In re Kazi
| Decision Date | 04 February 1991 |
| Docket Number | Bankruptcy No. BK 90-30166,Adv. No. 90-0164. |
| Citation | 125 BR 981 |
| Parties | In re Abdul W. KAZI, M.D., and Samina W. Kazi, Debtors. Stephen R. CLARK, Trustee, Movant, v. Abdul W. KAZI, M.D., and Samina W. Kazi, Debtors/Respondents. |
| Court | U.S. Bankruptcy Court — Southern District of Illinois |
Laura Grandy, Belleville, Ill., for trustee Clark.
Kevin Richter, Belleville, Ill., for debtors.
Timothy Hayes, St. Louis, Mo., for Blunt, Ellis & Loewi.
Abdul W. Kazi, M.D. and Samina W. Kazi, husband and wife, filed a joint bankruptcy petition under Chapter 7 of the Bankruptcy Code on February 28, 1990. Dr. Kazi is the sole shareholder and director of a professional corporation known as Abdul W. Kazi, M.D., Ltd., and is a participant in the Abdul Kazi, M.D., Ltd. Money Purchase Pension Plan and the Abdul Kazi, M.D., Ltd. Profit Sharing Plan. Debtors filed their original schedules on March 15, 1990 and listed as exempt $430,000.00 in tax-qualified "pension trusts." On May 18, 1990, debtors filed an amendment to their schedules, additionally claiming as exempt $14,000.00 in an individual retirement account ("IRA") owned by Dr. Kazi and $11,000.00 in an IRA owned jointly by both debtors. No objections to exemptions were filed within the time limits prescribed by Bankruptcy Rule 4003(b). However, on July 19, 1990, Blunt, Ellis & Loewi, a major unsecured creditor, filed objections to exemptions, claiming that debtors are not entitled to exempt either the funds in the pension and profit sharing plans or the funds in the IRAs. Debtors filed a motion to strike those objections on the basis that they were not timely filed.
The Chapter 7 Trustee, who likewise failed to timely object to debtors' exemptions, filed a complaint for turnover on August 2, 1990 requesting, among other things, that debtors be ordered to turn over all funds held in the pension and profit sharing plans, as well as all funds held in the IRAs. Debtors filed a motion to dismiss the complaint,1 claiming that the funds in question are not property of the estate, and further claiming that even if said funds do constitute property of the estate, debtors are entitled to exempt the funds pursuant to Ill.Rev.Stat. ch. 110, ¶ 12-1006(a).
Section 541 of the Bankruptcy Code defines property of the estate as "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). Thus, property becomes part of the bankruptcy estate regardless of any restrictions that may have been placed on its transfer. 11 U.S.C. § 541(c)(1). An important exception to this rule is found in section 541(c)(2), which provides that "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." 11 U.S.C. § 541(c)(2). At issue in the present case is the meaning of the phrase "applicable nonbankruptcy law." Debtors contend that the restrictions against assignment, required by the Employee Retirement Income Security Act ("ERISA") and contained in both Dr. Kazi's pension and profit sharing plans,2 are "enforceable under applicable nonbankruptcy law," (i.e., enforceable under ERISA), and that the plans are therefore excluded from the bankruptcy estate. Blunt, Ellis & Loewi, as well as the Trustee, contend that "applicable nonbankruptcy law" refers only to state spendthrift trust law, and that Dr. Kazi's pension and profit sharing plans may be excluded from the bankruptcy estate only if they qualify as spendthrift trusts under Illinois law.
The majority of courts clearly support the latter position. Indeed, "virtually every circuit that has considered the question has agreed that the debtor's interest in an ERISA pension or profit sharing plan is included in the bankruptcy estate unless the debtor's interest in the plan is considered a spendthrift trust under state law." In re Kincaid, 917 F.2d 1162, 1166 (9th Cir.1990) (citations omitted). See also In re Swanson, 873 F.2d 1121, 1123 (8th Cir.1989); In re Lichstrahl, 750 F.2d 1488, 1490 (11th Cir.1985); In re Graham, 726 F.2d 1268, 1270-73 (8th Cir.1984); Matter of Goff, 706 F.2d 574, 580 (5th Cir.1983). While the Seventh Circuit has not specifically addressed this issue, the Seventh Circuit did note, in In re Perkins, 902 F.2d 1254 (7th Cir.1990), that "the legislative history of § 541(c)(2) indicates that Congress enacted the provision in order to exempt spendthrift trusts from the debtor's estate." Id. at 1256 n. 1. Likewise, a number of lower courts have held that the phrase "applicable nonbankruptcy law" refers only to state spendthrift trust law. See, e.g., In re Silldorff, 96 B.R. 859, 863-64 (C.D.Ill.1989); In re Balay, 113 B.R. 429, 436 (Bankr.N.D.Ill.1990). See also In re Tomer, 117 B.R. 391, 394 (Bankr.S.D.Ill. 1990); In re Wimmer, 121 B.R. 539, 540 (Bankr.C.D.Ill.1990).
