In re Boon
| Decision Date | 07 August 1989 |
| Docket Number | Bankruptcy No. 85-04057-SJ,Adv. No. 86-0385-SJ,No. 87-6100-CV-SJ-8.,87-6100-CV-SJ-8. |
| Citation | 108 BR 697 |
| Parties | In re Wilford Wayne BOON and Donna Faye Boon, Debtors. Wilford Wayne BOON and Donna Faye Boon, Appellants, v. Hugh A. MINER, Trustee, Appellee. |
| Court | U.S. District Court — Western District of Missouri |
Hugh A. Miner, St. Joseph, Mo., appellee, pro se.
Mark G. Stingley, Linde, Thompson, Fairchild, Langworthy, Kohn & Van Dyke, Kansas City, Mo., for appellants.
This is an appeal from the bankruptcy court's order directing appellants to turn over $37,471.93, representing their vested interest in pension and profit sharing plans administered by appellant Donna Faye Boon's employer. See Matter of Boon, 90 B.R. 988 (Bankr.W.D.Mo.1987). The court notes appellate jurisdiction pursuant to 28 U.S.C. § 158(a). For the reasons discussed hereafter, the decision of the bankruptcy court will be reversed.
This appeal calls for the court to decide whether a debtor's interest in an employer funded retirement or profit sharing plan can ever be excluded from the bankruptcy estate pursuant to 11 U.S.C. § 541(c)(2). Appellants argue that such plans can and should be excluded from the estate as spendthrift trusts under Missouri law. Appellee contends that a debtor's interest in an employee benefits plan can never be excluded from the estate, but must instead be dealt with as a matter of exemption, subject to the limited discretion of the bankruptcy court pursuant to 11 U.S.C. § 522. The question presents numerous, sometimes conflicting policy considerations, which may affect the future establishment and administration of such pension plans.
The facts of this case, as found by the bankruptcy court, are as follows. On November 12, 1985, debtors/appellants Wilford Wayne Boon and Donna Faye Boon filed for relief under Chapter 7 of the United States Bankruptcy Code, 11 U.S.C. § 701 et seq. At that time, Donna Boon had interests in a pension plan and a profit sharing plan administered by her employer, the Citizens State Bank and Trust Company of Chillicothe, Missouri (Citizens).1 Both plans were qualified under the Employment Retirement Security Act of 1974 (ERISA), 29 U.S.C. § 1001, et seq. Debtors claimed an exemption for all interests in the plans and the trustee objected. After a hearing on the merits, the bankruptcy court found that Donna Boon had a vested interest in the plans totaling $54,471.93.
As required by both the Internal Revenue Code, 26 U.S.C. § 501(a) and ERISA, 29 U.S.C. § 1056(d)(1), both plans contain the following anti-alienation clause:
Spendthrift — the interest in this Trust, or any benefits provided hereunder, of or to any Participant or his beneficiary shall in no event be subject to sale, assignment, hypothecation, or transfer by such Participant or his beneficiary, and each Participant or his beneficiary is hereby prohibited from anticipating, pledging, assigning or alienating his interest in this Trust or in any account or benefit hereunder. The interest of any Participant or of his beneficiary shall not be liable or subject to the debts, liabilities, or obligations of the Participant or the beneficiary, nor shall the same or any part thereof be subject to any judgment rendered, nor to any levy, execution, attachment, garnishment, or other legal process. This provision shall not apply to qualified domestic relations orders or applicable income tax withholding.
The court found that these provisions were designed to "keep the debtor's interest in the plans from becoming subject to her claims or those of her creditors until she reaches the age of 65 years or otherwise in exceptional cases of emergency." Matter of Boon, 90 B.R. 988, 989 (Bankr.W.D.Mo. 1987). The court further recognized that all contributions to the plans were made by Citizens and that Mrs. Boon was a "voluntary participant" in both plans.
At the time of the hearing, the Boons had a combined income of approximately $16,500 per year, representing Mrs. Boon's salary at Citizens. Before bankruptcy, Mr. Boon was a farmer. However, because Mr. Boon suffers from incurable leukemia, he is no longer able to work and the Boons will doubtless expend considerable sums on health care over the remaining ten to twelve years he is expected to live.2
Given these facts, the bankruptcy court found that the debtors' interests in the pension and profit sharing plans must be deemed property of the estate within the meaning of 11 U.S.C. § 541. The court rejected debtors' argument that the interests are excludable as proceeds of a "spendthrift trust" under section 541(c)(2). Instead, the court held that debtors' $54,471.93 of vested interest in the plans would become part of the estate, subject only to the exemption provisions of section 522(b)(2)(A). The court then concluded that in view of Mr. Boon's expected medical expenses, $17,000 must be deducted as "reasonably necessary for the support and maintenance of debtors," leaving a difference of $37,471.93 to be paid into the estate out of the plan interests.
