In re Quinn, HL 00-05810.

• Decision Date: 30 September 2003
• Docket Number: No. HL 00-05810.,HL 00-05810.
• Parties: In the Matter of James J.P. QUINN, Debtor.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Western District of Michigan

299 B.R. 450

In the Matter of James J.P. QUINN, Debtor.

No. HL 00-05810.

United States Bankruptcy Court, W.D. Michigan.

September 30, 2003.

COPYRIGHT MATERIAL OMITTED

Scott A. Chernich, Esq., Lansing, Michigan, for Chapter 7 Trustee.

Robert J. Kempf, Esq., Lansing, Michigan, for Debtor.

OPINION

JEFFREY R. HUGHES, Bankruptcy Judge.

James J.P. Quinn ("Debtor") owns an interest in an annuity issued by the Teachers Insurance and Annuity Association of America ("TIAA"). He also owns an interest in the trust established in connection with the Ford Motor Savings and Stock Investment Plan for Salaried Employees ("Ford SSIP"). The issue before the court is whether Debtor's interest in either the TIAA annuity or the Ford SSIP trust is included among the Debtor's interests in property transferred to the estate created when Debtor filed his petition for relief under the Bankruptcy Code. I conclude that Debtor's interest in the TIAA annuity did become property of the estate but that Debtor's interest in the Ford SSIP trust did not become property of the estate.

JURISDICTION

The court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and L.R. 83.2(a) (W.D.Mich.). This matter is a core proceeding because it concerns the administration of the estate, 28 U.S.C. § 157(b)(2)(A), and because it affects the liquidation of the assets of the estate, 28 U.S.C. § 157(b)(2)(O). Consequently, the order entered in conjunction with this opinion is a final order subject to review by the United States District Court pursuant to 28 U.S.C. § 158(a).

PROCEDURAL BACKGROUND

Debtor contends that his interests in the TIAA annuity and the Ford SSIP may not be administered by Trustee either because these interests do not constitute property of the estate or because they are exempt pursuant to Section 522(d)(10)(E) of the Bankruptcy Code.¹ Trustee objected to each of these positions. As part of the pre-hearing process, I ordered that these two issues be bifurcated and that the issue concerning whether Debtor's interests in the TIAA annuity and the Ford SSIP trust constitute property of the estate be tried first.²

The parties agreed to submit this first issue to the court on stipulated facts and written argument. Therefore, the record upon which this decision is made consists of the stipulated facts and exhibits filed by the parties and their respective trial briefs.³ Debtor bears the burden of proving that the TIAA and the Ford SSIP are excluded from the bankruptcy estate pursuant to Section 541(c)(2). In re Barnes, 264 B.R. 415, 420-21 (Bankr.E.D.Mich.2001) (citing In re Fulton, 240 B.R. 854, 862 n. 4 (Bankr.W.D.Pa.1999)); In re Gilroy, 235 B.R. 512, 515 (Bankr.D.Mass.1999). This opinion represents my findings of fact and conclusions of law in accordance with Fed. R. Bankr.P. 7052 and 9014.

FACTS

TIAA Annuity

Debtor was employed by Michigan State University ("MSU") from 1968 to 1979 (Stip. at ¶ 18). During this time period, Debtor participated in the TIAA/CREF retirement plan offered by the university (Stip. at ¶ 9). Debtor's participation in the plan was mandatory (Stip. at ¶ 11). Debtor had accumulated approximately $115,066 in this plan as of the date of Debtor's bankruptcy petition (Stip. at ¶ 13). All of MSU's and Debtor's contributions to the plan were used to pay premiums for the annuity issued to Debtor by TIAA pursuant to the plan. (Stip. at ¶¶ 11 and 13). A copy of the contract evidencing the TIAA annuity is attached as Exhibit A to the Stipulation.

Ford SSIP

Debtor's former spouse was employed by Ford Motor Company during their marriage. As part of that employment, she participated in the stock savings plan offered by the company. Debtor and his former spouse were divorced in 1992. A Qualified Domestic Relations Order was entered as part of their divorce which awarded Debtor 1,340 shares of Ford Motor Company stock from the Ford SSIP. (Stip. at ¶ 16). As of the bankruptcy petition date, the value of Debtor's interest in the Ford SSIP trust was $179,622.00. (Stip. at ¶ 17). A copy of the Ford SSIP is attached as Exhibit B to the Stipulation. (Stip at ¶ 19).

