In re Van Nostrand

• Decision Date: 15 June 1995
• Docket Number: Bankruptcy No. 94-36102.
• Parties: In re William J. VAN NOSTRAND, Debtor.
• Court: U.S. Bankruptcy Court — District of New Jersey

183 B.R. 82 (1995)

In re William J. VAN NOSTRAND, Debtor.

Bankruptcy No. 94-36102.

United States Bankruptcy Court, D. New Jersey.

June 15, 1995.

Peter J. Broege, Broege, Neumann & Fischer, Manasquan, NJ, for debtor.

Michael L. Detzky, Freehold, NJ, for the Trustee.

OPINION

WILLIAM H. GINDIN, Chief Judge.

INTRODUCTION

Before the court is the trustee's motion objecting to the claim of exclusion, or in the alternative, exemption of the proceeds of the debtor's Individual Retirement Account ("IRA") and declaring the IRA to be property of the estate. The court heard argument on March 20, 1995 and reserved decision.

This court has jurisdiction over the matter pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core matter pursuant to 28 U.S.C. § 157(b)(2)(A), (B) and (E).

The following constitutes the court's findings of fact and conclusions of law.

FACTS

Debtor filed a petition under Chapter 7 of the Bankruptcy Code on September 23, 1994. In the petition, debtor listed an interest in an IRA currently worth $10,000.00 as an item of personal property. See Debtor's Petition, Schedule B, paragraph 11. Below the IRA entry on the schedule, however, debtor asserted an exclusion and noted that the IRA was "not property of the estate pursuant to N.J.S.A. 25:2-1(b)." Id. In Schedule C the debtor elected the federal exemptions pursuant to 11 U.S.C. § 522. The IRA was not claimed as exempt in Schedule C. The trustee filed a timely objection to the claim.

Debtor argues that the IRA is excluded from the estate by operation of a New Jersey statute, N.J.S.A. § 25:2-1(b). In the alternative, upon a finding by the court that N.J.S.A. § 25:2-1(b) is an exemption statute, debtor seeks leave to change its election under 11 U.S.C. § 522 to select the New Jersey state exemptions instead of the federal exemptions. The trustee responds that N.J.S.A. § 25:2-1(b) does not operate to exclude the IRA from the estate and that the IRA is property of the estate pursuant to 11 U.S.C. § 541. The trustee further asserts that having made the election of the federal exemption, the debtor may not change at this late date.

DISCUSSION

Property of the Estate

Pursuant to the Bankruptcy Code, the debtor's estate is comprised of "all legal and equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a). Neither party disputes that the IRA in this case is within the broad scope of § 541(a). There are, however, limited exclusions from the Code's broad definition of estate property as set forth in 11 U.S.C. § 541(b) or § 541(c)(2). Of these two sections, only § 541(c)(2) is applicable to an IRA. Code § 541(c)(2) provides that "a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable in a case under this title." 11 U.S.C. § 541(c)(2).

According to the Supreme Court in Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992), the phrase "applicable nonbankruptcy law" in Code § 541(c)(2) "encompasses any relevant nonbankruptcy law, including federal law such as" the Employee Retirement Income Security Act of 1974 ("ERISA"). Id. at 759, 112 S.Ct. at 2247, 119 L.Ed.2d at 527; see also Velis v. Kardanis, 949 F.2d 78 (3rd Cir.1991), rev'g in part and aff'g in part 123 B.R. 497 (D.N.J. 1991).¹ The trustee argues that the state law applicable to IRAs in New Jersey is N.J.S.A. § 3B:11-1 and that this section of the statute does not exclude an IRA from the estate. Additionally, the trustee asserts that an IRA is not an ERISA qualified plan. The debtor responds that N.J.S.A. § 25:2-1(b) is the applicable nonbankruptcy law and that this section does exclude an IRA from the estate. The court will address each of these arguments below.

N.J.S.A. § 3B:11-1

N.J.S.A. § 3B:11-1 provides that self-settled trusts, such as IRAs, are freely alienable. This section provides:

The right of any creator of a trust to receive either the income or the principal of the trust or any part of either thereof, presently or in the future, shall be freely alienable and shall be subject to the claims of his creditors, notwithstanding any provision to the contrary in the terms of the trust.

N.J.S.A. 3B:11-1. The legislative mandate in favor of allowing creditors access to self-settled spendthrift trusts has been upheld by the Appellate Division of the Superior Court of New Jersey and the U.S. District Court of New Jersey. In Aronsohn & Springstead v. Weissman, 230 N.J.Super. 63, 552 A.2d 649 (N.J.Super.Ct.App.Div.), certif. denied, 117 N.J. 36, 563 A.2d 808 (1989), the court reasoned "that there is strong policy that will prevent any person from placing his property in what amounts to a revocable trust for his own benefit which would be exempt from the claims of his creditors." Id. at 68, 552 A.2d 649. The Aronsohn opinion was then followed by the District Court in In re Velis. 123 B.R. 497 (D.N.J.), rev'd in part and aff'd in part in 949 F.2d 78 (3rd Cir.1991). Thus, N.J.S.A. § 3B:11-1 does not provide a restraint on alienation which would exclude the IRA from the estate pursuant to 11 U.S.C. § 541(c)(2).

