Where no Qualified Domestic Relations Order (QDRO) has yet been entered, the debtor’s claim for equitable distribution of her ex-husband’s pension is property of the estate and the trustee is free to negotiate a settlement agreement with respect to that pension. Walsh v. Urmann (In re Urmann), No. 11-21606 (Bankr. W.D. Pa. Apr. 15, 2014).
The debtor’s divorce was pending when she filed for bankruptcy and her ex-husband had moved for equitable distribution of marital assets including his 401(k) Plan (“Pension”) worth approximately $106,224.26. The issue came before the court on the trustee’s Motion to Approve Settlement of the distribution of the pension for $30,000.00, a sum the debtor maintained was substantially less than she would be entitled to in the divorce. The settlement agreement contemplated a QDRO in which the proceeds of the pension would be paid directly to the trustee. The debtor argued that the funds from the pension plan were not estate property under section 541(c)(2) which excludes “a beneficial interest of the debtor in a trust.”
Relying on Walsh v. Burgeson (In re Burgeson), 504 B.R. 800 (Bankr. W.D. Pa. 2014) the court found that “where a debtor possesses a claim for equitable distribution at the time of filing, but no [QDRO] or divorce decree delineating the debtor’s ownership interest in the pension plan was obtained prior to the filing of the bankruptcy petition, and the debtor was neither a participant nor named beneficiary under the pension plan, the debtor had no beneficiary interest in the pension but instead, possessed an interest in a claim for equitable distribution. . . . As such, the debtor’s interest in the pension could not be excluded from the estate pursuant to ERISA and the interest was property of the estate.”
The court then turned to the settlement agreement, noting that Rule 9019(a) gives the bankruptcy judge authority to approve a compromise settlement so long as the trustee carries his or her burden of persuading the court that the settlement is reasonable. The court cited four factors to consider: (1) the probability of success in litigation; (2) the likely difficulties in collection; (3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (4) the paramount interest of the creditors.
With respect to the probability of success, the debtor argued that she stood to gain significantly more than the $30,000.00 the trustee proposed for settlement. The court found, however, that given the divorce court’s discretion to consider equitable factors such as the parties’ relative contributions to the fund, the uncertainty of the result of the distribution of assets in the divorce, and costs involved in the resolution of the issue as well as other litigation costs, the proposed settlement amount was not unreasonable.
With respect to the interest of the creditors, the court found that “the Movant-Trustee would have a greater chance of collection of the estate assets with a QDRO directly payable to Movant-Trustee in place as contemplated by the proposed settlement.”
The court found that debtor’s foot-dragging and evasion in contravention of her duty under section 521(a)(3) in providing information concerning the value of the pension and in pursuing settlement despite being given the opportunity to do so by the trustee, counter-balanced any possible prejudice to the debtor resulting from the settlement.
This case hinged on the timing of the debtor’s bankruptcy filing in relation to her divorce. Had there been a QDRO in place giving the debtor an interest in her ex-husband’s pension plan at the time of filing, the result is likely to have been different. In re Nelson, 322 F.3d 541 (8th Cir. 2003) (Pension funds payable to a debtor through a QDRO are not part of the bankruptcy estate). See also Boggs v. Boggs, 520 U.S. 833 (1997) (generally recognizing that QDROs confer beneficiary status upon certain nonparticipants and give those persons the same protection under ERISA as plan participants); In re Banick, No. 12-54744 (Bankr. S.D. Ohio Feb. 25, 2013) (based on divorce decree, Debtor’s right to portion of ex-spouse’s pension plan is excluded from estate under section 541(c)(2)); In re Carterbland, 382 B.R. 743 (Bankr. S.D. Ohio 2008); In re Hthiy, 283 B.R. 447 (Bankr. E.D. Mich. 2002).
The debtor has filed a notice of appeal to the District Court for the Western District of Pennsylvania, Case No. 14-718.
Tags: Property of Estate
