In re Faulkner

• Decision Date: 04 November 1987
• Docket Number: Bankruptcy No. 3-87-01214.
• Citation: 79 BR 362
• Parties: In re Ronald Duane FAULKNER, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

79 B.R. 362 (1987)

In re Ronald Duane FAULKNER, Debtor.

Bankruptcy No. 3-87-01214.

United States Bankruptcy Court, E.D. Tennessee.

November 4, 1987.

McCord & Weaver, P.C., John F. Weaver, Knoxville, Tenn., for trustee.

Gail F. Wortley, Knoxville, Tenn., for debtor.

MEMORANDUM ON TRUSTEE'S OBJECTION TO CLAIM OF EXEMPTION

RICHARD STAIR, Jr., Bankruptcy Judge.

At issue is whether the debtor's vested interest in an ERISA¹-qualified profit sharing plan established and funded by his employer, RBX Industries, Inc., is excluded from the debtor's estate under 11 U.S.C.A. § 541(c)(2) (West Supp.1987). Alternatively, if it is determined that the debtor's vested interest in the profit sharing plan is an asset of his estate, the trustee seeks a determination as to what portion of that interest, if any, is allowable to the debtor as exempt under Tenn.Code Ann. §§ 26-2-102 or 26-2-111(1)(D) (1980).

This is a core proceeding. 28 U.S.C.A. § 157(b)(2)(A) and (B) (West Supp.1987).

I

A copy of the "RBX Industries, Inc. Profit Sharing Plan" (the Plan) and all facts essential to a resolution of the issues before the court have been stipulated by the parties. The "Stipulations For Trustee's Objection To Debtor's Claim Of Exemption" filed September 3, 1987, recites:²

1. The debtor, Ronald Duane Faulkner, filed a petition for relief under Chapter 7, Title 11, United States Code, on May 21, 1987.

2. On the date of his petition, the debtor was 30 years of age and had been an employee of RBX Industries, Inc., for eight years.

3. On the date of his petition, the debtor continued to work for RBX Industries, Inc.

4. In his Schedules A-2 and A-3, as amended, the debtor lists secured debts of $3,920.23 and unsecured debts of $12,990.60, respectively.

5. In his Schedule B-1 and Schedule B-2, as amended, the debtor lists no real property and lists personal property in the amount of $1,800.00.

6. In his Schedule B-2, as amended, the debtor lists, at a current value of "-0-," his interest in a profit sharing plan created by his employer, RBX Industries, Inc.

7. The debtor lists his total debts at $16,910.83 and his total property at $1,800.00.

8. In his Schedule B-4, as amended, the debtor claims as exempt, among other things, his interest in the profit sharing plan.

9. Exclusive of his interest in the profit sharing plan, the debtor lists no nonencumbered or nonexempt property.

10. The debtor\'s interest in the profit sharing plan is 70% vested.

11. The profit sharing plan qualifies under Section 401(a), 403(a), 403(b), 408 or 409 of the Internal Revenue Code of 1954.

12. The profit sharing plan is an ERISA qualified plan.

13. The profit sharing plan provides that, except with respect to qualified domestic relations orders or with respect to loans to the debtor from the assets of the profit sharing plan, plan benefits may not be anticipated, assigned, alienated, or subjected to attachment, garnishment, levy, execution, or other legal or equitable process.

14. The debtor, upon retiring at the age of sixty-five years, is entitled to his benefits under the profit sharing plan.

15. The debtor\'s beneficiaries, as designated by him, are entitled to his benefits under the profit sharing plan in the form of death benefit distributions upon the debtor\'s death.

16. The debtor may terminate his employment before attaining the age of sixty-five, other than by death, and receive his vested interest in his account in the profit sharing plan, at his election, by lump sum, installment payments, or annuity purchase or conversion.

17. The debtor has the right to receive his vested interest no later than sixty days after the close of the Plan Year in which occurs the debtor\'s termination of employment.

18. The Plan Year is the twelve-month period commencing November 1 and ending October 31, annually.

19. The debtor may borrow from the assets of the profit sharing plan; the debtor\'s vested interest in his profit sharing plan account is security for his loans; the plan administrator may require additional security; and any outstanding loan and accrued interest shall be deducted at retirement, death, or termination of his employment from any benefit to which the debtor or his beneficiary is entitled under the plan.

20. On the date of his petition, the debtor\'s vested, nonforfeitable interest in his profit sharing plan account was $14,498.84.

