In re Shaker

• Citation: 137 BR 930
• Decision Date: 15 January 1992
• Docket Number: Bankruptcy No. LU7-90-00884.
• Parties: In re Joseph L. SHAKER, Ruth A. Shaker, Debtors.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Western District of Wisconsin

137 B.R. 930 (1992)

In re Joseph L. SHAKER, Ruth A. Shaker, Debtors.

Bankruptcy No. LU7-90-00884.

United States Bankruptcy Court, W.D. Wisconsin.

January 15, 1992.

Melvyn L. Hoffman, Trustee, pro se.

Robert M. Osborne, Sparta, Wis., for debtors.

MEMORANDUM OPINION, FINDINGS OF FACT, AND CONCLUSIONS OF LAW

THOMAS S. UTSCHIG, Bankruptcy Judge.

This case comes before the Court on an objection by the trustee to the debtors' exemption claim of $17,849.08 in an employee profit-sharing plan and trust. The debtors, Joseph L. and Ruth A. Shaker, are represented by Robert M. Osborne. The trustee is Melvyn L. Hoffman and he is representing himself.

FACTUAL BACKGROUND

Joseph L. and Ruth A. Shaker filed a Chapter 7 bankruptcy on March 30, 1990. In amended Schedules B-3 and B-4 filed on August 14, 1990, the debtors disclosed the existence of what they referred to as an "IRA" (Individual Retirement Account) in the amount of $17,549.50. The debtors sought to exempt this amount pursuant to § 815.18(31) of the Wisconsin Statutes. After an initial objection filed on August 16, 1990, the trustee concluded that the characterization of the debtors' retirement plan as an "IRA" was erroneous and he accordingly filed an amended objection on August 23, 1990. The trustee asserted that the exemption provided by § 815.18(31) of the Wisconsin Statutes is unavailable to the debtors because the exemption is subject to federal preemption under the Employee Retirement Income Security Act of 1974 ("ERISA"), Pub.L. No. 93-406, 88 Stat. 829 (codified as amended in numerous sections of Titles 26 and 29 U.S.C.).

The parties have submitted briefs to the Court and have stipulated to the following facts:

1. As of the filing date, the debtor, Joseph L. Shaker, was employed by Brunner Drilling and Manufacturing Co., Inc. He was a participant in the Brunner Employees Profit-Sharing Plan and Trust (Plan), which was established by the debtor\'s employer for the exclusive benefit of its employees and their dependents.

2. As of the filing date, the debtor\'s interest in the Plan was 100% vested, with employer contributions totaling $8,775.43, and employee contributions of $9,073.65, for a total of $17,849.08. The employee contributions were made through the mechanism of salary reductions in accordance with Secs. 4.2 and 4.9 of the Plan.

3. The Plan constitutes an "employee benefit plan" for purposes of 29 U.S.C. §§ 1002(2)(A) and 1003(a).

4. It is the intent of the Plan that benefits arising thereunder be "tax-qualified" under 26 U.S.C. §§ 401(a) and 401(k).

5. For purposes of qualifying for tax-deferred treatment of employee benefits and current deductibility of employer contributions, the Plan contains anti-alienation, anti-assignment language which is consistent with the requirements of ERISA § 1056(d) and Internal Revenue Code (I.R.C.) § 401(a)(13), to wit:

9.2 ALIENATION

(a) Subject to the exceptions provided below, no benefit which shall be payable out of the Trust Fund to any person (including a Participant or Beneficiary) shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void; and no such benefit shall in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements, or torts of any such person, nor shall it be subject to attachment or legal process for or against such person, and the same shall not be recognized by the Trustee, except to such extent as required by law.

6. Pursuant to Para. 7.4 of the Plan, the Trustee has the discretion to make loans to Plan participants, subject to certain restrictions on the duration, security for and amount of such loans.

7. Pursuant to Para. 4.2 of the Plan, the debtor is able to withdraw amounts from the Plan while still employed by the Plan sponsor if he has either attained the age of 59½ or is able to demonstrate financial hardship.

8. Pursuant to Paras. 6.4(a) and 6.5(a)(1) of the Plan, upon the participant\'s termination of employment with the employer, the Trustee is directed to pay and may pay in one lump sum, the entire amount of the "Vested" portion of such terminated participant\'s benefits.

ISSUES

This matter raises these issues for the Court's consideration:

1. Whether the debtors' pension plan is excludable from the bankruptcy estate pursuant to the Employment Retirement Income Security Act of 1974 (ERISA) as "applicable nonbankruptcy law" under 11 U.S.C. § 541(c)(2).

2. Whether WIS.STAT. § 815.18(31) "relates to" ERISA pursuant to 29 U.S.C. § 1144(a) and is thereby preempted by it.

3. Whether ERISA's anti-alienation requirement 29 U.S.C. § 1056(d)(1) constitutes "other federal law" pursuant to § 522(b)(2)(A) of the Bankruptcy Code so as to qualify ERISA plan benefits for exemption from the bankruptcy estate.

