Matter of Nichols
| Decision Date | 13 June 1984 |
| Docket Number | Adv. No. 83-421.,Bankruptcy No. 82-823 |
| Citation | 42 BR 772 |
| Court | U.S. Bankruptcy Court — Middle District of Florida |
| Parties | In the Matter of James T. & Gloria N. NICHOLS, Debtors. Jary C. NIXON, Trustee, Plaintiff, v. P.J. PEDONE & COMPANY, INC., Defendant. |
Jary C. Nixon, Tampa, Fla., for plaintiff.
J. David Pobjecky, Lakeland, Fla., for defendant.
THIS IS a Chapter 7 case and the matters under consideration are two Motions for Summary Judgment, one filed by Jary C. Nixon, the duly appointed and acting Trustee for the estate of James T. and Gloria N. Nichols (Debtors); and the other by the Debtors. While the initial complaint named P.J. Pedone and Company, Inc. as a Defendant, the corporation is not involved in the matters under consideration. The above-captioned adversary proceeding was commenced by the Trustee who filed the complaint and sought an order of turnover of monies and initially named only P.J. Pedone & Company, Inc. as a defendant. The initial claim of the Trustee was based on the contention that the Defendant, P.J. Pedone & Company, Inc. has in its control and possession certain funds which, according to the claim of the Trustee, are properties of the estate by virtue of § 541 of the Bankruptcy Code and, therefore, the same shall be turned over to the Trustee pursuant to § 542 of the Bankruptcy Code to be administered for the benefit of the creditors.
Shortly after the commencement of the adversary proceeding, the Debtors intervened and claimed that the monies held by the initially named defendant are not properties of the estate and, therefore, should not be turned over to the Trustee for administration. In due course, the Trustee and the Debtors moved and sought a determination of the controversy by way of a Motion for Summary Judgment contending that there are no genuine issues as to any material facts and that the controversy can be resolved as a matter of law.
James T. Nichols, at the time relevant to the matters under consideration, was employed by the initially named Defendant and while he was employed, the company maintained a profit sharing and trust plan for the benefit of its employees. Under the framework of the plan, the company established a trust which consisted of contributions made by the employer and also by the participating employees together with any income and any appreciation which was derived from the contributions (Plan ¶ 2.25, 2.26). The company maintained a separate account for the benefit of each participating employee to which all contributions made by the employer were allocated (Plan ¶ 2.7). The profit sharing and trust plan also provided that the amount of the employer's contributions which would vest depended on the length of the employment of the participating employee and also upon the reason of the termination of the employment of the employee (Plan ¶ 6.2, 6.3). The account of the participating employees to which the employees' contributions were also allocated is deemed to be 100% vested at all times and thus, not conditioned either on the length of employment or on the reason for termination of the employment (Plan ¶ 2.17, 6.1). While employed by the company, Mr. Nichols was a participant in the plan and at the time relevant to the controversy, that is, April 27, 1983, his account indicated a balance of $5,376.51.
The plan was designed to establish a qualified trust within the meaning of § 401 of the Internal Revenue Code and was designed in a fashion to take advantage of the special tax treatment accorded to such trust by § 501 of the Internal Revenue Code. In order to comply with the requirements of the Internal Revenue Code, the plan contains a provision that the participants have no right to transfer, assign, encumber or otherwise alienate any of the benefits or proceeds from the benefits which they might expect to receive (Plan ¶ 11.2). The plan further provides that none of the benefits obtained under the plan are subject to any claim of any of the creditors of the participating employees.
In spite of the seemingly iron-clad provisions in the plan which are designed to prohibit alienation of any funds contributed to the plan either by the employer or by the employee, the plan provides that the participating employee is able under certain specific conditions to borrow funds from the trust. The administrative committee of the trust has the discretion to authorize the trustee to loan a participating employee any amount not in excess of the participating employee's vested interest in both his and the employer's account. The plan also provides that any such loan made must carry a reasonable interest rate, must be adequately secured and must be repayed within ten years.
