In the

United States Court of Appeals

For the Seventh Circuit

No. 01-2412

In the Matter of:

Donald Weinhoeft and Anita L. Weinhoeft,

Debtors-Appellants.

Appeal from the United States District Court 

for the Central District of Illinois. 

No. 00-3327--Richard Mills, Judge.

Argued December 6, 2001--Decided December 21, 2001

 Before Cudahy, Easterbrook, and Evans,

Circuit Judges.

 Easterbrook, Circuit Judge. When Donald

Weinhoeft entered bankruptcy proceedings,

one asset of his estate was a wrongfuldischarge suit against Union Planters

Bank, his former employer. That suit

eventually settled for $165,000 in cash,

plus the Bank’s release of any claims

against Donald and his wife Anita as a

creditor in their bankruptcies. Donald

contends that $40,000 of the settlement

proceeds is exempt from creditors’ claims

and should be turned over to him, because

it represents the value of pension

contributions that the Bank would have

made, had his employment continued. The

bankruptcy judge, and then the district

judge, rejected this contention. In this

appeal--which is within our jurisdiction

under 28 U.S.C. sec.158(d) even though

the bankruptcy proceedings are ongoing,

see In re Baker, 768 F.2d 191 (7th Cir.

1985)--the Weinhoefts contend that it is

the Trustee’s burden to prove that

settlement proceeds should not be

allocated to pension claims, rather than

the debtors’ burden to demonstrate that

they should be. The settlement agreement

is silent on the matter, so the

Weinhoefts think that they must prevail.

Yet the burden of persuasion matters only

if it is possible to exempt cash from the

estate. That depends on the language of

the Bankruptcy Code and the statutes to

which it points.

 The Code provides two sources of
exemption authority potentially relevant

to the Weinhoefts’ position. The first,

11 U.S.C. sec.541(c)(2), says that the

bankruptcy process respects any

"restriction on the transfer of a

beneficial interest of the debtor in a

trust that is enforceable under

applicable nonbankruptcy law".

"[A]pplicable nonbankruptcy law" includes

both state and federal provisions, see

Patterson v. Shumate, 504 U.S. 753

(1992), which means that pension plans

subject to the anti-alienation rule of

erisa, see 29 U.S.C. sec.1056(d)(1), are

not part of an estate in bankruptcy.

Likewise any state law governing

spendthrift trusts applies in bankruptcy.

Illinois provides that retirement plans

are exempt from creditors’ claims. 735

ILCS sec.5/12-1006. To the extent that

this statute speaks to pensions regulated

by erisa it is preempted (but redundant);

to the extent it deals with individual

retirement accounts, church plans, and

other assets outside the scope of erisa,

it is not preempted, see Reliance

Insurance Co. v. Zeigler, 938 F.2d 781

(7th Cir. 1991), and may supply

"applicable nonbankruptcy law" for

purposes of sec.541(c)(2). The second

possible source of authority is 11 U.S.C.

sec.522(b)(2)(A), which allows debtors to

shelter from creditors’ claims "any

property that is exempt under . . . State

or local law that is applicable on the

date of the filing of the petition at the

place in which the debtor’s domicile has

been located for the 180 days immediately

preceding the date of the filing of the

petition". Once again the potential state

exemption is 735 ILCS sec.5/12-1006. The

$40,000 did not enter a trust, so

sec.541(c)(2) does not avail the

Weinhoefts. Thus everything depends on

sec.522(b)(2)(A) and the scope of the

exemption in Illinois law.

 Section 5/12-1006 reads:

(a) A debtor’s interest in or right,

whether vested or not, to the assets held

in or to receive pensions, annuities,

benefits, distributions, refunds of

contributions, or other payments under a

retirement plan is exempt from judgment,

attachment, execution, distress for rent,

and seizure for the satisfaction of debts

if the plan (i) is intended in good faith

to qualify as a retirement plan under

applicable provisions of the Internal

Revenue Code of 1986, as now or hereafter
amended, or (ii) is a public employee

pension plan created under the Illinois

Pension Code, as now or hereafter

amended.

