Skiba v. Laher

Opinions of the United

2007 Decisions States Court of Appeals

for the Third Circuit

8-2-2007

Skiba v. Laher

Precedential or Non-Precedential: Precedential

Docket No. 05-4168

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2007

Recommended Citation

"Skiba v. Laher" (2007). 2007 Decisions. Paper 515.

http://digitalcommons.law.villanova.edu/thirdcircuit_2007/515

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova

University School of Law Digital Repository. It has been accepted for inclusion in 2007 Decisions by an authorized administrator of Villanova

University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

__________

Case No. 05-4168

__________

IN RE: DEBRA A. LAHER; TIMOTHY M. LAHER,

Debtors

GARY V. SKIBA

v.

TIMOTHY M. LAHER;

DEBRA A. LAHER;

TIAA-CREFF

Timothy M. Laher;

Debra A. Laher,

Appellants

__________

On Appeal from the United States District Court

for the Western District of Pennsylvania

(D.C. Civil No.05-cv-00151)

District Judge: Honorable Sean J. McLaughlin

__________

Submitted Under Third Circuit LAR 34.1(a)

on March 28, 2007

Before: RENDELL, BARRY, and CHAGARES,

Circuit Judges.

(Filed: August 2, 2007)

Joseph B. Spero [ARGUED]

3213 West 26th Street

Erie, PA 16506

Counsel for Appellants

Timothy M. Laher; Debra A. Laher

Gary V. Skiba [ARGUED]

Yochim, Skiba, Johnson, Cauley & Nash

345 West 6th Street

Erie, PA 16507

Counsel for Appellee

Gary V. Skiba

2

__________

OPINION OF THE COURT

__________

RENDELL, Circuit Judge.

This case presents the question of whether Timothy M.

Laher’s TIAA-CREF retirement annuity is excluded from the

bankruptcy estate pursuant to 11 U.S.C. § 541(c)(2). We hold

that it is, and will reverse the decision of the District Court and

order that the case be remanded to the Bankruptcy Court for

entry of an order excluding the annuity from the bankruptcy

estate.

FACTUAL AND PROCEDURAL HISTORY

While employed by Gannon University, Timothy Laher

participated in a tax-deferred retirement plan. Pre-tax

contributions were taken from his paycheck and accumulated

into a sum that would be used to purchase a contract that would

pay him an annuity over time after retirement.1 Salary

1

“A Tax Deferred Annuity Plan is an employee benefit plan

established by your Employer under IRC Section 403(b), under

which you may make salary reduction contributions to an

annuity contract.” CREF Annuity Certificate, App. 89. The

3

contributions and employer contributions were fixed as a

percentage of the employee’s salary.2 Under the plan, 3% of an

employee’s compensation was withheld from his paychecks, and

Gannon contributed an amount equal to 7% of the employee’s

compensation. Participation in the plan was mandatory. See

Gannon Plan, App. 44 (“An Eligible Employee is required to

begin participation in the Plan no later than the Plan Entry Date

following the completion of five Years of Service at the

Institution or the attainment of age 30, whichever occurs later.”).

Under the particular plan chosen by Laher, the pre-tax

contributions would be used to pay for premiums on an annuity

contract. The manager for his plan was TIAA-CREF, the

Teacher Insurance and Annuity Association – College

Retirement Equities Fund. TIAA-CREF “offer[ed] fixed dollar

(guaranteed) annuities through the Teachers Insurance and

Annuity Association (TIAA); or several variable investment

accounts through the College Retirement Equities Fund

terms of the account state that the plan was established “to

provide lifetime income benefits for retired employees.”

App. 62 (Gannon University Defined Contribution Retirement

Plan[,] Summary Plan Description).

2

Skiba states that “[t]here is no dispute that the pensions of

Timothy M. Laher are annuities qualified under IRC § 403(b).”

Appellee’s Br. 4. The TIAA-CREF form states that a “Funding

Vehicle is an annuity contract or custodial account established

to provide retirement benefits under IRC Section 403(b).”

App. 25.

4

(CREF).” App. 67. Each premium paid for an “Accumulation

Unit” in the TIAA or CREF accounts, and the sum of such units

would eventually provide the annuity benefits for Laher.3

The terms of the Summary Plan Description informed

Laher that the “accumulations resulting from your participation

in one or more of the investment contracts or accounts offered

by the Fund Managers [such as TIAA-CREF] will be the source

of your retirement benefits, which can be paid out under a

variety of methods available under this Plan.” App. 62. “You

3

The Gannon plan includes a “Retirement Transition Benefit,”

whereby at retirement a participant “may elect to receive up to

10% of his or her Accumulation Accounts in TIAA or CREF in

a lump sum prior to their being converted to retirement income.”

App. 70. However, the CREF Annuity Certificate informs the

participant that “You may choose to withdraw, as a Lump-sum

Benefit, all or part of your Accumulation before starting to

receive a lifetime income. Federal tax law may restrict

distributions before age 59½, as outlined in Section 47.”