ERISA

The trustee argues that the only non-bankruptcy law applicable to § 541(c)(2) is N.J.S.A. 3B:11-1. The Supreme Court's holding in Patterson v. Shumate makes clear that this is not so. The bankruptcy court must also analyze both the ERISA statute and the savings plan in question to determine whether there is an enforceable restriction on the transfer of the funds in the plan. Patterson, 504 U.S. 753, 758-59, 112 S.Ct. 2242, 2246-47, 119 L.Ed.2d 519 527-28. The restriction on transfer of benefits of ERISA qualified plans is found in 29 U.S.C. § 1056(d)(1). This section provides that "each pension plan shall provide that benefits provided under the plan may not be assigned or alienated." 29 U.S.C. § 1056(d)(1). This restraint on alienation provision, if applicable to IRAs, would constitute an enforceable transfer restriction pursuant to § 541(c)(2). Patterson, 504 U.S. at 759-60, 112 S.Ct. at 2247-48, 119 L.Ed.2d at 528. The ERISA restraint, however, is not applicable to an IRA. The Participation and Vesting section of ERISA, 29 U.S.C. § 1051, describes the types of employee benefit plans that are covered by ERISA. This section provides in relevant part that §§ 1051-1061 do not apply to "an individual retirement account or annuity described in section 408 of the Internal Revenue Code." 29 U.S.C. § 1051(6). There is no dispute that the IRA in this case was created pursuant to § 408 of the Internal Revenue Code ("IRC"). ERISA, therefore, does not provide the restraint on alienation necessary to exclude an IRA from the estate pursuant to § 541(c)(2). See In re Heisey, 88 B.R. 47 (Bankr.D.N.J. 1988).

N.J.S.A. § 25:2-1(b)

The debtor, on the other hand, argues that N.J.S.A. § 25:2-1(b) provides the necessary restraint on alienation. This New Jersey statute provides in relevant 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 an 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 401, 403, 408 or section 409 of the federal Internal Revenue Code of 1986 (26 U.S.C. § 401, 403, 408 or 409).

N.J.S.A. § 25:2-1(b). As the IRA in question was created pursuant to § 408 of the IRC, it is a qualifying trust under § 25:2-1(b). Debtor argues that N.J.S.A. § 25:2-1(b) restricts him from transferring his beneficial interest in the IRA, thus satisfying 11 U.S.C. § 541(c)(2).

The debtor's argument fails for two reasons. First, the IRA in question does not contain a restraint on alienation clause. The Supreme Court stated in dicta that § 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." Patterson v. Shumate, 504 U.S. at 758, 112 S.Ct. at 2246, 119 L.Ed.2d at 527 (emphasis added). The Supreme Court dicta has been construed to mean that "for § 541(c)(2) to apply, the restriction to be enforced must be contained in the plan or trust at issue." In re Meehan, 173 B.R. 818, 820 (S.D.Georgia 1994) (emphasis added). The IRA in this case does not contain a restraint on alienation clause. This court agrees with the dicta in Patterson and the holding in Meehan in finding that for a restraint on alienation provision to be enforceable pursuant to § 541(c)(2), the provision must be included in the investment plan.

Further, even if the transfer restriction may be applicable by statute only, the language of § 25:2-1(b) does not contain a restraint on alienation. The test for exclusion pursuant to 11 U.S.C. § 541(c)(2) is whether the debtor is precluded from transferring an interest in a trust, not whether the creditors may reach the trust assets. In re Heisey, 88 B.R. 47 (Bankr.D.N.J.1988) (Moore, J.). In Heisey, Judge Moore found that ERISA antialienation provisions did not create a restriction on the transfer of debtor's interest in trust. 88 B.R. at 50. Judge Moore held that an IRA was not excluded from the estate because the "debtor on the date of his petition was entitled to withdraw the entire IRA deposit." Id. The only consequence of such withdrawal was the imposition of a penalty tax. Id.; see 26 U.S.C. § 408(f)(1). The debtor in the instant case also was entitled to withdraw his entire IRA deposit; neither the enactment of N.J.S.A. § 25:2-1(b), nor the provisions of any other applicable non-bankruptcy law precludes such a withdrawal.

The debtor's second argument is that N.J.S.A. § 25:2-1(b) is a state exclusion sta...