Mark A Petruzzelli and Melissa M Petruzzelli

OCR transcription for search; preserved printed pages are authoritative

Case 03-42630-JDP Doc 23 Filed 07/29/04 Entered 07/29/04 12:22:00 Desc
Converted from BANCAP Page 1 of 11

U.S. Bankruptey Court
District of Idaho

Filed: July 29, 2004

At: 11:00 aim.

By: Diane Hutchinson ji—-

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF IDAHO

Tn Re:

Bankruptcy Case
MARK PETRUZZELLI and No. 03-42630

MELISSA PETRUZZELLI,

Debtors.

MEMORANDUM OF DECISION

Appearances:

James C. Meservy, FREDERICKSEN, WILLIAMS, MESERVY &
LOTHSPEICH, Jerome, Idaho, Attorney for Debtors.

R. Sam Hopkins, Pocatello, Idaho, Chapter 7 Trustee.
This is a contest between the Chapter 7 Debtors and the trustce of
their bankrupicy estate over funds on deposit in the Debtors’ deferred

compensation plan. The Court concludes that the plan funds are not bankruptcy
MEMORANDUM OF DECISION - 1

Ye AQ) TIA

AUTHENTICATED

SAO TZA
(Rev, 8/82)

Case 03-42630-JDP Doc 23 Filed 07/29/04 Entered 07/29/04 12:22:00 Desc

Converted from BANCAP Page 2 of 11

estate property and may not be distributed by the trustee to creditors. What
follows are the Court’s findings of fact, conclusions of law, and disposition of the

issues. Fed. R. Bankr. P. 7052; 9014.

Facts

Over the years, Debtors have saved $13,414 through Mr.
Petruzzelli’s employer’s deferred compensation plan established under 26 U.S.C.
§ 457, After filing for bankruptcy under Chapter 7 of the Bankruptcy Code on
December 11, 2003, Debtors sought to exempt that money under various state
statutes. Sched. C and Amendments thereto, Docket Nos. 1, 9,12, 18. The
Chapter 7 Trustee, R. Sam Hopkins, objected to Debtors’ exemption claims.
Docket Nos. 6, 10, 16.

The Court conducted a hearing concerning the exemption claims
and Trustee's objections on May 10, 2004. Minute Entry, Docket No. 20. At the
hearing, Dcbtors indicated for the first time that they intended to amend their

schedules to show that Mr. Petruzzclli’s deferred compensation plan was not part

MEMORANDUM OF DECISION - 2

mA TIA
(Rev. 8/82)

Case 03-42630-JDP Doc 23 Filed 07/29/04 Entered 07/29/04 12:22:00 Desc

Converted from BANCAP Page 3 of 11

of the estate under § 541(c)(2).! At that time, however, neither Trustee nor
Debtors were prepared to discuss whether the plan met the requirements
established by § 541(c){2) and the holding of the Supreme Court interpreting that
statute in Patterson v. Shumate, 504 U.S. 753 (1992). The Court granted each
side additional time to obtain the plan documents and submit written arguments.

On June 16, 2004, Debtors filed a description of the Deferred
Compensation Plan for Public Employees, together with a written brief arguing
that the plan funds were not property of the estate because of the anti-alienation
provisions in the plan, which they contend satisfy the requirements of
§ 541(c)(2).? Docket Nos. 21, 22. Trustee elected not to file a brief. The Court
took the issues under advisement.

Disposition
Although Debtors have not yct amended their schedules to show that

the money in Mr. Petruzzelli’s deferred compensation plan is not property of the

! Unless otherwise noted, all statutory references are to the Bankrupicy Code,
found at Title 11 of the United States Code.

* Debtors withdrew their earlier argument that the plan was exempt under Idaho
Code § 11-604A(3). Docket No. 22.

MEMORANDUM OF DECISION - 3

Case 03-42630-JDP Doc 23 Filed 07/29/04 Entered 07/29/04 12:22:00 Desc

AG TIA
(Rev. 8/42)

Converted from BANCAP Page 4 of 11

bankruptcy estate, the Bankruptcy Rules liberally allow debtors to amend their
schedules Has a matter of course at any timc before the case is closed.” Fed. R.
Bankr. P. 1009{a); Martinson v. Michael (In re Michael), 163 F.3d 526, 529 (9™
Cir. 1998). An amendment does not require court approval, unless there is a
showing that the amendment has been made in bad faith or prejudices third parties.
Michael, 163 F.3d at 529; Arnold vy. Gill (In re Arnold), 252 B.R. 778, 784 (B.A.P.
9" Cir, 2000); Magallanes v. Williams (In re Magallanes), 96 B.R. 253, 256
(B.A.P. 9" Cir. 1988); In re Bowden, 254 B.R. 907, 909 (Bankr. D. Idaho 2000).
Trustee has not contested Debtors’ right to amend their schedules, and assuming
they do so, the Court deems it appropriate to consider the issues in this context,
Section 541(c)(2) of the Code provides that “[a] restriction on the
transfer of a beneficial interest of the debtor in a trust that is enforccable under
applicable nonbankruptcy law is enforceable in a case under this title,” and is not
property of the bankruptcy estate. The Supreme Court in Patterson held that an
ERISA-qualified plan containing an anti-alienation provision constituted an
“enforceable transfer restriction for purposes of § 541(c){2)’s exclusion of

property from the bankruptcy estate.” Patterson, 504 U.S. at 761.