App. 77. Section 47 (“Restrictions on Elective Deferrals”)

states: “This Certificate is designed to be a part of a tax-deferred

group annuity contract as specified under IRC Section 403(b).”

It prohibits distribution of certain portions of the participant’s

Accumulation “until the participant: (1) attains age 59½;

(2) separates from service of the employer under whose plan the

aforementioned portion is attributable; (3) dies; (4) becomes

disabled within the meaning of IRC Section 72(m)(7); or

(5) encounters financial hardship within the meaning of IRC

Section 403(b).”

5

can begin to receive Plan benefits only after you have retired or

terminated employment with the University.” App. 70. The

CREF and TIAA certificates explained how the money would

be managed, and each stated that the benefits would be protected

from the claims of creditors to the “fullest extent permissible by

law.” CREF Certificate, App. 100; TIAA Certificate, App. 132.

Both stated that they were governed by New York law.

On May 20, 2004, Laher and his wife Deborah

(“Debtors”) filed a Chapter 7 bankruptcy petition in the Western

District of Pennsylvania’s Bankruptcy Court. On Schedule B of

their petition, Debtors listed the retirement account with TIAA-

CREF. The account had a value of $92,847.93. Records

indicate that roughly $41,000 of that amount was held in a

“TIAA Traditional” account, which “guarantees [the] principal

and a specified interest rate.” App. 20 (Portfolio Summary).

The other $51,000 was held in funds listed as “CREF Stock”

and “CREF Money Market.” Id. A pie chart in the summary

stated that 29% of Laher’s monies was in equities, 45% was

guaranteed, and 26% was in a money market account. Id.

On September 9, 2004, the Chapter 7 Trustee, Gary

Skiba, filed an adversary proceeding alleging that Laher’s

TIAA-CREF annuity was property of the bankruptcy estate

“under either Patterson v. Shumate, 504 U.S. 753 (1992), or

11 U.S.C. § 541(c)(2) because it is not a trust.” Skiba Compl. 2;

App. 18. Section 541 states, in relevant part:

6

The commencement of a case under

section 301, 302, or 303 of this title [11 USCS

§ 301, 302, or 303] creates an estate. Such estate

is comprised of all the following property,

wherever located and by whomever held:

(1) Except as provided in subsections (b)

and (c)(2) of this section, all legal or equitable

interests of the debtor in property as of the

commencement of the case.

11 U.S.C. § 541(a) (emphasis added).

Section (c) states:

(1) Except as provided in paragraph (2)

of this subsection, an interest of the debtor in

property becomes property of the estate under

subsection (a)(1), (a)(2), or (a)(5) of this section

notwithstanding any provision in an agreement,

transfer instrument, or applicable nonbankruptcy

law--

(A) that restricts or conditions

transfer of such interest by the debtor; or

(B) that is conditioned on the

insolvency or financial condition of the debtor, on

7

the commencement of a case under this title, or on

the appointment of or taking possession by a

trustee in a case under this title or a custodian

before such commencement, and that effects or

gives an option to effect a forfeiture,

modification, or termination of the debtor's

interest in property.

(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 title.

11 U.S.C. § 541(c) (emphasis added).

Skiba argued that the annuity’s restriction on creditors’

access to the account did not apply to Laher’s annuity because

the annuity did not qualify as a “trust” under § 541(c)(2). On

April 12, 2004, Judge Bentz rejected this argument and ruled

that the TIAA-CREF plan was excluded from the bankruptcy

estate. In a one-page order, Judge Bentz wrote that “it is

ORDERED that, in accordance with the separate Opinion issued

this date in the case of In re Gould, Bankruptcy No. 04-11889,

Document No. 19 related to Document No. 13, the Complaint is

dismissed and the Debtor’s retirement plan through TIAA-

CREF is excluded from the bankruptcy estate.” App. 34.

8

Judge Bentz’s opinion in In re Gould explained his

reasoning. Similar to the instant case, the case involved a debtor

whose pension plan was a “tax sheltered annuity plan qualified

under section 403(b) of the Internal Revenue Code, 26 U.S.C.

§ 403(b).” Skiba v. Gould (In re Gould), 322 B.R. 741, 741

(Bankr. W.D. Pa. 2005). The trustee (Gary Skiba, the same

trustee as in the instant case) argued that the “Pension Plan is an

annuity by definition and not a trust; that only an interest in a

trust can be a subject of an enforceable transfer restriction

within the meaning of 11 U.S.C. § 541(c)(2); and therefore, the

Debtor’s Pension Plan cannot be excluded from the bankruptcy

estate.” Id. at 742.4

Judge Bentz began by citing § 541(c)(2), id. at 742, and

then took issue with the decision of the Bankruptcy Appellate

Panel in the case of In re Adams, 302 B.R. 535 (B.A.P. 6th Cir.

