Reagan, Matter of
| Decision Date | 10 September 1984 |
| Docket Number | No. 83-1572,83-1572 |
| Parties | 11 Collier Bankr.Cas.2d 285, Bankr. L. Rep. P 70,039, 6 Employee Benefits Ca 1142 In the Matter of Gus H. REAGAN and Wife, Doris J. Reagan, Debtor. Gus H. REAGAN and Doris J. Reagan, Plaintiffs-Appellees, v. AUSTIN MUNICIPAL FEDERAL CREDIT UNION, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Susan J. Dasher, Jack F. Cook, Jr., Austin, Tex., for defendant-appellant.
Joseph D. Martinec, Austin, Tex., for plaintiffs-appellees.
Appeal from the United States District Court for the Western District of Texas.
Before CLARK, Chief Judge, JOLLY, and DAVIS, Circuit Judges.
This is an appeal from a district court's affirmance of the bankruptcy court's denial of secured status to a claim against a debtor. Because we find the present assignment of a future right to a share in a public employee retirement fund can create a valid secured claim in bankruptcy and that the right in the fund is property of the estate, we reverse the judgment of the district court.
Gus H. Reagan and Doris J. Reagan (debtors) filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code on August 26, 1980. Debtors listed in their schedule of debts one in the amount of $2,658.87 owed to Austin Municipal Federal Credit Union (Credit Union). This debt, incurred by debtors pursuant to an "open ended credit plan" with Credit Union, was primarily secured by funds contained in Doris Reagan's retirement fund account. That account, consisting of amounts withheld from her salary checks earned as a nurse at the municipal hospital, contained a total of $6,591.83.
Doris Reagan's right to possess and receive any benefits from the retirement fund was expressly contingent upon her termination of employment as a municipal employee. The ordinance governing the municipal retirement fund contained the following language relating to assignments of the fund as collateral:
None of the funds, provided in the Retirement system are assignable, with the exception that assignment of funds may be made to the Austin Municipal Credit Union, .. provided any assignments shall not become enforceable until such time as the employee involved is actually entitled to possession of such funds. City of Austin Retirement and Pensioning Ordinance, No. 72 0331-A. [emphasis added]
The Open End Credit Plan Agreement pursuant to which the debtors assigned Doris Reagan's retirement fund to Credit Union provides:
Upon notice given or notice received by the maker or any co-maker of his separation from employment by the City of Austin, the entire indebtedness of the undersigned shall become immediately due and payable at the option of the Credit Union without notice, and I/we, the maker and co-makers, hereby sell, assign and transfer to the Austin Municipal Federal Credit Union, its successors and assigns, any and all sums of money which may be due me/us at such time by the City of Austin as wages or salaries, as well as any and all sums in my/our City Retirement Fund ... such sale, assignment and transfer, however, to be only to the extent of all my/our obligations to the Credit Union, proceeds to be applied at Credit Union's discretion.
On its face, the assignment is valid under the pertinent ordinance. The issues are: (1) whether Doris Reagan's retirement fund is property of the bankruptcy estate, and (2) whether Credit Union's claim against the debtors is secured by the fund even though Doris Reagan's right to possession of the fund is contingent upon termination of her employment.
Section 541 of the Bankruptcy Code defines the bankrupt's estate to include "all the following property, wherever located: (1) ... all legal or equitable interests of the debtor in property as of the commencement of the case." Reagan's retirement fund consisted solely of accumulated monies withheld from her salary checks, plus interest. Federal income and social security taxes on the fund have already been paid. The fund will become Reagan's legal property upon her separation from city employment. She presently is possessed of a legal right of assignment, albeit a limited one, and an equitable interest evidenced by her vested future rights. It therefore qualifies as property of the estate under Sec. 541.
Sections 522 and 541(c)(2), as they read at the time of this proceeding, allow a debtor to retain certain assets which would otherwise be considered property of the estate. Section 522(d) listed property that a debtor may exempt if he chooses the federal law exemptions. Section 522(b) permits the debtor to choose state law exemptions instead of federal law exemptions. Debtors here chose the state exemptions. Texas law does not exempt retirement funds. Matter of Goff, 706 F.2d 574, 579 (5th Cir.1983).
Section 541(c)(2) provides that property subject to restrictions on alienation which are enforceable "under applicable nonbankruptcy law" never enters the property of the estate. In Matter of Goff, this court held that "applicable nonbankruptcy law" did not include an ERISA plan exemption, but that Congress intended to exclude from the property of the estate only "spendthrift trusts" traditionally protected against creditors under applicable state law. 706 F.2d at 580.
The Goff court explained that trust funds protected against the reach of creditors in most states are those created to provide monies for the maintenance of a beneficiary, upon which the settlor has placed "spendthrift" restrictions securing the fund from creditors and the beneficiary's own improvidence. Id. at 580. Those not so protected, in Texas and most other states, are trusts created by a settlor for his own benefit, even though they contain a spendthrift clause purporting to restrain alienation or assignment. Id. at 587. The retirement fund in this case which Reagan's contributions created for her own benefit is expressly assignable to a credit union under Texas law. The fund therefore cannot be considered a spendthrift trust of the sort traditionally beyond the reach of a creditor credit union, thus section 541(c)(2) does not prevent it from passing into the estate.
The bankruptcy court held that, despite the broad reach of Sec. 541, equitable considerations counselled against including the retirement fund in the property of the estate. The court stated that such inclusion would...
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Dyke, Matter of
...funds in a municipal pension plan, even though the plan benefits were assignable to the municipal credit union. In re Reagan, 741 F.2d 95, 97-98 (5th Cir.1984). The Court ruled that creditors could reach a vested interest in an ERISA-qualified trust. In re Brooks, 844 F.2d 258, 264 (5th Cir......
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In re Dyke
...is that it flies squarely into the face of Fifth Circuit precedent. See In re Brooks, 844 F.2d 258, 261 (5th Cir.1988); In re Reagan, 741 F.2d 95, 97 (5th Cir.1984); In re Johnson, 724 F.2d 1138, 1140-41 (5th Cir.1984); In re Goff, 706 F.2d 574, 587 (5th Cir.1983). In the case of In re Goff......
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In re Kerr
...on alienation which are enforceable "under applicable nonbankruptcy law" never becomes property of the estate.5 Matter of Reagan, 741 F.2d 95, 97 (5th Cir.1984). The issue of whether an ERISA-qualified plan fits within the terms of the § 541(c)(2) exception is complicated by the fact that t......
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In re Moorhous
...would defeat a valid pre-petition assignment of payments due under a retirement pension. For example, in Reagan v. Austin Municipal F.C.U. (In re Reagan), 741 F.2d 95 (5th Cir.1984), the debtor was a participant in a municipal retirement plan that, while generally prohibiting the assignment......