Opinion
No. 90 B 02776 D
September 20, 1991
Property of the Estate — Exclusions — Trusts — Pensions — ERISA. — An ERISA-qualified plan is excludable from the estate under Section 541(c)(2) only if it meets the test under state law of being a spendthrift trust, which the plan here did not.
See Sec. 541(c)(2) at ¶ 9510.
Exemptions — Federal Law — Pensions — ERISA. —
The Employees Retirement Income Security Act is covered by the phrase "exempt under Federal law" appearing in Section 522(b) of the Bankruptcy Code. Thus, a plan qualifying for ERISA protection (with its anti-alienation requirements) is exemptable from a bankruptcy debtor's estate, as was the plan here.
See Sec. 522(b) at ¶ 9203.
THIS MATTER came before the Court for hearing on Dover Industries Inc.'s ("Dover") Motion for an Order Concerning Distribution of Property. The Internal Revenue Service ("IRS") and the Trustee filed objections. A hearing was held on these matters on June 20, 1990.
Dover Industries, Inc. d/b/a/ Dietrich Standard Profit-Sharing Plan (the "Plan") requested an order allowing it is distribute the Debtor's accrued benefits in his pension plan in the approximate amount of $22,938.80.
The Debtor was a participant in the Plan through his employer, but terminated his employment on July 29, 1988. The Plan is a qualified ERISA plan with the standard anti-alienation language.
The Debtor filed a petition under Chapter 7 of the Bankruptcy Code on March 12, 1990. On February 13, 1989, the Internal Revenue Service levied on the Plan's sponsor (Debtor's former employer) for unpaid taxes thereby claiming entitlement to Debtor's retirement benefits. Dover seeks an order from this Court authorizing it to pay the accrued funds to one of three competing interests: the Debtor, the Chapter 7 Trustee, or the Internal Revenue Service.
This Court, following the hearing on June 20, 1990, entered an Order allowing the administrator of the Plan to pay the accrued benefits to the Chapter 7 Trustee, pending further order of this Court.
The IRS claims that it has not waived its sovereign immunity and argues that this matter should be resolved by an adversary proceeding. Its claim arises out of unpaid taxes in excess of $28,000 which is greater than the Debtor's benefits in the Plan. Their tax levy was filed against Debtor's interest in the pension plan funds on February 13, 1989. The IRS agrees that the funds are in a qualified ERISA plan with a standard anti-alienation clause, but claims a right to the funds because the Debtor had a right to distribution of those funds at the time of the IRS levy. The IRS and the other parties agree that the taxes for which the liens were filed are probably dischargeable since they fall outside the three year priority rule and the 240 day priority rule under 11 U.S.C. § 507(a). IRS also relies on its lien in arguing entitlement to these funds.
The IRS urges this Court to adopt the holdings of In re: Alagna, 107 B.R. 301 (Bankr. D. Colo. 1989); and In re: Toner, 105 B.R. 978 (Bankr. D. Colo. 1989), which hold that ERISA qualified plans are not excluded from the Debtor's estate. IRS also argues that because the Debtor had the immediate right of distribution upon his employment termination he had control over the funds inconsistent with the requirements for creating a valid spendthrift trust. In re: Matteson, 58 B.R. 909 (Bankr. D. Colo. 1986). Therefore the funds were Debtor's property at the time IRS levy was made, entitling the IRS to constructive possession of any right Debtor may have to the funds, including future distributions. Altman v. Commissioner of Internal Revenue Service, 83 B.R. 35 (D. Hawaii 1988) and LaSalle National Bank v. United States, 636 F. Supp. 874 (N.D. Ill.)
Finally, the IRS aruges that the case of In re: Jackson, 80 B.R. 213 (Bankr. D. Colo. 1987) holds that the IRS lien is more comprehensive than the levy and attaches to whatever rights the Debtor had on the day he filed his petition. The IRS also cited the case of In re: Isom, 901 F.2d 744 (9th Cir. 1990) in support of its position that the tax lien remains in effect when the underlying debt is discharged.
The Debtor argues that the Plan qualifies as a spendthrift trust, and that any rights under that trust are controlled by the restraint on alienation provision contained in that instrument, and therefore, the funds in the Plan are not property of the state under § 541(c)(2) of the Bankruptcy Code. In re Matteson, 58 B.R. 909 (Bankr. D. Colo. 1986). The Debtor argues that because there are three independent parties: the corporate settlor of the trust, the Debtor beneficiary, and the third party Trustee, Matteson is controlling and distinguish this Plan from those reviewed in the In re: Alagna and in re: Toner cases.