4

See BLACK’S LAW DICTIONARY 1508 (6th ed. 1990) (defining

“Trust” as a “legal entity created by a grantor for the benefit of

designated beneficiaries under the laws of the state and the valid

trust instrument”); see also RESTATEMENT (THIRD) OF TRUSTS

§ 2 (2003) (“A trust, as the term is used in this Restatement

when not qualified by the word ‘resulting’ or ‘constructive,’ is

a fiduciary relationship with respect to property, arising from a

manifestation of intention to create that relationship and

subjecting the person who holds title to the property to duties to

deal with it for the benefit of charity or for one or more persons,

at least one of whom is not the sole trustee.”).

9

2003), noting that he agreed with the dissenting opinion in that

case. Specifically, Judge Bentz believed that the Adams

majority erroneously “read[] the statute literally to require a

trust.” Id. Judge Bentz held that a literal trust was not required,

but, rather, a plan which functioned like a trust would satisfy

the “trust” requirement, relying on the following language of

Judge Latta’s dissent in Adams:

I find no functional distinction between the

protections afforded to beneficiaries of

ERISA-qualified pension plans in which assets

are held in trust and those in which assets are used

to purchase annuity contracts. Outside of

bankruptcy, no creditor of the Adams would be

able to reach the debtors’ beneficial interests in

their pension plans to satisfy claims, and this is

true not because these interests are exempt from

execution pursuant to state law, but because they

are exempt from execution pursuant to federal

law.

Id. (quoting In re Adams, 302 B.R. 535, 547 (B.A.P. 6th Cir.

2003) (Latta, J., dissenting)).

Judge Bentz agreed:

[My] view is aligned with the view of the

dissenting Opinion in Adams. [I] see no reason to

10

treat a corporate pension plan differently than a

403(b) annuity pension plan. Both are set up by

a third party, utilize the tax vehicles provided by

the Internal Revenue Code to accumulate funds

on a tax-free basis and contain anti-alienation

clauses to prevent creditors from reaching a

debtor's interests in the plan. [I] further conclude

that this broader view of § 541(c)(2) is supported

by the Congressional goal of protecting pension

benefits.

The anti-alienation clause set forth in Debtor’s

Pension Plan sufficiently restricts Debtor’s use of

funds such that outside of bankruptcy, no creditor

would be able to reach Debtor’s interests, and

therefore, the Pension Plan must be excluded from

the bankruptcy estate by the provisions of

§ 541(c)(2).

Id. at 744 (citation omitted).

The trustee appealed and on August 5, 2005, the District

Court for the Western District of Pennsylvania reversed the

decision of the Bankruptcy Court. The District Court first stated

that the “lone issue before us is whether [the] TIAA-CREF

pension plan falls within the § 541(c)(2) exception.” Skiba v.

Gould, 337 B.R. 71, 72-73 (W.D. Pa. 2005). It stated that the

“debtors, citing Patterson [v. Shumate, 504 U.S. 753 (1992)],

11

urge [me] to affirm the bankruptcy court’s conclusion that any

interest in an employer’s pension plan can be excluded from the

bankruptcy estate if the plan is subject to an enforceable transfer

restriction under applicable nonbankruptcy law.” Id. at 73. It

noted that “[i]n the wake of Patterson, several courts have . . .

[held] 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.”

Id.

In the District Court’s view, however, such an approach

was incorrect: “The Third Circuit . . . has since rejected this

broader inquiry, albeit implicitly. In Orr v. Yuhas (In re Yuhas),

104 F.3d 612 (3rd Cir. 1997), the Third Circuit, interpreting

Patterson, announced five requirements that must be satisfied

before a pension plan can be excluded from the bankruptcy

estate.” Id. The first was that “the IRA must constitute a ‘trust’

within the meaning of 11 U.S.C. § 541(c)(2).” In re Yuhas, 104

F.3d at 614. Accordingly, the District Court concluded that

“only a debtor’s beneficial interest in a trust may be excluded

from the bankruptcy estate pursuant to that subsection.” Skiba

v. Gould, 337 B.R. at 74. “In short, in light of the previously

described case law and the clarity of the statutorily described

language, we reject the bankruptcy court’s conclusion that

§ 541(c)(2) encompasses pension plans other than ‘trusts’.” Id.

at 75. A motion for reconsideration was filed in Skiba v. Gould

12

but it was denied. Debtors timely appealed.5

At the same time as the District Court was rendering its

decision, the Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005, P.L. 109-8, 119 Stat 23 (2005), was

passed. The Act made certain changes to how tax-deferred

annuities are treated with respect to the bankruptcy estate.

