Bankruptcy: Pension Plans

     As a result of numerous cases, as well as modifications of the Virginia Code, Virginia debtors have an increased ability to shield funds in retirement plans from creditors. Based on case law, ERISA qualified pension plans are excluded from property of the bankruptcy estate. Under Bankruptcy Code §541, assets excluded are not reachable by either the bankruptcy trustee or their creditors. Under Virginia Code §34-34, retirement plans that are not excluded from the bankruptcy estate may still be exempt to $17,500 in annual benefit.

     A debtor's interest in an ERISA qualified pension plan is not property of the bankruptcy estate, and, thus, is not subject to be turned over to the trustee in bankruptcy according to the 6th Circuit case of Forbes v. Lucas and the U.S. Supreme Court case Forbes v. Holiday Corporation Savings and Retirement Plan.
     In Patterson v. Patterson the U.S. Supreme Court rejected the trustee's contention that the anti-alienation requirement in the plan did not effectively apply to the debtor who controlled the company and thus controlled the plan. Therefore, the debtor's interest was not property of the bankruptcy estate, and the creditors could not reach the plan.
     In the Eastern District of Virginia case of In Re Wyles, the Chapter 7 trustee objected to the debtor's claim of exemption in ERISA Qualified Pensions Plans. The Court held, however, that the debtor's ERISA qualified pension plans were exempt, even though the debtor was a fifty percent shareholder of the corporation that set up the plans, and, as such, had authority to amend or terminate the plans as he sought fit. The Court ruled that there was no showing that the plans were established or maintained to defraud creditors, and that any premature plan distributions would constitute grounds for reopening the case so that such funds could be made available to creditors of the estate. The Court did enjoin withdraws and modifications without court order until the debtor reached the age fifty-nine and one-half.
     In the Eastern District of Virginia case of In Re Johnson, the Chapter 7 trustee objected to the debtor's claim of exemption for federal Thrift Savings Plan funds. The Court ruled in favor of the Trustee that funds withdrawn from the account prior to the bankruptcy and placed in bank accounts which could be used by the debtors free from retirement plan rules restrictions.
     The 4th Circuit Court case of In Re Moore holds that all ERISA qualified pension plans, which by definition have a non-alienation provision, are not property of the bankruptcy estate, and thus not reachable by creditors.
     Litigation has occurred regarding debtor contributions to ERISA qualified plans in Chapter 13 cases. In the case of In Re: Allen Scott and In Re: Annette Renaye Fountain, both decided by the United State Bankruptcy Court for the Eastern District Virginia at Richmond, debtor's plans were denied confirmation because not all of the debtor's disposable income was applied pursuant to Bankruptcy Code §1325 (b).
     In Scott the debtor had made two loans from his ERISA pension plan, and provided for a repayment of $790.36 per month, while paying the general unsecured creditors only seventeen percent. Since the ERISA plan had no secured interest against the debtor, the proposed Chapter 13 plan was denied confirmation.
     In Fountain the debtor proposed paying her ERISA plan fifty-five percent more that she would pay to unsecured creditors. The end result of her Chapter 13 plan would have been an approximately $16,000.00 exemption and additional equity in her residential real estate. The Bankruptcy Court ruled that since this contribution was not necessary for support, it must be included in the plan; since it has not, the Chapter 13 plan was denied confirmation.

Bankruptcy: ERISA Funds, the Bankruptcy Estate and Homestead Exemptions

     In the case of Philips v. Bottoms, Judge Payne of the United States District Court at Richmond, Virginia, upheld a Bankruptcy Court ruling that the Virginia homestead exemption, Virginia Code §34-34, was not preempted by ERISA, and that the bankruptcy trustee could claim a portion of an individual retirement account (IRA) not funded by the debtor’s funds from an ERISA-qualified plan.

     In Phillips, it was disputed that the IRA was not an ERISA-qualified plan. However, because the debtors used funds from an ERISA-qualified plan to create the IRA, the debtors contended that the exemption applicable to an ERISA-qualified plan exempted the IRA because it was created by funds having their origin in such a plan. The Bankruptcy Court held that the IRA was property of the bankrupt estate and that Virginia Code §34-34 was not preempted by ERISA. The Court further held that the debtor’s claimed exemption should be allowed in the amount of $21,532.
     In the Bankruptcy Court, the trustee sought to thwart the claim that the IRA funds were partially exempt by arguing that Virginia Code §34-34 was preempted by ERISA and therefore was not available to protect any part of the IRA from the claims of creditors. The Bankruptcy Court allowed $21,532 of the $48,858 in interest in the IRA because the parties had agreed that if an exemption was allowable at all, that was the correct amount.
     The District Court, in its review, found that although the federal bankruptcy provisions permitted exemption of a payment under a pension to the extent reasonably necessary for the support of the debtor and any dependent, Virginia had enacted an alternative exemption provision, found in Virginia Code §34-34. The state provision, like the federal one it replaced, limited the exemption of retirement benefits. However, rather than limiting the exemption to the extent reasonably necessary for the support of the debtor and his dependents, the Virginia law provided instead that the exemption should not apply to the extent that the interest of the individual in the retirement plan would provide an annual benefit in excess of $17,500. The District Court concluded that given the legislative intent underlying the Bankruptcy Code, it was logical to conclude that the limit on pension plan exemptions was Virginia’s attempt to set an exemption level appropriate for the Commonwealth, precisely as was envisioned by Congress when it revised the Bankruptcy Code.
     The District Court affirmed the Bankruptcy Court’s decisions that the debtor’s interest in the IRA was part of the bankruptcy estate and that Virginia Code §34-34, even if theoretically preempted by §514(a) of ERISA, was saved from preemption by §514(d) of ERISA.