CALIFORNIA PRIVATE RETIREMENT PLANS
Creditor Exemptions Under CCP § 704.115(a)
In re Phillips, 206 B.R. 196 (Bk.N.D.Cal., 1997).
United States Bankruptcy Court,
In re Charles PHILLIPS and Jean Phillips, Debtors.
Bankruptcy No. 96–33445BDM.
March 4, 1997.
As Corrected March 17, 1997.
Attorneys and Law Firms
*197 Matthew J. Shier, Poppin & Shier, San Francisco, CA, for Charles & Jean Phillips, Debtors.
Tobias S. Keller, Murphy, Weir & Butler, San Francisco, CA, for Scott & Kevin Mayer, Objecting Parties.
DENNIS MONTALI, Bankruptcy Judge.
This case involves a clash of policies, pitting a tradition of generous California exemptions and a liberal attitude in favor of debtors who claim them against the time-honored notion that a person may not enjoy the use of his or her assets through a personal trust that attempts to insulate those assets from the trustor's creditors. This case also appears to be one of first impression, testing the limits of that liberal exemption policy by asking whether the court will permit debtors to create an exemption all by themselves, virtually out of whole cloth, under the guise of a "private retirement plan." The parties have not presented the court with any reported cases that go as far as the debtors wish. Were the court to adopt the debtors' theory of this case, it might just as well inform California creditors that there will be no more enforcement of judgments against individual debtors since all those debtors *198 need to do to frustrate their creditors' efforts is claim that they have planned the use of their assets for their later (retirement) years. The court will not do that.
Although debtors claim another time-honored right, namely the freedom to convert in good faith non-exempt assets to exempt assets on the eve of bankruptcy, they have no exemption available to them at all through what they call their private retirement plan; if they do, their plan was not designed and used for retirement purposes and cannot help them here.
A trial was conducted on January 3, 1997 in this Chapter 13 case on objections filed by Scott and Kevin Mayer (collectively "the Mayers") to confirmation of the Chapter 13 plan filed by Charles Phillips and Jean Phillips ("Debtors"). Trial was limited to the claim by Debtors that their Phillips Retirement Plan and Phillips Retirement Trust (together the "Retirement Plan") was exempt under California law. The parties agreed that the determination of the exemption issue would influence whether or not the balance of Mayers' objections to confirmation of the Chapter 13 plan should be tried promptly or whether Debtors would have to revise their plan for further consideration.
Debtors appeared and were represented by Matthew J. Shier, Esq. of Poppin & Shier; Mayers appeared and were represented by Tobias S. Keller, Esq. of Murphy, Weir & Butler.
As indicated above, after reviewing the oral and documentary evidence presented and the pre- and post-trial authorities submitted by the parties, the court will sustain the Mayers' objections for the reasons stated below.1
Objections to exemptions are not the most direct way for a creditor to challenge confirmation of a Chapter 13 plan. Where exemptions are questioned, the more appropriate procedure is for the creditor to show that the value to be distributed under the plan on account of allowed unsecured claims is less than the amount that would have been paid if the debtor's estate were liquidated under Chapter 7. 11 U.S.C. sec. 1325(a)(4). The parties have agreed, however, that the court should consider the propriety of the claimed exemptions, not only to aid it and them in determining the "best interests" test of Debtors' Chapter 13 plan, but also because the validity of the claimed exemption would be in issue were the Debtors to dismiss their Chapter 13 case or convert it to Chapter 7.
The following discussion constitutes the court's findings of fact and conclusions of law. Fed.R.Bankr.P. 7052(a).
As of the date of trial, Debtor Charles Phillips was 64 years old and self-employed. His wife, Jean Phillips, was 58 years old and employed as a registered nurse. They have been married for approximately 23 years and have no children.
Debtors purchased their first home, 1022 Powell Street, No. 1, San Francisco, California ("Powell Street") in 1977; they sold Powell Street to the Mayers in 1988. In 1986, Debtors purchased their current residence at 170 Ninth Avenue, San Francisco, California ("Residence").
