On Appeal from the United States District Court for the Eastern District of Pennsylvania D.C. Civ. No. 95-0571
BEFORE: GREENBERG, COWEN, and ALITO, Circuit Judges
GREENBERG, Circuit Judge.
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. Section(s) 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 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. Section(s) 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. Section(s) 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. 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 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 "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. *fn1
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. ...