JERRE S. WILLIAMS, Circuit Judge.
This appeal is from a final order of the Bankruptcy Court for the Western District of Texas.
Debtors, husband and wife, filed a voluntary joint petition in bankruptcy, under Chapter 7 of the Code, on March 20, 1980. Pursuant to Section 522(b)(2)(A), 11 U.S.C. § 522(b)(2)(A), they elected to avail themselves of the state rather than the federal (11 U.S.C. § 522(d)) bankruptcy exemptions, presumably because of the high equity value of their homestead which could be retained under Texas law but not the federal law. Tex.Stat.Ann. art. 3833, 3836 (Vernon 1966 & Supp. 1982-1983).
The subjects of this appeal are the Goffs' self-employed retirement trusts (Keogh Plan), administered by City National Bank pursuant to an ERISA-qualified pension plan.
The trust agreement provided:
No withdrawals were ever made although the trust agreement arguably granted Dr. Goff the right to withdraw funds prematurely, i.e., prior to either retirement, sale or termination of his business, or death, subject only to the ten percent tax penalty exacted by the Internal Revenue Code, 26 U.S.C. § 72(m)(5). The Goffs excluded these Keogh trusts from the "property of the estate" to be relinquished in bankruptcy. 11 U.S.C. § 541.
After the creditors' committee opposed a compromise proposed by the trustee in bankruptcy,
A. "Property of the Estate"
The Bankruptcy Code was intended to create a more uniform and comprehensive scope to "property of the estate" which is subject to the reach of debtors' creditors than had previously existed under the old Bankruptcy Act.
The enactment of the Bankruptcy Code undertook to obviate this analytical conundrum. Under Section 541 of the Code, all property in which a debtor has a "legal or equitable interest" at the time of bankruptcy comes into the estate, 11 U.S.C. § 541(a)(1). This is so "notwithstanding any provision [except as recognized in subsection (2)] that restricts or conditions transfer of such interest by the debtor." Id. § 541(c)(1)(A). The sweeping scope of this automatic inclusion was intended to remedy much of the old Act's perceived deficiencies: "[The Act was] a complicated melange of references to State law, and [did] little to further the bankruptcy policy of distribution of the debtor's property to his creditor in satisfaction of his debts." H.R.Rep. No. 95-595, 95th Cong., 2d Sess. 175 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6136. See S.Rep. No. 95-989, 95th Cong., 2d Sess. 82, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5868.
B. Exemption and Exclusions
Of relevance to the question posed herein, two sections of the Code — Sections 522 and 541(c)(2) — permit a debtor to retain certain assets which would otherwise remain subject to the reach of his creditors. The property exempted pursuant to Section 522 initially enters the estate, and is subsequently excluded pursuant to the section's provisions. By contrast, Section 541(c)(2) property never enters the estate.
1. Section 522: Exemptions
Section 522(b) permits a bankrupt a choice between a "federal" or "state" exemption system.
In the immediate case, debtors selected the state exemption option, which does not provide in terms at least a partial exemption for Keogh plans as does the federal exemption. Under Section 522(d)(10)(E), 11 U.S.C. § 522(d)(10)(E), a debtor who elects the federal exemption may exempt his "right to receive a payment under a ... pension ... plan ... to the extent reasonably necessary for the support of the debtor and any dependent of the debtor," unless the plan demonstrates three disqualifying characteristics.
2. Section 541(c)(2): Exclusion
The second relevant code provision, Section 541(c)(2), is the focus of the immediate dispute. The claim of the Goffs is raised solely under this provision. Section 541(c)(1)(A) provides, with one caveat, that "any provision" "that restricts or conditions transfer" of property by the debtor is ineffective in bankruptcy to keep the property from becoming part of the estate. 11 U.S.C. § 541(c)(1)(A). The caveat situation, in which a restriction will keep property free from the estate, is set out in subsection (2):
11 U.S.C. § 541(c)(2) (emphasis added). The Goffs claim that their ERISA-qualified
In general terms, a spendthrift trust is a trust created to provide a fund for the maintenance of a beneficiary, with only a certain portion of the total amount to be distributed at any one time. The settlor places "spendthrift" restrictions on the trust, which operate in most states to place the fund beyond the reach of the beneficiary's creditors, as well as to secure the fund against the beneficiary's own improvidence. Although a given state's nonbankruptcy law of spendthrift trusts might afford protection to a particular pension trust, it is clear in the immediate case that appellant's self-settled trust did not constitute a spendthrift trust entitled to exclusion under relevant state law.