Debtors contend that as early as 1977 they adopted an "informal retirement plan." There is no writing to evidence this intent and over the years they used several of the assets they purportedly transferred informally to this plan for a variety of purposes, none directly related to their retirement.
In 1985, Debtors executed the Charles and Jean Phillips Revocable Trust (the "Revocable Trust"), which was essentially a probate avoidance device and a technique for estate planning. There is nothing about retirement mentioned in the Revocable Trust. Rather, while Debtors (as trustors) are both alive, the Revocable Trust provides for them to reach the income and the principal of the trust for numerous non-retirement purposes.3 They did not use the Revocable *199 Trust for retirement purposes. Powell Street is identified on Schedule A to the Revocable Trust as a trust asset, but there is no evidence that any deed transferring Powell Street to the trustees of the Revocable Trust was executed and recorded.
Article III (Distribution of Income and Principal During Trustors' Joint Lifetimes), provides as follows:
A. As long as both Trustors are alive:
(1) The Trustee shall pay to either or both of the Trustors (as their community property) or apply for their benefit, in quarter-annual or more frequent installments, the net income of the community estate and also as much of the principal of the community estate as the Trustee deems appropriate for their support, comfort, health, education and general welfare, taking into account their accustomed standard of living and the availability to them of other resources.
After Debtors purchased the Residence in 1986, they did not transfer it to the Revocable Trust. Subsequent to 1985, they used assets purportedly transferred previously for various purposes, including paying insurance expenses, making improvements at the Residence (expending as much as $50,000 for structural work, kitchen remodeling, and the construction of a deck), and paying expenses in connection with the Mayers litigation. At least one mutual fund account said to be in the Revocable Trust was specifically denominated as a "non-retirement account." Debtors did not consistently treat the assets purportedly transferred in 1985 as retirement assets and in fact failed to disclose the existence of any such retirement plan on financial statements subsequently provided to the Mayers.
In 1993, the Mayers discovered facts which caused them to sue to rescind the sale of Powell Street. Thereafter, for approximately 2–1/2 years, the Mayers and Debtors litigated that action in the Superior Court of San Francisco. On March 29, 1996, that court issued a tentative decision against the Debtors4 and notified Debtors that it would enter judgment in favor of the Mayers. Not long after receipt of the tentative decision, Debtors consulted with Poppin & Shier, a San Francisco bankruptcy law firm; not long after that consultation, Debtors consulted an estate planning specialist in the San Francisco law firm of Steinhart & Falconer. The documents creating the Retirement Plan were prepared and executed shortly thereafter.
The court stated, in part:
"The misrepresentations that have been found on the part of the [debtors] constitutes (sic) negligent misrepresentation and (sic) recognized as actionable fraud under California law (Civil Code sec. 1572(2)) which conduct the Court concludes justifies the remedy of rescission." Memorandum of Decision, p. 7.
The court entered its Judgment After Trial By Court on July 17, 1996. As of July 22, 1996, the Mayers obtained an Abstract Of Judgment reflecting an amount owed to them as of that date of $411,079.56.
The Retirement Plan is reflected in two documents, the Phillips Retirement Plan and the Phillips Retirement Trust. In those documents, Debtors are the participants, the sponsors, the administrators and the trustees of the Retirement Plan. Unlike the situations in numerous cases relied on by Debtors, there are no third parties who played any role in the implementation and operation of the Retirement Plan. Also, unlike the facts of those cases, no assets were used to fund the Retirement Plan other than assets of the Debtors, all of which presumably were subject to the claims of creditors (including the Mayers), subject only to proper exemptions available to Debtors.
On or about April 25, 1996, Debtors transferred the Residence5 and marketable investments to the Retirement Plan. According to Schedules C and D, the Residence has a value of $350,000 and is subject to a deed of trust in favor of Union Bank securing a debt of $39,226. Of the Debtors' equity, $75,000 is claimed as exempt as a homestead under California Code of Civil Procedure section 704.710, with the balance ($216,481) claimed as exempt as a private retirement plan under Code of Civil Procedure section 704.115. The other assets in the Retirement Plan, characterized as being in various mutual funds and related investments, have a value of $74,308 as of the petition date.
