Keith L. Phillips, United States Bankruptcy Judge.
Before the Court are two objections to the exemption claimed by Debtor John Herbert Foster, Jr. The Debtor filed a petition initiating this chapter 13 case on July 20, 2015. Along with the petition, he filed schedules as well as the required statement of financial affairs and statement of monthly income and calculation of commitment period.
The Debtor amended his schedules on November 23, 2015. On line 10 of Amended Schedule B, which requires a debtor to disclose annuities, the Debtor listed $103,893.04 in the "Outback Steakhouse, Inc., Partner Equity Plan, Partner Equity
Both the chapter 13 trustee and Margaret S. Foster
The Debtor was formerly a managing partner of Outback Steakhouse, Inc. He entered into the Partner Equity Plan in March of 2006. In connection therewith, he executed a document entitled "Partner Equity Deferred Compensation Diversified Plan Document" (the "Plan Document"). The Plan Document provides in its preamble that the Partner Equity Plan is part of an Outback Steakhouse, Inc. effort to "provide nonqualified deferred compensation benefits to Partners to supplement their retirement savings." The Plan Document also states that the Partner Equity Plan should be "interpreted to comply in all respects with Internal Revenue Code ... Section 409A and those provisions of the Employee Retirement Income Security Act of 1974 ... applicable to an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of `management or highly compensated employees.'" Additional provisions of the Partner Equity Plan include the following:
Article 2 of the Plan Document states that, "[f]rom time to time, the Company shall make a Company Contribution to the Plan on behalf of an Eligible Employee or existing Participant in the amount specified in a Participation Agreement with such Participant. Company Contributions shall be made in the complete and sole discretion of the Company based on the individually negotiated terms of the Participant's employment agreement with the Company." Under Article 4 of the Plan Document, participants in the Partner Equity Plan receive distributions in three installments pursuant to a prescribed schedule. The Debtor received two distributions prepetition, and a final distribution is due to him in August 2017. In Schedule B, the Debtor listed the value of funds remaining in his account established under the Partner Equity Plan to be $103,893.04, which amount is also reflected in the July 31, 2015, statement issued by the Partner Equity Plan.
There are two issues before the Court relative to the Debtor's interest in the Partner Equity Plan. First, Ms. Foster
Section 541(a)(1) of the Bankruptcy Code, 11 U.S.C. § 541(a)(1),
The general rule is thus that all property owned by a debtor at the time a case
In other words, an anti-alienation clause that satisfies the conditions of § 541(c)(2) may operate to prevent certain trust property from becoming property of the bankruptcy estate. The burden is on the Debtor to prove that the funds at issue are excluded from his bankruptcy estate pursuant to the provisions of § 541(c)(2). See Rhiel v. Adams (In re Adams), 302 B.R. 535, 540 (6th Cir. BAP 2003); RES-GA Dawson, LLC v. Rogers (In re Rogers), 538 B.R. 158, 161 (Bankr.N.D.Ga. 2015); In re Wendt, 320 B.R. 904, 909 (Bankr.D.Minn.2005); Pineo v. Fulton (In re Fulton), 240 B.R. 854, 862 n. 4 (Bankr. W.D.Pa.1999).
Ms. Foster argues that § 541(c)(2) is inapplicable in the present case because 1) the Partner Equity Plan is not a trust, and 2) the anti-alienation clause of § 10.1 is not "enforceable under applicable nonbankruptcy law." In support of her argument, she cites this Court's recent case of In re Gnadt, No. 11-10378-BFK, 2015 WL 2194475 (Bankr.E.D.Va. May 7, 2015). The Debtor counters that under the 2011 decision of Racetrac Petroleum, Inc. v. Khan (In re Khan), 461 B.R. 343 (E.D.Va. 2011), the Partner Equity Plan does qualify as a trust.
