In re White, Bankruptcy No. 82-02144
| Decision Date | 24 April 1986 |
| Docket Number | Bankruptcy No. 82-02144,Adv. No. A84-0219. |
| Citation | 61 BR 388 |
| Parties | In re William A. and Cecelia B. WHITE, Debtors. Glenn R. NELSON, Trustee of the Estate of William A. and Cecelia B. White, Plaintiff, v. William A. and Cecelia B. WHITE, husband and wife, and the marital community composed thereof, Defendants. |
| Court | U.S. Bankruptcy Court — Western District of Washington |
Daniel R. Merkle, Hatch & Leslie, Seattle, Wash., for debtors.
William S. Weinstein, Weinstein & Hacker, Seattle, Wash., for trustee.
The debtors, William and Cecelia White, seek to exclude from the bankruptcy estate, or claim as exempt, an interest of William White in a "Profit Sharing Trust" ("Trust") established by White Metal Fabricating, Inc. ("White Metal") which employed William White as its Chief Executive Officer. This matter has been before the Bankruptcy Court, the District Court, and the Ninth Circuit Court of Appeals. It is now before this court on remand from the District Court. 47 B.R. 410.
The trustee moved for entry of findings of fact and conclusions of law to reflect the District Court orders of February and March, 1985. The debtors object and seek to exclude the Trust interest from the estate under 11 U.S.C. § 541(c)(2) or to amend their exemptions to claim it as exempt under 11 U.S.C. § 522(d)(10)(E) which neither of them has previously scheduled. The trustee objects to amendment and denies that the debtors would be entitled to any Trust funds even if amendment is permitted.
The debtors filed a personal chapter 11 petition on July 21, 1982. The proceedings were converted to chapter 7 on January 26, 1984. On conversion, William White elected the state exemption scheme as permitted by Section 522(b)(2) and Cecelia White elected the federal exemptions under Section 522(b)(1). William White scheduled a state exemption in the Trust while Cecelia White did not schedule any claim of exemption for the Trust.
The Trust was established in 1967 by White Metal. It was amended in 1976 to comply with the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). The debtors owned 100 percent of White Metal stock. William White was employed as Chief Executive Officer and the Whites were the sole directors. William White had a vested interest in 95 percent of the funds in the Trust which amounted to about $315,000. All of the Trust funds were contributed by White Metal. William White was the trustee, administrator and named fiduciary of the Trust.
Section 19.06 of the Trust provided that no participant could alienate his interest in the Trust. Section 16.14(1) required diversification of investments to minimize risk. Section 16.14(2) required maintenance of sufficient liquidity for disbursements to plan participants.
There is no dispute that William White was in complete control of the Trust funds and of White Metal. As trustee of the Trust, in August 1981 and March 1982, he invested a total of $304,000 of Trust funds in Jeffron Enterprises ("Jeffron") which is a joint venture of the debtors and White Metal and, consequently, entirely owned and controlled by the debtors.
The Whites individually, White Metal, and Jeffron have all filed bankruptcy petitions. The funds loaned to Jeffron by the Trust have not been repaid. The White Metal estate has filed a disputed claim in the Jeffron estate.
The trustee's objections to exemption of an interest in the Trust were heard by Bankruptcy Judge Kenneth S. Treadwell. He determined that the Trust was excluded from the estate under Section 541(c)(2) because, as a qualified ERISA plan, it was subject to restraints on alienation enforceable under federal nonbankruptcy law. Since the Trust was excluded from the estate the exemption issue was not reached. It was also unnecessary to address the issue of exclusion from the estate as a trust enforceable under state nonbankruptcy law.
The trustee appealed Judge Treadwell's decision to the District Court where the matter was heard by Judge Barbara J. Rothstein who determined that the reference to "applicable nonbankruptcy law" in Section 541(c)(2) did not include federal nonbankruptcy law. The initial order of the District Court reversed and remanded to the Bankruptcy Court for further proceedings.
Before the matter could be heard on remand, the debtors moved to alter or amend judgment and urged as an alternative theory that the spendthrift trust restraints were enforceable under state nonbankruptcy law, RCW 6.32.250, and therefore the exclusion of Section 541(c)(2) was applicable. In denying this motion, the District Court concluded that
The debtors appealed to the Ninth Circuit Court of Appeals which dismissed without prejudice for lack of a final, appealable, order. Because Judge Treadwell has since retired the matter has been assigned to this Court.
