In re Cross

• Decision Date: 24 March 2022
• Docket Number: Case No. BG 21-01277
• Citation: 640 B.R. 388
• Parties: IN RE: Cleophas James CROSS, Sr., Debtor.
• Court: U.S. Bankruptcy Court — Western District of Michigan

640 B.R. 388

IN RE: Cleophas James CROSS, Sr., Debtor.

Case No. BG 21-01277

United States Bankruptcy Court, W.D. Michigan.

Signed March 24, 2022

Martin L. Rogalski, Jenison, Michigan, attorney for Cleophas James Cross, Sr.

Jeff A. Moyer, Grandville, Michigan, Chapter 7 Trustee.

OPINION SUSTAINING TRUSTEE'S OBJECTION TO EXEMPTIONS

James W. Boyd, United States Bankruptcy Judge

I. INTRODUCTION and JURISDICTION.

This matter is before the court on the objection of Jeff A. Moyer, chapter 7 trustee (the "Trustee") to the exemption claimed by Cleophas James Cross, Sr. (the "Debtor") in a payment he received from his General Motors pension plan (sometimes referred to herein as the "Plan") prior to the filing of his bankruptcy case. The parties agree that the Plan itself is ERISA-qualified and that the Debtor's interest in the Plan is therefore excluded from property of the estate under § 541(c)(2) of the Bankruptcy Code.¹ They dispute, however, whether the funds which were traceable to the Plan, but held as cash in the Debtor's bank account as of the petition date, enjoy similar protections such that they are not property of the estate, or alternatively, that they may be exempted under the Michigan exemption statute for pension and other employee benefit plans, Mich. Comp. Laws § 600.5451(1)(l ).

A hearing on the Trustee's objection was held before this court on November 10, 2021. Thereafter, the parties filed supplemental briefs, and a subsequent hearing was held on February 3, 2022. The Debtor appeared at the hearing through counsel. The Trustee appeared on behalf of himself remotely via Zoom videoconferencing.

The court has jurisdiction over this chapter 7 bankruptcy case. 28 U.S.C. § 1334. The case, and all related proceedings and contested matters, have been referred to this bankruptcy court for determination. 28 U.S.C. § 157(a) ; LGenR 3.1(a) (W.D. Mich.). The matter before the court is a core proceeding and this court has authority to enter a final order. 28 U.S.C. § 157(b)(2)(A) (matters concerning administration of the estate) & (B) (exemptions from property of the estate).

II. FINDINGS OF FACT.

The facts of this contested matter are not disputed. The Debtor filed his chapter 7 bankruptcy petition on May 14, 2021. The Debtor's assets included a savings account at Bank of America, which contained $1,862.90 as of the filing date. Of this amount, the parties agree that $1,003.06 was traceable to a Social Security payment received by the Debtor. The Debtor claimed these funds as exempt under 42 U.S.C. § 407, and the Trustee did not object to this claim of exemption.

The balance of the funds in the Bank of America account, $859.84, were traceable to a monthly payment the Debtor received from his retirement plan with General Motors. The Debtor has alleged, and the Trustee has not disputed, that the General Motors retirement plan is tax qualified as a pension under § 401 of the Internal Revenue Code, 26 U.S.C. § 401, and satisfies the applicable requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). Accordingly, there is no dispute in this contested matter that the Plan included the anti-alienation provision required for qualification under § 206(d)(1) of ERISA, 29 U.S.C. § 1056(d)(1), and is excluded from property of the estate under 11 U.S.C. § 541(c)(2). They disagree, however, as to whether the $859.84 that was distributed by the retirement plan to the Debtor via a prepetition direct deposit, and was held as cash in the Debtor's savings account as of the petition date, is entitled to similar protections. Specifically, they dispute whether the funds are property of the estate, and if so, whether they may be exempted under applicable Michigan law.

III. DISCUSSION.

The Debtor makes two arguments in support of his effort to retain the $859.84 in his savings account. First, the Debtor asserts that because the Plan itself is protected by ERISA and excluded from property of the estate under 11 U.S.C. § 541(c)(2), the same protection extends to the prepetition payment made to the Debtor from the Plan – i.e., the $859.84 at issue – to the extent the Debtor still held and controlled the funds as of the petition date. Second, even if the funds were property of the estate, the Debtor argues that they may be exempted under state law, Mich. Comp. Laws § 600.5451(1)(l ).² The Debtor bears the burden on the first issue and must establish that the requirements of § 541(c)(2) have been met such that the funds at issue are excluded from property of the estate. In re Adams , 302 B.R. 535, 540 (6th Cir. B.A.P. 2003). If the funds are property of the estate, the Trustee bears the burden of proving that the exemption claimed by the Debtor is not valid. See Fed. R. Bankr. P. 4003(c). Exemptions are to be liberally construed in favor of the debtor. See In re Schramm , 431 B.R. 397, 400 (6th Cir. B.A.P. 2010).

