In re Handel, 01-40758(RDD).

• Decision Date: 17 November 2003
• Docket Number: No. 01-40758(RDD).,01-40758(RDD).
• Citation: 301 B.R. 421
• Parties: In re Joel M. HANDEL, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

301 B.R. 421

In re Joel M. HANDEL, Debtor.

No. 01-40758(RDD).

United States Bankruptcy Court, S.D. New York.

November 17, 2003.

Sanford P. Rosen & Associates, P.C., by Sanford P. Rosen, New York City, Kenneth M. Lewis, White Plains, NY, for Debtor.

Phillips, Lytle, Hitchcock, Blaine & Huber, LLP, by William M. Hawkins and David M. Banker, New York City, for HSBC Bank USA.

MEMORANDUM DECISION ON HSBC BANK USA'S (1) OBJECTIONS TO PROPERTY CLAIMED AS EXEMPT AND (2) MOTION FOR DETERMINATION THAT SUCH PROPERTY IS NOT EXEMPT

ROBERT D. DRAIN, Bankruptcy Judge.

HSBC Bank USA ("HSBC") seeks a determination that the interest of Joel M Handel in the savings and profit sharing plan established by his former law firm, Baer Marks & Upham LLP ("Baer Marks"), is property of his estate under section 541 of the Bankruptcy Code and is not exempt under section 522 of the Code. Mr. Handel's schedule of exempt assets under Bankruptcy Rules 1007 and 4003(a) ("Exemption Schedule") valued that interest, which he apparently is not currently eligible to receive, at $862,700.¹ Mr. Handel responds that under section 541(c)(2) of the Bankruptcy Code his interest in the savings and profit sharing plan is not property of the estate and that it is, in any event, exempt under section 522(b)(2) and applicable New York law (New York having opted out of the Federal exemption scheme under N.Y. DCL § 284).

HSBC also objects to Mr. Handel's $30,000 exemption with respect to three life insurance policies (the "Insurance Policies") on the basis that his Exemption Schedule did not adequately identify the policies. HSBC's counsel confirmed that HSBC had decided not to pursue its other objections to exemptions raised in its motion.

Based on the testimony and exhibits admitted into evidence, as well as the agreed facts in the parties' Pre-Trial Statement dated July 22, 2003 ("Pre-Tr.St."), I find that Mr. Handel exerted control over his interest in the savings and profit sharing plan in violation of the plan's terms and the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. (ERISA) in a manner that would cause the plan, at least as it pertains to Mr. Handel, not to qualify for favorable tax treatment under section 401(a) of the Internal Revenue Code (IRC).

Given the plain language of section 541(c)(2) of the Bankruptcy Code, ERISA and applicable precedent, however, I conclude as a matter of law that such conduct is irrelevant. Mr. Handel's violation of the plan and ERISA did not render any less enforceable the alienation prohibition in the plan and ERISA § 206(d)(1). Accordingly, under section 541(c)(2) of the Bankruptcy Code Mr. Handel's interest in the plan is not property of his chapter 7 estate. Giving Mr. Handel the benefit of a pension plan whose requirements he has disregarded may seem inequitable, but, as currently enacted, ERISA's anti-alienation requirement has no exceptions that are applicable here, and the Supreme Court has refused to graft any equitable exceptions onto the statute.²

With regard to the second issue, Mr. Handel sufficiently identified the Insurance Policies on his Exemption Schedule. As neither the chapter 7 trustee nor any other party in interest, including HSBC, sought additional information about the Policies or raised any other objection, the exemption stands.

Facts

Effective January 31, 1985, Baer Marks adopted a savings and profit sharing plan. The parties have agreed that the plan's governing instrument for the period February 1, 1989 through February 1, 1998 is the amendment and restatement of Baer Marks & Upham Savings & Profit Sharing Plan dated January 31, 1995 (the "Plan"). Pre-Tr.St. ¶ 19.

Mr. Handel is an experienced corporate lawyer. He was a partner in Baer Marks or its predecessor from 1976 through 2001, when the firm dissolved, and he was a managing partner or a member of Baer Marks' managing committee from 1977 through 2001. Id. ¶¶ 11-13. Bear Marks is a mid-size New York law firm; from 1992 through 1997, Bear Marks had between 27 and 33 partners. Id. ¶ 16.

Mr. Handel was never officially a trustee of the Plan or a member of the Administrative Committee that served as Plan Administrator, but he had access to the terms and conditions of the Plan and testified that he gave a copy of the Plan to his broker/financial consultant when he applied to establish Plan accounts at Salomon Smith Barney, Inc. ("Smith Barney"). He actually executed the Plan on behalf of Baer Marks. Id. ¶ 20.

