Weinhoeft v. Pogge ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 01-2412
In the Matter of:
Donald Weinhoeft and Anita L. Weinhoeft,
Debtors-Appellants.
Appeal from the United States District Court
for the Central District of Illinois.
No. 00-3327--Richard Mills, Judge.
Argued December 6, 2001--Decided December 21, 2001
Before Cudahy, Easterbrook, and Evans,
Circuit Judges.
Easterbrook, Circuit Judge. When Donald
Weinhoeft entered bankruptcy proceedings,
one asset of his estate was a wrongful-
discharge suit against Union Planters
Bank, his former employer. That suit
eventually settled for $165,000 in cash,
plus the Bank’s release of any claims
against Donald and his wife Anita as a
creditor in their bankruptcies. Donald
contends that $40,000 of the settlement
proceeds is exempt from creditors’ claims
and should be turned over to him, because
it represents the value of pension
contributions that the Bank would have
made, had his employment continued. The
bankruptcy judge, and then the district
judge, rejected this contention. In this
appeal--which is within our jurisdiction
under 28 U.S.C. sec.158(d) even though
the bankruptcy proceedings are ongoing,
see In re Baker, 768 F.2d 191 (7th Cir.
1985)--the Weinhoefts contend that it is
the Trustee’s burden to prove that
settlement proceeds should not be
allocated to pension claims, rather than
the debtors’ burden to demonstrate that
they should be. The settlement agreement
is silent on the matter, so the
Weinhoefts think that they must prevail.
Yet the burden of persuasion matters only
if it is possible to exempt cash from the
estate. That depends on the language of
the Bankruptcy Code and the statutes to
which it points.
The Code provides two sources of
exemption authority potentially relevant
to the Weinhoefts’ position. The first,
11 U.S.C. sec.541(c)(2), says that the
bankruptcy process respects any
"restriction on the transfer of a
beneficial interest of the debtor in a
trust that is enforceable under
applicable nonbankruptcy law".
"[A]pplicable nonbankruptcy law" includes
both state and federal provisions, see
Patterson v. Shumate, 504 U.S. 753
(1992), which means that pension plans
subject to the anti-alienation rule of
erisa, see 29 U.S.C. sec.1056(d)(1), are
not part of an estate in bankruptcy.
Likewise any state law governing
spendthrift trusts applies in bankruptcy.
Illinois provides that retirement plans
are exempt from creditors’ claims. 735
ILCS sec.5/12-1006. To the extent that
this statute speaks to pensions regulated
by erisa it is preempted (but redundant);
to the extent it deals with individual
retirement accounts, church plans, and
other assets outside the scope of erisa,
it is not preempted, see Reliance
Insurance Co. v. Zeigler, 938 F.2d 781
(7th Cir. 1991), and may supply
"applicable nonbankruptcy law" for
purposes of sec.541(c)(2). The second
possible source of authority is 11 U.S.C.
sec.522(b)(2)(A), which allows debtors to
shelter from creditors’ claims "any
property that is exempt under . . . State
or local law that is applicable on the
date of the filing of the petition at the
place in which the debtor’s domicile has
been located for the 180 days immediately
preceding the date of the filing of the
petition". Once again the potential state
exemption is 735 ILCS sec.5/12-1006. The
$40,000 did not enter a trust, so
sec.541(c)(2) does not avail the
Weinhoefts. Thus everything depends on
sec.522(b)(2)(A) and the scope of the
exemption in Illinois law.
Section 5/12-1006 reads:
(a) A debtor’s interest in or right,
whether vested or not, to the assets held
in or to receive pensions, annuities,
benefits, distributions, refunds of
contributions, or other payments under a
retirement plan is exempt from judgment,
attachment, execution, distress for rent,
and seizure for the satisfaction of debts
if the plan (i) is intended in good faith
to qualify as a retirement plan under
applicable provisions of the Internal
Revenue Code of 1986, as now or hereafter
amended, or (ii) is a public employee
pension plan created under the Illinois
Pension Code, as now or hereafter
amended.
