United States Court of Appeals, Eleventh Circuit.
No. 95-8347.
In re Virginia Ann MEEHAN, Debtor.
Virginia Ann MEEHAN, Plaintiff-Appellant,
v.
A. Stephenson WALLACE, Chapter 7 Trustee, Defendant-Appellee.
Jan. 8, 1997.
Appeal from the United States District Court for the Southern
District of Georgia. (No. 93-10463), John S. Dalis, Judge; (No.
CV194-027), Dudley H. Bowen, Jr., Judge..
Before TJOFLAT and ANDERSON, Circuit Judges, and NANGLE*, Senior
District Judge.
ANDERSON, Circuit Judge:
Appellant Virginia Ann Meehan is a Chapter 7 debtor. The
contested property is debtor's individual retirement account (IRA),
which debtor claims is excluded from property of the estate under
11 U.S.C.A. § 541(c)(2). Both the bankruptcy court and the
district court rejected debtor's argument and held that the IRA was
included in her bankruptcy estate. We hold that debtor's IRA is
excluded from the estate under 11 U.S.C.A. § 541(c)(2) because of
the restriction on its transferability. Accordingly, we reverse.
I. FACTS
The facts are not in dispute. Debtor Virginia Ann Meehan
filed for relief under Chapter 7 of the Bankruptcy Code on March
25, 1993, as a result of $125,000 of unsecured debt incurred from
her ownership and operation of a children's store. Included in
debtor's schedules was an IRA, which was opened in 1983 and valued
*
Honorable John F. Nangle, Senior U.S. District Judge for
the Eastern District of Missouri, sitting by designation.
at $20,954.47. The parties stipulated that debtor's IRA was one
defined by § 408 of the Internal Revenue Code [Title 26 of the
United States Code].1
II. DISCUSSION
A. Standard of Review
The sole question at issue in this case is whether 11
U.S.C.A. § 541(c)(2) excludes from the property of a bankruptcy
estate an IRA which is subject to a restriction on transfer by a
state statute. The proper construction of the Bankruptcy Code,
whether by the bankruptcy court or by the district court, is a
matter of law. Accordingly, we subject such interpretations to de
novo review. In re Haas, 48 F.3d 1153, 1155 (11th Cir.1995).
B. Analysis
Property of a bankruptcy estate includes "all legal and
equitable interests of the debtor in property as of the
commencement of the case." 11 U.S.C.A. § 541(a)(1). The scope of
§ 541(a)(1) is broad, and includes property of all types, tangible
and intangible, as well as causes of actions. United States v.
Whiting Pools, Inc., 462 U.S. 198, 205 & n. 9, 103 S.Ct. 2309, 2313
& n. 9, 76 L.Ed.2d 515 (1983).
Debtor argues that her IRA is excluded from the bankruptcy
estate pursuant to 11 U.S.C.A. § 541(c)(2), which provides:
1
"An IRA ... is defined as a personal tax deferred,
retirement account which an employed person can establish under
specified deposit limits for individuals and married couples.
Withdrawals may be made from an IRA prior to age 591/2 but such
withdrawals are subject to a ten percent penalty tax. An IRA is
neither established nor maintained by an employer or employee
organization. Instead, an IRA is maintained by an individual
pursuant to the restrictions contained in 26 U.S.C. § 408." In
re Herbert, 140 B.R. 174, 176 (Bankr.N.D.Ohio 1992).
A restriction on the transfer of a beneficial interest of the
debtor in a trust that is enforceable under applicable
nonbankruptcy law is enforceable in a case under this title.2
Debtor argues that her IRA should be excluded from the estate
under § 541(c)(2) because O.C.G.A. § 18-4-22(a) imposes a
restriction on transfer by garnishment. Section 18-4-22(a)
provides in relevant part:
Funds or benefits from an individual retirement account as
defined in Section 408 of the United States Internal Revenue
Code of 1983, as amended, [are] exempt from the process of
garnishment until paid or otherwise transferred to a member of
such program or beneficiary thereof.
Appellee, the bankruptcy trustee, sets forth two reasons why
debtor's IRA should not qualify for the § 541(c)(2) exclusion:
first, because the transfer restriction is contained only in the
Georgia statute and is not contained within the IRA document
itself; and second, because debtor Meehan had access to the IRA
funds for personal use and the restriction was applicable only to
creditors.3
2
Other restrictions or conditions on transfer do not result
in exclusion from the bankruptcy estate. 11 U.S.C.A. §
541(c)(1).
