Opinion ID: 3026803
Heading Depth: 2
Heading Rank: 1

Heading: Patterson and Yuhas

Text: We first retrace the trajectory of how § 541(c)(2) has been interpreted by the Supreme Court in Patterson and by our Court in Yuhas. In Patterson, the Supreme Court was faced with an issue involving § 541(c)(2) and specifically addressed the question of 10 Our Court has jurisdiction pursuant to 28 U.S.C. § 1291 and reviews the legal determinations by the District Court de novo. Baroda Hill Inv., Inc. v. Telegroup, Inc. (In re Telegroup, Inc.), 281 F.3d 133, 136 (3d Cir. 2002) (“Because the District Court sat below as an appellate court, this Court conducts the same review of the Bankruptcy Court’s order as did the District Court.”). 19 “whether an antialienation provision contained in an ERISA-qualified pension plan constitutes a restriction on transfer enforceable under ‘applicable nonbankruptcy law,’ and whether, accordingly, a debtor may exclude his interest in such a plan from the property of the bankruptcy estate.” Patterson, 504 U.S. at 755. Patterson had participated in his company’s pension plan, a plan which “satisfied all applicable requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and qualified for favorable tax treatment under the Internal Revenue Code. In particular, Article 16.1 of the Plan contained the antialienation provision required for qualification under § 206(d)(1) of ERISA, 29 U.S.C. § 1056(d)(1).” Id. at 755. Justice Blackmun, writing for a unanimous court, held that “[t]he 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.” Id. at 758 (emphasis added). After concluding that “applicable nonbankruptcy law” was not merely limited to state law, the Court next addressed the issue of whether the antialienation provision contained in the ERISA-qualified Plan met the requirements of § 541(c)(2). It wrote: Section 206(d)(1) of ERISA, which states that “each pension plan shall provide that benefits provided under the plan may not be assigned or 20 alienated,” 29 U. S. C. § 1056(d)(1), clearly imposes a “restriction on the transfer” of a debtor’s “beneficial interest” in the trust. The coordinate section of the Internal Revenue Code, 26 U. S. C. § 401(a)(13), states as a general rule that “[a] trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that benefits provided under the plan may not be assigned or alienated,” and thus contains similar restrictions. Id. at 759. The Court concluded that the provisions in question satisfied § 541(c)(2) in that the “pension plan complied with these requirements.” Id. The Court did not discuss whether the pension plan at issue constituted a “trust” under the terms of § 541(c)(2), and seems to have expanded the type of legal instruments protected by § 541(c)(2) by referring to “any interest in a plan or trust.” Id. at 758 (emphasis added).11 The Court noted that “[p]etitioner first contends that 11 In re Barnes, 264 B.R. 415, 421 (Bankr. E.D. Mich. 2001) (noting that in resolving the issue of whether ERISA is applicable nonbankruptcy law, the Supreme Court in Patterson “may have created a new one -- namely, whether the statute applies to non-trust interests”). 21 contemporaneous legislative materials demonstrate that § 541(c)(2)’s exclusion of property from the bankruptcy estate should not extend to a debtor’s interest in an ERISA-qualified pension plan.” Id. at 761. The Court wrote that in his brief “petitioner quotes from House and Senate Reports accompanying the Bankruptcy Reform Act of 1978 that purportedly reflect ‘unmistakable’ congressional intent to limit § 541(c)(2)’s exclusion to pension plans that qualify under state law as spendthrift trusts. . . . These meager excerpts reflect at best congressional intent to include state spendthrift trust law within the meaning of ‘applicable nonbankruptcy law.’” Id. at 761-62. Thus, Patterson does not opine as to the meaning of “trust,” but it does employ language that could be interpreted to mean that § 541(c)(2) is not limited to literal trusts or trusts formed explicitly. “Curiously absent from the Supreme Court’s decision is any discussion of § 541(c)(2)’s trust requirement. And on occasion the Court seems unaware of the requirement.” In re Barnes, 264 B.R. 415, 421 (Bankr. E.D. Mich. 2001). In Yuhas we addressed the applicability of § 541(c)(2) to an Individual Retirement Account (“IRA”) formed under New Jersey law, and, in deciding the case, we parsed the requirements of § 541(c)(2) set forth in Patterson. 104 F.3d at 612. As we stated, “[t]he 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) from claims of creditors 22 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 IRA from a bankruptcy estate.” Id. at 613. We found that “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 estate.” Id. at 614. We stated that the requirements of § 541(c)(2) were: “(1) the IRA must constitute a ‘trust’ within the meaning of 11 U.S.C. § 541(c)(2); (2) the funds in the IRA must represent the debtor’s ‘beneficial interest’ in that trust; (3) the IRA must be qualified 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 ‘restriction on the transfer’ of the IRA funds; and (5) this restriction must be ‘enforceable under nonbankruptcy law.’” Id. Yuhas turned solely on prong four; the parties conceded that prong one was met and thus while Yuhas provides the overall framework for applying § 541(c)(2) it did not address what constituted a trust for purposes of the statute.12 Contrary 12 Debtors contend that the fact that the IRA was held to be excluded in Yuhas means that “it logically follows that the annuity and trust accounts in the TIAA-CREF retirement accounts should also be excluded since IRAs have traditionally been the easiest retirement vehicle through which bankruptcy 23 to Skiba’s position before us in this case, we did not decide in Yuhas what satisfied § 541(c)(2)’s “trust” requirement. In short, neither the Bankruptcy Code nor our applicable federal jurisprudence specifically defines “trust” for the purposes of § 541(c)(2). The Debtors urge that accordingly we should look to state law–here, New York law. In discussing prong five of the test in Yuhas–whether the New Jersey law at issue was a “restriction . . . enforceable under applicable nonbankruptcy law,” § 541(c)(2)–we stated that “[a]pplicable nonbankruptcy law includes both federal law such as ERISA, and state law.” In re Yuhas, 104 F.3d at 614 n.1 (citation omitted). Moreover, trusts are by nature created and defined by state law. See Barnes, 264 B.R. at 429-30 (“The Code does not contain a definition of the term ‘trust.’ But its traditional and common meaning is neither controversial nor mysterious . . . .”). In light of the inclusion of state law under “applicable nonbankruptcy law” and the fact that trusts are creatures of state law, we look to New York law in this Trustees have been able to access to said accounts. . . . Accordingly, [because] the least protective of retirement accounts found protection in the Court’s decision, it follows that other retirement accounts which previously maintained greater protection within the courts should continue said protection.” Appellants’ Reply Br. 3. This may be a good argument insofar as it frames the account in question as one subject to stringent restrictions, but it does not help Debtors show why as a textual matter the annuity should be considered a trust. 24 case in determining whether the annuity is a trust.