In re Houck

• Decision Date: 19 April 1995
• Docket Number: Bankruptcy No. 92-23984. Adv. No. 93-2282.
• Citation: 181 BR 187
• Parties: In re Ronald W. HOUCK, Debtor. David A. EISENBERG, Esquire, Trustee, Plaintiff, v. Ronald W. HOUCK, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

181 B.R. 187 (1995)

In re Ronald W. HOUCK, Debtor David A. EISENBERG, Esquire, Trustee, Plaintiff, v. Ronald W. HOUCK, Defendant.

Bankruptcy No. 92-23984. Adv. No. 93-2282.

United States Bankruptcy Court, E.D. Pennsylvania, at Reading.

April 19, 1995.

Mark C. Van Horn, Allentown, PA, for trustee.

James G. Watt, Allentown, PA, for debtor.

MEMORANDUM OPINION

JUDITH K. FITZGERALD, Bankruptcy Judge.

The matter before the court is the trustee's complaint for turnover against Debtor. The parties have submitted the matter on the pleadings and briefs.¹ There are no material facts in dispute. The trustee seeks to recover Debtor's interest in an Individual Retirement Account (IRA).² Debtor contends that under the United States Supreme Court's decision in Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992), and pursuant to 11 U.S.C. § 541(c)(2), the IRA is excluded from property of his bankruptcy estate. We find that the IRA is estate property and that Debtor must turn it over to the trustee.

The parties agree to the following facts: Debtor was employed by Colebrook Farms, Inc., for 15 years before April, 1990. During his employment, he was covered by an ERISA³ qualified non-contributory defined benefit pension plan. Debtor's employer filed a chapter 11 petition in 1989 and Debtor's employment ended that same year. The pension plan was terminated on April 15, 1990. The termination of the plan was approved by the Internal Revenue Service in September of 1990 and employees were provided with information on alternate investments and rollovers of their interests in the plan. In October of 1990 Debtor received a lump sum distribution of $9,721 from the pension fund. Several days later, Debtor deposited the entire amount in an IRA. Since then, he has held other jobs. Through his present employer Debtor is covered by a non-contributory pension plan that does not accept rollover contributions. Debtor filed this bankruptcy on October 20, 1992, two years after the pension distribution.

Debtor argues that because the IRA was created by a rollover from an ERISA qualified plan to which § 541(c)(2) would apply, the IRA also is protected. Section 541(c)(2) of the Bankruptcy Code provides that

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). In Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992), the Supreme Court held that the anti-alienation provisions of ERISA qualified plans constitute restrictions on transfer enforceable under "applicable non-bankruptcy law" in accordance with 11 U.S.C. § 541(c)(2).⁴ The Supreme Court overruled those lower court decisions that construed the § 541(c)(2) limitation to apply only to spendthrift trusts under state law.

In order to decide this issue, we must determine (1) whether distributed pension funds are excludable from the bankruptcy estate; (2) whether the rollover of a distribution of funds which were in an ERISA qualified plan to an IRA continues the protected status of the funds; (3) whether there is a restriction on transfer of an IRA that qualifies the IRA for exclusion from the estate as Debtor's "beneficial interest in a trust"; and (4) whether the IRA is a trust within the meaning of 11 U.S.C. § 541(c)(2).

I. Are Distributed Pension Funds Protected From Inclusion in the Bankruptcy Estate?

In the Third Circuit, payouts from ERISA plans constitute a distribution, subject to the reach of creditors. In Velis v. Kardanis, 949 F.2d 78 (3d Cir.1991) (rehearing denied), the question was whether a debtor could exclude from the estate his interests in a pension plan, a Keogh plan, and an IRA. In that case the debtor had borrowed from the plans. The Court of Appeals for the Third Circuit stated:

Even if pension plan assets in the hands of a pension trustee are beyond the reach of creditors because not a part of the debtor\'s estate under § 541(c)(2), distributions made from the plan to the debtor would not enjoy such protection, in the absence of exemption under § 522(d)(10)(E).

949 F.2d at 81-82.

Although Velis v. Kardanis predated Patterson v. Shumate, the Court of Appeals has had occasion to address the issue since Shumate. In Trucking Employees of North Jersey Welfare Fund, Inc. v. Colville, 16 F.3d 52 (3d Cir.1994), the court expanded its position in Velis v. Kardanis to a rollover situation. In Colville the court stated:

We . . . do not find the reasoning of Velis to be limited solely to the situation where funds have been distributed and then immediately invested in non-liquid assets.