In reaching its decision, the bankruptcy court purported to follow In re Graham, 726 F.2d 1268 (8th Cir.1984). The court read the Graham holding to prohibit absolutely the exclusion of pension funds from the estate under section 541(c)(2), which was designed to protect settlors of spendthrift trusts enforceable at state law. See Boon, 90 B.R. at 990. The court also characterized both plans in question as "self-settled" trusts — which are not recognized as valid in Missouri — without explaining exactly how it reached that conclusion. See id. 992-93.3 The fear expressed by the court was that, by allowing a section 541 exclusion for ERISA plans, "potential debtors could settle their own trusts and thereby force their creditors to bear the expense of their ERISA pension program." Id. at 993.
The Graham holding, as interpreted by the bankruptcy court, is at odds with virtually every other federal court which has decided the question. Indeed, the vast majority of courts have concluded that, under certain circumstances, ERISA plans may qualify as spendthrift trusts and are hence excludable under section 541(c)(2). Many of these courts read Graham to be entirely consistent with this conclusion, while others interpret it like the court below — in which case the holding has met with criticism. Within the Eighth Circuit, Graham has generated a bona fide split, with a handful of courts finding that ERISA benefits can never be excluded from the estate under any circumstances. Yet, at least a half dozen courts within this Circuit have held otherwise, finding that some ERISA plans may be excludable as spendthrift trusts under Graham. Although the dispositive resolution of this conflict may require another word from the Eighth Circuit, this court believes that Graham may be read consistently with the vast majority of other federal court decisions allowing exclusions under certain, specific circumstances.
Among the innovations of the Bankruptcy Code was the creation of a comprehensive provision designed automatically to bring all property in which the debtor has a legal or equitable interest within the scope of the estate. See 11 U.S.C. § 541(a)(1). The legislative history behind the Code suggests that this provision was intended to be far reaching, vastly simplifying the method for determining the scope of the estate that existed under the old Bankruptcy Act. See United States v. Whiting Pools, Inc., 462 U.S. 198, 206, 103 S.Ct. 2309, 2314, 76 L.Ed.2d 515 (1983).4 Under the Code, "all property of the debtor, even property necessary for a fresh start, is included in the estate . . . after the property comes into the estate, the debtor is then permitted to exempt property needed for a fresh start." In re Graham, 726 F.2d 1268, 1271 (8th Cir.1984). Property is exempted from the estate pursuant to section 522, or under any applicable state exemptions available as provided in section 522(b). In contrast, under section 541(c)(2), property never actually enters the estate.
Section 541(c)(2) provides that "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 paragraph effectively amounts to an exception to the broad definition of property contained in section 541(a)(2). The key in applying section 541(c)(2) is an understanding of exactly what is meant by "applicable nonbankruptcy law." Several early cases adopted a literal reading, allowing exclusions for transfer restrictions normally enforceable under ERISA. See In re Threewitt, 24 B.R. 927, 929 (D.Kan.1982); In re Pruitt, 30 B.R. 330, 331 (Bankr.D.Co. 1983). Under these cases, ERISA — and its anti-alienation clause requirement — may provide the basis for an exclusion as "applicable nonbankruptcy law." This view has since been rejected by virtually every court to consider the question, including Graham.
The first extensive treatment of section 541(c)(2) and its application to ERISA plans can be found in Matter of Goff, 706 F.2d 574 (5th Cir.1983). In Goff, the debtors argued that their ERISA-qualified Keogh plans should be excluded from the estate under that section, because the plans included anti-alienation restrictions as required by ERISA and the Internal Revenue Code. After undertaking an extensive analysis of the legislative history behind section 541(c)(2), the court concluded that "Congress did not evidence an intent, by reference to `applicable nonbankruptcy law' to include an ERISA plan exemption." Id. at 580. Rather, that statute was intended only to allow those restrictions on transfer recognized by state law. Id. at 582. As explained in the House Report accompanying the original bill, section 541(c)(2) "preserves restrictions on transfer...
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