In re Bowen, Bankruptcy No. 486-00367

• Decision Date: 09 December 1987
• Docket Number: Bankruptcy No. 486-00367,486-00366.
• Citation: 80 BR 1012
• Parties: In re Gary Dennis BOWEN and Deborah Jean Bowen, d/b/a Farmers, Debtors. In re Douglas John BOWEN and Julie Gloe Bowen, d/b/a Farmers, Debtors.
• Court: U.S. Bankruptcy Court — District of South Dakota

80 B.R. 1012 (1987)

In re Gary Dennis BOWEN and Deborah Jean Bowen, d/b/a Farmers, Debtors In re Douglas John BOWEN and Julie Gloe Bowen, d/b/a Farmers, Debtors.

Bankruptcy Nos. 486-00367, 486-00366.

United States Bankruptcy Court, D. South Dakota.

December 9, 1987.

A. Thomas Pokela, Sioux Falls, S.D., Chapter 7 Trustee, pro se.

Vance R.C. Goldammer, Boyce, Murphy, McDowell & Greenfield, Sioux Falls, S.D., for Chapter 7 Trustee Pokela.

Rick A. Yarnall, Moore, Rasmussen, Kading & McGreevy, Sioux Falls, S.D., for debtors.

Jeffrey D. Gednalske, May, Johnson, Doyle & Becker, P.C., Sioux Falls, S.D., for T & R Elec. Supply, Inc.

MEMORANDUM DECISION

PEDER K. ECKER, Chief Judge.

INTRODUCTION

This matter is before the Court on the Chapter 7 trustee's objections to claimed exempt personal property in the above-entitled cases. The parties have agreed to consolidate the two cases for the purpose of determining this matter. Specifically, the trustee contends that the interests of the debtors Deborah Bowen and Douglas Bowen in a profit-sharing plan established by their employer are included in their bankruptcy estates, are not exempt under federal or South Dakota law, and should be turned over to the trustee for distribution to creditors. On the other hand, the debtors and their employer, T & R Electric Supply, Inc. (T & R Electric), insist that the debtors' interests in the ERISA-qualified retirement plan are excluded from the bankruptcy estate.

A hearing on the trustee's objections to the claimed exempt property was held in Sioux Falls, South Dakota, on June 12, 1987. The material facts are as follows.

BACKGROUND

Debtor Deborah Bowen and her husband, Gary Bowen, filed a joint bankruptcy petition under Chapter 7 of the Bankruptcy Code on June 9, 1986. On the same day, debtor Douglas Bowen and his wife, Julie Bowen, also filed a joint petition under Chapter 7. Deborah Bowen has been employed by T & R Electric of Colman, South Dakota, for approximately sixteen years. Douglas Bowen has been employed by T & R Electric for approximately fifteen years. Neither Deborah nor Douglas is a shareholder, officer, or director of the company.

In 1967, T & R Electric established a profit-sharing retirement plan for the benefit of its employees. The plan was amended in 1976 to comply with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001-1461, and to qualify for tax purposes under the Internal Revenue Code, 26 U.S.C. § 401(a). Both Deborah and Douglas Bowen are participants in their employer's ERISA-qualified plan.

Each year, T & R Electric and its accountants determine whether the company will make a contribution to the retirement plan. If an employer contribution is to be made, then the amount of the contribution is determined. Allocations to each employee's account are made in the proportion that the earnings (income, wages, salaries, fees, and commissions) of each participant bear to the total earnings of all eligible participants.

Employer contributions to the plan vest at the rate of ten percent for each year of vesting service, with one hundred percent vesting after the completion of ten years of service, or upon normal retirement age or permanent disability. In addition, the participants may make nondeductible voluntary contributions to the trust, which voluntary contributions may be withdrawn at any time prior to termination of service with the employer.

The plan agreement, as adopted by T & R Electric, places certain restrictions on the funds in the plan trust. It does not allow withdrawals at any time from the employer's contributions. Participants are not allowed to obtain loans from their accounts, to have life insurance policies on their lives purchased under the plan, or to direct the investment of their accounts. In addition, the retirement plan contains the following anti-alienation clause:

Except as otherwise expressly permitted by the Plan or required by law, the interests of persons entitled to benefits under the Plan may not in any manner whatsoever be assigned or alienated, whether voluntarily or involuntarily, or directly or indirectly. The preceding sentence shall also apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, unless such order is determined to be a qualified domestic relations order, as defined in Section 414(p) of the Internal Revenue Code, or any domestic relations order entered before January 1, 1985.

