1997 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

2-10-1997

In Re: Peter Barshak v.

Precedential or Non-Precedential:

Docket 96-1423

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Recommended Citation

"In Re: Peter Barshak v." (1997). 1997 Decisions. Paper 35.

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1

 UNITED STATES COURT OF APPEALS 

 FOR THE THIRD CIRCUIT 

 

 No. 96-1423 

 

 IN RE: PETER D. BARSHAK, 

 Debtor

 Christine Shubert, Esquire, duly qualified and 

 acting Chapter 7 Trustee, 

 Appellant

 

 On Appeal from the United States District Court 

 for the Eastern District of Pennsylvania 

 (D.C. Civ. No. 95-05751) 

 

 Argued January 6, 1997 

 BEFORE: GREENBERG, COWEN, and ALITO, Circuit Judges

 (Filed: February 10, 1997) 

 

 Jay G. Ochroch (argued) 

 Susan B. Naftulin 

 Fox, Rothschild, O'Brien & 

 Frankel 

 2000 Market Street 

 10th Floor 

 Philadelphia, PA 19103 

 Attorneys for Appellee

 D. Ethan Jeffrey 

 Albert A. Ciardi, III (argued) 

 Ciardi, Maschmeyer & Karalis 

 1900 Spruce Street 

 Philadelphia, PA 19103 

 Attorneys for Appellant

 

 OPINION OF THE COURT 

 

GREENBERG, Circuit Judge. 
2

 I. BACKGROUND 

 Appellant, Christine Shubert, Chapter 7 trustee of the 

bankruptcy estate of appellee, Peter D. Barshak, appeals from a 

final order entered by the district court in this bankruptcy case 

involving a claim by Barshak that his Individual Retirement 

Account ("IRA") is exempt from inclusion in the estate. Shubert 

objected under Pennsylvania law to Barshak's claim of exemption, 

and the bankruptcy court upheld her objection. In re Barshak, 

185 B.R. 210 (Bankr. E.D. Pa. 1995) ("Barshak I"). Barshak then 

appealed and the district court reversed. In re Barshak, 195 

B.R. 321 (E.D. Pa. 1996) ("Barshak II"). We will reverse the 

order of the district court and reinstate the order of the 

bankruptcy court upholding Shubert's objection to the exemption. 

 The facts are not disputed. From 1974 to 1989 

Consolidated Printing, Inc. employed Barshak. During that period 

it made contributions on his behalf into an ERISA employee 

benefit plan which qualified for favorable tax treatment under 

section 401(a) of the Internal Revenue Code. 26 U.S.C. § 401(a). 

 The plan had a principal purpose of providing funds for 

Consolidated's employees' retirement. Barshak's employment at 

Consolidated ended in December 1989. On September 21, 1992, 

Barshak received a check for $71,134.75 from the plan which he 

deposited in his personal bank account. On September 30, 1992, 

Barshak wrote a check for $71,134.75 on his personal bank account 

which he deposited into his IRA. While the record does not 

disclose either whether Barshak commingled the $71,134.75 with 
3

other funds or whether Barshak wrote checks against his personal 

bank account after the deposit of the $71,134.75 into the account 

before he paid the $71,134.75 into his IRA, the parties have 

stipulated that Barshak deposited the money from the Consolidated 

plan into the IRA and we thus decide the case on that basis. In 

June 1993, the Consolidated plan made an additional distribution 

to Barshak of $3,887.16 which it paid directly into Barshak's IRA 

at his direction. 

 On December 30, 1994, Barshak filed a petition for 

relief under Chapter 7 of the Bankruptcy Code. In his Schedules 

and Statements of Financial Affairs, Barshak, as allowed by 11 

U.S.C. § 522(b), claimed his exemptions available under 

Pennsylvania law, including an exemption from inclusion in his 

bankruptcy estate of the IRA pursuant to 42 Pa. Cons. Stat. Ann. 

§ 8124 (Supp. 1996) ("section 8124"). In accordance with a 

limitation in section 8124 on the amount of contributions to an 

IRA plan that could be exempted, Shubert challenged Barshak's 

claim of the IRA exemption to the extent that the IRA included 

contributions exceeding $15,000 in any one year. Thus, she 

asserted that $56,134.75 of the $71,134.75 which Barshak 

contributed in 1992 should not be exempt. Shubert, however, did 

not challenge Barshak's claim for exemption of the 1993 

contribution of $3,887.16 to the IRA. 

