In re Hall, Bankruptcy No. GK91-81542.
| Decision Date | 18 February 1993 |
| Docket Number | Bankruptcy No. GK91-81542. |
| Citation | 151 BR 412 |
| Parties | In re Louis C. HALL, Debtor. |
| Court | U.S. Bankruptcy Court — Western District of Michigan |
William H. Shaw, Kalamazoo, MI, for Debtor.
Robert E.L. Wright, Kalamazoo, MI, for Richard C. Remes, Chapter 7 Trustee of Middle Earth Graphics, Inc.
Gary Shinners, Magalia, CA, for N.L.R.B.
Paul F. Davidoff, Kalamazoo, MI, for Thomas A. Bruinsma, Successor Chapter 7 Trustee of Louis C. Hall.
This contested matter requires the court to determine whether certain retirement plans are exempt from an individual chapter 7 debtor's bankruptcy estate. First, is a pension plan maintained by and benefitting only a sole shareholder and his spouse property of the estate pursuant to 11 U.S.C. § 541(c)(2)?1 Second, if the pension plan is property of the estate, may the pension plan be exempted pursuant to § 522(d)(10)(E)? Third, may an individual retirement plan be exempt from property of the estate pursuant to § 522(d)(10)(E)?
This court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334. This matter is a core proceeding in accordance with 28 U.S.C. § 157(b)(2)(A), (B), and (O). The court has the authority to enter a final order in this contested matter. 28 U.S.C. § 157(c)(2). The following constitutes the court's findings of fact and conclusions of law. FED.R.BANKR.P. 7052.
Louis C. Hall (herein "Debtor") filed a chapter 13 petition on March 15, 1991. The case was converted to chapter 7 on January 6, 1992. Upon conversion of the case, the Debtor filed amended bankruptcy schedules including a new Schedule C — Property Claimed as Exempt. The Debtor has claimed as exempt, inter alia, his interest in the Middle Earth Graphics, Inc.2 Pension Plan (herein "Pension Plan") and an individual retirement plan each pursuant to § 522(d)(10)(E).
On February 14, 1992, the Trustee for Middle Earth Graphics (herein "Middle Earth Trustee") filed an Objection to Debtor's Claim of Exemption regarding the Pension Plan. On February 28, 1992, the National Labor Relations Board (herein "NLRB") filed an Objection to Debtor's Claims of Exemption respecting both the Pension Plan and the individual retirement plan. On May 18, 1992, the Debtor's Chapter 7 Trustee (herein "Hall Trustee") filed Trustee's Objection to Exemption Claim opposing the claimed individual retirement plan exemption.
On July 31, 1992, the court held a consolidated evidentiary hearing regarding all three objections. The court heard testimony from four witnesses3, admitted fifteen exhibits into evidence4, and listened to argument of counsel. Upon conclusion of the hearing, the court requested supplemental memoranda of law and took the matter under advisement.
After trial and before release of this opinion, the parties conditionally settled this matter as well as other disputes. The court was requested to withhold issuance of an opinion. The court was subsequently advised that certain conditions were not satisfied and a global settlement was not then possible. Although the parties have continued discussions, at this time no settlement pleadings have been docketed. It is now appropriate to release this opinion.
The Debtor was the president and sole shareholder of a printing company named Middle Earth Graphics. (Trans. at 114.) The Debtor's spouse, Janet Hall, was the secretary of Middle Earth Graphics.5 (Trans. at 18.) On September 13, 1985, the Board of Directors of Middle Earth Graphics established the Pension Plan and the Middle Earth Graphics, Inc. Retirement Plan (herein "Retirement Plan" or collectively referred to with the Pension Plan as "the Plans"). (Trustee's Ex. 1; Trans. at 20, 114.) The effective date of the Plans was October 1, 1984. (Trustee's Ex. 1 & 2.) The Plans were established because Middle Earth Graphics was profitable in 1984 and its future business projections were encouraging. The Debtor testified the purposes for establishing the Plans were to provide Middle Earth Graphics a "tax break, preserve some working cash, as well as give incentive for long time employees to remain with us and take care of our own retirement." (Trans. at 166.)
In 1985, Middle Earth Graphics funded the Plans by making contributions of $115,000. (Debtor's Ex. B.) Middle Earth Graphics borrowed $95,000 of this amount from Old Kent Bank. The bank took a blanket security interest on all of Middle Earth Graphic's assets.6 (Trans. at 121-22.) In 1986, Middle Earth Graphics made contributions to the Plans totalling $62,458. (Debtor's Ex. C.)
