In re Martin
| Decision Date | 19 June 1990 |
| Docket Number | Bankruptcy No. 89B-05149,89B-05263,89B-06063. |
| Citation | 115 BR 311 |
| Parties | In re John Rogers MARTIN, Debtor. In re Henry A. VERWER and Kathleen M. Verwer, d/b/a H & K Paints, Debtors. In re David M. FULLMER and Linda L. Fullmer, Debtors. |
| Court | U.S. Bankruptcy Court — District of Utah |
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Paul James Toscano, of Prince, Yeates & Geldzahler, Salt Lake City, Utah, for Trustee of Estate of John Rogers Martin.
Ronald G. Schiess, and Matthew M.F. Hilton, Brown, Smith & Hanna, Salt Lake City, Utah, Special Counsel, with him on the brief for John Rogers Martin, debtor.
Duane H. Gillman, and Janet A. Goldstein, of McDowell & Gillman, P.C., Salt Lake City, Utah, for Trustee of Estate of Henry A. Verwer and Kathleen M. Verwer.
J. Kevin Bird, of Bird & Fugal, Provo, Utah, for Henry A. Verwer and Kathleen M. Verwer, debtors.
Stephen W. Rupp, and Mona Lyman, of McKay, Burton & Thurman, Salt Lake City, Utah, for Trustee of Estate of David M. Fullmer and Linda L. Fullmer.
Robert G. Norton, of Moore, McDonough & Norton, Salt Lake City, Utah, for David M. Fullmer and Linda L. Fullmer, debtors. Matthew M.F. Hilton, St. George, Utah, Special Counsel.
These three chapter 7 cases give this court the opportunity to address an issue vigorously litigated in bankruptcy courts nationwide. The dispute is whether the debtors' claimed exemptions in funds held in Employee Retirement Income Security Act of 1974 (ERISA)1 qualified retirement plans can withstand objections filed by the chapter 7 trustees pursuant to 11 U.S.C. § 522(l)2 and Bankruptcy Rule 4003(b). The court has considered the memoranda submitted by counsel, heard oral argument where appropriate, and made an independent review of case law and statutory authority. This court concludes that the debtors' state law exemptions claimed in funds held in qualified plans fall to the preemptive authority of ERISA and remain property of the estate.
Two issues are presented by these cases. First, are funds held in ERISA qualified retirement plans (Plans) property of the estate?3 Second, if such funds are property of the estate, can they be claimed as exempt? The claimed exemptions are found in Utah Code Ann. § 78-23-5(1)(j) (1989 Supp.) and Utah Code Ann. § 78-23-6 (1953). If applicable, these exemptions protect the Plans from creditors' claims.4 The essential facts of the three cases are summarized below.5
John Rogers Martin (Martin) is a mortgage loan officer for American Residential Mortgage Company. Martin participated in an employee investment plan provided by his employer that was qualified under I.R.C. §§ 401(k)6 and 501(a) (1986). The plan contains the anti-alienation and anti-assignment clauses required by ERISA in order to restrict the transfer of money held by the plan for the beneficiary of the trust. Martin became eligible to participate in the plan only after completion of one year of eligible service. Martin's participation in the investment plan was voluntary and could be terminated upon giving proper notice. He chose to participate in the plan and designated a beneficiary to receive benefits after his death. Martin can stop making contributions at any time upon written notice.
Martin's contribution to the investment plan was discretionary up to 12% of his salary, but not more than $7,000 annually. Whatever the amount contributed, it consisted entirely of salary deferral. Martin's employer would in turn contribute the lesser of:
Article 6—Allocation Limitations and Special Rules, § 6.1 Contribution Limitations, First Nationwide Employee's Investment Plan. Funds held in the plan could be withdrawn by Martin upon terminating his employment or upon retirement. Either a loan or withdrawal of funds held in the plan could be made upon application to a loan committee. A loan or withdrawal would be authorized for heavy and immediate financial needs only if the necessary funds were not reasonably available from other sources. The committee alone determined the validity of the hardship for which a loan was requested. Martin made application for such a loan but the committee denied his request.
Martin filed a petition for relief under chapter 7 and claimed the 401(k) investment plan as exempt pursuant to section 522(b) and Utah Code Ann. §§ 78-23-5(1)(j) and 78-23-6(3). At the time of filing the funds accumulated in the plan totaled $14,289.76. Martin contributed $7,807.58, his employer contributed $3,276.18, and income accumulation totaled $3,206.00.
