David Ostrander v. Angilene Brown, 614 B.R. 416

Background

Debtor Angilene S. Brown borrowed $18,000 from her ERISA-qualified Costco 401(k) in July 2018; the plan administrator issued a check to her which she did not cash before filing bankruptcy.
Debtor filed a Chapter 7 petition on August 6, 2018, listed the 401(k) (value $50,600) and claimed the plan wholly exempt under 11 U.S.C. § 522(d)(12).
Trustee learned of the prepetition loan and the unnegotiated $18,000 check at the § 341 meeting and requested turnover; the debtor’s counsel held the check but did not deliver it to the Trustee.
Trustee filed a turnover motion (Feb. 27, 2019) seeking the $18,000 as non-exempt estate property; debtor argued the check remained part of the exempt 401(k) plan.
Bankruptcy court denied turnover, reasoning the check remained in the plan until cashed and thus exempt; Trustee appealed to the BAP.
BAP reversed: it held the prepetition distribution (even if represented by an uncashed check) was estate property and the debtor’s § 522(d)(12) exemption failed because the funds were not in a tax-qualified account or rolled over within the statutory period.

Issues

Issue	Trustee's Argument	Debtor's Argument	Held
1. Is the unnegotiated prepetition check representing a 401(k) loan an asset of the bankruptcy estate under § 541?	It is estate property because the loan proceeds were distributed to and in the debtor’s possession/control prepetition.	The funds remained part of the exempt 401(k) plan until the check was cashed, so not estate property.	The check (or the funds it represents) is property of the estate.
2. Does § 541(c)(2)/ERISA anti‑alienation exclude the distributed funds from the estate?	No—ERISA protection applies only to assets still held in the plan; distributions lose anti‑alienation protection.	Yes—anti‑alienation continues until the check is cashed; funds remained in plan.	§ 541(c)(2) does not protect post‑distribution funds; distribution before filing removes ERISA protection.
3. Could the debtor exempt the $18,000 under § 522(d)(12)?	No—the exemption requires the funds be in an account eligible under the IRC or rolled into one (e.g., within 60 days); here they were not.	The claimed exemption of the entire 401(k) covers the check.	Exemption fails: funds were not in a tax‑qualified account nor rolled over within the required time, so not exempt.
4. Did the Trustee timely object to the exemption (Rule 4003(b)) so as to pursue turnover?	Yes—Turnover motion explicitly asserted the $18,000 was non‑exempt and sought turnover; it sufficed as a timely objection.	Debtor did not contest timeliness at appellate stage.	Turnover motion constituted a timely objection to the exemption; trustee satisfied Rule 4003(b).

Key Cases Cited

Patterson v. Shumate, 504 U.S. 753 (1992) (ERISA anti‑alienation provisions are "applicable nonbankruptcy law" under § 541(c)(2)).
Owen v. Owen, 500 U.S. 305 (1991) (an interest must be property of the estate before it can be exempted).
Taylor v. Freeland & Kronz, 503 U.S. 638 (1992) (timely objection rule—failure to object in time generally precludes challenge to exemptions).
Law v. Siegel, 571 U.S. 415 (2014) (limitations on trustee's ability to challenge exemptions where procedures not followed).
In re Weinhoeft, 275 F.3d 604 (7th Cir. 2001) (cash or distributed funds are not shielded by § 541(c)(2)).
Chilton v. Moser, 674 F.3d 486 (5th Cir. 2012) (§ 522(d)(12) requires funds be retirement funds in accounts exempt under specified IRC sections).
Trucking Employees of N. Jersey Welfare Fund v. Colville, 16 F.3d 52 (3d Cir. 1994) (ERISA anti‑alienation protects plan assets, not distributions to beneficiaries).
Barnhill v. Johnson, 503 U.S. 393 (1992) (transfer by check occurs when check is honored; distinguished for purposes of when debtor obtains an interest).