In a 30 page opinion published June 1, 2011, Judge Walrath ruled that funds held in a “rabbi” trust in order to pay for a “top hat” plan are property of the bankruptcy estate. Read on for the definition of “top hat” plans. Judge Walrath’s opinion is available here (the “Opinion”).  The background and opinion in this case are complex, so while this post will try to explain the situation, it will necessarily lack specificity that is found in the Opinion. I would encourage you to read the opinion as Judge Walrath appears to have taken great care to explain each piece of her analysis in great detail.


One of the strategies Washington Mutual (“WAMU”) employed to help it grow, was to merge with other banks. A number of employees of one of these acquired banks had enrolled in a specific type of deferred compensation plan. This type of plan is referred to as a “top hat” plan because it provides a means by which top management may receive tax benefits by deferring part of their compensation. Opinion at *3. In order to get the tax benefits, the top hat plans must be “unfunded” – meaning future payments to the plan participants must come from the general assets of the company. Opinion at *4. One method companies have implemented to assure that they can pay the funds promised in top hat plans is to establish and fund “rabbi” trusts. Companies can deposit funds sufficient to cover their top hat plan obligations into these trusts without affecting the plans “unfunded” status – so long as the trusts are considered an asset of the company, subject to a company’s creditors in case of bankruptcy. Opinion at *4-5.

What complicates the situation in this case, is that in the top hat plan allowed recipients to “elect to receive an immediate lump sum payment” after a change of control. Opinion at *12. Just shy of one year before the bankruptcy, in fall of 2007, a number of the employees who were entitled to the funds had requested a distribution. Opinion at *18-19. WAMU never transferred the funds from the trust, Opinion at *26, and after declaring bankruptcy filed the motion (the “Motion”) asking the Court to determine that it was entitled to the funds in the trust, Opinion at *2.

Judge Walrath’s Opinion

Extensive legal arguments were made by the parties of interest in the Motion. The employees who had deferred income in the “rabbi” trust argued that they should be entitled to a constructive trust and WAMU argued that top hat funds are, by definition, assets of the estate. Judge Walrath provided extensive analysis of constructive trust law, ultimately holding that the facts of this case did not warrant that remedy. Opinion at *20-29. She then quickly held that “because of the essential requirement that the top hat plans be unfunded” combined with the lack of payment before filing bankruptcy, the employees with claims against the trust were entitled only to unsecured claims in the bankruptcy.

Bankruptcy laws provide that transfers to insiders are preferential and can be recovered if made within one year of the bankruptcy. Because no transfer was made to the employees in this matter, this issue never arose. Yet, one wonders if WAMU’s decision not to release the funds makes any difference in the total value of the estate, or in the amount of compensation these employees received.