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Nov 1991

Retirement funds not exempt from creditors' claims in bankruptcy proceedings. (Employee Benefit Plans) (Column)

by Arbel, Ron

    Abstract- .

There were two arguments raised by the debtors:

1. The plans constituted spendthrift trusts that are excludable from the bankruptcy estate by virtue of Sec. 541 of the bankruptcy code; and

2. The ERISA plans were exempt and should be allowed based on a particular Florida statute.

Sec. 541 provides that, except as provided in Sec. 541(c)(2), all legal and equitable interests of the debtors in property are subject to the administration of the trustees of the estate.

Sec. 541(c)(2) provides that a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable under this title.

It was argued that since all ERISA plans contain anti-alienation provisions, these provisions constitute "applicable non-bankruptcy law" within the meaning of Sec. 541(c)(2) and, thus, the interest of the debtors in the plan should be excluded from the property of the estate.

However, the court decided that in that circuit, "applicable non- bankruptcy law" applies only to spreadthrift trust law. The next logical question was then: Was the plan a spendthrift trust?

Spendthrift or Not

Under Florida law the purpose of a spendthrift trust is to provide a fund for the maintenance of the beneficiary while protecting the beneficiary not only from himself but also from creditors. Where the beneficiary has the ability to terminate the plan or to require the conveyance of the property to him, the beneficiary has the dominion and control over the trust in a sufficient manner as to defeat the validity of the spendthrift trust provision. In the case in point, the participants of the plan could borrow against the funds and make hardship withdrawals--features inconsistent with any characteristic of a traditional spendthrift trust. Thus, funds in the account are not excludable property of the estate.

The second argument of the debtors was that even if the plan funds were property of the estate, they were exempt pursuant to a Florida statute providing that money or other assets payable to any participant or beneficiary in a qualified retirement plan under Sec. 401(a) is exempt from all claims of creditors of the beneficiary or participant. Citing the Supreme Court in Mackey v. Lanier 486 U.S. 825, 108 S. Ct. 2182 (1988), the court held that Sec. 514 of ERISA preempts Florida and any other state statute; in Mackey, the Supreme Court held that the Georgia statute that purported to immunize 401(k) funds from garnishment was invalid by virtue of federal preemption based on Sec. 514(a) of ERISA.

Finally, the debtors claimed that Sec. 522(b) allows a debtor to choose either the federal exemptions listed in 522(d) or those provided by state law and also any property exempt under federal law other than subsection (d) of this section. Thus, the debtors argued that ERISA created a specific non-bankruptcy federal exemption within the meaning of Sec. 522(b)(2)(A).

To No Avail

Citing the House and Senate reports on Sec. 522(b)(2)(A), the court indicated that the report provides a list of property that can be exempted under federal laws and since ERISA plans were not included, this was indicative of congressional intent not to exclude ERISA- qualified pension plans.

It was, therefore, the decision of the court that Sec. 401(k) plan funds were not exempt and the trustee could proceed to administer the funds in plan for the benefit of the estates.

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