United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT July 25, 2005
_______________________________
Charles R. Fulbruge III
No. 04-20311 Clerk
_______________________________
IN THE MATTER OF: JOSEPH C. COPPOLA,
Debtor.
JOSEPH C. COPPOLA,
Appellant,
v.
SHERI LYN BEESON; RONALD J. SOMMERS,
Appellees.
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_______________________________
No. 04-21013
_______________________________
IN THE MATTER OF: JOSEPH C. COPPOLA,
Debtor.
JOSEPH C. COPPOLA,
Appellant,
v.
SHERI LYN BEESON,
Appellee.
Appeals from the United States District Court
for the Southern District of Texas
Before GARWOOD, JONES, and PRADO, Circuit Judges.
PER CURIAM:
In these consolidated appeals, Debtor Coppola challenges
a judgment denying his retirement annuity account exemption in
bankruptcy and a separate judgment that the same account is not a
“retirement system” account under Chapter 821 of the Texas
Government Code, protected from the consequences of assignments or
pledges. For the reasons stated herein, we AFFIRM the lower
courts’ judgments.
BACKGROUND
On October 11, 1999, Joseph C. Coppola and his wife Sheri
Lyn Beeson divorced. The divorce decree provides for fifty-three
monthly alimony payments of $4,000, totaling $212,000, which were
declared deductible from Coppola’s taxable income and included as
taxable income to Beeson. Coppola owned a retirement account as a
faculty member employed by a state-supported educational
institution; the account served as an alternative to his
participation in the Texas Teachers Retirement System. He
assigned/pledged funds from his Optional Retirement Program Account
(“ORPA”), a qualified employer §403(b) retirement plan,1 to Beeson
as security for the alimony payments. The divorce decree provides:
Security for Alimony — The payments of alimony as set out
herein shall be secured by all interest held by Paying
Party [Joseph C. Coppola] in Aetna 1353674182292
retirement fund. Said retirement held in the name of
Joseph C. Coppola in an amount not less than $212,000.00.
Moreover, the parties agree and it is ORDERED that
Joseph C. Coppola shall continue to pay to the named
Receiving Party, Sheri Lyn Beeson, as the beneficiary of
said retirement fund until the full amount of the alimony
obligation has been paid.
The account was then worth over $640,000.
1
A § 403(b) retirement plan is one that complies with the requirements
of § 403(b) of the Internal Revenue Code (hereafter, “I.R.C.”).
2
Coppola made alimony payments for approximately fourteen
months. Around December 2000, he stopped payment and began
withdrawing substantial sums from the ORPA. Pursuant to the
default and acceleration provisions of the decree, Beeson filed an
action in state court to recover the funds. On October 11, 2001,
Coppola retaliated with a Chapter 7 bankruptcy petition and claimed
an exemption for his ORPA under TEX. PROP. CODE ANN. § 42.0021.
Trustee Ronald J. Sommers and Beeson filed objections to the
exemption.
Following an adversary proceeding, the bankruptcy court
found that:
pursuant to Section 72(p) of the Internal Revenue Code,
the amount of the agreed pledge or assignment is deemed
to have been received by Debtor as a distribution from
the OPR account . . . the amounts deemed to have been
distributed are no longer part of a qualified plan, and
therefore, may not be exempted by Debtor under Texas
Property Code Section 42.0021.
The district court affirmed this judgment.
Beeson was required to file another adversary proceeding
asserting the non-dischargeability of her alimony payments under
11 U.S.C. § 523(a)(5) and the validity of her security interest in
Coppola’s ORPA. After a trial on the issues, the bankruptcy court
again ruled for Beeson. The district court affirmed that judgment,
additionally holding that the ORPA is not a “retirement system”
within the meaning of Chapter 821 of the Texas Government Code.
Coppola has appealed both judgments.
3
STANDARD OF REVIEW
Applying the same standards as the district court, we
review the bankruptcy court’s conclusions of law de novo, and its
findings of fact for clear error. In re Young, 995 F.2d 547, 548
(5th Cir. 1993). A bankruptcy court’s factual findings must be
upheld unless, considering all the evidence, this court forms “a
definite and firm conviction that a mistake has been made.” Id.
DISCUSSION
The first issue, logically, is whether Beeson has a valid
security interest in the assigned/pledged portion of Coppola’s
ORPA. There is little point in our determining whether the ORPA is
exempt from creditors if Texas law prevents the account, as Coppola
contends, from being assigned or pledged.