The facts in Gnadt are strikingly similar to those in the instant case. There, the debtor was a participant in a § 409A deferred benefit plan (the "409A Plan") with terms similar to those in the Partner Equity Plan. The 409A Plan in Gnadt also contained an anti-alienation clause similar to that in the instant case.
In Gnadt, the Court set forth a three-part test to determine whether § 541(c)(2) applies to exclude property from the bankruptcy estate. First, the debtor must have "a beneficial interest in a trust." Second, there must be a "restriction on alienation of the debtor's beneficial interest." Third, "the restriction on alienation [must be] enforceable under applicable non-bankruptcy law." 2015 WL 2194475, at *6.
The Court in Gnadt found that its 409A Plan was not a trust; thus, the debtor had not satisfied the first element of the three-part test and § 541(c)(2) was inapplicable. In reaching this conclusion, the Court applied the Fourth Circuit's test to determine whether a trust has been established. In Kubota Tractor Corp. v. Strack, the Fourth Circuit held that:
Kubota Tractor Corp. v. Strack (In re Strack), 524 F.3d 493, 498-99 (4th Cir. 2008). Applying the Strack test to the facts before it, the Court observed that the 409A Plan provided that any obligations thereunder were a contractual liability and that payments were to be made from the general funds of the company. The Court found this provision to be inconsistent with the establishment of a trust. Therefore, the Court found § 541(c)(2) to be inapplicable, since a mandatory element of the three-part test had not been satisfied.
Despite having determined that § 541(c)(2) was inapplicable because 409A Plan was not a trust, the Court in Gnadt dealt a further blow to the debtor's attempt to exclude the 409A Plan from property of the estate. The Court found that the anti-alienation clause in the document establishing the 409A Plan was "not an enforceable provision under applicable non-bankruptcy law," 2015 WL 2194475, at *8, observing that "the Debtor has not pointed the Court to any language ... that would make the anti-alienation language in this plan enforceable."
This Court adopts the analysis employed in Gnadt. Applying that analysis to the facts of this case leads to the conclusion that in the present case, as in Gnadt, § 541(c)(2) is inapplicable, and the Partner Equity Plan is therefore property of the Debtor's bankruptcy estate. The 409A Plan and the Partner Equity Plan are practically identical in all relevant aspects. The 409A Plan provided that any obligations thereunder were a contractual liability and that payments were to be made from the general funds of the company. The Partner Equity Plan, which is self-described as a 409A plan, contains an almost identical provision. Further, the Partner Equity Plan and the 409A Plan
Having determined that the funds to be distributed to the Debtor in August of 2017 pursuant to the Partner Equity Plan constitute property of the Debtor's bankruptcy estate, the Court now turns to Ms. Foster's objection to the Debtor's claim that 75% of those funds are exempt under Va. Code § 34-29. The burden is on Ms. Foster to prove that the Debtor's claim of exemption is improper. Fed. R. Bankr. P. 4003(c). See also In re Bradby, 455 B.R. 476, 481 (Bankr.E.D.Va.2011); In re Crump, No. 06-33410-KRH, 2007 WL 1029325, at *1 (Bankr.E.D.Va. Apr. 3, 2007).
The ability of a debtor in bankruptcy to claim an exemption in earned but unpaid wages pursuant to Va.Code § 34-29
Recent decisions from the Western District of Virginia interpreting Va.Code § 34-29,
Exemption statutes, including those in Virginia, serve a number of important societal purposes by enabling debtors to protect certain property from the reach of creditors. One commentator has summarized the goals of the exemption statutes as follows:
Joseph E. Ulrich, Virginia's Exemption Statutes-The Need for Reform and a Proposed Revision, 37 Wash. & Lee L.Rev. 127, 129-30 (1980).
Even though exemption laws seek to balance the needs of debtors and their dependents with the rights of creditors, they inherently reflect a public policy in favor of having debtors retain essential property over the satisfaction of creditors' claims. Id. at 130.
