In re Taft

• Decision Date: 18 August 1994
• Docket Number: Bankruptcy No. 190-13220-352.
• Citation: 171 BR 497
• Parties: In re Robert L. TAFT, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of New York

171 B.R. 497 (1994)

In re Robert L. TAFT, Debtor.

Bankruptcy No. 190-13220-352.

United States Bankruptcy Court, E.D. New York.

August 18, 1994.

Robert W. Tauber, Brooklyn, NY, for debtor.

Yost & O'Connell, Flushing, NY, for Chapter 7 Trustee.

DECISION ON OBJECTION TO CLAIMED EXEMPTIONS

MARVIN A. HOLLAND, Bankruptcy Judge.

Richard E. O'Connell, Esq., the Chapter 7 Trustee (hereinafter "Trustee") filed an objection to the claim of Robert L. Taft (hereinafter "Debtor"), of an exemption of $55,000 in his Simplified Employee Pension (hereinafter "TCC SEP") and $3,400 in the Debtor's Individual Retirement Account (hereinafter "TCC IRA"). Since the Debtor did not oppose the relief requested by the Trustee regarding the funds deposited in the TCC IRA, we uphold the Trustee's objection regarding the TCC IRA. See In re Kramer, 128 B.R. 707 (Bankr.E.D.N.Y.1991). We further hold the Debtor's interest in the TCC SEP to be property of the estate not exempt pursuant to 11 U.S.C. § 522(b)(2)(A).

This proceeding is subject to the bankruptcy court's jurisdiction under 28 U.S.C. §§ 1334(b), 157(a), and the Order of Referral of Matters to Bankruptcy Judges of this district. It is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B).

FACTUAL BACKGROUND

The relevant facts are not disputed.

I. Prior to filing his petition in bankruptcy, and thereafter, the Debtor owned 51.6 percent of the stock of TCC Consulting Corp. (hereinafter "TCC") and served as the Chairman of its Board of Directors as well as its President.

II. On April 13, 1981, TCC set up the TCC SEP which is the subject of this decision.

III. TCC contributed not less than $24,500 to purchase individual retirement annuities on behalf of the Debtor from Guardian Insurance & Annuity Company, Inc.

IV. On August 1, 1990, the Debtor filed his petition in bankruptcy. On Schedule "C" of the petition, the Debtor claimed as exempt his $55,000 interest in the TCC SEP, pursuant to New York Civil Procedure Laws and Rules (hereinafter "CPLR") § 5205.

V. On January 28, 1992, the Trustee filed an objection to the above exemption.

VI. After the Trustee's objection was filed, this Court signed an order authorizing the amendment of Schedule "C" to claim 11 U.S.C. §§ 541(c)(2) and 522(b)(2)(A) as additional grounds for the claimed exemption.

DISCUSSION

Simplified Employee Pensions (hereinafter "SEP") are described in section 408(k) of the Internal Revenue Code (hereinafter "I.R.C."). A SEP is a plan pursuant to which an employer makes direct contributions to its employees' individual retirement accounts or individual retirement annuities as defined under I.R.C. §§ 408(a) and (b). 26 U.S.C. § 408(k). An essential characteristic of a SEP is that the employee must be permitted to make withdrawals from the plan. 26 U.S.C. § 408(k)(4).¹

The Debtor contends that his interest in the TCC SEP is not property of the estate pursuant to 11 U.S.C. § 541(c)(2), and if it is, that such interest is property exempt pursuant to 11 U.S.C. § 522(b)(2)(A).

I. THE DEBTOR'S INTEREST IN THE TCC SEP IS PROPERTY OF THE ESTATE

Section 541(a)(1) of the Bankruptcy Code provides that the commencement of a bankruptcy case creates an estate which is comprised of "all legal and equitable interests of the debtor in property as of the commencement of the case . . ." 11 U.S.C. § 541(a)(1).

However, 11 U.S.C. § 541(c) effectively prevents certain interests from becoming property of the estate by providing 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." 11 U.S.C. § 541(c)(2).²

It is not clear from the documents creating it whether the TCC SEP is a trust. If it is not a trust, the Debtor's interest in the TCC SEP would be property of the estate under 11 U.S.C. § 541(a)(1). Generally, an annuity contract creates a debtor-creditor relationship between the annuitant and the entity issuing the annuity, and not a trust relationship. See Appleman, Insurance Law and Practice, § 81 (1981 & 1991 Supp.); see also, In re Kohler, 96 Misc. 433, 441, 160 N.Y.S. 669, 675, (the court discussed the differences between annuities and trusts). While, according to Appleman, "an annuity contract ordinarily creates a debtor-creditor relationship and not a trust relationship emphasis added", the possibility exists that in the nontypical case, an annuity might create, or be part of, a trust relationship.³

For purposes of this decision, no lengthy analysis of annuity and trust law is necessary because we hold the Debtor's interest in the TCC SEP to be property of the estate even assuming arguendo that the TCC SEP were a trust. Accordingly, for purposes of this decision, the assumption is made that the TCC SEP is a trust.