 The bankruptcy court decided the case in an opinion of 

August 7, 1995. The court set forth the above facts and added 

that Consolidated in no one year contributed in excess of $15,000 

on Barshak's behalf to its plan. Barshak I, 185 B.R. at 211. 
4

The bankruptcy court indicated that section 8124(b)(1)(ix) 

provides for an exemption from execution or attachment of "[a]ny 

retirement or annuity fund provided for under section 401(a), 

403(a) and (b), 408 or 409 of the Internal Revenue Code of 1986 

(Public Law 99-514, 26 U.S.C. § 401(a), 403(a) and (b), 408 or 

409), the appreciation thereon, the income therefrom and the 

benefits or annuity payable thereunder." Id. The bankruptcy 

court noted, however, that the foregoing exemption provision 

"shall not apply to . . . [a]mounts contributed by the debtor to 

the retirement or annuity fund in excess of $15,000 within a oneyear period." Id. (quoting section 8124(b)(1)(ix)(B) 

("subsection B")). It then noted that Shubert did not claim that 

the IRA did not come within the sections of the Internal Revenue 

Code enumerated in the exemption provision. Id. 

 Barshak argued that the $71,134.75 placed in the IRA 

was a rollover from the Consolidated plan and thus the court 

should not regard it as a contribution to the IRA subject to the 

$15,000 yearly limitation on the exemption. Id. In response, 

Shubert argued that the plain meaning of subsection B required 

the court to deny the exemption for contributions in excess of 

$15,000 in one year. Id. Thus, $56,134.75 should not be exempt. 

 Shubert recognized, however, that property exempt from 

attachment and execution is excluded from a bankruptcy estate. 

Br. at 9. In view of the parties' contentions, the bankruptcy 

court stated that the "sole issue for [it] to determine is 

whether [Barshak's] deposit of $71,134.75 in funds from an ERISA 
5

qualified plan into an IRA is a 'contribution' subject to the 

$15,000 limitation in [subsection B]." Id. 

 The bankruptcy court was impressed with In re Goldman, 

182 B.R. 622 (Bankr. D. Mass. 1995), aff'd, 192 B.R. 1 (D. Mass. 

1996). In Goldman the debtor directed that his interest in a 

terminated ERISA plan be transferred to his IRA. In re Goldman, 

182 B.R. at 623. Under the applicable Massachusetts law, IRAs 

are exempt from insolvency proceedings and from execution and 

attachment, subject to a statutory limitation on the amount of 

deposits that can be exempted. Id. The debtor in Goldman argued 

that the limitation should not apply as his transfer was nothing 

more than a conversion of funds from one exempt retirement 

account to another exempt retirement account. Id. at 624. The 

bankruptcy court in Goldman rejected that argument because, while 

Massachusetts law did allow certain rollovers to preserve an 

exempt status, none applied in the circumstances in that case 

under the applicable statute as written. Id. at 625. Here the 

bankruptcy court agreed with Goldman that it must look at the 

plain language of the exemption statute to decide if the 

limitation on the exemption was applicable. Barshak I, 185 B.R. 

at 212-13. 

 Barshak requested the bankruptcy court to distinguish 

between "rollover contributions" and "contributions" and to apply 

the limitation on contributions free from attachment and 

execution in subsection B only to "contributions." Id. at 213. 

Barshak supported this contention by pointing out that both 

federal and Pennsylvania law accord favorable tax treatment to 
6

"rollover contributions." Id. The bankruptcy court rejected 

Barshak's request because it viewed the "plain language" of 

subsection B as requiring that it do so. Id. The bankruptcy 

court regarded the favorable tax treatment of rollover 

contributions as immaterial to resolution of the issue before it. 

