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02/27/97 NATIONAL BANK MONMOUTH v. MULTI NATIONAL

February 27, 1997

NATIONAL BANK OF MONMOUTH, PLAINTIFF-APPELLEE,
v.
MULTI NATIONAL INDUSTRIES, INC., MONTY P. MCCLELLAN, DEFENDANTS-APPELLANTS, MARSH FESLER NEWMAN, GARNISHEE.



Appeal from the Circuit Court of the 9th Judicial Circuit Warren County, Illinois. No. 83-L-35. Honorable Patricia A. Walton, Judge, Presiding.

As Corrected March 24, 1997. Released for Publication March 27, 1997.

Present - Honorable Tom M. Lytton, Presiding Justice, Honorable Michael P. McCUSKEY, Justice, Honorable William E. Holdridge, Justice. Justice Lytton delivered the opinion of the court. Holdridge and McCUSKEY, JJ., concur.

The opinion of the court was delivered by: Lytton

The Honorable Justice LYTTON delivered the opinion of the court:

This case involves an intricate maze of legal maneuvering in the state and federal courts. We are now faced with putting the final piece of this puzzle into place.

PROCEDURAL HISTORY

Monty P. McClellan is a physician who worked at the M & S Medical Center, S.C. (Center). He had a vested interest in the Center's pension and profit-sharing qualified plans (plan); the plan was subject to the provisions of the federal Employee Retirement Income Security Act of 1974 (ERISA) (29 U.S.C. ยง 1001 et seq. (1975)).

The bank received a $150,145.53 default judgment against McClellan on February 9, 1984, and subsequently obtained a non-wage garnishment order. A few days later, both McClellan and the Center filed for bankruptcy, and a bankruptcy trustee was appointed. The bankruptcy court ordered the plan's custodian to turn the plan funds over to the trustee, who used them, in part, to satisfy claims from other employees of the Center.

On August 7, 1992, McClellan filed a "Motion for Distribution of Exempt Property" seeking recovery of the remaining plan funds from the trustee. The bank objected, claiming that the distribution request was barred by the garnishment order. The bankruptcy court denied McClellan's motion, finding that the funds were part of the bankruptcy estate. Both parties appealed this decision to the United States District Court, which affirmed. McClellan then appealed to the United States Court of Appeals for the Seventh Circuit, and the bank cross-appealed.

On January 6, 1995, the Seventh Circuit reversed the district court, retroactively applying the decision in Patterson v. Shumate, 504 U.S. 753, 119 L. Ed. 2d 519, 112 S. Ct. 2242 (1992). In Patterson, the Supreme Court held that assets in ERISA-qualified plans never become part of a bankruptcy estate. Patterson, 504 U.S. at 759, 119 L. Ed. 2d at 528, 112 S. Ct. at 2247. Accordingly, the Seventh Circuit held that the bankruptcy court did not have subject matter jurisdiction over the plan or its assets and could not order the funds to be turned over to the trustee.

On March 29, 1995, the trustee had $81,281.44 of the original plan funds. The bank revived its default judgment against McClellan and filed an affidavit for a non-wage garnishment. McClellan then filed a motion in the bankruptcy court seeking a direct rollover of the funds into his individual retirement account (IRA). On June 13, 1995, the bankruptcy judge found that the trustee had no interest in the funds and ordered her to turn them over as directed by the Illinois trial court in the garnishment action. An appeal was taken to the federal district court.

Meanwhile, on September 25, 1995, the state trial court ordered that the funds be turned over to the bank. McClellan appealed the trial court's order to this court.

On October 31, 1995, the federal district court vacated the bankruptcy court's order as void for want of jurisdiction. McClellan appealed that decision to the Seventh Circuit; we stayed the instant appeal until after the ...


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