McDonnell v. Gilbert (In re Gilbert)
| Decision Date | 22 August 2022 |
| Docket Number | 21-12725,Adversary 22-1005 |
| Parties | In re: Eric S. Gilbert Debtor v. Eric S. Gilbert Defendant John M. McDonnell Plaintiff |
| Court | U.S. Bankruptcy Court — District of New Jersey |
Counsel for Movant - Debtor/Defendant, Eric S . G ilbert Andrea Dobin, Esquire Michele M. Dudas, Esquire McManimon Scotland & Baumann, LLC
Counsel for Plaintiff, John M. McDonnell Richard J. Corbi Esquire Law Office of Richard J. Corbi, PLLC
Brian Thomas Crowley, Esquire McDonnell Crowley, LLC
The question before the court in this adversary proceeding is whether the Chapter 7 trustee can use the funds in the Debtor's retirement account to pay creditors. Eric S. Gilbert filed a Chapter 7 bankruptcy petition on April 1, 2021. In that petition, he listed his interest in two retirement accounts. In Schedule A/B he listed a 401(a) account held by Voya Financial with a balance of $1,607,536.99. The Debtor also listed a 401(k) account held by Voya Financial with a balance of $47,031.48. The fundamental legal issue underlying all the counts of this complaint is whether those accounts are property of the bankruptcy estate.
In January 2022, the Trustee filed a complaint against the Debtor and his ex-spouse Julia Gilbert seeking, among other relief, a declaratory judgment that the funds contained in the Debtor's retirement accounts are property of the estate. Both defendants filed motions to dismiss. The court granted Julia Gilbert's motion and dismissed the claims against her with prejudice.[1] The court granted the Debtor's motion in part and permitted the Trustee to file an amended complaint.[2]
The Trustee filed his First Amended Complaint[3] on March 10, 2022. Similar to the initial complaint, the Amended Complaint seeks a declaratory judgment, an injunction, and the recovery of money or property. The Debtor now moves to dismiss all counts of the Amended Complaint. The court took oral argument on June 21, 2022, and issues these proposed findings of fact and conclusions of law.
Count One of the Amended Complaint is premised on 11 U.S.C. § 541 and is titled "Declaration that the Debtor's Retirement Funds Are Not [sic] Property of the Estate." As previously noted, there are two retirement plans at issue in this case. One is the Debtor's interest in the PSSoL Defined Benefit Plan [401(a)] ("DB Plan") and the other is the Debtor's interest in the PSSoL 401(k) Plan ("401(k) Plan"). This adversary proceeding centers on whether the Debtor's retirement accounts are either excluded from property of the bankruptcy estate under 11 U.S.C. § 541 or are property of the estate but may be exempted under 11 U.S.C. § 522. This central issue directly implicates every count of the Amended Complaint.
For the first time, the Debtor has asked this court to determine whether the retirement accounts are excluded from property of the estate based on 11 U.S.C. § 541(c)(2) and the holding in Patterson v. Shumate.[4] Until now, the parties' focus has been on whether the retirement plans are exempt under 11 U.S.C. § 522(d)(12), which focuses on the tax qualification of the retirement plans per 11 U.S.C. § 522(b)(4).
Despite directly putting the § 541 property of the estate question at issue in Count One, the Trustee objects to what he characterizes as the Debtor's "last minute change in strategy."[5] It is inaccurate to characterize the Debtor's position as a last-minute change of strategy. The Debtor noted in his bankruptcy petition that the retirement accounts are not property of the estate. This is simply the first time this court has been asked to rule on whether these retirement accounts are properly excluded from the estate. In Schedule A/B of his bankruptcy petition, the Debtor lists both his DB Plan and his 401(k) Plan with the notation "*not property of the estate." In Schedule C of his bankruptcy petition, the Debtor again lists the accounts with the notation "*not property of the estate," but also declares the accounts exempt pursuant to § 522(d)(12). There is nothing improper about that strategy; it is an indication that the Debtor believes the accounts are not property of the estate but if the court rules that the accounts are property of the bankruptcy estate that the Debtor is exempting them.
