In re Gnadt

• Decision Date: 07 May 2015
• Docket Number: Case No. 11-10378-BFK
• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re: ALBERT P. GNADT, Debtor.

In re: ALBERT P. GNADT, Debtor.

Case No. 11-10378-BFK

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF VIRGINIA Alexandria Division

May 7, 2015

Chapter 7

MEMORANDUM OPINION

This matter is before the Court on the Chapter 7 Trustee's Objections to the Debtor's claim of Exemptions with respect to the Debtor's nonqualified deferred compensation plan established pursuant to I.R.C. § 409A (for purposes hereof, the Debtor's interest in his deferred compensation plan will be referred to as his "409A Plan"). Docket No. 247. The Debtor filed a Response. Docket No. 252. The Court heard argument from the parties on February 3, 2015. For the reasons stated below, the Court will sustain the Trustee's Objections to the Debtor's claim of Exemptions.

Uncontested Facts

The Court makes the following findings of fact:

A. The Debtor's 409A Plan.

1. At the time that he filed for bankruptcy protection, the Debtor was employed by Kforce Services Corp. ("Kforce").

2. As a part of his compensation package, the Debtor had the opportunity to participate in the Kforce Executive Nonqualified Defined Benefit Plan (the aforementioned 409A Plan). Trustee's Ex. 2.

3. The 409A Plan states that it "is intended to be a nonqualified deferred compensation plan that complies with the provisions of Section 409A of the Internal Revenue Code ('the Code')." Id. at Sec. 1.

4. Consistent with IRC § 409A, the Plan provides that the following events are Qualified Distribution Events: (a) separation from service; (b) disability; (c) death; or (d) a Change in Control Event (a defined term under the Plan). Id. at Sec. 5.1-5.4.

5. Section 8.1 (Contractual Liability) of the Plan provides as follows:

8.1 Contractual Liability. Unless otherwise elected in the Adoption Agreement, the Company shall be obligated to make all payments hereunder. This obligation shall constitute a contractual liability of the Company to the Participants, and such payments shall be made from the general funds of the Company. The Company shall not be required to establish or maintain any special or separate fund, or otherwise to segregate assets to assure that such payments shall be made, and the Participants shall not have any interest in any particular assets of the Company by reason of its obligations hereunder. To the extent that any person acquires a right to receive payment from the Company, such right shall be no greater than the right of an unsecured creditor of the Company.

Id. at Sec. 8.1.

6. The Plan also contains an anti-alienation provision, as follows:

10.1 Benefits Not Assignable. No portion of any benefit credited or paid under the Plan with respect to any Participant shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void, nor shall any portion of such benefit be in any manner payable to any assignee, receiver or any one trustee, or be liable for his debts, contracts, liabilities, engagements or torts. Notwithstanding the foregoing, in the event that all or any portion of the benefit of a Participant is transferred to the former Spouse of the Participant incident to a divorce, the Committee shall maintain such amount for the benefit of the former Spouse until distributed in the manner required by an order of any court having jurisdiction over the divorce, and the former Spouse shall be entitled to the same rights as the Participant with respect to such benefit.

Id. at Sec. 10.1.

7. The description of the Plan, entitled "The Kforce Non-Qualified Deferred Compensation Plan Essentials," which is not a contract but the Court views it as reflective of the understanding of the parties, states in part as follows:

This Plan is NOT Formally Funded.

Under federal law, non-qualified deferred compensation plans cannot be formally funded without triggering adverse tax consequences. Your Plan balance and any earnings thereon will be reflected on the Company's books as general unsecured obligations of the Company. All payments under this Plan will come from the general assets of the Company.

Placing Assets in a Rabbi Trust Offers Some Protection.

The Company has placed assets to pay Plan benefits in a Rabbi Trust to protect the assets against a change of control in the ownership or management of the Company. This provides that the assets may only be used to pay the promised benefit to Plan participants, except in the event of the Company's bankruptcy or insolvency. In the event of such an occurrence, Rabbi Trust assets are treated like all other corporate assets and are subject to the claims of all general creditors of the Company. You will be considered a general creditor and will have no greater rights to your balance than other general creditors.

Trustee's Ex. 1 at 17.

8. Prior to filing for bankruptcy, the Debtor had accrued $30,154.99 in deferred compensation in his 409A Plan.

B. The Debtor's Chapter 11 Case.

9. The Debtor filed a voluntary petition under Chapter 11 with this Court on January 18, 2011. Docket No. 1.

10. In his Schedule C, the Debtor listed as exempt property his interest in the Kforce 409A Plan, in the amount of $30,154.99. Docket No. 26. The basis for the claim of exemption was Va. Code § 34-34. No party in interest filed an objection to the Debtor's claim of exemptions, at that time.

