In re Wimmer
| Decision Date | 19 July 1991 |
| Docket Number | No. 91-1021.,91-1021. |
| Citation | 129 BR 563 |
| Parties | In re William J. WIMMER and Cynthia S. Wimmer, Debtors. |
| Court | U.S. District Court — Central District of Illinois |
Charles E. Covey, Peoria, Ill., for appellant.
Andrew W. Covey, Peoria, Ill., for appellee.
Before the Court is an appeal by William J. Wimmer and Cynthia S. Wimmer, Debtors, from a final order of the Bankruptcy Court for the Central District of Illinois. This Court has jurisdiction to hear the appeal pursuant to 28 U.S.C. § 158(a). This Court affirms the order of the bankruptcy court.
The Debtors filed their voluntary petition under Chapter 7 of the Bankruptcy Code on December 11, 1989. (R. 1).1 On the date of the bankruptcy, Cynthia S. Wimmer held an interest in a 401(k) plan sponsored by her former employer, Ruppman Marketing Services, Inc. (R. 8). This retirement plan is subject to and qualified under the requirements of the Employee Retirement Income Security Act of 1934 (ERISA) and the Internal Revenue Code of 1986. (R. 8). As of the date of the bankruptcy, Cynthia Wimmer had terminated her employment with Ruppman and was entitled to a lump sum distribution on demand of at least $8,526.92. (R. 8). However, on the date of the bankruptcy, the money remained in the Ruppman Marketing Services, Inc. employee thrift and savings plan. The Debtor claimed as exempt her interest in the retirement plan under § 12-1006 of the Illinois Code of Civil Procedure. Ill.Rev.Stat. ch. 110, § 12-1006(a). She also claimed that the retirement fund was exempt under ERISA § 206(d)(1) on the theory that this section created a federal non-bankruptcy exemption for money in ERISA-qualified plans. The trustee objected to her claim of an exemption and the issue was briefed. (R. 6, 7, 9, 10, 11).
Thereafter, on September 12, 1990, the bankruptcy court issued its written opinion. (R. 12). The bankruptcy court held that ERISA preempted the Illinois exemption law (Ill.Rev.Stat. ch. 110, § 12-1006) regarding retirement plan. Further, the bankruptcy court ruled that Congress only intended to exclude traditional spendthrift trusts from the bankruptcy estate under the Bankruptcy Code; therefore, the Court concluded that the attempt by Illinois to turn all qualified retirement plans into spendthrift trusts failed to exclude these plans from the bankruptcy estate unless they qualified as traditional spendthrift trusts. (R. 12). However, the bankruptcy judge did not rule on whether ERISA creates a federal non-bankruptcy exemption. The Debtors then filed a motion to amend judgment (R. 14) and the bankruptcy judge, in an opinion dated January 3, 1991, (R. 18) refused to reverse his earlier decisions and further held that ERISA does not create a federal non-bankruptcy exemption. (R. 18). This appeal followed.
Under 11 U.S.C. § 541(a) of the Bankruptcy Code, the bankruptcy estate is comprised of all legal and equitable interests of the debtor in property subject only to the exception of 11 U.S.C. § 541(c)(2). Matter of Nichols, 4 B.R. 711 (Bankr. E.D.Mich.1980). Section 541(c)(2) of the Bankruptcy Code provides:
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. § 541(c)(2). A retirement plan which constitutes a spendthrift trust under state law is not the property of the bankruptcy estate by operation of § 541(c)(2). See, Matter of LeFeber, 906 F.2d 330, 331 (7th Cir.1990); In re Silldorff, 96 B.R. 859 (Bankr.C.D.Ill.1989); In re Lichstrahl, 750 F.2d 1488 (11th Cir.1985); Matter of Goff, 706 F.2d 574 (5th Cir.1983); In re Kincaid, 917 F.2d 1162 (9th Cir.1990).
In the instant case, the Debtors admit that the retirement plan does not constitute a spendthrift trust under Illinois common law because Cynthia Wimmer had the right to withdraw her money from the plan upon termination of her employment. In re Silldorff, 96 B.R. 859. In fact, the Debtors concede that, because Cynthia Wimmer had terminated her employment with Ruppman before the bankruptcy petition was filed, she had the immediate right to withdraw the money. However, the Debtors point out that the Illinois common law concerning spendthrift trusts was amended by the Illinois legislature by the enactment of § 12-1006(c) of the Illinois Code of Civil Procedure. That section now states that qualified retirement plans are conclusively presumed to be spendthrift trusts under the law of Illinois. This section states as follows:
A retirement plan that is (i) intended in good faith to qualify as a retirement plan under the applicable provisions of the Internal Revenue Code of 1986, as now or hereafter amended, or (ii) a public employee pension plan created under the Illinois Pension Code, as now or hereafter amended, is conclusively presumed to be spendthrift trust under the law of Illinois.
