IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 99-30109
(Summary Calendar)
IN THE MATTER OF: MARTHA C. SEWELL,
Debtor,
CYNTHIA L. TRAINA,
Appellant,
versus
MARTHA C. SEWELL,
Appellee.
- - - - - - - - - -
Appeal from the United States District Court
for the Eastern District of Louisiana
- - - - - - - - - -
July 27, 1999
Before JOLLY, SMITH, and WIENER, Circuit Judges.
WIENER, Circuit Judge.
In this bankruptcy appeal, Appellant Cynthia L. Traina,
Chapter 7 trustee (“Trustee”) in the bankruptcy proceeding of
Appellee Martha C. Sewell (“Debtor”), asks us to reverse the ruling
of the bankruptcy court, which was affirmed by the district court,
excluding from property of the estate the Debtor’s beneficial
interest in her employer’s ERISA1 retirement plan. The Trustee
insists that the bankruptcy and district courts erred in allowing
1
Employee Retirement Income Security Act of 1974, 29
U.S.C. §§ 1001 et seq.
that exclusion under § 541(c)(2) of the Bankruptcy Code,2 even
though the employer’s plan is an ERISA plan3 containing an ERISA-
required anti-alienation provision,4 because —— as the result of
alleged disqualifying acts by Debtor’s employer —— the subject plan
is purported not to be tax qualified under applicable provisions of
the United States Internal Revenue Code.5 Concluding that an ERISA
plan’s tax qualification is not a prerequisite to exclusion of a
participant’s beneficial interest from her bankruptcy estate under
§ 541(c)(2), we affirm.
I.
Facts and Proceedings
The Debtor was a full-time employee of Home Care Center, Inc.
(“Home Care”),6 but was not a shareholder, director, officer, or
highly-paid executive. Home Care sponsored a pension plan known as
the Deferred Capital Compensation Plan and Trust (the “Plan”). The
Debtor was a participant in the Plan, but was not a trustee,
2
11 U.S.C. § 541(c)(2).
3
29 U.S.C. § 1003(a).
4
Paragraph 12.5 of the subject Plan provides: “NON-
ASSIGNMENT or ALIENATION of BENEFITS: No benefit or interest
available hereunder will be subject to assignment or alienation,
either voluntarily or involuntarily.” See also 29 U.S.C. §
1056(d)(1).
5
26 U.S.C. §§ 1 et seq.
6
A company concededly engaged in interstate commerce.
2
administrator, or other fiduciary. Among other typical ERISA
provisions, the Plan contains a clause restricting transfer of the
Debtor’s beneficial interest in the retirement trust.7 Also
referred to as an anti-alienation or “spendthrift” clause, this
provision is admittedly enforceable under ERISA.
Although the record does not contain evidence that the Plan
was ever anything but presumptively qualified for tax purposes,
neither is there record evidence that the Plan was ever formally
disqualified for tax purposes by the Internal Revenue Service. The
Trustee, nevertheless, contends that specified acts —— “prohibited
transactions” —— by Home Care or individuals acting for it caused
the Plan not to be tax qualified at the times pertinent to this
case. Although we have doubts that an ERISA plan that is presumed
to be tax qualified or has opted to obtain a tax qualification
letter from the IRS can become disqualified other than by the overt
action of the IRS, we assume for purposes of today’s de novo review
(as have the parties and the bankruptcy and district courts) that
the Plan is not tax qualified.
The Debtor takes the position that her beneficial interest in
the Plan is excludable from her bankruptcy estate under § 541(c)(2)
of the Bankruptcy Code. This position is premised on the facts
that her interest in the Plan, unquestionably a trust, is subject
to a restriction prohibiting alienation (transfer) and that the
7
See supra note 4.
3
restriction is enforceable under ERISA, a nonbankruptcy law.
