Bank of America, N.A. v. Moglia

Outboard Marine Corporation (Outboard) was in Chapter 7 bankruptcy. Outboard’s holdings included assets in a rabbi trust (Rabbi Trust). The term “rabbi trust” originated from an Internal Revenue Service (IRS) letter ruling involving a rabbi and refers to a trust created by an institution for the benefit of its executive(s), namely, to financially protect the executive(s) against a change of institutional control resulting in reduced compensation or termination. The IRS explained that the institution owned the assets of the rabbi trust until the rabbi’s employment ended. An executive’s right to receive money from a rabbi trust must be substantially limited to receive the tax benefit associated with excluding the trust contributions, interest, or other trust earnings from the executive’s gross income in the year in which the contribution was made or the interest obtained. The Rabbi Trust instrument provided that the trust must remain subject to Outboard’s general creditors’ claims. Outboard could not give its executives a security interest in the Rabbi Trust, nor assign a security interest to any creditor. In the event of insolvency, the trustee could make the Rabbi Trust assets available to satisfy Outboard’s general creditors’ claims. Bank of America, N.A. (BOA) (plaintiff), as Outboard’s secured creditors’ agent, sued Moglia (defendant), the bankruptcy trustee who claimed the Rabbi Trust assets for Outboard’s unsecured creditors, claiming a security interest in the Rabbi Trust assets pursuant to a security agreement (Agreement) entered into after the Rabbi Trust was funded. The bankruptcy court and the district court ruled in Moglia’s favor and held that the Rabbi Trust assets were not subject to the Agreement. BOA appealed, arguing that the Agreement contained no language excluding the Rabbi Trust assets from BOA’s security interest, and that Illinois law only enforced contractual anti-assignment provisions against an assignee if the provision stated that the assignor has no power to assign.