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Precedential or Non-Precedential: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,

(Bankr. E.D. Pa. 1995) ("Barshak I").     Barshak then

appealed and the district court reversed.      In re Barshak, 

(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 

.


                                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."    

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."    

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.     

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.     

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.    

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]."     

court was impressed with In re Goldman,

(Bankr. D. Mass. 1995), aff'd, 

(D. Mass.

1996).   In Goldman the debtor directed that his interest in a

terminated ERISA plan be transferred to his IRA.      In re 

.    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.    

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.     

  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.    

   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 

.

             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."     

Barshak supported this contention by pointing out that both

federal and Pennsylvania law accord favorable tax treatment to


                                  5
"rollover contributions."   

court rejected

Barshak's request because it viewed the "plain language" of

subsection B as requiring that it do so.   

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.   

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 

.    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.

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."   

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."   

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.   

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."         

regard it quoted In re Houck, 

, 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 

.   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."       

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."         

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 

.    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, 

, 55-56

(3d Cir. 1994); Velis v. Kardanis, 

, 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."     

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."      

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 

.    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, 

, 

(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.      

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