While § 541(c)(2) itself was not amended, a new section,

§ 541(b)(7), was added. That section stated, in relevant part,

that “property of the estate does not include”:

(7) any amount--

(A) withheld by an employer from the wages

of employees for payment as contributions--

(i) to--

(I) an employee benefit plan that is

subject to title I of the Employee Retirement

Income Security Act of 1974 [29 USCS §§ 1001

et seq.] or under an employee benefit plan which

5

After its order was reversed by the District Court, the

Bankruptcy Court apparently began to stay resolution of those

cases before it that involved the issue of § 403(b) annuities and

will continue to do so until this case is decided. Appellee’s

Br. 2.

13

is a governmental plan under section 414(d) of the

Internal Revenue Code of 1986 [26 USCS

§ 414(d)];

(II) a deferred compensation plan

under section 457 of the Internal Revenue Code

of 1986 [26 USCS § 457]; or

(III) a tax-deferred annuity under

section 403(b) of the Internal Revenue Code of

1986 [26 USCS § 403(b)]; except that such

amount under this subparagraph shall not

constitute disposable income as defined in section

1325(b)(2) [11 USCS § 1325(b)(2)]; or

(ii) to a health insurance plan regulated by

State law whether or not subject to such title; or

(B) received by an employer from employees

for payment as contributions--

(i) to--

(I) an employee benefit plan that is

subject to title I of the Employee Retirement

Income Security Act of 1974 [29 USCS §§ 1001

et seq.] or under an employee benefit plan which

is a governmental plan under section 414(d) of the

14

Internal Revenue Code of 1986 [26 USCS

§ 414(d)];

(II) a deferred compensation plan

under section 457 of the Internal Revenue Code

of 1986 [26 USCS § 457]; or

(III) a tax-deferred annuity under

section 403(b) of the Internal Revenue Code of

1986 [26 USCS § 403(b)];

except that such amount under this

subparagraph shall not constitute disposable

income, as defined in section 1325(b)(2) [11

USCS § 1325(b)(2)]; or

(ii) to a health insurance plan regulated by

State law whether or not subject to such title;

11 U.S.C. § 541(b)(7) (emphasis added).

Collier on Bankruptcy notes that “[u]nder prior law . . .

the question of whether a debtor’s interest in funds held in a

pension plan was frequently litigated as an issue arising under

section 541(c)(2), the section which excludes from ‘property of

the estate’ funds held in trusts where under applicable

nonbankruptcy law the debtor's interest was inalienable.” 5-541

COLLIER ON BANKRUPTCY-15TH EDITION REV. P 541.22C

15

(footnotes omitted). Collier’s notes that the 2005 amendments

“probably will eliminate much of the need for litigation about

some portions of the funds held in pension and other

welfare-benefit plans, i.e., amounts withheld from wages by

employers for, and amounts received by employers from

employees for payment as, contributions to, enumerated types

of employee-benefit plans.” Id. (footnotes omitted).

DISCUSSION

Debtors argue that the TIAA-CREF annuity is treated as

an express trust under New York law and should be excluded

from the bankruptcy estate. They cite the TIAA-CREF

contract,6 New York state law,7 and various court cases.8 They

6

E.g., App. 79 (“The validity and effect of all right and duties

under the Contract are governed by the laws . . . in force [in

New York].”).

7

E.g., Appellants’ Br. 23 (“Under New York law, a trust

requires four elements: (1) a designated beneficiary; (2) a

designated Trustee, not the beneficiary; (3) a fund or other

identifiable property; and (4) the actual delivery of the fund or

other property to the Trustee with the intention of passing legal

title to the Trustee.”) (citing Matter of Mannara, 785 N.Y.S.2d

274 (N.Y. Sur. Ct. 2004)).

8

E.g., Morter v. Farm Credit Servs., 937 F.2d 354, 358 (7th

Cir. 1991) (“TIAA plan would be enforceable as a spendthrift

trust under state law because, in New York, all express trusts are

16

argue in the alternative that even if their annuity is not a trust,

that § 541(c)(2) applies to accounts tantamount to, or analogous

to, trusts.

Debtors argue that the District Court applied an unduly

restrictive reading of Patterson and the word “trust.” They urge

that Supreme Court has given a “natural reading” to § 541(c)(2)

in Patterson (wherein the Court had referred to a “plan or

trust”), and that courts should interpret § 541(c)(2) to further

Congress’s policy of protecting retirement plans with

enforceable transfer restrictions. Specifically, Debtors argue

that the “Supreme Court in Patterson placed greater emphasis

upon spendthrift trusts’ attributes, i.e., anti-

alienation/assignability, rather than traditional trust concepts of

equitable and legal title, settlor, beneficiary, trustee, and so

forth.” Appellants’ Br. 19.

Debtors also argue that the aims of 26 U.S.C. § 401(a)

and § 403 are aligned such that it does not make sense to refuse

to treat annuities as trusts: “[Section] 403(b) annuities are not

subject to the trust requirements of § 401(a), nor does § 401(f)

require their treatment as qualified trusts; but the transfer

restrictions imposed on such annuities by § 401(g) reach the

same result . . . .” Appellants’ Br. 20.

presumed to be spendthrift unless the settlor expressly provides

otherwise.”).