MEMORANDUM OF DECISION - 4

Case 03-42630-JDP Doc 23 Filed 07/29/04 Entered 07/29/04 12:22:00 Desc

AQ TIA
(Rev. 8/82)

Converted from BANCAP Page 5 of 11

Debtors’ plan contains anti-alienation and anti-assignment
provisions as required by ERISA, 29 U.S.C. § 1056(d)(1). See Plan, Article [X
§§ 9.07, 9.08, and Article X §§ 10.01, 10.07, Docket No. 21. The plan does,
however, allow employees to make early withdrawals in two situations: (1) if there
has been an “unforesceable emergency,” defined as a severe financial hardship
resulting from a sudden and unexpected illness or accident, or property loss duc to
casualty, see id. al §§ 1.01(t) and 8.04; and (2) for a voluntary in-service
distribution of up to $5,000 at any time, provided the participant has not made
such a request before aud he has made an election to receive the distribution, see
id. at § 8.05.

Although there has been no event that would trigger the
“emergency” provision, as noted above, Debtors do have the right under § 8.05 of
Mr. Petruzzelli’s deferred compensation plan to seek a permissive distribution of
up to $5,000.00 at any time and without restriction. The Court concludes that the
existence of this right does not modify the spendthrift qualities that apply to all
funds held in the plan. In other words, the entire $13,414 on deposit for Debtors
in the plan as of the date of the petition is subject to the restrictions upon

alienation and transfer so as to qualify the plan for ERISA treatment and, thereby,

MEMORANDUM OF DECISION - 3

Case 03-42630-JDP Doc 23 Filed 07/29/04 Entered 07/29/04 12:22:00 Desc

AQ TIA
(Rev. 8/82)

Converted from BANCAP Page 6 of 11

to exclude the funds from Debtors’ bankruptcy estate under § 541(c)(2). The
mere existence of the permissive distribution option docs not convert $5,000.00 of
the $13,414 into something else.’

The Court is disadvantaged by Trustee’s decision not to file a brief.
Assuming he had, Trustee might have argucd that Debtors’ right under the plan to
request and receive a permissive distribution 1s itself property of the bankruptcy
estate. True enough, § 541(a)(1) includes within the estate “all legal or equitable
interests of the debtor in property as of the commencement of the case.” All sorts
of intangible rights held by a debtor on the petition date pass to the estate. For
example, a debtor’s right to file suit; to make a demand on monies owed by a third
party; to foreclose claims held as a sccured creditor against another’s property;

and to exercise options undcr leases or contracts would all come within the estate.*

* A different situation could exist if, for example, Debtors had requested and
received a permissive distribution prior to filing. Once the funds were outside the plan, it
is doubtful the spendthrift protections would continue in effect as against the Trustee.
See In re Kane, 99.4 1.B.C.R. 175 (Bankr. D. Idaho 1999),

* See, e.2., Krystal Cadillac Oldsmobile GMC Truck, Inc. v. Gen, Motors Corp.
(In re Krystal Cadillac Oldsmobile GMC Truck, fne.}, 142 F.3d 631, 635 (3d Cir. 1998)
(franchise agreement is property of the estale under § 541(a)(1)); Wischan v, Adler (In re
Wischan), 77 F.3d 875, 877 (Sth Cir. 1996) (prepetition nights of action are properly of
the estate under § 541(a)(1)); Sierra Switchbourd Co. v. Westinghouse Elee. Corp., 789
F.2d 705, 707 (9th Cir.1986) (prepetition causes of action are property of the estate under
§ 541(a)(1)); Raw v. Ryerson (in re Ryerson), 739 F.2d 1423, 1425 (9th Cir, 1984) (right

MEMORANDUM OF DECISION - 6

Case 03-42630-JDP Doc 23 Filed 07/29/04 Entered 07/29/04 12:22:00 Desc

ACI TIA
(Rev. 4/82)

Converted from BANCAP Page 7 of 11

And the Chapter 7 trustee is empowered to exercise such intangible rights on
behalf of the estate. Why, then, wouldn’t the Trustee here have the same right as
Debtors to request and receive a permissive distribution from the deferred
compensation plan?

The Ninth Circuit has explicitly rejected the position that a debtor’s
control over the assets in an ERISA-qualified plan somehow brin gs either the
right to request a distribution, or the assets in the plan, into the estate when a
bankruptcy casc is filed. In Arkison v. UPS T, Arift Plan (In re Rueter), 11 F.3d
850 (9" Cir. 1993), the debtor’s profit sharing plan allowed employees to
withdraw their own contributions at any time and to withdraw employer
contributions after two years. Even under those circumstances, the court held that
it “need look no further than whether the ERISA-qualified plan at issue has an
anti-alicnation provision that satisfies the literal terms of § 541(c)(2).” /d. at 852.
Ifa plan does contain such a provision, then it meets the requirements laid down

by the Supreme Court in Patterson for exclusion under § 541(c)(2). Td.

to “contract valuc” earned prepetition is property of the estate under § 541(a)(1}); Ja re
Mingo, 95 LB.C.R. 4, 4 (Bankr, D. Idaho 1995) (debtor’s contract right to payment under
a lease is property of the estate).