3
Appellee also argues that the IRA should be included in the
estate because the nonbankruptcy law restricting its transfer,
O.C.G.A. § 18-4-22(a), is invalidated by 11 U.S.C.A. §
541(c)(1)(A). Section 541(c)(1)(A), in pertinent part, states
the following:
Except as provided in paragraph (2) of this subsection,
an interest of the debtor in property becomes property
of the estate ... notwithstanding any provision in an
agreement, transfer instrument, or applicable
nonbankruptcy law— ... that restricts or conditions
transfer of such interest by the debtor.
We disagree with appellee's interpretation of §
541(c)(1)(A). Section 541(c)(1)(A) says expressly,
"[e]xcept as provided in (c)(2)," and (c)(2) excludes a
beneficial interest in a trust if the trust is subject to a
In rejecting Meehan's claim for exclusion of the property,
both the bankruptcy court and the district court relied in part on
the fact that the restriction on transfer was contained only within
the Georgia statute; the courts below found it significant that
the IRA document itself contained no restriction on transfer. Both
the district court and the bankruptcy court relied on dicta in
Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519
(1992), which suggests that IRAs ordinarily will not qualify for
exclusion under § 541(c)(2) because such plans usually lack
transfer restrictions enforceable under applicable nonbankruptcy
law. Read by itself, the dicta would provide some support for the
interpretation of the courts below. However, read within its
context, it is clear that the Court was commenting upon the fact
that IRAs are not subject to the ERISA-mandated anti-alienation
provision, (i.e. federal law does not mandate that IRAs contain
such clauses). Thus, the Court was commenting on the fact that IRA
documents typically would not contain transfer restrictions. It is
clear from the context of the Shumate dicta that the Court was not
addressing the very different factual situation of this case—i.e.,
where state law provides a restriction on the transferability of
the IRA.
We conclude that § 541(c)(2) exclusion is not lost merely
because the IRA document itself does not contain the restriction,
it being contained instead in the Georgia statute. Our conclusion
is supported by the plain meaning of the language of § 541(c)(2),
restriction on transfer (such as O.C.G.A. § 18-4-22(a))
enforceable under nonbankruptcy law.
which requires only that the restriction be "enforceable under
applicable nonbankruptcy law."4 Nothing in the language of the
statute suggests that the restriction must be contained both within
a relevant nonbankruptcy statute and also within the trust
instrument itself.5 Section 18-4-22(a) of the Official Code of
Georgia Annotated clearly constitutes "applicable nonbankruptcy
4
Apparently only beneficial interests in trusts qualify for
the § 541(c)(2) exclusion. 11 U.S.C.A. § 541(c)(2) (referring to
"[a] restriction on the transfer of a beneficial interest of the
debtor in a trust"). No argument is made that Meehan's IRA is
not a trust. Moreover, by definition, an IRA is a trust. 26
U.S.C.A. § 408(a) ("the term "individual retirement account'
means a trust ...").
5
The district court thought that the language of § 541(c)(2)
suggested that the restriction must be found in the trust
document itself in order to avoid an "implausible ... empty
duplication." In re Meehan, 173 B.R. 818, 821 (S.D.Ga.1994).
Explaining, the district court said:
Filling in the blanks as required by Meehan's proposed
application of § 541(c)(2) to her IRA yields a
meaningless tautology: "[a] restriction [in O.C.G.A. §
18-4-22(a) ] ... that is enforceable under [O.C.G.A. §
18-4-22(a) ] ... is enforceable in a case under this
title."
In other words, the district court substituted the reference
to the Georgia statute in lieu of the shaded portion of §
541(c)(2) as follows:
A restriction on the transfer of beneficial interest of
the debtor in a trust that is enforceable under
applicable nonbankruptcy law is enforceable in a case
under this title.
The problem with the district court's construction is that
it assumes that the phrase "in a trust" modifies the word
"restriction." Rather, we believe that the phrase "in a
trust" modifies the immediately preceding phrase "beneficial
interest of the debtor." With this more natural reading of
the language of the statute, so that the phrase "in a trust"
means only that the statute is talking about a beneficial
interest in a trust, the district court's implausible
duplication disappears. Accord In re Yuhas, 186 B.R. 381,
385 (Bankr.D.N.J.1995).
law." In order for the restriction in § 18-4-22(a) to be
enforceable, nothing in Georgia law requires that the restriction
be repeated in any IRA document. Common sense also supports our
interpretation; a restriction is no less enforceable because it is
located in the statute rather than in the document.
