                                                                                                                           Opinions of the United
1997 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


1-22-1997

In Re: Ronald Yuhas
Precedential or Non-Precedential:

Docket 96-5146




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Recommended Citation
"In Re: Ronald Yuhas" (1997). 1997 Decisions. Paper 17.
http://digitalcommons.law.villanova.edu/thirdcircuit_1997/17


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        UNITED STATES COURT OF APPEALS
            FOR THE THIRD CIRCUIT
                  ____________

                      No. 96-5146
                     ____________

             IN RE: RONALD J. YUHAS,
                      Debtor
               ____________________

                   THOMAS J. ORR,
                      Appellant

                            v.

                 RONALD J. YUHAS
                ____________________

ON APPEAL FROM THE UNITED STATES DISTRICT COURT
         FOR THE DISTRICT OF NEW JERSEY
               ____________________

                (Civil Action No. 95-5551)

                 Argued: October 1, 1996
        Before: ALITO and McKEE, Circuit Judges
                and GREEN, District Judge *

            (Opinion Filed: January 22, 1997)

                ____________________

              OPINION OF THE COURT
                ____________________

                 Thomas J. Orr, Esq.
                 John K. Justin, Esq. (Argued)
                 331 High Street, Second Floor
                 Burlington, New Jersey 08016

                 Counsel for Appellant
_________________________
*
  The Honorable Clifford Scott Green, Senior United States District Judge for the Eastern District
of Pennsylvania, sitting by designation.



                                        Broege, Neuman, Fischer & Shaver
                                        Peter J. Broege, Esq. (Argued)
                                        25 Abe Voorhees Drive
                                        Manasquan, New Jersey 08736

                                        Counsel for Appellee

ALITO, Circuit Judge:


                The issue in this appeal is whether a New Jersey statute, N.J.S.A. § 25:2-1(b), that

protects a qualified individual retirement account (IRA) from claims of creditors constitutes a

"restriction on the transfer of a beneficial interest of the debtor in a trust" within the meaning of 11

U.S.C. § 541(c)(2) and thus results in the exclusion of the IRA from a bankruptcy estate. We hold

that it does, and we therefore affirm the decision of the district court.



                                                   I.

                Debtor Ronald J. Yuhas (the "debtor") filed a Chapter 7 bankruptcy petition, and a

trustee was appointed. At the time of his petition, the debtor held an IRA account containing

approximately $143,000. He states that these funds represented his interest in a terminated

pension plan that he had "rolled over" into his IRA two years earlier.

                The debtor listed the IRA as an asset but claimed that it was not part of the

bankruptcy estate because of N.J.S.A. § 25:2-1(b). He then filed a motion seeking a declaration to

this effect, and the trustee filed a cross-motion seeking to have the IRA declared an asset of the

estate. The bankruptcy court granted the debtor's motion and denied the trustee's motion, and the

district court affirmed. The trustee then took this appeal.
                                                   II.

                Section 541(c)(1) of the Bankruptcy Code, 11 U.S.C. § 541(c)(1), broadly states that

a bankruptcy estate includes "all legal or equitable interests of the debtor in property" as of the

commencement of the bankruptcy estate "[e]xcept as provided in subsections (b) and (c)(2) of this

section." Subsection (c)(2) provides:
A restriction on the transfer of a beneficial interest of the debtor in a trust that is
                enforceable under applicable nonbankruptcy law is enforceable in a
                case under this title.


11 U.S.C. § 541(c)(2). The question before us is whether N.J.S.A. § 25:2-1(b) constitutes a

"restriction on the transfer of a beneficial interest of the debtor in a trust under applicable

nonbankruptcy law."

              N.J.S.A. § 25:2-1(b) provides in pertinent part:
Notwithstanding the provisions of any other law to the contrary, any property held
              in a qualifying trust and any distributions from a qualifying trust,
              regardless of the distribution plan elected for the qualifying trust,
              shall be exempt from all claims of creditors and shall be excluded
              from the estate in bankruptcy . . . .