16 F.3d at 55.

In Colville, the pension fund sought to recover overpayments from a plan beneficiary. The beneficiary refused to reimburse the fund so the fund withheld early retirement benefits. The court reiterated its recognition of the difference between funds in the hands of an ERISA plan trustee and funds that have been distributed, even when those "funds have been distributed and then immediately invested in non-liquid assets". 16 F.3d at 55. In Colville the Court of Appeals panel rejected the distinction drawn by the district court between distributed funds that were illiquid and those that were placed in more readily accessible forms.

The distinction the district court draws in finding Velis inapplicable to the facts presented here appears to be unworkable. Investments, as opposed to more readily accessible funds, such as those in a bank account, may or may not be a source of a stream of income that could be used for current living expenses that was envisioned in Patterson v. Shumate. Under the theory employed by the district court, would annuity or dividend-paying stock investments be subject to the anti-alienation provision, or would they be subject to execution and claims of creditors in bankruptcy? The reasoning of the district court leaves this question unanswerable.

Colville, 16 F.3d at 55.

The court agreed with a decision from the Tenth Circuit concluding that the anti-alienation provision of a plan applies only to actions against the plan itself, not to actions against the beneficiary. See Guidry v. Sheet Metal Workers Int'l Ass'n, Local 9, 10 F.3d 700 (10th Cir.1993), aff'd in pertinent part on rehearing en banc Guidry v. Sheet Metal Workers National Pension Fund, 39 F.3d 1078 (10th Cir., 1994), cert. denied, ___ U.S. ___, 115 S.Ct. 1691, 131 L.Ed.2d 556, and ___ U.S. ___, 115 S.Ct. 1691, 131 L.Ed.2d 556 (1995). Once the funds have been distributed, the anti-alienation restriction no longer applies. Colville, 16 F.3d at 55-56. In Guidry the Court of Appeals for the Tenth Circuit, en banc, affirmed the panel holding that distributions from an ERISA qualified plan are subject to attachment. The court compared 29 U.S.C. § 1056(d)(1), which requires that anti-alienation provisions be included in a plan, to the Social Security Act, 42 U.S.C. § 407(a). The Social Security Act prohibits attachment or garnishment of the right to "`moneys paid or payable' to a beneficiary." 39 F.3d at 1083. Because ERISA contains no such prohibition with respect to distributions, the court concluded that the distributed funds were not protected by the applicable law. On the basis of the cited cases, the distributed funds at issue are part of the estate unless the rollover changes the result.

II. What is the Effect of the Rollover of the Distributed Pension into an IRA?

In the case at bar, Debtor's distributed interest in the Colebrook Farms ERISA-qualified plan was rolled over to an IRA. Under Velis and Colville, the distribution rendered the funds accessible to creditors, even if Debtor chose a rollover that could not be readily liquidated. In this case, the rollover to an IRA consisted of a deposit in a bank in the form of a savings account. In Nationsbank of North Carolina v. Shumate, 45 F.3d 427 (TABLE, text at 1994 WL 717544 (4th Cir. (Va.), 1994), the court of appeals held that ERISA's anti-alienation protection does not continue after actual distribution of the pension, even during the 60-day rollover period, when the pension funds are deposited into a bank account. The IRA in the matter before us is a bank account to which Debtor has immediate and unrestricted access, notwithstanding certain provisions in the documents that established the account, which will be addressed below. We find that the rollover does not afford the protection Debtor seeks.⁵

III. Is the IRA Subject to a Restriction on Transfer Enforceable Under Applicable Nonbankruptcy Law?

In Patterson v. Shumate, the Supreme Court noted that IRAs are specifically excepted from ERISA's anti-alienation⁶ requirement. 29 U.S.C. § 1051(6). The Court stated that IRAs "could not be excluded from property of the estate under § 541(c)(2) because they lack transfer restrictions enforceable under `applicable non-bankruptcy law'." 504 U.S. at 763, 112 S.Ct. at 2249. In this case, however, the bank documents provide:

Assignment, Pledge, Attachment, etc. of Custodial Account: No interest, right or claim in or to any part of the Custodial Account or any payment therefrom shall be assignable, transferable, or subject to sale, mortgage, pledge, hypothecation, commutation, anticipation, garnishment, attachment, execution, or levy of any kind and the Custodian shall not recognize any attempt to assign, transfer, sell, mortgage, pledge, hypothecate, commute, or anticipate the same, except to the extent required by law.

IRA Custodial Agreement and Disclosure Statement ¶ 8.15. The documents, therefore, contain a prohibition on transfer, pledge, assignment, et cetera, of the Individual Retirement Account and distributions therefrom.⁷ We must decide (1) what the "applicable nonbankruptcy law" is and (2) whether the anti-alienation clause contained in the IRA disclosure statement is "a restriction on the transfer of a beneficial interest of the debtor...