In re Witwer
| Decision Date | 01 December 1992 |
| Docket Number | Bankruptcy No. SA 91-40038 JW. |
| Citation | 148 BR 930 |
| Parties | In re James J. WITWER, Debtor. |
| Court | U.S. Bankruptcy Court — Central District of California |
COPYRIGHT MATERIAL OMITTED
Robert A. Foster, II, Irvine, CA, for creditors, Emery E. ("Bill") Lampman, Ralph James Lampman, as Trustee of the James Lampman Trust, and Ralph James Lampman, as Executor of the Estate of James Frank Lampman.
Keith Meyer, Fell, Meyer & McCarthy, Costa Mesa, CA, for debtor, James J. Witwer, M.D.
Creditors, Emery E. ("Bill") Lampman, Ralph James Lampman, as Trustee of the James Lampman Trust, and Ralph James Lampman, as Executor of the Estate of James Frank Lampman (collectively, "Creditors") object to James J. Witwer's ("Debtor") claim that his profit sharing plan is exempt from creditors' claims. The Debtor contends that his profit sharing plan is excluded from the bankruptcy estate under 11 U.S.C. § 541(c)(2) of the Bankruptcy Code ("Code") or, alternatively, is exempt pursuant to California Code of Civil Procedure ("C.C.P.") § 704.115.
On October 21, 1991, the Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. The Debtor has claimed his profit sharing plan corpus exempt pursuant to California Code of Civil Procedure § 704.115. On December 13, 1991, pursuant to Rule 4003 of the Federal Rules of Bankruptcy Procedure, the Creditors filed an Objection to Debtor's Claims of Exemption for, inter alia, the Debtor's profit sharing plan.
The Debtor is the sole stockholder and President of James J. Witwer, M.D., Inc., a California corporation. He is that corporation's only employee and beneficiary of a corporate profit sharing plan entitled the James J. Witwer M.D., Inc. Profit Sharing Plan ("Plan").1 Although the Debtor's Plan contemplates extending coverage to future employees, the Debtor is and always was the sole participant of the Plan.2
The Plan, with a present net value of $1.8 million, was originally established during 1970, and has been amended to remain consistent with Internal Revenue Service ("IRS") regulations for plan exemption. To ensure plan exemption, the Plan has been maintained by numerous specialists. Specifically, the Debtor hired an attorney experienced in pension and retirement plan law as well as an accountant to ensure the Plan was IRS tax qualified. Furthermore, a professional plan administrative service and a bank's trust department were hired to document loan transactions, collect loan repayments and compile quarterly and annual reports which depict all Plan transactions and the Plan's net worth.
The Plan contains an anti-alienation provision which purports to insulate the Plan corpus from creditor attachment.3 The Plan, however, gives the Debtor great latitude in withdrawing his beneficial interest, which became 100% vested after six years of employment. Further, the Plan provides that upon attaining the "normal retirement age" of 55, the Debtor would be entitled to receive his retirement benefits in a single lump sum payment. The Debtor has exceeded the Plan's normal retirement age. In fact, on December 18, 1990, March 5, 1991 and May 8, 1991, the Debtor received distributions paid as lump sum cash payments in the amounts of $128,000, $75,000 and $61,204, respectively.
The Plan is subject to amendment or discontinuance at will by the employer/Debtor. Also, the Plan provides that in the event of termination of the Debtor's employment with the corporation, he is entitled to payment of his accrued beneficial interest. Thus, as the Debtor is the sole shareholder and only employee of the corporation, he has sole discretion to terminate the Plan, whereupon all of the assets in the Plan would be distributed to him.
The Debtor has on numerous occasions borrowed money from the Plan. Between 1978 and 1990 the Plan loaned the Debtor in excess of $1.4 million. Presently, the Debtor has one outstanding loan, with a maturity date of July 10, 1995. As of January 15, 1992, the outstanding loan balance was $39,000. All other loans made to the Debtor have been paid back in full with interest.
The Debtor has also made numerous unsecured loans, evidenced by promissory notes, to friends while charging interest on the money borrowed. The amount of these loans total $179,000. Two of those loans, with a combined principal sum of $80,000, are in default.
