Bankruptcy and Alimony
The Fifth Circuit held that a section 403(b) retirement plan participant cannot extinguish in bankruptcy a lien he placed on his plan account to secure his ex-wife’s right to $212,000 in alimony.
According to the appeals court, the participant’s assignment of approximately one-third of his retirement account to his ex-wife constituted a loan, and thus a deemed distribution under the federal tax code, and therefore the portion of his account assigned to his ex-wife no longer qualified as a section 403(b) plan. The court said that because the portion of the participant’s retirement account assigned to his ex-wife was no longer part of a section 403(b) plan, that portion of the account was nonexempt under Texas law and under the Federal Bankruptcy Code.
The couple divorced in October 1999. The divorce decree required the husband to pay 53 monthly alimony payments of $4,000, totaling $212,000. As security for the alimony payments, the husband assigned funds from his section 403(b) retirement plan, known as an optional retirement program account (ORPA), which was an alternative retirement plan for Texas state employees who would otherwise be entitled to participate in the Texas Teachers Retirement System. According to the court, the husband’s plan account was worth approximately $640,000 at the time he made the assignment.
In December 2000, after making 14 alimony payments, the husband stopped payment and began withdrawing substantial sums from the ORPA, according to the court. The husband later filed a Chapter 7 bankruptcy petition and claimed that the funds in his ORPA were exempt from his bankruptcy estate under Tex. Prop. Code Ann. § 42.0021. The wife and the bankruptcy trustee objected to the attempt to have the ORPA funds declared exempt from his bankruptcy estate.
The U.S. Bankruptcy Court for the Southern District of Texas ruled in favor of the wife and the trustee, finding that the portion of the plan account assigned was “deemed” to have been received by the husband as a distribution and thus the amount assigned to the wife was no longer part of a qualified plan and therefore could not be exempt property under Texas law. The bankruptcy court’s decision was later affirmed by the U.S. District Court for the Southern District of Texas.
Affirming the decisions of the district court and the bankruptcy court, the appeals court first found that the wife had a valid security interest in the assigned portion of Coppola’s ORPA. In so ruling, the court rejected Coppola’s contention that the assigned portion of his ORPA constituted a “retirement account” under Tex. Gov’t Code Ch. 821 and was thus subject to a provision in that law that bars assignment of such accounts. According to the appeals court, Coppola’s ORPA was not shielded by the anti-assignment provision of Chapter 821 because that chapter of the Texas Government Code only governed the Texas Teachers Retirement System plan.
“[Plaintiff’s] ORPA … is an individualized annuity alternative plan provided to the faculty of higher education institutions and educational administrators under the separate framework of Tex. Gov’t Code Ch. 830. Unlike Chapter 821, Chapter 830 lacks an anti-assignment provision,” the appeals court said. Further, the court noted that not only was Coppola’s interest in his ORPA assignable, but it was in fact validly pledged to secure the wife’s alimony by the terms of the divorce decree.
The appeals court agreed with the wife and the trustee that the husband’s assignment of a portion of the ORPA was a plan loan, or a “deemed distribution,” transforming that portion of the ORPA into a nontax qualified plan, which effectively removed the funds from the account and made such funds nonexempt under Texas law. Specifically, the court noted that “[b]ecause Tex. Prop. Code Ann. § 42.0021 incorporates federal tax treatment of the distribution for purposes of determining a retirement plan’s exemption status, … the amount covered by the deemed distribution, once effectively removed from the tax-exempt protection of the Section 403(b) plan, also lacks the protection of Section 42.0021.”
Alternate Payee For Ex-Husband’s Bankruptcy Estate.
The Bankruptcy Court for the Southern District of Ohio held in 2008 that an ex-wife’s interest in her former husband’s employee stock ownership plan (ESOP) is not property that must be included in her bankruptcy estate. In finding for the ex-wife, the court rejected the bankruptcy trustee’s objection that the ex-wife had no interest in the ESOP because she obtained her interest solely from a QDRO. According to the court, it was immaterial that the ex-wife’s interest arose via a QDRO because she was considered a plan beneficiary as an alternate payee.
The court reiterated that people who obtain beneficiary status through QDROs are given the same protections as plan participants. Accordingly, the court said a person who acquires an interest in an ERISA plan via a QDRO can exclude the interest from the bankruptcy estate just as a plan participant can exclude it.
Facts. The facts support the finding. Tammy L. Carter-Bland’s husband was a participant in the Amsted Industries Inc. ESOP when they were married. The plan provided that alternate payees under a QDRO were entitled to distributions when he or she turned 65 years old, or on the fifth anniversary of the order, whichever came first, the court said. The plan also included an antialienation provision.
The parties executed a QDRO when they were divorced in 2006. The QDRO assigned Carter-Bland an interest in the ESOP as an alternate payee. In accordance with the ESOP, Carter-Bland diversified her investment, resulting in small cash payments and a reduced number of shares.
In August 2007, Carter-Bland filed for Chapter 7 bankruptcy and listed on the personal property schedule her interest in the ESOP as being valued at $1 because she had no current right to take possession of or spend the asset. She also claimed her interest was exempt, but noted that the value of the claimed exemption was 100%.
The Chapter 7 trustee filed an objection to the claimed exemption, contending that Carter-Bland had no interest in the ESOP because it arose only from the QDRO, and therefore she had no interest in the plan trust, which was the only interest that the Bankruptcy Code would exclude from the estate.
Carter-Bland argued that she had an interest in the plan and plan trust, and that under Bankruptcy Code § 541(c)(2), her interest did not constitute property of her estate.
Holdings. Because the principal goal of ERISA is to protect plan participants and their beneficiaries, the court said that in creating the QDRO provisions, Congress was careful to provide that alternate payees were considered plan beneficiaries. The court further noted that many courts have found that QDROs provide a property interest in a plan separate and distinct from the interest of the plan participant. As such, the court found that Carter-Bland had an interest in the plan.
According to the court, in determining whether Bankruptcy Code § 541(c)(2) excludes a debtor’s interest in property from the estate, the court must consider if the debtor has a beneficial interest in the trust, if there is a restriction of the transfer of the interest, and if the restriction is enforceable under nonbankruptcy law.
The court found that the first two factors were easily met. As an alternate payee, Carter-Bland was a plan beneficiary, and thus had a beneficial interest in the trust, the court said. Furthermore, the plan contained a restriction of the transfer, sale, and assignment of a plan participant’s or beneficiary’s interest, the court said. Regarding the third factor, the court said the restriction was enforceable under ERISA.
The court also said that although ERISA Section 206(d)(1)’s antialienation provision does not apply to QDROs, there was nothing in ERISA that made the antialienation provision inapplicable to an interest in an ERISA plan created by virtue of a QDRO. Because Congress intended that plan participants and beneficiaries via a QDRO should be enjoy the same protections, including those of ERISA’s antialienation provisions, the court said that a person who acquires an interest in an ERISA plan through a QDRO can exclude the interest from the bankruptcy estate. This ensures that the treatment of pension benefits will not vary based on a beneficiary’s bankruptcy status, and gives effect to ERISA’s goal of protecting pension benefits, the court said.