(b) "Retirement plan" includes the
following:
(1) a stock bonus, pension, profit
sharing, annuity, or similar plan or
arrangement, including a retirement plan
for self-employed individuals or a
simplified employee pension plan;
(2) a government or church retirement
plan or contract;
(3) an individual retirement annuity or
individual retirement account; and
(4) a public employee pension plan
created under the Illinois Pension Code,
as now or hereafter amended.
(c) A retirement plan that is (i)
intended in good faith to qualify as a
retirement plan under the applicable
provisions of the Internal Revenue Code
of 1986, as now or hereafter amended, or
(ii) a public employee pension plan
created under the Illinois Pension Code,
as now or hereafter amended, is
conclusively presumed to be a spendthrift
trust under the law of Illinois.
This statute covers two kinds of
entitlements: rights "to the assets held
in" pension plans, and rights to "receive
pensions . . . under a retirement plan".
The Weinhoefts do not claim any rights to
assets held in a plan; the $165,000 was
paid in cash to the Trustee in
bankruptcy. Nor do they claim shelter for
a right to receive anything from a
retirement plan, a term defined by
sec.5/12-1006(b).
What the Weinhoefts instead argue is
that $40,000 would have been placed in a
pension plan, had Donald not been fired.
Maybe so, but neither erisa nor sec.5/12-
1006 asks what would or could have
happened. These statutes apply an anti-
alienation rule (or, under state law, the
rule for spendthrift trusts) to assets
that actually entered pension plans--
and, for employees in the private sector,
only tax-qualified plans at that. None of
the $165,000 could be excluded from
Donald Weinhoeft’s income as a
contribution to a pension plan (nor could
or does he argue that $40,000 was
"intended in good faith to qualify as a
retirement plan under the applicable
provisions of the Internal Revenue Code
of 1986" within the meaning of sec.5/12-
1006(a)(i)).
Federal cases such as Patterson and,
e.g., Guidry v. Sheet Metal Workers
National Pension Fund, 493 U.S. 365
(1990), apply erisa’s anti-alienation rule
mechanically: A pension trust is
inalienable no matter how strong the
creditor’s equitable claim to the money,
and funds not in pension trusts are
alienable no matter how much the debtor
would prefer to keep the value out of
creditors’ hands. The proof of this is
the rule that as soon as funds are
withdrawn from a plan, creditors can
reach them freely. See Velis v. Kardanis,
949 F.2d 78, 82 (3d Cir. 1991). We see no
reason why sec.5/12-1006 should be
construed to cover funds that are outside
retirement plans. It evidently was
designed to track erisa to the extent the
Supremacy Clause allows states to
regulate in this field. The Weinhoefts do
not cite, and we could not find, any
decision of an Illinois court applying
sec.5/12-1006 to assets that might have
entered a retirement plan but didn’t; nor
have they pointed to any decision
construing a similar statute in any of
the other 49 states in such a manner. The
case on which the Weinhoefts principally
rely, Auto Owners Insurance v. Berkshire,
225 Ill. App. 3d 695, 588 N.E.2d 1230 (2d
Dist. 1992), dealt with funds received
from a pension plan for current support,
not with funds that never entered a
pension plan.
So the question is not how the funds for
the settlement were or could have been
allocated by agreement between Donald
Weinhoeft and his former employer. Such
an allocation, whether informal or
express, could be used to gyp creditors.
It is not origin but destination that
matters. If settlement funds are
deposited in a retirement plan covered by
either erisa or state law such as
sec.5/12-1006, then they are exempt from
creditors’ claims as long as they remain
in that plan. But cash on hand is not
shielded from creditors’ claims by
sec.541(c)(2), erisa, or sec.5/12-1006 in
conjunction with sec.522(b)(2)(A).
Affirmed