In re Harless

Citation187 BR 719
Decision Date25 September 1995
Docket NumberBankruptcy No. 94-71994. Adv. No. 95-70311.
PartiesIn re Paul Kenneth HARLESS, and Loretta Jane Harless, Debtors. Donald L. DIONNE, Trustee, Plaintiff, v. Paul Kenneth HARLESS, and Loretta Jane Harless, Defendants.
CourtUnited States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Northern District of Alabama

Craig L. Slay, Tuscaloosa, Alabama, for Debtors.

Donald L. Dionne, Tuscaloosa, Alabama, Trustee.

E. Kenneth Aycock, Tuscaloosa, Alabama, for Trustee.

Helen H. Ellis, Tuscaloosa, Alabama, Estate Analyst.


C. MICHAEL STILSON, Bankruptcy Judge.

This matter came before the court on an adversary proceeding filed by Donald L. Dionne, as Trustee, seeking turnover of funds held by the debtor, Paul Kenneth Harless, in a "rollover" Individual Retirement Account (IRA). The court has reviewed the documents on file, including the parties' Joint Stipulation of Facts, and finds the Trustee's request should be DENIED, the debtors having properly claimed the IRA as exempt under Ala.Code § 19-3-1(b) (1975 & Supp. 1994).


On April 28, 1994, Paul K. Harless applied with AmSouth Bank, N.A., to deposit funds in a "rollover" Individual Retirement Account (IRA) established under 26 U.S.C. § 408(a).1See Exhibit A to Joint Stipulation of Facts, AP Doc. 5. The funds for the IRA were proceeds Harless cashed out of a retirement plan created under 26 U.S.C. § 401(k) by Harless' former business, Mardel Enterprises of Alabama, Inc. The fund was identified as "Individual Retirement Custodial Account (Under Section 408(a) of the Internal Revenue Code)" in the account's Disclosure Statement. (Exhibit B to AP Doc. 5.)

The Disclosure Statement accompanying Harless' Custodial Agreement with AmSouth (Exhibit B to AP Doc. 5) provided that all or part of an individual's IRA might be awarded to an ex-spouse or spouse in court action.

The Disclosure Statement also said:

Removal of Contributions. You may withdraw an IRA contribution by the due date (including extensions) for filing your federal income tax return for the year for which the contribution was made. You must also withdraw the earnings attributable to the excess and include the earnings as income for the year in which the contribution was made.

Further, the agreement describes the tax penalties Harless would suffer if he made withdrawals from the account before he reached age 59½; if he used all or part of the IRA as security for a loan; and if he directly borrowed from the IRA.

Harless' interest in the account was clearly transferrable although transfer would result in adverse tax consequences. No language which would prevent the withdrawal, assignment or transfer of the funds in the IRA appears in either 26 U.S.C. § 408(a), or in Exhibit A or Exhibit B to AP Doc. 5.

October 6, 1994, the Harlesses filed this Chapter 7 bankruptcy case. (BK Doc. 1) On their Schedule C, Property Claimed as Exempt, the Harlesses listed the "IRA Account at AmSouth Bank" totalling $7,961.48 as exempt from the trustee and their creditors under Ala.Code § 19-3-1(b). The debtors' attempt to protect this account is the subject of Adversary Proceeding 95-70311.

November 17, 1994, Dionne, as trustee, filed an Objection to Claim of Exemptions (BK Doc. 9) citing in particular $13,625.00 claimed as exempt under Ala.Code § 6-10-6 and $1,800.00 claimed under Ala.Code § 6-10-6. However, the trustee also ". . . respectfully requests that this Honorable Court deny the Debtors' claim of exemption in total due to the Debtors' clearly manifested intent to claim exemptions substantially in excess of the statutory maximum."

December 28, 1994, the trustee filed a Motion of Trustee Objecting to Claim of Exemptions and Seeking Turnover of Property of the Estate. (BK Doc. 18) This motion asked turnover of certain items of jewelry (two rings, a pearl necklace and bracelet, and a tennis bracelet and choker) because the trustee said the property was not insured.

March 17, 1995, Dionne filed Adversary Proceeding 95-70311 asking for turnover of the AmSouth IRA and any interest drawn on the account. The trustee's complaint alleged that the account could not be excluded from the bankruptcy estate under Ala.Code § 19-3-1(b) because the account could not be viewed as a "spendthrift trust" under Alabama law "nor do the debtors have sufficient room in their exemptions to allow this IRA to be included in their exempt assets."

The Harlesses' pleadings argued two points. They contended first, that the IRA never became property of the bankruptcy estate created by 11 U.S.C. § 541 because of the exclusion granted by Section 541(c)(2). Alternatively, they argued that, if their interest in the account were part of the bankruptcy estate, they could claim the funds as exempt under Ala.Code § 19-3-1(b).