Debtors urge this Court to reject the majority view and to adopt the position taken by the Fourth Circuit in In re Moore, 907 F.2d 1476 (4th Cir.1990). In Moore, the Fourth Circuit held that the phrase "applicable nonbankruptcy law" is not limited to state spendthrift trust law, and further held that "because ERISA clearly prevents general creditors from reaching a debtor's interest in an ERISA-qualified trust, it constitutes `applicable nonbankruptcy law' under which restrictions on the transfer of pension interests may be enforced." Id. at 1480. The court reasoned that had Congress intended for section 541(c)(2) to apply only to state spendthrift trusts, "the term `spendthrift trust' would have appeared in the statute, rather than the phrase `applicable nonbankruptcy law.'" Id. at 1478 (citations omitted). In reaching its conclusion, the court explained:
In addition to being faithful to the language of both the Bankruptcy Code and ERISA, this conclusion furthers ERISA\'s broader purpose of ensuring uniform treatment of pension benefits throughout the country. See Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 15-17, 107 S.Ct. 2211, 2219-20, 96 L.Ed.2d 1 (1987). "ERISA was designed to ensure that substantive pension benefits not be subject to the vagaries of state law." PPG Industries Pension Plan A v. Crews, 902 F.2d 1148 (4th Cir.1990). Our holding ensures that the security of employee retirement benefits will not depend on the particularities of state spendthrift trust law. Were it otherwise, a state that did not recognize spendthrift trusts at all could nullify the anti-alienation provisions of ERISA — a result which is contrary to ERISA\'s preemptive force. See 29 U.S.C. § 1144(a).
Id. at 1480. See also In re Lucas, 924 F.2d 597 (6th Cir.1991) (LEXIS, Genfed library, U.S.App file) (agreeing with Moore).
While the Court is mindful of the policy considerations underlying the Fourth Circuit's decision in Moore, the Court agrees with the majority view that Congress intended to exclude from the bankruptcy estate only those trusts that are recognized under state law as true spendthrift trusts. The Bankruptcy Code specifically provides that pension benefits may be exempted, 11 U.S.C. § 522(d)(10)(E), "clearly indicating that they were intended and assumed to be part of the estate." In re Graham, 726 F.2d at 1272. Indeed, "if § 541(c)(2) were construed to exclude retirement funds from the bankruptcy estate then the part of the Code which provides a limited federal exemption for these funds would be rendered meaningless." In re Swanson, 873 F.2d at 1124. The Court refuses to construe the Bankruptcy Code in this manner and instead favors an interpretation that gives effect to all of the provisions of the Code. See Darling v. Bowen, 878 F.2d 1069 (8th Cir.1989); Green v. C.I.R., 707 F.2d 404 (9th Cir.1983) ()
In addition, the legislative history to section 541(c)(2) suggests that "Congress had something very specific in mind with its facially broad reference to `applicable nonbankruptcy law' as the benchmark for assessing the enforceability of trust restraints on alienation in bankruptcy." Matter of Goff, 706 F.2d at 581.3 Specifically, the House Report provides, in relevant part:
The Bill determines what is property of the estate by a simple reference to what interests in property the debtor has at the commencement of the case. This includes all interests . . . whether or not transferable by the debtor. . . . The bill . . . continues over from the Act the exclusion from property of the estate of the debtor\'s interest in a spendthrift trust to the extent the trust is protected from creditors under applicable State law.
H.R.Rep. No. 595, 95th Cong., 1st Sess. 175-76 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 6136 (emphasis added). The Senate Report similarly explains that section 541(c)(2) "preserves restrictions on a transfer of a spendthrift trust . . . enforceable under nonbankruptcy law." S.Rep. No. 989, 95th Cong., 2d Sess. 83, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5869 (emphasis added). Therefore, it is clear that Congress intended to exclude from the bankruptcy estate only those trusts recognized by state law as true spendthrift trusts. Based on this legislative history and in view of the inclusion of a federal exemption for pension and profit sharing plans, the Court finds that ERISA does not constitute "applicable nonbankruptcy law" as that phrase is used in section 541(c)(2). Accordingly, Dr. Kazi's plans constitute property of the estate unless they qualify as spendthrift trusts under Illinois law.
Debtors also contend that the pension and profit sharing plans, as well as the IRAs, are excluded from...
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