...

For purposes of this section, a "qualifying trust" means a trust created or qualified
              and maintained pursuant to federal law, including, but not limited
              to, section . . . 408 . . . of the federal Internal Revenue Code of
              1986 (26 U.S.C. § . . . 408 . . . ).




                Section 408(a) of the Internal Revenue Code, 26 U.S.C. § 408(a), defines an

"individual retirement account" as "a trust" that is "created or organized in the United States for the

exclusive benefit of an individual or his beneficiaries" and that meets certain requirements. IRAs

that meet these requirements are said to be "qualified" and receive favorable federal income tax

treatment. See Section 408(d) and (e) of the Internal Revenue Code, 26 U.S.C. § 408(d) and (e).



                                                  - 3 -
                The trustee's first argument is that under § 541(c)(1) and (2) trusts subject to

transfer restrictions are not excluded in their entirety from a bankruptcy estate but rather are

included in the estate subject to those restrictions. Therefore, he argues, the debtor's IRA should

be included in the bankruptcy estate with the state-law protection against creditors' claims

remaining in effect. And since he stands in the shoes of the debtor, the trustee maintains, this

restriction on creditors does not impair his ability to liquidate the IRA.

                This argument, however, is inconsistent with the Supreme Court's analysis in

Patterson v. Shumate, 504 U.S. 753, 758 (1992), of the interplay between § 541(c)(1) and §

541(c)(2). There are two arguable interpretations of this interplay. One is that trusts subject to the

type of restriction described in     § 541(c)(2) are entirely excluded from a bankruptcy estate. The

other is that such trusts are included but that they remain subject to the same restrictions that

applied before bankruptcy. In Patterson, the Court clearly chose the first interpretation, stating

that "[t]he natural reading of [§ 541(c)(2)] entitles a debtor to exclude from property of the estate

any interest in a plan or trust that contains a transfer restriction enforceable under any applicable

nonbankruptcy law." Patterson, 504 U.S. at 758.

                Although the trustee in essence urges us to disregard this statement as careless

dictum, we will not do so. The statement in Patterson concerned an important step in the Court's

reasoning and represented an entirely natural reading of the statutory language. The trustee

contends that the Court used this language because the case before it involved a debtor's interest in

a trust, an ERISA plan, that was entirely beyond the reach of either the debtor or his creditors.

Thus, the trustee maintains that what the Court meant to say was that § 541(c)(2) excludes from

property of the estate any interest in a plan or trust that contains a restriction that "renders the

entirety of the asset unreachable" under applicable nonbankruptcy law. Appellant's Br. at 6. In

our judgment, this is not a plausible interpretation of what the Court said, and we must therefore




                                                  - 4 -
reject it. Accordingly, if the debtor's IRA meets all of the requirements of § 541(c)(2), we must

hold that it is completely excluded from the bankruptcy estate.

                These requirements are the following: (1) the IRA must constitute a "trust" within

the meaning of 11 U.S.C. § 541(c)(2); (2) the funds in the IRA must represent the debtor's

"beneficial interest" in that trust; (3) the IRA must be qualified under Section 408 of the Internal

Revenue Code; (4) the provision of N.S.J.A. § 25:2-1 stating that property held in a qualifying IRA

is "exempt from all claims of creditors" must be a "restriction on the transfer" of the IRA funds; and

(5) this restriction must be "enforceable under nonbankruptcy law." In this appeal, the trustee's

arguments do not focus on any of the first three requirements, and thus we assume for present

purposes that they are satisfied. Nor does the trustee dispute the fact that N.J.S.A. § 25:2-1 would

constitute "applicable nonbankruptcy law" if it restricted transfer of the debtor's interest in the way

that the trustee believes is required by 11 U.S.C. § 541(c)(2).1 Thus, to the extent that the trustee's

remaining arguments confront the statutory language, they focus on the fourth requirement, i.e.,

the requirement that N.J.S.A. § 25:2-1 must constitute a "restriction on the transfer" of the IRA

funds.