DISCUSSION

Judge Spector, in In re Barnes, 264 B.R. 415, thoroughly evaluated whether a debtor's interest in an annuity contract issued by TIAA is excluded from the property which trustee is to administer as the appointed representative of the bankruptcy estate. Like Debtor in the instant case, the debtor in Barnes argued that Section 541(c)(2) excluded from the bankruptcy estate her interest in a TIAA annuity contract because the annuity contract prohibited the assignment of Debtor's interest. Judge Spector rejected this argument. He concluded that the exclusion provided by Section 541(c)(2) was limited to interests in trusts and that no trust relationship existed between TIAA and the debtor with respect to the annuity contract.

I agree with Judge Spector's conclusion in Barnes. I also join with Judge Spector in his rejection of Morter v. Farm Credit Services (In re Morter), 937 F.2d 354 (7th Cir.1991), In re Montgomery, 104 B.R. 112 (Bankr.N.D.Iowa 1989), In re Braden, 69 B.R. 93 (Bankr.E.D.Mich.1987), and In re Fink, 153 B.R. 883 (Bankr.D.Neb.1993), the four cases cited by Debtor in support of his position. I will not repeat or even summarize Judge Spector's sound analysis. However, I will offer some more insight as to why Congress included in Section 541(c)(2) the requirement that the beneficial interest be associated with a trust.

There has been a tendency among courts to interpret Section 541(c)(2) without reference to the balance of Section 541. See, e.g., Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992); Taunt v. General Retirement System of the City of Detroit (In re Wilcox), 233 F.3d 899 (6th Cir.2000); U.S. v. Brooks, 114 F.3d 106 (7th Cir.1997). However, it is not possible to read Section 541(a)(2) by itself. Section 541(c)(2) is an exception to Section 541(c)(1). Consequently, Section 541(c)(2) cannot be understood unless it is considered in the context of what Section 541(a)(1) is to accomplish in the first place. Moreover, Section 541(c) makes little sense unless it in turn is considered in conjunction with Section 541(a), for Section 541(c) supplements Section 541(a). Accordingly, consideration of Section 541(c)(2) should first begin with an examination of Section 541 generally and the purposes that section is to serve.

Section 541 performs three separate functions, each of which is crucial to the bankruptcy process. First, Section 541 creates an estate each time relief is sought under the Bankruptcy Code. "The commencement of a case under Section 301, 302, or 303 of this title creates an estate." 11 U.S.C. § 541(a). (emphasis added). The bankruptcy estate is a legal entity which is separate from the debtor. The estate serves as the vehicle through which the entire bankruptcy proceeding is then administered. When the bankruptcy trustee acts, she acts as the representative of the bankruptcy estate, not as a representative of the debtor. For example, if the bankruptcy trustee liquidates property of the estate pursuant to Section 363, she conveys title to that property on behalf of the bankruptcy estate, not on behalf of the debtor.

Second, Section 541(a) establishes that all of the debtor's assets owned as of the date of the debtor's petition are to be owned by the newly created estate.

(a) ... Such estate is comprised of all the following property, wherever located and by whomever held:

(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.

11 U.S.C. § 541(a)(1).

Finally, Section 541 addresses the mechanics associated with creating this separate bankruptcy estate. Implicit in Section 541 is the recognition that there must be an immediate and comprehensive conveyance of all of the debtor's pre-petition interests in property from the debtor to the newly created estate. Otherwise, Section 541's provision for a bankruptcy estate and its declaration that the debtor's property is to be included in that estate would be meaningless.

Congress enacted Section 541(c)(1) to ensure that the immediate transfer of Debtor's property to the bankruptcy estate would not be impeded by restrictions imposed by either statute or contract upon the transfer of that property:

Subsection (c) invalidates restrictions on the transfer of property of the debtor, in order that all of the interests of the debtor will become property of the estate.

S.Rep. No. 95-989, at 83 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5869; see also, H.R.Rep. No. 95-595, at 176-77 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5963, 6325. Section 541(c)(1) itself states:

(c)(1) 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.

11 U.S.C. § 541(c)(1).

The application of Section 541(c)(1) in a particular bankruptcy proceeding is for the most part transparent. For example, Michigan, like all other states, requires the transfer of real property to be evidenced by the owner's execution of a deed, MCLA § 565.1, and the transfer of an automobile to be evidenced by the owner's endorsement of the certificate of title. MCLA § 257.233(8). Section 541(c)(1)...