The Debtor also argues in the alternative, that if the property is deemed to belong to the estate, then the Debtor is entitled to a 75% exemption, both under ERISA and under C.R.S. § 13-54-104 (1989).
The Debtor claims that neither the Trustee nor the IRS has any interest in the property since the Debtor was not entitled to distribution of the benefits until 60 to 90 days following the year in which there was a break in service following termination of his employment. The Plan provided that an employee would be determined to have a break in service when he had not attained 501 hours in any given year. The Debtor had not attained the 500 hours break in service until the end of 1989 and, therefore, he was not entitled to distribution until 60 days following the end of 1989, making him eligible for distribution on March 2, 1990, subsequent to the date of the IRS levy. It is undisputed that the Debtor terminated his employment in July of 1988.
The Debtor argues that § 63-31(b) of the Internal Revenue Code defines levy to include power of restraint and seizure by any means and provides:
Except as otherwise provided in subsection (e), a levy shall extend only to property possessed and obligations existing at the time thereof, and in any case which the Secretary may levy upon property or rights to property, he may seize and sell such property rights to property, whether real or personal, tangible or intangible.
The IRS made only one levy in February, 1991. The Debtor cites the case of In re AIC Industries, 83 B.R. 774 (Bankr. D. Colo. 1988) for the proposition that a levy does not reduce distribution rights to cash which must be paid to the IRS.
The Plan administrator stated that at the time the Debtor was separated from his employment, the Plan provided that the administrative committee had the discretion to make distributions following termination of service if made prior to the retirement age of 65. The administrative committee's policy was that the distributions would not be made until a participant had incurred a break in service for at least 500 hours. Since the Debtor completed 500 hours of service in 1988, and none in 1989, he would be entitled to a distribution within 60 days following the end of 1989, i.e. March 2, 1990.
The Trustee urges this court to follow the analysis of Judge Finesilver in an unpublished opinion in the In re: Toner, case decided in January, 1990. That case generally follows the holding of In re: Toner, 105 B.R. 978 (Bankr. D. Colo. 1989). The Trustees argues that the Debtor had a right to distribution as of the date of filing of the petition on March 12, 1990, and because there was such a right, the funds became property of the estate which would be subject to a 75% exemption pursuant to C.R.S. § 13-54-104(1.1) (1989). The remaining 25% is property of the estate.
MERITS
The Plan is question contains the anti-alienation language required by ERISA, 29 U.S.C. § 1056(d)(1). The parties agree that the Plan is a duly qualified ERISA plan containing the following language: ". . .A benefit under the Plan is not subject to attachment, garnishment, levy, execution or other legal or equitable process." and that the Debtor has accrued benefits in excess of $28,000.00.
The Debtor terminated his employment in July of 1988, and was entitled to receive distribution of his accrued benefits as of March 2, 1990, some 11 days prior to filing his Chapter 7 petition under the Bankruptcy Code, and more than a year following the IRS levy against his former employer. The Plan provided that the Debtor could withdrew all or any part of the value of his accrued benefits derived from his contributions to the Plan once a year. The Debtor was also entitled to receive distribution prior to reaching the retirement age of 65 under certain conditions and was also entitled to change his beneficiaries.
The court finds that the amount of dominion and control maintained by the Debtor over the Plan is inconsistent with the conclusion that the Plan created a valid spendthrift trust under Colorado state law. In re: Matteson, 58 B.R. 909 (Bankr. D. Colo. 1986); and In re: Toner, 105 B.R. 978 (Bankr. D. Colo. 1989). Therefore, the Debtor's accrued interest in the Plan qualifies as property of the bankruptcy estate under 11 U.S.C. § 541(c).
Having found that the Debtor's accrued benefits are part of his bankruptcy estate, the question becomes whether the Debtor is entitled to any exemption under either federal or state law.
Exemptions are governed by 11 U.S.C. § 522(b)(2) since Colorado elected to "opt out" of the federal exemption scheme. C.R.S. § 13-54-107. Section 522(b)(2) of the Bankruptcy Code provides as follows:
(b) Notwithstanding section 541 of this Title, an individual debtor may exempt from property of the estate. . .
