In Re: Peter Barshak v.

Opinions of the United
1997 Decisions 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Precedential or Non-Precedential: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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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.
1
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
2
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.
3
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 one-
year 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
4
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
5
"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.
6
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
7
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
8
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
9
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
10
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
11
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.
12
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.
13
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.
14
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.
15