Coppola contends that the assigned/pledged portion of the
ORPA constitutes a “retirement account” under Texas Government Code
Chapter 821, and thus subject to § 821.005, a provision that bars
assignment of such accounts. We disagree. Moreover, even if
§ 821.005 shielded the ORPA as a retirement account, Texas law
excepts divorce decrees from the anti-assignment provision.
Texas Government Code Chapter 821 governs the Texas
Teachers Retirement System plan. Coppola’s ORPA, however, is an
individualized annuity alternative plan provided to the faculty of
higher education institutions and educational administrators under
the separate framework of Chapter 830. Unlike Chapter 821, Chapter
4
830 lacks an anti-assignment provision. Coppola’s analogical
arguments based on, e.g., TEX. GOVT. CODE ANN. § 659.121(6) (benefit
replacement pay), are inapposite and his arguments regarding other
Texas Government Code provisions are unavailing because individual
account plans such as the ORPA at issue are excluded from
consideration under these provisions. See TEX. GOV. CODE ANN.
§ 801.001. If anything, the cross-references that combine both
types of retirement accounts suggest strongly, under standard
canons of statutory construction, that the legislature intended to
omit Chapter 830 plans from the scope of § 821.005. Finally, even
if generally applicable, anti-assignment provisions like that
embodied in § 821.005 were “not enacted to shield retirement
benefits from court orders dividing the amounts to become payable
and ordering direct payment of a spouses’s community interest.”
Irving Fireman’s Relief and Retirement Fund v. Sears, 803 S.W.2d
747, 749 (Tex. App.-Dallas 1990). In Irving, the court also held
that spendthrift provisions “are limited to protection of the
benefits from the annuitant’s creditors and assignees.” The wife
was held to be neither a creditor nor an assignee, but the owner of
a community interest in the fund. Id.
Not only was Coppola’s interest in his ORPA assignable,
but it was in fact validly pledged to secure Beeson’s alimony by
the terms of the divorce decree, and the security interest was
perfected, in lieu of U.C.C. compliance, by the divorce judgment.
See TEX. BUS. & COM. CODE, ANN. § 9.104(8) (excepting interest created
5
by court judgment from the perfection requirements of Article 9);
Goetz v. Goetz, 567 S.W.2d 892, 895 (Tex. Civ. App.-Dallas 1978)
(holding that a debtor’s right in collateral may be transferred by
court order).
Coppola next asserts that the ORPA is exempt from
creditors in bankruptcy pursuant to 11 U.S.C. § 522(b), which
incorporates exemptions authorized by federal, state or local law.
In pertinent part, TEX. PROP. CODE ANN. § 42.0021 provides that:
(a) . . . a person's right to the assets held in or to
receive payments, whether vested or not, under any
stock bonus, pension, profit-sharing, or similar
plan, including a retirement plan for self-employed
individuals, and under any annuity or similar
contract purchased with assets distributed from
that type of plan, and under any retirement annuity
or account described by Section 403(b) . . . is
exempt from attachment, execution, and seizure for
the satisfaction of debts unless the plan,
contract, or account does not qualify under the
applicable provisions of the Internal Revenue Code
of 1986. . . .
Coppola’s ORPA is thus exempt unless it failed to qualify under the
applicable I.R.C. provision at the time the § 42.0021 exemption was
claimed.
Coppola maintains that various provisions of federal law
treat an assignment/pledge of assets from a qualified employer plan
as a loan from the plan to the individual, which is considered a
“deemed distribution,” as opposed to an “actual distribution” for
the purposes of exemption under I.R.C. §§ 401, 401(k)(2)(B), 402,
and 403(b)(11). The Trustee and Beeson do not contest the deemed
distribution status of the assignment/pledge. They contend instead
6
that the Debtor’s conveyance converted the assigned/pledged portion
of the ORPA into a non-tax qualified sum resulting in tax
consequences to Coppola and effectively removing the funds from the
account, rendering that portion of the ORPA non-exempt under Texas
law. To resolve this dispute, we turn to the federal tax
provisions.
Coppola’s assignment of $212,000 from his § 403(b) ORPA
as security for the alimony due under his divorce decree
constituted a loan within the meaning of I.R.C. § 72(p)(1)(B).
That section provides that:
(B) Assignments or pledges. -- If during any taxable
year a participant or beneficiary assigns (or agrees to
assign) or pledges (or agrees to pledge) any portion of
his interest in a qualified employer plan, such portion
shall be treated as having been received by such
individual as a loan from such plan.
“Loans” under § 72(p)(1)(B) are in turn deemed to be distributions
under § 72(p)(1)(A), which provides that:
(1) Treatment as distributions —
(A) Loans. -- If during any taxable year a
participant or beneficiary receives (directly or
indirectly) any amount as a loan from a qualified
employer plan, such amount shall be treated as
having been received by such individual as a
distribution under such plan.
