In re Foster

• Citation: 556 B.R. 233
• Decision Date: 12 August 2016
• Docket Number: Case No. 15–33626–KLP
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re: John Herbert Foster, Jr., Debtor.

556 B.R. 233

In re: John Herbert Foster, Jr., Debtor.

Case No. 15–33626–KLP

United States Bankruptcy Court, E.D. Virginia, Richmond Division .

Signed August 12, 2016

Laura Taylor Alridge, Veronica D. Brown–Moseley, Amanda Erin DeBerry, Emily C. Fort, Mark C. Leffler, Stephen F. Relyea, Boleman Law Firm, P.C., Richmond, VA, Barry W. Spear, Boleman Law Firm, P.C., Virginia Beach, VA, for Debtor.

MEMORANDUM OPINION

Keith L. Phillips, United States Bankruptcy Judge

Before the Court are two objections to the exemption claimed by Debtor John Herbert Foster, Jr. The Debtor filed a petition initiating this chapter 13 case on July 20, 2015. Along with the petition, he filed schedules as well as the required statement of financial affairs and statement of monthly income and calculation of commitment period.

The Debtor amended his schedules on November 23, 2015. On line 10 of Amended Schedule B, which requires a debtor to disclose annuities, the Debtor listed $103,893.04 in the "Outback Steakhouse, Inc., Partner Equity Plan, Partner Equity Deferred Compensation Diversified Plan" (the "Partner Equity Plan") and stated in part that "Debtor's interest [in the Partner Equity Plan] is excluded from property of the estate pursuant to 11 U.S.C. § 541(c)(2)." In Amended Schedule C, the Debtor claimed a 75% exemption in "aggregate disposable income" from an anticipated August 2017 distribution of $103,893.04 from the Partner Equity Plan, basing the exemption on Va.Code § 34–29.¹

Both the chapter 13 trustee and Margaret S. Foster² have objected to the Debtor's claimed exemption of his interest in the Partner Equity Plan. The Court held a hearing on the objections on April 26, 2016, at which the Court received evidence and heard the argument of the parties. At the conclusion of the hearing, the Court took the two objections under advisement.

FACTS

The Debtor was formerly a managing partner of Outback Steakhouse, Inc. He entered into the Partner Equity Plan in March of 2006. In connection therewith, he executed a document entitled "Partner Equity Deferred Compensation Diversified Plan Document" (the "Plan Document"). The Plan Document provides in its preamble that the Partner Equity Plan is part of an Outback Steakhouse, Inc. effort to "provide nonqualified deferred compensation benefits to Partners to supplement their retirement savings." The Plan Document also states that the Partner Equity Plan should be "interpreted to comply in all respects with Internal Revenue Code ... Section 409Aand those provisions of the Employee Retirement Income Security Act of 1974 ... applicable to an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of 'management or highly compensated employees.' " Additional provisions of the Partner Equity Plan include the following:

10.1 Nonassignability. The benefits provided under the Plan may not be alienated, assigned, transferred, pledged or hypothecated by any person, at any time, or to any person whatsoever. Those benefits shall be exempt from the claims of creditors or other claimants of the Participant or Beneficiary and from all orders, decrees, levies, garnishment or executions to the fullest extent allowed by law. Notwithstanding the foregoing, the Administrator shall have full power and authority to the extent consistent with Code Section 409A and other applicable laws to comply with all liens by the Internal Revenue Service and any bona fide domestic relations orders and to adjust any amounts otherwise payable under the Plan accordingly.

10.2 No Right to Company Assets. The benefits paid under the Plan shall be paid from the general funds of the Company, and the Participant and any Beneficiary shall be no more than unsecured general creditors of the Company with no special or prior right to any assets of the Company for payment of any obligations hereunder.

Article 2 of the Plan Document states that, "[f]rom time to time, the Company shall make a Company Contribution to the Plan on behalf of an Eligible Employee or existing Participant in the amount specified in a Participation Agreement with such Participant. Company Contributions shall be made in the complete and sole discretion of the Company based on the individually negotiated terms of the Participant's employment agreement with the Company." Under Article 4 of the Plan Document, participants in the Partner Equity Plan receive distributions in three installments pursuant to a prescribed schedule. The Debtor received two distributions prepetition, and a final distribution is due to him in August 2017. In Schedule B, the Debtor listed the value of funds remaining in his account established under the Partner Equity Plan to be $103,893.04, which amount is also reflected in the July 31, 2015, statement issued by the Partner Equity Plan.

