Matter of Parker

• Decision Date: 23 July 1979
• Docket Number: No. BK-76-746.,BK-76-746.
• Citation: 473 F. Supp. 746
• Parties: In the Matter of William T. PARKER, Bankrupt. Kenneth B. MASON, Jr., as Trustee in Bankruptcy for William T. Parker, Plaintiff, v. EASTMAN KODAK COMPANY and Morgan Guaranty Trust Company, Defendants.
• Court: U.S. District Court — Western District of New York

473 F. Supp. 746

In the Matter of William T. PARKER, Bankrupt.

Kenneth B. MASON, Jr., as Trustee in Bankruptcy for William T. Parker, Plaintiff, v. EASTMAN KODAK COMPANY and Morgan Guaranty Trust Company, Defendants.

No. BK-76-746.

United States District Court, W. D. New York.

July 23, 1979.

Kenneth B. Mason, Jr., Rochester, N. Y., for plaintiff-appellant.

Nixon, Hargrave, Devans & Doyle, Rochester, N. Y. (William S. Thomas, Jr., Rochester, N. Y., of counsel), for defendants-respondents.

CURTIN, Chief Judge.

This case raises the issue of whether the bankrupt's credits under a qualified Employee Retirement Income Security Act of 1974 ERISA pension plan constitute property which passes to the trustee under § 70(a)(5) of the Bankruptcy Act. It is on appeal from a decision of Bankruptcy Judge Beryl E. McGuire of the Western District of New York dated October 31, 1978, finding that the pension credits were not property. For the reasons stated below, the Bankruptcy Judge's decision is affirmed.

The bankrupt, William T. Parker, filed a voluntary petition in bankruptcy in this court on March 5, 1976. Scheduled among his assets was "Kodak Employees' Savings Investment Plan . . . $500." Appellant, as trustee for the estate, commenced an action under the Bankruptcy Act on June 17, 1976, seeking to obtain pension credits accrued during the years 1972-1975 for distribution to the creditors of the bankrupt. Respondents Eastman Kodak Company and Morgan Guaranty Trust Company are the bankrupt's employer and the trustee of the pension plan, respectively. They take the position that the bankrupt has no right or interest in the pension fund and further that the fund is a spendthrift trust beyond the reach of the employee or the employee's creditors, including the trustee in bankruptcy.

The parties have submitted a stipulated statement of facts. The only issues that remain are ones of law, which have been thoroughly briefed and argued before this court. Jurisdiction over the parties and the subject matter exists under §§ 2a(7) and 23 of the Bankruptcy Act. 11 U.S.C. §§ 11a(7), 46.

The pension plan at issue was initiated by Kodak in August of 1960. In addition to Kodak, six of its subsidiaries are also participating employers in the plan. Kodak and its subsidiaries have a policy of declaring wage dividends payable to employees out of current or accumulated profits. The wage dividend payment is in addition to the employee's regular pay and is in the company's discretion, subject to the employee meeting certain employment standards for the year of the declared dividend. Under the plan, an employee who has met certain service requirements can make an irrevocable election to have Kodak contribute all or a percentage of any possible wage dividend which might be declared that year to a trust administered by Morgan, as trustee. The election must be made during an enrollment period ending November 1 of the year preceding the declaration of the wage dividend. If a wage dividend is declared, cash payments to employees are made by Kodak in March, and the Kodak contributions to the trustee are made in April of the year in which the dividend is declared.

Employees have an option of designating placement of Kodak's contributions in three of four funds, consisting of various types of securities. An employee's interest in a given fund is recorded in terms of units, with the value of each unit in a fund determined by dividing the total assets in the fund by the total number of units held by participants. The securities in the funds are at no time registered in the employee's name.

The plan is a qualified plan under the Internal Revenue Code (26 U.S.C. § 401), and, as such, participating employees are taxed only at distribution. As of January 1, 1976, the plan was amended to bring it within the provisions of the ERISA (29 U.S.C. § 1001). In accordance with these federal requirements, from its inception through its amendment history the plan has contained provisions prohibiting assignment or transfer of participating employees' credits.

Distribution normally occurs upon termination of employment or death. The value of an employee's account will then be paid under one of 16 employee options. Payment is to be made in a lump cash sum unless optional installment payments are elected. Prior to termination of employment, borrowing of up to 50% of the credits on certain of the funds is permitted with the fund then collateralizing the loan. Certain hardship withdrawals can also be authorized.

