In re Bissell

• Decision Date: 22 November 2000
• Docket Number: No. 00-12185-RGM.,00-12185-RGM.
• Citation: 255 BR 402
• Parties: In re Richard Etter BISSELL, Debtor.
• Court: U.S. District Court — Virgin Islands, Bankruptcy Division

255 B.R. 402 (2000)

In re Richard Etter BISSELL, Debtor.

No. 00-12185-RGM.

United States Bankruptcy Court, E.D. Virginia, Alexandria Division.

November 22, 2000.

COPYRIGHT MATERIAL OMITTED

Donald F. King, Odin, Feldman & Pittleman, P.C., Fairfax, VA, for Global Advanced Technologies, Inc.

Thomas P. Gorman, Tyler, Bartl, Burke & Gorman, P.L.C., Alexandria, VA, for Debtor.

MEMORANDUM OPINION

ROBERT G. MAYER, Bankruptcy Judge.

The court is called upon to determine the manner in which the exemption of retirement plans is computed under Section 34-34 of the Code of Virginia where a debtor has an interest in an Individual Retirement Account ("IRA"), a Simplified Employer Plan ("SEP")¹ and a pension plan that satisfies the requirements of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq.

The Debtor's Position

The debtor asserts that the maximum exemption allowable under § 34-34 of the Code of Virginia² for the IRA and SEP is computed without regard to the ERISA-qualified pension plan. He aggregates the value of the IRA and the SEP and applies the maximum allowable exemption, $52,955.00, against this amount. He acknowledges that since the IRA and SEP have a total value of $71,538.52, the excess over the maximum allowable exemption of the IRA and SEP, $18,583.52, is not exempt under § 34-34.³ The ERISA-qualified pension plan does not form a part of the computation because it, unlike the IRA and SEP, is not property of the estate. Patterson v. Shumate, 504 U.S. 753, 760, 112 S.Ct. 2242, 2248, 119 L.Ed.2d 519 (1992); 11 U.S.C. § 541(c).

The Creditor's Position

The creditor asserts that the value of the ERISA-qualified pension plan⁴ must first be applied to the $52,955.00 amount exempt under § 34-34. Since the ERISA-qualified pension plan has a value of $363,915.13, this method of computing the allowable exemption would exhaust the $52,955.00 exemption allowed under § 34-34. There would be no exemption remaining available for the IRA or the SEP and the full value of the two accounts, $71,538.52, would be turned over to the trustee. The creditor acknowledges that the pension plan is not property of the bankruptcy estate and, therefore, cannot be reached by the trustee. Patterson v. Shumate, 504 U.S. at 760, 112 S.Ct. at 2248.

The creditor's interpretation of § 34-34 rests on two propositions. The first proposition is that an ERISA-qualified pension plan is a "retirement plan" under § 34-34. The creditor points to the statutory definition of "retirement plan." Va.Code Ann. § 34-34(A). The second proposition is that an ERISA-qualified pension plan that is excluded from property of the estate by 11 U.S.C. § 541(c)(2) is nonetheless claimed exempt under § 34-34. These two propositions lead to the creditor's conclusion that the value of the ERISA-qualified pension plan must be deducted from the exemption otherwise allowed by § 34-34 for an IRA or SEP.

The creditor's interpretation of § 34-34 is contrary to the commonly accepted practice. Statewide continuing legal education seminars treat ERISA-qualified pension plans and IRAs separately, the former under 11 U.S.C. § 541(c) and the latter under § 34-34.⁵ Debtors routinely compute the exemption under § 34-34 without regard to the amount of any ERISA-qualified pension plan which is excluded from the bankruptcy estate by virtue of § 541(c)(2). Historically, neither chapter 7 trustees nor creditors objected to this method of calculation.⁶ Of course, a common practice does not mean that the practice is correct or that it is immune from challenge. See, e.g., In re Heath, 101 B.R. 469, 471 (Bankr. W.D.Va., 1987). The creditor's position recently received judicial support in In re Gurry, 253 B.R. 406 (Bankr.E.D.Va., 2000).

Federal Preemption

The statutory definition of "retirement plan" under § 34-34 appears, at first blush, to include an ERISA-qualified pension plan. The statutory definition is:

"Retirement plan" means a plan, account, or arrangement that is intended to satisfy the requirements of United States Internal Revenue Code §§ 401, 403(a), 403(b), 408, 408A, 409 (as in effect prior to repeal by United States P.L. 98-369) or § 457. Whether a plan, account, or arrangement is intended to satisfy the requirements of one of the foregoing provisions shall be determined based on all of the relevant facts and circumstances including, but not limited to, the issuance of a favorable determination letter by the United States Internal Revenue Service, reports or returns filed with the United States or state agencies, and communications from the plan sponsor to participants.

