In re Hennessey

135 B.R. 711 (1992)

In re Dennis J. HENNESSEY, Debtor.

Bankruptcy No. 91-40179-JFQ.

United States Bankruptcy Court, D. Massachusetts.

February 3, 1992.

Stephan M. Rodolakis, Peters & Erskine, Worcester, Mass., Trustee.

Carl Aframe, Worcester, Mass., for debtor.

OPINION

JAMES F. QUEENAN, Jr., Chief Judge.

Relying upon a Massachusetts statute, Dennis J. Hennessey (the "Debtor") seeks to exempt from the bankruptcy estate his retirement benefits under the profit sharing plan maintained by his employer, the Melville Corporation. The benefits are now worth about $100,000. The trustee in bankruptcy, Stephen M. Rodolakis (the "Trustee"), has filed an objection to the exemption, contending that the Massachusetts statute is pre-empted by the Employee Retirement Income Security Act ("ERISA"), Pub.L. No. 93-406, 88 Stat. 829 (codified as amended at 29 U.S.C. §§ 1001 et seq. (1988)). Although I conclude that ERISA pre-empts the Massachusetts statute, I nevertheless allow the Debtor to exempt his retirement benefits based upon an exemption provided by ERISA itself.

Treatment of retirement benefits in bankruptcy has reached the arcane. The present issue is but one of several that can arise. In combination, they form a jigsaw puzzle which cries out for clarification by Congress. For example, I have previously held that benefits under a retirement trust are not excluded from the bankruptcy estate as beneficial trust interests subject to restriction on transfer within the meaning of the provision excluding such interests appearing in 11 U.S.C. § 541(c)(2) (1988). In re Nadler, 122 B.R. 162 (Bankr.D.Mass. 1990). In seeking to harmonize § 541(c)(2) with § 522(d)(10)(E) granting a limited exemption for retirement benefits, Nadler interprets § 541(c)(2) to refer to trusts which do not provide retirement benefits, disagreeing with the majority of courts who place no such limitations on the statute and struggle to apply traditional spendthrift law to retirement trusts. In light of Nadler, the Debtor relies on his exemption rights under § 522.

Judge Kenner of this court has held that retirement benefits may be claimed as exempt under the federal non-bankruptcy law exemption provided by § 522(b)(2)(A), and that ERISA grants such an exemption. In re White, 131 B.R. 526 (Bankr.D.Mass. 1991). The Debtor's bankruptcy filing preceded White, so that he made his exemption claim without the benefit of White in mind, relying only on the Massachusetts statute. As shall be seen, however, in deciding the present question of pre-emption it is also necessary to resolve the issue dealt with in White.

I. THE FEDERAL AND STATE STATUTORY FRAMEWORK

The Bankruptcy Code permits a debtor to elect either the exemptions which it provides or the exemptions granted by state law and other federal law. 11 U.S.C. § 522(b) (1988). Its provision for an exemption under state law and other federal law permits a debtor to exempt:

. . . any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition at the place in which the debtor\'s domicile has been located for the 180 days immediately preceding the date of the filing of the petition . . . "

11 U.S.C. § 522(b)(2)(A) (1988).

Section 522(b)(1) allows a state to restrict its residents to the exemptions provided under its laws. Massachusetts is not among the states which have taken this action, so that its residents continue to have the election. In providing an unrestricted exemption for retirement benefits, the Massachusetts statute, which is quoted in the margin,¹ is more generous that the Bankruptcy Code, whose exemption is limited to retirement benefits "to the extent reasonably necessary for the support of the debtor and any dependent of the debtor." § 522(d)(10)(E). This is obviously why the Debtor elected his Massachusetts exemptions.

ERISA regulates retirement plans, which it calls "pension plans," and any so-called "welfare plans," which are defined as plans providing benefits for hospitalization, death, disability, and the like; ERISA refers to a plan of either variety as an "employee benefit plan." 29 U.S.C. § 1002 (1988). ERISA contains a provision affecting creditors' rights concerning pension plans, but not welfare plans. With exceptions for voluntary assignments and so-called "qualified domestic relations orders," ERISA states that "each pension plan shall provide that benefits provided under the plan may not be assigned or alienated." ERISA § 206(d), 29 U.S.C. § 1056(d) (1988). This command has been construed through regulations of the Secretary of the Treasury to prohibit garnishment of retirement benefits by the creditors of a participant. E.g., Guidry v. Sheet Metal Workers Nat. Pension Fund, 493 U.S. 365, 110 S.Ct. 680, 107 L.Ed.2d 782 (1990) (ERISA prohibits constructive trust of retirement benefits, with dicta disapproving garnishment); Tenneco Inc. v. First Virginia Bank of Tidewater, 698 F.2d 688 (4th Cir.1983); General Motors Corp. v. Buha, 623 F.2d 455 (6th Cir.1980).