The Grant Deed transferring the Residence from the Debtors, husband and wife, as joint tenants, to themselves as trustees of the Phillips Retirement Trust, dated April 24, 1996, conveys the Residence "reserving therefrom, however, the duly recorded homestead interest in said real property, as evidenced by recorded Phillips homestead declaration." Thus, Debtors attempted to reserve their homestead amount outside of the Retirement Plan, and to exempt the balance of the value of the Residence in the Retirement Plan.
The Residence is not a revenue or income producing asset as it is occupied by Debtors, who maintain it as their primary residence. *200 They do not pay any rent to themselves as trustees of the Retirement Plan although they do pay the mortgage payments on the Residence. Under the terms of the Retirement Plan, the assets therein are reachable upon Charles Phillips' 65th birthday, February 16, 1997.
According to Debtors, the purpose of the transfers of assets to the Retirement Plan was to have the assets there and available. In their mind, transfer of substantial assets to the Retirement Plan seemed the prudent thing to do. In fact, Mrs. Phillips expressly conceded that funds were put into the Retirement Plan "to protect them" as they were in jeopardy.
Debtors filed their voluntary Chapter 13 petition on August 7, 1996.
As things stand today the Retirement Plan contains all but approximately $25,000 of the Debtors' assets, the latter amount having been expressly withheld in anticipation of filing bankruptcy to deal with creditors in the Chapter 13 case. No additional contributions to the trust are likely6 and the Debtors project selling the Residence in the year 2003, investing the net proceeds and living on the income produced by the investments in the Retirement Plan, together with whatever is available to them as social security benefits.
In the Phillips Retirement Plan, Section 3.01. Sponsor Contributions, provides, in part, the "Sponsor shall make such contributions to Plan for the benefit of the Participants ... from time to time and in such amounts as the Sponsor shall determine." The Phillips Retirement Trust, in Article I, A. Establishment of Trust, provides, in part, the "Sponsor shall make contributions in such manner and at such times as shall be appropriate."
Based upon the unequivocal testimony that there would be no further contributions to the Retirement Plan, these words found in the Retirement Plan are virtually meaningless and undermine any notion that the Retirement Plan is a true private retirement plan that has been declared exempt by the California Legislature.
The critical question for the court to decide is whether the Retirement Plan constitutes a "private retirement plan" as provided in subparagraph (1) of California Code of Civil Procedure section 704.115(a) ("Section 704.115"), which section curiously and unhelpfully defines "private retirement plan" as a "Private retirement plan". There apparently is no legislative history to help the court determine whether Debtors may create such a plan entirely on their own.
Subparagraph (b) of Section 704.115 provides that:
All amounts held ... by a private retirement plan, for the payment of benefits as an annuity, pension, retirement allowance ... from a private retirement plan are exempt. (Emphasis added.)
If the Retirement Plan is a "private retirement plan" under Section 704.115, the next question is whether the Retirement Plan was "designed and used" for Debtors' retirement purposes. Bloom v. Robinson (In re Bloom), 839 F.2d 1376 (9th Cir.1988); Daniel v. Security Pacific National Bank (In re Daniel), 771 F.2d 1352 (9th Cir.1985); Yaesu Electronics Corp. v. Tamura, 28 Cal.App.4th 8, 33 Cal.Rptr.2d 283 (1994). If both questions are answered in the affirmative, then all assets in the Retirement Plan are exempt.7
The Mayers have stipulated with Debtors that the amount in the Retirement Plan is not at issue. No actuarial evidence was submitted to determine if the value in the Retirement Plan is excessive. In other words, as a matter of law the amount is "reasonably necessary" for Debtors' retirement.
a. The 1977 and 1985 Activities.