Va.Code Ann. § 34-34(A).⁷ However, the matter is not that simple. The effect of federal preemption of pension plans by ERISA must be considered. See 29 U.S.C. § 1144(a). Federal preemption in this area is pervasive. ERISA totally occupies the field. Section 1144(a) states:

Except as provided in subsection (b) of this section, the provisions of this subchapter and subchapter III of this chapter shall supersede . . . any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 1003(a) of this title and not exempt under section 1003(b) of this title.

See Metropolitan Life Ins. Co. v. Mass., 471 U.S. 724, 739, 105 S.Ct. 2380, 2389, 85 L.Ed.2d 728 (1985); Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97, 103 S.Ct. 2890, 2900, 77 L.Ed.2d 490 (1983) ("A law `relates to' an employee benefit plan, in the normal sense of the phrase, if it has a connection with or reference to such a plan."); Powell v. Chesapeake and Potomac Tel. Co. of Va., 780 F.2d 419, 421 (4th Cir., 1985); In re Hanes, 162 B.R. 733, 741 (Bankr.E.D.Va., 1994).

Preemption is so pervasive that state statutes consistent with ERISA but which provide additional protections for workers are preempted. The additional protections are invalidated. New York's Human Rights Law is an example. N.Y. WORK. COMP. LAW § 200-242 (McKinney 1965 and Supp.1982-83). It was "a comprehensive anti-discrimination statute prohibiting, among other practices, employment discrimination" on the basis of gender. Shaw, 463 U.S. at 88, 103 S.Ct. at 2895. The New York statute prohibited an employer from maintaining an employee benefit plan that treated pregnancy differently from other non-occupational disabilities. It "had a reach broader than Title VII." Shaw, 463 U.S. at 89, 103 S.Ct. at 2896.⁸ Relying on ERISA's preemption provision, the Supreme Court held that the provisions of New York's Human Rights Law relating to health care coverage of pregnancy were preempted.⁹ The additional protection was not effective. In reaching this conclusion, the Supreme Court held that federal preemption by ERISA is not limited to state laws specifically designed to affect employee benefit plans or to state laws dealing only with subject matters covered by ERISA, but includes all state statutes that refer to or affect an ERISA-qualified benefit plan. Shaw, 463 U.S. at 98, 103 S.Ct. at 2900. Preemption encourages employee benefit plans by eliminating a myriad of state and local regulations each with a different scope and all containing potentially conflicting and inconsistent requirements.

A preemption case of particular interest in this case is Mackey v. Lanier Collection Agency & Serv., Inc., 486 U.S. 825, 108 S.Ct. 2182, 100 L.Ed.2d 836 (1988). Georgia enacted a law that prohibited garnishment of employee welfare benefit plans. ERISA treats welfare benefit plans and pension benefit plans differently. Only pension plans are required to contain nonalienability clauses; welfare benefit plans are not. The Supreme Court held that because ERISA occupies the field, the Georgia statute prohibiting garnishment of employee welfare plans was preempted and fully displaced even though it furthered the purposes of ERISA by providing additional protections for workers. The effect of preemption was to permit creditors to garnish employee welfare plans.

In light of the pervasive preemption of ERISA, and particularly in light of Mackey, it is clear that the Virginia General Assembly can pass no law that would affect in any way the ability to garnish an ERISA-qualified pension plan. It can neither permit creditors to recover from an ERISA-qualified pension plan nor add protections for debtors not contained in ERISA, such as limiting the enforceability of qualified domestic relations orders against pension plans.

The definition of "retirement plan" in § 34-34(A) must either include ERISA-qualified pension plans or exclude them. If they are included within the definition, the statute would "relate to" ERISA-qualified pension plans and federal preemption must be considered. The effect of preemption may be harsher than expected. Section 34-34 could be preempted in its entirety, leaving no IRA exemption. It is, therefore, necessary to construe § 34-34 to determine whether ERISA-qualified pension plans are included within the statutory definition of "retirement plans" and, if so, the effect of federal preemption; or, whether ERISA-qualified pension plans are excluded from the statutory definition.

Virginia Rules of Statutory Construction

When an issue of state law has not previously been determined by the state's highest court, as is the situation in this case, a federal court seeks to anticipate how the state's highest court would interpret the statute if it were confronted with it. See Commissioner of Internal Revenue v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 1782-83, 18 L.Ed.2d 886 (1967) (Where "the underlying substantive rule involved is based on state law . . . the State's highest court is the best authority on its own law. If there be no decision by that court then federal authorities must apply what they find to be the state law after giving `proper regard' to relevant rulings of other courts of the State. In this respect, it may be said to be, in effect, sitting as a state court."); Food Lion,...