The Trustee further asserts that "the Debtor believes that a state law exemption applies and the case is simply over with a hypnotical [sic] amendment."[6]It is unclear to the court what type of amendment the Trustee believes is required before the Debtor can assert this legal defense to the declaratory judgment cause of action asserted in Count One. If the Trustee's statement refers to a need to amend the petition to claim the state rather than the federal exemptions, then the Trustee's position is legally incorrect. The Debtor's argument under § 541(c)(2) does not concern exemptions at all; rather a determination of what property is included within the umbrella of property of the bankruptcy estate as determined by § 541.
That determination is entirely distinct from the determination of whether property (once found to be property of the estate) may then be exempted from the estate and not made available for the payment of creditors. The Debtor's alternative argument that N.J.S.A. § 25:2-1(b) (rather than ERISA) may provide the restriction on transfer required by § 541(c)(2) is not the same thing as claiming the state rather than federal exemptions. It is simply providing an alternative "applicable nonbankruptcy law." It is disquieting that at many points in the Trustee's complaint and brief he fails to recognize these crucial distinctions.
In Count One, the only legal citation is to 11 U.S.C. § 541(d). That citation is perplexing because that section addresses property to which a debtor has bare legal title but no equitable interest (for example, a mortgage for which the debtor is merely the servicer.) Not once in the 67-page brief in opposition to this motion does the Trustee mention § 541(d). Therefore, the court must assume that the Trustee has abandoned any argument under that Code section. The remainder of Count One focuses on alleged operational improprieties regarding the retirement accounts and concludes that "the Retirement Accounts are not proper exemptions and thus, are property of the Debtor's estate."[7]
That argument skips the crucial initial determination of whether the retirement accounts are property of the estate at all. Exemptions under § 522 remov e certain assets from the bankruptcy estate that are deemed necessary post- bankruptcy for a debtor to have a fresh start and not be destitute.[8] The factual issues[9] raised in the Amended Complaint all pertain to whether the retirement accounts were maintained in compliance with ERISA and the IRC. Whether these accounts were maintained in compliance with federal law is relevant only to the exemption issue, thus it only comes into play if the court finds that the accounts are property of the bankruptcy estate. When questioned at oral argument, Trustee's counsel agreed that the property of the estate issue was a pure legal issue[10] capable of determination at this stage.[11]
Section 541 of the Bankruptcy Code broadly includes within property of the estate "all legal or equitable interest of the debtor in property as of the commencement of the case."[12] There are certain exclusions from its broad sweep and the exclusion at issue here is contained in § 541(c)(2). That section provides that an interest of the debtor in property becomes property of the estate excep t if 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."
Several elements must be satisfied for the § 541(c)(2) exclusion from property of the estate to apply. First, the Debtor must have a beneficial interest in a trust. The typical elements of a trust under nonbankruptcy law are: (1) a trust res; (2) a beneficiary; and (3) a trustee obligated to administer the res for the benefit of the beneficiary.[13] For purposes of this analysis, the court must look at each plan individually. A "trust res" is established in the DB Plan document in Section 1.67, which defines "Trust Fund" to mean "the assets of the Plan and Trust as the same shall exist from time to time." Similarly, the governing document for the 401(k) Plan defines a "Trust Fund" as "[a]ll money and property of every kind and character held by the Trustee pursuant to the Plan." Next, there is a beneficiary of the trust because the Debtor at all times was a beneficiary of both retirement accounts. Finally, both retirement plans designate a trustee to administer the accounts.[14] Accordingly, the court finds that the first element is satisfied because the retirement accounts are trusts and the Debtor has a beneficial interest in them.
The next element needed for the § 541(c)(2) exclusion from property of the estate to apply is that there is a restriction on transfer. Both retirement plan documents contain anti-alienation provisions that restrict the ability of the owner to transfer an interest. For the DB Plan, this restriction is contained in paragraph 12.22. In the 401(k) Plan, the anti-alienation provision is found in paragraph 3.13.6.
The final element needed for the § 541(c)(2) exclusion from property of the estate to apply is that the restriction on transfer is enforceable under applicable nonbankruptcy law. The Supreme Court held in Patterson that ERISA is "applicable nonbankruptcy law." Arguably, this could be the end of the analysis; however, the Trustee argues that it is not enough that a restriction is enforceable...
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