In re Wheat

• Decision Date: 03 December 1992
• Docket Number: Bankruptcy No. 92-13222-BKC-AJC.
• Citation: 149 BR 1003
• Parties: In re Jerry D. WHEAT S.S.# XXX-XX-XXXX, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Florida

149 B.R. 1003 (1992)

In re Jerry D. WHEAT S.S.# XXX-XX-XXXX, Debtor.

Bankruptcy No. 92-13222-BKC-AJC.

United States Bankruptcy Court, S.D. Florida.

December 3, 1992.

Peter D. Spindel, c/o De Zayas & Spindel, P.A., Coconut Grove, FL, for debtor.

Ashley L. Diener, c/o Ashley L. Diener & Associates, P.A., Hialeah, FL, for creditor.

Arthur Weitzner, Trustee, Miami, FL.

ORDER OVERRULING CYNTHIA WHEAT'S OBJECTION TO DEBTOR'S CLAIMED EXEMPTION OF DEFERRED COMPENSATION PLAN

A. JAY CRISTOL, Bankruptcy Judge.

THIS CAUSE was heard August 18, 1992 on Cynthia Wheat's objection to the Debtor's claimed exemption of his City of Miami deferred compensation plan (the "Plan").

On July 31, 1992 Cynthia Wheat (the "Creditor") filed an objection to the Debtor's claimed exemption of his Plan.¹ The Plan is a benefit of the Debtor's employment with the City of Miami Police Department. It is funded solely by the Debtor through voluntary and regular wage deductions. The Debtor argues that, pursuant to 11 U.S.C. § 541(c)(2), the Plan is not property of the estate and that, even if it were, it is exempt under 11 U.S.C. § 522(b) and Florida Statute §§ 185.25 & 222.11.²

11 U.S.C. § 541(c)(2)

I. "A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable in a case under this title," 11 U.S.C. § 542(c)(2), and does not become property of the estate, 11 U.S.C. § 542(c)(1) ("Except as provided in § 541(c)(2), an interest of the debtor in property becomes property of the estate . . ."). The Debtor and Creditor argue at great lengths over whether the Debtor's Plan contains a transfer restriction which is enforceable under state spendthrift trust law and, thus, satisfies the requirements of 11 U.S.C. § 541(c)(2). Their arguments focus primarily on the Debtor's degree of control over his interest in the Plan. However, the Debtor's degree of control is irrelevant in this case since one cannot create a spendthrift trust for oneself in Florida.

A spendthrift trust is defined to be those trusts that are created with a view of providing a fund for the maintenance of another, and at the same time securing it against his own improvidence or incapacity for self-protection. The provisions against alienation of the trust fund by the voluntary act of the beneficiary, or invitum by his creditors, are the usual incidents of such trusts. 26 Am. & Eng. Ency.Law (2d Ed) p. 138 and authorities cited.

Croom v. Ocala Plumbing & Electric Co., 62 Fla. 460, 57 So. 243, 244 (1911) (emphasis added) (facts did not involve an attempt to create a spendthrift trust for oneself). Accord Waterbury v. Munn, 159 Fla. 754, 32 So.2d 603, 605 (1947) (facts did not involve an attempt to create a spendthrift trust for oneself); In re Lichstrahl, 750 F.2d 1488, 1490 (11th Cir.1985); Matter of Witlin, 640 F.2d 661, 663 (5th Cir. Unit B March 1981).

The Court notes that the cases examined, which prohibit creating a spendthrift trust for oneself, involved settlor-beneficiaries with much more control over their interests than the Debtor. See Id.; Fehlhaber v. Fehlhaber, 850 F.2d 1453, 1454-5 (11th Cir. 1988). Moreover, the policy against such spendthrift trusts is heavily dependent upon a settlor-beneficiary's control. See, e.g., Fehlhaber, 850 F.2d at 1455 ("It is against public policy to permit a man to tie up his property in such a way that he can enjoy it but prevent his creditors from reaching it."); Matter of Witlin, 640 F.2d at 663 ("There is, of course, a strong public policy that will prevent any person from placing his property in what amounts to a revocable trust for his own benefit which would be exempt from the claims of his creditors."). Thus, the stated policy against self-settled spendthrift trusts is not as compelling in situations where, as here, the settlor-beneficiary's control is relatively limited.³

II. In Patterson v. Shumate, 504 U.S. ___, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992), the Supreme Court held that, pursuant to 11 U.S.C. § 541(c)(2), a debtor's interest in an ERISA qualified pension plan did not become property of the estate. More specifically, the Supreme Court held that the phrase "applicable nonbankruptcy law" was not limited to state spendthrift trust law, but includes any relevant federal or state law. 11 U.S.C. § 541(c)(2). The Debtor argues that his Plan is sufficiently similar to the Patterson plan that it is, likewise, not property of the estate.⁴

