In re Kellogg
| Decision Date | 27 March 1995 |
| Docket Number | Bankruptcy No. 94-40550. |
| Parties | In re Gerald G. KELLOGG and Francis M. Kellogg, Debtors. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
Louis S. Robin, for debtors.
David J. Noonan, Trustee in Bankruptcy.
Before the Court for determination is the "Trustee's Objection to the Debtors' Self-Employment Pension Plan Exemption" (the "Objection") in which the Chapter 7 Trustee in Bankruptcy (the "Trustee") seeks a determination that the simplified employee pension plan owned by the debtor, Gerald G. Kellogg ("Gerald") is (1) not excludable from property of the estate pursuant to 11 U.S.C. § 541(c)(2)1 and (2) not exempt pursuant to 11 U.S.C. § 522(d)(10)(E).2
On February 11, 1994, Gerald G. Kellogg and Francis M. Kellogg (the "Debtors") filed a voluntary petition under Chapter 7 of the Bankruptcy Code. Approximately three weeks later, the Debtors filed a motion requesting an additional thirty (30) days to file their schedule of exemptions. The Court allowed that motion. On March 16, 1994, the Debtors filed Schedule "C" in which they claim "SEP Plan — Putnam Convertible (A08-3-029-32-4493-BBBD) and Putnam Voyager (A07-3-32-4493-BBBB)" (the "SEP Plan") as exempt, pursuant to § 522(d)(10), in the amount of $60,000, the approximate value of the property. Additionally, in a footnote on Schedule "C", the Debtors indicate that
Gerald established the SEP Plan on or about April 8, 1988. The SEP Plan was administered through a Putnam Investments Individual Retirement Account.3 At all relevant times, Gerald was the employer, sole employee and sole participant under the terms of the SEP Plan. Article XIII of the SEP Plan includes a spendthrift provision as follows:
To the extent permitted by applicable law, a Participant\'s beneficial interest in the Plan shall not be assignable, subject to hypothecation, pledge, or lien, nor subject to attachment or receivership, nor shall it pass to any trustee in bankruptcy or be reached or applied by the legal process for the payment of any obligation of the Participant or any Beneficiary thereunder.
The SEP Plan also provides, in Article VII, Paragraph 7.9, that "any employer contribution to the IRA Account pursuant to a Simplified Employee Pension Plan may be withdrawn by the Participant at any time." Additionally, Article IX, Paragraph 9.1 provides that:
a Participant may at any time terminate the Plan adopted by the Participant, and an Employer may at any time terminate a Plan adopted by the Employer. Termination may be effected by delivering to the Service Company a written notice of termination addressed to the Trustee and the Service Company and signed by the Participant or the Employer. On termination, if permitted by the terms of the investment, distribution of the IRA Account (reduced by any penalty applicable thereto) shall be made by payment of a lump sum in cash and/or in Investment Company Shares to the Participant.
The Trustee filed his Objection on September 16, 1994. The Debtors filed an opposition thereto and the Trustee responded. The Trustee's Objection was then marked for hearing.
Through his pleadings and arguments presented at the hearing, the Trustee asserts that the SEP Plan is not only property of the estate, but also not properly claimed as exempt under § 522(d)(10)(E). The Trustee asserts that the SEP Plan can not be excluded from property of the estate under the Supreme Court's recent holding in Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992) because the plan fails to comply with both the requirements of the Internal Revenue Code and the Employee Retirement Income Security Act of 1974 ("ERISA"). First, the Trustee asserts that the spendthrift provision is invalidated by the provisions of the SEP Plan which enable the "Participant" to (1) withdraw funds at any time, and (2) terminate the Plan at any time. Second, the Trustee asserts that because Gerald is employer, sole employee and sole participant of the SEP Plan, he can not qualify as an "employee" as the term is defined by ERISA, and in accordance with the decisions of Kwatcher v. Mass. Serv. Employees Pension Fund, 879 F.2d 957, 959-61 (1st Cir.1989) and In re Orkin, 170 B.R. 751 (Bankr.D.Mass.1994). The Trustee asserts that if the SEP fails to qualify under ERISA, then it "inescapably follows" that it cannot be excluded from his bankruptcy estate under the Shumate decision.