17

They also argue that affirming the District Court would

“jeopardize the thousands of TIAA-CREF annuities that are not

before this Honorable Court whose recipients depend on same

for their retirement.” Appellants’ Br. 8.9

In response, Skiba contends that § 541(c)(2) requires a

“trust” and that the annuity at issue is not a trust: “An annuity

creates the relationship of debtor to creditor where certain

property is owed under an annuity contract under certain terms

and conditions and later times; it is not a trust and cannot meet

the requirement for exclusion under section 541(c)(2). This

court’s decision in [In re Yuhas] leaves no doubt that a trust is

required.” Appellee’s Br. 6.

Both sides argue that the addition of paragraph (b)(7) to

§ 541 bolsters their position. Skiba asks rhetorically, “Why

would [C]ongress add this provision if exclusion were already

mandated by section § 541(c)(2), which was not changed?”

Appellee’s Br. 13, n.1. Debtors, on the other hand, urge that it

was not Congress’s intent to change the law but to “make

§ 541(c)(2) harmonious with what it had originally intended and

was codifying how the Supreme Court naturally read § 541 in

9

Similarly, Debtors argue that “TIAA-CREF annuities are

proper funding vehicles for tax advantaged retirement plans, and

similar policy reasons that support treating annuity contracts

issued under [§ 401(a)] plans also support the same treatment for

annuity contracts under [§ 403(b)] plans.” Appellants’ Br. 21.

18

[Patterson].” Appellants’ Reply Br. 6-7. It is further argued

that the “additional section was added to eliminate the ambiguity

in the code section as was previously written.” Appellants’

Reply Br. 7. (The parties agree that the new provisions do not

apply retroactively to cover the instant case).

Thus, this case presents a question of statutory

interpretation,10 namely, the meaning of the term “trust,” in

§ 541(c)(2) of the Bankruptcy Code. As this term is not defined

in the Code, and its meaning is not plainly discernible from the

statutory context, we will examine relevant caselaw and

statutory changes in interpreting its meaning.

A. Patterson and Yuhas

We first retrace the trajectory of how § 541(c)(2) has

been interpreted by the Supreme Court in Patterson and by our

Court in Yuhas.

In Patterson, the Supreme Court was faced with an issue

involving § 541(c)(2) and specifically addressed the question of

10

Our Court has jurisdiction pursuant to 28 U.S.C. § 1291 and

reviews the legal determinations by the District Court de novo.

Baroda Hill Inv., Inc. v. Telegroup, Inc. (In re Telegroup, Inc.),

281 F.3d 133, 136 (3d Cir. 2002) (“Because the District Court

sat below as an appellate court, this Court conducts the same

review of the Bankruptcy Court’s order as did the District

Court.”).

19

“whether an antialienation provision contained in an

ERISA-qualified pension plan constitutes a restriction on

transfer enforceable under ‘applicable nonbankruptcy law,’ and

whether, accordingly, a debtor may exclude his interest in such

a plan from the property of the bankruptcy estate.” Patterson,

504 U.S. at 755. Patterson had participated in his company’s

pension plan, a plan which “satisfied all applicable requirements

of the Employee Retirement Income Security Act of 1974

(ERISA) and qualified for favorable tax treatment under the

Internal Revenue Code. In particular, Article 16.1 of the Plan

contained the antialienation provision required for qualification

under § 206(d)(1) of ERISA, 29 U.S.C. § 1056(d)(1).” Id. at

755.

Justice Blackmun, writing for a unanimous court, held

that “[t]he natural reading of [§ 541(c)(2)] 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 nonbankruptcy law.” Id. at 758 (emphasis added).

After concluding that “applicable nonbankruptcy law” was not

merely limited to state law, the Court next addressed the issue

of whether the antialienation provision contained in the

ERISA-qualified Plan met the requirements of § 541(c)(2). It

wrote:

Section 206(d)(1) of ERISA, which states that

“each pension plan shall provide that benefits

provided under the plan may not be assigned or

20

alienated,” 29 U. S. C. § 1056(d)(1), clearly

imposes a “restriction on the transfer” of a

debtor’s “beneficial interest” in the trust. The

coordinate section of the Internal Revenue Code,

26 U. S. C. § 401(a)(13), states as a general rule

that “[a] trust shall not constitute a qualified trust

under this section unless the plan of which such

trust is a part provides that benefits provided

under the plan may not be assigned or alienated,”

and thus contains similar restrictions.

Id. at 759.

