Is a debtor’s undistributed interest in an ERISA pension plan arising from a QDRO excluded from property of the estate in a bankruptcy case?
Yes, in In re Lalchandani, 27 B.R. 880 (BAP 1st Cir., 2002), where the Bankruptcy Appellate Panel for the 1st Circuit Court of Appeals affirmed the Bankruptcy Court’s holding that the debtor’s interest in her former husband’s Employee Retirement Income Security Act (“ERISA”) qualified pension plan arising from a Qualified Domestic Relations Order (“QDRO”) was excluded from property of the estate.
In Lalchandani, before filing bankruptcy, the Debtor wife and her husband had entered into a separation agreement under which the husband agreed to transfer the sum of $25,000 to the Debtor wife as an alternate payee of her husband’s ERISA pension plan. As required under ERISA, the transfer would be made by a QDRO, a special order issued in divorce cases to meet the requirements of ERISA and allow the plan administrator of the retirement plan to transfer an interest in the employee’s account. The Debtor wife then filed a chapter 7 bankruptcy case and did not identify her interest in her husband’s retirement plan on Schedules B and C. Five days later, the Massachusetts probate and family court granted the parties a provisional divorce, known as a divorce nisi, and issued the QDRO.
The chapter 7 bankruptcy trustee, who was appointed to administer nonexempt property in the Debtor wife’s case, filed a motion with the bankruptcy court judge to declare the wife’s interest in the pension plan to be property of the estate under 11 U.S.C. § 541(a)(5)(B) and to compel the wife to turnover such interest to him. The Debtor wife contested the matter, arguing that her interest in the plan was excluded under 11 U.S.C. 541(c)(2), which states as follows:
A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.
The bankruptcy court judge denied the trustee’s motion. Relying on the language of the separation agreement, the bankruptcy court judge found the transfer was one from one ERISA pension plan to another ERISA pension plan, both excludable from the property of the estate. The chapter 7 trustee appealed the decision.
On appeal, the Bankruptcy Appellate Panel first recognized that an interest in an ERISA plan was excluded from the property of the bankruptcy estate under 11 U.S.C. § 541(c)(2) and the U.S. Supreme Court’s holding in the case of Patterson v. Shumate, 504 U.S. 753 (1992), due to the anti-alienation clause in the ERISA statute, 29 U.S.C. §1056(d)(1). The Bankruptcy Appellate Panel adopted the reasoning of the 8th Circuit Bankruptcy Appellate Panel in the case of In re Nelson, 274 B.R. 789 (2002), recognizing that the protections of ERISA extends not only to the employee, but also to the spouse, former spouse, or dependent children, who may also be beneficiaries under the retirement plan. Finding that he Debtor wife in Lalchandani was a beneficiary of her former husband’s plan, the Bankruptcy Appellate panel held that Patterson v. Shumate was applicable, and her interest in the ERISA plan under the QDRO was properly excluded from property of the estate.
If you have questions about whether property received under equitable distribution in Virginia, a divorce decree, separation agreement, or property settlement agreement is subject to administration in you or your spouse’s bankruptcy case, contact your Virginia bankruptcy and divorce lawyer or Richmond bankruptcy and divorce lawyer James H. Wilson, Jr.