ERISA has its own pre-emption provisions, so that we need not rely only upon general principles flowing from Article VI, clause 2 of the Constitution.² Section 514(a) of ERISA, 29 U.S.C. § 1144(a) (1988), provides in pertinent part:

The provisions of this title and title IV shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan. . . .

Section 514(d) of ERISA (29 U.S.C. § 1144(d)) states:

Nothing in this title shall be construed to alter, amend, modify, invalidate, impair, or supersede any law of the United States . . . or any rule or regulation issued under any such law.

This statutory framework raises two questions. Does the Massachusetts statute "relate to" an employee benefit plan within the meaning of the pre-emption provision appearing in § 514(a)? And, if it does, under § 514(d) would pre-emption of the Massachusetts statute "invalidate, impair or supersede" § 522 of the Bankruptcy Code?

II. PRE-EMPTION UNDER SECTION 514(a)

Any one of three features of the Massachusetts statute is sufficient to bring it within the general sweep of § 514(a) of ERISA. Taken together, they compel the conclusion that the statute is one which does "relate to" an employee benefit plan under § 514(a). The Massachusetts statute singles out ERISA retirement benefits for special treatment, duplicates ERISA, as construed by the courts, in prohibiting creditors from attaching or levying upon retirement benefits, and, finally, conflicts with ERISA in not making an exception for qualified domestic relations orders.

State law may not single out for special treatment benefits under a plan governed by ERISA, even if the law does not directly conflict with ERISA and is designed to help effectuate ERISA's underlying spirit. This is the clear teaching of Mackey v. Lanier Collection Agency & Service, Inc., 486 U.S. 825, 108 S.Ct. 2182, 100 L.Ed.2d 836 (1988). That case involved a plan providing vacation and holiday benefits, which is a so-called employee "welfare" plan falling outside the ERISA anti-assignment provision governing only employee "pension" plans. A Georgia statute prohibited garnishment (except for alimony or child support) of benefits from a "pension, retirement or employee benefit plan or program subject to the provisions of ERISA." The Court concluded that ERISA pre-empted the Georgia statute because the statute expressly sought to affect benefits included within the ERISA regulatory scheme, even though ERISA contains no prohibition against assignment of welfare benefits as opposed to retirement benefits. The Court regarded the singling out of ERISA plans as fatal. The distinction between a law which affects ERISA benefits by singling them out and one which affects them only through general provision is underscored by the other holding in Mackey, which permitted garnishment of the welfare benefits under the general Georgia garnishment statute.

In a similar vein is Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 103 S.Ct. 2890, 77 L.Ed.2d 490 (1983). One of the laws before the Court there was the New York Human Rights Law forbidding discrimination in employment, including discrimination in employee benefit plans on the basis of pregnancy. The court stated that "a law `relates to' an employee benefit plan, in the normal sense of the phrase, if it has connection with or reference to such a plan." Id. at 96-97, 103 S.Ct. at 2900. Conceding that ERISA regulates the administration of plans and does not seek to prohibit discrimination, the Court nevertheless held that the New York statute fell within § 514(a) because the statute sought to regulate the very same employee benefit plans governed by ERISA. Id. at 98, 103 S.Ct. at 2900-01.

The Massachusetts statute contains additional defects not present in Mackey or Shaw. It seeks to duplicate ERISA's prohibition against garnishment of retirement benefits. Federal law displaces any attempt by the state to enact the same regulation. Fidelity Federal Savings & Loan Assn. v. De La Cuesta, 458 U.S. 141, 153, 102 S.Ct. 3014, 3022, 73 L.Ed.2d 664 (1982). And the Massachusetts statute commits perhaps the cardinal sin in the federal-state relationship. Its provisions conflict with ERISA in that they contain no exception for qualified domestic relations orders. Although the Massachusetts statute permits creditor process designed to enforce "an order of a court concerning divorce, separate maintenance or child support," it does not limit such process to the order defined in § 514(d) of ERISA as a "qualified domestic relations order." For example, under § 514(d) the order must furnish the name and last known mailing address of the participant, the amount or percentage of the participant's benefits included under the order, and the number of payments or period to which the order applies. Also, the order must not require the plan to...