Cite as: Keith M. Lundin, Lundin On Chapter 13, § 46.7, at ¶ ____, LundinOnChapter13.com (last visited __________).
The question whether pension benefits are property of the Chapter 13 estate is somewhat more complicated. As mentioned elsewhere,1 a pension benefit payable to a Chapter 13 debtor can be regular income for eligibility and confirmation purposes. But § 541(c)(2) excludes many pension benefits from the Chapter 13 estate notwithstanding that those same benefits are regular income for other purposes.
Section 541(c)(2) 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.”2 In Patterson v. Shumate,3 the Supreme Court held that the phrase “applicable nonbankruptcy law” in § 541(c)(2) included any federal or state law restrictions on alienation found in many pension and retirement plans.
Sometimes called the “spendthrift trust” exclusion, § 541(c)(2) has been interpreted to exclude from the bankruptcy estate a debtor’s interest in a pension or retirement system that meets the description of a trust and contains a restriction on transfer that would be enforceable under nonbankruptcy law. In McLean v. Central States, Southeast & Southwest Areas Health & Welfare Pension Fund (In re McLean),4 the Fourth Circuit concluded that an ERISA-qualified pension plan was indistinguishable from a spendthrift trust under Illinois law and thus benefits payable to a Chapter 13 debtor were not property of the Chapter 13 estate.5 On different facts, other courts have concluded that pension and retirement benefits that do not fall within the statutory exclusion in § 541(c)(2) are property of the Chapter 13 estate.6
There are important consequences when a pension or retirement benefit is not property of the Chapter 13 estate. For example, if pension or retirement benefits are excluded from the Chapter 13 estate, a creditor with a lien on those benefits may be unsecured for purposes of distributions in the Chapter 13 case. Discussed in more detail elsewhere,7 § 506(a) defines a secured claim as an allowed claim “secured by a lien on property in which the estate has an interest.”8 Pension and retirement benefits that are excluded from the Chapter 13 estate by § 541(c)(2) would not be property “in which the estate has an interest,” and a creditor with a lien on those benefits could not have a secured claim under § 506(a). Of course, the lienholder could enforce its lien outside bankruptcy; the lienholder simply wouldn’t have the rights of a secured claim holder at confirmation in the Chapter 13 case.
This logic led several courts, including the U.S. Court of Appeals for the Ninth Circuit, to conclude that the IRS does not have a secured claim in a Chapter 13 case based on a prebankruptcy lien on the debtor’s interest in an ERISA-qualified pension plan when the benefits are excluded from the estate by § 541(c)(2) and Patterson.9
2 11 U.S.C. § 541(c)(2).
3 504 U.S. 753, 112 S. Ct. 2242, 119 L. Ed. 2d 519 (1992).
4 762 F.2d 1204 (4th Cir. 1985).
5 Accord Chrysler-UAW Pension Plan v. Watkins (In re Watkins), 95 B.R. 483 (W.D. Mich. 1988) (Pension plan was enforceable spendthrift trust. Debtor’s interest was excluded from property of the Chapter 13 estate, and the bankruptcy court could not direct the pension plan to pay a portion of the debtor’s monthly pension benefits to the trustee.); In re Herndon, 289 B.R. 629 (Bankr. E.D. Mich. 2003) (ERISA-qualified retirement fund account is not property of the Chapter 13 estate, and fund does not need relief from the stay to offset loan balances and to provide notice of the distribution to taxing authorities.); In re Satterwhite, 271 B.R. 378, 382 (Bankr. W.D. Mo. 2002) (Debtor’s right to receive a portion of her former spouse’s military pension under Uniformed Services Former Spouse’s Protection Act is a “proprietary, inalienable interest” that is excluded from the Chapter 13 estate by Patterson v. Shumate, 504 U.S. 753, 112 S. Ct. 2242, 119 L. Ed. 2d 519 (1992).); In re Miller, 224 B.R. 913 (Bankr. D.N.D. 1998) (ERISA-qualified pension and retirement plan is excluded from property of the estate by § 541(c)(2). Debtor cannot claim an exemption because the plan did not become property of the estate, and the debtor’s ex-spouse does not need relief from the stay (though the court grants relief from the stay) to litigate her interest in the plan pursuant to a divorce decree.); In re Scott, 142 B.R. 126 (Bankr. E.D. Va. 1992) (In the Fourth Circuit, ERISA-qualified pension plan benefits are not property of the Chapter 13 estate under § 541(c)(2).).
6 See In re Fitak, 121 B.R. 224 (S.D. Ohio 1990) (Contributions to Public Employees Retirement System Fund are property of the Chapter 13 estate and upon withdrawal from the system, the debtors’ accumulated benefits are payable to creditors and are not subject to exclusion or exemption under applicable law.); In re Burgette, 114 B.R. 188 (Bankr. W.D. Mo. 1990) (Debtor’s interest in a state-mandated retirement system probably is property of the Chapter 13 estate but is exempt under state law and excluded from the best-interests-of-creditors test calculation in § 1325(a)(4).); In re Bruce, 80 B.R. 927 (Bankr. C.D. Ill. 1987) (Employee stock investment plan funded by contributions from employees does not qualify as a spendthrift trust and is property of the estate. The Chapter 13 debtor can reject the stock investment plan as an executory contract, and the debtor’s wages that were being deducted to fund the stock investment plan are available to fund the Chapter 13 plan.). Accord Regan v. Ross, 691 F.2d 81 (2d Cir. 1982); In re Simmons, 94 B.R. 74 (Bankr. W.D. Pa. 1988); Miles Fin. Co. v. Robinson, 39 B.R. 47 (Bankr. E.D. Va. 1984); In re Kelley, 31 B.R. 786 (Bankr. N.D. Ohio 1983); In re Wood, 23 B.R. 552 (Bankr. E.D. Tenn. 1982). See also Cox v. Cox (In re Cox), 247 B.R. 556 (Bankr. D. Mass. 2000) (Debtor had no rights in pension benefits that could become property of the Chapter 13 estate because domestic relations court order that gave the debtor an interest in pension was nullified by court of appeals before the Chapter 13 petition.).
7 See § 106.1 [ Is Claim Secured, and By What? ] § 76.2 Is Claim Secured, and By What?.
8 11 U.S.C. § 506(a) (emphasis added).
9 United States v. Snyder, 343 F.3d 1171 (9th Cir. 2003). Accord IRS v. Wingfield (In re Wingfield), 284 B.R. 787 (E.D. Va. 2002) (Applying § 541(c)(2) and Patterson v. Shumate, 504 U.S. 753, 112 S. Ct. 2242, 119 L. Ed. 2d 519 (1992), 401(k) plan is not property of the Chapter 13 estate for purposes of determining whether the IRS has a secured claim.); In re Grant, 301 B.R. 464 (Bankr. E.D. Va. 2003); In re Robinson, 301 B.R. 461, 464 (Bankr. E.D. Va. 2003) (“[A] debtors’ interest in an ERISA qualified pension plan is not property of the bankruptcy estate for the purpose of establishing a secured claim by the IRS. This determination is buttressed by . . . [United States v. Snyder, 343 F.3d 1171 (9th Cir. 2003)].”).