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Click here for the full text of this decision FACTS:In these consolidated appeals, the debtor, Joseph Coppola, challenges a judgment denying his retirement annuity account exemption in bankruptcy and a separate judgment that the same account is not a “retirement system” account under Chapter 821 of the Texas Government Code, protected from the consequences of assignments or pledges. Coppola and his wife Sheri Lyn Beeson divorced. The divorce decree provides for 53 monthly alimony payments of $4,000, totaling $212,000, which were declared deductible from Coppola’s taxable income and included as taxable income to Beeson. He assigned/pledged funds from his Optional Retirement Program Account (ORPA), a qualified employer 403(b) retirement plan then worth over $640,000, to Beeson as security for the alimony payments. Coppola made alimony payments for approximately 14 months before he stopped payment and began withdrawing substantial sums from the ORPA. Pursuant to the default and acceleration provisions of the decree, Beeson filed an action in state court to recover the funds. Coppola then retaliated with a Chapter 7 bankruptcy petition and claimed an exemption for his ORPA under Texas Property Code 42.0021. The trustee and Beeson filed objections to the exemption. The bankruptcy court found that, pursuant to 72(p) of the Internal Revenue Code, the amount of the agreed pledge or assignment is deemed to have been received by the debtor as a distribution from the OPRA account and the amounts deemed to have been distributed are no longer part of a qualified plan, and therefore, may not be exempted by the debtor under Texas Property Code 42.0021. The district court affirmed this judgment and Beeson was required to file another adversary proceeding asserting the non-dischargeability of her alimony payments under 11 U.S.C. 523(a)(5) and the validity of her security interest in Coppola’s ORPA. After a trial on the issues, the bankruptcy court again ruled for Beeson. The district court affirmed that judgment, additionally holding that the ORPA is not a “retirement system” within the meaning of Chapter 821 of the Texas Government Code. Coppola has appealed both judgments. HOLDING:Affirmed. The first issue addressed by the court is whether Beeson has a valid security interest in the assigned/pledged portion of Coppola’s ORPA. The court holds that Coppola’s analogical arguments based on provisions such as Texas Government Code 659.121(6) (benefit replacement pay), are inapposite and unavailing because individual account plans such as the ORPA at issue are excluded from consideration under these provisions. The court holds that, not only was Coppola’s interest in his ORPA assignable, but it was in fact validly pledged to secure Beeson’s alimony by the terms of the divorce decree, and the security interest was perfected, in lieu of U.C.C. compliance, by the divorce judgment. Coppola next asserts that the ORPA is exempt from creditors in bankruptcy pursuant to 11 U.S.C. 522(b), which incorporates exemptions authorized by federal, state or local law. In pertinent part, Texas Property Code 42.0021 provides that: “a person’s right to the assets held in or to receive payments, whether vested or not, under any stock bonus, pension, profit-sharing, or similar plan, including a retirement plan for self-employed individuals, and under any annuity or similar contract purchased with assets distributed from that type of plan, and under any retirement annuity or account described by 403(b) . . . is exempt from attachment, execution, and seizure for the satisfaction of debts unless the plan, contract, or account does not qualify under the applicable provisions of the Internal Revenue Code of 1986.” Coppola’s ORPA is thus exempt unless it failed to qualify under the applicable I.R.C. provision at the time the 42.0021 exemption was claimed. The court holds that Coppola’s assignment of $212,000 from his 403(b) ORPA as security for the alimony due under his divorce decree constituted a loan within the meaning of I.R.C. 72(p)(1)(B). The court holds that Coppola’s assignment/pledge of a portion of the ORPA resulted in a deemed taxable distribution of that portion, resulting in its loss of exempt status under Texas law. The court concludes that because Texas Property Code 42.0021 incorporates federal tax treatment of the distribution for purposes of determining a retirement plan’s exemption status, the amount covered by the deemed distribution, once effectively removed from the tax-exempt protection of the 403(b) plan, also lacks the protection of 42.0021. OPINION:Per curiam. Garwood, Jones and Prado, JJ.

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