A. "Applicable Nonbankruptcy Law": Statutory Intent
The legislative history of Section 541(c)(2) indicates that Congress had something very specific in mind with its facially broad reference to "applicable nonbankruptcy law" as the benchmark for assessing the enforceability of trust restraints on alienation in bankruptcy. In its section-by-section analysis, the House Report accompanying their bill, H.R. 8200, explained:
H.R.Rep. No. 95-595, 95th Cong., 2d Sess. 369 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6325 (emphasis added). Even more significant, in providing an overview comparison of the proposed Code to the old Act, the House Report said:
Id. at 176, 1978 U.S.Code Cong. & Ad.News at 6136 (emphasis added).
The Senate Report, accompanying S. 2266, similarly explained that Section 541(c)(2) "preserves restrictions on a transfer of a spendthrift trust ... enforceable [under] nonbankruptcy law." S.Rep. No. 95-989, 95th Cong., 2d Sess. 83, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5869 (emphasis added). The Senate version of the Code, however, was dissimilar to that proposed by the House, in that it limited the extent to which Section 541(c)(2) property would be insulated from the estate, to that "reasonably necessary for the support of a debtor and his dependents." Id.
In summary, from the legislative history of Section 541(c)(2), it is clear that Congress intended by its reference to "applicable nonbankruptcy law" to exempt from the estate only those "spendthrift trusts" traditionally beyond the reach of creditors under state law. This provision carries over from the old Act the previously recognized exemption for spendthrift trusts. See, e.g., In re Witlin, 640 F.2d 661 (5th Cir.1981) (recognition, under the applicable prior Act, that spendthrift trusts were exempt pursuant to state trust law).
B. The Overall Scheme and the Federal-State Exemption Election
The specific legislative intent behind Section 541(c)(2) is reinforced by a consideration of the overall congressional scheme embodied in the Bankruptcy Code. Appellant debtors argue for an expansive definition of "nonbankruptcy law" in Section 541(c)(2) to include federal laws which prohibit alienation. We find that the other provisions of the Code negate this intent because the Code explicitly makes reference to "federal law" or pension laws, including ERISA, when federal as opposed to state law is the subject of the reference.
The most telling example lies with Section 522 and its legislative history. As summarized above, Section 522 provides debtors a choice between the "state" or the "federal" exemption systems. If the "state" system is selected, a debtor may also exempt property pursuant to "Federal law other than subsection (d)." 11 U.S.C. § 522(b)(2)(A).
S.Rep. No. 95-989, 95th Cong., 2d Sess. 75, reprinted in 1978 U.S.Code Cong. & Ad. News 5787, 5861; H.Rep. No. 95-595, 95th Cong.2d Sess. 360 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6316. The reports provide no further insight into which other, if any, federal laws were intended to be brought within this provision's scope.
The restrictive nature of the exemption listed is marked. Yet two recent cases have been decided in bankruptcy courts which reach diametrically opposite interpretations of the scope of this provision relative to ERISA-qualified pension plans. Compare In re Graham, 24 B.R. 305 (Bkrtcy.N.D. Iowa 1982) (not exempt under § 522(b)(2)(A)) with In re Hinshaw, 23 B.R. 233 (Bkrtcy.D.Kan.1982) (exempt under § 522(b)(2)(A)). In both cases, the bankruptcy courts were presented with ERISA-qualified retirement trusts, which contained provisions prohibiting assignment or alienation as required for qualification under the Act, 26 U.S.C. § 401(a)(13);
In Graham, the court considered the listing of statutes in the legislative history, and concluded that Congress did not intend to include ERISA within the statutory exemption. First, the court reasoned, "[e]ven though ERISA was in effect at the time the Bankruptcy Code was debated and passed, ERISA is notably absent from the listing of other federal exemptions." 24 B.R. at 311-12. Second, the court compared the federal laws listed in the legislative history with the ERISA provisions at issue and found them to be significantly distinguishable:
5 U.S.C. § 8346 (moved from 5 U.S.C. § 2265). In this provision Congress directly exempted the Civil Service Benefits from creditors. In contrast, ERISA only requires that the plan contain a restriction on alienation and assignment in order to qualify for ERISA tax benefits. That requirement is not an exemption from creditors' process provided by federal law. If Congress had intended that ERISA would provide such an exemption, a provision similar to the provision quoted above could have been enacted. The fact that they did not do so leads this Court to conclude that an ERISA fund is not within
Id. at 312.
By contrast, the court in Hinshaw, after examining the same congressional list of representative federal laws, concluded that ERISA-qualified plans were covered by the exemption. While the Hinshaw court similarly undertook an analysis of the statutory provisions cited by Congress, it reached a different conclusion and relied upon different statutes than did the Graham court. The Hinshaw court began its analysis by reasoning:
23 B.R. at 235.
23 B.R. at 236. Thus the court in Hinshaw concluded that tax-qualified ERISA plans were exempt under 11 U.S.C. § 522(b)(2)(A).