The Bankruptcy Reform Act of 1978 created federal exemptions for bankrupt individuals but granted states the authority to preclude their residents from
Title 34 of the Code of Virginia, entitled "Homestead and Other Exemptions," sets forth most of the exemptions available to Virginia debtors. Section 34-29, commonly referred to as the "wage exemption," is included in Title 34. This statute establishes a limit to the amount of an individual's "disposable earnings," as defined by § 34-29(d)(2), that shall be "subjected to garnishment." The term "garnishment" is defined as "any legal or equitable procedure through which the earnings of any individual are required to be withheld for payment of any debt." Va. Code § 34-29(d)(3).
The current version of § 34-29 was enacted in 1970 after Congress passed the Consumer Credit Protection Act, Pub.L. 90-321, 82 Stat. 146 (1968) (the "CCPA"). The CCPA preempts state law in the area of wage garnishments, requiring all states to recognize a minimum restriction on garnishment, limiting the withholding of earnings in most cases to the lesser of 25% of disposable earnings per week or the amount by which disposable earnings for a week exceed 30 times the minimum hourly wage.
Prior to the Virginia legislature's adoption of the language of the CCPA, Va. Code § 34-29 had included a schedule setting forth minimum and maximum amounts of "wages or salary" that would be "exempt from distress, levy, garnishment or other process...." Va. Code Ann. § 34-29 (1960). An even earlier version of the statute provided that "wages or salary owing or to be owing to a ... householder or head of a family, shall be exempt from distress, levy, garnishment or other process to the extent of seventy-five percentum of such wages or salary...." Va. Code § 34-29 (1948). Before the adoption of the 1970 version of the statute, which replaced the language exempting earnings from "distress, levy, garnishment or other process" with a limitation on the amount "which is subjected to garnishment," the language in the statute made it clear that a portion of an individual's wages were protected from all forms of creditor process. Such language would, in turn, allow a debtor in bankruptcy to claim this "wage exemption" pursuant to § 522(b)(3)(A) of the Bankruptcy Code.
The circumstances leading to the revision of § 34-29, along with the content and context of the revised statute, indicate that the Virginia General Assembly did not intend to proscriptively limit the "wage exemption" to nonbankrupt debtors. Virginia's "wage exemption" statute was amended solely in order to comply with the CCPA's mandatory limitations on wage garnishments; it does so by mirroring the language of 15 U.S.C. § 1673. The conclusion that the legislature did not further intend to prevent the application of § 34-29 in bankruptcy is evident when one considers that the revision was enacted in the legislative session occurring shortly after the CCPA's effective date, tracks the language of 15 U.S.C. § 1673 nearly word for word and, according to a report commissioned by Virginia's General Assembly, was prompted only by the mandates of the CCPA.
Not only does the legislative history weigh in favor of allowing the wage exemption in bankruptcy, but further support is also found in the language of the statute itself. When the Virginia legislature enacted what is essentially the current version of § 34-29, it included the following sentence: "The exemptions allowed herein shall be granted to any person so entitled without any further proceedings." Va. Code § 34-29(c) (emphasis added).
Va. Code § 34-1 (emphasis added). Therefore, the language of § 34-29, considered in the context of § 34-1, evidences
Similarly, other exemption provisions in Title 34 of the Virginia Code reflect that the Virginia legislature gave no consideration to the thought that revising § 34-29 would thereafter limit its applicability to garnishment proceedings occurring outside of bankruptcy. Despite the revisions to § 3429, other statutes continue to specifically acknowledge that § 34-29 protects wages generally from any form of creditor process.
