In re Benton

• Decision Date: 30 June 1999
• Docket Number: Bankruptcy No. 98-53150-R.
• Citation: 237 BR 353
• Parties: In re Rebecca C. BENTON, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

237 B.R. 353 (1999)

In re Rebecca C. BENTON, Debtor.

Bankruptcy No. 98-53150-R.

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

June 30, 1999.

Charles Schneider, Livonia, MI, for plaintiff.

Stuart Snider, Detroit, MI, for trustee.

James Buschmann, Detroit, MI, for Wayne County Plans.

Opinion

STEVEN W. RHODES, Bankruptcy Judge.

The issue before the Court is whether the debtor's interests in the Wayne County Retirement Ordinance Plan and the Wayne County Deferred Compensation Plan are excluded from the bankruptcy estate under 11 U.S.C. § 541(c)(2). The debtor, Rebecca Benton, and the Wayne County Employees' Retirement System ("WCERS") contend that these plans are excluded from the estate because they are trusts that contain transfer restrictions enforceable under applicable nonbankruptcy law.¹ The trustee contends otherwise. In the alternative, Benton seeks to exempt her interest in these two plans under § 522(d)(10)(E) and the trustee objects to the exemption.

The Court concludes that Benton's interest in the deferred compensation plan is property of the estate because her employer maintains ownership of the deferred compensation until it is paid to her, and therefore the plan is not a trust. Benton's interest in the retirement plan is also property of the estate because its transfer restriction is not enforceable under any nonbankruptcy law.

Further hearings are necessary regarding the claim of exemption.

I. Property That Is Excluded from the Estate Under 11 U.S.C. § 541(c)(2)

The filing of a bankruptcy petition creates an estate comprised of all legal or equitable interests of the debtor in property. 11 U.S.C. § 541(a)(1). However, property which falls under § 541(c)(2) is excluded from the estate. That section 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." This "provision entitles a debtor to exclude from property of the estate any interest in a plan or trust that contains a transfer restriction enforceable under any relevant nonbankruptcy law." Patterson v. Shumate, 504 U.S. 753, 758, 112 S.Ct. 2242, 2246, 119 L.Ed.2d 519 (1992).

The application of § 541(c)(2) raises three issues: (1) whether the debtor's interest is a beneficial interest in a trust; (2) whether there is a restriction on the transfer of that beneficial interest; and (3) whether that restriction is enforceable under applicable nonbankruptcy law. Id.

II. The Wayne County Retirement Ordinance Plan Is a Trust But The Deferred Compensation Plan Is Not a Trust

A trust is "any arrangement whereby property is transferred with the intention that it be administered by a trustee for another's benefit." Black's Law Dictionary 1508 (6th ed.1990) (citations omitted). An express trust requires: (1) a clearly defined res; (2) an unambiguous trust relationship; and (3) specific affirmative duties undertaken by the trustee. See In re Johnson, 691 F.2d 249, 252-53 (6th Cir.1982).

The Wayne County Retirement Ordinance Plan satisfies all three elements of a trust. The funds contributed to the plan define a clear res. The plan is administered by the trustees for the benefit of the plan participants, and the trustees have specific affirmative duties set forth in the plan. Accordingly, the Wayne County Retirement Ordinance Plan is a trust.

In contrast, the Deferred Compensation Plan is not a trust. Under 26 U.S.C. § 457, as a condition of tax-deferred status, the funds in such a plan must "remain (until made available to the participant or other beneficiary) solely the property and rights of the employer . . ., subject only to the claims of the employer's general creditors." 26 U.S.C. § 457(b)(6).²

As required by § 457, Article III of the Deferred Compensation Plan contains the following provisions:

2. All assets of the Plan, including all deferred amounts, property and rights purchased with the deferred amounts, and all income attributable to such deferred amounts, property or rights, shall be the exclusive property of the Employer and shall be subject to all claims of creditors of the Employer, without protection or preference.

. . . .

6. The rights of the Participant created by this Plan shall be those of a general creditor of the Employer, and in an amount equal to fair market value of the Deferred account maintained with respect to the Participant. The Participant acknowledges that his rights are no greater than those of a general creditor of the Employer and that in any suit for an accounting, to impose a constructive trust, or to recover any sum under this Plan, the Participant\'s rights are limited to those of a general creditor of the Employer. The Employer acknowledges that the Plan Administrator is the agent of the Employer.

7. Ownership of Deferred Compensation Assets: Ownership of any title to all assets of the Wayne County Deferred Compensation Plan shall be vested in Wayne County until such time as a Participant is entitled to receive benefits under the Plan; no Participant shall have any legal or equitable interest in any asset or assets of the Plan.

