1.  BACKGROUND -

          1.1.  Hearing on Trustee's Objection to Exemption - A hearing was held on February 14, 1992 concerning the trustee's objection to the claim of the debtor, Jerome Jury, to an exemption     2 ABR 279  for a pension plan he has with the Municipality of Anchorage. The parties indicate that the plan is qualified under the Internal Revenue Code. 26 USC § 457. This plan was funded by a voluntary check-off from debtor's salary, and he had accumulated approximately $22,000.00, more or less, at the time of the bankruptcy. Debtor amended his exemptions and now seeks to exempt the property under 11 USC § 522(d)(10)(E), the federal bankruptcy exemption allowance for certain pension funds.

     Now, debtor raises the additional argument that the pension plan is a spendthrift trust and therefore not property of the estate. If it is not property of the estate, it is not available to the trustee. Additional briefing will be necessary on this point.

          1.2.  Spendthrift Trust under Kincaid? - Since the first argument in this case, the Ninth Circuit has decided several pension cases which the parties think are pertinent. The debtor and trustee have cited In re Kincaid, 917 F2d 1162 (9th Cir 1990), which held that a voluntary employee contribution plan should be excluded from property of the estate under 11 USC § 541(c)(2) so long as the debtor had no significant control over the funds once contributed until he reached payment status or subject to relatively restricted contingencies. Id. at 1167-68.

     Kincaid held that the pension plan was not excluded from the estate under 11 USC § 541(c)(2) based on the federal ERISA and     2 ABR 280  Internal Revenue Code anti-alienation and anti-assignment statutes. This is not the "applicable nonbankruptcy law" referred to in § 541(c)(2), but "[V]irtually every circuit that has considered the question has agreed that debtor's interest in an ERISA pension or profit sharing plan is included in the bankruptcy estate unless the debtor's interest in the plan is considered a spendthrift trust under state law [citations omitted]." Id. at 1166. The court held that either Massachusetts or Oregon law applied.

     Then, without discussing the law of those states in any detail, the court held that a voluntary employee contribution plan for a run-of-the-mill employee without any real control over the plan qualified as a spendthrift trust. The court should have been concerned with state law. Compare In re Kirkland, 915 F2d 1236, 1238 (9th Cir 1990) which held:

When interpreting state law, a federal court is bound by the decision of the highest state court. Dimidowich v. Bell & Howell, 803 F.2d 1473, 1482 (9th Cir.1986), reh'g denied, op. modified, 810 F.2d 1517 (9th Cir.1987).. In the absence of such a decision, a federal court must predict how the highest state court would decide the issue using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance. Id. at 1482; Molsbergen v. United States, 757 F.2d 1016, 1020 (9th Cir.1985), cert. dismissed, 473 U.S. 934, 106 S.Ct. 30, 87 L.Ed.2d 706 (1985). However, " 'in the absence of convincing evidence that the highest court of the state would decide differently,' " American Triticale, Inc. v. Nytco Services, Inc., 664 F.2d 1136, 1143 (9th Cir.1981) (quoting Stoner v. New York Life Ins. Co., 311 U.S. 464, 61 S.Ct. 336, 85 L.Ed. 284 (1940)), a federal court is     2 ABR 281  obligated to follow the decisions of the state's intermediate courts. See id.

     I believe that the three judge panel in Kincaid lost its focus when discussing the spendthrift status of the pension plan in that case. While the panel starts out discussing Massachusetts or Oregon law, they faded into a discussion of a "generic" spendthrift trust as opposed to one bound by the rulings of state court (or the federal bankruptcy court's interpretation of what a state court would decide if there are no rulings from the state court on the issue).

     A later three judge panel in Pitrat (at 424-25) struggled to harmonize Kincaid's sub rosa adoption of a federal standard     2 ABR 282  regarding ordinary employee contribution plans with its cases holding that state law is the standard. Pitrat said at 424 fn 7:

This case [Kincaid] decided whether a particular retirement plan is a spendthrift trust under Oregon and Massachusetts law. Thus we are not technically bound by the Kincaid holding because we are deciding a question of Arizona law. However, Kincaid does not rely on any state law inconsistent with Arizona law or the Restatement (Second) of Trusts. Kincaid is essentially a common law interpretation of spendthrift trust law as is our decision in this case. Therefore, for the sake of consistency within the circuit we follow Kincaid.

Thus the traditional view has been that assets placed in an alleged spendthrift trust are not protected against the claims of a beneficiary's creditors if the beneficiary is also the settlor of the trust. Arizona Bank v. Morris, 435 P.2d 73, 76, 6 Ariz.App. 566 (1967), modified, 436 P.2d 499, 500, 7 Ariz.App. 107 (1968); Restatement (Second) of Trusts § 156 comment f (1957). The common law position has been that the benefits of self-paternalism do not out weigh its costs.

[4] The traditional rule against self-settled spendthrift trusts can not be circumvented by a beneficiary who is the settlor in fact though not in name. Restatement (Second) of Trusts § 156 comment f (1957). "If a person furnishes the consideration for the creation of a trust, he is the settlor." Restatement (Second) of Trusts § 156 comment f, reporter's notes (1959).