The Pension Plan was established for the exclusive benefit of the Debtor and his spouse. The Debtor and Janet Hall were the trustees, sole beneficiaries, and only participants of the Pension Plan. (Trustee's Ex. 1; Trans. at 115.) At the time of its inception, the Pension Plan was qualified under the applicable provisions of the Internal Revenue Code7 and the Employee Retirement Income Security Act of 1974 (herein "ERISA").8 The Pension Plan contains an anti-alienation provision.9 I.R.C. § 401(a)(13); 29 U.S.C. § 1056(d)(1) (ERISA § 206(d)(1)). The Retirement Plan was established for the benefit of Middle Earth Graphics' hourly employees. (Trans. at 20.) The Debtor testified the Retirement Plan covered four or five employees when it was established. (Trans. at 202.)
The Board of Directors of Middle Earth Graphics held a special meeting on September 15, 1986. At this meeting, a resolution terminating the Pension Plan was adopted, effective as of October 1, 1986. (Trustee's Ex. 3.) Notices of the termination were issued to the trustees and participants of the Pension Plan on September 15, 1986. (Trustee's Ex. 4 & 5.) Neither the Debtor nor Janet Hall has ever requested the Pension Plan funds be distributed. (Trans. at 36, 134.) Currently, the value of the Pension Plan is approximately $135,000. (Trans. at 97.)
Even though the minutes to the September 15, 1986 Board of Director's meeting, the Notice to the Pension Plan trustees, and the Notice to the Pension Plan participants indicate otherwise, the Debtor and Janet Hall maintain the Board of Directors of Middle Earth Graphics never intended to terminate the Pension Plan. (See Trustee's Ex. 3, 4 & 5.) Both the Debtor and Janet Hall contend the purpose of the Board of Directors was to suspend contributions to the Pension Plan because of a significant decrease in the profitability of Middle Earth Graphics. (Trans. at 34-35, 118.) The Debtor claims the Board of Directors intended to recommence contributions to the Pension Plan upon Middle Earth Graphics regaining adequate profitability. (Trans. at 118.) Middle Earth Graphics subsequently became more profitable but no further contributions to the Pension Plan have been made. (Trans. at 157.) Middle Earth Graphics continued to file the necessary reports with the IRS regarding the status and assets of the Pension Plan.10 (Trustee's Ex. 2, 6-9; Trans. at 133-34.)
The Debtor originally established the individual retirement plan with First of America Bank in the late 1970's or early 1980's. The individual retirement plan was subsequently transferred to Equitable Life Insurance Company which presently holds all of the funds. All contributions to the individual retirement plan were made through automatic withdrawals from the Debtor's checking account. The Debtor did not transfer or withdraw any funds from the individual retirement plan in the year prior to the bankruptcy filing. The amount of the individual retirement plan, although not clearly known, is at least $14,000.11 (Trans. at 159-62.)
The Middle Earth Trustee and NLRB12 have objected to the Debtor's claimed exemption of the Pension Plan. Before considering the Debtor's claimed exemption under § 522(d)(10)(E), the Pension Plan must first be determined to be property of the estate pursuant to § 541 of the Bankruptcy Code. If the Pension Plan is "ERISA qualified" it is not property of the estate under § 541(c)(2). The Middle Earth Trustee argues: (1) the Pension Plan is not "ERISA qualified" because it was properly terminated under ERISA law and it no longer comports with I.R.C. §§ 401(a) & 410; and (2) even if the Pension Plan was suspended, rather than terminated, it still is not an "ERISA qualified plan".
If the Pension Plan is property of the estate, the Middle Earth Trustee argues it may not be exempted pursuant to § 522(d)(10)(E) because: (1) the Pension Plan is excepted from the exemption pursuant to § 522(d)(10)(E)(i)-(iii); and (2) even if the Pension Plan does not come within the exception to § 522(d)(10)(E), the Debtor has not shown the lump sum benefit is "reasonably necessary for the support of the debtor".
The Debtor argues the status of the Pension Plan as terminated or suspended is irrelevant because it is not property of estate under § 541(c)(2) of the Code. If the Pension Plan is property of the estate, the Debtor asserts his interest is properly exempt and the entire amount of funds held in the Pension Plan are "reasonably necessary for his support". 11 U.S.C. § 522(d)(10)(E).
Section 541(c)(2) of the Bankruptcy Code states:
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 Patterson v. Shumate, ___ U.S. ___, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992), the Supreme Court interpreted § 541(c)(2) specifically focusing on the phrase "applicable nonbankruptcy law". In Shumate, the pension plan satisfied all applicable requirements of ERISA and qualified for favorable tax treatment under the Internal Revenue Code. 112 S.Ct. at 2245. The pension plan also contained the anti-alienation provision required by ERISA. Id. (citing 29...
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