Raymond Lione Morter, AKA D/B/A Swinengineering, Inc., Debtor-Appellant v. Farm Credit ServicesRaymond Lione Morter, AKA D/B/A Swinengineering, Inc., Debtor-Appellant v. Farm Credit Services
Raymond Lione Morter served as a professor of veterinary science at Purdue University for more than thirty years. He was forced to retire at age seventy in the fall of 1990 because of Purdue’s mandatory retirement policy. As a condition of his employment at Purdue, Morter was required to participate in Purdue University’s retirement plan, the Teacher’s Insurance and Annuity Association of America/College Retirement and Equity Fund (“TIAA-CREF”). Although a participant may make voluntary payments to the plan, Morter chose not to do so; Purdue paid all preretirement contributions on his behalf.
The retirement plan in question — TIAA-CREF — provides funding for the retirement programs of over half a million employees in over 3000 colleges and universities.
See generally Peters v. Wayne State University,
CREF is a companion nonprofit corporation created to invest in financial instruments other than those traditionally permitted for fixed annuity funds like TIAA. Unlike TIAA, CREF provides an annuity that varies with the success of its investments.
The strict anti-assignment provision of TIAA-CREF makes it impossible for annuitants to reach the funds in their accounts before retirement.
See Connick v. Teachers Insurance and Annuity,
16. No assignment. Any assignment or pledge of this contract or of any benefit hereunder will be void and of no effect.
17. Protection Against Claims of Creditors. The benefits, options, rights, and privileges accruing to any Beneficiary will not be transferable or subject to surrender, commutation, or anticipation, except as may be otherwise endorsed on this contract. To the extent permitted by law, annuity and other benefit payments will not be subject to claims of any creditor of any Beneficiary or to execution or to legal process.
Clause 17 of the CREF contract contains similar language protecting benefits against the claims of creditors. Pursuant to these provisions, Morter had no access to the accumulation of assets in the TIAA-CREF retirement plan short of retirement or death.
In June 1986, Morter filed a voluntary petition for bankruptcy pursuant to Chapter 7 of the Bankruptcy Code, 11 U.S.C. §§ 101-1330 (1978). A bankruptcy estate consists of “all legal and equitable interests of the debtor in property as of the commencement date.” 11 U.S.C. § 541(a)(1). Sections 522 and 541 of the Code permit a debtor to retain certain assets. In particular, section 541(c)(2) provides, “A restriction on the transfer of a
On his schedule listing property exempt from the bankruptcy estate, Morter listed his interest in the TIAA-CREF retirement plan at $280,795.86. Both the Farm Services Credit of Madison, Wisconsin (d/b/a Product Credit Association and d/b/a The Federal Bank Association) and the United States Trustee objected to the claimed exclusion of the TIAA-CREF retirement plan, so the matter was submitted to the bankruptcy court for decision. On July 6, 1989, the court issued a Memorandum and Order sustaining the objections to Morter’s claimed exemptions. The court ruled that the retirement plan was the property of the bankruptcy estate and that the only exemption Morter could take was a $100 intangible personal property right allowed by Indiana law. See Ind.Code § 34-2-28-l(a)(3) (1980). On February 6, 1990, the district court issued a Memorandum Opinion and Order that vacated in part and affirmed in part the judgment of the bankruptcy court. From that judgment, Morter brought a timely appeal.
State law determines whether access to a fund is sufficiently restricted to qualify for exclusion from the bankruptcy estate. The TIAA and CREF contracts expressly state that New York law governs their interpretation. Applying New York law, the district court concluded that the CREF component of the retirement plan was excluded from the bankruptcy estate, but that the TIAA component was not.
See Morter aka d/b/a Swinengineering, Inc. v. Farm Credit Services,
In order to decide whether the TIAA-CREF was excluded from Morter’s bankruptcy estate under section 541(c)(2) of the Bankruptcy Code, the district court examined in some detail the legislative history of the provision. The court determined that Congress intended to exclude from bankruptcy estates only “traditional” — i.e., do-native — spendthrift trusts under applicable nonbankruptcy law.
