Regan v. Ross

• Decision Date: 06 October 1982
• Docket Number: Nos. 1277-1279,D,s. 1277-1279
• Citation: Regan v. Ross, 691 F.2d 81, 9 BCD 1059 (2nd Cir. 1982)
• Parties: 7 Collier Bankr.Cas.2d 485, 9 Bankr.Ct.Dec. 1059, Bankr. L. Rep. P 69,025 Edward V. REGAN, as New York State Comptroller, and New York State Employees' Retirement System and New York State Policemen's and Firemen's Retirement System, Plaintiffs-Appellants, v. Donald F. ROSS, Defendant-Appellee. Edward V. REGAN, as New York State Comptroller, and New York State Employees' Retirement System and New York State Policemen's and Firemen's Retirement System, Plaintiffs-Appellants, v. Charles B. CONNORS, Defendant-Appellee. Edward V. REGAN, as New York State Comptroller, and New York State Employees' Retirement System and New York State Policemen's and Firemen's Retirement System, Plaintiffs-Appellants, v. George F. GRANDY, Defendant-Appellee. ockets 82-5008, 82-5010 and 82-5012.
• Court: U.S. Court of Appeals — Second Circuit

Page 81

691 F.2d 81

7 Collier Bankr.Cas.2d 485, 9 Bankr.Ct.Dec. 1059,

Bankr. L. Rep. P 69,025

Edward V. REGAN, as New York State Comptroller, and New York

State Employees' Retirement System and New York

State Policemen's and Firemen's

Retirement System, Plaintiffs-Appellants, v. Donald F. ROSS, Defendant-Appellee.

Edward V. REGAN, as New York State Comptroller, and New York

State Employees' Retirement System and New York

State Policemen's and Firemen's

Retirement System, Plaintiffs-Appellants, v. Charles B. CONNORS, Defendant-Appellee.

Edward V. REGAN, as New York State Comptroller, and New York

State Employees' Retirement System and New York

State Policemen's and Firemen's

Retirement System, Plaintiffs-Appellants, v. George F. GRANDY, Defendant-Appellee.

Nos. 1277-1279, Dockets 82-5008, 82-5010 and 82-5012.

United States Court of Appeals Second Circuit.

Argued June 14, 1982.

Decided Oct. 6, 1982.

Robert M. Cohen, New York City (Kauffman & LaPointe, Susan L. Kauffman, Richard A. LaPointe, Schenectady, N. Y., on the brief), for debtors-appellees.

Robert E. Littlefield, Jr., Albany, N. Y. (Littlefield & Littlefield, Albany, N. Y., of counsel) brief for amicus curiae Chapter 13 trustee.

John Q. Driscoll, Asst. Atty. Gen. of N. Y., Albany, N. Y. (Robert Abrams, Atty. Gen., Albany, N. Y., on the brief, William J. Kogan, Asst. Atty. Gen., Albany, N. Y., of counsel), for appellants.

Before OAKES, MESKILL, and KEARSE, Circuit Judges.

OAKES, Circuit Judge:

This appeal raises the question whether pension beneficiaries may require their pension systems to transfer a portion of their monthly benefits for distribution to creditors under Chapter 13 of the new Bankruptcy Code. ¹ Chapter 13 allows individuals with a "regular income" ² to avoid straight bankruptcy by making payments to creditors under a voluntary, court approved plan. In this case, three retired New York State employees wish to fund Chapter 13 plans with a portion of their monthly pension benefits. The Bankruptcy Court for the Northern District of New York confirmed these plans and issued income deduction orders to the systems in question. ³ The systems appealed, arguing that an anti-assignment provision in the pension statute removed the benefits from the operation of Chapter 13. The United States District Court for the Northern District of New York, Roger J. Miner, Judge, affirmed the bankruptcy court. The funds have been transferred to the standing Chapter 13 trustee who holds them in escrow pending determination of this appeal.

We agree with the district court's conclusion that the state law prohibition against assignment to creditors, N.Y. Retire. & Soc. Sec. Law § 110 (McKinney 1971), does not prevent pension benefits from being property of the estate in a Chapter 13 proceeding. We also agree that 11 U.S.C. § 541(c)(2), which preserves some transfer restrictions "enforceable under applicable nonbankruptcy law," was not intended to bar the use of such benefits in a voluntary repayment plan confirmed under Chapter 13. Accordingly, we affirm and in so doing state that, in our view, the use of pension benefits to fund payments under a Chapter 13 plan does not disqualify the state retirement systems under I.R.C. § 401(a)(13). ⁴

DISCUSSION

Non-assignability under New York Law

It is true that N.Y. Retire. & Soc. Sec. Law § 110(2), (3) (McKinney 1971) provides that state pension benefits "(s)hall not be subject to execution, garnishment, attachment or any other process whatsoever" and that such benefits "(s)hall be unassignable ...." The retirement systems argue from this to the conclusion that these benefits may not be used by retirees to fund a Chapter 13 repayment plan. This conclusion depends on whether pension benefits become part of the debtor's estate under the Code generally or Chapter 13 specifically. ⁵ We believe that Judge Miner was quite correct in holding that the benefits were estate property under the new Bankruptcy Code. As such, they were subject to the income deduction orders issued here.

