John M. McDonnell V. Eric S. Gilbert
- Summarized by Stephen Falanga , Walsh Pizzi O'Reilly Falanga LLP
- 2 months 2 weeks ago
- Case Type:
- Consumer
- Case Status:
- Affirmed
- Citation:
- No. 23-2944 (3rd Circuit, Oct 24,2024) Published
- Tag(s):
-
- Ruling:
- In this precedential decision, the Third Circuit affirmed the decision of the district and bankruptcy courts below that pursuant to 11 U.S.C. 541(c)(2), a chapter 7 debtor's interests in retirement plan assets are excluded from the bankruptcy estate even if the plans were operated in violation of ERISA and the Internal Revenue Code because of the ERISA statute's anti-alienation provisions.
- Procedural context:
- Chapter 7 trustee filed an adversary proceeding against a chapter 7 debtor alleging that the debtor's interests in two retirement plans with assets in excess of $1 million were property of the debtor's estate which could be used to pay creditors because the trustee alleged that the debtor operated the plans in violation of ERISA and the Internal Revenue Code. The Trustee also sought related relief against the debtor's spouse to avoid transfers to her from the plans pursuant to the parties' divorce. The Bankruptcy Court granted the debtor's motion to dismiss the Complaint finding that the plans were not property of the estate even if they did violate ERISA or the Internal Revenue Code. The District Court affirmed, and the Third Circuit affirmed on appeal.
- Facts:
- The debtor, Eric Gilbert filed for Chapter 7 bankruptcy in 2021 and listed his interest, approaching $1.7 million, in retirement accounts set up under two defined benefit plans (the "Plans") for which he claimed exclusion under 11 U.SC. 541(c)(2), which protects a debtor’s “beneficial interest . . . in a trust” that is subject to a “restriction on . . . transfer . . . enforceable under applicable non-bankruptcy law[,]” also known as an anti-alienation provision.
John McDonnell, the Chapter 7 trustee, filed a complaint seeking a declaratory judgment that the Plans were, in fact, available to Gilbert’s creditors. The complaint alleged that their operation flouted rules in both ERISA and the IRC and alleged that since inception the debtor utilized the 401(k) Plans as an extra bank account.
Gilbert filed a motion to dismiss, arguing that his interests in the Plans were excluded from the bankruptcy estate per § 541(c)(2). He noted that each Plan had anti-alienation language, which he said was “enforceable under” ERISA such that § 541(c)(2) applied. McDonnell countered that it did not apply in light of the alleged violations of ERISA and the Internal Revenue Code.
The Third Circuit following the Supreme Court decision in Patterson v. Shumate held that 541(c)(2) means what it says: interests in trusts are not part of the bankruptcy estate if applicable law prohibits their alienation regardless of whether the trusts comply with ERISA or the Internal Revenue Code. In so holding, the Third Circuit dismissed the trustee's appeal to equity that affirmance would allow the debtor to “receive a windfall of over $1 million in a
sham retirement account while living in Puerto Rico at the expense of his creditors.” The Third Circuit held that the
Supreme Court informs us that equity cannot be used to override bankruptcy’s detailed scheme delineating the property of the bankruptcy estate,
- Judge(s):
- JORDAN, McKEE, and AMBRO, Circuit Judges
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