McLean v. Central States, Southeast and Southwest Areas Pension Fund

• Decision Date: 24 May 1985
• Docket Number: Nos. 84-1707,84-2017,s. 84-1707
• Citation: McLean v. Central States, Southeast and Southwest Areas Pension Fund, 762 F.2d 1204 (4th Cir. 1985)
• Parties: , 12 Collier Bankr.Cas.2d 1431, 13 Bankr.Ct.Dec. 367, Bankr. L. Rep. P 70,578, 7 Employee Benefits Ca 1440 Harry Lee McLEAN; W. Keenan Stephenson, Jr., Appellees, v. CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS PENSION FUND, Appellant. United States, Amicus Curiae. In re Harry Lee McLEAN, Debtor. Harry Lee McLEAN; W. Keenan Stephenson, Jr., Appellees, v. CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS PENSION FUND, Appellant. In re Harry Lee McLEAN, Debtor.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1204

762 F.2d 1204

53 USLW 2614, 12 Collier Bankr.Cas.2d 1431,

13 Bankr.Ct.Dec. 367, Bankr. L. Rep. P 70,578,

7 Employee Benefits Ca 1440

Harry Lee McLEAN; W. Keenan Stephenson, Jr., Appellees, v.CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS PENSION FUND,

Appellant.

United States, Amicus Curiae.

In re Harry Lee McLEAN, Debtor.

Harry Lee McLEAN; W. Keenan Stephenson, Jr., Appellees, v.CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS PENSION FUND,

Appellant.

In re Harry Lee McLEAN, Debtor.

Nos. 84-1707, 84-2017.

United States Court of Appeals Fourth Circuit.

Argued Feb. 5, 1985.

Decided May 24, 1985.

Francis J. Carey, Pittsburgh, Pa. (Michele L. Tate, Chicago, Ill., Carlton B. Bagby, Columbia, S.C., on brief), for appellant.

Sue C. Erwin, Columbia, S.C.(Boyd, Knowlton, Tate & Finlay, Anne McLain Johnson, Palmetto Legal Services, Columbia, S.C., on brief), for appellees.

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Richard Farber, Michael J. Roach, Tax Div., Dept. of Justice, Washington, D.C., Henry Dargan McMaster, U.S. Atty., Columbia, S.C., on brief, for amicus curiae.

Before PHILLIPS and WILKINSON, Circuit Judges, and KISER, ^*District Judge.

JAMES DICKSON PHILLIPS, Circuit Judge.

In this Chapter 13 bankruptcy proceeding, Central States Pension Funds (Central) appeals the district court judgment, 41 BR 893, upholding the bankruptcy court's order that Central pay pension funds due the debtor, Harry McLean, directly to the trustee of McLean's Chapter 13 plan.Central also appeals a contempt order entered against it by the district court.We reverse both the judgment upholding the pay order and the order holding Central in contempt.

I

Harry McLean filed a Chapter 13 plan and sought to fund the plan in part with portions of pension payments that accrue to him on a monthly basis on account of his interest in an ERISA qualified fund administered by Central.McLean's trustee in bankruptcy sought in the bankruptcy court a pay order pursuant to 11 U.S.C. Sec. 1325(b) requiring Central to pay directly to the trustee that portion of the monthly pension payments due McLean that were designated to fund the Chapter 13 plan.Central opposed issuance of the pay order on the basis that it would require Central to violate an anti-assignment provision of the fund's trust agreement forbidding alienation of benefits by the beneficiaries of the fund.

The anti-assignment provision was required to be included in the trust agreement in order for Central to qualify as an ERISA fund.See29 U.S.C. Sec. 1056(d)(1).In addition, the anti-assignment provision was required to maintain Central's tax exempt status under 26 U.S.C. Sec. 501(a) pursuant to which Central had to meet the qualifications of a 26 U.S.C. Sec. 401(a) qualified trust, including a requirement that the fund include an anti-assignment provision.See26 U.S.C. Sec. 401(a)(13).Central contended, therefore, that if it violated the statutorily mandated anti-assignment provision by paying funds directly to the trustee, it might lose both its ERISA qualification and its tax exempt status, a position supported on this appeal by the Commissioner of Internal Revenue as amicus.In the face of these objections by Central, the bankruptcy court nevertheless issued the pay order as requested by the trustee.When this was upheld by the district court, Central noted this appeal.

II

The dispositive issue is whether McLean's interest in the trust fund is bankruptcy estate property, hence subject to a pay order.The Trustee contends that it is; Central, that it is not.We agree with Central.

We construe the relevant statutory provisions as follows.The Bankruptcy Code,11 U.S.C. Sec. 541(a)(1), now broadly brings within the definition of estate property all legal or equitable interests of the debtor in property except for interests defined in Secs. 541(b)and541(c)(2).SeeBezanson v. Maine National Bank(In re Kwaak), 42 B.R. 599, 601(Bankr.D.Me.1984).Section 541(c)(2) provides that a restriction on the transfer of a beneficial interest in a trust enforceable under applicable non-bankruptcy law is enforceable in bankruptcy.Therefore, interests of the debtor subject to such enforceable transfer restrictions are not estate property.Seeid.