Courts in "opt out" states deciding whether a bankrupt debtor may exempt earnings from property of the estate pursuant to statutes similar to Va. Code § 34-29 have split. A number of courts have found the garnishment statutes of their states do provide exemptions in bankruptcy. See, e.g., Forker v. Irish (In re Irish), 311 B.R. 63, 67 (8th Cir. BAP 2004) ("a bankruptcy proceeding easily falls within the ambit of Iowa's adopted definition of `garnishment,' which is any `legal or equitable procedure through which the earnings of any individual are required to be withheld for payment of any debt.'"); In re Haraughty, 403 B.R. 607, 613-614 (Bankr.S.D.Ind.2009) (Indiana statute modeled after CCPA permits bankrupt debtors to claim an exemption in earned but unpaid wages); In re Urban, 262 B.R. 865, 867 (Bankr.D.Kan.2001) ("A review of the [Kansas exemption statute] ... makes clear that Kansas has a tradition of wage exemption and that the legislature intended to carry that tradition forward with the enactment of the present statute in 1970."); In re Sanders, 69 B.R. 569, 576 (Bankr.E.D.Mo.1987) ("the `opt-out' statute itself clearly implies that bankrupt and non-bankrupt debtors are to be treated
Recent decisions of the bankruptcy court in the Western District of Virginia have found that in the absence of a pending garnishment, Va. Code § 34-29 does not provide a wage exemption in bankruptcy. In In re Kluge, No. 11-61517 (Bankr. W.D.Va. Oct. 3, 2011), the court denied an exemption in "[w]ages due but not received" pursuant to § 34-29 because no "order [had] been issued pursuant to a judicial procedure ordering a third party to withhold payment of the Wages to the Debtors." Id. at 5. Subsequently, the court in In re Pierce, No. 15-71047 (Bankr.W.D.Va. Dec. 30, 2015), citing Kluge, concurred that § 34-29 applies only to earnings that are subject to garnishment, stating that because there was "no garnishment at issue in this case, Section 34-29 simply does not apply to afford the Debtor the relief claimed in her exemption." Id. at 4.
Kluge and Pierce notwithstanding, this Court rejects the proposition that in the absence of a pending garnishment at the time of a bankruptcy filing a debtor may not exempt wages pursuant to Va.Code § 34-29. Such an interpretation, which would allow the wage exemption only if the debtor happened to be experiencing a wage garnishment at the time of his bankruptcy filing, makes no sense as a practical matter.
Furthermore, the presence of language in Va. Code § 34-29 limiting the amount of wages "subject to garnishment" without specifically providing additional protections against all forms of creditor process does not support the conclusion that the restriction is not an exemption applicable in bankruptcy since a judgment creditor may generally recover a debtor's unpaid wages only by instituting garnishment proceedings pursuant to Va. Code § 8.01-511. See In re Haraughty, 403 B.R. at 611 ("In the Court's opinion, it would make little sense to protect unpaid wages from forms of process that are simply inapplicable."); In re Urban, 262 B.R.at 868 ("[T]his Court considers the argument that [the limitation on wage garnishment] is a restriction not an exemption to be a distinction without a difference. Garnishment is the only method of `executing' on a debtor's wages available in this state."). Prohibiting additional forms of creditor process that are not available to a creditor in any event serves no purpose.
Some courts have pointed out that the definition of "garnishment" included in state statutes utilizing the language of 15 U.S.C. § 1673 supports the contention that the protections included therein are available to bankrupt debtors. Va. Code § 34-29(d)(3), like other similar statutes, defines "garnishment" as "any legal or equitable procedure through which the earnings of any individual are required to be withheld for payment of any debt." Bankruptcy falls within that definition, as it is a procedure whereby a debtor's earnings would be used to satisfy a debt. See Forker v. Irish (In re Irish), 311 B.R. at 68; In re Urban, 262 B.R. at 869.
The reasoning and conclusions of the courts in In re Urban and In re Haraughty, finding that exemption provisions similar to Va.Code § 34-29 provide a wage exemption available to an individual in bankruptcy, are sound. Prior decisions of this Court, conduct of the Virginia General Assembly, the language of the statute (including the other provisions of Title 34) as well as a long-standing practice of construing Virginia's exemption statutes liberally,
Having found that § 34-29 permits a debtor in bankruptcy to exempt accrued but unpaid earnings, the Court must determine whether the distribution that the Debtor is entitled to receive in August of 2017 qualifies as "earnings" under the definition contained in the statute.
