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w . v i l l a no v a . e du/thir dc ir c uit_1997/17UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

____________ No. 96-5146

____________ IN RE: RONALD J. YUHAS, Debtor

____________________ THOMAS J. ORR, Appellant

v. RONALD J. YUHAS

____________________ ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY

____________________ (Civil Action No. 95-5551) Argued: October 1, 1996 Before: ALITO and McKEE, Circuit Judges and GREEN, District Judge * (Opinion Filed: January 22, 1997)

____________________ OPINION OF THE COURT

____________________ Thomas J. Orr, Esq. John K. Justin, Esq. (Argued) 331 High Street, Second Floor Burlington, New Jersey 08016 Counsel for Appellant_________________________

* The Honorable Clifford Scott Green, Senior United States Di strict Judge for the Eastern District of Pennsylvania, sitting by designation.

Broege, Neuman, Fischer & Shaver Peter J. Broege, Esq. (Argued) 25 Abe Voorhees Drive Manasquan, New Jersey 08736 Counsel for Appellee ALITO, Circuit Judge :

The issue in this appeal is whether a New Jersey statute, N .J.S.A. § 25:2-1(b), that protects a qualified individual retirement account (IRA) f rom claims of creditors constitutes a "restriction on the transfer of a beneficial interest of the debtor in a trust" within the meaning of 11 U.S.C. § 541(c)(2) and thus results in the exclusion of the IR A from a bankruptcy estate. We hold that it does, and we therefore affirm the decision of the dis trict court.

I. Debtor Ronald J. Yuhas (the "debtor") filed a Chapter 7 ba nkruptcy petition, and a trustee was appointed. At the time of his petition, the deb tor held an IRA account containing approximately $143,000. He states that these funds represe nted his interest in a terminated pension plan that he had "rolled over" into his IRA two years earlier. The debtor listed the IRA as an asset but claimed that it was not part of the bankruptcy estate because of N.J.S.A. § 25:2-1(b). He then f iled a motion seeking a declaration to this effect, and the trustee filed a cross-motion seeking to have the IRA declared an asset of the estate. The bankruptcy court granted the debtor's motion an d denied the trustee's motion, and the district court affirmed. The trustee then took this appeal.- 3 - II. Section 541(c)(1) of the Bankruptcy Code, 11 U.S.C. § 541(c )(1), broadly states that a bankruptcy estate includes "all legal or equitable intere sts of the debtor in property" as of the commencement of the bankruptcy estate "[e]xcept as provide d in subsections (b) and (c)(2) of this section." Subsection (c)(2) provides: A restriction on the transfer of a beneficial interest of the debtor in a trust that is

enforceable under applicable nonbankruptcy law is enforce able in a case under this title.

11 U.S.C. § 541(c)(2). The question before us is whether N.J .S.A. § 25:2-1(b) constitutes a "restriction on the transfer of a beneficial interest of the debtor in a trust under applicable nonbankruptcy law." N.J.S.A. § 25:2-1(b) provides in pertinent part: Notwithstanding the provisions of any other law to the contr ary, any property held

in a qualifying trust and any distributions from a qualifyin g trust, regardless of the distribution plan elected for the qualify ing trust, shall be exempt from all claims of creditors and shall be excl uded from the estate in bankruptcy . . . .

. . . For purposes of this section, a "qualifying trust" means a tr ust created or qualified

and maintained pursuant to federal law, including, but not l imited to, section . . . 408 . . . of the federal Internal Revenue Code o f 1986 (26 U.S.C. § . . . 408 . . . ).

Section 408(a) of the Internal Revenue Code, 26 U.S.C. § 408 (a), defines an "individual retirement account" as "a trust" that is "crea ted or organized in the United States for the exclusive benefit of an individual or his beneficiaries" an d that meets certain requirements. IRAs that meet these requirements are said to be "qualified" and r eceive favorable federal income tax treatment. See Section 408(d) and (e) of the Internal Revenue Code, 26 U.S.C . § 408(d) and (e).- 4 -