A careful evaluation of this issue leads us to the result reached by the bankruptcy
The failure of Congress to include ERISA in its listing of illustrative federal statutes is highly probative of congressional intent that ERISA was not within the group of "federal law" based exemptions. ERISA, a comprehensive and much-debated statute with sweeping coverage was enacted in 1974; the House and Senate reports on the subsequently enacted Bankruptcy Code Section 522(b)(2)(A) were issued in 1977 and 1978, respectively. Congress knew of the previously-enacted ERISA when drafting Section 522(b)(2)(A), yet neither the House nor the Senate deemed fit to include it within their respective illustrative lists. Congress did refer to ERISA where it wanted to do so in other provisions of the Code. Of similar relevance is the specific reference in another subsection of Section 522 itself to the very ERISA provision relied upon by appellants as constituting a "Federal law" exemption. 11 U.S.C. § 522(d)(10)(E)(iii) (reference to pension benefit exemption when the federal exemptions are elected by the debtor). See also H.Rep. No. 95-595, 95th Cong., 2d Sess. 455 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 5963, 6411.
Certainly, therefore, Congress did not "overlook" ERISA. Given the extensive and general reach of ERISA-qualified plans, it is highly improbable that Congress intended their inclusion without mention in the Section 522(b)(2)(A) exemption in the midst of a listing of significantly less comprehensive and less well known statutes. The often-stated admonition that it may be treacherous to attach great weight to congressional silence in interpreting its laws does not apply in this case in light of the comprehensive consideration of this issue which is revealed by this history.
Further, we stress that ERISA's anti-assignment and alienation provisions are different in kind from those contained in the statutes listed in the Code's legislative history. We do not see across-the-board differences in the explicitness of the restraints against alienation in the listed statutes and in ERISA.
As additional reenforcement of our view of the Section 522 exemptions, we find that "property" covered by ERISA differs in
C. "Applicable Nonbankruptcy law" under Section 541 and ERISA
Flowing out of this discussion is clear indication of a congressional intent that Section 541(c)(2) — the exemption relied upon by the Goffs' on appeal — was never intended to include ERISA in its reference to "applicable nonbankruptcy law." Congress made reference to federal law and pension benefits when such a characterization was intended; yet it did not do so in Section 541(c)(2). As we have pointed out above, Congress while well aware of ERISA, specifically considered the role of pension benefits in bankruptcy proceedings in Section 522, and did not grant a broad exemption. The only reasonable inference to draw is that Congress intended that pensions provided for by federal law be insulated from bankruptcy only to the extent recognized in Section 522. While pensions might be excludable from the property of the estate pursuant to Section 541(c)(2), the state law exemption, their exclusion under that section is provided solely by state spendthrift trust law and not by the operation of ERISA.
It is well to make a final telling observation on the relationship between
Having reached this conclusion we must nevertheless stop short of an arbitrary interpretation urged by the trustee in bankruptcy. The trustee argues that the inclusion in Section 522(d) of a pension benefit exemption, 11 U.S.C. § 522(d)(10)(E), for those making a federal election, negatives any congressional intent to include any ERISA pensions at all within the ambit of Section 541. The trustee reasons that the Section 522(d)(10)(E) exemption would be surplusage if Section 541 had the effect of keeping all possible ERISA-qualified plans from ever entering the estate.
We have now concluded that Section 541(c)(2) was intended to exempt only "spendthrift trust" assets from the bankruptcy estate. We now consider whether the Goffs' Keogh plans can fall within the spendthrift trust definition. The general rule is well established that if a settlor creates a trust for his own benefit and inserts a "spendthrift" clause, restraining alienation or assignment, it is void as far as creditors are concerned and they can reach the settlor's interest in the trust. In re Witlin, 640 F.2d 661, 663 (5th Cir.1981) (see also the cases and treatises cited therein). This general proposition is the law in Texas, which in this case provides the "applicable nonbankruptcy law." See, e.g., Bank of Dallas v. Republic National Bank of Dallas, 540 S.W.2d 499 (Tex.Civ.App. — Waco 1976, writ ref'd n.r.e.); Glass v. Carpenter, 330 S.W.2d 530
Our reasoning in the Witlin case is persuasive. There we held that self-settled Keogh plans were not exempt under the spendthrift trust provision of the old Bankruptcy Act. We said: "There is ... a strong policy that will prevent any person from placing his property in what amounts to a revocable trust for his own benefit which would be exempt from the claims of his creditors." 640 F.2d at 662. See Glass v. Carpenter, 330 S.W.2d 530, 534 (Tex.Civ. App. — San Antonio 1959, writ ref'd n.r.e.). Here, as in Witlin, appellant-debtors attempted such a revokable trust for their own benefit. They retained the freedom to withdraw their Keogh plan assets, yet purported to insulate those assets from their creditors.
