California Private Retirement Plans
In re Friedman, 220 B.R. 670 (9th Cir.B.A.P., 1998).
United States Bankruptcy Appellate Panel
of the Ninth Circuit.
In re Wayne Kenneth FRIEDMAN, Debtor.
Wayne Kenneth FRIEDMAN, Appellant,
William H. BROACH, Trustee, Appellee.
BAP No. NC–97–1019–NRRY.
Bankruptcy No. 96–48944–TR.
Argued and Submitted March 18, 1998.
Decided May 7, 1998.
As Amended June 11, 1998.*
Attorneys and Law Firms
*670 Iain A. MacDonald, Law Offices of Iain A. MacDonald, San Francisco, CA, for Wayne Kenneth Friedman.
Reidum Stromsheim, Law Offices of Reidum Stromsheim, San Francisco, CA, for William H. Broach, Trustee.
Before: NIELSEN,1RUSSELL, and RYAN, Bankruptcy Judges.
Hon. George B. Nielsen, Jr., Chief Bankruptcy Judge for the District of Arizona, sitting by designation.
NIELSEN, Bankruptcy Judge.
Debtor appeals the bankruptcy court's ruling sustaining trustee's objection to a claimed exemption. We AFFIRM.
Appellant Wayne Kenneth Friedman (“debtor”) was the owner of World Auxiliary Power Company (“WAPCO”). Appellant asserts that WAPCO established an ERISA-qualified pension plan.
On September 26, 1996, appellant loaned himself and his wife $30,000 in two $15,000 loans from their pension plan. Promissory notes2 totaling $30,000 were allegedly executed.
The record provided by appellant includes an “Irrevocable Pledge and Assignment” evidencing a $30,000 loan. However, the “attached” promissory note is from an earlier April 22, 1996 loan for $20,000.
Debtor maintains that he made a direct deposit of $30,000 into a separate account with Bank of America and used approximately $12,000 to pay household bills. The funds in this checking account were subsequently levied in the amount of $17,697.59 (the “disputed funds”). Appellant asserts that no other pre-petition or post-petition deposits from any other source were made into this account.
On October 22, 1996, debtor filed a chapter 7 bankruptcy petition. Debtor made an exemption claim for the disputed funds under *671 California Code of Civil Procedure (“CCP”) section 704.115(b). William H. Broach, trustee, objected.
Following a hearing on January 3, 1997, the bankruptcy court subsequently entered an order holding that the disputed funds were not exempt under CCP section 704.115(b), and sustained trustee's objection.
II. ISSUE ON APPEAL
Whether funds borrowed from a private pension plan are exempt under CCP section 704.115(b).
III. STANDARD OF REVIEW
The bankruptcy court's application of California exemption law is a question of statutory construction which is reviewed de novo. Spenler, M.D. v. Siegel (In re Spenler, M.D.), 212 B.R. 625, 628 (9th Cir. BAP 1997).
The filing of a petition creates an estate comprising all legal or equitable interests of the debtor in property as of the commencement of the case. See 11 U.S.C. sec. 541. However, the Bankruptcy Code permits individual debtors to exempt assets from the bankruptcy estate. A debtor may exempt either assets delineated in the Bankruptcy Code or assets exempted by the law of the debtor's state. California provides the option of choosing between exemptions available to non-bankrupts, and state bankruptcy exemptions. See DeMassa v. MacIntyre (In re MacIntyre), 74 F.3d 186, 187 (9th Cir.1996).
Here, debtor claimed an exemption under CCP section 704.115(b), which provides an exemption for all amounts held in private retirement plans. Section 704.115(b) provides: “All amounts held, controlled, or in the process of distribution by a private retirement plan, for the payment of benefits as an annuity, pension, retirement allowance, disability payment, or death benefit from a private retirement plan are exempt.” In addition to this provision, debtor cites two other California statutory provisions.
First, debtor cites CCP section 704.115(d), which provides that “[a]fter payment, the amounts described in subdivision (b) and all contributions and interest thereon returned to any member of a private retirement plan are exempt.”
Second, debtor cites CCP section 703.080, which provides in pertinent part: “(a) Subject to any limitation provided in the particular exemption, a fund that is exempt remains exempt to the extent that it can be traced into deposit accounts or in the form of cash or its equivalent.”
Debtor argues that this statutory scheme provides that if the funds were part of a private retirement plan, they retain their exempt character, even if debtor has borrowed the funds from his plan, because the borrowed funds are easily traceable. Debtor also argues that if the corpus is exempt, then any monies received from it are exempt. Appellant's Br. at 3–4.