The Court concluded that the provisions in question

satisfied § 541(c)(2) in that the “pension plan complied with

these requirements.” Id. The Court did not discuss whether the

pension plan at issue constituted a “trust” under the terms of

§ 541(c)(2), and seems to have expanded the type of legal

instruments protected by § 541(c)(2) by referring to “any

interest in a plan or trust.” Id. at 758 (emphasis added).11

The Court noted that “[p]etitioner first contends that

11

In re Barnes, 264 B.R. 415, 421 (Bankr. E.D. Mich. 2001)

(noting that in resolving the issue of whether ERISA is

applicable nonbankruptcy law, the Supreme Court in Patterson

“may have created a new one -- namely, whether the statute

applies to non-trust interests”).

21

contemporaneous legislative materials demonstrate that

§ 541(c)(2)’s exclusion of property from the bankruptcy estate

should not extend to a debtor’s interest in an ERISA-qualified

pension plan.” Id. at 761. The Court wrote that in his brief

“petitioner quotes from House and Senate Reports

accompanying the Bankruptcy Reform Act of 1978 that

purportedly reflect ‘unmistakable’ congressional intent to limit

§ 541(c)(2)’s exclusion to pension plans that qualify under state

law as spendthrift trusts. . . . These meager excerpts reflect at

best congressional intent to include state spendthrift trust law

within the meaning of ‘applicable nonbankruptcy law.’” Id. at

761-62.

Thus, Patterson does not opine as to the meaning of

“trust,” but it does employ language that could be interpreted to

mean that § 541(c)(2) is not limited to literal trusts or trusts

formed explicitly. “Curiously absent from the Supreme Court’s

decision is any discussion of § 541(c)(2)’s trust requirement.

And on occasion the Court seems unaware of the requirement.”

In re Barnes, 264 B.R. 415, 421 (Bankr. E.D. Mich. 2001).

In Yuhas we addressed the applicability of § 541(c)(2) to

an Individual Retirement Account (“IRA”) formed under New

Jersey law, and, in deciding the case, we parsed the

requirements of § 541(c)(2) set forth in Patterson. 104 F.3d at

612. As we stated, “[t]he issue in this appeal is whether a New

Jersey statute, N.J.S.A. § 25:2-1(b), that protects a qualified

individual retirement account (IRA) from claims of creditors

22

constitutes a ‘restriction on the transfer of a beneficial interest

of the debtor in a trust’ within the meaning of 11 U.S.C.

§ 541(c)(2) and thus results in the exclusion of the IRA from a

bankruptcy estate.” Id. at 613. We found that “if the debtor’s

IRA meets all of the requirements of § 541(c)(2), we must hold

that it is completely excluded from the bankruptcy estate.”

Id. at 614.

We stated that the requirements of § 541(c)(2) were:

“(1) the IRA must constitute a ‘trust’ within the meaning of 11

U.S.C. § 541(c)(2); (2) the funds in the IRA must represent the

debtor’s ‘beneficial interest’ in that trust; (3) the IRA must be

qualified under Section 408 of the Internal Revenue Code;

(4) the provision of N.S.J.A. § 25:2-1 stating that property held

in a qualifying IRA is ‘exempt from all claims of creditors’ must

be a ‘restriction on the transfer’ of the IRA funds; and (5) this

restriction must be ‘enforceable under nonbankruptcy law.’” Id.

Yuhas turned solely on prong four; the parties conceded

that prong one was met and thus while Yuhas provides the

overall framework for applying § 541(c)(2) it did not address

what constituted a trust for purposes of the statute.12 Contrary

12

Debtors contend that the fact that the IRA was held to be

excluded in Yuhas means that “it logically follows that the

annuity and trust accounts in the TIAA-CREF retirement

accounts should also be excluded since IRAs have traditionally

been the easiest retirement vehicle through which bankruptcy

23

to Skiba’s position before us in this case, we did not decide in

Yuhas what satisfied § 541(c)(2)’s “trust” requirement. In short,

neither the Bankruptcy Code nor our applicable federal

jurisprudence specifically defines “trust” for the purposes of

§ 541(c)(2).

The Debtors urge that accordingly we should look to state

law–here, New York law. In discussing prong five of the test in

Yuhas–whether the New Jersey law at issue was a “restriction .

. . enforceable under applicable nonbankruptcy law,”

§ 541(c)(2)–we stated that “[a]pplicable nonbankruptcy law

includes both federal law such as ERISA, and state law.” In re

Yuhas, 104 F.3d at 614 n.1 (citation omitted). Moreover, trusts

are by nature created and defined by state law. See Barnes, 264

B.R. at 429-30 (“The Code does not contain a definition of the

term ‘trust.’ But its traditional and common meaning is neither

controversial nor mysterious . . . .”). In light of the inclusion of

state law under “applicable nonbankruptcy law” and the fact that

trusts are creatures of state law, we look to New York law in this

Trustees have been able to access to said accounts. . . .

Accordingly, [because] the least protective of retirement

accounts found protection in the Court’s decision, it follows that

other retirement accounts which previously maintained greater

protection within the courts should continue said protection.”