It is the contention of the Trustee that the funds now held by the Defendant are properties of the estate by virtue of § 541(a) of the Bankruptcy Code, thus, subject to a turnover proceeding by virtue of § 542 of the Code and must be turned over to the estate forthwith. While the initially named Defendant does not resist the Trustee's efforts to obtain the funds, the Debtors, as noted, intervened in the adversary proceeding and now contends that the funds held by the company are not properties of the estate by virtue of the exclusionary clause of § 541(c). In the alternative, the Debtors contend that even if the funds are property of the estate, they are exempt by virtue of § 522(b) of the Bankruptcy Code and for this reason, the Trustee, although he may be entitled to obtain the funds from the Company, will not be able to use the same for the benefit of the estate, but the same must be allowed as exempt and turned over to the Debtors.
Based on the contentions advanced by the parties, it is evident that the resolution of this controversy must be resolved by considering the relevant provisions of the Code; that is, § 541(a), which defines what are properties of the estate; the exclusionary clause of § 541(c) which defines certain types of properties excluded from the estate; and, the pertinent provisions of the Code which deal specifically with exemptions.
The Trustee's contention is based on § 541 which defines properties of the estate and in pertinent part provides as follows:
In opposition, the Debtors contend that the Plan contains a valid anti-alienation clause enforceable under non-bankruptcy law and, therefore, is excluded from the estate. In support of his claim, the Debtor relies on § 541(c)(2) of the Bankruptcy Code which provides as follows:
As noted earlier, this Plan contains an anti-alienation and anti-assignment clause designed to qualify the Profit Sharing Plan as tax exempt under IRC § 401. Both ERISA (Employee Retirement Income Security Act) and IRC § 401 pertaining to qualified pension and profit sharing plans contain nearly identical language prohibiting the alienation or assignment of plan benefits. Thus, at first blush the funds now held by the Company appear to come under the exception set forth in sub-clause (c)(2) of § 541 of the Bankruptcy Code. However, the answer is not that simple and cases dealing with this problem, i.e. the inclusion of ERISA benefits in the bankrupt estate are in conflict.
There are cases which hold that by virtue of § 541(c)(2), the trustee cannot reach the debtor's interest in funds held in an ERISA type plan. In re Pruitt, 30 B.R. 330 (Bankr.Colo.1983); Clotfelter v. CIBA-GEIGY Corp. (In re Threewitt), 24 B.R. 927 (D.Kan.1982); Shults v. Rose's Stores, Inc. (In re Holt), 32 B.R. 767, 10 B.C.D. 1267 (Bankr.D.Tenn.1983); In re Rodgers, 24 B.R. 181 (D.Ariz.1982). The holdings of these cases are based on a broad expansion of the reach of § 541(c)(2) by encompassing assignment and transfer restrictions recognized in general federal non-bankruptcy law in addition to recognizing the traditional state trust law. In reaching this conclusion, some of these courts noted that the language of § 541(c)(2) on its face is clear and unambiguous and does not contain any reference to the term "spendthrift." Therefore, the subsection should be read to include any and all trusts which bar creditors from reaching the Debtor's interest. Because these courts found that ERISA's transfer restrictions were enforceable under federal non-bankruptcy law, the courts contend that there was no need to consider the local law concerning the validity of the restrictions.
Rejecting this reasoning, the other line of cases held that § 541(c)(2) was intended to protect only a debtor's interest in traditional spendthrift trusts. Goff v. Taylor (In the Matter of Goff), 706 F.2d 574 (5th Cir.1983); Firestone v. Metropolitan Life Insurance Co. (In re DiPiazza), 29 B.R. 916 (Bankr.N.D.Ill.1983); Samore v. Graham (In re Graham), 24 B.R. 305 (Bankr. N.D.Iowa 1982), aff'd 726 F.2d 1268, Bankr.L.Rep. (CCH) ¶ 69,705 at 84,306 (8th Cir.1984). In an extensive discussion on the subject the Court of Appeals for the 5th Circuit in Goff, supra analyzed the legislative history and overall congressional scheme in reaching its conclusion concerning the relationship between ERISA and § 541(c)(2). The 5th Circuit determined that the concept of property of the estate under the Code was...
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