Section 541(c)(2) provides:
A restriction on the transfer of the
beneficial interest of the debtor in a trust
that is enforceable under applicable
nonbankruptcy law is enforceable in a case
under this title.8
The Trustee objected to the Debtor’s exclusion of her interest
in the Plan, but the bankruptcy court overruled that objection on
the basis of § 541(c)(2), holding that the Plan is “ERISA-
qualified” and that its tax qualification —— or lack thereof —— is
immaterial. Specifically, the bankruptcy court rejected the
Trustee’s contention that to be an “ERISA-qualified pension plan,”9
the Plan had to be tax qualified under the Internal Revenue Code.
The Trustee appealed to the district court, which affirmed the
bankruptcy court. The Trustee then timely filed a notice of appeal
to this court.
II.
Analysis
A. Standard of Review
When a ruling by the bankruptcy court that has been appealed
to and ruled on by the district court is appealed to us, we perform
the same appellate review as did the district court: We examine
the bankruptcy court’s findings of fact under the clearly erroneous
8
11 U.S.C. § 541(c)(2).
9
Patterson v. Shumate, 504 U.S. 753, 765 (1991).
4
standard, and we examine that court’s legal determinations under
the de novo standard.10 The sole issue on appeal of this case ——
whether a bankruptcy debtor’s beneficial interest in an ERISA
retirement plan that contains an anti-alienation provision is
excludable from the bankruptcy estate under § 541(c)(2) when the
ERISA plan in question is not or may not be qualified for tax
purposes under the Internal Revenue Code —— is purely a legal one.
Consequently, our review in this case is plenary.
B. Property Excludable from the Bankruptcy Estate
Under the well-known scheme of the Bankruptcy Code, all
property and interests in property owned by the debtor at the time
the petition in bankruptcy is filed (and, in some instances, for a
short period prior thereto) are available to satisfy claims of
creditors and costs of the proceedings unless such assets are (1)
“excluded” from the bankruptcy estate altogether, or (2) included
in the bankruptcy estate but “exempted” from use in satisfying
claims of creditors and other authorized charges. As the Debtor in
the instant case has claimed —— and the bankruptcy and district
courts have allowed —— the exclusion of her beneficial interest in
the Plan from her bankruptcy estate, we never reach the issue of
exemptions: Exemptions come into play only when property is
included in the bankruptcy estate and is sought to be used to
satisfy claims of creditors; by definition, excluded property never
10
Nationwide Mut. Ins. Co. v. Berryman Prods, Inc. (In re
Berryman), 159 F.3d 941, 943 (5th Cir. 1998).
5
forms part of the bankruptcy estate and thus need not to be tested
for exempt status.
Under the equally well-known scheme of ERISA, provisions in
Title 29 of the U.S. Code identify the various types of ERISA plans
and specify what must be included in such plans; on the other hand,
provisions in Title 26 specify what must be included in an ERISA
plan for it to be “qualified” for tax purposes and thus be subject
to special tax provisions that entitle the plan’s sponsors and
participants to tax benefits provided under ERISA. Obviously,
ERISA is a largely parallel, dual system, jointly administered by
the Department of Labor and the Department of the Treasury, and
statutorily bifurcated into Titles 26 and 29 of the U.S. Code.
Moreover, many provisions and requirements found in Title 29 are
replicated in Title 26. Prominent among such twin provisions is
the requirement that an ERISA employee pension benefit plan contain
a restriction on alienation of the beneficial interests of the
participants in the plan.11 Clearly, an ERISA plan like Home Care’s
is required to have an anti-alienation clause; likewise, for such
a plan to be “qualified” for tax purposes, it must contain an anti-
alienation clause.
11
Compare § 206(d)(1) of ERISA, which states that “[e]ach
pension plan shall provide that benefits provided under the plan
may not be assigned or alienated,” 29 U.S.C. § 1056(d)(1), with §
401(a)(13) of the Internal Revenue Code, which states as a
general rule that “[a] trust shall not constitute a qualifed
trust under this section unless the plan of which such trust is a
part provides that benefits provided under the plan may not be
assigned or alienated,” 26 U.S.C. § 401(a)(13).
