Matter of Tisdale

• Decision Date: 16 March 1990
• Docket Number: Bankruptcy No. 2-89-01059.
• Citation: 112 BR 61
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: In the Matter of James G. TISDALE, Jr. d/b/a Kitchens Extraordinaire, Debtor.

112 B.R. 61 (1990)

In the Matter of James G. TISDALE, Jr. d/b/a Kitchens Extraordinaire, Debtor.

Bankruptcy No. 2-89-01059.

United States Bankruptcy Court, D. Connecticut.

March 16, 1990.

Laura Gold Becker, Law Offices of Thomas M. Germain, Hartford, Conn., for trustee.

Gregory F. DeManche, O'Connell, Flaherty, Attmore & Forsyth, Hartford, Conn., for debtor.

MEMORANDUM AND ORDER

ROBERT L. KRECHEVSKY, Chief Judge.

I. ISSUE

The principal questions raised in this proceeding are the extent to which a debtor's interest in a defined contribution plan, qualified under The Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. (ERISA), and tax exempt pursuant to § 401 of the Internal Revenue Code, 26 U.S.C. § 1 et seq., is property of the estate, and if such property, exemptive by the debtor. The debtor has conceded that his two Individual Retirement Accounts, see 26 U.S.C. § 219, are property of the estate and exemptive only to the extent of the unused exemption available to him under § 522(d)(5) of the Bankruptcy Code (Code).¹

II. BACKGROUND

James G. Tisdale, the debtor, is a 41-year-old, formerly married individual who has been employed by Monaco & Sons Motor Sales, Incorporated (Monaco) for the past 14 years. He currently is Monaco's sales manager and earned $58,000.00 in 1987 and 1988, and $36,000.00 in 1989. He filed a voluntary chapter 7 petition on August 15, 1989. In schedule B-3 submitted with his petition, the debtor listed under the category of "Property of any kind not otherwise scheduled" a "Monaco & Sons Motor Sales, Inc. 401K Savings and Retirement Plan distributable upon termination or death" (Plan), with a stated market value of $82,164.14. In schedule B-4, the debtor, specifying Code § 522(d)(10)(E)² as the statute creating the exemption, exempted the full value of the Plan.

Thomas M. Germain, trustee of the debtor's estate, timely objected to the debtor's claims that the Plan was either excludable from property of the estate or that it was exemptive by the debtor.

Monaco's Plan provides for various types of savings, retirement and death benefits for any of its employees who choose to participate. The two benefits that are at issue here are a Deferred Contributions Account (DCA) and a Regular Account (RA). The DCA indicates a fund maintained by the Plan trustees into which a Plan participant elects to place a portion of his earnings through payroll deductions. These earnings thereby become nontaxable until retrieved by a participant. The debtor has had either six or seven percent of his annual compensation placed in the DCA. The RA contains funds contributed by Monaco at its discretion matching those the debtor placed in his DCA, plus any additional contributions from company profits authorized by Monaco's board of directors. In the debtor's instance, the RA also includes funds rolled over from a prior retirement plan, some of which funds came from the debtor's earnings with the balance constituting Monaco's contributions. The debtor is fully vested in the funds in the RA, having participated in the Plan for over ten years.

The Plan contains an ERISA-mandated anti-alienation provision which reads as follows:

Section 16.3. The Trust Fund is established for the purpose of providing for the support of the Participants upon their retirement and for the support of their families. Except as provided in Sections 16.5 and 16.6 hereof, no right or interest of any Participant in any part of the Trust Fund shall be transferrable or assignable by the Participant or be subject to alienation, anticipation, or encumbrance by the Participant, and no such right or interest shall be subject to garnishment, attachment, execution, or levy of any kind.

Unless the accounts are previously depleted as hereinafter explained, the Plan states that the debtor or his estate, as the case may be, is entitled to the accumulated funds in his accounts on the earlier of his retirement age of 65, his permanent disability, or his death. Articles IX and X. The debtor has the right to direct how the funds in his accounts are invested in investment vehicles made available by the Plan trustee. Monaco retains the option to terminate the Plan at any time and distribute all funds to the participants.