Appellants’ Reply Br. 3. This may be a good argument insofar

as it frames the account in question as one subject to stringent

restrictions, but it does not help Debtors show why as a textual

matter the annuity should be considered a trust.

24

case in determining whether the annuity is a trust.

B. A Trust under New York Law

“To create a valid trust under the law of [New York ]

State four essential elements must be proved: (1) a designated

beneficiary, (2) a designated trustee, who is not the same person

as the beneficiary, (3) a clearly identifiable res, and (4) the

delivery of the res by the settlor to the trustee with the intent of

vesting legal title in the trustee.” Agudas Chasidei Chabad

of U.S. v. Gourary, 833 F.2d 431, 433-34 (2d Cir. 1987). “A

trust may be created orally or in writing, and no particular form

of words is necessary.” Id. at 434. With respect to those

requirements, Debtors claim:

(1) Gannon University is the settlor of a trust that

funds its basic retirement plan through the

purchase of a TIAA-CREF retirement annuity,

with its employees, such as the Debtor, the

designated beneficiaries; (2) TIAA[-CREF]

serves as the trustee by accepting premium

payments that it invests within the parameters of

the annuity plan; (3) the funds contributed by

Gannon University and its employees, including

the debtor, are the trust res; and (4) Gannon

University delivers the contributions to TIAA-

CREF to hold, invest, manage and distribute

pursuant to the terms of the annuity contract.

25

Appellants’ Br. 24.

The parties do not cite, and we have not found, a case by

a New York court which states explicitly whether an annuity of

this kind would be treated as a trust under New York law.

Debtors rely on Alexandre v. Chase Manhattan Bank, N.A.,

61 A.D.2d 537 (N.Y. App. Div. 1978), a case in which an ex-

spouse sought “recovery of the accumulated premiums paid for

the purchase of the [TIAA-CREF] annuity contracts, or in the

alternative . . . appointment as receiver and to have the annuity

immediately paid over to her.” Id. at 540. Debtors cite

Alexandre because it held that the monies “paid under the

annuity contract are neither conditional nor refundable and the

judgment debtor has no ‘interest’ in them.” Id. Thus, Debtors

imply, the annuitant’s interest was a trust because the annuitant

had only an equitable interest in the trust estate.

Despite the fact that Alexandre (and a subsequent case,

Aurora G. v. Harold G., 414 N.Y.S.2d 632 (N.Y. Fam. Court

1979)) did not state explicitly that TIAA-CREF annuities were

spendthrift trusts, some courts have referred to those cases and

New York’s restrictions on TIAA-CREF annuity alienability in

holding that TIAA-CREF annuities are trusts for purposes of

§ 541(c)(2). See, e.g., In re Montgomery, 104 B.R. 112, 118 n.8

(Bankr. N.D. Iowa. 1989) (“[Alexandre and Aurora G.] do not

appear to actually use the term ‘spendthrift trust’ anywhere in

the opinions. The substance of the decisions, however, leads the

Court to conclude that the New York courts considered the

26

TIAA/CREF plans to be spendthrift trusts.”).

A variety of other courts have followed this approach.

See, e.g., Morter v. Farm Credit Servs., 937 F.2d 354, 357

(7th Cir. 1991) (“[I]n every decision we could find that

addressed the very pointed question whether TIAA is a

spendthrift trust under New York law, the answer was a

resounding ‘yes.’”); In re Reynolds, 1989 Bankr. LEXIS 2719,

at *11-12 (Bankr. W.D. Ark. 1989) (“This Court, as did the New

York courts in Aurora G. and Alexandre and the bankruptcy

courts in Montgomery and Braden, holds that the CREF

certificate, because of the language in the New York statute, is

a spendthrift trust.”); In re Woodward, 1988 Bankr. LEXIS

2683, at *7 (Bankr. W.D. Ky. 1988) (“Under New York law, the

provisions of the TIAA-CREF documents effectively restrict the

debtor/beneficiary’s ability to transfer his interest in the

accounts and also preclude the beneficiary's creditors from

reaching the funds. This Court finds that the contracts are valid

spendthrift trusts for purposes of Section 541(c)(2).”).

We join these courts in holding that under New York law

an employer-mandated retirement plan such as this one

constitutes a trust. Gannon has parted with the res, intending

that it be held by TIAA-CREF for Laher’s benefit. TIAA-CREF

has been entrusted with the res, is managing it for Laher’s

benefit, and Laher will receive the funds upon retirement. The

requirements of New York law have been met here and the

operation of the account as an annuity does not take the account

27

out of the definition of a trust or § 541(c)(2).

While Skiba contends that the annuity is best understood

not as a trust but as the subject of a debtor-creditor relationship,

Appellee’s Br. 6, we find that argument unpersuasive. The fact

that the relationship between Laher, Gannon, and TIAA-CREF

can be cast, in part, as debtor-creditor or as a contractual

relationship has no bearing on the trust analysis under New

York law. As noted, that analysis looks to the presence of a

designated beneficiary, a trustee different from the beneficiary,

a clearly identifiable res, and the delivery of the res by the

trustor to the trustee with the requisite intent. All of those

elements are present here. All trusts can be described as

contractual relationships insofar as the obligations of all the

parties are set forth in an agreement, and the trustee can be

described as a debtor to the beneficiary creditor under a trust.