11. The Court approved the Debtor's Second Amended Disclosure Statement on October 16, 2013. Docket No. 152.

12. The Debtor filed a Third Amended Plan on March 24, 2014. Docket No. 171.

13. A confirmation hearing on the Debtor's Third Amended Plan was set for June 4, 2014.

14. In the meantime, the U.S. Trustee filed a Motion to Convert the case to Chapter 7. Docket No. 183.

15. When the case came before the Court on June 4^th, Debtor's counsel advised the Court that the Debtor had just lost his employment with Kforce. The Debtor conceded that his Third Amended Plan was not feasible, and he consented to the U.S. Trustee's Motion to Convert the case to Chapter 7. The Court entered an Order converting the case from Chapter 11 to Chapter 7 on June 11, 2014. Docket No. 206.

C. The Trustee's Objections to the Debtor's Claim of Exemptions.

16. Ms. Meiburger was appointed as the Chapter 7 Trustee. Docket No. 207.

17. The meeting of creditors in the Chapter 7 case initially was scheduled for July 10, 2014. Docket No. 207. It was adjourned five times, at the request of the Chapter 7 Trustee. Docket Nos. 217-20, 225.

18. The Trustee filed a Motion for a Rule 2004 Examination of Kforce on September 12, 2014. Docket No. 221. This Motion was granted by Order entered on October 1, 2014. Docket No. 226.

19. The meeting of creditors was concluded on October 2, 2014.

20. The time for the Trustee to object to the Debtor's claim of exemptions under Bankruptcy Rules 4003(b) and 1019(2)(B) would have expired on November 3, 2014.¹

21. On November 3, 2014, the Trustee filed a Motion to Extend Time to Object to the Debtor's Exemptions. Docket No. 238. This was granted, without any objection from the Debtor, by Order entered on December 3, 2014. Docket No. 241. This Order extended the time to object to the Debtor's exemptions through and including December 5, 2014. Id.

22. On December 5, 2014, the Trustee filed a Second Motion to Extend Time to Object to the Debtor's Exemptions. Docket No. 242. This Motion was granted, with the consent of the Debtor ("Seen and Agreed"), by Order entered on December 8, 2014. Docket No. 244. This Order extended the time to object through and including January 16, 2015. Id.

23. The Trustee filed her Objections to the Debtor's claim of Exemptions in his 409A Plan on January 14, 2015. Docket No. 247.

Conclusions of Law

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the Order of Reference of the U.S. District Court for this District entered August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) (matters concerning the administration of the estate), and (B) (exemptions from property of the estate).

Before addressing the substance of the parties' arguments, the Court will take a brief detour into the procedural posture of the case, and what is at issue here. When the Debtor originally filed his bankruptcy petition, he claimed an exemption in his 409A Plan pursuant toVa. Code § 34-34. Docket No. 26. The Trustee objected on the ground that Section 34-34 does not include Section 409A of the Internal Revenue Code as one of the enumerated sections entitled to an exemption. See VA. CODE § 34-34(A) ("'Retirement plan' means a plan, account, or arrangement that is intended to satisfy the requirements of United States Internal Revenue Code §§ 401, 403 (a), 403 (b), 408, 408 A, 409 (as in effect prior to repeal by United States P.L. 98-369), or § 457.")² In response, the Debtor shifted gears, and claimed that his interest in his 409A Plan was not property of the estate under Bankruptcy Code Section 541(c)(2), as interpreted by the Supreme Court in Patterson v. Shumate, 504 U.S. 753 (1992), or alternatively, that it is exempt as a spendthrift trust under State law. The Trustee disagrees that the property is excluded from the estate under Section 541(c)(2), or that the Debtor's 409A Plan constitutes a spendthrift trust. She concedes, however, that the sum of $30,154.99 in the Debtor's 409A Plan on the date of the bankruptcy filing represents the product of the Debtor's wages, bonuses and commissions and that, therefore, the Debtor is entitled to amend his State exemptions to claim that 75% of this amount is exempt pursuant to Va. Code § 34-29 (Maximum portion of disposable earnings subject to garnishment). See FED. R. BANKR. P. 1009(a) ("A voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before the case is closed.") The questions presented, in light of the Trustee's concession, are whether the remaining 25%,...