Section 16.5 excepts from Section 16.3 any court order "which creates or recognizes the existence of an alternate payee's right to receive all or a portion of the benefits payable to a Participant hereunder pursuant to a State's domestic relations law." Section 16.6 requires upon written request of the debtor that the Plan Trustees loan the debtor any and all of the vested portions of his accounts, if the purpose of the loan is to defray "extraordinary unreimbursed medical expenses" or "significant educational expenses" of the debtor or his dependents, or for "the purchase of a principal place of residence" for the debtor. The loans cannot exceed the lesser of $50,000.00 or 50% of the vested value of the debtor's accounts. Section 12.5 permits the debtor to apply for all his benefits upon termination of his employment with Monaco. Section 23.1 allows the debtor, once a year, upon submission to the Plan Administrator of proof of financial hardship due to extraordinary unreimbursed medical expenses or educational expenses, to withdraw up to 90% of the value of the accounts.³

III. DISCUSSION

Code § 541, entitled "Property Of The Estate," is a detailed, broad and encompassing provision designed to include within a debtor's estate "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).⁴ One of the statutory exclusions to property of the estate is contained in § 541(c)(2): "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." 11 U.S.C. § 541(c)(2) (1988).

A.

The debtor first contends that the phrase "applicable nonbankruptcy law" includes an ERISA-qualified contribution plan with its anti-alienation clause (see 26 U.S.C. § 401(a)(13)), thereby excluding the Plan from property of the estate. Although a few early district and bankruptcy court rulings⁵ adopted such a reading, the vast majority of opinions, including at least four United States Courts of Appeals, have rejected that position. These courts hold that ERISA itself does not provide a basis for exclusion under § 541(c)(2), and that Congress intended only trusts enforceable under state law as spendthrift trusts be excluded.⁶ I conclude that the majority position should be adopted and hold that § 541(c)(2) applies to the Plan only if it qualifies as a spendthrift trust under Connecticut law.⁷

B.

The debtor argues that the limited control of a Plan participant over the funds in the accounts together with the Plan's anti-alienation clause satisfies Connecticut law for the creation of a valid spendthrift trust.

Connecticut law recognizes the validity of a spendthrift trust which is usually defined as one "which creates a fund for the benefit of another, secures it against the beneficiary's own improvidence, and places it beyond the reach of his creditors." Zeoli v. Commissioner of Social Services, 179 Conn. 83, 88, 425 A.2d 553, 555 (1979). Such trusts are further controlled by Conn. Gen.Stat. § 52-321.

§ 52-321. Liability of income of trust fund to creditors. Expenses of trustee

(a) If property has been given to trustees to pay over the income to any person, without provision for accumulation or express authorization to the trustees to withhold the income, and the income has not been expressly given for the support of the beneficiary or his family, the income shall be liable in equity to the claims of all creditors of the beneficiary.

(b) Any creditor of the beneficiary who has secured a judgment against the beneficiary may bring an action against him and serve the trustees with garnishee process, and the court to which the action is returnable may direct the trustees to pay over the net income derived from the trust estate to the judgment creditor, as the income may accrue, until the creditor\'s debt is satisfied.

(c) The court having jurisdiction over the fund may make such an order for payment pursuant to subsection (b) when the beneficiary is a nonresident of this state, as well as when the beneficiary is a resident, but in the case of a nonresident beneficiary notice shall be given to the nonresident of the action against him as provided in section 52-87. The nonresidence of the beneficiary shall not deprive the court of authority to make such an order.

(d) If any such trust has been expressly provided to be for the support of the beneficiary or his family, a court of equity having jurisdiction may make such order regarding the surplus, if any, not required for the support of the beneficiary or his family, as justice and equity may require.

(e) The defendant trustee in any such action shall be entitled to charge in the administration account of the trust such expenses and disbursements as the court to which the action is brought determines to be reasonable and proper.

Conn.Gen.Stat.Ann. § 52-321 (West Supp. 1989).

The Connecticut Supreme Court, in Greenwich Trust Co. v. Tyson, 129 Conn. 211, 219, 27 A.2d 166, 171 (1942), ruled that public policy denied the validity of a trust where a person placed "his property in trust for his own benefit under limitations similar to those which characterize a spendthrift trust." This holding is in accordance with prevailing law throughout the United States. See Bogert, Trusts and Trustees § 223 (2d ed. rev. 1979) (If a settlor creates a trust for his own benefit and inserts a spendthrift clause, it is void as far as existing or future creditors are concerned, and they can reach his interests under the trust.). Accordingly, the debtor's interest in the DCA, which contains only the debtor's own funds, is property of...