In re Ridenour

• Decision Date: 13 November 1984
• Docket Number: Bankruptcy No. 3-84-00216.
• Citation: 45 BR 72
• Parties: In re G.W. RIDENOUR, Jr. a/k/a G.W. Ridenour, a/k/a George W. Ridenour, Jr., Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

45 B.R. 72 (1984)

In re G.W. RIDENOUR, Jr. a/k/a G.W. Ridenour, a/k/a George W. Ridenour, Jr., Debtor.

Bankruptcy No. 3-84-00216.

United States Bankruptcy Court, E.D. Tennessee.

November 13, 1984.

Lacy & Winchester, P.C., J. Michael Winchester, Knoxville, Tenn., for debtor.

Wade M. Boswell, Knoxville, Tenn., for trustee.

Morton, Lewis, King & Krieg, Mary M. Farmer, Knoxville, Tenn., for Federal Deposit Insurance Corporation.

MEMORANDUM

CLIVE W. BARE, Bankruptcy Judge.

At issue is whether the assets of the debtor's pension plan, established and funded by a partnership of which debtor was a partner, are either excluded from the debtor's estate under 11 U.S.C.A. § 541(c)(2) (1979) or, alternatively, exempted from the debtor's estate under Tenn.Code Ann. § 26-2-111(1) (1980).

I

Involuntary chapter 7 proceedings were commenced against this debtor on February 10, 1984. During the previous nineteen years debtor was a partner in a law firm. Effective December 1, 1976, the partnership established a pension plan for partners and employees. The terms of the plan were set forth in a document designated "Defined Contribution (Money Purchase) Prototype Retirement Plan and Trust Agreement For Self-Employed Individuals No. K-1." Originally, debtor was named as trustee of the plan under the adoption agreement. Debtor terminated his association with the partnership in April 1983. Presently, the debtor no longer serves in the capacity of trustee.¹

Under the plan the employer contributed for each participant an amount equal to ten percent of the compensation paid to the participant during the taxable year. The participant could make additional voluntary contributions if desired. However, debtor never elected to make any such additional voluntary contributions. All of the funds in issue were contributed to the fund by the partnership.

The plan provided for an immediate 100 percent vested interest in all contributions, employer-made or voluntary, credited to the participant's account. The funds in the plan were used to purchase annuity contracts and life insurance policies. The trustee was the owner of these contracts with all the rights and privileges under the contracts.

The plan provided for distribution of benefits to the participant to commence upon either death, retirement, disability, or termination of employment. However, paragraph 8.2 of the plan provided that "except in the case of Disability, no distribution shall be made to any Owner-employee prior to his attaining age 59½ in excess of the amount of his own contributions (if any)."² Paragraph 9.2 of the plan provided that if the plan itself were terminated "all Participants other than Owner-employees shall be treated as though they have each incurred a Termination of Employment, and the Trustee shall make distributions in accordance with the procedure set forth in section 8.2 above." Furthermore, this paragraph provided:

On termination of this Plan, all restrictions on the distribution of benefits shall continue to apply, and no distribution shall be made to any Owner-employee following termination of this Plan prior to his attaining age 59½ in excess of the amount of his own contributions (if any) made pursuant to section 3.4 above.

In effect, then, under the existing terms of the plan an owner-employee such as the debtor would be entitled upon termination of his employment or upon termination of the plan only to a distribution based upon his own voluntary contributions to the fund and not to a distribution based upon the so-called employer-made contributions.

The plan, however, was subject to amendment. Under paragraph 9.1 the employer reserved the right to amend the plan by changing the investment options. In addition, the employer could change the duties and responsibilities of the Trustee with the Trustee's written consent. If the employer did amend the Prototype Plan and Trust in any manner other than to simply change the investment options, then a plan so amended would "no longer participate under the prototype arrangement" and would "henceforth be considered an individually designed plan."

In order to meet the requirements of the Employee Retirement Income Security Act, 29 U.S.C.A. § 1056(d)(1) (1975), and to qualify for tax exempt status under the Internal Revenue Code, 26 U.S.C.A. § 401(a)(13) (1978), paragraph 13.9 of the plan included the following anti-alienation and anti-assignment clause:

Nontransferability and Spendthrift Provision The right of any Participant or beneficiary to any benefit or interest under this Plan and Trust shall not be subject to sale, assignment, discount, pledge as collateral for any purpose, encumbrance or other alienation and, to the extent permitted by law, shall not be subject to attachment, execution, garnishment or other legal or equitable process by any creditor of any Participant or beneficiary.

