In re Majul

• Decision Date: 27 August 1990
• Docket Number: Bankruptcy No. 89-52662-RBK.
• Citation: 119 BR 118
• Parties: In re Felix Perez MAJUL and Ana Maria Majul, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Texas

119 B.R. 118 (1990)

In re Felix Perez MAJUL and Ana Maria Majul, Debtors.

Bankruptcy No. 89-52662-RBK.

United States Bankruptcy Court, W.D. Texas, San Antonio Division.

August 27, 1990.

Edgar M. Duncan, J. Stephen Weakley, Maebius & Duncan, Inc., San Antonio, Tex., for debtors, Felix Perez Majul and Ana Maria Majul.

John Patrick Lowe, W. Patrick Dodson & Associates, P.C., Uvalde, Tex., trustee.

OPINION

RONALD B. KING, Bankruptcy Judge.

The questions in this case are whether the Chapter 7 Debtors' interest in two pension and profit sharing plans is property of the estate, and if so, whether it can be claimed as exempt property under a state exemption or "other federal law." This Court holds that the ERISA qualified pension and profit sharing plans at issue are spendthrift trusts under the provisions of ERISA and, therefore, the Debtors' interest in the pension plans is not property of the estate pursuant to section 541(c)(2) of the Bankruptcy Code. Alternatively, if the Debtors' interest in the pension plans is property of the estate, it may be claimed as exempt pursuant to section 522(b)(2)(A) of the Bankruptcy Code under "other federal law."

I. FACTS

Felix and Ana Majul, the Debtors in this case, are the beneficiaries of two pension and profit sharing plans (the "Plans") created through Dr. Majul's dentistry practice. The Plans were created in 1975 and funded during the next fourteen years by income from Dr. Majul's professional corporation, of which he is the sole shareholder and director. The trustees of the Plans were historically Dr. Majul, his wife and his father, although recently a bank has been named as the sole successor trustee of one of the Plans. The Plans were clearly created by a closely-held professional corporation of which the Debtor is the controlling shareholder, officer, and director. The Plans are qualified plans and contain spendthrift provisions pursuant to ERISA and the Internal Revenue Code.¹ As such, the facts closely resemble those in the cases of In re Brooks, 844 F.2d 258 (5th Cir.1988), and In re Goff, 706 F.2d 574 (5th Cir.1983).

The Chapter 7 Trustee, John Patrick Lowe, objected to the attempt by the Debtors to exclude their interest in the Plans from the estate under section 541(c)(2) of the Bankruptcy Code, or to claim it as exempt property under section 522(b) of the Bankruptcy Code. In the initial hearing, this Court sustained the Trustee's objections, following the bankruptcy court holding of In re Dyke, 99 B.R. 343 (Bankr. S.D.Tex.1989), rev'd, 119 B.R. 536 (S.D.Tex. 1990). A rehearing was granted in order to reexamine the prior holding based upon Dyke, which was reversed by the district court on appeal, and to consider United States Supreme Court, courts of appeals and bankruptcy court case law decided after Goff and Brooks.

II. PREEMPTION

A. State exemption statute.

Section 514(a) of ERISA preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan" covered by the statute. 29 U.S.C. § 1144(a) (1988). The Supreme Court of the United States has held in Mackey v. Lanier Collections Agency & Serv., Inc., 486 U.S. 825, 108 S.Ct. 2182, 100 L.Ed.2d 836 (1988), that all state laws which "relate to" an employee benefit plan are preempted under section 514(a). This provision has been discussed in a number of recent cases, many of which hold that attempts by states to create a statutory exemption of ERISA qualified plans are invalid as being preempted by the broad reach of ERISA. E.g., In re Komet, 104 B.R. 799 (Bankr.W.D.Tex.1989); In re Starkey, 116 B.R. 259 (Bankr.D.Colo.1990); contra, In re Volpe, 100 B.R. 840 (Bankr. W.D.Tex.1989), aff'd, 120 B.R. 843 (W.D. Tex.1990). This Court agrees that such laws are preempted by ERISA. The Plans are, therefore, not exempt under Tex.Prop. Code Ann. § 42.0021 (Vernon Supp.1990).

