Pension Plan Loans are Bona Fide Debts Under the Bankruptcy Code

August 6, 2021, District of New Mexico – A Chapter 7 Trustee sued a trustee of a Pension Plan (“Defendant”) to recover a sum that a Debtor paid to the Plan shortly before filing bankruptcy. The money repaid a loan that one of the Debtors took from the Pension Plan. Plaintiff’s theories of recovery are that the payment is avoidable as a preferential and/or fraudulent transfer. Defendant trustee of the Pension Plan filed a motion to dismiss the Chapter 7 Trustee’s claim for failure to state a claim. Defendant made two arguments in support of her motion. First, Defendant argued that when the Debtor repaid the loan, she did not owe a ‘debt’ to the Plan because pension plan loans are not debts under the Bankruptcy Code. Consequently, there was no antecedent debt upon which to base an avoidable preference claim. Next, Defendant argues that Plaintiff’s claims failed because there was no ‘transfer’ – the Debtor simply moved the money from one account to another.

The Court ruled that Plaintiff stated a claim under both theories of recovery and denied Defendant’s motion to dismiss. The Court held that Plaintiff validly alleged that there was an antecedent debt when the payment was made, so his preference claim was viable. The Court reasoned that the view that pension plan loans are not ‘claims’ or ‘debts’ is not supportable, especially post-BAPCPA. The Court found that the Bankruptcy Code in several places states that such loans are debts. §§ 362(b)(19) and 523(a)(18). The Court followed the reasoning In re Buchferer, In re MacDonald, and In re Bartell, which conclude that a debtor’s loans from a retirement plan constitute a ‘debt’ or ‘claim’ and appear to be secured in some sense and thus entitled to different treatment than unsecured claims.  

Rejecting Plaintiff’s second argument, the Court held that pension plan borrowers do not ‘borrow their own money.’ The Court pointed out that while the amount of the loan may be capped by the size of the borrower’s pension plan account, there is no link between the borrower’s account and the borrowed funds because pension plan assets typically are pooled. The Court added that participants have an undivided beneficial ownership interest in the pooled assets, but the plan fiduciaries do not segregate the investment assets of each plan participant. The fact that pension plan assets are pooled is inconsistent with the idea that participants ‘borrow their own money.’

The Court ruled that Plaintiff stated a valid claim that the payment was a transfer and Defendant was the initial transferee. The Court denied Defendant’s motion and held that the pension plan loans are bona fide debts outside of bankruptcy and are recognized as such by the Bankruptcy Code.

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