(b) "Retirement plan" includes the

following:

(1) a stock bonus, pension, profit

sharing, annuity, or similar plan or

arrangement, including a retirement plan

for self-employed individuals or a

simplified employee pension plan;

(2) a government or church retirement

plan or contract;

(3) an individual retirement annuity or

individual retirement account; and

(4) a public employee pension plan

created under the Illinois Pension Code,

as now or hereafter amended.

(c) A retirement plan that is (i)

intended in good faith to qualify as a

retirement plan under the applicable

provisions of the Internal Revenue Code

of 1986, as now or hereafter amended, or

(ii) a public employee pension plan

created under the Illinois Pension Code,

as now or hereafter amended, is

conclusively presumed to be a spendthrift

trust under the law of Illinois.

This statute covers two kinds of

entitlements: rights "to the assets held

in" pension plans, and rights to "receive

pensions . . . under a retirement plan".

The Weinhoefts do not claim any rights to

assets held in a plan; the $165,000 was

paid in cash to the Trustee in

bankruptcy. Nor do they claim shelter for

a right to receive anything from a

retirement plan, a term defined by

sec.5/12-1006(b).

 What the Weinhoefts instead argue is

that $40,000 would have been placed in a

pension plan, had Donald not been fired.

Maybe so, but neither erisa nor sec.5/12-

1006 asks what would or could have

happened. These statutes apply an antialienation rule (or, under state law, the

rule for spendthrift trusts) to assets

that actually entered pension plans--

and, for employees in the private sector,

only tax-qualified plans at that. None of

the $165,000 could be excluded from

Donald Weinhoeft’s income as a
contribution to a pension plan (nor could

or does he argue that $40,000 was

"intended in good faith to qualify as a

retirement plan under the applicable

provisions of the Internal Revenue Code

of 1986" within the meaning of sec.5/12-

1006(a)(i)).

 Federal cases such as Patterson and,

e.g., Guidry v. Sheet Metal Workers

National Pension Fund, 493 U.S. 365

(1990), apply erisa’s anti-alienation rule

mechanically: A pension trust is

inalienable no matter how strong the

creditor’s equitable claim to the money,

and funds not in pension trusts are

alienable no matter how much the debtor

would prefer to keep the value out of

creditors’ hands. The proof of this is

the rule that as soon as funds are

withdrawn from a plan, creditors can

reach them freely. See Velis v. Kardanis,

949 F.2d 78, 82 (3d Cir. 1991). We see no

reason why sec.5/12-1006 should be

construed to cover funds that are outside

retirement plans. It evidently was

designed to track erisa to the extent the

Supremacy Clause allows states to

regulate in this field. The Weinhoefts do

not cite, and we could not find, any

decision of an Illinois court applying

sec.5/12-1006 to assets that might have

entered a retirement plan but didn’t; nor

have they pointed to any decision

construing a similar statute in any of

the other 49 states in such a manner. The

case on which the Weinhoefts principally

rely, Auto Owners Insurance v. Berkshire,

225 Ill. App. 3d 695, 588 N.E.2d 1230 (2d

Dist. 1992), dealt with funds received

from a pension plan for current support,

not with funds that never entered a

pension plan.

 So the question is not how the funds for

the settlement were or could have been

allocated by agreement between Donald

Weinhoeft and his former employer. Such

an allocation, whether informal or

express, could be used to gyp creditors.

It is not origin but destination that

matters. If settlement funds are

deposited in a retirement plan covered by

either erisa or state law such as

sec.5/12-1006, then they are exempt from

creditors’ claims as long as they remain

in that plan. But cash on hand is not

shielded from creditors’ claims by

sec.541(c)(2), erisa, or sec.5/12-1006 in

conjunction with sec.522(b)(2)(A).
Affirmed