In the years 1972-1975, the bankrupt elected to have Kodak contribute 25% of his wage dividends declared in the following years to the plan. In each of those years, dividends were declared, and in April Kodak contributed the percentage indicated to the bankrupt's pension account. These contributions amounted to $524.76 in 1973, $624.34 in 1974, and $689.62 in 1975. In April of 1976, after the petition was filed, $703.59 was contributed. The trustee of the bankrupt's estate now seeks to recover the value of these pension credits.

Section 70a(5) of the Bankruptcy Act provides as follows:

(a) The trustee of the estate of a bankrupt . . . shall . . . be vested by operation of law with the title of the bankrupt as of the date of the filing of the petition to . . . (5) property, including rights of action, which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him, or otherwise seized, impounded, or sequestered . ..

11 U.S.C. § 110(a)(5).

There are two questions presented on appeal. The first is whether the pension funds claimed by the trustee constitute "property" within the meaning of the above provision of the Bankruptcy Act. Assuming that the funds are property, the second question is whether they were subject to transfer, levy, or seizure within the meaning of the same provision.

In a well-reasoned decision, Judge McGuire found that the pension funds did not constitute property under the relevant cases. He also found that they were not transferable because of the nonassignment provision in the plan.

I concur in Judge McGuire's judgment on the second question for the reasons set forth in his opinion. In accordance with the broad preemption provisions of ERISA contained in 29 U.S.C. § 1144(a), ERISA's prohibition of assignment, id. § 1056(d), preempts any state law to the contrary.¹ What follows is a discussion of the first question.

The governing legal principles for determining whether an asset is property of the bankrupt are contained in a trilogy of Supreme Court cases: Segal v. Rochelle, 382 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2d 428 (1965), Lines v. Frederick, 400 U.S. 18, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970), and Kokoszka v. Belford, 417 U.S. 642, 94 S.Ct. 2431, 41 L.Ed.2d 374 (1974). These cases indicate that the question is answered by examining the nature of the asset in light of the purposes of the Bankruptcy Act, and is independent of whether it can be transferred, levied upon or seized.

Segal v. Rochelle involved a trustee's claim to loss-carryback tax refunds received by the bankrupt after filing the bankruptcy petition based on business losses which occurred prior to filing. The court analyzed the question by outlining and applying the two purposes underlying § 70a(5):

The main thrust of § 70a(5) is to secure for creditors everything of value the bankrupt may possess in alienable or leviable form when he files his petition. To this end the term "property" has been construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed.

Supra, 382 U.S. at 379, 86 S.Ct. at 515 (citations omitted). This objective is qualified by the conflicting purpose of enabling the bankrupt to obtain a fresh start after bankruptcy:

However, limitations on the term do grow out of other purposes of the Act; one purpose which is highly prominent and is relevant in this case is to leave the bankrupt free after the date of his petition to accumulate new wealth in the future. Accordingly, future wages of the bankrupt do not constitute "property" at the time of bankruptcy nor, analogously, does an intended bequest to him or a promised gift—even though state law might permit all of these to be alienated in advance.

Id. at 379-80, 86 S.Ct. at 515. Applying these principles, the court found that the refund claim was "sufficiently rooted in the pre-bankruptcy past and so little entangled with the bankrupt's ability to make an unencumbered fresh start" that it passed to the trustee in bankruptcy under § 70a(5). Id. at 380, 86 S.Ct. at 515.

Subsequently, in Lines v. Frederick, supra, the Supreme Court reiterated the proposition that the term "property" should be interpreted in light of the dual purposes of the Bankruptcy Act to serve the interests of both the creditors and the bankrupt. That case involved a trustee's claim to accrued but unpaid vacation pay. The Court reached the opposite result, finding that vacation pay did not pass to the trustee because it did not constitute property. Contrasting the bankrupt's plight in the case at hand to that in Segal, the Court observed:

The respondents here are wage earners whose sole source of income, before and after bankruptcy, is their weekly earnings. The function of their accrued vacation pay is to support the basic requirements of life for them and their families during brief vacation periods or in the event of layoff. Since it is a part of their wages, the vacation pay is "a specialized type of property presenting distinct problems in our economic system." . . .

The wage-earning bankrupt who must take a vacation without pay or forgo a vacation altogether cannot be said to have achieved the "new opportunity in life and the clear field for future effort, unhampered by the pressure and discouragement of preexisting debt," . . . which it was the

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