(Appeal Related to Bankruptcy Case No. 05-36491).
The opinion of the court was delivered by: Nora Barry Fischer United States District Judge
Pending before the Court is an appeal from an April 6, 2006 Order entered by the Bankruptcy Court in Bankruptcy Case No. 05-36491. Jefferey and Pamela Varchetto (hereinafter "Appellants" or "Varchettos") filed a voluntary chapter 7 petition on October 13, 2005. Thereafter, the Varchettos filed a list of exempted property with the Bankruptcy Court, claiming an exemption of Mr. Varchetto's § 403(b) retirement account from the bankruptcy estate under 11 U.S.C. § 541(c)(2), and alternatively, an exemption by Mrs. Varchetto under 11 U.S.C. § 522(d)(5) of certain funds in the § 403(b) account. The Trustee objected to the inclusion of both exemptions claimed by the Varchettos, and the Bankruptcy Court granted the Trustees' objections, entering an Order that is now the subject of this appeal. On appeal, the Varchettos seek to overturn the Bankruptcy Court's Order rejecting both exemptions and raise the issue whether the Trustee can obtain early distribution of assets under the § 403(b) retirement account because of restrictions on the account preventing withdrawal prior to the employee's attainment of age 59 1/2 . The appeal was stayed by this Court pending the resolution of In Re Laher, 496 F.3d 279 (3d Cir. 2007), by the Court of Appeals for the Third Circuit, the outcome of which was believed by the Court and the parties to be controlling. The opinion of In Re Laher, was thereafter issued by the Court of Appeals. For the following reasons, the Order of the Bankruptcy Court is REVERSED and the matter is REMANDED to the Bankruptcy Court for further proceedings in accordance with this Opinion.
This Court has appellate jurisdiction over final judgments, orders and decrees of the Bankruptcy Court pursuant to 28 U.S.C. § 158(a)(1). The Court reviews the Bankruptcy Court's findings of fact under a clearly erroneous standard and its conclusions of law under a de novo standard. In re Sharon Steel Corp., 871 F.2d 1217, 1222-23 (3d Cir. 1989); Manus Corp. V. NRG Energy Inc. (In Re O'Brien Environmental Energy Inc.), 188 F.3d 116, 122 (3d Cir. 1999) (rendering that "[a] bankruptcy court abuses its discretion when its ruling is founded on an error of law or a misapplication of law to the facts"); see also Continental Cas. Co. v. H.K. Porter Co. (In re H.K. Porter Co.), Civ. Action No. 07-189, 2007 U.S. Dist. LEXIS 84524, at *12 (W.D. Pa. Nov. 15, 2007); Lauro v. Shearer (In re Lauro), Civ. Action No. 07-670, 2007 U.S. Dist. LEXIS 85637, at *8 (W.D. Pa. Nov. 20, 2007).
The main issue on appeal is whether Mr. Varchetto's § 403(b) retirement account is included in the bankruptcy estate and subject to distribution to his and his wife's creditors or if the account is a trust contemplated by § 541(c)(2) and thereby exempted from the bankruptcy estate, preventing access to the funds by such creditors. Appellants contend that a § 403(b) retirement account held by Mr. Varchetto is exempt from the bankruptcy estate pursuant to 11 U.S.C. § 541(c)(2) as the account constitutes a 'plan or trust' within the Supreme Court's holding in Patterson v. Shumate, 504 U.S. 753 (1991), and that it was error of law for the Bankruptcy Court to include the account in the bankruptcy estate. The Trustee, in accord with the Bankruptcy Court's order, contends that the account does not constitute a "trust" and as such cannot be exempt under section 541(c)(2).
The starting point for the analysis is the applicable statutory provisions of the Bankruptcy Code. Section 541 describes the property that comprises the bankruptcy estate and provides that the estate, subject to certain exceptions, includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). The exception at issue here, section 541(c)(2), provides:
(2) A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable in a case under this title.
11 U.S.C. § 541(c) (emphasis added). Mr. Varchetto's § 403(b) retirement account must therefore be a "trust that is enforceable under applicable non-bankruptcy law" to qualify as exempt from the bankruptcy estate.
The Bankruptcy Court below held that Mr. Varchetto's § 403(b) retirement account was not exempt from the bankruptcy estate because "[a] section 403(b) account is not excluded from the bankruptcy estate by § 541(c)(2)." (Docket No. 1-2.) In reaching that determination, the Bankruptcy Court relied on Skiba v. Gould, 337 B.R. 71 (W.D. Pa. 2005), which held that an explicit trust is required for a § 403(b) retirement account to be exempt under § 541(c)(2).
The district court in Skiba heard an appeal from a bankruptcy court decision which held "that a pension plan does not have to qualify as a 'trust' to fall within the parameters of § 541(c)(2) and, therefore, the debtors' 403(b) annuity was excluded from the bankruptcy estate." Skiba, 337 B.R. at 73. The bankruptcy court had cited the United States Supreme Court's decision in Patterson as authority.
In Patterson, the Supreme Court discussed § 541(c)(2) and recognized that "[t]he natural reading of the provision 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 non-bankruptcy law." Patterson, 504 U.S. at 758 (emphasis added). The district court in Skiba acknowledged that "several courts have seized upon the phrase 'in a plan or trust' to hold that a broad range of retirement plans other than 'trusts' are excludable from the bankruptcy estate as long as the instrument contains a qualifying transfer restriction provision." Skiba, 337 B.R. at 73. The district court in Skiba interpreted the Court of Appeals for the Third Circuit's holding in Orr v. Yuhas (In re Yuhas), 104 F.3d 612 (3d Cir. 1997), which set forth a framework to analyze whether section 541(c)(2) applies, as implicitly overruling several district courts' broad interpretation of the "in a plan or trust" language of Patterson to include retirement accounts other than trusts. Skiba, 337 B.R. at 73-74 In rejecting the broader interpretation, the district court restricted the exemption in § 541(c)(2) to explicit trusts. Skiba, 337 B.R. at 73-74 ("[i]n light of the holding in Yuhas and other recent cases strictly construing the plain language of § 541(c)(2), we conclude that only a debtor's beneficial interest in a trust may be excluded from the ...