Bankruptcy Court May Not Approve Request by Chapter 7 Trustee to be Paid from Assets of Debtors’ 401(k) Plan, Second Circuit Rules

By Peter D. DeChiara

pdechiara@cwsny.com

Posted March 2015

In a Chapter 7 bankruptcy, the Chapter 7 trustee often performs services administering, then terminating, the debtor’s 401(k) plan.  Can the assets of the 401(k) plan be used to compensate the Chapter 7 trustee for those services?  According to a recent decision of the U.S. Court of Appeals for the Second Circuit, a bankruptcy court lacks jurisdiction to grant a request by a Chapter 7 trustee to be paid from 401(k) plan assets for services the trustee performed in connection with the plan.  See In re Robert Plan Corp. (2d Cir. Feb. 5, 2015).

In Robert, two corporations filed a Chapter 11 reorganization case in the bankruptcy court for the Eastern District of New York.  After a few months, the case converted to Chapter 7 and the Chapter 7 trustee assumed the role of administrator of the debtors’ 401(k) plan.  The trustee hired legal and accounting professionals and, with their assistance, worked to terminate the 401(k) plan and distribute its assets to plan participants.

The Chapter 7 trustee then filed a request with the bankruptcy court for compensation for his work and that of the professionals, asking for payment from assets of the 401(k) plan.  The United States Department of Labor objected, claiming that the bankruptcy court lacked jurisdiction to grant the request.  The bankruptcy court rejected the DOL’s argument but, on appeal, the U.S. District Court of the Eastern District of New York reversed.

The Second Circuit affirmed the district court’s holding that the bankruptcy court lacked jurisdiction to grant the trustee’s request for payment from the assets of the 401(k) plan.  The court noted that a bankruptcy court only has jurisdiction over matters either arising under the Bankruptcy Code or related to a bankruptcy case.

The court held that the matter of the trustee’s compensation did not “arise under” the Bankruptcy Code even though Section 704(11) of the Code puts a trustee in the role of administrator of the debtor’s 401(k) plan.  That Code provision, the Court reasoned, was just a procedural vehicle; it is ERISA, not the Bankruptcy Code, that governs substantive rights and obligations regarding the plan.  The court next concluded that the matter of the trustee’s pay request did not “relate to” a bankruptcy case because a matter only relates to a bankruptcy case if it might affect the debtor’s estate.  The court reasoned that since the Bankruptcy Code, in Section 541(b)(7), explicitly excludes employee benefit plan assets from a debtor’s bankruptcy estate, the trustee’s request for payment from plan assets could not possibly have affected the debtors’ estate.

While holding that the bankruptcy court could not grant the trustee’s application for compensation from the 401(k) plan’s assets, the Second Circuit expressed no view on the question whether the bankruptcy court could approve use of assets from the debtors’ bankruptcy estate to compensate the trustee for services administering the plan.