(2)(A) 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 at the place in which the debtor's domicile has been located for the 180 days immediately preceding the date of the filing of the petition. . .
Two recent United States Supreme Court decisions, when read in conjunction with one another, lead this court to conclude that a Debtor's accrued benefits in his ERISA qualified pension plan are exempt under federal law within the meaning of 11 U.S.C. § 522(b)(2)(A). Mackey v. Lanier Collections Agency and Service, Inc., 108 S.Ct. 2182 (1988); and Guidry v. Sheetmetal Workers National Pension Fund, 110 S.Ct. 680 (1990). This court is convinced that given the Supreme Court pronouncement in Guidry coupled with the dictum in Mackey, that ERISA qualified pension plans are exempt under federal law as that phrase is used in § 522(b)(2)(A).
In the Guidry case, the court found that the trial court's imposition of a constructive trust on Guidry's pension plan benefits violated ERISA's prohibition on assignment or alienation of pension benefits. Employee Retirement Income Security Act of 1974, 88 Stat. 829, as amended, (ERISA), 29 U.S.C. § 1001, eq seq. § 206(d)(1). 29 U.S.C. § 1056(d)(1) of ERISA states: "each pension shall provide that benefits provided under the Plan may not be assigned or alienated." The Guidry court held that § 206(d)(1) of ERISA erects a general bar to the garnishment of pension benefits from plans covered by the Act. The court held at page 687:
Section 206(d) reflects a considered congressional policy choice, a decision to safeguard a stream of income for pensioners (and their dependents, who may be, and perhaps usually are, blameless), even if that decision prevents others from securing relief for the wrongs done them. If exceptions to this policy are to be made, it is for Congress to undertake that task. (Emphasis added.)
The court rejected the trial court's use of a constructive trust on Guidry's pension plan benefits as an equitable exception to the anti-alienation provision to redress alleged breaches of Guidry's duty to the pension plan. The court found that it is inappropriate to approve any generalized equitable exceptions to ERISA's prohibition on the assignment or alienation of pension benefits. The court stated at page 685:
The view that the statutory restrictions on assignment or alienation of pension benefits apply to garnishment is consistent with applicable administrative regulations,10 with the relevant legislative history,11 and with the views of other federal courts.12 It is also consonant with other statutory provisions designed to safeguard retirement income.13
The court found an express, specific congressional directive that pension benefits should not be subject to assignment or alienation and further directed that:
". . .courts should be loath to announce equitable exceptions to legislative requirements or prohibitions that are unqualified by the statutory text." Id. at 687. (Emphasis added.)
The court emphasized that any exceptions to be drawn should be left to Congress and not to the courts.
In the Mackey case, the court stated in dictum that Congress, through § 206(d)(1), intended to bar, with certain enumerated exceptions, the alienation or assignment of benefits provided for by ERISA pension benefit plans. 29 U.S.C. § 105(6)(d)(1). The court, at pages 2188-89, stated that:
Section 206(d)(1) bars the assignement or alienation of pension plan benefits, and thus prohibits the use of state enforcement mechanisms only insofar as they prevent those benefits from being paid to plan participants.
Although the issue before the Mackey court was whether Congress intended to bar the alienation or garnishment of ERISA welfare benefit plans, the court left no doubt that it felt that Congress intended to bar the alienation or garnishment of ERISA pension benefit plans.
This court also adopts the analysis and holding in the In re John Edwin Starkey case decided by Judge Matheson and reported at 116 B.R. 259 (Bankr. D. Colo. 1990). The holding in that case is dispositive of the issues in this case. The court held that ERISA creates a federal exemption for purposes of 11 U.S.C. § 522(b)(2)(A) and, therefore, ERISA pension benefits of Debtors can properly be claimed to be exempt pursuant to that provision.
Therefore, pursuant to the findings and conclusions stated herein, it is hereby
ORDERED that judgment is entered in favor of the Debtor, finding that all benefits in his plan which had accrued as of the date of filing his bankruptcy petition are exempt pursuant to 11 U.S.C. § 522(b)(2)(A) and 29 U.S.C. § 1056(d)(2) as property of the estate. The Trustee is, therefore, ordered to pay to the Debtor all of the accrued benefits presently in his custody exclusive of allowable administrative costs.