In re Putman
| Decision Date | 14 February 1990 |
| Docket Number | Bankruptcy No. 87-00120-A,Adv. No. 87-0738-A. |
| Citation | 110 BR 783 |
| Parties | In re Robert PUTMAN and Kathy Putman, Debtors. Robert O. TYLER, Trustee, Plaintiff, v. Robert PUTMAN and Kathy Putman and Xerox Corporation, Defendants. |
| Court | U.S. District Court — Virgin Islands, Bankruptcy Division |
Henry Counts, Jr., Alexandria, Virginia, for debtors.
Arnold S. Albert, Thomas, Hirsch & Albert, P.C., Washington, D.C., for Robert O. Tyler, trustee.
Daniel M. Lewis, Arnold & Porter, Washington, D.C., for Xerox Corporation.
MARTIN V.B. BOSTETTER, Jr., Chief Judge.
We are called upon to determine whether the debtor's interest in funds under a profit sharing plan sponsored by Xerox Corporation ("defendant" or "Xerox") is excluded from property of the estate under § 541(c)(2) of the United States Bankruptcy Code ("Code").
Robert and Kathy Putman ("debtors") filed a petition under Chapter 7 of the Code on January 23, 1987. On the schedule of exempt property, the debtors listed as exempt Kathy Putman's profit sharing accounts with her employer, Xerox. An unsecured creditor, Sterling One Industrial Limited Partnership, filed an objection to the designation of the Xerox Plan accounts as exempt property. By order dated June 24, 1987, this Court granted an exemption on the Xerox Plan accounts.1 The trustee subsequently filed a Complaint for Turnover of Assets against the Putmans and Xerox Corporation. On April 26, 1988 the trustee filed a motion for summary judgment. Defendant Xerox Corporation filed a cross-motion for summary judgment on June 3, 1988.
In view of the fact that this matter comes before the Court on motions for summary judgment, the basis upon which we may issue judgment is outlined by Federal Rule of Civil Procedure 56 (Rule 56), made applicable to this proceeding by Bankruptcy Rule 7056. Pursuant to Rule 56, a movant is entitled to summary judgment if there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). Both the plaintiff trustee and defendant Xerox agree that no genuine issue of material fact exists.2 Accordingly, the Court must determine whether the trustee or Xerox is entitled to judgment as a matter of law. To make a determination as to whether the Xerox Plan accounts are excluded or exempt from the bankruptcy estate as a matter of law, we first must examine the nature of the accounts.
The Xerox Profit Sharing Retirement and Savings Plan ("Plan")3 qualifies as a plan under the Employee Retirement Income Security Act of 1974 ("ERISA"), which Congress enacted to regulate private pension plans and protect employees participating in such plans. See H.R.Rep. No. 93-533, 93d Cong., 2d Sess. (1974), reprinted in 1974 U.S.Code Cong. & Admin. News 4639 ( that the primary purpose of ERISA is the protection of individual pension rights). To be ERISA qualified, a plan must prohibit the assignment or alienation of pension plan benefits. See 29 U.S.C. § 1056(d)(1) ().4 The Xerox Profit Sharing Plan contains such an anti-alienation clause that provides in pertinent part:
None of the benefits, payments or proceeds arising out of or by virtue of the Plan shall be subject to any claim of or any legal process by any creditor of a Participant, retired Participant, or of any beneficiary, and no Participant, retired Participant, or beneficiary thereof, shall have any right to anticipate, alienate, encumber or assign any right or benefit arising out of or by virtue of the Plan. . . .
See § 14.04 Xerox Profit Sharing Retirement and Savings Plan.
