Schlein, In re
| Decision Date | 02 December 1993 |
| Docket Number | No. 92-2670,92-2670 |
| Citation | 8 F.3d 745 |
| Parties | , Bankr. L. Rep. P 75,629, 17 Employee Benefits Cas. 2020, Pens. Plan Guide P 23887P In re Edward SCHLEIN and Kay Schlein, Debtors. Edward SCHLEIN and Kay Schlein, Plaintiffs-Appellants, v. George E. MILLS, Jr., Trustee, Florida National Bank, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Richard W. Hennings, Tavares, FL, for plaintiffs-appellants.
David R. McFarlin, Wolff, Hill, McFarlin & Herron, Orlando, FL, for defendant-appellee.
Appeal from the United States District Court for the Middle District of Florida.
Before EDMONDSON and CARNES, Circuit Judges, and MORGAN, Senior Circuit Judge.
Dr. Edward Schlein and his wife, Kay Schlein, debtors in a Chapter 7 bankruptcy case, appeal from an order of the district court that affirmed in part and reversed in part the judgment of the bankruptcy court on certain exemptions they claimed. This appeal requires us to confront the tension between the preemption provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"), codified at 29 U.S.C. § 1144(a), and the state law exemptions relating to "employee benefit plans" that are available to debtors in "opt-out" states under the Bankruptcy Code, 11 U.S.C. § 522. More specifically, we must decide whether such state exemptions are preempted by ERISA's preemption clause or are saved by its "saving" clause, which is contained in 29 U.S.C. § 1144(d). We join the Fifth and Eighth Circuits in holding that ERISA does not preempt state exemptions that are enacted pursuant to the express authority bestowed on states under the Bankruptcy Code. We reverse the district court's contrary holding on this issue.
We are also called upon to decide a Florida law issue that is unrelated to the ERISA preemption question: whether the Florida wage exemption statute, Fla.Stat.Ann. § 222.11 (West 1989), provides an exemption for that part of a bank account that consists of the earnings of an independent contractor. We conclude that under Florida law, the earnings of an independent contractor are not protected under § 222.11. We affirm the district court's holding on this issue.
The questions presented in this appeal are purely issues of law. The parties do not dispute any factual matters relevant to the legal issues. Edward Schlein is an emergency room physician who works under a medical services contract between a hospital and Medical Emergency Department Services, Inc. ("MEDS"). The Schleins are officers, directors, and shareholders of MEDS. From the moneys received under the contract, MEDS pays Dr. Schlein for his services as a physician. He testified at trial that his share of the earnings, and thus his compensation, was based upon the number of hours he worked. At oral argument, his counsel explained that the MEDS corporation was paid by the hospital for the work done by the shareholder physicians pursuant to the contract. The corporation deducted overhead expenses and then distributed the profits to each shareholder physician based upon the percentage of the total number of hours that that physician had worked. Dr. Schlein was not paid wages, the corporation did not withhold taxes from the amounts distributed, and Dr. Schlein did not consider himself an employee.
Prior to filing bankruptcy, Dr. Schlein made periodic deposits to individual retirement accounts ("IRAs") under the Internal Revenue Code, 26 U.S.C. § 408(a). Also, as a self-employed physician, Dr. Schlein set up simplified employee pensions ("SEPs") under I.R.C. § 408(k). One of the IRAs and one of the SEPs were combined in one bank account at each of two banks.
The Schleins filed their bankruptcy petition under Chapter 11 of the Bankruptcy Code on September 13, 1988. The case was converted to Chapter 7. George E. Mills, Jr., is the trustee of the Chapter 7 estate.
In appeals from bankruptcy judgments, this Court functions "[a]s the second court of review." In re Sublett, 895 F.2d 1381, 1384 (11th Cir.1990) (citation omitted). In this role, we "examine[ ] independently the bankruptcy court's factual and legal determinations and employ[ ] the same two review standards used by the district court." In re Club Assocs., 951 F.2d 1223, 1228 (11th Cir.1992) (citations omitted). These standards are well established. Id.