Wayne County Deferred Compensation Plan at 5-6 (emphasis added).

In Sicherman v. Ohio Public Employee Deferred Compensation Program (In re Leadbetter), 992 F.2d 1216 (Table), 1993 WL 141068 (6th Cir.1993), the court of appeals held that a debtor's interest in a deferred compensation plan is property of the bankruptcy estate and is not excluded under § 541(c)(2). The bankruptcy court had ordered the turnover of funds held in the Ohio Public Employees Deferred Compensation Plan. In re Leadbetter, 111 B.R. 640 (Bankr.N.D.Ohio 1990). The district court affirmed. On appeal, the Sixth Circuit affirmed, expressly adopting the reasoning of the bankruptcy court. In re Leadbetter, 946 F.2d 895 (Table), 1991 WL 211232 (6th Cir.1991). The Supreme Court vacated the Sixth Circuit's decision for reconsideration in light of Patterson v. Shumate. Ohio Pub. Emp. Deferred Comp. Prog. v. Sicherman, 505 U.S. 1202, 112 S.Ct. 2987, 120 L.Ed.2d 865 (1992).

On remand, the Sixth Circuit again affirmed. 992 F.2d 1216, 1993 WL 141068. The court first concluded that the funds held in a public deferred compensation plan were property of the estate. The plan proponents had argued that because the funds remained "solely" the property of the employer pursuant to IRC § 457(b)(6), they are not property of the estate. The court rejected this argument, quoting from In re Hansen, 111 B.R. 647 (Bankr.N.D.Ohio 1990). In Hansen, the bankruptcy court had examined the same Ohio plan and stated, "`one can readily surmise that the Debtor or any such depositor has an expectancy of a return of investment at some future date as a result of the very purpose of this type of program.'" Leadbetter, 992 F.2d at 1216 (quoting Hansen, 111 B.R. at 649). The Leadbetter court continued:

Moreover, under ¶ 3.04 of the Ohio Program\'s plan document, participants are characterized as general creditors of their employer; and, under § 457(b)(6), the deferred funds are subject to the claims of the employer\'s general creditors. Thus, participants in the Ohio program have, at a minimum, a contingent interest in the funds.

Leadbetter, 992 F.2d at 1216.

Likewise in this case, although the funds in the Deferred Compensation Plan remain the property of the employer, plan participants like Benton are characterized as general creditors of the employer, and thus have, at a minimum, a contingent interest in the funds.

In Leadbetter, the court of appeals next concluded that § 541(c)(2) was inapplicable because the funds were not held in a trust, as required by that section. The court again noted that whereas IRC § 457 provides that a qualified plan remains property of the employer, subject only to general creditor claims, a trust exists only when one party, the trustee, holds legal title, while another party, the beneficiary, holds an equitable or beneficial title in the corpus. Leadbetter, 992 F.2d at 1216. See also Foil v. Commissioner, 920 F.2d 1196, 1209 (5th Cir.1990) (Funds in a retirement plan did not qualify under § 457 because the funds belonged to the members as beneficiaries and were not the sole property of the employer.).

In light of the specific language of the Wayne County Retirement Ordinance and the decision of the court of appeals in Leadbetter, the Court concludes that Benton's interest in the Wayne County Deferred Compensation Plan is not an interest in a trust and is thus not excluded from the bankruptcy estate under § 541(c)(2).

The Court must examine the remaining requirements for exclusion from the estate under § 541(c)(2) only with respect to the Wayne County Retirement Ordinance.

III. The Transfer Restriction in the Wayne County Retirement Ordinance Is Not Enforceable Under Michigan Spendthrift Law

The Wayne County Retirement Ordinance provides:

Section 32.01 Assignments Prohibited.

(a) The right of an individual to a pension, to refund of accumulated member contributions or the member account, the employer account, the pension itself, or any other right accrued or accruing to any individual, and the assets of the Retirement System, shall not be subject to execution, garnishment, attachment, the operation of bankruptcy or insolvency law, or other process of law . . . and shall be unassignable except as otherwise specifically provided by the Retirement Ordinance.

Wayne County Retirement Ordinance, § 32.01 at p. 43. Benton argues that this transfer restriction is enforceable under state spendthrift law.

Michigan has long recognized spendthrift trusts. In re Edgar Estate, 425 Mich. 364, 368, 389 N.W.2d 696 (1986). A spendthrift trust is:

one created to provide a fund for the maintenance of the beneficiary and at the same time to secure it against his improvidence or incapacity. In a narrower and more technical sense, a spendthrift trust is one that restrains

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