Court: ERISA Profit-Sharing Plan Not Subject to Bankruptcy Trustee

January 28, 2005 ( - A US Court of Appeals has ruled that a debtor's Employee Retirement Income Security Act-qualified profit-sharing plan is not part of his bankruptcy estate and thus cannot be touched by the bankruptcy trustee.

>The US 10th Circuit Court of Appeals has ruled that a lower court – the US Bankruptcy Appellate Panel of the Tenth Circuit – was correct in ruling that a bankruptcy trustee does not have the right to exercise a debtor’s prerogative to withdraw funds contributed by the debtor. Relying on the reasoning of a Utah Bankruptcy Court, the lower court ruled that Ronald Kent Kunz’s portion of a profit-sharing plan – $1,277,759 – could not be touched by a bankruptcy trustee after Kunz entered Chapter 7 bankruptcy.

>Kunz held the profit-sharing plan through K&B Developments Inc. In November 2002, Kunz filed for bankruptcy, and trustee Stephen Rupp brought adversary proceedings against Kunz in an attempt to withdraw funds from the plan on behalf of the bankruptcy estate. Rupp argued before the court that the funds were in fact were a self-settled trust, and although not property of the estate due to its ERISE status, should be open to the trustee. Furthermore, Rupp argued that Kunz’s power to withdraw funds from the plan was a power that belonged to Kunz, and thus now belonged to Kunz’s bankruptcy trustee.
The lower bankruptcy court found in favor of Kunz, saying that the plan was not property of the bankruptcy estate. On appeal, the 10th Circuit upheld the ruling, holding that a tax-qualified ERISA pension profit-sharing plan is exempt from a bankruptcy estate. In turning down the trustees claims, Circuit Judge Bobby Baldock, writing for in a unanimous decision, noted: “Thus, Supreme Court and Tenth Circuit precedent clearly foreclose the Trustee’s argument. To the extent the Trustee claims his argument is ‘novel,’ we disagree because the Debtor’s powers and rights under the Plan are subsumed within his interest in the Plan.”

The full text of the opinion can be found at .