Published on:

Retirement Benefits Not Part of the Estate in Bankruptcy

By Carolyn J. Woodruff, North Carolina Family Law Specialist

In re Lawson, 570 B.R. 563 (Bankr. N.D. Ohio 2017)

Facts: A husband and wife filed divorce proceedings in Ohio. Among the marital assets was the husband’s defined contribution retirement plan. The parties read into the record in the Ohio action an agreement that awarded the wife 50% of the plan account. The court approved the agreement. No DRO was immediately entered.

After the divorce case was filed, the wife filed a petition in bankruptcy. The bankruptcy trustee argued that the wife’s interest in the husband’s retirement plan was part of the estate in bankruptcy. He asked the bankruptcy court to authorize him to seek a DRO in state court and to order the husband not to oppose the DRO.

Issue: Should the trustee be authorized to seek a DRO?

Answer to Issue: No.

Summary of Rationale: Even though the state court had not yet entered a DRO, its order made the wife a beneficiary under the plan. A DRO is a formality required to enforce a state court judgment dividing retirement benefits; it is not a prerequisite to awarding the nonowning spouse an interest in the plan. The wife was also a beneficiary under the plan even before the state court order was entered, as she was the husband’s survivor beneficiary.

Benefits that are subject to a transfer restriction are generally not part of a debtor’s estate in bankruptcy. 11 U.S.C. § 541(c)(2). Since all ERISA-regulated benefits are subject to a transfer restriction, the wife argued (and the United States, intervening in the case, agreed) that her interest in the husband’s retirement benefits was not property of the estate.

The wife also had an exemption under Ohio state law, which applied to “rights to or interest in a pension, benefit, annuity, retirement allowance, or accumulated contributions,” Ohio Rev. Code Ann. § 2329.66(A)(10)(a), and to “rights or interests in the assets held in, or to directly or indirectly receive any payment or benefit under, any individual retirement account [or] individual retirement annuity,” id. § 2329.66(A)(10)(c). Both exemptions expressly apply to any “alternate payee under a qualified domestic relations order (QDRO) or other similar court order.” Id. § 2329.66(A)(10)(f).

The trustee asked the court to authorize an application for a DRO in state court, as a DRO is a stated exception to the transfer restriction. The court rejected this request, finding that the effect of the DRO requested by the trustee would be to frustrate the intended purpose of the state and federal exemptions and to deny “the paramount importance of retirement funds not coming into bankruptcy estates.” Lawson, 570 B.R. at 578. The court relied in part upon a bankruptcy court decision affirmed in Walsh v. Dively, 551 B.R. 570 (W.D. Pa. 2016), discussed in last year’s version of this outline.

The trustee argued “that the [wife] had a domestic relations law claim for equitable distribution of marital assets, which was at that point sufficiently undifferentiated and inchoate that it was not specifically an interest in the Plan assets,” Lawson, 570 B.R. at 578, and therefore not within the scope of the relevant exemptions. The court again disagreed, holding that the effect of this distinction was contrary to the clear legislative intent that retirement benefits be excluded from estates in bankruptcy.

Finally, the court held that compelling the wife to apply for the state court to grant a DRO was beyond the scope of the court’s equitable powers.

Comment: As long as the state court awarded the nonowning spouse an interest in a specific retirement plan and not a general monetary award, the federal decisions have not been receptive to attempts by bankruptcy trustees to frustrate the general rule that retirement benefits are not part of an estate in bankruptcy.