The Treasury regulations confirm that § 72(p)(1)(A) distributions
are treated as “deemed distributions for tax purposes.”2
2
See 26 C.F.R. § 1.72(p)-1. This section provides that:
(a) Loans. Under section 72(p), an amount received by a
participant or beneficiary as a loan from a qualified employer
7
While the parties appear to agree on these points of law,
they dispute the significance of the deemed distribution for
exemption purposes. Relying on a treasury regulation, Coppola
distinguishes deemed distributions from actual distributions and
contends they are dissimilarly treated for purposes of I.R.C.
§§ 401, 402, and 403. By this reasoning, his partial
pledge/assignment from his ORPA § 403(b) plan is a deemed
distribution that does not disqualify (or otherwise render non-
exempt) the plan, whereas an actual distribution, in which funds
are removed from the ORPA, would be a disqualifying event. The
Appellees, however, contend that there is no distinction between a
deemed distribution and an actual distribution for the purposes of
deciding whether the assigned/pledged amount is exempt. Their
position turns on the consequence of Coppola’s assignment/pledge on
the portion deemed distributed — not on the general qualification
of the § 403(b) plan itself. In their view, Coppola’s
assignment/pledge of a portion of the ORPA § 403(b) plan
constitutes a deemed distribution that destroys tax qualification
plan is treated as having been received as a distribution from
the plan (a deemed distribution), unless the loan satisfies
the requirements of Q&A-3 of this section. . . .
(b) Pledges and assignments. Under section 72(p), if a participant
or beneficiary assigns or pledges (or agrees to assign or
pledge) any portion of his or her interest in a qualified
employer plan as security for a loan, the portion of the
individual's interest assigned or pledged (or subject to an
agreement to assign or pledge) is treated as a loan from the
plan to the individual, with the result that such portion is
subject to the deemed distribution rule described in paragraph
(a). . . .
8
of that portion, renders it non-tax qualified under § 403(b), and,
thus, non-exempt. We reject Coppola’s position and accept that of
the Appellees.
Coppola invokes IRS Regulation § 1.72(p)-1, A-12, which
provides that:
A-12: [I]f a participant in a money purchase plan
. . . has a deemed distribution under section
72(p), the plan will not be considered to have
made an in-service distribution to the
participant in violation of the qualification
requirements applicable to money purchase
plans. . . .
This regulation is plainly inapposite. It addresses and confirms
only that the integrity of the overall qualified plan or the plan’s
general amenability to exemption is not compromised by a debtor’s
assignment/pledge.
The narrower and decisive issue here, which is unad-
dressed by the regulation, is whether Coppola’s assignment/pledge
of a portion of the ORPA resulted in a deemed taxable distribution
of that portion, resulting in its loss of exempt status under Texas
law. This is indeed the result because, as the district court
held, a taxpayer’s
[r]eceipt of a deemed distribution results in a tax
consequence to Coppola. See 26 U.S.C. § 72(p) (providing
as a general rule that all participant loans will be
treated as “deemed” taxable distributions); 26 C.F.R.
§ 1.72(p)-1. Therefore, funds that are deemed
distributed are no longer part of a tax-exempt plan.
While the funds may never have been actually distributed
to Coppola, he did receive a deemed distribution, which
creates a tax liability by operation of law.
9
See also In re Sallee, 286 F.3d 878, 902 (6th Cir. 2002) (holding
that a § 72(p) assignment of an interest in a ESOP is a deemed
distribution of the interest, eliminating its tax-deferred status).
Because Texas Property Code § 42.0021 incorporates
federal tax treatment of the distribution for purposes of
determining a retirement plan’s exemption status, Youngblood v.
FDIC, 29 F.3d 225, 228 (5th Cir. 1994), the amount covered by the
deemed distribution, once effectively removed from the tax-exempt
protection of the § 403(b) plan, also lacks the protection of
§ 42.0021.
CONCLUSION
Based on the foregoing discussion, we conclude that:
(1) Beeson has a valid security interest in Coppola’s ORPA to
secure his $212,000 alimony debt; (2) the assignment/pledge
constituted a loan and thus a deemed distribution from the ORPA
§ 403(b) plan to Coppola under I.R.C. § 72(p); and (3) because the
deemed distributed portion no longer qualifies under the § 403(b)
plan, it is non-exempt under Texas law and the Bankruptcy Code.
The judgments of the bankruptcy and district courts are AFFIRMED.
10