ANALYSIS

This Court initially notes that the issues presented by this case have generated a tremendous amount of litigation and legal commentary in recent years. Numerous courts from a variety of jurisdictions have reached differing results on disparate grounds on nearly every issue presented by this case. See generally Retirement Benefits—Exempt and Excluded? Maybe, Maybe Not, Norton Bankr. Law Adviser (Callaghan) Part 1, No. 10, at 6 (Oct.1990), Part 2, No. 11, at 6 (Nov.1990), Part 3, No. 12, at 3 (Dec.1990), Part 4, No. 1, at 6 (Jan.1991); Golden, Protecting Qualified Retirement Plans in Bankruptcy, 2 Faulkner & Gray's Bankr.L.Rev. at 20 (Winter 1991); Sterbach, Weiss, & Salerno, Pre-Bankruptcy Planning for Professionals and ERISA Qualified Pension Plans: Are State Created Statutory Exemptions D.O.A. in Bankruptcy Proceedings?, 94 Comm.L.J. 229 (1989); Seiden, Chapter 7 Cases: Do ERISA and the Bankruptcy Code Conflict as to Whether a Debtor's Interest in or Rights Under a Qualified Plan Can Be Used to Pay Claims?, First Installment, 61 Am.Bankr. L.J. 219 (1987), Second Installment, 61 Am. Bankr.L.J. 301 (1987); Wohl, Pension and Bankruptcy Laws: A Clash of Social Policies, 64 N.C.L.Rev. 3 (1985); Lewell, ERISA Retirement Plans in Individual Bankruptcy, 19 U.Mich.J.L.Ref. 183 (1985).

Even given this great divergence of judicial authority as noted by the aforementioned commentators, however, certain lines of reasoning have emerged as a majority view on most of the issues presented here. The Court will consider each of the three issues in turn.

I. § 541(c)(2) AND "APPLICABLE NONBANKRUPTCY LAW"

The threshold issue before the Court is whether the debtors' profit-sharing plan account is includable in the bankruptcy estate pursuant to 11 U.S.C. § 541(c). That provision provides:

(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.

(2) 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) (West 1991). The relevant question here is whether the "applicable nonbankruptcy law" language of § 541(c)(2) was meant to encompass only state spendthrift trust law, or whether it also encompasses other federal laws such as ERISA. If the latter is true, then ERISA's anti-alienation provision¹ § 206(d)(1) of ERISA; 29 U.S.C. § 1056(d) is "enforceable in a case under this title" pursuant to § 541(c)(2). That would mean that creditors in bankruptcy (or the trustee here) could not reach the debtors' assets held in an ERISA-qualified plan.

This question has generated a tremendous amount of litigation in recent years among bankruptcy, district, and circuit courts of appeals. The circuit courts of appeals are currently evenly split on this issue. Many courts have undertaken exhaustive reviews of the legislative history of § 541(c)(2); others have waxed eloquent (at length) about the underlying policies of ERISA and the Bankruptcy Code; still others have done both.

A shrinking majority of these courts, including four circuit courts of appeals, have concluded that the "applicable nonbankruptcy law" language of § 541(c)(2) was meant to encompass only state spendthrift trust law. See, e.g., Daniel v. Security Pacific Nat'l Bank (In re Daniel), 771 F.2d 1352, 1360 (9th Cir.1985), cert. denied 475 U.S. 1016, 106 S.Ct. 1199, 89 L.Ed.2d 313 (1986); Lichstrahl v. Bankers Trust (In re Lichstrahl), 750 F.2d 1488, 1490 (11th Cir.1985); Samore v. Graham (In re Graham), 726 F.2d 1268, 1271 (8th Cir. 1984); Goff v. Taylor (In re Goff), 706 F.2d 574, 582-86 (5th Cir.1983); In re Fullmer, 127 B.R. 55, 57-58 (D.Utah 1991); Employee Benefits Committee v. Tabor (In re Cress), 127 B.R. 194, 198-99 (S.D.Ind.1991); In re Velis, 123 B.R. 497, 508 (D.N.J.), aff'd in part and rev'd in part, Velis v. Kardanis, 949 F.2d 78 (3rd Cir.1991); Clark v. Kazi (In re Kazi), 125 B.R. 981, 985 (Bankr.S.D.Ill.1991); In re Nadler, 122 B.R. 162, 165-66 (Bankr.D.Mass.1990); In re Burns, 108 B.R. 308, 312 (Bankr. W.D.Okl.1989). Some of these and other courts have gone a step further and have held that § 541(c)(2) encompasses only "traditional" — i.e., donative spendthrift trusts and therefore does not under any circumstances apply to retirement accounts or pension plans. See, e.g., In re Nadler, 122 B.R....