A. The first issue in determining whether 11 U.S.C. § 541(c)(2) applies to the Debtor's Plan is whether there is "a restriction on the transfer of a beneficial interest of the debtor in a trust". Sections 9.08 and 9.09 of the Debtor's Plan (see footnote # 4), clearly impose "a restriction on the transfer of a beneficial interest of the debtor in a trust" within the meaning of 11 U.S.C. § 541(c)(2). In addition, although not expressed as clearly or forcefully as the language in the Patterson plan (see footnote # 4), § 7.04 of the Debtor's Plan also imposes "a restriction on the transfer of a beneficial interest of the debtor in a trust" within the meaning of 11 U.S.C. § 541(c)(2).⁵ Section 7.04 the Debtor's Plan provides, with emphasis added:

7.04. All assets of the Plan, including all deferred amounts, property and rights purchased with deferred amounts, and all income attributable to such deferred amounts, property or rights, shall remain (until made available to the PARTICIPANT or Beneficiary) solely the property and rights of the EMPLOYER (without being restricted to the provision of benefits under the Plan), subject only to the claims of creditors of the EMPLOYER. Contracts and other evidences of investments of all assets under this Plan shall be registered in the name of the EMPLOYER which shall be the owner and beneficiary thereof. The rights of the PARTICIPANT created by this Plan shall be those of a general creditor of the Employer, and in an amount equal to the fair market value of the deferred account maintained with respect to the PARTICIPANT. The PARTICIPANT acknowledges that his rights are no greater than those of a general creditor of the EMPLOYER and that in any suit for an accounting, to impose a constructive trust, or to recover any sum under this Plan, the PARTICIPANT\'S rights are limited to those of a general creditor of the EMPLOYER. The EMPLOYER acknowledges that the Administrator is the agent of the EMPLOYER.

B. Having determined that the Debtor's Plan imposes "a restriction on the transfer of a beneficial interest of the debtor in a trust" within the meaning of 11 U.S.C. § 541(c)(2), the Court must now determine whether such restriction is "enforceable under applicable nonbankruptcy law" within the meaning of this section. In addition to state spendthrift trust law, which the Court found the Debtor's Plan to be unenforceable under, the Debtor argues that his Plan is enforceable under state contract law and federal law. The Debtor's argument that §§ 9.08, 9.09, 9.11, & 10.04 of his Plan (see footnote # 4) are enforceable under state contract law is without merit. State contract law is not "applicable nonbankruptcy law" for purposes of 11 U.S.C. § 541(c)(2).⁶ See 11 U.S.C. § 541(c)(2) ("A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law . . .") (emphasis added).

Unlike the Patterson Plan, the Debtor's Plan is not governed by ERISA. See 29 U.S.C. § 1003(b)(1) ("The provisions of this title shall not apply to any employee benefit plan if — (1) such plan is a governmental plan . . ."). The Debtor's Plan is, however, governed by 26 U.S.C. (I.R.C.) § 457 ("Deferred compensation plans of state and local governments and tax-exempt organizations."). See, e.g., Debtor's Plan §§ 1.01(e), 2.04, 2.06, & 4.01-.02. Section 457(b) of the Internal Revenue Code ("Eligible deferred compensation plan defined.") provides, inter alia and with emphasis added:

For purposes of this section, the term "eligible deferred compensation plan" means a plan established and maintained by an eligible employer —

(6) which provides that —

(A) all amounts of compensation deferred under the plan,

(B) all property and rights purchased with such amounts, and

(C) all income attributable to such amounts, property, or rights,

shall remain (until made available to the participant or other beneficiary) solely the property and rights of the employer (without being restricted to the provision of benefits under the plan), subject only to the claims of the employer\'s general creditors.

Section 7.04 of the Debtor's Plan, contains language virtually identical to I.R.C. § 457(b)(6). Consequently, the Debtor argues that this language is enforceable under applicable federal law. The Court agrees.

Section 7.04 of the Debtor's Plan was obviously drafted pursuant to federal law, I.R.C. § 457(b)(6). Unlike I.R.C. § 401(a)(13) which is expressly enforceable through ERISA, 29 U.S.C. §§ 1104(a)(1)(D) & 1132(a)(3) & (5), I.R.C. § 457 is not supplemented with similar legislation providing an enforcement mechanism of the transfer restriction it authorizes. However, where there is a right there is a remedy for a right without a remedy is not a right. Furthermore, were the Court to hold unenforceable the language contained in I.R.C. § 457(b)(6) and the corresponding section of the Debtor's Plan, § 7.04, the Debtor's Plan would not qualify under I.R.C. § 457. This would nullify I.R.C. § 457. Thus, the Court holds that I.R.C. § 457(b)(6) and the corresponding section of the Debtor's Plan, § 7.04, imposes "a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law . . ." 11 U.S.C. § 541(c)(2). Hence, the Debtor's interest in his Plan is not property of the estate pursuant to 11 U.S.C. § 541(c)(2).

Florida Statute § 185.25

The purpose of Chapter 185 of Florida Statutes (...