B. What hath Goff wrought?

The issues to be decided in this case are whether the preemptive reach of ERISA also extends to state law relating to spendthrift trusts, and whether "applicable nonbankruptcy law" includes ERISA. Section 206(d)(1) of ERISA expressly 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) (1988). Goff is one of the earliest cases which discussed this issue and decided that ERISA's anti-alienation provisions do not operate by their own force to shelter pension funds in bankruptcy. The court in Goff determined that a restriction on transfer of a beneficial interest in a trust enforceable under "applicable nonbankruptcy law" as used in section 541(c)(2) of the Bankruptcy Code refers only to a restriction enforceable under state law relating to spendthrift trusts. Goff reasoned that under Texas law, a spendthrift trust does not include a "settlor trust" in which a person attempts to shield his own assets from the claims of creditors in a revocable trust for his own benefit. Therefore, the self-settled ERISA plan at issue in Goff was held to be property of the estate under section 541(c)(2) of the Bankruptcy Code.

The premise that "applicable nonbankruptcy law" refers only to state spendthrift trust law rather than ERISA, supported chiefly by the citation to legislative history, was the entire foundation for the holding in Goff that a qualified pension plan is property of the estate if it is a self-settled trust under state law. Although Goff contained a careful analysis constructed on that premise, this Court disagrees with that basic premise and believes that in light of subsequent opinions by the United States Supreme Court, the Court of Appeals for the Fourth Circuit, and district and bankruptcy courts, the premise is incorrect and undermines the force of the Goff holding. Although Goff was reexamined in Brooks, the court in Brooks did not independently review the issue or cite additional authority in support of the premise that ERISA qualified pension plans, which may be settlor trusts under state law, do not qualify for the exclusion from property of the estate under section 541(c)(2) of the Bankruptcy Code.

1. Exclusion versus exemption.

Many recent cases which discuss the protection of pension plans against the claims of creditors use the term "exemption" in an imprecise fashion. Two separate concepts must be clearly articulated in framing the issue. First, section 541(c) of the Bankruptcy Code provides as follows:

Except as provided in paragraph (2) of this subsection, an interest of the debtor in property becomes property of the estate under subsection (a)(1), (a)(2), or (a)(5) of this section notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law —

(A) that restricts or conditions transfer of such interest by the debtor; or

(B) that is conditioned on the insolvency or financial condition of the debtor, on the commencement of a case under this title, or on the appointment of or taking possession by a trustee in a case under this title or a custodian before such commencement, and that effects or gives an option to effect a forfeiture, modification, or termination of the debtor\'s interest in property.

(2) 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) (1988). The effect of section 541(c) of the Bankruptcy Code is that the debtor's interest in a spendthrift trust, enforceable under "applicable nonbankruptcy law," does not ever become property of the estate under section 541(a) of the Bankruptcy Code. As such, the trustee and the creditors have no claim to such property because it never enters the bankruptcy system. Goff, 706 F.2d at 579.

In contrast to an exclusion from property of the estate, section 522 of the Bankruptcy Code allows the debtor to exempt certain property from the estate. Section 522(b) provides:

Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (1) or, in the alternative, paragraph (2) of this subsection. . . .

11 U.S.C. § 522(b) (1988). Thus, property which a debtor is entitled to exempt does enter the bankruptcy system as property of the estate, but the debtor is allowed to attempt to exempt such property under the provisions of section 522 of the Bankruptcy Code. Although the effect may be similar, the concepts are entirely distinct. If property is excluded from "property of the estate," it is obviously unnecessary to exempt such property under section 522. If the property is property of the estate under section 541 of the Bankruptcy Code, then in that event, the debtor may have the opportunity to claim an exemption of the property under section 522 of the Bankruptcy Code.

2. ERISA's preemptive bar to alienation or assignment.

The principal issue in Goff was whether the Keogh plan was property of the estate under section 541(c)(2).² Goff concluded "that ERISA's anti-alienation provisions do not operate by their own force to shelter pension funds in bankruptcy." Goff, 706 F.2d at 577. Implicitly, Goff held that ERISA does not preempt state law relating to spendthrift trusts. Based upon cases decided after Goff and Brooks, this Court disagrees with that conclusion.

One of the most recent statements by the United States Supreme Court relating to the requirement that ERISA pension plans contain spendthrift provisions is found in Guidry v. Sheetmetal Workers Nat'l Pension Fund, ___ U.S. ___, 110 S.Ct. 680, 107 L.Ed.2d 782 (1990). In Guidry, the United States Supreme Court decided that the trustee of a labor union pension plan, who admittedly had embezzled funds from his labor union, was still protected by the ERISA prohibition on the assignment or alienation of pension benefits. The Court overturned a judgment imposing a constructive trust on Guidry's pension benefits, and in...