In re Groves
| Decision Date | 23 October 1990 |
| Docket Number | Adv. No. 89 A 801.,Bankruptcy No. 89 B 5462 |
| Citation | 120 BR 956 |
| Parties | In re Brenda GROVES, Debtor. Pamela S. HOLLIS, Trustee, Plaintiff, v. STATE EMPLOYEES' RETIREMENT SYSTEM OF ILLINOIS, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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Pamela S. Hollis, Donald E. Johnson, Hollis & Johnson, Chicago, Ill., for plaintiff.
James D. Newbold, Asst. Atty. Gen., Litigation Div., Chicago, Ill., for defendant.
Pamela S. Hollis, Hollis & Johnson, Chicago, Ill., Trustee.
This matter comes before the court on the cross motions of the trustee, Pamela S. Hollis, and the State Employees' Retirement System of Illinois ("SERS") for summary judgment pursuant to Rule 56 of the Fed.R.Civ.P. which is applicable to these proceedings by virtue of Bankruptcy Rule 7056. For reasons explained in the opinion, SERS's motion for summary judgment is granted. The trustee's motion for summary judgment is denied.
The parties have stipulated to the material facts. The debtor Brenda Groves was employed as a youth supervisor by the State of Illinois at the time of her bankruptcy filing and continues in that position today. As a state employee, she was required to participate in SERS, the state employees' retirement system. See Ill.Rev. Stat. ch. 108½, ¶ 14-101 et seq. Employee contributions to the state system are by mandatory wage deductions. SERS is also funded by annual state legislative appropriations and interest earnings upon accumulated sums. The debtor may only withdraw her contributions upon termination of employment, retirement or disability. Ill. Rev.Stat. ch. 108½, ¶¶ 14-103.26, 14-130. SERS has no provision for withdrawal of any contributions for hardship, loans or payments to creditors. SERS is not subject to the Employee Income Retirement Security Act of 1974 ("ERISA") because it is a governmental pension plan. 29 U.S.C.A. § 1003(b)(1) (1985). However, like ERISA-qualified plans, SERS funds are not subject to execution, garnishment or attachment and are not assignable by the employee. Ill.Rev.Stat. ch. 108½, ¶ 14-147.
SERS does not maintain a separate account for each employee's mandatory contributions. In the event of resignation, discharge or dismissal, SERS must calculate the amount of the employee's contributions in order to determine the amount of the employee's refund.
The debtor Brenda Groves made mandatory contributions to SERS which totalled $9,742.60 as of June 30, 1988. She filed her voluntary petition under Chapter 7 of the Bankruptcy Code on March 31, 1989, and claimed her contributions to the State Employees' Retirement System as exempt property. The trustee filed an objection to the debtor's exemption claim with respect to her SERS contribution. The debtor did not contest the trustee's opposition to the exemption claim. Accordingly, on July 10, 1989, this court sustained the trustee's objection by default and denied the debtor's claim that her SERS contributions were exempt. The trustee then filed the instant adversary proceeding seeking to compel SERS to turn over to the estate the debtor's contributions to the retirement system.
The trustee maintains that the debtor's contributions are property of the estate pursuant to § 541 and seeks a turnover of the funds so that they may be used to pay creditors' claims. SERS opposes the trustee's turnover complaint. In that regard it makes the following arguments: (1) The funds are not property of the estate; (2) The debtor is entitled to an exemption under Ill.Rev.Stat. ch. 108½, § 14-147; (3) The Eleventh Amendment shields the state from a turnover action; (4) Even if held to be property of the estate, the funds are not subject to immediate turnover because the debtor has no present right to demand distribution; (5) Public policy prohibits compelling a turnover of the funds; and (6) A turnover order impairs SERS's contract with the debtor and violates the parties' rights to due process under the Fourteenth Amendment. Both the trustee and SERS have filed motions seeking summary judgment. These motions have been fully briefed and are now before this court for decision.