 Furthermore, it pointed out that the fact "that the Pennsylvania 

legislature decided to and did create . . . a distinction 

[between rollover contributions and contributions] in another 

statute, indicate[d] that it knew how to [make that distinction] 

and chose not to do so in" subsection B. Id. Consequently, the 

court entered an order on August 9, 1995, sustaining Shubert's 

objection and denying Barshak's exemption in his IRA to the 

extent of $56,134.75.1

 Barshak then appealed to the district court which 

decided the case in its opinion of May 2, 1996. That court said 

that "contribution" in subsection B "is subject to two 

interpretations." Barshak II, 195 B.R. at 323. It explained 

these interpretations as follows: 

 Under a broad interpretation, any transaction 

in which a debtor adds money to a retirement 

or annuity fund is a 'contribution' by that 

debtor. This was the sense in which the word 

seems to have been read by the Bankruptcy 

Court. This reading has some unusual 

implications. It would seem to suggest that 

if, for instance, a fund erroneously 

disbursed more money to a debtor than 

intended, and the debtor returned the excess 

to the fund, the second transaction would 

constitute a 'contribution,' because it would 

be an addition of money into the fund. 

 

1. The bankruptcy court in its order did not address the 

appreciation and income, if any, on the amount of the exemption 

it denied and thus we do not consider that point. 
7

 Another sense of the word 'contributed' is 

somewhat narrower. In this interpretation, a 

transaction is a 'contribution' if it 

transforms assets from ordinary assets to 

retirement assets. This reading would render 

it permissible for assets that had once 

acquired the status of retirement assets to 

later pass briefly through the hands of the 

debtor, if they did so in a way that did not 

raise serious doubts as to whether they 

remained retirement assets. Under this 

reading, then, neither the return of an 

erroneous disbursement nor the transaction at 

issue in the present case would be a 

'contribution,' because in both transactions 

the assets involved would already have been 

designated as retirement assets and neither 

transaction would have called that status 

into doubt. 

Id. 

 The court indicated that it found the "latter 

interpretation" of "contributed," i.e., a transaction which 

"transform assets from ordinary assets to retirement assets" "the 

more natural and appropriate one." Id. It found that this 

"reading better captures the sense of the word 'contribute,' 

which usually refers to a meaningful change in an asset's status 

or ownership." Id. It also thought that if the legislature 

intended to use "contributed" in the broad sense, it would have 

used a different word like "transfer" and that the broad 

interpretation would allow an asset to be contributed more than 

once as the same asset could be put in one retirement fund and 

later moved to another. Id. 

 The district court also thought that the narrower 

interpretation "better reflects the purpose[ ]" of section 8124 

which it pointed out "is intended to protect an individual's 
8

retirement income in bankruptcy proceedings." Id. In this 

regard it quoted In re Houck, 181 B.R. 187, 193 (Bankr. E.D. Pa. 

1995), which stated that: "[T]he Pennsylvania legislature has 

made a policy decision that, for purposes of state law, IRAs 

should be insulated from involuntary alienation via a creditor's 

execution." The district court indicated that the legislature 

intended that individuals could designate a substantial but 

finite amount of income as retirement income each year and that a 

rule penalizing debtors for transferring funds from one account 

to another would not seem to serve this policy. Barshak II, 195 

B.R. at 324. The district court found that such a rule would 

impose an arbitrary limitation on one class of debtors who "must 

shift retirement funds between accounts." Id. 

 The district court noted that the Internal Revenue Code 

"permits an individual to exclude a [rollover] from an employee 

trust account from gross income for tax purposes if the 

distribution is transferred within sixty days to another 

qualified retirement account, such as an IRA." Id. See 26 

U.S.C. §§ 402(a)(5), 408(d)(3). While the district court 

recognized that the legislature was aware of rollovers and did 

not exclude them from the $15,000 limitation of subsection B, it 

concluded that it could draw no inferences from this omission. 

Barshak II, 195 B.R. at 324. In view of its conclusions, the 

district court entered an order on May 9, 1996, reversing the 

order of the bankruptcy court. Shubert then appealed. 

 II. DISCUSSION 
9

 Shubert's argument on this appeal is not complicated. 

She contends that the plain language of subsection B requires 

that we reverse the order of the district court as, in her view, 

it is perfectly clear that Barshak contributed $71,134.75 to the 

IRA in a one-year period. Indeed, he made the contribution at 

one time and in one lump sum. Barshak counters that subsection B 

"cannot be adequately interpreted by examining only the word 

'contributed,'" that there is no case law which is instructive 

with respect to the meaning of subsection B, and that "equitable 

considerations weigh in support of upholding the district court 

decision." Br. at i. We exercise plenary review as we are 

deciding the case through the application of legal precepts. 