The distribution of a participant's accrued benefits begins upon a participant's termination of service. Termination of service includes: 1) retirement on or after normal retirement age, 2) permanent disability, 3) resignation or discharge from employment, or 4) failure to return to active work after an authorized leave of absence or temporary layoff. Distribution also is made to a beneficiary upon the death of an employee-participant. Distribution will occur by one or more of three methods: a lump-sum payment, fixed-period installments, or the purchase of a non-transferable period-certain annuity contract.

In the present cases, debtors Deborah Bowen and Douglas Bowen each have worked for T & R Electric for over ten years, and thus are fully vested in their employer contribution accounts. No voluntary contribution amounts attributable to these debtors remain in the plan trust. Both debtors are currently employed by T & R Electric. Thus, the trust funds at issue are fully vested employer contributions from which distribution has not commenced.

In addition, neither debtor has dominance or control over the corpus of the plan trust. They are not shareholders, directors, or officers of the employer corporation. Deborah Bowen is an "Authorized Employer Representative" for the plan, but this function involves only clerical duties such as supplying employee histories and payroll data. She has no decision-making authority to direct distribution under the plan.

ISSUES

The principal issues raised are:

1. Whether the debtors\' interests in the ERISA-qualified profit-sharing plan established by their employer are included in their bankruptcy estates pursuant to 11 U.S.C. § 541.

2. Whether the debtors\' interests in the plan are exempted from their bankruptcy estates.

a) Whether the debtors\' interests in the plan are exempted under federal nonbankruptcy law.

b) Whether the debtors\' interests in the plan are exempted under the South Dakota Codified Laws.

3. Whether S.D.C.L. § 3-12-115 deprives the debtors of their right to equal protection of the laws pursuant to the Fourteenth Amendment of the United States Constitution, if that provision exempts benefits accruing to public employees under the South Dakota Retirement System.

4. Whether S.D.C.L. § 3-12-115 violates Article 3, Section 23 of the South Dakota Constitution, as special legislation.

DISCUSSION

First Issue

As to the first issue, this Court holds that the interests of the debtors in the T & R Electric profit-sharing plan are included in their respective bankruptcy estates. This Court recognizes the split of authority among the circuit courts of appeal in delineating the extent of the exclusion from property of the estate contained in 11 U.S.C. § 541(c)(2). This Court, nevertheless, must follow the controlling authority of the Eighth Circuit Court of Appeals as stated in In re Graham, 726 F.2d 1268 (8th Cir.1984). The application of In re Graham to the present facts is based on the following discussion.

The filing of a Chapter 7 bankruptcy petition creates a bankruptcy estate comprised of "all legal and equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). The legislative history of Section 541 indicates that this definition was meant to be "broad." See S.Rep. No. 989, 95th Cong., 2d Sess. 82, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5868 (hereinafter "Senate Report"); H.R.Rep. No. 595, 95th Cong., 1st Sess. 367-68 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 6322-24 (hereinafter "House Report"); see also United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983); In re Graham, 726 F.2d at 1270. The estate "includes all kinds of property, including tangible and intangible property, causes of action . . . and all other forms of property currently specified in Section 70a of the Bankruptcy Act." Senate Report at 82, reprinted in 1978 U.S.Code Cong. & Admin.News at 5868; House Report at 367, reprinted in 1978 U.S.Code Cong. & Admin.News at 6322.

Section 541(c) provides a narrow exception to the all-encompassing definition of estate property. Subparagraph (1) of that subsection invalidates any restriction or condition on the transfer of a debtor's interest in property to insure that all interests of the debtor in property will become property of the estate. See 4 Collier on Bankruptcy ¶ 541.01 (15th ed. 1987). Subparagraph (2) states the following exception to this rule: "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 key phrase in Section 541(c)(2) is "applicable nonbankruptcy law." See In re Flygstad, 56 B.R. 884, 886 (Bankr.N.D. Iowa 1986). The debtors, Deborah Bowen and Douglas Bowen, argue that the anti-alienation, or anti-transfer, provision in the T & R Electric plan instrument, as required by ERISA, is enforceable against creditors under "applicable nonbankruptcy law" and thus is enforceable against the Chapter 7 trustee. In other words, the funds in the plan trust should not be transferred to the bankruptcy estate. To support this argument, the debtors refer to the legislative history of Section 541(c)(2): "Paragraph (2) of subsection (c), however, preserves restrictions on transfer of a spendthrift trust...