Henry and Kathleen Verwer (Verwers) were employed by Signetics when they filed their petition.7 Both the Verwers had the option to participate in an ERISA qualified 401(k) Employee Savings Plan through their employer. Their plan also contained the ERISA required anti-assignment and anti-alienation clauses similar to Martin's plan. The Verwers assert their plan is not self-settled but was created by Signetics for their benefit and they are without power to control or modify the terms of the plan. The only discretion the Verwers claim to have is the ability to participate and become beneficiaries. The Verwers argue their plan qualifies as a spendthrift trust and the funds accumulated are excluded from inclusion as property of the estate.8
At the time of filing Mr. Verwer had accumulated vested benefits under the plan of $58,656.73 and Mrs. Verwer had accumulated $17,190.45.9 The Verwers filed a petition for relief under chapter 7 and claimed the amounts in the plans as exempt pursuant to the same sections of the Bankruptcy Code and the Utah Code as did Martin.
David Fullmer (Fullmer) had been employed by United Savings/Western Mortgage for 17 years and during that time participated in the companys' 401(k) plans. Fullmer, and his wife Linda, filed a joint chapter 7 petition for relief and claimed the funds held in the plans as exempt property pursuant to Utah Code Ann. § 78-23-6.10 Fullmer valued his interest in the Western Mortgage plan at $32,464.37 and his interest in the United Savings plan at $59,050.63.11 Fullmer, unlike Martin and the Verwers, does not assert that his plan qualifies for a spendthrift trust exception from property of the estate. Fullmer claims the ERISA plan trustees must be joined as indispensable parties under Bankruptcy Rule 7019.12
The court has jurisdiction over the subject matter of and parties to these contested matters pursuant to 28 U.S.C. §§ 1334(b) and 157(a). The court has authority to enter a final order in these core matters as set forth in 28 U.S.C. §§ 157(b)(1) and 157(b)(2)(A) and (B).
The filing of these chapter 7 petitions created individual estates consisting of the debtors' legal or equitable interest in property as of the commencement of each case.13 The funds in the Plans represent legal or equitable interests of the debtors in property. Ordinarily such property transfers to the estate upon the filing of a petition. In re Weeks, 106 B.R. 257, 260 (Bankr.E.D.Okla.1989). ERISA does not interfere with the automatic vesting of the debtors' interests in the estates because "nothing in this title shall be construed to alter, amend, modify, invalidate, impair, or supercede any law of the United States". 29 U.S.C. § 1144(d).
These estates also include exempt property. Exempt property under section 522(l) can be released from an estate if a valid exemption is claimed by a debtor and no objection to the claim of exemption is sustained by the court.14
An exception to the broad sweep of section 541(a)(1) is found in section 541(c)(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." § 541(c)(2). The congressional intent behind this section was to preserve restrictions on the transfer into the estate of property held in a spendthrift trust. Weeks, 106 B.R. at 260 and In re Kerr, 65 B.R. 739, 744 (Bankr.D.Utah 1986). Section 541(c)(2) limits the exception to those trusts that qualify as spendthrift trusts under state law. Goff v. Taylor (Matter of Goff), 706 F.2d 574, 587 (5th Cir.1983). Therefore, it is possible that ERISA qualified plans may not enter the estate if they qualify as valid spendthrift trusts under state law. Boon v. Miner (In re Boon), 108 B.R. 697, 705-06 (W.D.Mo. 1989).
In re Kerr, 65 B.R. at 744-45, reviewed the characteristics of a spendthrift trust.15 In a valid spendthrift trust the debtor cannot be both the settlor and the beneficiary of the trust. Leach v. Anderson, 535 P.2d 1241 (Utah 1975); Cronquist v. Utah State Agricultural College, 114 Utah 426, 201 P.2d 280 (1949).16 Analyzing spendthrift trusts in a bankruptcy context, Kerr noted:
The debtors argue the Plans themselves establish a trust, as opposed to the individual efforts of the debtors. They assert the Plans were created for the benefit of all employees, not just these individual debtors, and that the debtors have no control over any distribution by the trustees. Under this reasoning the debtors, as...
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