On Appeal from the United States District Court for the District of New Jersey; D.C. No. 90-02217.
Nygaard and Alito, Circuit Judges, and John P. Fullam, District Judge.*fn*
This appeal presents important issues, of first impression in this court, concerning the status of qualified pension plans, Keogh plans, and IRA accounts in bankruptcy.
Section 541(a)(1) of the Bankruptcy Code, 11 U.S.C. § 541(a)(1), in very broad language, provides that the estate of the debtor includes "all legal or equitable interests of the debtor in property as of the commencement of the case." But § 541(c)(2) of the Bankruptcy Code excludes property from the estate to the extent that
"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 parties disagree, and the reported decisions are in disarray, as to whether "applicable nonbankruptcy law" in this context was intended by Congress to be limited to state spendthrift trust law, or whether it embraces federal law as well.
The debtor, Constantine P. Velis, is an orthopedic surgeon employed by a professional corporation, Dr. Constantine P. Velis, P.C. (hereinafter, "PC"). He is the 100-percent owner of the stock in the PC and is the only physician employed by the PC. The PC also employs the debtor's wife as an office manager.
In January 1980, the PC established a pension plan for the benefit of the debtor, his wife and two other employees. In addition, the PC created a Keogh plan and an IRA in the name of the debtor, as well as a separate IRA in the name of the debtor's wife. It is undisputed that the pension plan, the Keogh plan and the IRA are qualified plans, containing language prohibiting the assignment or alienation of benefits as required by § 401(a)(13) of the Internal Revenue Code, 26 U.S.C. § 401(a)(13), and § 206(d)(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1056(d)(1).
On December 18, 1986, the debtor filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. At that time, his interest in the pension plan was valued at $184,000, his interest in the Keogh plan was valued at $162,478, and his IRA was valued at $9,100; thus, his total interest in the three plans amounted to $355,578.
The bankruptcy petition was triggered by the following events: In August 1986, the debtor and his wife entered into an agreement to purchase the two cooperative apartments in which the medical practice was located, for a total price of $775,000. They made a down payment of $77,500, using funds derived from the sale of some jointly owned real estate. They obtained a commitment from a bank to finance $620,000 of the balance. In October 1986, however, the appellee, Mary Kardanis, recovered a $3.7 million medical malpractice judgment against the debtor (later reduced to $2.1 million). Debtor had only $1 million in malpractice insurance coverage. The bank canceled its mortgage commitment. The debtor negotiated an extension of the agreement of sale, conditioned upon his making a further payment of $222,500 on or before December 31, 1986. The debtor "borrowed" that sum (and, later, additional sums needed to complete the settlement) from his and his wife's various interests in the pension plan, IRAs and the Keogh plan. In all, the couple raised $700,433 from these sources, including $355,578 from debtor's interests in these plans.
It was not until October 5, 1987 that these arrangements were approved by the bankruptcy court, in an order which retroactively authorized the "borrowing" from the pension plans and the creation of corresponding liens against the cooperative apartments.
In the bankruptcy court the debtor took the position that his interests in these pension plans were excluded from the estate, pursuant to § 541(c)(2); alternatively, he claimed exemption to the maximum extent allowed ...