The Debtor makes two arguments regarding 11 U.S.C. § 541(c)(2): (1) that the TCC SEP is an "employee pension benefit plan" under the Employee Retirement Income Security Act of 1974 ("ERISA")⁴, and as such, is excluded property pursuant to 11 U.S.C. § 541(c)(2); and (2) that the TCC SEP is a spendthrift trust under New York law, pursuant to CPLR § 5205(c), and as such, is excluded property pursuant to 11 U.S.C. § 541(c)(2).

Each of the Debtor's contentions will be addressed separately.

A. THE DEBTOR'S INTEREST IN THE TCC SEP DOES NOT QUALIFY FOR EXCLUSION UNDER ERISA

"ERISA is a federal regulatory scheme enacted to ensure the protection and preservation of private pension plans. To encourage employers to participate in these plans, Congress coordinated various provisions of the I.R.C. with ERISA to provide favorable tax treatment." Helene Yvette Spielman Sherman, ERISA Benefits Under the Bankruptcy Code and a New York Debtor's Rights, 58 Brooklyn L.Rev. 177 (1992). "ERISA contains a variety of provisions designed to protect an employee's accrued benefits under a retirement plan which is covered by that statute." Mary F. Radford, Exclusion and Exemption in Bankruptcy of Debtor's Interests in ERISA-Qualified Retirement Plans, Norton Bankr L & Prac Monograph 1986, No. 2, p. 4. One such provision is that, subject to certain exceptions, each pension plan covered by ERISA "shall provide that benefits provided under the plan may not be assigned or alienated." 29 U.S.C. § 1056(d)(1).

In Patterson v. Shumate, ___ U.S. ___, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992), the Supreme Court addressed the issues of whether an anti-alienation provision in an ERISA-qualified pension plan constituted a restriction on transfer enforceable under applicable nonbankruptcy law for purposes of 11 U.S.C. § 541(c)(2), and whether, accordingly, a debtor's beneficial interest in such plan was excluded from the property of the bankruptcy estate. The pension plan in Patterson satisfied all the applicable requirements of ERISA and qualified for favorable tax treatment under I.R.C. § 401. Id. at ___, 112 S.Ct. at 2245. The pension plan contained an anti-alienation provision which provided that the debtor could not voluntarily transfer his interest and further provided that it was not subject to the claims of creditors. Id. at ___, 112 S.Ct. at 2247. The debtor claimed that his interest in the pension plan, therefore, was not property of the bankruptcy estate pursuant to 11 U.S.C. § 541(c)(2). The Supreme Court agreed.

First, the Supreme Court held that the phrase "applicable nonbankruptcy law," as used in 11 U.S.C. § 541(c)(2), included federal law such as ERISA. Id. at ___, 112 S.Ct. at 2246. The Court stated that "the natural reading of 11 U.S.C. § 541(c)(2) entitles a debtor to exclude from property of the estate any interest in a plan or trust that contains a transfer restriction enforceable under any relevant nonbankruptcy law." Id.

Second, the Supreme Court held that the pension plan's anti-alienation provision which prohibited both voluntary and involuntary transfer of the debtor's interest satisfied the literal terms of 11 U.S.C. § 541(c)(2) because 29 U.S.C. § 1056(d)(1) "clearly imposes a `restriction on the transfer' of a debtor's `beneficial interest' in a trust." Id. at ___, 112 S.Ct. at 2247.

Finally, the Court held that such restriction was enforceable under applicable nonbankruptcy law because ERISA created its own enforcement procedures whereby civil actions could be commenced to enforce the provisions of ERISA. Id.

Patterson has been interpreted as being limited in its application to situations where the pension plan at issue was "ERISA-qualified". For example, in In re Henderson, 167 B.R. 67, 69 (Bankr.N.D.Miss.1993), the Court, in holding that an interest in a SEP was property of the bankruptcy estate, held that Patterson was limited to cases concerning ERISA-qualified pension plans and that SEP's, although "qualified under § 408 of the I.R.C. . . . are not considered as being qualified under the provisions of ERISA." Thus, the Henderson Court held that "because SEP-IRA's are not ERISA qualified, this court cannot conclude that they are excluded from property of the bankruptcy estates pursuant to § 541(c)(2)."⁵ Id. at 70; but see In re Mehra, 166 B.R. 393 (Bankr. E.D.Mo.1994) (without discussing whether SEP's are ERISA-qualified, the court held that under Patterson, the debtor's interest in his SEP's was not property of the bankruptcy estate pursuant to 11 U.S.C. § 541(c)(2)).

Notwithstanding Henderson, it remains unclear what is meant by the term "ERISA-qualified" and whether a SEP is "ERISA-qualified". In In re Kaplan, 162 B.R. 684, 691 (Bankr.E.D.Pa.1993), the court commented that "although the Court, in Patterson, laid to rest the controversy over whether ERISA constituted `applicable nonbankruptcy law,' the Court did not decide what types of pension plans constitute `ERISA qualified' plans." Moreover, in In re Hall, 151 B.R. 412, 418 (Bankr.W.D.Mich.1993), the court noted that "the Patterson Court may have intended any one of three interpretations for the term `ERISA qualified'...