Because the Debtor's retirement plan constitutes a spendthrift trust as defined under § 12-1006(c) of the Illinois Code of Civil Procedure, the Debtor asserts that it is excluded from the bankruptcy estate pursuant to § 541(c)(2) of the Bankruptcy Code.
The trustee asserts that the bankruptcy court was correct in finding that the exception created in § 541(c)(2) of the Bankruptcy Code is limited to true "spendthrift trusts" as traditionally viewed. Matter of Goff, 706 F.2d 574, 582-586 (5th Cir.1983); In re Dagnall, 78 B.R. 531, 533-534 (Bankr.C.D.Ill.1987); Matter of Osburn, 56 B.R. 867, 872-873 (Bankr.S.D.Ohio 1986).
As the trustee correctly notes, the holding in these cases is supported by the legislative history as discussed in the above cited cases. Further, the plain language of § 541(c)(2) clearly contemplated that the exception would apply only where there was a restriction on the transfer of the beneficial interest as in the context of the traditional spendthrift trust under common law.
In addition, the trustee notes that case law from this Court supports the proposition that § 541(c)(2) was only intended to apply to spendthrift trusts which were traditionally beyond the reach of creditors under state law. Specifically, this Court has previously stated:
In other words, the court in Goff concluded that Congress intended by its reference to "applicable non-bankruptcy law" to exempt from the estate only those spendthrift trusts traditionally beyond the reach of creditors under state law, thus continuing the previously recognized exemption for spendthrift trusts under the old Bankruptcy Act.
See, In re Silldorff, 96 B.R. 859, 863. This Court then went on to discuss the requirements which were necessary to qualify as a traditional spendthrift trust under Illinois law. This Court stated:
Id. at 864 (emphasis added). Further, this Court noted that:
Just because a plan is ERISA-qualified does not mean the funds contained therein are protected from manipulation. In fact, in the appellate court cases considering this issue, the plans in question were all ERISA-qualified. If a bankruptcy trustee can never reach funds held in an ERISA-qualified pension plan, then there is too much room for manipulation by a participant anticipating bankruptcy. On the other hand, if creditors were always able to reach the funds, ERISA\'s protection of retirement plans would be impermissibly diluted. The spendthrift trust rule allows for consideration of both statutory schemes, protecting debtor and creditor alike.
Id. at 863 (emphasis added).
In this case, this Court finds that it is unnecessary to determine whether § 541(c)(2) of the Bankruptcy Code is limited in its application to true spendthrift trusts because Cynthia Wimmer had no restrictions on her ability to obtain or transfer the funds in her pension fund. As the Debtors note, it is true that ERISA protects Cynthia Wimmer's pension funds from attachment or garnishment under state law until she removes the funds from the pension plan. See, Mackey v. Lanier Collection Agency & Service, Inc., 486 U.S. 825, 108 S.Ct. 2182, 2185-2191, 100 L.Ed.2d 836 (1988); 29 U.S.C. § 1056(d)(1). However, this Court believes that the legislative history and the plain intent of § 541(c)(2) is to require a restriction on the debtor's ability to transfer his or her beneficial interest. Without a restriction on Cynthia Wimmer's ability to transfer her beneficial interest after she terminated her job, this Court does not believe that her interest can be excluded from the bankruptcy estate.
The Debtor points out that the Seventh Circuit has upheld a statute from Indiana which it asserts is similar to the Illinois statute. See, In re LeFeber, 906 F.2d 330 (7th Cir.1990).
This Court does not believe that the LeFeber case leads to the result suggested by the Debtor in this case. See, In re Wimmer, 121 B.R. 539, 544-545 (Bankr.C.D.Ill. 1990). In LeFeber, a retiree was receiving a pension of $1,000 per month. The pension allowed the debtor to make revocable assignments of 10% of his benefits, and the debtor could not make an irrevocable assignment of any portion of his benefits. Under these circumstances, the Seventh Circuit held that the...
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