In re Dunn
| Decision Date | 12 November 1997 |
| Docket Number | Bankruptcy No. 96-52985-R. |
| Parties | In re Jesse Douglas DUNN, Debtor. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan |
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Robert Reed, Detroit, MI, for Debtor.
Samuel Sweet, Troy, MI, Elias Majoros, Southfield, MI, for trustee.
A restriction on the transfer of an interest in a trust that is created and funded by an individual for the benefit of that individual is not enforceable in bankruptcy because the restriction is not enforceable under applicable law. The issue in this case is whether the result should be different when the trust is created by the debtor's employer, but is still fully funded through voluntary contributions by the debtor. The Court concludes that the result should not be different, and that therefore the debtor's beneficial interest in the Annuity Savings Plan administered by the debtor's employer is not excluded from the estate under 11 U.S.C. § 541(c)(2).
The Court further concludes that the debtor's exemption of this interest under 11 U.S.C. § 522(d)(10)(E) should be disallowed to the extent that the debtor's interest is needed to pay the claims against the estate and the administrative expenses, because that amount is not necessary for the debtor's support.
Jesse Douglas Dunn, the debtor, is employed by the City of Detroit and is a participant in the General Retirement System of the City of Detroit (GRS). The GRS was created by amendment to the 1919 City Charter. Dunn participates in two separate plans established by the GRS. The Defined Benefit Plan is funded exclusively by the City.1 Dunn also participates in the Defined Contribution Plan (also known as the Annuity Savings Plan), which is funded exclusively through voluntary employee contributions.
There are no traditional plan documents for the plans. Rather, the plans consist of a compilation of various provisions of the 1974 and 1997 City of Detroit Charter. (Defendant's exhibit 23.)2 The City of Detroit Charter defines the Annuity Savings Plan (the Plan) as follows:
(Defendant's exhibit 23B.)
In an informational pamphlet provided to employees, the GRS describes the Annuity Savings Plan as "an optional program . . . which can be used to enhance . . . retirement . . . funded by employee contributions and earnings from the assets of the System." (Questions and Answers on the General Retirement System of the City of Detroit, p. 11; Defendant's exhibit 9.)
Dunn has made voluntary contributions to the Annuity Savings Plan during his employment with the City. According to a statement of benefits dated June 30, 1996, Dunn has accumulated $105,407 in this Plan.
Dunn will be eligible for a lump sum distribution from the Plan in November 1997, upon completion of twenty-five years of service. Dunn would also be eligible to receive a distribution upon death, termination of employment, or on the basis of a disability retirement. The Annuity Savings Plan has an anti-alienation provision, as required for favorable tax treatment under 26 U.S.C. § 401(a).
On September 30, 1996, Dunn filed a voluntary petition under Chapter 7 of the Bankruptcy Code. In Schedule E, Dunn disclosed unsecured debts of $25,011.82. In his original Schedule B, Dunn disclosed his interest in the Annuity Savings Plan of the General Retirement Systems of the City of Detroit. In Schedule C, Dunn exempted the value of the Annuity Savings Plan under § 522(d)(10)(E).
The Trustee filed an objection to this exemption, arguing that the entire amount of Dunn's interest in the Annuity Savings Plan was not reasonably necessary for Dunn's support. Dunn later amended Schedule B and asserted that the value of the Annuity Savings Plan was "one dollar or more amount undetermined." He also amended Schedule C to exclude his interest in the Annuity Savings Plan under § 541(c)(2).
In response to Dunn's claim that his interest in the Plan is not property of the estate, the trustee makes three arguments. First, the trustee argues that the Plan is not a trust as required by § 541(c)(2). Second, he argues that the transfer restriction in the Plan is not enforceable under non-bankruptcy law as required by § 541(c)(2). Third, he argues that the administrators of the Plan have waived the transfer restriction by regularly recognizing and honoring security interests asserted by the Detroit Municipal Credit Union.3
The issues are whether Dunn's interest in the Annuity Savings Plan is property of the estate and whether Dunn's exemption of that interest should be allowed. As noted, the Court concludes that the interest is property of the estate and that the exemption should be disallowed.
The filing of a bankruptcy petition creates an estate comprised of all of the debtor's legal or equitable interests in property. 11 U.S.C. § 541(a)(1). However, certain property is excluded from the bankruptcy estate under § 541(c), which provides:
§ 541. Property of the estate.
11 U.S.C. § 541(c)(1) & (2).
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 determination of whether Dunn's interest in the Plan is property of the bankruptcy estate requires a three step analysis. First, the Court must determine whether Dunn's interest in the Plan is a beneficial interest in a "trust." Second, the Court must determine whether there is a restriction on the transfer of Dunn's interest in the Plan. Third, the Court must determine whether that restriction is enforceable under either federal or state law. Id. For the reasons set forth below, the Court concludes that although the Annuity Savings Plan is a trust and does have a restriction on transfer, that restriction is not enforceable under either federal or state law. Accordingly, the Court concludes that Dunn's interest in the Plan is not excluded from the bankruptcy estate under § 541(c)(2).
The trustee argues that the Annuity Savings Plan funds are not held in trust, and therefore are included in the bankruptcy estate because § 541(c)(2) requires a trust. The trustee notes that the Plan documents do not have language that explicitly creates a trust.
Black's Law Dictionary defines a trust as "any arrangement whereby property is transferred with the intention that it be administered by trustee for another's benefit." Black's Law Dictionary (6th Ed.1990) (citations omitted). "No particular form of words is necessary for the creation of a spendthrift trust." RESTATEMENT (SECOND) TRUSTS § 152, cmt. c. (1957).
In the present case, although the word "trust" does not appear in the Plan itself, the Court concludes that the funds are held in trust by the GRS. The administrators of the Plan are referred to as "trustees." Employees contribute money to the Plan with the intention that it be administered by the trustees for the benefit of the participants under the terms of the Plan. The contributed funds are clearly the res of the trust.
The Annuity Savings Plan contains an anti-alienation provision. Title 9, Chapter 6, Article 9, Section 1 of the 1994 Charter provides as follows:
However, the issue remains whether the restriction is enforceable under nonbankruptcy law. The Plan is excluded from the bankruptcy estate under § 541(c)(2) only if the restriction is enforceable under federal or state law.
For different reasons, neither the I.R.C. nor ERISA provides for the enforcement of the transfer restrictions of the Annuity Savings Plan.
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