Morter v. Farm Credit Services

• Decision Date: 06 February 1990
• Docket Number: Civ. No. L89-62.
• Citation: 110 BR 390
• Parties: Raymond Lione MORTER d/b/a Swinengineering, Inc., Plaintiff, v. FARM CREDIT SERVICES, Defendant.
• Court: U.S. District Court — Northern District of Indiana

110 B.R. 390 (1990)

Raymond Lione MORTER d/b/a Swinengineering, Inc., Plaintiff, v. FARM CREDIT SERVICES, Defendant.

Civ. No. L89-62.

United States District Court, N.D. Indiana, Lafayette Division.

February 6, 1990.

Carolyn S. Holder, Elizabeth Justice, Holder & Davis, Lafayette, Ind., for plaintiff.

Chet Zawalich, Boynton Kamm & Esmont, South Bend, Ind., for Farm Credit Services.

Leonard Opperman, Bose McKinney & Evans, Indianapolis, Ind., for intervenor Teachers Ins. and Annuity Ass'n of America and College Retirement Equities Fund.

Edward Chosnek, Lafayette, Ind., Trustee.

MEMORANDUM OPINION AND ORDER

ALLEN SHARP, Chief Judge.

Raymond Lione Morter is a professor of veterinary science at Purdue University. Morter has served the university as a faculty member for thirty of his 69 years. He faces mandatory retirement when he turns 70 this fall. Though approaching his "golden years" both professionally and chronologically, Morter recently filed a petition for relief under Chapter 7 of the United States Bankruptcy Code. Chapter 7 liquidation is a remedy through which the debtor, in effect, surrenders his non-exempt assets pro rata to his creditors and seeks the relief of a discharge.

An educator at the college level for most of his adult life, Morter holds an interest in two retirement annuities identified as the Teacher's Insurance and Annuity Association (TIAA) and the College Retirement Equity Fund (CREF). Purdue University, as Morter's employer, has paid the entire cost of his participation in the TIAA-CREF plans. A plan participant may voluntarily make additional payments to his retirement fund, but Morter has not done so. Upon his retirement, Morter will receive a periodic stream of income until he dies. The annuities do not provide for loans or have cash surrender value, and the right to receive income may not be pledged or assigned.¹ Morter argues the annuities (the combined value of which exceeds $280,000) are exempt property under relevant law and thus not part of the bankruptcy estate reachable by his creditors.

The Bankruptcy Court, applying Indiana law, held the only allowable exemption on the annuity contracts was the $100 intangible personal property right pursuant to I.C. XX-X-XX-X(a)(3). Morter appeals that determination and presents two issues for this court's review: 1) whether the TIAA-CREF annuities are excludable from the bankruptcy estate under 11 U.S.C. § 541(c)(2) and 2) whether the retirement plan annuities are exempt from the bankruptcy estate pursuant to Indiana or other applicable state law.

28 U.S.C. § 158(a) confers jurisdiction in the district court to hear this appeal, taken pursuant to Bankruptcy Rule 8001(a), from the Bankruptcy Court's final judgment.

I. Standard of Review

Rule 8013 of the Federal Rules of Bankruptcy Procedure governs the pertinent standard of review. In an appeal from a bankruptcy court's decision, a district court applies two standards of review: one for findings of fact; the other for conclusions of law. Matter of Busick, 65 B.R. 630, 632 (N.D.Ind.1986). When the appellant alleges errors of fact, Rule 8013 dictates that "findings of fact shall not be set aside by the district court unless clearly erroneous." See also In re Kimzey, 761 F.2d 421, 423 (7th Cir.1985). A finding is clearly erroneous when, "although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985).

The relevant standard of review for conclusions of law also is governed by Rule 8013, which provides the district court with the discretion to "affirm, modify, or reverse" the bankruptcy court's legal conclusions. See also Matter of Evanston Motor Co., 735 F.2d 1029, 1031 (7th Cir.1984). When a bankruptcy judge's conclusions are challenged, the district court must make a de novo review and may overturn the findings if they are contrary to law. Busick, 65 B.R. at 632.

Having found the Bankruptcy Court's factual findings not clearly erroneous, this court proceeds to review independently the Bankruptcy Court's conclusions of law.

II. Legal Conclusions and Discussion

Raymond Morter filed a Chapter 7 bankruptcy petition in June of 1986 and, in so doing, created a bankruptcy estate. Generally, a bankruptcy estate consists of "all legal and equitable interests of the debtor in property as of the commencement date." 11 U.S.C. § 541(a)(1). The only relevant exception for purposes of this review is found at 11 U.S.C. § 541(c)(2). This section provides that "a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable under this title." 11 U.S.C. § 541(c)(2). Thus, if state law prevents a creditor from reaching income payable at a future date (as when the debtor is the beneficiary of a spendthrift trust), then the Bankruptcy Code will similarly treat that right to receive future income as outside the bankruptcy estate and likewise unreachable by creditors.