After converting their case to Chapter 7 of the Bankruptcy Code in December of 1988, the Schleins filed a Schedule B-4 (Property Claimed As Exempt). Property described as follows was included on the schedule:
Debtors claim an exemption pursuant to Fla.Stat. § 222.21(2)(a) in all monies on deposit in their respective individual retirement account, (IRA)-simplified employee pension (SEP) bank accounts established pursuant to Section 408 of the Internal Revenue Code, including all monies in such accounts at First Federal Savings & Loan Association, Leesburg, Florida (IRA-SEP account with an approximate balance of $138,927.62); Barnett Bank, Leesburg, Florida (IRA-SEP account with approximate balance of $28,655.92); and Sun First National Bank of Lake County, Leesburg, Florida (IRA account with approximate balance of $2,488.86). Total Value of Pension Exemption: $170,072.40.
According to the bankruptcy court, the Trustee objected to the claimed exemption in the following property:
(i) An Individual Retirement Account/Simplified Employee Pension Account ("IRA/SEP account") in First Federal Savings and Loan Association with a balance of $136,502.70.
(ii) An IRA/SEP account in Barnett Bank with a balance of $26,250.00.
(iii) A regular checking account in Barnett Bank with a balance of $54,253.55.
After a hearing on those objections, the bankruptcy court sustained the Trustee's objections to the Schleins' claims for exemption. The Schleins were ordered to turn over the funds in their retirement accounts to the Trustee. According to the Schleins, the total amount taken by the Trustee was $175,278.83, which included the principal amount of the IRA and SEP deposits plus accrued interest. The bankruptcy court's ruling was based on the following syllogism: The Schleins' "SEP/IRA account is an employee benefit plan as defined by ERISA"; ERISA, 29 U.S.C. § 1144(a), preempts "any and all state laws insofar as they may now or hereafter relate to any employment benefit plan"; Florida Statute "s 222.21(2)(a) directly relates to an employee benefit plan covered by ERISA"; therefore, ERISA preempts Fla.Stat. § 222.21(2)(a). In re Schlein, 114 B.R. at 782-83.
The district court agreed with the bankruptcy court's conclusion that Fla.Stat. § 222.21(2)(a) relates to ERISA plans, and is therefore preempted by ERISA. The court reasoned that "[t]he Supreme Court has repeatedly held that ERISA shall preempt any state law that 'relates to' an employee benefit plan, even if the law is consistent with ERISA's substantive requirements." The court also noted that the Supreme Court has declared that this broad preemption is not restricted to state laws that affect plan terms, conditions, or administration. Finding that "the existence of a pension plan is a critical factor in establishing a debtor's right to exemption under section 222.21(a)," the court held that section to be preempted by ERISA.
The court also rejected the Schleins' argument that the saving clause contained in 29 U.S.C. § 1144(d) applies to Fla.Stat. § 222.21(2)(a). The court concluded that although debtors can opt for state exemption schemes, "the Bankruptcy Code does not transform state laws into federal laws that section [1144(d) of ERISA] saves." Relying primarily on the Ninth Circuit's opinion in Pitrat v. Garlikov, 947 F.2d 419 (9th Cir.1991), withdrawn, 992 F.2d 224 (9th Cir.1993), 2 the court found that because "state law exemptions are not necessary to the enforcement of the Bankruptcy Code," and because "the Bankruptcy Code, as a whole, can operate effectively without any state law ... section [1144(d) ] does not save section 222.21(2)(a) from preemption."
Section 514(a) of ERISA, 29 U.S.C. § 1144(a), broadly preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan" covered by ERISA. Section 514 also provides the following saving clause:
Nothing in this subchapter shall be construed to alter, amend, modify, invalidate, impair, or supersede any law of the United States (except as provided in sections 1031 and 1137(b) of this title) or any rule or regulation issued under any such law.
Section 514(d), 29 U.S.C. § 1144(d).
Under the Bankruptcy Code, an individual debtor is entitled to exempt certain property that has been swept into his bankruptcy estate under 11 U.S.C. § 541(a). While the Bankruptcy Code provides a set of federal bankruptcy exemptions in 11 U.S.C. § 522, Bankruptcy Code § 522(b) gives states the option of "opting out" of the federal bankruptcy exemption scheme. In states that have opted out, the debtor may only exempt "any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition...." 11 U.S.C. § 522(b)(2)(A). Under the federal set of exemptions, the following may be exempted:
a payment under a stock bonus, pension, profit-sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and...
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