This matter arises under § 522(b), §§ 541(a)(1) and (c)(2), and § 542(a) of the Bankruptcy Code. Accordingly, this Court has jurisdiction over this dispute under 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B) and (E) and is before the court pursuant to Local Rule 2.33 of the United States District Court for the Northern District of Illinois automatically referring bankruptcy cases and proceedings to the court for hearing and determination.
Summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). In the case at bar both parties have stipulated to the material facts and agree that this adversary proceeding can be resolved as a matter of law.
In determining what is and what is not property of a bankruptcy estate, the starting point for analysis is 11 U.S.C. § 541(a) which provides that the bankruptcy estate consists of "all legal or equitable interests of the debtor in property as of the commencement of the case." Property of the debtor becomes property of the estate "notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law." 11 U.S.C. § 541(c)(1). An exception to this broad scope of the bankruptcy estate is found in § 541(c)(2), which provides:
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.
SERS argues that the provision in the Illinois law governing SERS that protects the beneficiary's interest in SERS from execution or garnishment and prohibits assignment of the interest creates a trust containing alienation restrictions enforceable under applicable non-bankruptcy law pursuant to § 541(c)(2). Ill.Rev.Stat. ch. 108½, ¶ 14-147.1 While the language of § 541(c)(2) arguably supports SERS's position that an anti-alienation, anti-assignment clause is sufficient to exclude a debtor's benefits as property of the estate, and some courts have so held, a majority of courts have relied on the legislative history and have concluded that Congress intended the subsection to exclude only traditional spendthrift state law trusts. In re Dagnall, 78 B.R. 531, 533 (Bankr.C.D.Ill.1987) (citations omitted). See also In re LeFeber, 906 F.2d 330 (7th Cir.1990). But see In re Moore, 907 F.2d 1476 (4th Cir.1990) ().
The legislative history of § 541(c)(2) clearly indicates that the intent underlying the provision was to preserve "restrictions on transfer of a spendthrift trust to the extent that the restriction is enforceable under applicable nonbankruptcy law." Dognall, 78 B.R. at 533 (quoting H.R.Rep. No. 595, 95th Cong., 2d Sess. 369, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5963, 6325). (Emphasis added). Given the Congressional intent to define the concept of property of the estate broadly in § 541(a), S.Rep. No. 95-989, 95th Cong. 2nd Sess. 82-3 (1978), it is appropriate to read § 541(c)(2) narrowly to avoid limiting the definition of property of the estate further than Congress intended. Therefore, this court agrees with the line of authorities holding that anti-alienation provisions alone are insufficient to result in the exclusion of the debtor's interest in a pension plan from the bankruptcy estate. See In re Tomer, 117 B.R. 391 (Bankr.S.D.Ill.1990); In re Lyons, 118 B.R. 634 (C.D.Ill.1990). To fit within the § 541(c)(2) exclusion, the pension plan must qualify as a spendthrift trust under state law.
There is no Illinois statute defining the term "spendthrift trust". Instead, the legislature has left it to the courts to define the term. There are three characteristics which the Illinois courts have come to look to in determining whether a spendthrift trust exists under Illinois law:
See In re Perkins, 902 F.2d 1254, 1257 n. 2 (7th Cir.1990). The most important characteristic in determining whether a spendthrift trust exists is the degree of control which a beneficiary exercises over the trust corpus. Id.
Applying these principles to the case at hand, it is apparent that SERS is not a spendthrift trust under Illinois law. Under SERS, the debtor can receive a refund of any or all of her contributions to the pension fund at any time. All she has to do to be able to compel such a distribution is to quit her job with the state. It is entirely her decision. This ability of the debtor to force distribution of the trust corpus at any time is contrary to the nature of a spendthrift trust. One of the key purposes of a spendthrift trust is to protect the beneficiary from her perceived inability to manage her own funds. The settlor of a spendthrift trust wants to provide funds for the maintenance and support of the beneficiary while at the same time precluding the beneficiary from having control over the trust res specifically to prevent the beneficiary from...
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