In re Graham

• Decision Date: 18 October 1982
• Docket Number: Adv. No. 81-0565.,Bankruptcy No. 81-04153
• Citation: In re Graham, 24 B.R. 305 (Bankr. N.D. Iowa 1982)
• Parties: In re Charles W. GRAHAM, Debtor. Edward F. SAMORE, Trustee, Plaintiff, v. Charles W. GRAHAM, Trustee of the Charles W. Graham, M.D. Ltd., Profit Sharing Plan Trust, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Iowa

24 B.R. 305 (1982)

In re Charles W. GRAHAM, Debtor Edward F. SAMORE, Trustee, Plaintiff, v. Charles W. GRAHAM, Trustee of the Charles W. Graham, M.D. Ltd., Profit Sharing Plan Trust, Defendant.

Bankruptcy No. 81-04153, Adv. No. 81-0565.

United States Bankruptcy Court, N.D. Iowa, W.D.

October 18, 1982.

Donald H. Molstad, Sioux City, Iowa, for plaintiff.

Edward F. Samore, Sioux City, Iowa, for trustee/plaintiff.

Robert L. Fanter and Rodney Kubat, Des Moines, Iowa, for defendant.

Findings of Fact, Conclusions of Law and ORDER Granting Bankruptcy Trustee's Petition for Turn Over of Debtor's Interest in ERISA Benefits, with Memorandum.

WILLIAM W. THINNES, Bankruptcy Judge.

The matter before the Court is the bankruptcy trustee's complaint requesting an order directing the pension fund trustee to turn over to the estate the debtor's interest in the proceeds of a pension and profit sharing fund. Trial was had on the matter. Edward F. Samore, bankruptcy trustee, Donald H. Molstad, attorney for the trustee, and Rodney P. Kubat, attorney for the defendant, were present. The parties were ordered to submit briefs and the matter was taken under advisement. Having been fully advised, the Court now makes the following Findings of Fact, Conclusions of Law, and Orders.

FINDINGS OF FACT

1. The debtor, Charles W. Graham, filed a Chapter 7 bankruptcy petition on April 24, 1981.

2. Graham was the sole stockholder, director and officer of Charles W. Graham, M.D. Ltd., a professional corporation (herein the "Corporation"). That Corporation formed a pension and profit-sharing trust (the "Fund") under the Employee Retirement Income Security Act of 1974 (ERISA). Graham is a trustee (the "Fund Fiduciary") and the primary beneficiary of the fund.

3. The Fund qualified as tax exempt under 26 U.S.C. § 401(a) (1976).

4. The Corporation made contributions to the Fund based upon its net profit during the previous fiscal year. The parties agree that the Corporation contributed $150,000 to the Fund for Graham's benefit and that his right to that money is 100% vested.

5. The Corporation's earnings were derived from Graham's services as a physician.

6. A written plan (the "Plan") governs the administration of the Fund.

7. The Plan provides that benefits under the Plan cannot be assigned or alienated. That provision reads as follows:

8.05 ASSIGNMENT OR ALIENATION: The participant or beneficiary shall not assign or alienate any benefit provided under the Plan, and the Trustee shall not recognize any such assignment or alienation. For this purpose, however, the Trustee shall not take into account a Participant\'s voluntary and revocable assignment of benefits he is receiving under the Plan provided the assignment or alienation does not exceed ten percent (10%) of any benefit payment and is not made for the purpose of defraying Plan administration costs. This Section 8.05 shall not prohibit the Trustee from making a loan to a participant or to a beneficiary provided the loan is secured by the nonforfeitable portion of the Participant\'s Accrued Benefit and the loan is exempt from the tax imposed by Code § 4975 by reason of Code § 4975(d)(1).

8. The prohibition on assignment and alienation is required by ERISA, 29 U.S.C. § 1056(d) (1976) and 26 U.S.C. § 401(a) (1976), in order to qualify the Fund as tax exempt.

9. Article VI of the Plan governs the "Time and Method of Payment of Benefits." That article provides that the method of payment may be by annuity contracts, fixed installments, or a lump sum amount. That article further provides for the time of payments:

The payment of Nonforfeitable Accrued Benefits under the Plan to the Participant will begin not later than the 60th day after the close of the Plan Year in which . . . the Participant terminates his service with the employer.

10. Another Plan provision provides a different time for payment of benefits:

¶ 5.03 TERMINATION OF SERVICE PRIOR TO NORMAL RETIREMENT AGE: Upon termination of a participant\'s employment prior to attaining Normal Retirement Age (for any reason other than death or disability), The Advisory Committee, in its sole discretion, may direct the Trustee to pay the Participant his nonforfeitable Accrued Benefit. The Advisory Committee must give its direction to the Trustee within ninety (90) days of the Participant\'s Termination of Employment . . . If the Advisory Committee does not give the Trustee a direction to distribute, the Trustee shall continue to hold the Participant\'s Accrued Benefit in trust until the close of the Plan Year in which the Participant attains Normal Retirement Age, at which time the Trustee shall commence distribution of the Participant\'s nonforfeitable Accrued Benefit in accordance with the provisions of Article VI.

11. The Plan defines the Advisory Committee as the Corporation's Board of Directors. Plan ¶ 1.05. In this case, Graham as the sole director of the Corporation constituted the Advisory Committee.