Turning to the specific accounts under the Xerox Plan, we observe that it provides eligible employees with four possible individual accounts: 1) A Retirement Account, which is funded by Xerox on the basis of company profits and employee compensation; 2) A Company Savings Account, which is funded by Xerox on the basis of company profits and employee compensation; 3) An Employee Before-Tax Savings Account, which is funded by employee contributions and 4) An Employee After-Tax Savings Account, which is funded by employee contributions.5
The Plan also sets forth conditions under which an employee may withdraw funds in the individual accounts. Under the Plan, an employee can gain access to his Retirement Account, his Company Savings Account and Employee Savings Accounts upon retirement,6 death,7 or upon termination of employment by resignation or discharge.8 Additionally, an employee can withdraw funds from his Company Savings Account and the interest portion of his After Tax Savings Account upon a showing of "financial hardship."9 The Plan defines financial hardship as that arising from: the sickness or disability of the employee participant or his spouse; purchasing real property which is to serve as the employee participant's principal residence; financing the cost of education beyond the secondary school level for the employee participant's children; or other extraordinary financial hardship other than those set forth above pursuant to the rules established by the Plan Administrator. Finally, a Xerox employee can withdraw from his After-Tax Savings Account an amount equal to the total of his contributions to the account, provided that he has not made a withdrawal from the account within the previous three months.10
Kathy Putman, whom Xerox hired as an administrative assistant in January, 1976, became eligible to participate in the Plan in January, 1977. As of January 1, 1988, Kathy Putman had the following balances in three separate accounts in the Xerox Profit Sharing Plan: $27,601.73 in her Retirement Account; $1,360.93 in her Company Savings Account, and $3,080.08 in her After-Tax Savings Account.11 To determine whether these accounts are included in the bankruptcy estate, we turn to § 541 of the Code, which governs property of the estate.
Section 541(a)(1) provides that a debtor's estate is comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case."12 11 U.S.C. § 541(a)(1). The defendant Xerox concedes that Kathy Putman had a legal or equitable interest in her Plan accounts as of the commencement of this case, and that the Plan accounts, therefore, are property of the estate unless they fall within an exception to § 541(a)(1).13
While § 541(a)(1) brings all of the debtor's legal and equitable interests in property into the bankruptcy estate, section 541(c) prevents certain property from entering the estate.14 Specifically, § 541(c)(1) provides in part that "except as provided in paragraph (2) of this subsection, an interest of the debtor in property becomes property of the estate. . . ." See 11 U.S.C. § 541(c)(1). Section 541(c)(2), in turn, provides that "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." See 11 U.S.C. § 541(c)(2) (emphasis supplied). Thus, under § 541(c)(2), if "applicable nonbankruptcy law" enforces restrictions on the transfer of a debtor's interest in a trust, those restrictions are enforceable in bankruptcy and such interest is excluded from the bankruptcy estate. It is the interpretation of § 541(c)(2), and in particular the phrase "applicable nonbankruptcy law," which is at the heart of the dispute in the case at bar.
The trustee, citing a number of cases to support his position, asserts that § 541(c)(2) protects a debtor's interest only in traditional spendthrift trusts created under state law. He further argues that the Xerox Plan is not a traditional spendthrift trust mainly because the debtor exercises substantial control over the funds held in trust.15 The trustee concludes that because the Xerox Plan is not a traditional spendthrift trust under state law, the debtor's interest in the funds is not excluded from the estate pursuant to § 541(c)(2).
Disputing the trustee's contention that § 541(c)(2) protects a debtor's interest only in traditional spendthrift trusts, Xerox cites a number of cases that have interpreted the phrase "applicable nonbankruptcy law" in § 541(c)(2) as including ERISA. Specifically, Xerox would like us to find that, because transfer restrictions in the Xerox Plan are enforceable under ERISA, which courts have held is "applicable nonbankruptcy law" under § 541(c)(2), such transfer restrictions are enforceable in bankruptcy and the funds thus are excluded from the estate. Xerox also maintains that the transfer restrictions in the Plan are enforceable under general state law and traditional spendthrift trust law.
In determining whether § 541(c)(2) excludes a debtor's interest in an ERISA pension plan account from the bankruptcy estate, courts have split on whether ERISA constitutes "applicable nonbankruptcy law" under § 541(c)(2). A majority of courts have relied on § 541(c)(2)'s legislative history to hold that § 541(c)(2) does not automatically exclude ERISA pension plan accounts from the bankruptcy estate. The legislative history of § 541(c)(2) provides that it "preserves restrictions on transfer of a spendthrift trust to the extent that the restriction is enforceable under applicable nonbankruptcy law." See H.R.Rep. No. 95-595, 95th Cong., 2d Sess. 369, reprinted in 1978 U.S.Code Cong. & Admin. News 5787, 5963, 6325. In relying on this language, courts have interpreted § 541(c)(2) as excluding from property of the estate only those spendthrift trusts traditionally beyond the reach of creditors under state law. See In re Daniel, 771 F.2d 1352, 1360 (9th Cir.1985) (...
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