Trustee disputes this, arguing that an exemption under CCP section 704.115(b) must be both (1) an amount held, controlled or in the process of distribution by a private retirement plan, and (2) for the payment of benefits. Trustee argues that debtor's reading of the statute ignores the second prong, which requires that the payment be a “payment of benefits.” Further, trustee argues CCP section 704.115(d) is inapplicable as the disputed funds were not a payment of benefits. Instead, they were merely borrowed to pay household expenses. Further, he argues the tracing provision of CCP section 703.080 is inapplicable, as that section is limited by the language “subject to any limitation provided in the particular exemption.” Trustee argues that CCP section 704.115(b) is the applicable provision. Appellee's Br. at 4.
While we are guided by the principle that “[t]he purpose of the section 704.115 exemption for the corpus of private retirement plans is to safeguard a stream of income for retirees at the expense of bankruptcy creditors,” MacIntyre, 74 F.3d at 188, we are also mindful that in construing these provisions, we must presume that a legislature says in a statute what it means and means in a statute what it says. Id.
*672 A fair reading of the California statutes supports trustee. First, CCP section 704.115(b) exempts only private retirement plan funds held, controlled, or in the process of distribution “for the payment of benefits.” Cal.Civ.Proc.Code sec. 704.115(b). In the present case, the disputed funds were no longer held, controlled, or in the process of distribution for payment of benefits. Instead, once they were loaned to debtor, they lost their exempt status. They no longer met all of the requirements under section 704.115(b).
CCP section 704.115(d) does not change this result. This provision maintains the exemption of CCP section 704.115(b) for funds distributed or returned to a plan member. The critical issue is whether the funds distributed or returned are section 704.115(b) funds. If “payment” is made to a member as an annuity, pension, retirement allowance, disability payment, or death benefit, then such monies are exempt under section 704.115(d), because payment is of funds “described in subdivision (b).” Cal.Civ.Proc.Code sec. 704.115(d).
In this case, the payment to debtor was not a “payment of benefits.” Instead, the payment was a loan from the plan. The funds loaned are not exempt under CCP section 704.115(d), as they were not CCP section 704.115(b) funds.
Finally, the tracing provision of section 703.080 is not helpful. Section 703.080(a) provides that: (1) subject to any limitation provided in a particular exemption; (2) a fund “that is exempt” will remain exempt to the extent that it “can be traced into deposit accounts or in the form of cash or its equivalent.” Here, the “limitation provided in the particular exemption” is that the funds must be held, controlled or in the process of distribution “for the payment of benefits” to be exempt. Since the funds do not meet this qualification, they are not exempt.
The disputed funds are not exempt under California law. The bankruptcy court properly sustained trustee's objection to debtor's exemption. Accordingly, we AFFIRM.
TEXT OF CCP § 704.115
California Code of Civil Procedure § 704.115.
(a) As used in this section, “private retirement plan” means:
(1) Private retirement plans, including, but not limited to, union retirement plans.
(2) Profit-sharing plans designed and used for retirement purposes.
(3) Self-employed retirement plans and individual retirement annuities or accounts provided for in the Internal Revenue Code of 1986, as amended, including individual retirement accounts qualified under Section 408 or 408A of that code, to the extent the amounts held in the plans, annuities, or accounts do not exceed the maximum amounts exempt from federal income taxation under that code.
(b) All amounts held, controlled, or in process of distribution by a private retirement plan, for the payment of benefits as an annuity, pension, retirement allowance, disability payment, or death benefit from a private retirement plan are exempt.
(c) Notwithstanding subdivision (b), where an amount described in subdivision (b) becomes payable to a person and is sought to be applied to the satisfaction of a judgment for child, family, or spousal support against that person:
(1) Except as provided in paragraph (2), the amount is exempt only to the extent that the court determines under subdivision (c) of Section 703.070.
(2) If the amount sought to be applied to the satisfaction of the judgment is payable periodically, the amount payable is subject to an earnings assignment order for support as defined in Section 706.011 or any other applicable enforcement procedure, but the amount to be withheld pursuant to the assignment order or other procedure shall not exceed the amount permitted to be withheld on an earnings withholding order for support under Section 706.052.
(d) After payment, the amounts described in subdivision (b) and all contributions and interest thereon returned to any member of a private retirement plan are exempt.
(e) Notwithstanding subdivisions (b) and (d), except as provided in subdivision (f), the amounts described in paragraph (3) of subdivision (a) are exempt only to the extent necessary to provide for the support of the judgment debtor when the judgment debtor retires and for the support of the spouse and dependents of the judgment debtor, taking into account all resources that are likely to be available for the support of the judgment debtor when the judgment debtor retires. In determining the amount to be exempt under this subdivision, the court shall allow the judgment debtor such additional amount as is necessary to pay any federal and state income taxes payable as a result of the applying of an amount described in paragraph (3) of subdivision (a) to the satisfaction of the money judgment.