21. On the date of his petition, the debtor was not receiving any payments from the profit sharing plan.

Although the parties summarize certain provisions of the Plan in their stipulations, it is appropriate to set forth with specificity the following material provisions of the Plan:

6.03. Termination of Employment Distributions.

In the event a Participant terminates his employment before attaining age sixty-five, other than by death, his vested interest in his account shall be distributed as provided in the following subsections.³

(a) A terminated Participant may elect (with the written consent of his spouse in accordance with Plan section 6.06(d) if the Participant is then married and distribution of his benefit is subject to the survivor annuity rules) to receive the entire vested portion of his Basic Account, together with his Rollover Account, if any, in a single lump sum. An election pursuant to this subsection must be made in time to allow the distribution to be made not later than the close of the second Plan Year following the Plan Year in which the Participant terminates his employment. If the Participant requests and the Plan Administrator consents, the Trustee may transfer the vested account of a terminated Participant to another Qualified Plan or Trust that accepts such transfers.

. . . . .

6.04. Forms of Benefit Payment.

Unless Plan section 6.03 or 6.07 applies, each Participant shall have the right to elect to have the benefits to which he is entitled under the Plan paid under one of the options listed below,⁴ effective August 23, 1984. If a Participant fails to make an effective election of an optional form of benefit payment, the Plan Administrator shall direct payment in a lump sum unless Plan section 6.06 requires an annuity form of payment.

(a) Lump Sum. The value of the Participant\'s account, as of the applicable Valuation Date, shall be paid to him in a single lump sum.

. . . . .

6.09. Limits on Assignment.

(a) Except as allowed by Code section 401(a)(13) with respect to Qualified Domestic Relations Orders or by Plan section 7.06 with respect to loans, Plan benefits may not be anticipated, assigned (either at law or in equity), alienated, or be subject to attachment, garnishment, levy, execution, or other legal or equitable process.⁵

. . . . .

7.06. Loans.

(a) Any Participant may apply to the Plan Administrator in writing (on a form adopted by the Plan Administrator) for a loan from the Trust Fund. Upon receipt of a loan application, the Plan Administrator may direct the Trustee to make loans from the Trust Fund to the Participant under the remaining provisions of this section. In administering this Plan\'s loan rules, the Plan Administrator must treat similarly situated applicants in a like manner and not unreasonably discriminate between applicants (for example, on the basis of age or sex).

(b) Loans may be made under the provisions of this section for any reason approved by the Board so long as loans are made on a uniform and nondiscriminatory basis to all similarly situated Participants.

(c) Each loan made according to this Plan section must contain provisions for reasonable interest, adequate security, and repayment at a fixed maturity date. For any Plan loan, the Plan Administrator must direct the Trustee to obtain an appropriate note. With the written consent of the Participant (and if the Participant is subject to the survivor annuity rules described in Plan section 6.06, with the consent of his spouse, if any), the vested value of the Participant\'s account is security for that Participant\'s loans from this Plan. The Plan Administrator may require additional security. If a Participant\'s account is security for a Plan loan, any outstanding loan and accrued interest shall be deducted at retirement, death, or other termination of employment from any benefit to which such Participant or his Beneficiary is entitled under the Plan.

(d) The Plan Administrator may adopt and announce additional loan rules not inconsistent with the provisions of this Plan section, such as rules relating to minimum amounts of loans as well as a maximum amount of the Trust Fund that may be made available for loans to all Participants.

It is also noted that the Plan is funded exclusively by contributions of the debtor's employer.

II

The commencement of a bankruptcy case under title 11 of the United States Code creates an estate consisting of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C.A. § 541(a)(1) (West 1979 & Supp. 1987). The Bankruptcy Code further provides that "an interest of the debtor in property becomes property of the estate . . . notwithstanding any provision . . . —(A) that restricts or conditions transfer of such interest by the debtor." 11 U.S.C.A. § 541(c)(1)(A) (West Supp.1987). However, § 541(c)(2) provides for an exception to the general 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.A. § 541(c)(2) (West Supp.1987).

This court, speaking through Judge Clive W. Bare, following the Eighth Circuit in In re Graham, 726 F.2d 1268 (1984), has previously determined that § 541(c)(2) is not preempted by ERISA and that the concept of a restriction "enforceable under applicable nonbankruptcy law" applies only to trusts qualifying as valid spendthrift trusts under relevant state law. See In re Ridenour, 45 B.R. 72 (Bankr.E.D.Tenn.1984).⁶ In his decision in Ridenour, Judge Bare concluded in...