However, describing them as such does not mean they are not

trusts. See RESTATEMENT (SECOND) OF TRUSTS, § 197 cmt. b

(“The creation of a trust is conceived of as a conveyance of the

beneficial interest in the trust property rather than as a

contract.”). We do not view the framing of the relationship as

“debtor-creditor” to be helpful to the inquiry at hand.

Two additional factors inform our interpretation of New

York law and § 541(c)(2). The first is that Patterson analyzed

§ 541(c)(2) in a manner that presumed a “natural reading” of

§ 541(c)(2), not limiting the universe of excluded funds to those

explicitly labeled “trusts.” New York law looks to the features

28

of the fund and its creation–the existence of a beneficiary, a

designated trustee, a clearly identifiable res, and the donative

intent–not merely the label affixed to the fund. See Gourary,

833 F.2d at 433-34. Similarly, Patterson’s emphasis on the

nature of the restrictions on the fund reflects a textured

interpretation of § 541(c)(2). The inquiry Patterson conceives

of focuses on the nature of the fund, not the label, and we adhere

to that approach.

The second factor which convinces us that the annuity at

issue here is excluded from the estate is that the newly enacted

legislation referred to above–legislation that does not apply to

Laher’s case–excludes annuities such as these from the

bankruptcy estate.

As noted, the 2005 Bankruptcy Act Amendments did not

amend § 541(c)(2) but did add § 541(b)(7) which created

protection for annuities. That provision states that the property

of the estate does not include “any amount . . . withheld by an

employer from the wages of employees for payment as

contributions . . . to . . . a tax-deferred annuity under section

403(b) of the Internal Revenue Code of 1986,” as well as “any

amount . . . received by an employer from employees for

payment as contributions . . . to . . . a tax-deferred annuity under

section 403(b) of the Internal Revenue Code of 1986.”

§ 541(b)(7)(A)-(B). While we acknowledge that reasonable

minds could differ as to the inference to be drawn from this

amendment, we see no reason why we should hold that the

29

annuity interest held by this debtor is included in his estate,

when we know that the very same annuity, held by an annuitant

who files after October 17, 2005, is not.

As we find that this is a trust under New York law, we

need not reach the question of whether § 541(c)(2) includes

trust-like accounts tantamount or analogous to a trust.13 We note

that some courts (including the Bankruptcy Court in the instant

case) have held that § 541(c)(2) does not require a trust, but

rather simply requires a fund be tantamount to a trust or be

encumbered by restrictions analogous to those imposed on a

trust. See, e.g., Morter v. Farm Credit Servs., 937 F.2d 354, 357

(7th Cir. 1991) (“Even in cases in which courts have included

retirement plans within the bankruptcy estate, there has been a

willingness to exclude the plan if it is employer-created and

controlled and, therefore, analogous to a spendthrift trust.”)

(citing cases); In re Quinn, 327 B.R. 818, 829 (Bankr. W.D.

Mich. 2005) (listing features that render annuity “functionally

indistinguishable from a spendthrift trust” and excluding it from

the estate under § 541(c)(2)).

13

We also note that some courts have held that the CREF

account constitutes a trust but the TIAA account did not. For

example, the Court in Barnes excluded the CREF account from

the bankruptcy estate but not the TIAA account. 264 B.R.

at 434. We eschew this approach because it fails to properly

focus on the trustor’s intent, which was the same for both

funding vehicles.

30

Meanwhile, other courts have rejected this approach.

See, e.g., In re Adams, 302 B.R. 535, 539 (B.A.P. 6th Cir. 2003)

(“[O]nly an interest in a trust can be the subject of an

enforceable transfer restriction within the meaning of 11 U.S.C.

§ 541(c)(2).”); Barnes, 264 B.R. at 428 (rejecting Morter’s

“[apparent] proposition that an employee benefit plan need not

be a trust at all: So long as the plan has an enforceable transfer

restriction and is designed to function in a manner ‘analogous’

to a spendthrift trust, the debtor’s interest therein will be

excluded from the bankruptcy estate pursuant to § 541(c)(2).”).

The annuity here clearly fits within the concept of “trust”

in § 541(c)(2). We necessarily leave for another day the

question of whether the word “trust” as used in § 541(c)(2) may

be read in light of Patterson to include a category of funds

tantamount or analogous to trusts.

CONCLUSION

For the reasons set forth above, we will reverse the order

of the District Court. The case will be remanded to the

Bankruptcy Court for entry of an order excluding the annuity

from the bankruptcy estate and for proceedings consistent with

this Opinion.

31