On April 13, 1992 the Creditors moved for summary judgment. After hearing oral arguments on June 25, 1992 and September 10, 1992, the motion for summary judgment was submitted for further consideration to determine whether the Debtor's pension plan is excluded from the bankruptcy estate under 11 U.S.C. § 541(c)(2) of the Code or, alternatively, whether the Plan is exempt pursuant to C.C.P. § 704.115.
The filing of a petition under the Code creates an estate comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1) (1988). An exception to this broadly defined section is found in § 541(c)(2) (1988), which provides 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."
Recently, the United States Supreme Court in Patterson v. Shumate, ___ U.S. ___, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992) resolved years of conflicting rulings among the Courts of Appeals as to whether, in addition to a state spendthrift trust, a pension plan under the Employee Retirement Income Security Act of 1974 ("ERISA") which contains an anti-alienation provision should be excluded from the bankruptcy estate. The Court held that the plain language of the Code and ERISA established that an anti-alienation provision in a qualified pension plan constitutes a restriction enforceable under "applicable nonbankruptcy law" for purposes of § 541(c)(2). Id. at ___-___, 112 S.Ct. at 2246-48. Thus, the debtor's ERISA qualified plan was excluded from his bankrupt estate. Id.
ERISA qualified plans are created pursuant to 29 U.S.C. § 1001 et seq. of the Labor Code and 26 U.S.C. § 401(a) of the Internal Revenue Code ("I.R.C."), and must include a restriction against alienation. 29 U.S.C. § 1056(d)(1) (1988); 26 U.S.C. § 401(a)(13) (1988).4 In Patterson the Court determined that the anti-alienation provision in the debtor's plan satisfied the literal terms of § 541(c)(2). However, the preliminary issue regarding whether or not the plan was ERISA qualified was apparently conceded as the case never addressed the requirements necessary for a plan to be ERISA qualified.
In this case the Creditors assert two challenges to the Debtor's claim that his Plan is ERISA qualified. First, the Creditors contend that the Debtor, as the sole shareholder and only person employed by the James J. Witwer, M.D. corporation is an "employer" and therefore cannot be an "employee" for purposes of plan participation. Thus, the argument continues, the Debtor's Plan is not ERISA qualified and Patterson is inapplicable. Alternatively, if the Plan is ERISA qualified, the Creditors challenge the validity of the anti-alienation provision in the Debtor's Plan.
The Creditors cite Kwatcher v. Massachusetts Service Employees Pension Fund, 879 F.2d 957 (1st Cir.1989) in support of their first challenge. In Kwatcher the sole shareholder of a corporate employer sued the administrator of an ERISA qualified pension plan for collection of benefits allegedly due him. Id. at 958. The Court held that ERISA does not permit a sole shareholder who is employed by the corporation he owns to participate in an ERISA regulated pension plan. Id. at 963. To recover benefits, the Court reasoned, ERISA required Kwatcher to be a "participant" in the plan. Id. at 959.
ERISA defines "participant" as a present or former employee of an employer. 29 U.S.C. § 1002(6) (1988). The Secretary of Labor ("Secretary"), pursuant to authority granted in 29 U.S.C. § 1135 (1988)5, has limited the definition of employee as follows:
29 C.F.R. § 2510.3-3(b), (c)(1) (1988) (emphasis added).
Since the Secretary is vested with policy making power, its authority to supplement ERISA with regulations are afforded considerable deference. See Sure-Tan, Inc. v. National Labor Relations Board, 467 U.S. 883, 891, 104 S.Ct. 2803, 2808, 81 L.Ed.2d 732 (1984). Accordingly, this Court may not substitute its interpretation for that of the Secretary so long as the Secretary's regulation is "reasonably defensible." Id.
Congressional support for the Secretary's regulation is found in ERISA's text and legislative history. Title I of ERISA was adopted to remedy the abuses that existed in the handling and management of welfare and pension plan assets held in trust for workers in a traditional employer employee relationship. Schwartz v. Gordon, 761 F.2d 864, 868 (2d Cir.1985); See 29 U.S.C. § 1001(a) (1988) (); See S.Rep. No. 383, 93d Cong., 2nd Sess., (1974) reprinted in 1974 U.S.C.C.A.N. 4639, 4890, 4903 (...
To continue reading
Request your trial