See Morter,
Morter believes that the district court over-emphasized the importance of the fact that TIAA someday might have to reach into its own funds. In this appeal, both he and
amicus curiae
TIAA-CREF argue that, in reviewing pension plans to determine whether they are included or excluded from the bankruptcy estate, courts properly should focus on whether the
debtor
has access to the funds. If, as here, the debt- or’s access is restricted by a ban on receiving any of the funds until retirement, a
Courts are split on the standards for determining whether a given set of restrictions on transfer and debtor access are sufficient to warrant the exclusion of a retirement or pension plan from a bankruptcy estate under 11 U.S.C. § 541(c)(2). Some have held that the plan must constitute a traditional spendthrift trust under applicable state law.
See, e.g., In re Swanson,
The collective wisdom of this second group of cases is persuasive: the plain language of section 541(c)(2) does not require that a retirement plan be a “traditional” spendthrift trust. We agree with the Fourth Circuit’s reasoning in McLean that section 541(c)(2)
should [not] be confined in its recognition of enforceable transfer restrictions to those found in “traditional” spendthrift trusts. The language of § 541(c)(2) does not suggest such a limitation, and the legislative history reveals only that the provision has the unambiguous purpose of preserving enforceable transfer restrictions in spendthrift trusts....
Moreover, in every decision we could find that addressed the very pointed question whether TIAA is a spendthrift trust under New York law, the answer was a resounding “yes.”
See, e.g., In re Reynolds,
No. 87-1515311F, slip op. (Bankr.W.D.Ark., September 18, 1989);
In re Montgomery,
The proper inquiry under section 541(c)(2), then, is not whether the accumulated funds are in a “traditional” spendthrift trust, but whether the retirement plan bars the beneficiary and his creditors from reaching the funds. If it does, the plan is tantamount to a spendthrift trust under state law. When we look at a retirement plan to determine whether it is a spendthrift trust, the fact that the plan administrators might have to dip into the fund to make up any shortfall is not as important to the analysis as the extent of access to the plan and who has that access.
What about Morter’s retirement plan? It is not “self-settled,”
see Swanson,
The plan provides that, upon retirement, Morter will receive monthly payments from his TIAA plan; he will not receive a lump-sum distribution of the assets. Although Morter can opt to receive a ten percent distribution on retirement, he does not have access to the other ninety percent that will generate income to be paid out over time. The fact that ninety percent of the fund is distributed in the form of periodic payments demonstrates that the fund was structured to insure the preservation of the corpus. To our mind, this scheme bears all the earmarks of a spendthrift trust.
Cf. Watkins,
Further, the TIAA plan would be enforceable as a spendthrift trust under state law because, in New York, all express trusts are presumed to be spendthrift unless the settlor expressly provides otherwise:
The right of a beneficiary of an express trust to receive the income from property and apply it to the use of or pay it to any person may not be transferred by assignment or otherwise unless a power to transfer such right, or any part thereof is conferred upon such beneficiary by the instrument creating or declaring the trust.
N.Y. Est. Powers & Trust Law § 7-1.5(a)(1) (McKinney 1988).
See In re Kriess,
To hold otherwise would defeat the legitimate expectations of Purdue University when it set up the plan and paid Morter’s share of contributions. The district court held that, although both the TIAA and CREF annuity contracts satisfied the elements of an express trust, “only the CREF contract is so ‘unequivocal in nature’ as to [whether] the formation of a trust was the object of the parties’ agreement.”
Morter,
Section 541(e)(2) ... strikes a delicate balance between enlarging the bankruptcy estate, while still honoring the spendthrift trust donor’s wishes under state law. For it is the donor’s desires which are protected through the concept of the spendthrift trust_ [T]his is underscored by the legislative history of § 541(c)(2) which notes that “[t]he bankruptcy of the beneficiary ... should not be permitted to defeat the legitimate expectations of the settlor of the trust.”
Swanson,
For the above reasons, we conclude that both the TIAA and CREF components of Morter’s retirement plan are excluded from the bankruptcy estate under 11 U.S.C. § 541(c)(2). Thus, we need not address Morter’s argument that Indiana’s recently amended exemption statute, Ind.Code § 34-2-28-1 (1990), prohibits levy or execution by judgment creditors on pension funds. That part of the district court’s judgment including the TIAA portion of Morter’s pension in the bankruptcy estate is hereby
Reversed.