John Hancock Mutual Life Insurance v. Watson (In re Kincaid), 917 F.2d 1162 (9th Cir.1990), modified the common law definition of what a self-settled trust is⁷.

     In any event, it is possible that the State of Alaska would determine that a voluntary contribution plan such as we have in this case would not qualify for spendthrift trust status. The parties indicate that there are no Alaska spendthrift trust cases, so we will have to theorize what the Alaska Supreme Court would hold. See In re Kirkland. Thus, if I find that Alaska would not deem the voluntary contribution plan to be a spendthrift trust, the ruling would not be in derogation of Kincaid.

     The Municipality of Anchorage asked permission to brief this issue to show that the plan does qualify as a spendthrift trust, or that Kincaid does control. Therefore, additional briefing will take place as the order below reflects.

     It should be noted, however, that In re Pitrat held that an Arizona statute very similar to AS 09.38.017 was invalid under the ERISA preemption provisions. Id at 425-39. AS 09.38.017 attempts to declare a judgment debtor's rights under certain IRS tax qualified plans are spendthrift trusts by definition.

          1.3.  11 USC § 522(d)(10)(E) - If I ultimately determine, after the additional briefing, that the plan does not     2 ABR 284  qualify under Alaska State spendthrift trust standards, the next question is whether the pension fund is nonetheless exempt under 11 USC § 522(d)(10)(E) which provides:

(E) a payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor, unless-

(i) such plan or contract was established by or under the auspices of an insider that employed the debtor at the time the debtor's rights under such plan or contract arose;

(ii) such payment is on account of age or length of service; and

(iii) such plan or contract does not qualify under section 401(a), 403(a), 408, or 409 of the Internal Revenue Code of 1954 (26 11 U.S.C. 401(a), 403(a), 403(b), 408, or 409).

     I heard substantial testimony on this, and, in accordance with the dicta in In re Neuton, 922 F2d 1379, 1384 (9th Cir 1990) (citing In re Hotchkiss, 93 BR 547, 548 (Bankr ND Ohio 1988), which considered eleven factors for determining whether or not a debtor qualifies under § 522(d)(10)(E)), I would hold that the debtor does not qualify for the exemption. The eleven factors are: (1) Debtor's present and anticipated living expenses; (2) Debtor's present and anticipated income from all sources; (3) Age of Debtor and dependents; (4) Health of Debtor and dependents; (5) Debtor's ability to work and earn a living; (6) Debtor's job skills and training; (7) Debtor's other assets, including exempt assets; (8)     2 ABR 285  Liquidity of other assets; (9) Debtor's ability to save for retirement; (10) Special needs of Debtor and dependents; and, (11) Debtor's financial obligations.

     Neuton suggests that § 522(d)(10)(E) should be liberally construed for the benefit of the person claiming the exemption. Notwithstanding, my ruling that the debtor does not qualify is based on debtor's testimony regarding the ages, financial condition, and needs of the debtors. Jerome is a fireman who was about 32 years old at the time the case commenced. His wife is approximately the same age and was employed then at Carrs Grocery in the meat department. She has no pension plan, but Jerome has another pension plan funded by his employer which is not subject to any attack. Both make adequate wages, and, with the discharge of indebtedness in their chapter 7 bankruptcy, are not in financial straights. Applying the eleven factors discussed in the Hotchkiss case, I feel that the $22,000.00, more or less, in the § 457 plan is not exempt.

     In light of this possible ruling, debtor should consider amending his claim of exemptions to seek a state exemption if there is an Alaskan Statute covering this pension plan.

          1.4.  Problems of Trustee in Liquidating the Pension Fund - This does not end the inquiry. Even if the pension is not exempt, there is a question about whether the trustee can get to it due to whatever restrictions exist under the trust agreement setting up the pension plan or other legal impediments to getting to the     2 ABR 286  funds. In the briefing to take place, the Municipality is going to inform the court and the parties as to how the $22,000.00 fund can be withdrawn from the plan, and what restrictions exist on its withdrawal, including any penalties for early withdrawal. See Sterbach, Weiss, and Salerno, Pre-bankruptcy Planning for Professionals and ERISA Qualified Pension Plans: Are State Created Statutory Exemptions D.O.A. in Bankruptcy Proceedings, 94 Comm LJ 229, 252-54 (1989).

     Therefore,

          2.  ORDER - IT IS ORDERED that,

          2.1.  Continued Hearing - The court will continue the hearing until Monday, March 30, 1992, at 1:30 p.m.

          2.2.  Additional Briefing and Information - The Municipality of Anchorage and the debtor, if he chooses, shall submit briefs in support of their position that the Kincaid case applies or any other authority for their position that the Municipal pension fund in question is a spendthrift trust. In addition, the Municipality will advise the court on the terms and conditions of the plan, hopefully, giving me a copy of the plan itself, and how the funds can be withdrawn, any restrictions and penalties on early withdrawal, et cetera. This shall be filed and served on trustee's attorney by Friday, March 20, 1992. The trustee shall file a response to this brief by Friday, March 27, 1992.