In re Pulley

• Decision Date: 12 October 1989
• Docket Number: Adv. No. 88-6176.,Bankruptcy No. 88-61275
• Citation: 111 BR 715
• Parties: In re Billy Thomas PULLEY and Angelia Kay Pulley, Debtors. Gordon E. GOUVEIA, Trustee, Plaintiff, v. Billy Thomas PULLEY and Bethlehem Steel Corporation, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Indiana

111 B.R. 715 (1989)

In re Billy Thomas PULLEY and Angelia Kay Pulley, Debtors.

Gordon E. GOUVEIA, Trustee, Plaintiff, v. Billy Thomas PULLEY and Bethlehem Steel Corporation, Defendants.

Bankruptcy No. 88-61275, Adv. No. 88-6176.

United States Bankruptcy Court, N.D. Indiana, Hammond Division at Gary.

October 12, 1989.

COPYRIGHT MATERIAL OMITTED

S.W. Johnson, Portage, Ind., for defendant Billy Thomas Pulley, debtor/defendant (debtor).

M. McClintock Kennedy, Merrillville, Ind., for G. Gouveia, Chapter 7 Trustee, plaintiff/trustee (trustee).

G.P. Youra, Esq. and E.J. Szarwark of Barnes & Thornburg, South Bend, Ind., Bethlehem Steel Corp., for defendant Bethlehem (Bethlehem).

MEMORANDUM OF DECISION ON SUMMARY JUDGMENT

FRANCIS G. CONRAD, Bankruptcy Judge^*.

On November 10, 1988, the Trustee filed a "Complaint to Compel Turnover"¹ to the debtors' estate any interest Debtor had as a participant in an "Employee Investment Program" (EIP) with Bethlehem as of August 10, 1988, the filing date of the debtors' Chapter 7 Petition for relief under 11 USC §§ 101, et seq. The Trustee alleges, inter alia, that any interest Debtor has in the EIP is property of the estate under 11 USC § 541,² subject to a two-year waiting period because Debtor may withdraw common stock or cash sales proceeds from the EIP on a monthly basis. Id., at page 1.³

Debtor's December 13, 1988 answer admits participation in the EIP with Bethlehem but alleges insufficient information and knowledge to form a belief that any interest of the Debtor in the EIP as of the date of the bankruptcy filing is property of the debtors' estate and, that Bethlehem is the custodian of the EIP funds. Debtor denies the Trustee's allegation that subject to a two year waiting period, Debtor "could withdraw common stock or cash proceeds from the sale thereof from the EIP on a monthly basis."

On February 6, 1989, the Trustee filed a "Motion for Preliminary Injunction" to enjoin Bethlehem from making any "cash profit-sharing payment" to Debtor under its EIP. After receiving evidence and argument from the Trustee at the preliminary injunction hearing,⁴ we issued a preliminary injunction enjoining Bethlehem from making a cash profit-sharing payment to Debtor until further order of the Court.

On February 28, 1989, Bethlehem entered its appearance. On March 30, 1989, Bethlehem answered the Trustee's complaint and admits that: Debtor is a participant in Bethlehem's EIP; Bethlehem is a custodian of "any and all funds" in Debtor's EIP;⁵ and, subject to a two-year waiting period, Debtor may withdraw common stock or cash proceeds from the sale thereof from the EIP on a monthly basis. Bethlehem alleges as affirmative defenses that:

{T}he debtor\'s interest in the Employee Stock Ownership portion of the EIP is not property of the estate. Payment of the debtor\'s interest in the ESOP Employee Stock Ownership Program to any person other than the debtor, even under an order of a bankruptcy court with jurisdiction over the debtor, may result in disqualification of the ESOP.

Id., pages 1-2. Bethlehem's prayer asks that no payments be made directly to the Trustee, but only to Debtor. Bethlehem also asks that we require Debtor to authorize them to send the ESOP benefits directly to the State Street Bank trustee. Id., at page 2.

On April 14, 1989, the Trustee filed a "Motion For Summary Judgment."

We paraphrase the Trustee's material facts:

(1) Debtor is an employee of Bethlehem;

(2) Debtor is a participant in Bethlehem\'s EIP and is entitled, under certain conditions, to receive cash profit-sharing payments as well as stock contributions held under an ESOP;

(3) Profit-sharing payments are based on profits earned by Bethlehem during the previous year and on the number of hours an employee has worked during that year;

(4) The projected payment date for the 1988 profit-sharing is March 1989;

(5) An employee may not withdraw amounts contributed to the ESOP until the earlier of termination of employment or two years from the date of contribution; and

(6) Debtor is entitled to his first withdrawal on October 16, 1989.

"Statement of Material Facts, Proposed Conclusions of Law, and Memorandum of Law in Support of Plaintiff's Motion for Summary Judgment." Bethlehem does not dispute the Trustee's "material facts."