The Trustee's second argument challenges the validity of the Debtors' claim of an exemption under § 522(d)(10). First, the Trustee asserts that the Debtors are not entitled to utilize the exemption under § 522(d)(10)(E) because the SEP Plan (1) was established by an "insider" within the meaning of 11 U.S.C. § 101(31)(A)(iv), (2) provides for payment on account of age or length of service, and (3) fails to qualify for preferential tax treatment. See 11 U.S.C. § 522(d)(10)(E). Second, assuming that the exemption can be properly utilized under § 522(d)(10)(E), the Trustee asserts that the amount of the claimed exemption is more than what is "reasonably necessary for the support of the Debtors", based on the age, present and future prospects of employment, and health of the Debtors.4
The Debtors argue that the SEP Plan is excludable from the bankruptcy estate for essentially two reasons. First, the Debtors argue that the anti-alienation rules, provided under 26 U.S.C. § 401(a)(13) (Internal Revenue Code) and 29 U.S.C. § 1056(d)(1) (ERISA), both apply to the SEP Plan, and, therefore, the SEP Plan's anti-alienation provision is enforceable under ERISA. Second, adhering to the Supreme Court's policy of preventing "a party from receiving a windfall merely by reasons of the happenstance of bankruptcy," Shumate, 504 U.S. at 764, 112 S.Ct. at 2249, the Debtors assert that because Massachusetts General Laws, ch. 235, § 34A prohibits the attachment of Simplified Employee Pension Plans ("SEPs") and Individual Retirement Accounts ("IRAs"), the SEP Plan should receive similar treatment under the Bankruptcy Code.
The Debtors alternatively argue that if the SEP Plan is not excludable from the estate, it may be claimed as exempt under § 522(d)(10)(E), because, in order to be disqualified for such exemption, the SEP Plan must meet all of the exceptions set forth in § 522(d)(10)(E). In this case, the SEP Plan is tax qualified under 26 U.S.C. § 408. Therefore, the Debtors claim that it is not disqualified for exemption under § 522(d)(10)(E). And, assuming that the SEP Plan can qualify for exemption under § 522(d)(10)(E), the Debtors assert that the plan is "reasonably necessary for the support of the Debtors." See 11 U.S.C. § 522(d)(10)(E).
In support of their argument that the SEP Plan is reasonably necessary for their support, the Debtors argue that the SEP Plan is not needed for retirement; rather, it will be needed to acquire a new home in the likely event of foreclosure. As a self-employed contractor, Gerald Kellogg claims not to receive a steady income. Frances Kellogg claims to have been diagnosed with borderline diabetes and not to be currently employed. Finally, the Debtors assert they will have to pay substantial personal income taxes. Accordingly, the Debtors argue that the SEP Plan should be properly exempted from the estate pursuant to § 522(d)(10)(E).
After a hearing held on the Trustee's Objection, the Court took under advisement the issue of whether the SEP Plan is excludable from the estate pursuant to 11 U.S.C. § 541(c)(2) and whether it was disqualified from exemption under § 522(d)(10)(E).
Until Shumate, there was a split among federal circuit courts on the issue of whether a debtor's pension plan interest could be excluded from the bankruptcy estate pursuant to § 541(c)(2).5 The dispute centered on the correct interpretation of the term "applicable nonbankruptcy law" in § 541(c)(2) — that is, whether or not an anti-alienation provision in ERISA-qualified plan constitutes a restriction on transfer enforceable under "applicable nonbankruptcy law" for the purposes of § 541(c)(2). In Shumate, the Supreme Court concluded that the term "applicable nonbankruptcy law" includes federal law as well as state spendthrift law. Id. at 756-57, 112 S.Ct. at 2246.
Title I of the Employee Retirement Income Security Act of 1974 (ERISA), codified at 29 U.S.C. §§ 1001-1461, is a federal regulatory scheme enacted to ensure the protection and preservation of private pension plans. In re Taft, 171 B.R. 497, 499 (Bankr. E.D.N.Y.1994), quoting, Helen Yvette Speilman Sherman, ERISA Benefits Under the Bankruptcy Code and a New York Debtor's Rights, 58 Brooklyn L.Rev. 177 (1992). For the purposes of ERISA, a "pension plan" is generally defined as "any plan, fund or program . . . maintained by an employer or employee organization . . . that . . . provides retirement income to employees or results in a deferral of income by employees for periods extending to the termination of employment or beyond." 29 U.S.C. § 1002(2)(A). Among the requirements imposed under ERISA is an anti-alienation rule which requires that "each pension plan shall provide that benefits provided under the plan may not be assigned or alienated." 29 U.S.C. § 1056(d)(1).
To encourage employers to participate in these plans, Congress coordinated various provisions of the Internal Revenue Code with ERISA to provide favorable tax benefits. In re Taft, 171 B.R. at 499, quoting, Helen Yvette Speilman Sherman, ERISA Benefits Under the Bankruptcy Code and a New York Debtor's Rights, 58 Brooklyn L.Rev. 177. The qualification standards of the Internal Revenue Code also include, among other requirements, an...
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