In re Barnes, 99-30869.

• Decision Date: 06 June 2001
• Docket Number: No. 99-30869.,99-30869.
• Citation: 264 BR 415
• Parties: In re Maralyn A. BARNES, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

264 B.R. 415 (2001)

In re Maralyn A. BARNES, Debtor.

No. 99-30869.

United States Bankruptcy Court, E.D. Michigan, Southern Division—Flint.

April 18, 2001.

Subsequent Opinion June 6, 2001.

COPYRIGHT MATERIAL OMITTED

Paul A. Pianto, Owosso, MI, for Debtor.

Collene K. Corcoran, Bingham Farms, MI, Chapter 7 Trustee.

Subsequent Opinion Regarding Debtor's TIAA Account June 6, 2001.

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND OPINION REGARDING OBJECTION TO EXEMPTION IN DEBTOR'S TIAA AND CREF ACCOUNTS

ARTHUR J. SPECTOR, Chief Judge.

This contested matter arose upon the filing of an objection by Colleen Corcoran, the chapter 7 trustee, to the Debtor's claim that her interest in certain annuity contracts was exempt. Pursuant to F.R.Civ.P. 52(a) (incorporated by F.R.Bankr.P. 9014 and 7052), the Court now issues its Findings of Fact and Conclusions of Law. For the reasons set forth hereafter, the Court holds that only one of the two interests at issue constitutes property of the bankruptcy estate. The trustee's objection to the non-estate interest will therefore be dismissed as moot. With respect to the estate interest, a hearing will be set to determine the validity of the trustee's objection.

Findings of Fact

(1) The Debtor is an employee of Michigan State University ("MSU").

(2) As such, she was required to enroll in MSU's "Base Retirement Plan" (the "Plan"). Exhibit 1 (a copy of the Plan).

(3) The Debtor participated in the Plan through the purchase of two annuity contracts, one issued by the Teachers Insurance and Annuity Association of America ("TIAA"), and the other issued by the College Retirement Equities Fund ("CREF"). Exhibits A ("Retirement Annuity Contract" (TIAA)) and B ("Retirement Unit-Annuity Certificate" (CREF)).

(4) The premiums for the annuity contracts are paid by MSU, with the cost thereof defrayed by a 5% reduction of the Debtor's salary. Exhibit 1 at p. 6.

(5) For purposes of this litigation, the Court assumes that the Plan and annuity contracts meet the requirements of 26 U.S.C. § 403(b)(1). Testimony of Sherry Smalley Van Kampen, C.E.B.S. (Ms. Van Kampen, who is employed as a Human Resource Analyst in the Benefits Retirement Office of MSU's Human Resources Department, described the benefit program in which the Debtor participates as a "403(b) Plan."); Exhibit 4 (CREF Prospectus), at p. 46 ("CREF certificates are tailored for retirement plans set up under section 403(b) of the Internal Revenue Code. . . ."); Exhibit 5 (TIAA Real Estate Account Prospectus), at p. 50 ("The annuity contracts are tailored for retirement plans set up under section 403(b) of the . . . Internal Revenue Code."); Exhibit 1 at p. 6 ("Contributions are tax-deferred . . . and are not taxed as income in the year they are contributed, but are taxed as income in the year they are distributed."); 26 U.S.C. § 403(b)(1) (If an "annuity contract" meets the criteria set forth in this statute, "then amounts contributed by the . . . employer . . . shall be excluded from the gross income of the employee for the taxable year. . . . The amount actually distributed to any distributee under such contract shall be taxable to the distributee (in the year in which so distributed). . . . ").

(6) Pursuant to the Plan, the Debtor may obtain annuity distributions only if one of the following circumstances applies: "i attainment of age 59½; ii disability; iii death; iv financial hardship, such as purchase of a principal residence; to avoid eviction from home; college tuition for self, spouse or dependent; funeral expenses; medical expenses; v loans. . . ." Exhibit 1 at p. 11. See also Exhibit C ("Changes Made to MSU's Base Retirement Plan") at p. 1; compare 26 U.S.C. § 403(b)(11) (Pursuant to this provision, § 403(b) — including the tax deferral on contributions for an "annuity contract" granted under § 403(b)(1) — is not applicable "unless under such contract distributions attributable to contributions made pursuant to a salary reduction agreement . . . may be paid only — (A) when the employee attains age 59½, separates from service, dies, or becomes disabled . . ., or (B) in the case of hardship.").

(7) Under the terms of the Plan, the amount which a participant may borrow from TIAA/CREF¹ cannot exceed the lesser of (i) $50,000; (ii) 45% of combined TIAA and CREF accumulations; or (iii) 90% of CREF accumulations. Exhibit C at pp. 1 & 6; Testimony of Sherry Smalley Van Kampen, C.E.B.S. Compare 26 U.S.C. § 72(p)(1)(A) ("If during any taxable year a participant . . . receives . . . any amount as a loan from a qualified employer plan, such amount shall be treated as having been received by such individual as a distribution under such plan.") with 26 U.S.C. § 72(p)(2)(A)(i) (Section 72(p)(1)(A) generally does not apply to loans of $50,000 or less.). By these criteria, the Debtor was eligible to obtain a $50,000 loan. Testimony of Sherry Smalley Van Kampen, C.E.B.S.