The legislative history to § 541(c)(2) unambiguously indicates this provision was designed to preserve the restrictions on spendthrift trusts. H.R.Rep. No. 595, 95th Cong., 1st Sess. 369 (1977) U.S.Code Cong. & Admin.News 1978, p. 6325 ("Paragraph (2) of subsection (c) . . . preserves restrictions on transfer of a spendthrift trust to the extent that the restriction is enforceable under applicable nonbankruptcy law."); S.Rep. No. 989, 95th Cong., 2d Sess. 83 (1978) U.S.Code Cong. & Admin.News 1978, p. 5869 ("Paragraph (2) of subsection (c) . . . preserves restrictions on a transfer of a spendthrift trust that the restriction is enforceable nonbankruptcy law to the extent of the income reasonably necessary for the support of a debtor and his dependents."). What remains unclear is whether § 541(c)(2) excludes from the bankruptcy estate only traditional spendthrift trusts, or whether Congress also intended to exclude other "arrangements"² that exhibit the characteristics of a spendthrift trust.

Other circuits addressing this question have generally taken the conservative view that Congress intended to exclude from the bankruptcy estate only traditional spendthrift trusts as they are defined under applicable nonbankruptcy law. See, e.g., In re Swanson, 873 F.2d 1121, 1123 (8th Cir. 1989) ("`Congress only intended by § 541(c)(2) to preserve the status of traditional spendthrift trusts, as recognized by state law. . . .'") quoting In re Graham, 726 F.2d 1268, 1271 (8th Cir.1984); In re Lichstrahl, 750 F.2d 1488, 1490 (11th Cir. 1985) ("`Applicable nonbankruptcy law' refers only to state spendthrift law. Therefore, . . . pension plans . . . are excluded pursuant to section 541(c)(2) only if they are enforceable under state law as spendthrift trusts."); Matter of Goff, 706 F.2d 574, 580 (5th Cir.1983) ("Congress intended to exclude only trust funds in the nature of `spendthrift trusts' from the property of the estate."). But see McLean v. Central States, Southeast and Southwest Areas Pension Fund, 762 F.2d 1204, 1207 n. 1 (4th Cir.1985) ("Nowhere in the statute § 541(c)(2) is there a requirement that the trust be `traditional,' nor is there any definition of what might be found to constitute a `traditional' trust."). While the statutory language of § 541(c)(2) does not expressly limit the exclusion solely to spendthrift trusts, the court finds the legislative history and the cited circuit opinions to be persuasive authority for the narrower construction urged by the trustee and Farm Credit Services. Accordingly, the court holds that, for the TIAA-CREF plans to be excluded from Morter's bankruptcy estate under § 541(c)(2), they must be spendthrift trusts under applicable non-bankruptcy law.

Paragraph 20 of the TIAA specimen contract provides in relevant part: "This contract is made and delivered and is to be performed in the State of New York. It is to be governed as to its validity and effect by the laws there in force, with reference to which it is made." Paragraph 20 of the CREF specimen contract reads almost verbatim in specifying that the laws of the State of New York are to govern the contract's validity and effect. Because Morter and TIAA/CREF expressly have provided that New York law will govern their contracts, the court finds New York's spendthrift trust law to be the "applicable nonbankruptcy law." This holding is consonant with other courts that have addressed the issue. See, e.g., In re Montgomery, 104 B.R. 112, 115 (Bankr.N.D.Iowa 1989) ("New York law governs the effect and validity of the TIAA/CREF annuities. . . ."); In re Braden, 69 B.R. 93, 94 (Bankr.E.D.Mich.1987) ("Applicable nonbankruptcy law" . . . is the law of the State of New York. . . ."). Accordingly, if the TIAA/CREF plans qualify under New York law as spendthrift trusts, then the plans are excluded from Morter's bankruptcy estate under § 541(c)(2); if the plans are not spendthrift trusts under New York law, then they are considered property of the estate pursuant to § 541(a).

The above-cited bankruptcy cases (Montgomery and Braden) also grappled with New York's treatment of the TIAA/CREF retirement plans. In each case, the court excluded the plans from the bankruptcy estate after finding them enforceable under applicable state law. But only the Montgomery court specifically found the pension plans to constitute a valid spendthrift trust under nonbankruptcy law. Montgomery, 104 B.R. at 116 ("The law of the State of New York fully supports the contention that the annuity plan is a spendthrift trust under `applicable nonbankruptcy law.'"). The Braden court seemed to apply the more liberal standard of not requiring the pension plans to constitute a traditional spendthrift trust under applicable law.³ Because this court has adopted the conservative construction of § 541(c)(...