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Alternate Payee’s Interest Not Part Of Bankruptcy Estate

A lump sum payment due to an alternate payee under the former spouse’s qualified retirement plan, as part of a qualified domestic relations order, does not constitute property of the alternate payee’s bankruptcy estate. The court relied on the Supreme Court holding in Boggs v. Boggs, stating that “in creating [ERISA’s] QDRO mechanism Congress was careful to provide that the alternate payee … is to be considered a plan beneficiary.” A beneficiary’s interest in an ERISA-qualified retirement plan is protected by the anti-alienation provisions of ERISA, and may be excluded from a bankruptcy estate.

Facts. In September 2000, Ronald J. Nelson was awarded an interest in his former spouse’s ERISA-qualified retirement plan in the amount of approximately $71,000. Pursuant to a qualified domestic relations order, Nelson was made an alternate payee under the retirement plan, entitling him to receive a single lump sum distribution.

In February 2001, Nelson filed a Chapter 7 bankruptcy petition. Nelson claimed that his interest in the retirement plan was not property of the bankruptcy estate. The bankruptcy court disagreed, ruling that his interest in the retirement plan was property of the bankruptcy estate.

Holding. Relying on Boggs, the appeals court reversed the decision of the district bankruptcy court to find that Nelson’s undistributed interest in the retirement plan, even though obtained through a QDRO, was not property of the bankruptcy estate. The court was succinct: “Boggs clearly states that the beneficiaries under an ERISA-qualified retirement plan who are entitled to the protection of [ERISA’s] anti-alienation provision include a plan participant’s ex-spouse who is made an alternate payee of the plan pursuant to a qualified domestic relations order. Here, pursuant to ERISA Nelson has an inalienable interest in a portion of his former spouse’s ERISA-qualified retirement plan, and that interest is excluded from his bankruptcy estate.”

Alternate Payee’s Interest In A Qualified Plan Is Not Part Of The Bankruptcy Estate.

An alternate payee’s undistributed interest in her former husband’s ERISA retirement plan, due to her as part of a qualified domestic relations order, does not constitute property of the alternate payee’s bankruptcy estate. The court noted that “[A]lthough there is a clear distinction between a plan participant and an alternate payee, that distinction is irrelevant as to the protections afforded by ERISA [Section] 206(d)(1), which requires that all qualified plans must prevent the assignment or alienation of benefits provided under the plan.”

In a prior case, the Eighth Circuit panel found that a lump sum payment due to former husband from his former wife’s retirement plan, as an alternate payee under a QDRO, was exempt from the former husband’s bankruptcy estate.

Facts. As part of divorce proceedings, a separation agreement required Michelle Lalchandani’s former husband to transfer $25,000 from his pension plan to Lalchandani’s pension plan by means of a QDRO. Pursuant to the QDRO, Lalchandani was made an alternate payee under the husband’s pension plan. Lalchandani never received an actual distribution of funds from the pension plan since the funds went straight into her plan.

Five days prior to the issuance of the QDRO, Lalchandani filed for Chapter 7 bankruptcy. She did not identify her undistributed interest in the pension plan as an asset of her bankruptcy estate. The bankruptcy trustee claimed her interest in the plan was part of the bankruptcy estate. The lower bankruptcy court found that since the funds were intended to remain in Lalchandani’s new ERISA-qualified account, the funds fell within Bankruptcy Code § 541(c)(2)’s exclusion of property from the estate.

The Bankruptcy Appellate Panel affirmed the lower court’s decision. The court agreed with Lalchandani that under Patterson v. Shumate, her interest in her former husband’s pension plan was subject to the anti-alienation provisions of ERISA.

In Patterson, the U.S. Supreme Court held that an anti-alienation provision contained in an ERISA-qualified pension plan constituted a restriction on transfer enforceable under applicable nonbankruptcy law, and therefore a debtor could exclude his or her interest in such a plan from property of a bankruptcy estate. The court rejected the trustee’s argument that Patterson did not apply since Lalchandani’s property interest “emanated from the QDRO, rather than from the retirement plan itself.”

The court found that the distinction between a plan participant and an alternate payee under a QDRO was irrelevant to ERISA’s anti-alienation provision. “Moreover, the purpose behind ERISA [Section] 206(d)(1), is to protect the beneficial interest in an ERISA-qualified retirement plan, regardless of to whom that interest belongs, including an alternate payee who is considered a beneficiary,” the court said.

By Adam Hunt

Ohio Criminal Defense Attorney Adam Hunt
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