(8) The Plan requires that a loan from TIAA/CREF "for the purchase of a primary residence" be repaid within 10 years. Exhibit C at p. 6. A loan for any other purpose must be repaid within 5 years. See id. Compare 26 U.S.C. § 72(p)(2)(B)(i) (Section 72(p)(2)(A) "shall not apply to any loan unless such loan, by its terms, is required to be repaid within 5 years.") with 26 U.S.C. § 72(p)(2)(B)(ii) (Section 72(p)(2)(B)(i) "shall not apply to any loan used to acquire any dwelling unit which within a reasonable time is to be used . . . as the principal residence of the participant.").

(9) The Plan states that the "amount of any default in repayment of the loan will be reported to the IRS as ordinary income." Exhibit C at p. 6. If the borrower is less than 59 and ½ years of age, the default may also be treated as an "early distribution." Id.

(10) Each annuity contract provides that its "validity and effect . . . are governed by the laws" of the State of New York. Exhibits A and B at p. 3.

(11) The TIAA contract states that "any assignment, pledge, or transfer of ownership, by the Annuitant i.e., the Debtor . . . of this contract or of any benefits hereunder will be void and of no effect." Exhibit A at ¶ 15. The contract provides further that "the benefits, options, rights, and privileges accruing to the Annuitant . . . will not be transferable or subject to surrender, commutation, or anticipation. . . . To the extent permitted by law, annuity and other benefit payments will not be subject to the claims of any creditor of the Annuitant . . . or to execution or to legal process." Id. at ¶ 17.

(12) The CREF contract states that "any assignment, pledge, or transfer of ownership, by the Annuitant² . . . of this certificate or of any benefits hereunder will be void and of no effect." Exhibit B at ¶ 15. The contract contains another provision which states: "Benefits under this certificate are protected by the following clause contained in the statute of the State of New York establishing CREF:

`No money or other benefit provided or rendered by the corporation hereby formed, nor any rights or interests of any participating person in any benefit provided by said corporation, . . . shall be subject to assignment or pledge, or be liable to attachment, garnishment, or other process, or to be seized, taken, appropriated, or applied by any legal or equitable process or operation of law to pay any debt or liability of any such person. . . . \'"

Id. at ¶ 16 (quoting 1952 N.Y. Laws ch. 124, § 9).

(13) The Debtor filed for chapter 7 bankruptcy relief on April 19, 1999.

(14) The Debtor claimed that her interest in the annuity contracts is fully exempt pursuant to 11 U.S.C. § 522(d)(10)(E). See Debtor's Schedule C.

(15) The trustee timely filed an objection to this claim of exemption. The objection is based on her contention that "not all of the funds in the retirement annuity are reasonably necessary for the Debtor's continued support." Brief in Support of Trustee's Objection at p. 2. See 11 U.S.C. § 522(d)(10)(E) (A debtor generally may exempt her "right to receive . . . a payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor." (emphasis added)).

(16) In response to the trustee's objection, the Debtor asserted that her interest in the annuity contracts is excluded from the bankruptcy estate by operation of 11 U.S.C. § 541(c)(2).

Conclusions of Law

(1) Neither party arguing to the contrary, the Court assumes that the validity of the contracts is to be determined by New York law. See, e.g., Richardson v. TIAA/CREF, 123 B.R. 540, 542 (E.D.N.C. 1991) (giving effect to TIAA and CREF contract provisions calling for application of New York law); In re Montgomery, 104 B.R. 112, 115 (Bankr.N.D.Iowa 1989) (doing likewise, notwithstanding the parties' apparent assumption that Iowa law controlled); see generally In re Portnoy, 201 B.R. 685, 697 (Bankr.S.D.N.Y.1996) ("Federal . . . choice of law principles generally respect a designation in a trust which provides that a certain law be applied to interpret it.").

(2) For present purposes, the Court accepts as true the trustee's unchallenged assertion that the Plan is a "governmental plan" within the meaning of § 1002(32) of the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. ("ERISA"). See Trustee's Brief at p. 3 (citing a decision which collected cases holding that "public school districts are exempt from ERISA because they are government plans," Missouri State Colleges & Universities Group Ins. Consortium v. Business Men's Assurance Co. of America, 980 F.Supp. 1333, 1334 (W.D.Mo. 1997)); cf. In re Lyons, 148 B.R. 88, 93 n. 6 (Bankr.D.D.C.1992) (assuming, since the debtor did not argue otherwise, that the TIAA and CREF contracts "were not ERISA-qualified pensions"); see generally 29 U.S.C. § 1002(32) ("The term ...