The estate property definition of Sec. 541 is adopted for Chapter 13 plans by 11 U.S.C. Sec. 1306(a), which for purposes of Chapter 13 proceedings also draws into the definition of estate property after-acquired property of the debtor that would qualify under Sec. 541 as estate property.Hence, a pensioner's interest in a trust fund that in the hands of the fund trustee is subject to an enforceable transfer restriction and is therefore not in that form Sec. 541 estate property, may become estate property in a Chapter 13 plan once paid to the debtor under terms of the trust.

Under this construction of the relevant statutory provisions, the only remaining question is whether the restriction on transfer in the Central trust agreement is enforceable under Illinois law, which governs the fund.If it is, the restriction is also enforceable in bankruptcy under Sec. 541(c)(2), and McLean's pre-distribution interest in the fund is excluded from estate property by operation of Sec. 541(c)(2) as adopted for Chapter 13 proceedings by Sec. 1306.

On this point, it is clear that the anti-assignment provision of the Central trust agreement would be enforceable under governing Illinois law as a valid restriction on transfer.Illinois courts have long recognized the enforceability of spendthrift trusts, holding that their protection might run to both income and corpus.SeeVon Kesler v. Scully, 267 Ill.App. 495, 505(1932).More recently, the Illinois courts have recognized that the spendthrift provisions of ERISA-qualified funds may be enforceable under Illinois spendthrift trust law.SeePeoples Finance Co. v. Saffold, 83 Ill.App.3d 120, 38 Ill.Dec. 534, 403 N.E.2d 765, 767-68(Ill.1980);Christ Hospital v. Greenwals, 82 Ill.App.3d 1024, 38 Ill.Dec. 469, 403 N.E.2d 700, 702-04(Ill.1980).

The Central trust agreement's anti-assignment provision is indistinguishable in critical respect from spendthrift provisions held enforceable by the Illinois courts.¹ Moreover, the Central pension fund is not one of those which because settled and revocable by a beneficiary, may not on that account for public policy reasons be protected against the claims of the beneficiary's creditors by anti-assignment provisions.SeeJohnson v. Fenslage(In re Johnson), 724 F.2d 1138, 1140-41(5th Cir.1984);Kwaak, 42 B.R. at 602.Contributions to the Central Fund are made only by employers and the employees have no power to revoke the trust and reach its corpus.Public policy concerns would not therefore prevent enforcement of this restriction under controlling nonbankruptcy state law.

III

Against this construction of the relevant statutory provisions, the trustee in bankruptcy advances a number of contentions leading to the opposite conclusion that McLean's interest in the trust fund is estate property subject to the pay order.We consider these in order and find none persuasive.

A.

First, the trustee urges that because pension interests are made expressly subject to exemptions by a bankrupt under 11 U.S.C. Sec. 522(d)(10)(E), they must of necessity be estate property under Sec. 541(a)(1); and that this interpretation is made even more compelling by Congress' clear intention to make Chapter 13 proceedings available to pensioners.

Though two circuits have apparently accepted this argument, seeSamore v. Graham(In re Graham), 726 F.2d 1268 1272-73(8th Cir.1984);Regan v. Ross, 691 F.2d 81, 86(2d Cir.1982), we do not because, with all respect, we think its essential premise is flawed.The fact that pension interests are in general made subject to exemption from bankruptcy estate property does not mean that some may not be included in estate property at all.We are more persuaded by, and adopt, the Fifth Circuit's approach in Goff v. Taylor(In re Goff), 706 F.2d 574, 586-89(5th Cir.1983), and that of the bankruptcy court in Kwaak, 42 B.R. at 601-02.With those courts, we believe that whether a particular pension fund interest subject to transfer restrictions is initially included in estate property is wholly determined by whether, per Sec. 541(c)(2), the restriction is enforceable under applicable nonbankruptcy law, including any public policy concerns that might make unenforceable a restriction in a pension plan settled and revocable by a beneficiary.See, e.g., Goff, 706 F.2d at 588.

This interpretation in no way undercuts the exemption provisions of Sec. 522(d)(10)(E).As the Goff court pointed out, Sec. 522(d)(10)(E) makes a broad array of employment benefits, including those embodied in certain qualified and unqualified pension plans, subject to exemption.Id. at 587.Section 541(c)(2) is simply a more narrowly focussed provision that excludes from estate property some, but not all, of the employment benefits which, if included in estate property, might then be subject to exemption by the debtor under Sec. 522(d)(10)(E).This construction, we believe, harmonizes the two sections while that urged by the trustee would effectively read out Sec. 541(c)(2) in unwarranted deference to a misperceived conflict with Sec. 522(d)(10)(E).²

Neither do we find persuasive the trustee's related contention that a construction that excludes this pension interest from estate property, hence from the reach of a direct pay order, undercuts Congress' expressed intention to make Chapter 13 proceedings available to pensioners.SeeH.R.Rep. No., 595, 95th Cong., 2d Sess. 312, reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6269.

In the first place, pension benefits not subject to enforceable restrictions, hence to exclusions from estate property under Sec. 541(c)(2), are of course directly available--by pay order if necessary--to fund pensioners' Chapter 13 pl...