The premise of the Trustee's turnover action is that both the profit sharing and the stock contribution components of Bethlehem's EIP are, in part, earnings from services performed prior to Debtor's bankruptcy and, as such, constitute property of the estate. The Trustee concedes that the portion attributable to post-filing services is excluded from the estate.

As for Debtor's contribution to the EIP, the Trustee argues that the EIP was established to "allow Bethlehem Steel employees to make up wage concessions given up in the 1986 labor contract through profit-sharing and stock contributions by the company. The Debtor's right to receive amounts contributed to the ESOP according to the formula negotiated in the 1986 labor agreement is part of his estate." Trustee's "Statement of Material Facts, Proposed Conclusions of Law, and Memorandum of Law in Support of Plaintiff's Motion for Summary Judgment," page 4.

The Trustee concludes that Debtor's contribution to the ESOP should be allocated pre- and post-petition, with the pre-petition contributions being property of the debtors' estate.

On April 28, 1989, Bethlehem responded with "Bethlehem Steel Corporation's Answer Brief in Opposition to the Plaintiff's Motion for Summary Judgment." It concedes that the EIP came from wage concessions and that the EIP consists of (a) an "Annual EIP Profit Sharing Pool" (EIP Pool), (b) an ESOP, and (c) a "Special Profit Sharing Plan" (Shortfall Plan).

The EIP Pool is neither an Employee Retirement Income Security Act Plan (ERISA),⁶ nor is it qualified⁷ under the Internal Revenue Code (IRC) of 1986, 26 USC § 401(a). The Shortfall Plan is governed by ERISA as an employee benefit plan, but is not qualified under the IRC. The ESOP is both an employee benefit plan and is qualified under the IRC.

Bethlehem explains that a percentage of annual profits, if any, from the preceding year is made available by Bethlehem for the EIP Pool. Funds from the EIP Pool are used first to pay any shortfall payable under the Shortfall Plan. Excess cash from the EIP is paid to eligible employees. Any EIP investments not given to an eligible employee from the EIP Pool are reimbursed by a contribution of preference stock to the ESOP.

Preference Stock may be converted into common stock, with the employee able to direct its sale. Cash proceeds from the sale may be withdrawn by the employee upon termination of employment or two years from the date the preference stock was contributed to the ESOP. In-service withdrawals are also permitted due to financial hardship.⁸

The Shortfall Plan was established to make shortfall payments to ESOP beneficiaries whose conversion of preference stock does not produce the required amount under the EIP.

Bethlehem characterizes the Trustee's turnover argument as seeking a partial distribution from the EIP because that amount constitutes earnings from services performed by Debtor prior to bankruptcy. Bethlehem believes the Trustee is seeking an order which snares all allocable payments from the pre-bankruptcy period as property of the debtors' estate. Bethlehem argues against any order that would require Bethlehem to make distributions from the EIP Pool and the ESOP directly to the Trustee because:

{c}ompliance with such an order in regard to the ESOP* would require Bethlehem to take action which the IRS has stated would risk disqualification of the ESOP under Section 401(a) of the Code 26 USC § 401, thereby harming the corporation and thousands of innocent participants in the ESOP.

Bethlehem's answer brief, page 4 (* footnote in original, brackets supplied). The * footnote in Bethlehem's answer brief contains the following concession and reservation:

* Bethlehem Steel has no objection to an order directing payment of the 1988 EIP Profit Sharing Pool (EIP Pool) amount to the bankruptcy trustee. However, Bethlehem Steel does object to that portion of the requested order that would require a payment by the ESOP to the plaintiff of stock or cash credited to Mr. Pulley\'s (Debtor\'s) account in the ESOP.

Id., at page 4 (parentheticals supplied).

Bethlehem advances three points to support its counter: 1) the relief sought violates Federal Law and congressional policy to the prejudice of innocent beneficiaries, 2) Debtor's interest in the ESOP cannot become part of the bankruptcy estate, and 3) "the court has options which would protect creditors and the legitimate interests of the ESOP and its beneficiaries."

On their first point, Bethlehem relies on 26 USC § 401(a)(13)(A)⁹ which provides that a retirement plan qualified under the IRC may not permit either a voluntary or involuntary alienation of the interests of plan participants. Further, they argue, Congress intended to exempt qualified funds from the reach of court process because the sole exception to the anti-alienation requirement is a qualified domestic relations order (QDRO) under 26 USC § 401(a)(13)(B).¹⁰ Section 15 of Bethlehem's ESOP¹¹ complies with ERISA requirements. Moreover, the IRS's Private Letter Rulings¹² take the position that compliance with a Bankruptcy Court order to turnover such funds to the bankruptcy trustee will risk disqualification of the plan. Therefore, if Bethlehem was ordered to turnover the funds sought by the Trustee as part of the debtors' estate Bethlehem's ESOP will be disqualified from favorable treatment under the IRC with the possible loss of tax deductions, and taxation of plan earnings, participant earnings and contributions.

Second, and shifting away from the ERISA argument, Bethlehem says the antialienation provision in Debtor's ESOP excludes it from becoming part of the debtors' estate under...