In re Atallah
| Decision Date | 18 January 1989 |
| Docket Number | Bankruptcy No. 87-03181S. |
| Citation | 95 BR 910 |
| Parties | In re Michael K.C. ATALLAH, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Robert Williamson, Media, Pa., for debtor.
Christopher G. Kuhn, Philadelphia, Pa., trustee.
We are called upon in the present case to determine if the Debtor's Individual Retirement Accounts (hereinafter referred to as "IRAs") constitute property of the estate or whether they are excluded therefrom by operation of 11 U.S.C. § 541(c)(2). For the reasons discussed herein, we conclude that the exclusionary provisions of § 541(c)(2) are limited to restraints on transfer that are enforceable under state spendthrift trust law. We further conclude that the Debtor's IRAs do not qualify as "spendthrift trusts" under Pennsylvania law. Therefore, we reject the Debtor's contention that his IRAs are excluded from property of his estate by operation of § 541(c)(2). We do not determine the issues of the possible exemption of the Debtor's IRAs under state or federal exemption laws since no such exemptions are presently claimed by the Debtor.
Michael K.C. Atallah (hereinafter referred to as "the Debtor"), filed a voluntary Petition under Chapter 7 of the Bankruptcy Code on June 26, 1987. Christopher G. Kuhn, Esquire (hereinafter "the Trustee") was appointed Interim Trustee of the Debtor's estate by order of this Court dated June 27, 1987.
On June 26, 1987, the Debtor filed his original Schedules of Assets and Liabilities and Statement of Financial Affairs, including Schedule B-2, setting forth his Personal Property, and Schedule B-4, reciting Property Claimed as Exempt (hereinafter "the original Schedules"). In the original Schedules, the Debtor listed four separate IRAs with a combined listed value of $8,373.75. The Debtor also claimed that $7,900.00 of the IRAs was exempt pursuant to 11 U.S.C. § 522(d)(5).1
On June 21, 1988, the Trustee filed an Objection to the Debtor's Claim of Exemption alleging that the Debtor's claim of exemption for this IRAs exceeded the maximum allowable amount of such exemption under § 522(d)(5). The Trustee's Objection was originally scheduled for a hearing on July 19, 1988. After a number of continuances, this matter was finally scheduled for and proceeded to a hearing on October 18, 1988. Also on that date, the Debtor filed his Answer to the Trustee's Objection and an Amended Schedule B-4.2 The Debtor's Amended Summary of Debts and Property asserted that $8,346.75, constituting the Debtor's interest in his IRAs, should be excluded from the Debtor's bankruptcy estate altogether.
At the hearing on October 18, 1988, counsel appeared and indicated that they wished the matter to be considered upon a Stipulation of Facts. The court entered an Order providing the Trustee and the Debtor with an opportunity to submit a written Stipulation of Facts and Opening and Reply Briefs in the case. Pursuant or our Order, Opening Briefs were due on November 7, 1988, and Reply Briefs were due November 23, 1988. These dates were later extended for one week by agreement of the parties. The parties' Stipulation of Facts and the Trustee's Memorandum of Law in Support of the Trustee's Objection were filed on November 14, 1988. The Debtor's brief was filed on November 17, 1988. The Debtor also filed a Reply Brief on November 23, 1988, while the Trustee declined an opportunity to do likewise. The parties' Stipulation of Facts in this matter is incorporated within the preceding procedural history and the following Findings of Fact.
The Debtor has four (4) IRAs. Three of the Debtor's IRAs are held in trust at the Philadelphia Savings Fund Society (hereinafter "PSFS"), and are valued at $1,128.44, $2,182.69, and $2,220.94, respectively. The fourth IRA, in the amount of $2,841.68, is held in trust by the Navy Federal Credit Union. Each IRA was established prior to the Debtor's Chapter 7 filing.
Each of the IRAs was established under the terms of an Individual Retirement Custodial Account Agreement (hereinafter "the IRA Agreements"). For each IRA Account, the Debtor is both the "depositor" and the "beneficiary" as those terms are defined in the IRA Agreements.