The question of whether a deferred compensation payment constitutes "earnings" and is thus exemptible under Va. Code § 34-29 was answered in the affirmative by this Court in In re Gnadt. The Court noted that the Fourth Circuit has held that
2015 WL 2194475, at *5 (quoting Andrews v. Riggs Nat'l Bank (In re Andrews),
On the basis of the foregoing, the Court finds that the Debtor has not met his burden of establishing that the Partner Equity Plan is not property of the bankruptcy estate and must include those earnings in his bankruptcy estate. The Court further finds that Ms. Foster and the chapter 13 trustee have not met their burden of proving that the Debtor's exemption of the Partner Equity Plan proceeds was improper. Therefore, the objections of Ms. Foster and the chapter 13 trustee to the Debtor's claim of exemption are overruled. A separate order will be entered.
The Court notes that in part 4 of the proof of claim, Ms. Foster states that she holds an unsecured nonpriority claim in the amount of $75,000 and a priority claim of $72,500, but on line 5 of the proof of claim, Ms. Foster lists the total amount of her claim as $75,000, with $72,500 being a priority claim and $2,500 a nonpriority claim. The Court assumes that line 5 reflects the actual amounts claimed by Ms. Foster.
In her second proof of claim, Ms. Foster asserts an unsecured nonpriority claim for $18,000. The basis for this claim is an alleged default under the prepetition property settlement agreement between the parties.
In In re Gnadt, the Chapter 7 trustee conceded "that the sum of $30,154.99 in the Debtor's 409A Plan on the date of the bankruptcy filing represents the product of the Debtor's wages, bonuses and commissions and that, therefore, the Debtor is entitled to amend his State exemptions to claim that 75% of this amount is exempt pursuant to Va. Code § 34-29 (Maximum portion of disposable earnings subject to garnishment)." 2015 WL 2194475, at *3.
The Supreme Court has resisted finding a significant departure from historical bankruptcy practice without a clear legislative directive, noting in Dewsnup v. Timm, 502 U.S. 410, 419, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), that it would be "reluctant to accept arguments that would interpret the Code, however vague the particular language under consideration might be, to effect a major change in pre-Code practice that is not the subject of at least some discussion in the legislative history." Interpreting the 1970 revisions of § 34-29 to no longer provide an exemption of wages to a bankrupt debtor would create a major departure from the practice that existed prior to that time, yet there is no record of any related discussion in Virginia's legislative history.
Under the "harmonious-reading canon," provisions included in a text "should be interpreted in a way that renders them compatible, not contradictory." Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 180 (2012) (cited in Gray v. Martin, No. 13-73-ART, 2013 WL 6019335 (E.D.Ky. Nov. 13, 2013)). A more harmonious interpretation of the current provisions of Title 34 would be to recognize the continued existence of the "wage exemption" in bankruptcy.
It has been suggested that Virginia chose to opt out of the federal exemptions of 11 U.S.C. § 522(d) because the federal exemptions are more generous than those granted under Virginia law and where an exemption scheme favors one filing bankruptcy, the number of bankruptcy filings would increase. Joseph E. Ulrich, Virginia's Exemption Statutes-The Need for Reform and a Proposed Revision, 37 Wash. & Lee L.Rev. 127, 128-29 (1980). On the flip side, if state law exemptions were more generous than the federal exemptions, creditors would be more likely to file involuntary petitions against the debtor. Id. at 128 n. 8. It would seem, therefore, that the legislature's apparent goal of discouraging bankruptcy filings would be best served by having the Virginia exemptions provide a debtor with the same property in or out of bankruptcy.
Id. at 872-73 (citations omitted).