In Re: Michael D. Wilcox

• Decision Date: 04 August 2000
• Docket Number: No. 99-1726,99-1726
• Citation: 233 F.3d 899
• Parties: (6th Cir. 2000) In re: Michael Duane Wilcox, Debtor. Charles J. Taunt, Trustee, Plaintiff-Appellee, v. General Retirement System of the City of Detroit and Board of Trustees of the General Retirement System of the City of Detroit, Defendants-Appellants. Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 899

233 F.3d 899 (6th Cir. 2000)

In re: Michael Duane Wilcox, Debtor.

Charles J. Taunt, Trustee, Plaintiff-Appellee, v. General Retirement System of the City of Detroit and Board of Trustees of the General Retirement System of the City of Detroit, Defendants-Appellants.

No. 99-1726

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: August 4, 2000

Decided and Filed: November 13, 2000

Appeal from the United States District Court for the Eastern District of Michigan at Ann Arbor. No. 98-60511--Barbara K. Hackett, District Judge. [Copyrighted Material Omitted] Timothy A. Fusco, CHARLES J. TAUNT & ASSOCIATES, Birmingham, Michigan, for Appellee.

Lira A. Johnson, Peter A. Jackson, CLARK HILL, Detroit, Michigan, Judith Greenstone Miller, CLARK HILL, Birmingham, Michigan, for Appellants.

Ernest L. Jarrett, Detroit, Michigan, for Amicus Curiae.

Before: NELSON and NORRIS, Circuit Judges; MATIA, Chief District Judge^*.

OPINION

DAVID A. NELSON, Circuit Judge.

Although the Bankruptcy Code provides, in general, that all of a bankrupt debtor's property interests are to be turned over to the trustee in bankruptcy for the benefit of creditors, the code creates the following exception: "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).

The debtor in the case at bar has a beneficial interest in assets held by the trustees of a municipal employees' retirement plan. The terms of the plan have been effectively incorporated in the city charter adopted by the municipality pursuant to state law home-rule provisions. The plan (and thus the city charter) provides that the debtor's interest is "unassignable" and is not subject to execution, attachment, or the operation of bankruptcy law.

The question presented is whether this restriction is "enforceable under applicable nonbankruptcy law." If it is, the restriction is enforceable in bankruptcy proceedings as well, and the debtor's pension rights are not to be turned over to the trustee in bankruptcy. If the restriction is not enforceable, we shall assume for purposes of this opinion that the trustee in bankruptcy can compel a turnover. (There is a timing issue in this connection, but we need not reach that question.)

Concluding that the restriction on transfer is not enforceable under applicable nonbankruptcy law, the bankruptcy court entered a summary judgment in which it held that the debtor's retirement plan interest had to be turned over to the bankruptcy trustee. The district court affirmed that judgment on appeal. On de novo review, however, we conclude that the restriction is enforceable under applicable nonbankruptcy law. We shall therefore reverse the district court's disposition of the case.

I

The Michigan Constitution gives Michigan cities the power to adopt charters and ordinances¹. It further provides that the "provisions of this constitution and law concerning counties, townships, cities and villages shall be liberally construed in their favor." Mich. Const. Art. VII, § 34.

The Michigan Home Rule City Act, Mich. Comp. Laws §§117.1 et seq., authorizes charter cities to exercise any power enumerated or not, that advances the interests of the city. Mich. Comp. Laws § 117.4j(3)². Michigan courts commonly treat city charters just as they do any other source of state law. See, e.g., City of Detroit v. Walker, 520 N.W.2d 135, 139 (Mich. 1994) (holding that traditional principles of statutory construction apply to the Detroit City Charter).

Pursuant to the authority granted by the Michigan Constitution and the Michigan Home Rule City Act, the City of Detroit has established a defined contribution retirement plan for its employees. The plan, which is funded by voluntary employee contributions, is administered by the General Retirement System of the City of Detroit.

For decades, the city's defined contribution retirement plan - the terms of which were initially written into the Detroit City Charter - has contained an anti-assignment provision reading as follows:

"The right of a person to a pension, annuity, or a retirement allowance, to the return of accumulated contributions, the pension, annuity or retirement allowance itself, any optional benefit, any other right accrued or accruing to any person under the provisions of this chapter and the moneys in the various funds of the retirement system shall be unassignable and shall not be subject to execution, garnishment, attachment, the operation of bankruptcy or insolvency law, or any other process of law whatsoever, except as specifically provided in this chapter." Detroit City Charter, Title 9, Chap.6, Art. 9, § 1 (1964) (emphasis supplied).