Each of the IRA Agreements contains certain "anti-alienation" provisions. The IRA Agreements provide that amounts deposited in the IRA Account may be distributed to the depositor when he or she attains age 59½ or becomes disabled ). Article IX of the IRA Agreements also provides as follows:
Nonassignability of Benefits: Prohibited Transactions. Except to the extent otherwise required by law, none of the benefits, payments or proceeds due any Participant, spouse of a Participant or Beneficiary hereunder shall be subject to the claims of any creditor of such Participant, spouse or Beneficiary. Except to the extent permitted by law, no Participant, spouse or Beneficiary shall have any right to anticipate, sell, assign, or otherwise alienate the assets of the Custodial Account or any benefits which may be payable under this Agreement prior to distribution of such assets pursuant to this Agreement. Neither the Depositor nor the Depositor\'s spouse nor the Depositor\'s Beneficiaries under this Agreement shall use the Custodial Account or any part thereof as security for a loan, nor shall the Depositor, the Depositor\'s spouse or Beneficiaries under this Agreement, the Custodian and any other disqualified person with respect to the Custodial Account engage in any transaction prohibited by the Code or the Employee Retirement Income Security Act of 1974 ("ERISA") with respect to such Custodial Account.
Article IV of the IRA Agreements provides that a depositor's interest in his or her IRA Account "shall at all times be fully vested and nonforfeitable ...," but shall be subject to charges and penalties imposed by FDIC regulations for premature withdrawal.
The Debtor does not claim any present right to distribution under Article VI of the IRA Agreements, presumably because he is neither 59½ years of age nor disabled. However, there does not appear to be any express provision in the IRA Agreement prohibiting the Debtor from making a "premature withdrawal" of his interest in the IRAs. Indeed, Article VII of the IRA Agreements requires a depositor to provide PSFS with a declaration of intention as to the disposition of any amount distributed, except in the case of the depositor's death, disability, or attainment of age 59½. The clear implication of this provision is that a distribution may be made even though the depositor is neither disabled nor 59½ years old.
It was stipulated by the parties that if the Debtor were to obtain a premature distribution of the funds in his IRAs, he would "suffer an adverse tax consequence." Exhibit C is a letter from the Debtor's accountant, William H. McCue (hereinafter "McCue"), estimating the Debtor's tax liability if the Debtor's IRAs had been distributed in June, 1987. According to McCue, such a distribution would have been both taxable as ordinary income (estimated liability — $2,986.85) and subject to a ten (10%) percent tax on premature distribution from IRAs (estimated liability — $853.39).
While this case arose originally upon the Trustee's objection to the Debtor's claim of exemption under 11 U.S.C. § 522(d)(5), this objection has been rendered moot by the Debtor's amendment of the original Schedules. The issue now presented before the court is whether the Debtor's IRAs are included within his bankruptcy estate.
The Debtor here claims that his IRAs are excluded from property of the estate by operation of 11 U.S.C. § 541(c)(2). He has not claimed that such assets are exempt under § 522(d)(10)(E). In any event, it appears that § 522(d)(10)(E) applies to payments of retirement benefits and not to the corpus of a retirement trust account. See In re Clark, 711 F.2d 21 (3d Cir.1983) (). Since the Debtor has chosen the federal rather than the state exemptions, we need not address the issue of whether his IRAs are exempt under other federal law as provided in 11 U.S.C. § 522(b)(2)(A). But see In re Lichstrahl, 750 F.2d 1488 (11th Cir.1985) (). Accord, In re Daniel, 771 F.2d 1352 (9th Cir.1985), cert. denied sub nom. Daniel v. Security Pacific National Bank, 475 U.S. 1016, 106 S.Ct. 1199, 89 L.Ed.2d 313 (1986). Neither do we address the issue of whether the Debtor's IRAs would be exempt under the applicable state exemption found at 42 Pa.C.S. § 8124(b)(1)(vii). See Marine Midland Bank v. Surfbelt, Inc., 532 F.Supp. 728, 730 (W.D.Pa.1982) (judgment debtor must show amount deducted as IRA contribution for federal income tax purpose to qualify for exemption under § 8124(b)(1)(vii); and Industrial Valley Bank v. Rosenfield, 13 PHILA. CO.RPTR. 559, 566-67, 37 Pa.D. & C.3d 621 (1985) (IRA exempt under 42 Pa.C.S. § 8124(b)(1)(vii)). We shall first address first the scope of the exemption from property of the estate provided in 11 U.S.C. § 541(c)(2).
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