A. Property of the Estate .

Section 541(c)(2) excludes a debtor's interest "in a plan or trust that contains a transfer restriction enforceable under any relevant nonbankruptcy law" from the Bankruptcy Code's otherwise broad definition of property of the estate.³ Patterson v. Shumate , 504 U.S. 753, 757-58, 112 S. Ct. 2242, 119 L.Ed.2d 519 (1992). In Patterson , the United States Supreme Court confirmed that the anti-alienation provisions contained in ERISA-qualified pension plans are among the types of "restriction[s] on transfer enforceable under ‘applicable nonbankruptcy law’ " that could result in the "exclusion of property from the debtor's bankruptcy estate" under § 541(c)(2). Id . at 757, 112 S. Ct. 2242. In this case, the Debtor and the Trustee have agreed that the General Motors Plan is ERISA-qualified and that the Debtor's interest in the Plan itself is excluded from property of the estate. The dispute here goes one step further and requires the court to consider whether ERISA's anti-alienation protections continue to apply after the funds are paid out of the plan.

The Sixth Circuit Court of Appeals has not directly addressed that issue in a bankruptcy case but has consistently held that ERISA's protections cease to apply after benefits are distributed to the plan beneficiary in other contexts. For example, in Central States, S.E. & S.W. Areas Pension Fund v. Howell , 227 F.3d 672 (6th Cir. 2000), the Sixth Circuit held that once benefits under an ERISA employee welfare benefit plan⁴ have been distributed to a properly designated beneficiary, ERISA no longer preempts claims against those proceeds under state law. The dispute in Central States involved the proceeds of three life insurance policies, one of which was subject to ERISA, and arose when the husband died during the pendency of divorce proceedings. During the divorce case, the husband changed the beneficiary designation on his ERISA life insurance policy from his wife to his three children from a prior marriage, despite an order of the domestic relations court that prohibited such changes. After he died, the ERISA life insurance proceeds were paid to the children. The Sixth Circuit upheld this payment, finding that the domestic relations order was preempted by ERISA. The court also held, however, that after the benefits were paid to the children, nothing in ERISA prevented the wife from seeking to impose a constructive trust on the benefits. In so holding, the court favorably cited the Tenth Circuit Court of Appeals' decision in Guidry v. Sheet Metal Workers Nat'l Pension Fund (Guidry II) , 39 F.3d 1078 (10th Cir. 1994) (en banc decision on remand from the U.S. Supreme Court), which held that while "the anti-alienation provision of ERISA precluded the imposition of a constructive trust before distribution of benefits to the beneficiary, ... nothing in the legislative scheme prevented the imposition of a constructive trust after the benefits were paid to the beneficiary of the pension benefits." Central States , 227 F.3d at 678 (citing Guidry II , 39 F.3d at 1086 ) (emphasis in original).

Similarly, in DaimlerChrysler Corp. v. Cox , 447 F.3d 967 (6th Cir. 2006), the court considered whether the Michigan State Correctional Facility Reimbursement Act (the "SCFRA"), and other state laws and directives, violated ERISA by requiring state prisoners or their wardens to notify their pension plans that benefit payments must be sent to the prisoner's institutional account, where they could subsequently be utilized to reimburse the state for the costs of the prisoner's incarceration. Because "the SCFRA notices operate on plan benefits before they are sent," the Sixth Circuit held that the state law provisions were preempted by ERISA's anti-alienation provisions. Id . at 974-76. The court noted, however, that its holding did not render "the state incapable of seeking reimbursement" from a prisoner's pension benefits "[o]nce the benefit payments are received." Id . at 976. At that time, the state would be allowed to impose a constructive trust against the funds without running afoul of ERISA's anti-alienation provisions. Id . at 974, 976 (citing Central States and Guidry II "for the proposition that once a pension plan has sent benefit payments to a beneficiary and relinquished control of those payments, the attachment of those funds by a creditor does not constitute an alienation").

The Sixth Circuit's view that ERISA's anti-alienation provisions cease to protect benefits after they are paid to the beneficiary is consistent with the vast majority of circuit caselaw on the subject. See, e.g ., Hoult v. Hoult , 373 F.3d 47, 54 (1st Cir. 2004) (ERISA's restrictions on alienation apply only to benefits "while held by the plan administrator and not after they reach the hands of the beneficiary"); Trucking Employees of North Jersey Welfare Fund, Inc. v. Colville , 16 F.3d 52, 53-56 (3d Cir. 1994) (ERISA anti-alienation provision does not apply to benefits after they are received by a beneficiary, even if they remain in the beneficiary's bank account); but see ...