MEMORANDUM OF DECISION - 7

:22:00 Desc
Case 03-42630-JDP Doc 23 Filed 07/29/04 Entered 07/29/04 12:
° Converted from BANCAP Page 8 of 11

Years later, in Barkley v. Conner (In re Conner), 73 F.3d 258 (9
Cir, 1995), the Ninth Circuit encountered yet another plan that allowed the debtors
complete access to their after-tax contributions at any time. Taking Arkison one
step further, the court stated that:

[Under [Patterson], ERISA plans are exempted from

the bankruptcy estate, even though ERISA only

requires restraints on alienation to third partics. In

interpreting the § 541(c)(2) exemption to cover ERISA

plans, the Supreme Court appears to have discounted

any distinctions based on the debtors’ control of their

asscts. Thus, the appellant’s argument that we should

conduct a functional analysis focusing on the debtors’

control of the assets in the ERISA Plan has been

rejected by the Supreme Court.
Id. at 260, See also IRS vy. Snyder, 343 F.3d 1171, 1178 (9" Cir, 2003) (holding
that, even though the plan’s anti-alienation clause was enforceable against
everyone except the IRS, that was enough to prevent the transfer of the debtor’s
interest in the plan to the bankruptcy estate); Meehan v. Wallace (In re Meehan),
102 F.3d 1209, 1211 (11" Cir, 1997) (holding that the § 541(c)(2) exclusion is not
lost merely because it was state law, not debtor’s IRA document, that contained

the applicable restriction on transfer, and rejecting the argument that debtor’s

ability to withdraw funds from het IRA subject to a penalty tax brought the funds

MEMORANDUM OF DECISION - 8

AQ 72A
(Rev. 8/82)

Case 03-42630-JDP Doc 23 Filed 07/29/04 Entered 07/29/04 12:22:00 Desc

SAD 724A
(Rev. 8/42}

Converted from BANCAP Page 9 of 11

within the estate); Whetzal v. Alderson, 32 F.3d 1302, 1304-05 (8" Cir. 1994)
(concluding that debtor’s option to withdraw lump-sum benefits from his pension
plan before reaching retirement age did not render the bencfits property of the
debtor’s bankruptcy estate); Rupp v. Kunz (in re Kunz), 309 B.R. 795, 798-99
(B.A.P. 10" Cir. 2004) (recognizing that the four circuit courts that have
addressed arguments focusing upon a debtor’s power to immediately withdraw
funds from a plan have all held “that the analysis ends with the determination that
§ 541(c)(2) requirements have been met by the plan.”).

Thus, it is clear that Trustee can not reach the funds in Debtors’ plan
by requesting a permissive distribution,

Conclusion

The Court concludes that because Debtors’ ERISA-qualified
deferred compensation plan meets the requirements of 11 U.S.C. § 541(c)(2), it is
not property of the estate and cannot be reached by the Trustee despite Mr.

Petruzzelli’s power to request a $5,000 distribution at any time. While the funds

MEMORANDUM OF DECISION - 9

Case 03-42630-JDP Doc 23 Filed 07/29/04 Entered 07/29/04 12:22:00 Desc
Converted from BANCAP Page 10 of 11

are not exempt, Debtors may amend their schedules to declare that the plan funds

are not included in their bankruptcy estate.

A separate order will be entered.

DATED This 29" day of July/2004.

JIMD.PAPPAS “~~” Kos —

U.S. BANKRUPTCY JUDGE

MEMORANDUM OF DECISION - 10

TAQ TZA
(Rev. 4/82}

Cas

AQ TIA
(Rev, 8/42)

i d 07/29/04 12:22:00 Desc
- -JDP Doc23 Filed 07/29/04 Entere
i OS42080- Converted from BANCAP Page 11 of 11

CERTIFICATE OF SERVICE

I, the undersigned, hereby certify that I served by the method
indicated below, a true copy of the document to which this certificate is attached,
to the following named person(s) at the following address(es), on the date shown
below:

Office of the U.S. Trustee

jeff. howe@usdoj.gov

gary meclendon(@usdoj.gov

James C, Meservy, Esq.

~fwmattys@northrimnet, — 3¢ meseruy@ cableone-net

Sam Hopkins

sam_hopkins@if rmci.net

Via Email

Note re E-mail service: A “pdf” version of the above decision/order was electronically transmitted to the
parties indicated above, Email Rervice is provided as a courtesy only upon request of a party, To review an
electronic image of the original of this document, or to subscribe tor email service of future devisions/orders
from the Bankuptcy Judges, please access the Court's Internet web site, www.id uscourts. gov.

CASE NO.: 03-42630 CAMERON 8S. BURKE, CLERK
U.S. BANKRUPTCY COURT

DATED: July 29, 2004 By Diane tito & Deputy Clerk

MEMORANDUM OF DECISION - 11