 We will reverse. Subsection B is straightforward. It 

provides that the exemption from attachment and execution (and 

thus exemption from inclusion in a debtor's bankruptcy estate) 

"shall not apply" to amounts "contributed" by the debtor to a 

retirement fund in excess of $15,000 in a one-year period. When 

the Consolidated plan disbursed the $71,134.75 to Barshak, he was 

free to use the money as he saw fit. While Barshak argues that 

it was Consolidated which contributed the money, its 

contributions were into its own plan. Certainly, at least no 

later than when the Consolidated plan disbursed the $71,134.75 to 

Barshak, the money was his, free of any claim of either 

Consolidated or its plan. Thus, when Barshak placed the money in 

the IRA he contributed the money to the IRA as much as if he had 

placed currently earned income in the IRA. We reiterate that no 

law required him to place the money in his IRA or any other 
10

qualified retirement plan, though there were significant tax 

considerations encouraging him to do so. See Trucking Employees 

of North Jersey Welfare Fund, Inc. v. Colville, 16 F.3d 52, 55-56 

(3d Cir. 1994); Velis v. Kardanis, 949 F.2d 78, 81-82 (3d Cir. 

1991). Furthermore, subsection B simply does not distinguish 

between "rollover contributions" and "contributions" as it places 

the limitation of the exemption on amounts "contributed." It 

would be a pure judicial construct to exclude "rollover 

contributions" from subsection B, and we will not engage in that 

process. 

 Barshak asserts that when the distribution of the 

$71,134.75 was made: "IRS regulations provided that payments from 

an ERISA qualified employee benefit plan could be made directly 

to the individual beneficiary, even if the intent of the 

beneficiary were to roll the funds over into the IRA." Br. at 

14. He then indicates that when the plan disbursed the $3,887.16 

the following year the money was paid directly from 

Consolidated's plan into the IRA "because IRS regulations had 

changed in the intervening time." Id. He thus suggests that he 

"is left to wonder if the technical change in the IRS regulations 

had occurred a year earlier, whether the Rollover Contribution 

issue would be before this Court at all." Id. 

 We gather from these observations that Barshak believes 

that if the Consolidated plan had paid the $71,134.75 directly 

into the IRA the $15,000 limitation in subsection B would be 

inapplicable. Of course, we cannot rule on that hypothetical 

possibility. We do note, however, that we doubt that the result 
11

would have been different in that circumstance provided that 

Barshak could have required the plan to disburse the $71,134.75 

directly to him rather than to the IRA and provided further that 

he then could have used the money as he desired. We think the 

determinative facts in this case are that Barshak owned the 

$71,134.75 and could use that money as he saw fit. Consequently, 

in substance if the Consolidated plan paid the $71,134.75 

directly to the IRA at Barshak's direction, the case would be the 

same as it is now. Furthermore, as we explain below, the 

subsection B limitation probably would have applied even if 

Barshak could not have exercised dominion over the $71,134.75 

when it was transferred from the Consolidated plan to the IRA 

because the transfer would have changed the status of the money 

so that the transfer would have been a contribution to the IRA. 

 We reject the district court's contrary reasoning. As 

we have indicated, that court thought that what it termed "a 

broad interpretation" of subsection B could have "some unusual 

implications" as it would suggest that if "a fund erroneously 

disbursed more money to a debtor than intended, and the debtor 

returned the excess to the fund, the second transaction would 

constitute a 'contribution,' because it would be an addition of 

money into the fund." Barshak II, 195 B.R. at 323. We, however, 

doubt that the return of the money in these circumstances would 

be a contribution as the repayment merely would be a reversal of 

an erroneous transaction that would place the fund in the same 

position it would have occupied if no error occurred. On the 

other hand, Barshak's transfer of the $71,134.75 did not restore 
12

money to the IRA and thus place it in the position it had been 

before it made the error. Rather, the contribution enhanced the 

IRA by $71,134.75. 