Since 1974, when a new charter was adopted by the City of Detroit, the plan has been the subject of collective bargaining between the city and various unions. The plan is, however, incorporated in the charter by reference. The current version of the Detroit City Charter, adopted in 1997, accomplishes this in the following language:

"The retirement plans of the city existing when this Charter takes effect, including the existing governing bodies for administering those plans, the benefit schedules for those plans and the terms for accruing right to and receiving benefits under those plans shall, in all respects, continue in existence exactly as before unless changed by this Charter or an ordinance adopted in accordance with this article." Detroit City Charter, Art. 11, § 11-102 (1997).

The anti-assignment terms of the retirement plan have thus been continued, under the new charter, "exactly as before," no change in these terms having been effected by charter or ordinance.

(We note parenthetically that Michigan law also restricts the transfer of retirement plan interests of public employees who are not on the payroll of a home-rule municipality:

"The right of a person to a pension, an annuity, a retirement allowance, any optional benefit, any other right accrued or accruing to any person under the provisions of this act, the various funds created by this act, and all money and investments and income of the funds, are exempt from any state, county, municipal, or other local tax, and shall not be subject to execution, garnishment, attachment, the operation of bankruptcy or insolvency laws, or other process of law, and shall be unassignable except as otherwise provided in this act." Mich. Comp. Laws § 38.40(1) (emphasis supplied).)

The debtor in the case at bar, Michael Duane Wilcox, is both an employee of the City of Detroit and a participant in the city's defined contribution retirement plan. The terms of the plan permit the withdrawal of funds from Mr. Wilcox's account only upon his death, the termination of his employment, his completion of 25 years of service, or his retirement under a disability. None of these conditions has been met.

Mr. Wilcox entered into a revolving loan agreement with the Detroit Municipal Credit Union on July 19, 1995. Notwithstanding the anti-assignment provision of the retirement plan, and in keeping with what appears to have been a common practice, Mr. Wilcox purported to pledge his interest in the plan as collateral for the loan³.

A few months after taking out the credit union loan, Mr. Wilcox filed a voluntary petition under Chapter 7 of the Bankruptcy Code. In the course of the ensuing proceedings the bankruptcy court ordered that Mr. Wilcox's interest in the plan, which then amounted to $32,141.66, be turned over to the bankruptcy trustee. The retirement system declined to comply with the order, advising the bankruptcy trustee that Mr. Wilcox's interest could not be turned over because (a) the plan contained an anti-alienation provision prohibiting such transfers, (b) Mr. Wilcox was not yet eligible to receive benefits, and (c) the system was not bound by the bankruptcy court's order.

The bankruptcy trustee then commenced the present adversary proceeding against the retirement system and its board of trustees. On cross-motions for summary judgment, the bankruptcy court ruled in favor of the trustee in bankruptcy. Following an unsuccessful motion for reconsideration, the retirement system filed a timely notice of appeal to the United States District Court for the Eastern District of Michigan. That court affirmed, and the appeal to our court followed.

II

The question before us, to repeat, is whether the anti-assignment provision of the defined contribution retirement plan, as incorporated in the city charter, is "[a] restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law . . . ." 11 U.S.C. § 541(c)(2).

An inquiry under § 541(c)(2) normally has three parts: First, does the debtor have a beneficial interest in a trust? Second, is there a restriction on the transfer of that interest? Third, is the restriction enforceable under nonbankruptcy law?

Here it is undisputed that Mr. Wilcox's interest in the plan is an interest in a "trust." It is also undisputed that the anti-assignment provision purports to restrict the transfer of that interest. The parties further agree that no federal statute, such as the Employee Retirement Income Security Act or the Internal Revenue Code, restricts the transfer of Mr. Wilcox's interest. The only issue we are called upon to decide, then, is whether the incorporation of the anti-assignment provision in the city charter means that "under applicable nonbankruptcy law" the provision is "enforceable."

Dismissing as "unsupported" the retirement system's argument that the restriction on alienation is enforceable under Michigan law just as any other provision of the Detroit City Charter is enforceable, the bankruptcy court decided that the provision is not enforceable because the defined contribution plan is funded solely through the voluntary contributions of city...