1. Whether the Trust can be excluded from the estate pursuant to Section 541(c)(2).
2. Whether the debtors should be permitted to amend their exemption schedules to include the beneficial interest in the Trust.
3. Whether the Trust can be exempted under Section 522(d)(10)(E).
4. Whether the Court should sign the findings of fact and conclusions of law proposed by the trustee.
SECTION 541(c)(2)
The debtors originally argued that the phrase "applicable nonbankruptcy law" includes federal nonbankruptcy laws such as ERISA which requires qualified plans to contain restraints on alienation. The ruling of the bankruptcy court agreeing with this contention was reversed by the District Court which held that this section does not exclude from the estate trusts with restrictions enforceable under federal nonbankruptcy law. In re White, 47 B.R. 410 (W.D. WA 1985). Since that opinion was filed, the Ninth Circuit has reached the same conclusion. In re Daniel, 771 F.2d 1352 (9th Circuit 1985).
In response to the motion to alter or amend, the District Court held that Section 541(c)(2) does not exempt ERISA plans even if they would be enforceable under state nonbankruptcy law. In re White, supra at 413. That holding was based upon 29 U.S.C. § 1144(a) which provides that ERISA supersedes state law. Other courts have reached a contrary conclusion. See e.g. In re Crenshaw, 51 B.R. 554 (D.C. Ala.1985).
Once a matter has been heard on appeal and is remanded, the decision of the appellate court, in this case the District Court, constitutes the "law of the case" and the remand court is bound to proceed in accordance with the terms of the remand order. In re Sanford Fork and Tool, 160 U.S. 247, 255-56, 16 S.Ct. 291, 293, 40 L.Ed. 414 (1895); Hermann v. Brownell, 274 F.2d 842 (9th Cir.1960); 6A Moore's Federal Practice ¶ 59.16. Thus, the "law of the case" doctrine would preclude a determination at this level to apply state spendthrift trust law to the terms of the White Metal ERISA plan.
The issue of whether ERISA-qualified plans meeting state spendthrift trust requirements may be excluded from the bankruptcy estate under Section 541(c)(2) is inherent in this case. However, it was not dealt with by the bankruptcy court. On appeal, for the first time, and then in the course of a post-hearing motion, it was brought to the attention of the District Court by way of a motion to alter or amend the earlier decision which had considered and decided the issue of exclusion only under federal nonbankruptcy law.1 Because this issue of exclusion under state law has been directly raised and argued on remand, and the importance of the question, it would be appropriate, under the circumstances, to consider and rule on it.
Section 541(c)(2) does not exclude from the estate property subject to restrictions on alienation enforceable under federal nonbankruptcy law. In re Daniel, supra, In re Lichstrahl, 750 F.2d 1488 (11th Cir. 1985), Matter of Goff, 706 F.2d 574 (5th Cir.1983). However, analysis under state spendthrift trust law is appropriate even for a qualified ERISA plan. The Ninth Circuit has endorsed the view of the Eleventh Circuit that ". . . ERISA-qualifying pension plans containing anti-alienation provisions are excluded pursuant to Section 541(c)(2) only if they are enforceable under state law as spendthrift trusts." In re Daniel, supra at 1360 quoting In re Lichstrahl, supra at 1490. Accord, Matter of Goff, supra.
While ERISA provisions override state law, they do not "alter, amend, modify, invalidate, impair, or supercede any law of the United States . . ." 29 U.S.C. § 1144(a) and 1144(d). However, the question arises as to whether it is appropriate to examine an ERISA plan's restrictions on alienation to determine if they would be enforceable under state law by virtue of 11 U.S.C. § 541(c)(2).
If Section 541(c)(2) could never exclude an ERISA trust, such trusts would always be considered as exemptions under Section 522(d)(10)(E) which permits exemption only to the extent necessary for support. Exemption might be allowed in whole, in part, or not at all. Consequently, a non-ERISA state spendthrift trust would be excluded from the estate whereas as an ERISA-qualified trust, albeit containing equivalent spendthrift trust provisions, would be subject to nullification. The analysis of the trust under state spendthrift trust law for purposes of exclusion from the estate under Section 541(c)(2) should be undertaken whether or not the trust is ERISA-qualified.2 Considering the lack of specific statutory language or history, and consistent with the policy directed toward financial rehabilitation for the debtor and preservation of exemptions, the simple event of bankruptcy should not invalidate the spendthrift provisions of a retirement plan only because the plan is ERISA-qualified. The...
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