Opinion
Case No. 04-61752-R.
November 16, 2004
Opinion Regarding Trustee's Objection to Claim of Exemption
On August 3, 2004, Aaron and Pamela Pringle filed for chapter 7 relief. On Schedule B, the debtors listed Aaron Pringle's interest in a § 457(b) Retirement Plan with the State of Michigan valued at $64,000. On Schedule C, the debtors claimed the funds exempt pursuant to 11 U.S.C. § 522(d)(10)(E).
The trustee filed an objection to the claim of exemption, arguing that the funds are not reasonable and necessary for the support of the debtors. The debtors filed a response and argued that the Plan is excluded from property of the estate pursuant to § 541(c)(2). Alternatively, the debtors argued that the funds were reasonable and necessary.
Following a hearing on October 18, 2004, the Court took under advisement the issue of whether the Plan is excluded from property of the estate.
I.
The filing of a bankruptcy petition creates an estate comprised of all legal or equitable interests of the debtor in property. 11 U.S.C. § 541(a)(1). However, property which qualifies under § 541(c)(2) is excluded from the estate. That section provides, "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 a case under this title." 11 U.S.C. § 541(c)(2). This "provision entitles a debtor to exclude from property of the estate any interest in a plan or trust that contains a transfer restriction enforceable under any relevant nonbankruptcy law." Patterson v. Shumate, 504 U.S. 753, 758 (1992). Thus, in order for § 541(c)(2) to apply, three requirements must be satisfied: 1) the debtor's interest must be a beneficial interest in a trust; (2) there must be a restriction on the transfer of that beneficial interest; and (3) the restriction must be enforceable under applicable nonbankruptcy law. Id.
The Plan here is known as a "457 Plan." 26 U.S.C. § 457(g) provides:
(1) In general. — A plan maintained by an eligible employer described in subsection (e)(1)(A) shall not be treated as an eligible deferred compensation plan unless all assets and income of the plan described in subsection (b)(6) are held in trust for the exclusive benefit of participants and their beneficiaries.
The trustee concedes that the Plan at issue satisfies the trust requirement. The Plan provides:
[I]n accordance with Code Section 457(g), all amounts of compensation deferred pursuant to the Plan, all property and rights purchased with such amounts, and all income attributable to such amounts, property or rights shall be held in the Trust Fund for the exclusive benefit of members and Beneficiaries under the Plan.
(See Plan at 6, § VI, ¶ 6.1.)
The second requirement, that there be a restriction on the transfer of the debtor's beneficial interest in the trust is also satisfied. Specifically, the Plan provides:
Spendthrift Provision. A member's deferred salary account shall not be subject to assignment, conveyance, transfer, anticipation, pledge, alienation, sale, encumbrance, or charge, whether voluntary, or involuntary, by a member or Beneficiary, unless otherwise provided in this Plan and Trust document or by the Administrator, or under a PADRO.
Not Security. A member's deferred salary account shall not provide collateral or security for a debt of a member or Beneficiary or be subject to garnishment, execution, assignment, levy, or to another form of judicial or administrative process or to the claim of a creditor of a member or Beneficiary, through legal process or otherwise, except as otherwise permitted under the Code.
Attempts Void. Any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge, or otherwise dispose of benefits payable, before actual receipt of the benefits, or a right to receive the benefits, shall be void. The Trust shall not be liable for, or subject to, the debts, contracts, liabilities, engagements, or torts of any member or Beneficiary entitled to benefits. The benefits and Trust assets under this Plan shall not be considered an asset of a member or Beneficiary in the event of insolvency or bankruptcy.
(See Plan at 19, § XIII, ¶ 13.2.)
The trustee argues that the transfer restriction does not satisfy the third requirement because it is not enforceable under Michigan law. The debtors argue that it is an enforceable spendthrift trust.
Under Michigan law a spendthrift trust is:
[O]ne created to provide a fund for the maintenance of the beneficiary and at the same time to secure it against his improvidence or incapacity. In a narrower and more technical sense, a spendthrift trust is one that restrains either the voluntary or involuntary alienation by a beneficiary of his interest in the trust, or which, in other words, bars such interest from seizure in satisfaction of his debts.
Fornell v. Fornell Equip., Inc., 213 N.W.2d 172, 176 (Mich. 1973).