(f) Where the amounts described in paragraph (3) of subdivision (a) are payable periodically, the amount of the periodic payment that may be applied to the satisfaction of a money judgment is the amount that may be withheld from a like amount of earnings under Chapter 5 (commencing with Section 706.010) (Wage Garnishment Law). To the extent a lump-sum distribution from an individual retirement account is treated differently from a periodic distribution under this subdivision, any lump-sum distribution from an account qualified under Section 408A of the Internal Revenue Code shall be treated the same as a lump-sum distribution from an account qualified under Section 408 of the Internal Revenue Code for purposes of determining whether any of that payment may be applied to the satisfaction of a money judgment.
Published Court Opinions regarding California private retirement plans (sorted by date):
In re Daniel, 771 F.2d 1352 (9th Cir., 1985).
In re Bloom, 839 F.2d 1376 (9th Cir., 1988).
In re Crosby, 162 B.R. 276 (Bk.C.D.Cal., 1993).
Yaesu Electronics Corp. v. Tamura, 28 Cal.App.4th 8, 33 Cal.Rptr.2d 283 (1994).
Schwartzman v. Wilshinsky, 50 Cal.App.4th 619, 57 Cal.Rptr.2d 790 (1996).
In re Friedman, 220 B.R. 670 (9th Cir.B.A.P., 1998).
In re Phillips, 206 B.R. 196 (Bk.N.D.Cal., 1997).
In re Lieberman, 245 F.3d 1090 (9th Cir., 2001).
In re Barnes, 275 B.R. 889 (Bk.E.D.Cal., 2002).
In re Stern, 345 F.3d 1036 (9th Cir., 2003).
McMullen v. Haycock, 147 Cal.App.4th 753, 54 Cal.Rptr. 3d 660 (2007).
In re Rucker, 570 F.3d 1155 (9th Cir., 2009).
In re Segovia, 404 B.R. 896 (2009).
In re Simpson, 557 F.3d 1010 (2009).
In re Beverly, 374 B.R. 221 (9th Cir., B.A.P., 2011).
In re Chen, 2011 WL 2358653 (Bk.N.D.Cal., 2011).
Marriage of La Moure, 221 Cal.App.4th 1463, 15 Cal.Rptr.3d 417 (2013).
Salameh v. Tarsadia Hotel, 2015 WL 6028927 (S.D.Cal., 2015).
O'Brien v AMBS Diagnostics, LLC, 38 Cal.App.5th 553, 251 Cal.Rptr.3d 41 (Aug. 8, 2019).
Only published court opinions are included; non-published opinions are not useful as legal precedent and should not be relied upon for any purpose.
ARTICLES ON CALIFORNIA PRIVATE RETIREMENT PLANS
The California Private Retirement Plan: Separating Fact From Fiction (Jay Adkisson, Forbes.com, Dec. 28, 2015).
MAIN SECTIONS OF THIS WEBSITE
Leading Court Opinions and Legislative History of CCP § 704.115 -- The published court opinions, both state and federal, and the legislative history of CCP § 704.115 give valuable insight into how California private retirement plans should be properly structured and used. See Court Opinions and Legislative History
Voidable Transactions Issues (formerly: Fraudulent Transfers) -- As amply demonstrated by the case law, the law of voidable transactions (formerly: fraudulent transfers) has frequently and successfully been used by creditors to avoid transfers made to California Private Retirement Plans. Please see our Voidable Transactions page for more.
Plan Defect Issues -- Creditors have frequently been successful in busting California Private Retirement Plans because either (1) there was no real "plan", or (2) the plan was not substantially followed by the debtor. Read more on our Plan Defect Issues page.
ERISA, Tax-Qualified Plans and Non-Tax Qualified Plans -- Considers the types of private retirement plans as measured by ERISA and tax law, including ERISA-qualified plans, tax-qualified plans, and non-qualified plans. Read more on our ERISA and Tax Issues page.
Post-Distribution Exemption-Tracing Issues -- Considers the application of the exemption tracing statute, CCP § 703.080, to California Private Retirement Plans. Please visit our Post-Distribution Exemption-Tracing Issues page.
Services & Contact Information -- Jay Adkisson assists clients in creating California Private Retirement Plans in appropriate circumstances, and reviews existing plans for their defensibility against creditor challenges. Jay is also involved with litigation in attacking PRPs from the creditor's side, and defending them from the debtor's side. Please see our Services & Contact Information page.
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