The Code broadly defines "all legal or equitable interests of the debtor in property," 11 U.S.C. § 541(a)(1), as property of the debtor's estate in bankruptcy "notwithstanding any provision ... that restricts or conditions transfer of such interest by the debtor." Id. § 541(c)(1)(A). This "substantial departure ... from the extensive reliance of the (former Act) on nonbankruptcy law ... to determine what property will come into the estate" ⁶ reflects a congressional intent to "include( ) as property of the estate all property of the debtor, even that needed for a fresh start." S.Rep.No.989, 95th Cong., 2d Sess. 82, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5868. The existence of a legal or equitable interest may often turn on non-bankruptcy law, ⁷ but once it is determined that such an interest exists, it becomes part of the debtor's estate by operation of law under § 541 of the new Bankruptcy Code. Chapter 13 expressly incorporates § 541 and, in addition, defines as property of the estate all benefits received throughout the pendency of a Chapter 13 case. ⁸ See In re Dawson, 13 B.R. 107, 109 (Bkrtcy.M.D.Ala.1981) (state disability benefits part of Chapter 13 debtor's estate); In re Howell, 4 B.R. 102, 106 (Bkrtcy.M.D.Tenn.1980) (payments under Federal Employees' Compensation Act); In re Buren, 6 B.R. 744, 746-47 (Bkrtcy.M.D.Tenn.1980) (payments under Social Security Act).

The systems do not dispute that the retirees in this case have a legal or equitable interest in their pension benefits, ⁹ and this is the crucial determinant of what constitutes property of the estate under the Code. Whether this interest is treated as fully vested at the time of filing or as a series of entitlements that accrue throughout the duration of the Chapter 13 payment plan is immaterial for present purposes. The Code anticipates both of these contingencies and captures the benefits in each case for the debtor's estate. As property of the estate, the benefits may be used by the debtor, through the trustee, to pay claims under a Chapter 13 plan. The income deduction procedure at issue in this case is but a specific example of the bankruptcy court's authority to issue whatever orders are "necessary or appropriate" ¹⁰ to implement the Code. Under Chapter 13, the "future income of the debtor" is subject to such "supervision and control of the trustee as is necessary for the execution of the (repayment) plan." 11 U.S.C. § 1322(a)(1). Income deduction orders may therefore be issued by the bankruptcy court to "any entity from whom the debtor receives income." Id. § 1325(b). ¹¹

Section 541(c)(2) Exception

The retirement systems nevertheless argue that the anti-assignment provision's operation is saved by dint of 11 U.S.C. § 541(c)(2), which 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 in bankruptcy proceedings. We must reject the systems' argument, however, because it would produce a result that runs counter to congressional intent as evinced by both specific legislative history and reasonable inferences drawn from other Code provisions.

The legislative history of the new Code indicates that Congress intended to extend Chapter 13 relief to precisely the class of debtors involved in this case. In enacting the new Bankruptcy Code, Congress explicitly expanded the coverage of Chapter 13 to include pension and welfare recipients in addition to wage earners, who alone were covered under the old Act. See H.R.Rep.No.595, 95th Cong., 2d Sess. 312, reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6269 (Chapter 13 relief under new Code available to all individuals with income "sufficiently stable and regular" to enable them to make payments; individuals "on welfare, social security, (or) fixed pension incomes ... will be able to work out repayment plans with their creditors rather than being forced into straight bankruptcy.") See also S.Rep.No.989, 95th Cong., 2d Sess. 24, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5810 (same). Thus "(t)he clear purpose and intent of Congress was that social welfare recipients should not be denied the benefits of Chapter 13 plans." In re Buren, 6 B.R. at 746. The systems' construction of § 541(c)(2) would result in denial of Chapter 13 relief to one of the very classes that Congress sought to benefit in enacting the new Code. ¹²

In contrast to this unambiguous legislative history indicating that Congress intended pension benefits to be used in Chapter 13 plans, the legislative history pertaining to § 541(c)(2) refers only to spendthrift trusts. See H.R.Rep.No.595, 95th Cong., 2d Sess. 369, reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6325 ("Paragraph (2) of subsection (c), however, preserves restrictions on transfer of a spendthrift trust to the extent that the restriction is enforceable under applicable nonbankruptcy law"); see also S.Rep.No.989, 95th Cong., 2d Sess. 83, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5869. The systems seize upon that and argue that the pension funds are "spendthrift" ¹³ in form and therefore qualify as exempt under § 541(c)(2). We reject this argument for several reasons.

First, as noted earlier, 11 U.S.C. § 1325(b) expressly provides that a bankruptcy court "may order any entity from whom the debtor receives income" to pay that income to the trustee under a confirmed plan. There is no question that Congress contemplated a notion of income broad enough to encompass pension benefits. Accordingly, any doubt regarding the scope of the § 541(c)(2) exception or its applicability in Chapter 13 cases must be resolved in a manner consonant with both legislative history and explicit statutory language directing that all forms of income-and pension income specifically-may be used in a Chapter 13 repayment plan.

Second, we note that it is far from clear that the anti-assignment...