The Fornell court went on to note that:
A person cannot, however, create a true spendthrift for himself. Public policy does not permit a man to place his own assets beyond the reach of his creditors. But a settlor is not precluded from transferring his own property in trust to protect himself against his own improvidence. "Such a trust is binding on him except insofar as it is still within his power to alien or encumber it with debts[.]"
Id. (quoting 54 Am. Jur. Trusts, § 166, p. 135 (1945)).
In In re Benton, 237 B.R. 353 (Bankr. E.D. Mich. 1999), this Court considered whether the Wayne County Retirement Ordinance Plan qualified as a valid spendthrift trust under Michigan law. The Court noted, "The primary consideration in determining whether a valid spendthrift trust exists is the beneficiary's degree of control over the trust." Id. at 360 (quoting Restatement 2d Trusts § 153(2) (1959)). The Court relied on the following factors in finding that the plan was not a valid spendthrift trust:
(1) employees elect one of four plans; (2) the plan that Benton elected is funded in part by her and in part by her employer; (3) Benton can elect, within limits, how much to fund and thus how much her employer funds; (4) Benton's plan provides for full distribution to her upon her termination after a relatively brief period of service; (5) her plan permits loans by members, in an amount that can exceed the employee's contributions into the plan; and (6) Benton has removed assets from the plan by taking out loans. In addition, to the extent Benton makes contributions to the Retirement Ordinance Plan, the plan is a self-settled trust.
Id. at 359-60.
Here, the trustee contends that the following factors support the conclusion that the Plan is not a valid spendthrift trust: 1) the debtor can designate the amount of his salary to be deferred under the plan; 2) the debtor can cancel his deferred salary deduction at any time; and 3) the debtor is entitled to distribution upon separation of service, retirement, unforeseen emergency and disability.
With respect to the last factor cited by the trustee, the Plan provides:
[The] deferred amount shall . . . only be paid to the member (or his/her Beneficiary in case of death) at retirement, separation from service, death or other contingency hereinafter provided.
(See Plan at 3, § IV, ¶ 4.1.)
The "other contingency" provision is described as follows:
Unforeseeable Emergency. In the event of an unforeseeable emergency . . . payments can be made to the member.
An unforeseeable emergency is (i) a severe financial hardship to the member resulting from a sudden and unexpected illness or accident of the member or a dependant of the member, or (ii) a loss of the member's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the member. Payment may not be made to the extent that such hardship is or may be relieved: through reimbursement or compensation by insurance or otherwise; by liquidation of the member's assets (to the extent such liquidation would not itself cause severe financial hardship); or by cessation of deferrals under the Plan.
(See Plan at 8, § VII, ¶ 7.2(C).)
The Court concludes that this Plan is an unenforceable spendthrift trust, because (1) the debtor's own income funds the trust; (2) the debtor designates the amount of the funding contribution; (3) the debtor has a right to cancel contributions at any time; and, (4) the debtor has a right to a refund of his contribution upon separation of service or an unforeseen emergency. This degree of control over the trust is not consistent with the concept of a spendthrift trust under Michigan law. The Plan is clearly distinguishable from the examples of valid spendthrift trusts cited by the Court in Benton:
In Jacobs v. Shields, 116 B.R. 134 (D. Minn. 1990), the court concluded that a pension plan established by Ford Motor Co. was a valid spendthrift trust under Michigan law. The court relied on the following factors: (1) the plan was funded exclusively by Ford; (2) the funds were held in trust; (3) Ford appointed the trustee; (4) the plan was administered by an administrative board; (5) the debtor would receive monthly payments only upon retirement; (6) there were no provisions for hardship withdrawals, loans, or distribution upon termination of employment; and (7) the plan prohibited alienation of benefits. Id. at 138.
Similarly, in In re Watkins, 95 B.R. 483 (W.D. Mich. 1988), the court found that a Chrysler pension plan was a valid spendthrift trust under Michigan law, where: (1) the contributions to the plan were made exclusively by Chrysler; (2) there was no provision for a hardship distribution; (3) the plan contained an anti-alienation provision; (4) there was no provision for withdrawal of funds upon termination of employment; (5) loans were not permitted; (6) beneficiaries could not withdraw any funds from the plan; and (7) beneficiaries could not elect a lump-sum payment in lieu of monthly payments upon retirement.
Benton, 237 B.R. at 358.
Accordingly, the debtor's Plan is not excluded from property of the estate under § 541(c)(2). The Court will proceed with the December 7, 2004 evidentiary hearing to determine whether the debtors should be permitted to exempt the Plan under § 522(d)(10)(E).