In addition to the plain meaning of § 541(c)(2) and common
sense, we believe our conclusion is supported by the case law. In
Whetzal v. Alderson, 32 F.3d 1302 (8th Cir.1994), the Eighth
Circuit held that a debtor's interest in his civil service
retirement benefits was excluded from his bankruptcy estate under
§ 541(c)(2) because of the statutory restriction on alienation
contained in 5 U.S.C. § 8346(a). As in this case, the restriction
on transfer was contained in the statute, as neither the Whetzal
opinion nor the statute indicate that there would be a plan
document.6 See also In re Yuhas, 186 B.R. 381 (Bankr.D.N.J.1995)
(where an IRA which did not contain a provision restricting
creditor access to funds was nevertheless excluded from the
bankruptcy estate under § 541(c)(2) because a state statute
restricting access constituted "applicable non-bankruptcy law").
The appellee-trustee also argues that debtor Meehan's IRA
cannot be excluded from her bankruptcy estate because she could
withdraw the corpus of the trust and incur only a 10% penalty tax.
The district court perceived an inequity in allowing debtors to
shield IRA funds from creditors notwithstanding the debtors'
6
In re Solomon, 67 F.3d 1128 (4th Cir.1995), is not to the
contrary. Although in the Chapter 13 context Solomon did say
that an IRA would be part of the bankruptcy estate, the Fourth
Circuit did not address the possible applicability of § 541(c)(2)
to exclude the IRA.
ability to withdraw the corpus for personal use. In addition to
the district court, bankruptcy courts have relied on this factor.
See In re Van Nostrand, 183 B.R. 82, 85 (Bankr.D.N.J.1995); In re
Harless, 187 B.R. 719, 726 (Bankr.N.D.Ala.1995). Although we
recognize the force of the trustee's argument, we conclude that the
case law indicates otherwise.
The Supreme Court in Patterson v. Shumate, 504 U.S. 753, 112
S.Ct. 2242, 119 L.Ed.2d 519 (1992), resolved a split among the
circuits regarding whether the phrase "applicable nonbankruptcy
law" referred to in § 541(c)(2) was limited only to state
spendthrift trust law or instead encompassed federal law as well.7
The Court rejected those pre-Shumate cases which had limited the §
541(c)(2) exclusion to state spendthrift trust law. Shumate, 504
U.S. at 761 & n. 4, 112 S.Ct. at 2248 & n. 4. The pre- Shumate
cases had declined to apply the § 541(c)(2) exclusion to ERISA
plans because plan beneficiaries have a greater ability to access
plan funds than beneficiaries of spendthrift trusts. See e.g., In
re Goff, 706 F.2d at 587; In re Lichstrahl, 750 F.2d at 1490.
7
Before Shumate, the Ninth, Eleventh, Eighth and Fifth
Circuits interpreted "applicable nonbankruptcy law" to include
only state spendthrift trust law. Daniel v. Security Pacific
Nat'l Bank (In re Daniel), 771 F.2d 1352 (9th Cir.1985), cert.
denied, 475 U.S. 1016, 106 S.Ct. 1199, 89 L.Ed.2d 313 (1986);
Lichstrahl v. Bankers Trust (In re Lichstrahl), 750 F.2d 1488
(11th Cir.1985); Samore v. Graham (In re Graham), 726 F.2d 1268
(8th Cir.1984); Goff v. Taylor (In re Goff), 706 F.2d 574 (5th
Cir.1983). In contrast, the Tenth, Third, Sixth and Fourth
circuits did not limit § 541(c)(2) to state spendthrift trust
law. Gladwell v. Harline (In re Harline), 950 F.2d 669 (10th
Cir.1991), cert. denied, 505 U.S. 1204, 112 S.Ct. 2991, 120
L.Ed.2d 869 (1992); Velis v. Kardanis, 949 F.2d 78 (3d
Cir.1991); Forbes v. Lucas (In re Lucas), 924 F.2d 597 (6th
Cir.), cert. denied, 500 U.S. 959, 111 S.Ct. 2275, 114 L.Ed.2d
726 (1991); Moore v. Rain (In re Moore), 907 F.2d 1476 (4th
Cir.1990).