                The Bankruptcy Code defines the term "transfer" to encompass a wide range of

dispositions:
"transfer" means every mode, direct or indirect, absolute or conditional, voluntary
               or involuntary, of disposing of or parting with property or with an
               interest in property, including retention of title as a security interest
               and foreclosure of the debtor's equity of redemption.


11 U.S.C. § 101(54). Any procedure by which funds in an IRA might be reached to satisfy the

"claims of creditors" (N.J.S.A. § 25:2-1(b)) would seem to fall within this broad definition and



1.
   Applicable nonbankruptcy law includes both federal law such as
ERISA, see Patterson v. Shumate, 504 U.S. 753, 758 (1992), and
state law, Velis v. Kardanis, 949 F.2d 78, 80-81 (3d Cir. 1991).


                                                  - 5 -
thus constitute a "transfer." Consequently, N.J.S.A. § 25:2-1(b) would seem to be a "restriction on .

. . transfer."

                 Despite this statutory language, the trustee contends that "Section 541(c)(2) was

intended to be read and should be read as though `restriction on transfer' were to read `restriction

on the debtor's ability to transfer.' Only by such a reading are the policy interests inherent

throughout the Bankruptcy Code best served." Appellant's Br. at 13. The trustee maintains that

this reading is needed to prevent "the legalization of what would otherwise be the fraudulent activity

of converting and hiding assets to avoid the collection actions of creditors" and that "it would be

lunacy for any debtor's rights attorney . . . to advise his clients to do anything but place their liquid

assets into an IRA account." Appellant's Br. at 9-10. He thus submits that § 541(c)(2) was intended

solely to exclude trusts, such as pension plans and spendthrift trusts, that are created by another for

the long-term benefit of the debtor and with respect to which the debtor has no right of immediate

liquidation. Appellant's Br. at 13.

                 In response to this argument, the debtor points out that the Bankruptcy Code

already contains protection against fraudulent transfers of assets. See e.g., 11 U.S.C. § 544(b)

(trustee may avoid any transfers of interest of property by a debtor that is voidable under applicable

law, such as state fraudulent conveyances law); id. § 547(b)(4)(a) (allowing a trustee to avoid certain

transfers of interest by a debtor made on or within 90 days prior to the date of filing the petition for

bankruptcy protection); id. § 548 (allowing a trustee to avoid any transfer of property made by a

debtor within one year of filing a petition for bankruptcy protection if, among other things, the

transfer was made with actual intent to defraud or was made in exchange for less than reasonably

equivalent value while the debtor was insolvent). Further militating against the trustee's argument is

the generally applicable restriction in the Internal Revenue Code on the amount that an individual

can transfer into an IRA in any one year. See 26 U.S.C. § 408(a)(1) ("[N]o contribution will be

accepted unless it is in cash, and contributions will not be accepted for the taxable year in excess of


                                                  - 6 -
$2,000 on behalf of any individual."). In addition, the bankruptcy judge argued that excluding an

IRA from a bankruptcy estate furthered the policy of protecting retirement savings, and she noted

our statement in Velis v. Kardanis, 949 F.2d 78, 82 (3d Cir. 1991):
[T]here can be no doubt that Congress has expressed a deep and continuing
               interest in the preservation of pension plans, and in encouraging
               retirement savings, as reflected in the statutes which have given us
               ERISA, Keogh plans and IRAs. We believe it reasonable to
               conclude that Congress intended to provide protection against the
               claims of creditors for a person's interest in pension plans, unless
               vulnerable to challenge as fraudulent conveyances or voidable
               preferences.