6
Nowhere in ERISA, however, is there a requirement that, to be
an ERISA plan and thus be governed by ERISA, a plan must be tax
qualified. Indeed, the converse is true: An ERISA plan that is
not or may not be tax qualified nevertheless continues to be
governed by ERISA for essentially every other purpose.12 It would
be perverse, indeed, if the negligent or intentional act of an
ERISA plan sponsor, administrator, or other fiduciary, that results
in disqualification for tax purposes could, ipso facto, remove the
plan —— and thus the beneficial interests of the
employees/participants —— from the aegis of ERISA and its
protections of the very interests for which the legislation was
adopted and is administered in parallel by the Treasury and Labor
Departments. The instant case is a perfect example: Were the rule
otherwise, the Debtor’s beneficial interest in her ERISA employee
pension benefit plan, replete with restrictions on voluntary and
involuntary alienation and thus facially excludable from the
Debtor’s bankruptcy estate under § 541(c)(2) of the Bankruptcy
Code, could be stripped of all ERISA protection, including
enforceable nonbankruptcy restrictions on transfer, by the failure
of her employer —— beyond any control of the Debtor —— to maintain
tax qualification of the Plan.
Although the excellent and comprehensive appellate briefs of
the parties contain detailed analyses of the statutory and
12
See, e.g., Baker v. LaSalle, 114 F.3d 636, 641 (7th Cir.
1997)(“[V]iolations of ERISA do not make ERISA inapplicable.”).
7
jurisprudential development of this area of the law, we are
satisfied that consideration of two opinions —— one from the United
States Supreme Court and the other from the U.S. Court of Appeals
for the Seventh Circuit —— provide all the guidance and precedent
needed to decide this appeal, which presents a matter of first
impression in this circuit.
The question whether the beneficial interest of a debtor in an
ERISA retirement plan and trust that contains an ERISA-appropriate
and ERISA-enforceable restriction on transfer comes within the
ambit of § 541(c)(2)’s exclusion was answered definitively and in
the affirmative by the United States Supreme Court in Patterson v.
Shumate.13 The Court held unequivocally that § 541(c)(2)’s
requirement that a restriction on transfer of a beneficial interest
of the debtor in a trust be enforceable “under applicable
nonbankruptcy law” is not limited to enforceability under state
law; it suffices that such a restriction in an “ERISA-qualified
pension plan”14 be enforceable under some federal law other than
bankruptcy law —— there, as here, ERISA. In its opinion, however,
the Court inadvertently opened another jurisprudential Pandora’s
Box when, for reasons that are not apparent to us, it coined the
phrase “ERISA-qualified pension plan” which appears nowhere in
ERISA’s statutory language. The phrase is neither a term of art
13
504 U.S. 753 (1992).
14
Id. at 765.
8
nor a defined term for purposes of ERISA. Moreover, § 541(c)(2)
makes no reference to ERISA, much less to an ERISA-qualified plan.
Nevertheless, one line of Patterson progeny comprises a body of
jurisprudence concerning a question not answered in Patterson:
Whether, to be “ERISA-qualified,” the plan must be “qualified” for
tax purposes.15 For present purposes, it suffices to note that
bankruptcy courts and district courts have answered that question
both ways.
To date only one federal court of appeals has addressed the
tax qualification issue head on: the Seventh Circuit, in Baker v.
LaSalle.16 The operable facts in Baker are on all fours with those
we consider today.17 Given the congruency of the cases, we find it
appropriate to quote one lengthy but dispositive paragraph from
Judge Easterbrook’s opinion in Baker:
Patterson states its holding this way: “a
debtor’s interest in an ERISA-qualified
pension plan may be excluded from the property
15
The ERISA plan considered in Patterson was tax
qualified, so, alone, Patterson does not dispose of this aspect
of the instant case.
16
114 F.3d 636 (7th Cir. 1997).
17
Indeed, the equities —— frequently a consideration in
disposing of bankruptcy cases —— weigh more heavily in favor of
the Debtor here than they did for the plan participant in Baker.