12. On April 21, 1981, ¶ 5.03 was amended to read:

The Trustee shall continue to hold the Participant\'s Accrued Benefit in trust until the close of the Plan Year in which the Participant attains Normal Retirement Age, at which time the Trustee shall commence distribution of the Participant\'s nonforfeitable Accrued Benefit in accordance with the Provision of Article VI.

13. On April 24, 1981, the same date he filed his Chapter 7 bankruptcy petition, Graham terminated his employment with the Corporation.

14. On June 12, 1981, Graham resigned from the positions of officer and director of the Corporation.

15. On July 10, 1981, the bankruptcy trustee was elected sole director of the Corporation. The Corporation then rescinded the amendment of ¶ 5.03 retroactive to April 24, 1981.

16. Graham has filed an amended B-4 schedule claiming his interest in the Fund as exempt property under 11 U.S.C. § 522(b)(2)(A) (Supp. IV 1980).

CONCLUSIONS OF LAW

1. Graham's interest in the Fund is property of the bankruptcy estate under 11 U.S.C. § 541(a)(1) (Supp. IV 1980).

2. The Plan's restriction on alienation and assignment does not except Graham's interest in the Fund from the estate pursuant to 11 U.S.C. § 541(c)(2) which allows a beneficiary's interest in a spendthrift trust to be excepted from the estate.

3. Graham's interest in the Fund is not exempt under 11 U.S.C. § 522(b)(2)(A) which allows exemptions pursuant to nonbankruptcy federal law.

4. The bankruptcy trustee is entitled to receive Graham's interest in the Fund which is the right to a lump sum payment of $150,000 subject to whatever ERISA taxes and penalties may be imposed.

ORDERS

IT IS THEREFORE ORDERED that the bankruptcy trustee's request for an order directing the pension fund trustee to turn over the fund shall be, and hereby is, granted.

IT IS FURTHER ORDERED that Graham turn over to the bankruptcy trustee $150,000 subject to whatever ERISA taxes and penalties may be imposed.

MEMORANDUM

Charles W. Graham has filed a Chapter 7 bankruptcy petition. Charles W. Graham, M.D. Ltd., a professional corporation (the "Corporation"), made contributions to a pension and profit sharing trust (the "Fund") for employee Graham's benefit. The Fund qualifies for tax exempt status under the Employee Retirement Income Security Act of 1974 (ERISA). Graham is not only an employee of the corporation and a beneficiary of the Fund, but is also a Fund trustee (the "Fund Fiduciary"). Pursuant to the parties' stipulation, Graham's vested interest in the Fund is $150,000. The bankruptcy trustee has requested an order directing Graham, as Fund Fiduciary, to turn over to the estate Graham's beneficial interest in the Fund. The issues presented by the bankruptcy trustee's turnover complaint are:

1. Is Graham\'s interest in the Fund property of the bankruptcy estate under 11 U.S.C. § 541(a)(1)?

2. If Graham\'s interest in the Fund is property of the estate, is he entitled to exempt that interest from the estate under 11 U.S.C. § 522(b)(2)(A) pursuant to an exemption provided by other federal law, i.e., 29 U.S.C. § 1056(d) and 26 U.S.C. § 401(a)?

3. If Graham\'s interest in the Fund is non-exempt property of the estate, what is Graham\'s interest in the Fund that the estate is entitled to?

I. PROPERTY OF THE BANKRUPTCY ESTATE UNDER § 541(a)(1)

The Bankruptcy Reform Act of 1978 provides that the commencement of a case creates an estate. That estate encompasses all of the debtor's "legal and equitable interests . . . in property as of the commencement of the case." 11 U.S.C. § 541(a)(1) (Supp. IV 1980). Non-bankruptcy law defines what the debtor's interest in property is, while bankruptcy law determines whether that interest passes to the bankruptcy trustee as property of the bankrupt's estate. In re State of Missouri, 7 B.R. 974 (E.D.Ark.1980); In re Ross, 18 B.R. 364 (N.D.N.Y.1982). As the legislative history clearly indicates and the courts have consistently recognized, the scope of § 541(a)(1) is very broad. H.R.Rep. No. 595, 95th Cong., 1st Sess. 367 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 82 (1978), U.S.Code Cong. & Admin.News 1978, p. 5787; In re Koch, 14 B.R. 64 (Bkrtcy.D.Kan. 1981); State of Missouri v. U.S. Bankruptcy Court for E.D. of Arkansas, 647 F.2d 768 (8th Cir.1981); In re Ross, 18 B.R. 364 (N.D.N.Y.1982); In re Shore Air Conditioning & Refrigeration, Inc., 18 B.R. 643 (Bkrtcy.D. N.J.1982).

Graham has an interest in the Fund because of his participation in the Plan while he was an employee of the Corporation. The parties stipulate that Graham's interest is 100% vested.¹ Whatever his interest in the Fund is, it is property of the estate under the broad scope of § 541(a)(1).

A similar question arose in In re Threewitt, 20 B.R. 434 (Bkrtcy.D.Kan.1982). In Threewitt, the court rejected the fund fiduciary's argument that a Chapter 7 debtor's vested interest in a tax qualified ERISA fund was not property of the estate and ordered the debtor's vested interest to be paid to...