Can a chapter 7 bankruptcy trustee sell the debtor’s right to a portion of her former spouse’s 401(k) plan?

Can a chapter 7 bankruptcy trustee sell the debtor’s right to a portion of her former spouse’s 401(k) plan?

Not in the case of In re Carlton, Case No: 300-40223, an unpublished case from U.S. Bankruptcy Court for the District of Oregon, where the judge held that the Debtor has no claim against her former husband, but instead has a right in his 401(k) plan and a right to obtain a Qualified Domestic Relations Order (“QDRO”).

In Carlton, the Debtor wife was divorced from her husband before filing chapter 7 bankruptcy.  In the divorce decree, the state court judge awarded the Debtor wife fifty percent (50%) of her husband’s 401 (k) plan and an equalizing judgment for a sum to compensate her for her share of the husband’s IRAs that he would retain.  The state divorce court retained jurisdiction to enter a QDROs transferring wife’s share of her husband’s retirement plan.  The wife did not obtain a QDRO before filing for chapter 7 bankruptcy to discharge her debts.  In her bankruptcy filing, the wife listed her interest in the 401(k) plan as a contingent, unliquidated claim against her ex-husband on her schedule B of personal property, but did not list it as exempt on her schedule C of exempt property. The chapter 7 trustee appointed in the Debtor’s bankruptcy case negotiated with the Debtor’s ex-husband to sell her interest in his 401(k) plan back to him for the sum of $5,000.  The Debtor wife objected to the trustee’s notice of intent to sell filed in the case to obtain the bankruptcy court judge’s approval of the sale.

The chapter 7 trustee in Carlton argued that the Debtor wife had no interest in her husband’s retirement plan until she obtained a QDRO, but instead had a claim against her ex-husband.  The Debtor wife argued that the divorce decree created an interest in her former husband’s 401(k) plan, which interest was not property of the estate due to the anti-alienation provisions of the Employee Retirement Income Security Act (“ERISA”), 29 U.S. Code Section 1056(d)(1).   ERISA is a federal law that regulates the creation of pension and retirement plans for employees and their beneficiaries, including spouses and children.  In general, interests in an ERISA plan may not be alienated, sold or transferred. This restriction on the alienation of ERISA benefits ensures that these plans are created exclusively to provide retirement benefits to participating employees and their beneficiaries.  Boggs v. Boggs, 520 U.S. 833, 845 (1997) .  One exception to this general rule against alienation was created for former spouses, who can obtain an interest in their spouse’s retirement plan from a divorce by a special order known as a Qualified Domestic Relations Order or QDRO,  29 U.S. Code Section 1056(d)(3)  .  (Spouses may also use a regular Domestic Relations Order in a divorce case to preserve the tax treatment of a transfer of a non-ERISA retirement plan, such as an Individual Retirement Plan or IRA.)

The bankruptcy court judge recognized that the state divorce decree awarding an interest in the husband’s 401(k) plan created the wife’s interest in the plan and limited the husband’s interest in the whole plan, citing Trustees of the Directors Guild of America-Producer Pension Benefits

Plans v. Tise, 234 F.3d 415 (9th Cir. 2000).   Instead of having a claim against her husband, the Debtor had a claim against the 401(k) plan.  The divorce decree gave the wife a right to obtain a QDRO in order to enforce her claim.  The bankruptcy judge ruled that the right was personal to the Debtor wife and could not be exercised by a chapter 7 trustee, who was not within the definition of alternate payee under ERISA, limited to a spouse, former spouse, child or other dependent of the employee participant.  29 U.S.C. 1056(d)(3)(K).  Since the chapter 7 trustee could not obtain a QDRO, he could not sell the interest in the retirement plan.

If you have any questions about a chapter 7 bankruptcy trustee’s rights in your or your former spouse’s retirement plan, call your Virginia bankruptcy and divorce law lawyer or Richmond Bankruptcy and Divorce Lawyer James H. Wilson, Jr.

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