Finally, appellants argue that reliance upon traditional spendthrift trust law results in disparate treatment of self-employed and employer-created pension trusts which, in turn, offends both law and reason. Appellants contend that since ERISA requires that all qualified plans include restraints on alienation, and its provisions extend equally to guarantee all workers the benefits of their contributions in retirement years, distinctions in bankruptcy exemption status according to employment status would conflict with ERISA's statutory intention to treat all retirement plans the same way. Further, the Goffs argue, since employees may quit their employment post-bankruptcy and thus be entitled to withdraw their pension contributions under ERISA, any bankruptcy distinction made on the basis of the revokable, self-settled nature of self-employed pension plans is arbitrary.
We find that this difference is contrary to neither law nor logic. First, whether or not ERISA bestows equal treatment upon both types of plans is not at issue. As discussed previously, ERISA was not intended to affect the operation of other federal laws including federal bankruptcy laws. If a distinction is created by operation of bankruptcy law, which might conflict with ERISA, bankruptcy law prevails. Even assuming arguendo that the court-drawn distinction conflicts with federal pension law, it is nonetheless enforceable if valid under federal bankruptcy law.
Second, we disagree with appellants' characterization that the degree of beneficiary control over both types of pension plans is indistinguishable, thus rendering their separate treatment unreasonable. Under appellants' self-employed Keogh plans considerable control, including withdrawal authority, was retained. The only limitation upon withdrawal was a ten percent tax penalty. We find this to be significantly different from the usual case of employer-created funds in which the beneficiary employee has little or no control during the term of his employment, and may only withdraw funds upon termination of employment. He must quit his job in order to gain premature access to his retirement funds. We cannot equate a "tax penalty" with "employment termination" as equal restraints upon withdrawal of pension funds.
After considering the legislative history of Section 541(c)(2) specifically, and of the Bankruptcy Code generally, as well as the statutory framework within which Section 541(c)(2) appears, it is apparent that Congress did not intend by reference to "applicable nonbankruptcy law" to exempt ERISA-qualified pension plans from the bankruptcy estate by virtue of ERISA's provisions precluding assignment or alienation. Rather, it is clear that Congress intended a limited exemption for "spendthrift trusts," as defined by reference to state law. Since we find that the self-settled Keogh plans at issue do not qualify as "spendthrift trusts" under state law, we affirm the bankruptcy court's inclusion of the pension trusts in the bankrupts' estate.
The bankruptcy court found that while debtors did not affirmatively announce their state election, that election was obvious, given the equity value of the homestead. Further, the court concluded that, insofar as the pension trusts might have been subject to federal exemption under § 522(d)(10)(E), had debtors so elected, debtors failed to list these trusts as required by § 522(l). Hence they had waived any claim to the federal exemption option. The parties do not challenge these findings on appeal.
While the existence of a "legal or equitable interest" may turn upon state nonbankruptcy law, once it is determined that such an interest exists, it automatically becomes property of the estate under § 541 of the Code.
Its guarantee of state plus other "federal law" exemptions under the state election option precludes the states from prohibiting the latter exemptions under § 522(b)(1). See note 13 infra.
Since a plan must exhibit all three of the above traits to be ineligible for § 522(d)(10)(E) exemption, the exemption provision has a broad reach. Provided that the plan does not fall within both subsections (i) and (ii), the plan would be subject to exemption whether or not it was (iii) an ERISA and Internal Revenue Code "qualified" plan. See, e.g., In re Threewitt, 24 B.R. 927, 929-30 & n. 4 (D.Kan.1982).
(footnotes omitted). As discussed infra, the Commission's recommended limitation on the spendthrift trust exemption, to the extent of "reasonable support," was incorporated in the rejected Senate version but excluded in the House version which was adopted in the enacted Code. See 124 Cong.Rec. H11089, 11096 (daily ed. Sept. 28, 1978), reprinted in 1978 U.S.Code Cong. & Ad.News 6436, 6455 (statement by the Hon. Don Edwards, Chairman of the Subcommittee on Civil and Constitutional Rights of the House Committee on the Judiciary, upon introducing the House Amendment to the Senate Amendment to H.R. 8200).
Appellant debtors heavily, and erroneously, rely upon one such nonbankruptcy rule, set out in Commercial Mortgage Insurance Inc. v. Citizens National Bank of Dallas, 526 F.Supp. 510 (N.D.Tex.1981). See note 27 and the accompanying discussion supra. In that case, the district court held that debtors' Keogh plans, subject to ERISA-based restraints on alienation, were insulated from the reach of their creditors. As we conclude above, ERISA restraints do not apply by their own force in the context of federal bankruptcy proceedings. The question addressed in Commercial Mortgage — of ERISA's preclusion of state creditors' from attaching pension funds — is inapposite. But cf. In re Threewitt, 24 B.R. 927, 929 (D.Kan.1982) (employer operated fund was beyond reach of general creditors, and thus exempt under § 541(c)(2) from bankruptcy creditors).