CONCLUSIONS OF LAW

There are two issues before the Court relative to the Debtor's interest in the Partner Equity Plan. First, Ms. Foster³ contends that the Debtor's remaining funds in the Partner Equity Plan should be included as property of his bankruptcy estate, despite the Debtor's assertion to the contrary in Schedule B. Second, Ms. Foster contends that the provisions of Va. Code § 34–29do not support the Debtor's claim in Schedule C that the Partner Equity Plan is partially exempt. As there would be no reason to address the Debtor's claim of exemption if the Partner Equity Plan is not property of his bankruptcy estate, the Court will first address that issue.

The Debtor's Interest in the Partner Equity Plan Constitutes Property of the Debtor's Bankruptcy Estate.

Section 541(a)(1) of the Bankruptcy Code, 11 U.S.C. § 541(a)(1),⁴ defines one of the fundamental concepts of bankruptcy law, the existence of the "bankruptcy estate:"

(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:

(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.

The general rule is thus that all property owned by a debtor at the time a case is commenced becomes property of the bankruptcy estate. However, § 541(c)(2)qualifies that definition by addressing anti-alienation or nonassignability clauses such as the one contained in § 10.1 of the Partner Equity Plan:

(2) 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.

In other words, an anti-alienation clause that satisfies the conditions of § 541(c)(2)may operate to prevent certain trust property from becoming property of the bankruptcy estate. The burden is on the Debtor to prove that the funds at issue are excluded from his bankruptcy estate pursuant to the provisions of § 541(c)(2). See Rhiel v. Adams (In re Adams), 302 B.R. 535, 540 (6th Cir. BAP 2003); RES–GA Dawson, LLC v. Rogers (In re Rogers) , 538 B.R. 158, 161 (Bankr.N.D.Ga.2015); In re Wendt, 320 B.R. 904, 909 (Bankr.D.Minn.2005); Pineo v. Fulton (In re Fulton), 240 B.R. 854, 862 n. 4 (Bankr.W.D.Pa.1999).

Ms. Foster argues that § 541(c)(2)is inapplicable in the present case because 1) the Partner Equity Plan is not a trust, and 2) the anti-alienation clause of § 10.1 is not "enforceable under applicable nonbankruptcy law." In support of her argument, she cites this Court's recent case of In re Gnadt, No. 11–10378–BFK, 2015 WL 2194475 (Bankr.E.D.Va. May 7, 2015). The Debtor counters that under the 2011 decision of Racetrac Petroleum, Inc. v. Khan (In re Khan) , 461 B.R. 343 (E.D.Va.2011), the Partner Equity Plan does qualify as a trust.

The facts in Gnadt are strikingly similar to those in the instant case. There, the debtor was a participant in a § 409Adeferred benefit plan (the "409A Plan") with terms similar to those in the Partner Equity Plan. The 409A Plan in Gnadt also contained an anti-alienation clause similar to that in the instant case.

In Gnadt, the Court set forth a three-part test to determine whether § 541(c)(2)applies to exclude property from the bankruptcy estate. First, the debtor must have "a beneficial interest in a trust." Second, there must be a "restriction on alienation of the debtor's beneficial interest." Third, "the restriction on alienation [must be] enforceable under applicable non-bankruptcy law." 2015 WL 2194475, at *6.⁵ This test is not stated in the alternative, and in order to satisfy it and successfully exclude property from the bankruptcy estate under § 541(c)(2), a debtor must satisfy each of the three elements.

The Court in Gnadt found that its 409A Plan was not a trust; thus, the debtor had not satisfied the first element of the three-part test and § 541(c)(2)was inapplicable. In reaching this conclusion, the Court applied the Fourth Circuit's test to determine whether a trust has been established. In Kubota Tractor Corp. v. Strack, the Fourth Circuit held that:

Under Virginia law, "[a]n express trust is based on the declared intention of the trustor," manifested either in writing or through the parties' actions.

Leonard v. Counts, 221 Va. 582, 272 S.E.2d 190, 194 (1980); see also Woods v. Stull, 182 Va. 888, 30 S.E.2d 675, 682 (1944)( "In order to constitute an express trust there must be either explicit language to that effect or circumstances which show with reasonable certainty that a trust was intended to be created."). Although the parties' use of the word "trust" is to be given great weight, it is not determinative. See Exec. Comm. v. Shaver, 146 Va. 73, 135 S.E. 714, 716 (1926); see also Broaddus v. Gresham , 181 Va. 725, 26 S.E.2d 33, 36 (Va.1943)(recognizing that an express trust can be established without use of any "technical words"). All that is necessary is the "unequivocal" intent " 'that the legal estate [be] vested in one person, to be held in some manner or for some purpose on

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