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In re Worldcom

September 14, 2007


The opinion of the court was delivered by: Denise Cote, District Judge


This appeal arises from the bankruptcy of WorldCom, Inc. ("WorldCom"), and concerns the ownership of funds held in trust for appellant Judith Whittaker, who served as a member of the board of directors of MCI Communications Corporation ("MCI") until MCI merged with WorldCom in 1998. During her tenure on the board of directors, Whittaker deferred her compensation through a plan established by MCI and administered by the Putnam Fiduciary Trust Company ("Putnam"). When WorldCom filed for bankruptcy in 2002, it directed Putnam to freeze the trust assets. Whittaker subsequently sought distribution of the trust assets, and the reorganized debtors that emerged from the WorldCom bankruptcy objected. She appeals from the judgment of the bankruptcy court (Gonzalez, B.J.) finding that her claim was general and unsecured, and from that court's grant of the reorganized debtors' objection to payment of that claim. For the following reasons, the decision of the bankruptcy court is affirmed.


I. The Putnam Plan and WorldCom Bankruptcy

The facts recited here are taken from the parties' fact stipulation. Whittaker served as a member of MCI's board of directors from 1985 until its merger with WorldCom in 1998. In 1994, Whittaker initiated participation in the MCI Communications Corporation Board of Directors Deferred Compensation Plan (the "Plan"), through which she elected to defer 100% of her retainer and 100% of her meeting fees, to be paid in ten annual installments commencing no later than February 15, 2003. MCI established a trust with Putnam to administer the Plan, and "transferred funds to Putnam corresponding to the compensation Whittaker had elected to defer, which MCI asserts were deposited into the trust and Whittaker asserts were deposited into her account." When MCI and WorldCom merged in 1998, the board of directors was reconstituted and the Plan was closed to new participants. Existing participants, including Whittaker, continued to accrue benefits under the Plan.

On November 13, 2001, Whittaker called Putnam representative Deborah Hutchins with an inquiry regarding her Plan account. Hutchins in turn contacted David Blackman, a senior manager at WorldCom charged with day-to-day oversight of the Plan, and asked for directions in response to Whittaker's inquiry. Hutchins responded to Whittaker by email dated November 20, 2001 (the "Putnam Email"), cc'ing Raymond Helms, a senior manager at WorldCom with certain accounting responsibilities for the Plan. Hutchins wrote that she had followed up on Whittaker's inquiry concerning "removing the funds from this account." Because MCI stopped making contributions to the Plan, Hutchins wrote, "there is no longer a formal plan in place" and the trust established for Whittaker was "viewed as simply an account with Putnam." "What this means," Hutchins continued, "is that the funds in the current account are available to you whenever you choose to take them."

The "waiting period" -- i.e., the time until February 15, 2003, before which installment payments to Whittaker were scheduled to commence -- "no longer exists," Hutchins wrote. Hutchins further instructed Whittaker that, "[i]n order to close out your account, and receive a check, we will need a letter of instruction from you."

Between November 20, 2001, the date of the Putnam Email, and July 21, 2002, the date of WorldCom's bankruptcy filing, Whittaker did not request that either Putnam or MCI close her account or make a distribution from it. Nor during that time did Whittaker receive any tax form reporting her Putnam account as income to any state or federal taxing agency, nor did Whittaker herself declare the value of her account as income. Further, Whittaker alleges that during that time period she did not regularly receive quarterly statements regarding her Putnam account. She received at least one such statement, however, which indicated that the "Vested Percent" of her account was "100%." As of June 30, 2002, the balance in Whittaker's account was $345,183.

Whittaker did not receive notice when WorldCom filed its bankruptcy petition in July 2002. In November 2002, Whittaker contacted Deborah Hutchins again and asked about cashing out her Putnam account. Hutchins informed Whittaker that her account had been frozen at WorldCom's instruction. Whittaker filed a proof of claim in the United States Bankruptcy Court for the Southern District of New York, which the court received on December 9, 2002.

II. Procedural History of Whittaker's Action

The bankruptcy court approved the WorldCom debtors' Modified Second Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code on October 21, 2003, and the plan became effective on April 20, 2004.*fn1 On September 19, 2003, the debtors filed a Notice of Rejection of Executory Contracts, which purported to reject the Plan. Whittaker interposed an objection to the Notice of Rejection on January 23, 2004, claiming that the Plan was no longer an executory contract as to her because her interest in it had fully vested.

The debtors filed their objection to Whittaker's claim on September 2, 2004, arguing that her claim was "no more than a general unsecured claim and is not entitled to priority or secured treatment." The parties subsequently agreed to a stipulation providing that Whittaker's claim would be allowed as a general unsecured claim. A hearing was held before the bankruptcy court on June 20, 2006, and the court issued its opinion on March 27, 2007,*fn2 holding that Whittaker's claim was general and unsecured, and that the debtors' objection to the claim was granted.

The bankruptcy court denominated the trust at issue a "rabbi trust," which is "an irrevocable trust for deferred compensation. Funds held by the trust are out of reach of the employer, but are subject to the claims of the employer's creditors in the event of bankruptcy or insolvency." In re ITT Group, Inc., 448 F.3d 661, 665 (3d Cir. 2006) (quoting David J. Cartano, Taxation of Compensation & Benefits § 20.05[D][3], at 735 (2004)). Under a rabbi trust, "the recipient receives only the company's unsecured promise to pay benefits and has no rights against any assets other than the rights of a general unsecured creditor of the company." 6 Mertens Law of Fed. Income Tax'n § 25B:212 (2007); see also Westport Bank & Trust Co. v. Geraghty, 90 F.3d 661, 664 (2d Cir. 1996) (explaining that the assets of the rabbi trust at issue were "subject to the claims of [the employer's] creditors at all times"). No income is imputed to the beneficiary of the trust so long as the trust assets remain subject to "substantial limitations or restrictions." I.R.S. Priv. Ltr. Rul. 81-13-107 (Dec. 31, 1980).

While Whittaker does not contest the description of the trust that held her assets as a rabbi trust, she claims that her rights in the trust assets vested on November 20, 2001 because the Putnam Email accelerated payment of her "fully funded and 100% vested deferred compensation plan account at least eight months prior to the Debtors' bankruptcy filings." Accordingly, the bankruptcy court observed that "Whittaker's assertion of an ownership ...

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