The trustee's first argument is that under § 541(c)(1) and ( 2) trusts subject to transfer restrictions are not excluded in their entirety fr om a bankruptcy estate but rather are included in the estate subject to those restrictions. There fore, he argues, the debtor's IRA should be included in the bankruptcy estate with the state-law pro tection against creditors' claims remaining in effect. And since he stands in the shoes of the d ebtor, the trustee maintains, this restriction on creditors does not impair his ability to liqu idate the IRA. This argument, however, is inconsistent with the Supreme Court's analysis in Patterson v. Shumate , 504 U.S. 753, 758 (1992), of the interplay between § 541(c) (1) and § 541(c)(2). There are two arguable interpretations of this i nterplay. One is that trusts subject to the type of restriction described in § 541(c)(2) are entirely ex cluded from a bankruptcy estate. The other is that such trusts are included but that they remain su bject to the same restrictions that applied before bankruptcy. In Patterson , the Court clearly chose the first interpretation, stating that "[t]he natural reading of [§ 541(c)(2)] entitles a debt or to exclude from property of the estate any interest in a plan or trust that contains a transfer restr iction enforceable under any applicable nonbankruptcy law." Patterson , 504 U.S. at 758. Although the trustee in essence urges us to disregard this s tatement as careless dictum, we will not do so. The statement in Patterson concerned an important step in the Court's reasoning and represented an entirely natural reading of th e statutory language. The trustee contends that the Court used this language because the case b efore it involved a debtor's interest in a trust, an ERISA plan, that was entirely beyond the reach of either the debtor or his creditors. Thus, the trustee maintains that what the Court meant to say was that § 541(c)(2) excludes from property of the estate any interest in a plan or trust that con tains a restriction that "renders the entirety of the asset unreachable" under applicable nonban kruptcy law. Appellant's Br. at 6. In our judgment, this is not a plausible interpretation of wh at the Court said, and we must therefore- 5 -

reject it. Accordingly, if the debtor's IRA meets all of the requirements of § 541(c)(2), we must hold that it is completely excluded from the bankruptcy esta te. These requirements are the following: (1) the IRA must cons titute a "trust" within the meaning of 11 U.S.C. § 541(c)(2); (2) the funds in the IRA m ust represent the debtor's "beneficial interest" in that trust; (3) the IRA must be qual ified under Section 408 of the Internal Revenue Code; (4) the provision of N.S.J.A. § 25:2-1 stating that property held in a qualifying IRA is "exempt from all claims of creditors" must be a "restricti on on the transfer" of the IRA funds; and (5) this restriction must be "enforceable under nonbankrup tcy law." In this appeal, the trustee's arguments do not focus on any of the first three requirements , and thus we assume for present purposes that they are satisfied. Nor does the trustee dispu te the fact that N.J.S.A. § 25:2-1 would constitute "applicable nonbankruptcy law" if it restrict ed transfer of the debtor's interest in the way that the trustee believes is required by 11 U.S.C. § 541(c)(2 ). 1 Thus, to the extent that the trustee's remaining arguments confront the statutory language, they focus on the fourth requirement, i.e. , the requirement that N.J.S.A. § 25:2-1 must constitute a "re striction on the transfer" of the IRA funds. The Bankruptcy Code defines the term "transfer" to encompa ss a wide range of dispositions: "transfer" means every mode, direct or indirect, absolute o r conditional, voluntary

or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a secu rity interest and foreclosure of the debtor's equity of redemption.

11 U.S.C. § 101(54). Any procedure by which funds in an IRA m ight be reached to satisfy the "claims of creditors" (N.J.S.A. § 25:2-1(b)) would seem to fall within this broad definition and

1. Applicable nonbankruptcy law includes both federal law such as ERISA, see Patterson v. Shumate , 504 U.S. 753, 758 (1992), and state law, Velis v. Kardanis , 949 F.2d 78, 80-81 (3d Cir. 1991).- 6 -

thus constitute a "transfer." Consequently, N.J.S.A. § 25: 2-1(b) would seem to be a "restriction on . . . transfer." Despite this statutory language, the trustee contends tha t "Section 541(c)(2) was intended to be read and should be read as though `restriction o n transfer' were to read `restriction on the debtor's ability to transfer.' Only by such a reading a re the policy interests inherent throughout the Bankruptcy Code best served." Appellant's Br. at 13. The trustee maintains that this reading is needed to prevent "the legalization of what would otherwise be the fraudulent activity of converting and hiding assets to avoid the collection acti ons of creditors" and that "it would be lunacy for any debtor's rights attorney . . . to advise his cli ents to do anything but place their liquid assets into an IRA account." Appellant's Br. at 9-10. He thu s submits that § 541(c)(2) was intended solely to exclude trusts, such as pension plans and spendthr ift trusts, that are created by another for the long-term benefit of the debtor and with respect to whi ch the debtor has no right of immediate liquidation. Appellant's Br. at 13. In response to this argument, the debtor points out that the Bankruptcy Code already contains protection against fraudulent transfers of assets. See e.g. , 11 U.S.C. § 544(b) (trustee may avoid any transfers of interest of property by a debtor that is voidable under applicable law, such as state fraudulent conveyances law); id. § 547(b)(4)(a) (allowing a trustee to avoid certain transfers of interest by a debtor made on or within 90 days pr ior to the date of filing the petition for bankruptcy protection); id. § 548 (allowing a trustee to avoid any transfer of property ma de by a debtor within one year of filing a petition for bankruptcy protection if, among other things, the transfer was made with actual intent to defraud or was mad e in exchange for less than reasonably equivalent value while the debtor was insolvent). Furth er militating against the trustee's argument is the generally applicable restriction in the Internal Reven ue Code on the amount that an individual can transfer into an IRA in any one year. See 26 U.S.C. § 408(a)(1) ("[N]o contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year in excess of- 7 -

