of Ohio has authorized appeals to the Bankruptcy Appellate Panel of the Sixth Circuit.

The bankruptcy court's determination that the assets of these pension plans were excluded from the bankruptcy estate by operation of § 541(c)(2) is a conclusion of law which is reviewed de novo. Nicholson v. Isaacman (In re Isaacman), 26 F.3d 629, 631 (6th Cir.1994). A court's findings of fact are accepted by appellate courts unless they are clearly erroneous. Fed.R.Civ.P. 52; Fed. R. Bankr.P. 8013.

III. FACTS

The Debtors, Mr. and Mrs. Raymond Adams, each has an interest in a separate retirement plan, both of which are qualified under 26 U.S.C. § 403(b) as tax-sheltered annuity pension plans. Both plans contain anti-alienation clauses (transfer restrictions) that prevent the Debtors from reaching the assets of their pension funds until they are 59 1/2 years of age. There are certain hardship exceptions to this general rule, but none have so far applied. No creditors can reach the assets of the Debtors' pension plans under the terms of the anti-alienation clauses.

The plans have similar structures. Mr. Adams's pension plan, established by his employer, the United Negro College Fund, provides that the employer will forward a certain percentage of his salary to one or more of the fund's sponsors, Teachers Insurance and Annuity Association, College Retirement Equities Fund, or the Equitable Life Assurance Society of the United States. The sponsors are to establish separate "accumulation accounts" for each plan participant, accumulate the plan contributions in those accounts, and afford the plan participant an opportunity to invest in various vehicles, such as stock funds, made available to him by the sponsors. Mr. Adams has sole authority to direct how his account shall be invested. Benefits may not be paid to him until he attains the age of 59 1/2 and separates from the service of his employer, dies, or becomes disabled. Finally, paragraph 10.5 of the plan incorporates by reference the terms of each "funding vehicle" provided by the sponsor and provides that they control in case they conflict with the terms of the plan. From a certificate issued by Equitable Life Assurance Society which appears in the appendix, it appears that Mr. Adams has chosen Equi-Vest (an investment arm of Equitable) as his fund sponsor and has allocated his contributions among several stock mutual funds and an interest-bearing account.

Mrs. Adams's pension plan document is similar to her husband's, except that her employer is Children's Hospital, Inc., the accumulation accounts are called "elective deferral accounts," and the eligibility for benefits, including the time when they become payable, is controlled by the fund sponsors. These sponsors are not named in the pension plan. Paragraph 11.5 of the plan provides that the "terms of the contracts between the Fund Sponsors and the Employer and/or the Participants and any certificates issued to a Participant in accordance with the provisions of Section 5.1 are a part of the Plan as if fully set forth in the Plan document." The appendix does not contain any of the contracts between the plan administrators and the fund sponsors, and there is no information available in the record on that subject. The appendix does, however, contain part of a certificate issued by Aetna Life Insurance and Annuity Co. confirming that Mrs. Adams is a participant in its group annuity contract. The certificate appears to be incomplete, and no details are given as to how Aetna holds contributions made under the plan.

IV. DISCUSSION

The bankruptcy court held that both of the pension plans in question were excluded from property of the estate by § 541(c)(2), which reads: "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." 11 U.S.C. § 541(c)(2). The court stated in its memorandum that "the plans are `ERISA-qualified' as contemplated by the Supreme Court in Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992). As such, they are not property of the estate, and are not subject to administration by the Trustee." (Emphasis added.) Thus, there is some indication that the court thought the only criterion for excluding the assets of a pension plan from the estate under § 541(c)(2) was whether the plan in question was ERISA-qualified.

The Sixth Circuit, however, requires that there be a trust: "An inquiry under § 541(c)(2) normally has three parts: First, does the debtor have a beneficial interest in a trust?" Taunt v. Gen. Ret. Sys. (In re Wilcox), 233 F.3d 899, 904 (6th Cir.2000).

Thus, the Trustee argues that the bankruptcy court glossed over the trust requirement in § 541(c)(2) and contends that the plain terms of the statute exclude from property of the estate only a debtor's beneficial interest in a trust, not necessarily his interest in a pension plan, or ERISA-qualified pension plan, or anything other than a trust.

In a lengthy discussion of this subject in In re Barnes, 264 B.R. 415, 423 (Bankr.E.D.Mich.2001), Bankruptcy Judge Spector recognized that some courts appear to have adopted the proposition that

an employee benefit plan need not be a trust at all: So long as the plan has an enforceable transfer restriction and is designed to function in a manner "analogous" to a spendthrift trust, the debtor's interest therein will be excluded from the bankruptcy estate pursuant to § 541(c)(2).

Id. The court then disagreed with that view and insisted that proof of a trust was essential to exclusion under § 541(c)(2).

This Court rejects that proposition. There is no statutory support for the notion that in determining whether a trust was created, employee benefit plans are subject to a less stringent standard than are other assets in which the debtor holds an interest. Since § 541(c)(2) makes no distinction along these lines, neither should the courts.

Id. at 428 (citation omitted). We agree with and adopt the views in Barnes regarding the trust requirement of § 541(c)(2) and, following Wilcox, hold that only an interest in a trust can be the subject of an enforceable transfer restriction within the meaning of 11 U.S.C. § 541(c)(2).

The bankruptcy court also briefly stated in its memorandum that "a review of both plans reveals that the funds, even though being invested in tax sheltered annuities, are being held in trust for the Debtors' retirement." Unfortunately, the court did not explain this conclusion or support it with any discussion of the terms of the plans, contracts, accounts, or annuities such as might have caused the court to view them as trusts. Neither did it offer any discussion of the legal elements of a trust or how the Debtors proved any of those elements. There is only the bare conclusion that some trusts exist.

The Debtors bear the burden of demonstrating that all the requirements of § 541(c)(2) have been met before the property in question can be effectively excluded from the estate. Id. at 420-21; Pineo v. Fulton (In re Fulton), 240 B.R. 854, 861 n. 4 (Bankr.W.D.Pa.1999). The Debtors, therefore, must show that the property in question is the subject of a trust of which they are beneficiaries. We think it is far from self-evident that the plans in this case constitute trusts, a critical finding for exclusion from the bankruptcy estate. Although they were probably drafted by attorneys, there is no mention of a trust, much less the appointment of a trustee. There are no formal grants in trust. There is no direct manifestation of any intent to create a trust in anyone.

The term "trust" is a term of art and has a specific legal meaning. In Ohio, a trust is created by

"an explicit declaration of trust, or circumstances which show beyond reasonable doubt that a trust was intended to be created, accompanied with an intention to create a trust, followed by an actual conveyance ... of definite property ... vesting the legal title presently in a person capable of holding it, to hold as trustee for the benefit of a cestui que trust."

Ulmer v. Fulton, 129 Ohio St. 323, 195 N.E. 557, 564 (1935) (quoting 65 C.J. § 21); accord, Booth v. Vaughan (In re Booth), 260 B.R. 281, 290-91 (6th Cir. BAP 2001). The Restatement defines a trust in similar terms as

[a] fiduciary relationship with respect to property, arising from a manifestation of ...