 We also note that if a fund erroneously disbursed money 

to a beneficiary, the beneficiary might become indebted to the 

fund for the amount of the disbursement. In such a circumstance, 

a return of the money hardly would be a contribution to the fund. 

 It would be the payment of a debt which merely would convert an 

asset the fund already owned, an account receivable, into cash. 

The circumstances here are different because Barshak's payment 

was voluntary and added a new asset to the IRA. Overall, while 

we cannot make a definitive ruling on the point, we think that 

the "broad interpretation" of subsection B would not have the 

"unusual implications" which the district court foresaw. 

 The district court also believed that "contribute" 

suggests a change in an asset's "status or ownership," 

circumstances it apparently thought were absent here. We have 

problems with this observation. To start with when the 

Consolidated plan disbursed the $71,134.75 to Barshak there was a 

change in the status of the money as at that time it came under 

his control and there were no restrictions on its use. 

Furthermore, under Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 

2242 (1992), the $71,134.75 while in the Consolidated plan would 

not have been a portion of Barshak's bankruptcy estate as a 

matter of federal law, a protection that Barshak does not even 

claim survived after the Consolidated plan disbursed the money. 
13

See In re Yuhas, No. 96-5146, slip op. at 4 (3d Cir. Jan. 22, 

1997). 

 Moreover, even if we ignore the transfer of the money 

to Barshak and treat the transfer as if it were directly from the 

plan to the IRA, there was a change in the status of the money 

after the plan disbursed it. Aside from its loss of protection 

of the money under federal law from inclusion in Barshak's 

estate, there can be no doubt that the management and the terms 

of the plan differed from those of the IRA. For example, as 

Patterson v. Shumate points out, an ERISA plan qualifying for 

favorable tax treatment under the Internal Revenue Code must 

include an antialienation provision not required for IRAs. Id. 

at 762-63, 112 S.Ct. at 2249. The antialientation provision 

affects assignments unrelated to bankruptcy proceedings. Thus, 

although there are favorable tax advantages in both qualified 

employee benefits plans and IRAs and both serve to secure money 

for retirement, the status of an asset changes dramatically when 

it is shifted from a qualified ERISA plan to an IRA.2 

Consequently, if a change in status signals that a transfer is a 

contribution that signal is present here. 

 There is a second difficulty with the district court's 

belief that a change in "ownership" of an asset is an indication 

 

2. Shubert might have been able to argue successfully that 

the $3,887.16 which the Consolidated plan paid directly to the 

IRA was not exempt as it could be combined with the $71,134.75 

contributed to the IRA for purposes of subsection B as the 

payments were made within a one-year period. But we do not 

address that possibility as she does not challenge the exemption 

of the $3,887.16 from the bankruptcy estate. 
14

that a transfer of money into an IRA is a contribution. Surely a 

person making a contribution to an IRA ordinarily will be placing 

his or her own money into the IRA so there will be no change in 

ownership of the money when the contribution is made. Rather, 

there will be a change in how the money is held. Thus, if a 

transfer to an IRA must reflect a change of ownership to be a 

contribution, then a person making a transfer to an IRA rarely, 

if ever, would be making a contribution to the IRA and the 

subsection B limitation on exemption from attachment and 

execution would be meaningless. 

 In reaching our result we acknowledge that a reasonable 

argument can be made that the outcome in the district court is 

consistent with the general policy reflected in section 8124 to 

exempt retirement funds from attachment and execution. 

Furthermore, it plausibly could be argued that that outcome does 

not frustrate subsection B's limitation on the exemption, since 

the $71,134.75 was accumulated in yearly increments of less than 

$15,000. But even if this policy argument were well-founded, a 

point on which we express no opinion, the plain language of 

subsection B compels us to reach our result. We are not free to 

ignore the clear language of a Pennsylvania statute merely 

because by rewriting the statute we arguably would act 

consistently with a legislative policy. 1 Pa. Cons. Stat. Ann. § 

1921(b) (1995). In the end, the case comes down to this: we 

rule on the basis of what the law is rather than what a party 

wishes it could be. 
15

 III. CONCLUSION 

 In view of the aforesaid we will reverse the order 

entered May 3, 1996, and will remand this matter to the district 

court for further proceedings consistent with this opinion so 

that the order of the bankruptcy court of August 9, 1995, can be 

reinstated.