Writing on behalf of the Third Circuit Court of Appeals, Judge Thomas L. Ambro recently issued an opinion which found that a retirement plan that is governed by ERISA and that is not tax-qualified is protected by ERISA’s “anti-alienation bar” and is not property of the bankruptcy estate and is not subject to creditors’ claims.

In this case (In re Gilbert, No. 23-2944 (3d Cir. 2024)), a Chapter 7 Debtor disclosed ERISA trusts of $1.6 million and claimed them as exempt from the bankruptcy estate under 11 U.S.C. Section 541(c)(2).  It should be noted that 541(c)(2) excludes from the bankruptcy estate and protects Debtor’s “beneficial interest in a trust that is subject to a ‘restriction on…transfer…enforceable under applicable non-bankruptcy law,’ known as the ‘anti-alienation’ provision.” The Chapter 7 trustee took issue with this characterization and filed a complaint alleging that there were operations of the trust that violated both ERISA and the Internal Revenue Code and therefore these assets should be deemed property of the bankruptcy estate. Judge Kathryn C. Fergusen of the Bankruptcy Court for the District of NJ dismissed trustee’s action and found that under 11 USC Section 541(c)(2) they were not property of the estate even if they were operating inconsistently with ERISA and the Internal Revenue Code. The Trustee appealed this ruling, the District Court affirmed the ruling and agreed that ERISA’s anti-alienation provision applied regardless of any alleged violations and the Trustee appealed this decision to the Third Circuit.

Judge Ambro affirmed the lower courts’ decisions and characterized Bankruptcy Judge Ferguson as having “dismissed [the trustee’s complaint] because ‘a plain meaning reading of § 541(c)(2) excluded the retirement plans from the bankruptcy estate even if they were operated contrary to ERISA and the IRC.’” Recognizing that even though there is a split in the circuits on this issue, Judge Ambro felt there was no statutory or other authority to suggest that ERISA’s “anti-alienation” bar fails to protect a “misbehaving ERISA Plan administrator.”

To discuss the issues raised here or any other issues involving creditors rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or at lbaskin@sgrvlaw.com.