In re Kwaak
| Decision Date | 24 September 1984 |
| Docket Number | Adv. No. 283-0308.,Bankruptcy No. 283-00186 |
| Citation | 42 BR 599 |
| Parties | In re Peter W. KWAAK, Frances L. Kwaak, Debtors. Dennis G. BEZANSON, Esquire, Plaintiff, v. MAINE NATIONAL BANK, Maine Aviation Corporation, Peter William Kwaak, Frances Louise Kwaak, Defendants. |
| Court | U.S. Bankruptcy Court — District of Maine |
Dennis G. Bezanson, South Portland, Me., pro se.
Robert Checkoway, Portland, Me., for defendants Maine National and Maine Aviation.
Judith Clancy, Portland, Me., for defendants William and Louise Kwaak.
The trustee seeks a determination that the debtors' interest in an employer-financed stock bonus and profit-sharing retirement trust is non-exemptible property of the estate. The debtors, the employer, and the bank which administers the funds all oppose the relief sought by the trustee. After a careful review of the trust, the statutes, and the relevant case law, the court concludes that the debtors' interest in the plan is not property of the estate.
In their chapter 7 petition, filed July 11, 1983, the debtors, Peter and Frances Kwaak, claim an exemption in a retirement plan held at Maine National Bank. The plan, entitled "Employees' Stock Bonus and Profit-Sharing Plan and Trust," is a benefit provided to the thirty-nine year old Peter Kwaak by his employer, Maine Aviation Corporation. The trustee filed an objection to the exemption claimed by the debtors and filed a complaint for turnover of the debtors' interest in the retirement plan. The court ordered that the two proceedings be consolidated.
The trust is an ERISA plan qualified under section 401(a) of the Internal Revenue Code, 26 U.S.C.A. § 401(a) (1978 and Supp.1984). Contributions to the trust are made by the employer, either in cash or in shares of company stock, in an amount to be determined by the company at the end of each fiscal year. The employer, because of its own financial problems, has made no contributions to the trust since 1979. The debtors' account shows an interest in 1,633.5 shares of Class B non-voting stock of Maine Aviation Corporation and $3,373 in cash.
Unlike some ERISA plans, the one at issue invites no active participation by the employee, who has no control over his benefits. All investments have been determined and deposited by Maine Aviation, and there is no incentive plan whereunder employee deposits are met with correlating employer contributions. No withdrawals are permitted, except upon the employee's death, termination, disability, or retirement, or upon the termination of the plan itself. If Mr. Kwaak had left his employment at the time the bankruptcy petition was filed, his eight years of service would have entitled him to a vested interest in 70 percent of the assets in his account. Upon his death, retirement, full disability, or the termination of the plan, eight years of employment would have given him an interest in one hundred percent of the assets reserved for him.
Section 541 of the Bankruptcy Code reaches broadly to bring most assets of the debtor into the bankruptcy estate. U.S. v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). Relevant here is subsection (a)(1), which places in the estate "all legal or equitable interests of the debtor in property as of the commencement of the case," 11 U.S.C.A. § 541(a)(1) (1979). This sweeping provision is intended to obviate the complicated pre-Code determinations of what constitutes estate property. H.R.Rep. No. 95-595, 95th Cong., 2d Sess. 175 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5963, 6136. An "interest" in property is, of course, defined by state law. Turner v. Burton (In re Turner), 29 B.R. 628, 630 (Bankr.D.Me.1983); 4 Collier on Bankruptcy ¶ 541.021 (L. King 15th ed. 1984).
In spite of the breadth of section 541(a), some property is excluded from the estate by section 541(b) and (c), and other property is brought into the estate and then exempted under section 522. The section 541(c)(2) exclusion reads:
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.A. § 541(c)(2) (1979).
Authorities have disagreed about the meaning of this exclusion. Some courts have interpreted the section as broadly as it reads on its face, noting that resort to legislative history is not necessary when a statute's wording is clear. See, e.g., In re Pruitt, 30 B.R. 330, 331 (Bankr.D.Colo. 1983); In re Threewitt, 24 B.R. 927 (D.Kan.1982). These courts tend to exclude ERISA plans from the estate. Other courts have relied on the section's legislative history, see H.R.Rep. No. 95-595, 95th Cong., 2d Sess. 369 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News, 5963, 6325,1 to conclude that only traditional state law spendthrift trusts are referred to by the term "applicable nonbankruptcy law." These courts are likely to include ERISA plans in the estate. See, e.g., Firestone v. Metropolitan Life Insurance Company (In re DePiazza), 29 B.R. 916 (Bankr.N.D.Ill.1983).
Even under the restrictive interpretation of section 541(c)(2), an ERISA pension plan trust might be excludable from the estate if it is analogous to a spendthrift trust as defined by state law. See Goff v. Taylor (In re Goff), 706 F.2d 574, 580 (5th Cir. 1983). To be a tax-qualified trust under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C.A. § 1001 et seq. (1975), a trust is obliged by section 401(a)(13)2 of the Internal Revenue Code to include a clause forbidding transfer and assignment. This clause alone, though it prevents garnishment or other state law creditor remedies, may not be enough to exclude an ERISA plan from the bankruptcy estate. However, since ERISA plans vary widely, all features of a particular plan must be examined to see if the criteria of a state law spendthrift trust exist.
Though spendthrift trusts are valid in Maine, see e.g. Roberts v. Stevens, 84 Me. 325, 24 A. 873 (1892), case law describing their characteristics is scarce. Generally speaking, a spendthrift trust is one which, by the terms of the trust or by statute, restrains the voluntary or involuntary transfer of the beneficiary's interest. Restatement (Second) of Trusts § 152(2) (1959). Under the common law of trusts, a spendthrift trust which names the settlor as beneficiary is invalid, and as a consequence, existing or future creditors can reach the settlor's interest. G. Bogert, Law of Trusts and Trustees, rev. 2d ed. § 223, pp. 438-439 (1979). These provisions ensure that though an...
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