The employee whose beneficial interest in Baker’s employee
pension benefit plan was at issue there was a major stockholder
in the company that sponsored the ERISA plan in question and was
a party to transactions that brought that plan’s tax
qualification into question. In contrast, the Debtor here was a
common law employee of the Plan’s sponsor, Home Care, completely
remote from the management of the Company and the Plan.
9
of the bankruptcy estate pursuant to §
541(c)(2).” 504 U.S. at 765, 112 S. Ct. at
2250. What is an “ERISA-qualified” plan? The
term does not appear in the statute, and its
provenance is mysterious. Some plans are tax-
qualified, a term of art meaning that
contributions to the plan are deductible at
the corporate level and not taxed to the
employee until the plan distributes benefits.
Taxation has nothing to do with the question
at hand, however. Most likely, the Court used
“ERISA-qualified” to mean “covered by
Subchapter I of ERISA.” Not all pension plans
need contain an anti-alienation clause. See
29 U.S.C. § 1003(b). Early in its opinion the
Court referred to “the anti-alienation
provision required for qualification under §
206(d)(1) of ERISA, 29 U.S.C. § 1056(d)(1).”
504 U.S. at 755, 112 S. Ct. at 2244.
Understanding “ERISA-qualified” to mean
nothing more complex than “containing the
anti-alienation clause required by § 206(d)(1)
of ERISA” makes the phrase mesh with the topic
of the opinion: whether ERISA is “applicable
nonbankruptcy law.” (Perhaps the term “ERISA-
qualified” has some significance elsewhere in
the law; our discussion of its scope applies
only to the question whether a creditor can
reach funds in bankruptcy.)18
Quite literally, everything contained in the quoted paragraph from
Baker applies here.
As Judge Easterbrook went on to observe, “Subchapter I of
ERISA covers every ‘employee benefit plan’ established by an
employer engaged in interstate commerce, with five exceptions.”19
Like the plan sponsor in Baker, Home Care is engaged in interstate
commerce and none of these five exceptions applies to it. ERISA
thus covers the Plan, which —— like the plan in Baker —— contains
18
Baker, 114 F.3d at 638.
19
Id. at 638-39.
10
an ERISA anti-alienation clause. And, like the Seventh Circuit in
Baker, we are satisfied that Ҥ 541(c)(2) of the Bankruptcy Code
excludes the [P]lan’s value from [the Debtor’s] estate in
bankruptcy.”20
III.
Conclusion
We discern no reason to depart from the Seventh Circuit’s
analysis in Baker or to reach a different legal conclusion. We
agree with the Baker court that taxation and tax qualification of
employee pension benefit plans have nothing to do with the
bankruptcy exclusion at issue in this case. Joining the Seventh
Circuit, we hold for this Circuit that, for purposes of §
541(c)(2)’s exclusion of a debtor’s non-transferable beneficial
interest in an ERISA employee pension benefit plan such as Home
Care’s, the fact that the plan is not or may not be “qualified” for
tax purposes does not preclude excludability.21
20
Id. at 639.
21
This opinion should not be construed as creating a per
se rule for this Circuit, making excludable under § 541(c)(2)
every beneficial interest of every participant in every ERISA
retirement plan and trust that purports to restrict transfer.
Patterson cannot be read as holding that the entire balance of
every participant’s beneficial interest in every “ERISA-
qualified” plan and trust is ipso facto excludable from the
bankruptcy estate of that participant, and this opinion should
not be read that way either. Like the Seventh Circuit in Baker,
“[w]e do not read Patterson to say that money readily available
to participants for current consumption necessarily is
unavailable to repay debts.” Baker at 638. For example, we can
conceive of a provision in an ERISA trust entitling the
participant “to invade the principal of a defined-contribution
plan for his own purposes —— to take a loan that can be converted
11
AFFIRMED.
to a withdrawal for failure to repay, or to accelerate
disbursement directly, as many plans provide once the employee
reaches a specified age....But because [the Trustee] does not
argue, and the record does not suggest, that [the Debtor]
lawfully could have withdrawn any of the funds remaining in [her]
account at the time the bankruptcy case began, we do not pursue
the question.” Id.
12