Sec. 403(b) annuity included in bankruptcy estate.

• Author: O'Driscoll, David

E had a retirement account through an employer, which was a qualified annuity under Sec. 403(b). E filed a voluntary petition under Chapter 7 of the Bankruptcy Code and chimed that pension/annuity should be excluded from the bankruptcy estate under Section 541 (c)(2). The Bankruptcy Court excluded the annuity, and the trustee appealed to the District Court.

Analysis

Section 541(c)(1) of the Bankruptcy Code broadly provides a bankruptcy estate includes "all legal or equitable interests of the debtor in property" as of the commencement of the bankruptcy estate "except as provided in subsections (b) and (c)(2) of this section." Under Section 541(c)(2):

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 fide. The courts are in conflict over whether annuity pension plans that are tax-qualified under the provisions of Sec. 403(b) should be excluded from a bankruptcy estate by Section 541(c)(2). In Patterson v. Shumate, 504 US 753 (1992), the Supreme Court held an antialienation provision in an ERISA-qualified pension plan constituted an enforceable restriction on transfer under "applicable nonbankruptcy law" (Id. at 757). In the wake of Patterson, several courts have seized on the phrase "in a plan or trust" to hold a broad range of retirement plans other than "trusts" excludible from the bankruptcy estate as long as the instrument contains a qualifying transfer restriction provision. For example, In re Johnson, 191 BR 75 (Bankr. MD PA 1996), a case relied on by the debtors, used this approach to find that a Sec. 403(b) annuity was not property of the bankruptcy estate. However, according to the District Court, the Third Circuit has since rejected this broader inquiry. In Orr, 104 F3d 612 (3rd Cir. 1997), it interpreted Patterson, and announced five requirements that must be satisfied before a pension plan can be excluded from the bankruptcy estate. First and foremost, it held "the IRA must constitute a 'trust' within the meaning of 11 U.S.C. [section] 541(c)(2)" and, secondly, "the funds in the IRA must represent the debtor's 'beneficial interest' in that trust ..."

Following Orr, courts within the Third Circuit have strictly required the existence of a trust to satisfy the statutory exclusion; see, e.g., In re...