April 25, 1995, the Bankruptcy Court approved a consent Order Approving Partial Compromise and Settlement of the issues in the trustees' initial motions in the main bankruptcy file. (BK Doc. 62) The order said the settlement resolved all exemption questions:

with the exception of the exemptability by the Debtors of Individual Retirement Accounts with AmSouth Bank which were valued at $7,961.48 at the time of filing.

After these issues were settled, the parties apparently turned their attention to AP 95-70311. On May 12, 1995, Dionne and the Harlesses filed a Joint Stipulation of Facts. (AP Doc. 5):

On May 18, 1995, Dionne filed a Motion for Summary Judgment (including brief material in support of the trustee's position). (AP Doc. 6). The trustee contended that the IRA could not be excluded from the estate by Section 541(c)(2) of the Bankruptcy Code because there were no restrictions on transfer in either 25 U.S.C. § 408(a) or in the agreements that created the account. The trustee further argued that the account was property of the estate because it did not meet the state law definition for a "spendthrift trust."

The Harlesses filed a Motion for Summary Judgment (AP Doc. 11) and a Brief in Support of Summary Judgment (AP Doc. 12) on June 22, 1995. They contended that since IRAs are "qualified trust(s)" under Section 19-3-1(b), they are excluded from the bankruptcy estate under Section 541(c)(2); or, if included in the estate, could be validly claimed as exempt by the Harlesses under Section 19-3-1(b).

The court took the case under submission for decision on the parties' motions for summary judgment July 25, 1995.


The Harless IRA is included in property of their Chapter 7 bankruptcy estate.

A. Congress intended for 11 U.S.C. § 541(a)'s definition of property of the estate to be construed expansively; its exceptions, as under Section 541(c)(2), more narrowly.

1. Section 541(a) brings "all legal and equitable interests of the debtor in property" "wherever located and by whomever held" as of the petition date into the bankruptcy estate.

It has now become a cliché to quote the famous definition of the legal entity known as the "bankruptcy estate" created by 11 U.S.C. § 541(a).2 The bankruptcy estate comprises "all legal or equitable interests of the debtor in property" "wherever located and by whomever held" on the day the debtor files his/her bankruptcy petition.

The House and Senate reports accompanying the Bankruptcy Reform Act of 1978 make it clear that Congress intended a broad, and expansive definition of property interests included in the estate.3 The Supreme Court of the United States reiterated that construction in United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). In that case, the courts forced the Internal Revenue Service to turn over property it had seized under a tax lien to a Chapter 11 debtor-in-possession. The IRS' seizure of the debtor's business premises precipitated the Chapter 11. To reach its holding, the Supreme Court determined the debtor-in-possession's property was property of the bankruptcy estate despite the IRS' prepetition levy on its lien "collateral."

While the Whiting Pools case dealt with a Chapter 11 reorganization, its policy language on the scope of the bankruptcy estate is applicable in any bankruptcy chapter:

The statutory language reflects this view of the scope of the estate. As noted above, § 541(a)(1) provides that the "estate is comprised of all the following property, wherever located: . . . all legal or equitable interests of the debtor in property as of the commencement of the case." 11 USC § 541(a)(1) (1976 ed, Supp V) The House and Senate Reports on the Bankruptcy Code indicate that § 541(a)(1)\'s scope is broad.

Whiting Pools, 462 U.S. at 204-205, 103 S.Ct. at 2313.

The court further defined the property interests included in the estate at 462 U.S. at 204, n. 8, 103 S.Ct. at 2313; n. 8:

Similar (congressional) statements to the effect that § 541(a)(1) does not expand the rights of the debtor in the hands of the estate were made in the context of describing the principle that the estate succeeds to no more or greater causes of action against third parties than those held by the debtor . . . (emphasis added)

So the legal entity known as the bankruptcy estate succeeds to the same ownership interest held by the debtor when the petition is filed — unless the interest comes under an exception to Section 541(a)(1).

2. Section 541(c)(2) provides that an "enforceable" restriction on transfer of a debtor's interest in a trust or account will exclude it from the bankruptcy estate.

The Harlesses contend Section 541(c)(2)4 should exclude the IRA from their Chapter 7 bankruptcy estate. The section states that when nonbankruptcy law provides an enforceable restriction on the debtor's transfer of his/her interest in property, that restriction will be enforced against the operation of Section 541(a)(1) as well. The restricted property will never enter the bankruptcy estate at all.

Before the impact of the Employee Retirement Income Security Act (ERISA) of 1974 was felt nationwide, ...

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