The Plan was drafted to be subject to ERISA³ and to qualify for favorable tax treatment under section 401(a) of the IRC.⁴ Plan at 1. Eric Martins, a Baer Marks partner and one of the Plan's three trustees, testified that he believed the Plan met the requirements of ERISA. The Plan limits the maximum annual additions to a member's Plan assets (Plan § 3.11) (see 26 U.S.C. §§ 401(a)(16), 415(c)); provides that the Plan trustees shall invest and distribute the Plan assets, which are held in trust, although members may direct investments within separate funds, or Individual Accounts, maintained in trust by the Plan (Plan §§ 4.1-4.3) (see 29 U.S.C. §§ 1103(a), (c), 1104(c)); contains an anti-alienation, or spendthrift provision (Plan § 6.9) (see 29 U.S.C. § 1056(d)(1); 26 U.S.C. § 401(a)(13)(A));⁵ limits Plan withdrawals by members (Plan § 8.1) (see 29 U.S.C. § 1106(b)(1); 26 U.S.C. § 401(a)(19)); limits and prescribes the types of loans that can be made to beneficiaries by the Plan (Plan § 8.3) (see 29 U.S.C. §§ 1056(d)(2), 1104(c), 1106(a)(1)(B), 1108(b)(1); 26 U.S.C. §§ 401(a)(4), (5), (10)(A), (19) 4975(a), (c)); and provides for adjustments if the Plan becomes "top heavy" — that is, if Plan Account Values are too heavily weighted in favor of Key Employees. (Plan Art. 13) (see 26 U.S.C. §§ 401(a)(10)(B), 416(a)).

Not only was the Plan drafted to be subject to ERISA and receive favorable tax treatment, but Baer Marks also sought and obtained two letters, dated January 9, 1987 and January 30, 1996, respectively, in which the IRS determined that the Plan was qualified under IRC § 401(a). The evidentiary effect of these letters is significantly weakened, however, by their statement that they are "based on the information supplied," and that information, such as Baer Marks' applications to the IRS, is not in the record. It is not clear, but highly doubtful, that Baer Marks informed the IRS of Mr. Handel's conduct, discussed below, with respect to his interest in the Plan. Further, each IRS determination letter states that qualification for favorable tax treatment does not depend solely on the Plan's language: "Continued qualification of the plan will depend on its effect in operation under its present form." (Emphasis added.)

Mr. Handel testified that his Individual Account (that is, his Plan assets) comprised only brokerage accounts at Smith Barney (the "Brokerage Accounts"), an investment in Josh Baer Fine Arts Associates LP ("Josh Baer") and a life insurance policy (the "MetLife Policy") issued by Metropolitan Life Insurance Company. Pre-Tr.St. ¶ 30.⁶

Mr. Handel exerted control over these assets contrary to the requirements of the Plan, ERISA and IRC § 401(a).

First, although he was not officially named a trustee of the Plan, Mr. Handel dealt with Smith Barney as if he was. For example, when he established a Brokerage Account, Mr. Handel executed a Smith Barney New Account Application in several places as "Trustee" and once as "TTEE"⁷ of a Baer Marks plan in which he also described himself as the "Plan Participant." Mr. Handel contends he was required to execute the Application in this manner to receive Smith Barney's authorization to direct investments in the Brokerage Account. (The direction of investments within an Individual Account by a beneficiary of the Plan is permissible under the Plan and ERISA; the free transfer by beneficiaries of funds and investments in and out of Individual Accounts is not.)⁸ However, Brian Jenkins, a senior operations manager responsible for the day-to-day operation of the Smith Barney branch where the Brokerage Accounts were kept, testified that by identifying himself as the "Trustee," Mr. Handel would have given himself greater authority over the Account than simply the ability to direct investments within it. According to Mr. Jenkins, Smith Barney would have treated the person listed as the "trustee" of an account for a savings and profit sharing plan, such as the Plan, as the only person with unfettered power to direct deposits into and withdrawals out of the account.

Mr. Jenkins contrasted the Brokerage Account listed on the Application with a "self-directed account," a type of account that Smith Barney also administers and which Mr. Handel has argued the Brokerage Accounts really were. According to Mr. Jenkins, Smith Barney's "self-directed accounts," while letting the owner direct investments within the account, do not permit the owner to make withdrawals freely from the account. According to Mr. Jenkins, the Application under which Mr. Handel established the Brokerage Account as "Trustee" was not for a "self-directed account" but, rather, for an "ERISA account," and, therefore, Smith Barney would have treated the "Trustee" identified on the Application as the trustee of the assets in the plan identified on the Application, not merely as the participant in a self-directed account.⁹

It is possible, of course, that Smith Barney required Mr. Handel to sign the wrong form in the wrong way, as Mr. Handel argues (Pre-Tr.St.¶ 35), but there is no evidence to support this contention with the exception of Mr. Handel's testimony that he knew who the trustees of the Plan were and did not intend to represent that he was one of them, and the latter statement was not credible in the light of the executed forms themselves and Mr. Handel's legal expertise. In this regard, Mr. Handel testified that one of his closest friends, Jay Feder, was the Smith Barney...