The contributions credited to the debtor's account were used to purchase (1) a Pension Insurance Policy, issued December 1, 1970, (2) a Pension Life Insurance Policy, issued November 1, 1974, and (3) a Flexible Retirement Annuity Contract, issued April 1, 1980. Each of these contracts contains provisions establishing a cash surrender value for the respective contract dependent upon the length of time payments have been made on the contract. The precise extent of the present value of these contracts is not clear from the information provided to the court.

II

The commencement of bankruptcy proceedings under Title 11 of the United States Code creates an estate consisting of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C.A. § 541(a)(1) (1979). As the legislative history makes clear, this provision was intended to make "significant changes in what constitutes property of the estate," H.R.Rep. No. 595, 95th Cong., 1st Sess. 175, reprinted in 1978 U.S.Code & Ad.News 5787, 5963, 6136, and to broaden considerably the scope of the definition of property of the estate under prior law. H.R.Rep. No. 595, 95th Cong., 1st Sess. 367-69, reprinted in 1978 U.S. Code & Ad.News 5963, 6323-25. Specifically, the new Bankruptcy Code abandoned the test under Section 70a(5) of the old Bankruptcy Act which defined the property of the bankrupt's estate as "property . . . which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him, or otherwise seized, impounded, or sequestered." 11 U.S.C.A. § 110(a)(5) (repealed 1978); 4 L. King, Collier on Bankruptcy ¶ 541.02 at 12 (1984). Thus, the Bankruptcy Code provides that "an interest of the debtor in property becomes property of the estate . . . notwithstanding any provision— (A) that restricts or conditions transfer of such interest by the debtor." 11 U.S.C.A. § 541(c)(1)(A) (1979).

However, § 541(c)(2) does provide for an exception to this general rule: "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.A. § 541(c)(2) (1979).

The immediate issue is, then, whether this exception encompasses and excludes from the debtor's estate a pension plan containing an anti-alienation and anti-assignment clause in order to satisfy the requirements of the Employees' Retirement Income Security Act, 29 U.S.C.A. § 1056(d)(1) (1975), and to qualify for tax exempt status under the Internal Revenue Code, 26 U.S.C.A. § 401(a)(13) (1978).

The courts are not of one mind in this question. Those taking a more liberal view have held § 541(c)(2) applicable in this context. For example, in Clotfelter v. CIBAGEIGY Corp. (In re Threewitt), 24 B.R. 927 (D.Kan.1982), the district court rejected as an "unnecessarily narrow construction," 24 B.R. at 929, the Bankruptcy Court's conclusion that § 541(c)(2) would apply only to a pension plan that constituted a traditional spendthrift trust under state law. The district court reasoned that the actual language of the statute was not limited to "spendthrift trusts." The court also reasoned that, since under the majority approach a debtor's interest in an ERISA pension fund may not be levied upon by general creditors, such an interest would also be beyond the bankruptcy trustee's reach. The court said:

In the case sub judice the relevant question is not whether the Plan looks like a good, old-fashioned spendthrift trust; the relevant question is whether Mr. Threewitt\'s interest in the Plan would be protected from creditors in an ordinary state court action in which nonbankruptcy law would apply. Under the plain and simple language of Section 541(c)(2), if the ERISA anti-alienation provisions are enforceable against general creditors, they are enforceable against the bankruptcy trustee.

Clotfelter, 24 B.R. at 929.

See also In re Pruitt, 30 B.R. 330 (Bankr. D.Colo.1983); Warren v. G.M. Scott & Sons (In re Phillips), 34 B.R. 543 (Bankr.S. D.Ohio 1983).

Those courts taking the contrary view have held that an ERISA pension fund is excludable from the estate under § 541(c)(2) only if it constitutes a spendthrift trust under the relevant state law. Samore v. Graham (In re Graham), 726 F.2d 1268 (8th Cir. 1984); Goff v. Taylor (In re Goff), 706 F.2d 574 (5th Cir.1983). See also Firestone v. Metropolitan Life Ins. Co. (In re Di Piazza), 29 B.R. 916 (Bankr. N.D.Ill.1983); Avery Federal Savings & Loan Ass'n v. Klayer (In re Klayer), 20 B.R. 270 (Bankr.W.D.Ky.1981). The court in Graham, for example, reached its conclusion based upon the broadened scope of property of the estate under the new Bankruptcy Code, the legislative history of § 541(c)(2), the existence of exemption provisions specifically addressing pension plans, and the fact that ERISA provisions, while preempting state law, do not preempt other federal law. Graham, 726 F.2d at 1271.

The legislative history of § 541(c)(2) is...