                It is not for us to take sides in this policy debate. "Given the clarity of the statutory

text . . ., [the trustee] bears an `exceptionally heavy' burden of persuading us that Congress

intended to limit the § 541(c)(2) exclusion to restrictions on transfer" that apply only to the debtor,

Patterson, 504 U.S. at 760, and the trustee's arguments are insufficient under this standard.
                Our rejection of this argument dooms the trustee's final argument, i.e., that §

541(c)(2) is merely a state exemption statute available for debtors who elect state exemptions

pursuant to 11 U.S.C § 522(b)(2).2 This argument is based on In re Van Nostrand, 183 B.R. 82,

86 (Bankr. D.N.J. 1995), but the analysis of § 541(c)(2) in that decision is flawed.

                In Van Nostrand, the court held that N.J.S.A. § 25:2-1(b) did not constitute a

"restriction on . . . transfer" for two reasons. 183 B.R. at 84. First, the court interpreted Patterson

to mean that such a restriction must be included in the document that creates the trust rather than

a statute. The trustee "concedes that this interpretation of Patterson may be incorrect," Appellant's

Br. at 18, and we agree that it is wrong.3 Second, Van Nostrand held that a "restriction . . . on
2.
   11 U.S.C. § 522 allows a debtor to choose between federal
exemptions listed in subsection (d), or any exemptions allowed
under state, local and federal nonbankruptcy law. 11 U.S.C. §
522(b)(2)(A). A debtor must choose one or the other, but may not
select exemptions from both. Id.
3.
   Ironically, this argument is based on the same sentence in
Patterson that we found to doom the trustee's prior argument.                                          As

                                                  - 7 -
transfer" must preclude transfer by the debtor, not by creditors. 183 B.R. at 85.4 We have already

explained why we cannot agree with this argument. The Van Nostrand court then went on to

consider a contention not made by the debtor in this case, viz., that "N.J.S.A. 25:2-1(b) is a state

exclusion statute which must be enforced by the bankruptcy court so that the debtor receives

treatment in the bankruptcy court similar to treatment which he would receive in state court.

Butner v. U.S., 440 U.S. 48 (1978)." 183 B.R. at 85. The court disagreed, holding that N.J.S.A. §

25:2-1(b) was instead a state exemption statute, 183 B.R. at 85, and it is upon this last holding that

the trustee now relies.

                 This holding is not relevant, however, for present purposes. The debtor here does

not argue that N.J.S.A. § 25:2-1(b) is a "state exclusion statute," and insofar as the Van Nostrand

court addressed the argument that the debtor in this case has made, i.e., that N.J.S.A. is a

"restriction on . . . transfer," that court erred.

(..continued)
noted, the Patterson Court wrote: "The natural reading of [§
541(c)(2)] entitles a debtor to exclude from property of the
estate any interest in a plan or trust that contains a transfer
restriction enforceable under any relevant nonbankruptcy law."
504 U.S. at 758 (emphasis added). Van Nostrand and some other
cases have interpreted this language to mean that a trust subject
to a statutory restriction on transfer cannot come within §
541(c)(2). We disagree. In Patterson, the Court said that a
debtor may exclude a trust from the bankruptcy estate if the
trust contains an appropriate restriction; the court did not say
that a debtor may exclude a trust only if it, as opposed to a
statute, contains such a restriction. Moreover, the statutory
language that the Court was interpreting does not hint at the
sort of restriction that Van Nostrand and similar cases impute to
Patterson, and we feel confident that the Court would not have
construed the statute as containing such a restriction without
providing an explanation. Therefore, we reject the argument that
a restriction contained in a statute cannot qualify as a
"restriction on . . . transfer under applicable nonbankruptcy
law" within the meaning of § 541(c)(2)
4.
   In re Lamb, 179 B.R. 419 (Bankr. D.N.J. 1994), on which the
trustee also relies, is based on this same incorrect conclusion.
 See 179 B.R. at 423.


                                                     - 8 -
                                               III.

               In conclusion, we have considered all the arguments raised by the trustee but are

not persuaded. We therefore affirm the decision of the district court.




                                              - 9 -