In deciding whether the ERISA plan in which Shumate
participated was excluded from the estate under § 541(c)(2), the
district court in Shumate relied on the pre-Shumate cases which
narrowly interpreted § 541(c)(2). Creasy v. Coleman Furniture
Corp., 83 B.R. 404, 406-08 (W.D.Va.1988).8 The district court thus
inquired into whether the pension plan at issue, which satisfied
the applicable requirements for ERISA,9 qualified as a state
spendthrift trust. Creasy, 83 B.R. at 407-09. The crux of the
district court's inquiry focused on the degree of dominion and
control which Shumate exercised over the pension plan. Creasy, 83
B.R. at 408-09 (citing In re Lichstrahl, 750 F.2d at 1490; In re
Goff, 706 F.2d at 588). Shumate controlled 96% of the voting stock
of the plan sponsor, and therefore had the power to terminate the
plan and receive his interest in a lump sum. The district court
concluded: "Shumate exercised such power over the ... pension
trust that he could control it to suit his needs." Creasy, 83 B.R.
at 408. As a result of Shumate's extensive control over the plan,
the district court found that the plan was "inconsistent with the
notion of spendthrift trusts," and held that it was not covered by
8
The caption of the Shumate case in the district court was
Creasy v. Coleman Furniture Corp.
9
The pension plan satisfied the applicable ERISA
requirements, and qualified for favorable tax treatment under the
Internal Revenue Code (I.R.C.). See ERISA, § 201(d)(1), 29
U.S.C.A. § 1056(d) (requiring that "[e]ach pension plan shall
provide that benefits provided under the plan may not be assigned
or alienated"); I.R.C., 26 U.S.C.A. § 401(a)(13)(A)
(conditioning qualification under ERISA and thus exemption from
taxation on the non-transferability of pension benefits: "[a]
trust shall not constitute a qualified trust under this section
unless the plan of which trust is a part provides that benefits
provided under the plan may not be assigned or alienated").
§ 541(c)(2). Id.
The Fourth Circuit reversed the district court's holding in
light of In re Moore, 907 F.2d 1476 (4th Cir.1990), which held that
"applicable nonbankruptcy law" includes the law of ERISA. Shumate
v. Patterson, 943 F.2d 362, 363 (4th Cir.1991). The Fourth Circuit
stated that the district court's "focus on state spendthrift trust
law, which looks to the reality behind the non-alienation
provision, is misplaced." Id. at 364. The Fourth Circuit
explained that because "ERISA requires a plan to have a
non-alienation provision, ... [n]o more inquiry need be made to
determine whether the trust is controlled by the settlor or the
beneficiary, or whether they are the same person." Id.
The Supreme Court affirmed the Fourth Circuit, holding that
the phrase "applicable nonbankruptcy law" contained in § 541(c)(2)
is not limited to state law. 504 U.S. at 758, 112 S.Ct. at 2246.
The Court then determined that the "anti-alienation provision
contained in the ERISA qualified plan at issue satisfie[d] the
literal terms of § 541(c)(2)." 504 U.S. at 759, 112 S.Ct. at 2247.
While the Court did not expressly address the control analysis upon
which the district court so heavily relied, it did so implicitly in
rejecting the argument that § 541(c)(2) exclusion should be limited
to spendthrift trusts. 504 U.S. at 761-62, 112 S.Ct. at 2248.
Significantly, because the facts of the case involved extensive
control by Shumate, the Supreme Court's holding necessarily means
that such control does not bar exclusion pursuant to § 541(c)(2).
Our analysis is supported by both the Ninth and Eighth
Circuits. In In re Conner, 73 F.3d 258 (9th Cir.), cert. denied,
--- U.S. ----, 117 S.Ct. 68, 136 L.Ed.2d 29 (1996), the Ninth
Circuit construed Shumate as apparently discounting the
significance of a debtor's control over the assets of the plan. 73
F.3d at 260 (9th Cir.1996); accord In re Rueter, 11 F.3d 850 (9th
Cir.1993). The fact that the debtor could have withdrawn his plan
benefits did not prevent the court from excluding the plan under §
541(c)(2). In re Conner, 73 F.3d at 260. In Whetzal, the Eighth
Circuit rejected the trustee's argument that the debtor's option to
withdraw the Civil Service retirement benefits in a lump sum should
make the § 541(c)(2) exclusion inapplicable. 32 F.3d 1302. The
court relied upon Shumate and its emphasis on the important
congressional policy of protecting pension benefits. Id. at 1304.
In light of the foregoing precedent, and in light of the
congressional concern about protecting pension benefits as
recognized by the Supreme Court in Shumate, we conclude that debtor
Meehan's potential access to the IRA funds is not sufficient to
deprive her of the § 541(c)(2) exclusion.
III. CONCLUSION
Because debtor's IRA is subject to a statutory restriction, it
is excluded from the estate under § 541(c)(2). Accordingly, the
judgment of the district court is reversed, and the case is
remanded so that the district court may reverse the order of the
bankruptcy court.
REVERSED and REMANDED.