$2,000 on behalf of any individual."). In addition, the bank ruptcy judge argued that excluding an IRA from a bankruptcy estate furthered the policy of protect ing retirement savings, and she noted our statement in Velis v. Kardanis , 949 F.2d 78, 82 (3d Cir. 1991): [T]here can be no doubt that Congress has expressed a deep an d continuing

interest in the preservation of pension plans, and in encour aging retirement savings, as reflected in the statutes which hav e given us ERISA, Keogh plans and IRAs. We believe it reasonable to conclude that Congress intended to provide protection agai nst the claims of creditors for a person's interest in pension plans , unless vulnerable to challenge as fraudulent conveyances or void able preferences.

It is not for us to take sides in this policy debate. "Given th e clarity of the statutory text . . ., [the trustee] bears an `exceptionally heavy' burde n of persuading us that Congress intended to limit the § 541(c)(2) exclusion to restrictions on transfer" that apply only to the debtor,
Patterson , 504 U.S. at 760, and the trustee's arguments are insufficie nt under this standard. Our rejection of this argument dooms the trustee's final ar gument, i.e. , that § 541(c)(2) is merely a state exemption statute available for debtors who elect state exemptions pursuant to 11 U.S.C § 522(b)(2). 2 This argument is based on In re Van Nostrand , 183 B.R. 82, 86 (Bankr. D.N.J. 1995), but the analysis of § 541(c)(2) in th at decision is flawed. In Van Nostrand , the court held that N.J.S.A. § 25:2-1(b) did not constitute a "restriction on . . . transfer" for two reasons. 183 B.R. at 84 . First, the court interpreted Patterson to mean that such a restriction must be included in the docume nt that creates the trust rather than a statute. The trustee "concedes that this interpretation o f Patterson may be incorrect," Appellant's Br. at 18, and we agree that it is wrong. 3 Second, Van Nostrand held that a "restriction . . . on

2. 11 U.S.C. § 522 allows a debtor to choose between federal exemptions listed in subsection (d), or any exemptions allowed under state, local and federal nonbankruptcy law. 11 U.S.C. § 522(b)(2)(A). A debtor must choose one or the other, but may not select exemptions from both. Id.

3. Ironically, this argument is based on the same sentence in Patterson that we found to doom the trustee's prior argument. As- 8 -

transfer" must preclude transfer by the debtor, not by credi tors. 183 B.R. at 85. 4 We have already explained why we cannot agree with this argument. The Va n Nostrand court then went on to consider a contention not made by the debtor in this case, vi z. , that "N.J.S.A. 25:2-1(b) is a state exclusion statute which must be enforced by the bankruptcy court so that the debtor receives treatment in the bankruptcy court similar to treatment whi ch he would receive in state court. Butner v. U.S. , 440 U.S. 48 (1978)." 183 B.R. at 85. The court disagreed, hol ding that N.J.S.A. § 25:2-1(b) was instead a state exemption statute, 183 B.R. a t 85, and it is upon this last holding that the trustee now relies. This holding is not relevant, however, for present purpose s. The debtor here does not argue that N.J.S.A. § 25:2-1(b) is a "state exclusion sta tute," and insofar as the Van Nostrand court addressed the argument that the debtor in this case has made, i.e. , that N.J.S.A. is a "restriction on . . . transfer," that court erred.

(..continued) noted, the Patterson Court wrote: "The natural reading of [§ 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." 504 U.S. at 758 (emphasis added). Van Nostrand and some other cases have interpreted this language to mean that a trust subject to a statutory restriction on transfer cannot come within § 541(c)(2). We disagree. In Patterson , the Court said that a debtor may exclude a trust from the bankruptcy estate if the trust contains an appropriate restriction; the court did not say that a debtor may exclude a trust only if it, as opposed to a statute, contains such a restriction. Moreover, the statutory language that the Court was interpreting does not hint at the sort of restriction that Van Nostrand and similar cases impute to Patterson , and we feel confident that the Court would not have construed the statute as containing such a restriction without providing an explanation. Therefore, we reject the argument that a restriction contained in a statute cannot qualify as a "restriction on . . . transfer under applicable nonbankruptcy law" within the meaning of § 541(c)(2)

4. In re Lamb , 179 B.R. 419 (Bankr. D.N.J. 1994), on which the trustee also relies, is based on this same incorrect conclusion. See 179 B.R. at 423.- 9 -

III. In conclusion, we have considered all the arguments raise d by the trustee but are not persuaded. We therefore affirm the decision of the dist rict court.