 Preliminarily, the court must determine whether the 1977 informal retirement plan and the Revocable Trust are of any legal significance. The court rejects both of those devices as irrelevant to the issues at hand. First, the informal retirement plan was nothing more than Debtors deciding that they wanted to keep their assets for themselves. There was no "plan" involved at all. At best, there was a recognition by two people that they wanted to keep their own assets, a rather normal reaction of almost anyone, particularly someone who did not then and do not now have children or other family members for whom they might set up some sort of schedule for gifting excess assets *201 as they advance in years. Nor have Debtors presented any evidence of any philanthropic tendencies either in 1977, 1985 or 1996, any one of which might have established a pattern of recognizing that some assets might intentionally be rendered unavailable to them in their later years. In other words, the statement that Debtors intended to retain their assets for their retirement is tantamount to saying they intend to keep those assets from their creditors.
 By 1985 some manifestations of Debtors' intent at least was reduced to writing, but the evidence is convincing that they created the Revocable Trust for estate planning purposes. They were very informal about how they dealt with assets included in the Revocable Trust. Even if by stretching the stated purposes as of 1985 (see footnote 3) to their litigation position in 1997 that this was an exempt private retirement plan, the Debtors did not treat the assets in that trust as part of any actual retirement plan. In any event, for many of the same reasons the Retirement Plan is not held to be a private retirement plan, the Revocable Trust fails as well.
b. The Self–Settled Trust.
 The Retirement Plan is a self-settled trust in that the Debtors as settlors or trustors are the beneficiaries. As such, unless exempt by Section 704.115, the assets in that Retirement Plan are just as vulnerable to the claims of Debtors' creditors, including the Mayers, as they were before they were transferred. Nelson v. California Trust Co., 33 Cal.2d 501, 502, 202 P.2d 1021 (1949); Yaesu Electronics Corp. v. Tamura, 28 Cal.App.4th 8, 33 Cal.Rptr.2d 283 (1994); Brownell v. Kilian (In re Schneider's Estate), 140 Cal.App.2d 710, 296 P.2d 45 (1956). The California Supreme Court in Nelson stated it most succinctly and most emphatically:
"It is against public policy to permit a man to tie up his property in such a way that he can enjoy it but prevent his creditors from reaching it." 33 Cal.2d at 502, 202 P.2d 1021 (1949).
The California Legislature confirmed the rule of Nelson in California Probate Code section 15304(a) which states, in part:
If the settlor is a beneficiary of a trust created by the settlor and the settlor's interest is subject to a provision restraining the voluntary or involuntary transfer of the settlor's interest, the restraint is invalid against transferees or creditors of the settlor.8
Former Probate Code section 15304(a), added by 1986 Cal.Stat. Ch. 820, sec. 40 was repeated verbatim in 1990 enactment of the California Probate Code (Stats.1990, c. 79 (A.B. 759)), sec. 14, operative July 1, 1991. The Law Revision Commission Comment to that section cites Nelson with approval.
The Retirement Plan fits squarely within the reach of Probate Code section 15304(a), since the Phillips Retirement Plan contains a typical spendthrift provision.9
Section 15.02. Inalienability Of Benefits, provides in part:
"The right of any participant or beneficiary to any benefit or payment under the Plan shall not be subject to voluntary or involuntary transfer, alienation or assignment, and, to the fullest extent permitted by law, shall not be subject to attachment, execution, garnishment, sequestration or legal or equitable process."
Debtors argue that the application of California Probate Code section 15304(a) to this case will destroy the exemptions of all individual tax-qualified plans such as "... IRA's and self-employed retirement plans (most of which are self-settled, self-administered and self-controlled) ..." (emphasis added). (Debtors' Post Trial Memorandum, p. 3, 11. 23–25). Debtors' concern about self-employed retirement plans and the possible loss of protection under Section 704.115(a)(3) is misplaced. That subsection refers to "individual retirement annuities or accounts" and not to "self-employed retirement plans" as suggested.
Individual Retirement Accounts ("IRA's") must have banks or others as trustees (26 U.S.C. sec. 408(a)(2)) and thus the evils dealt with nearly fifty years ago in Nelson, and visited by the California Legislature in its 1991 amendments to the California Probate Code, are not present.
*202 IRA's quite obviously are created and controlled by the individuals who claim them as exempt, but the California Legislature has distinguished between IRA's in Section 704.115(a)(3), where there is a limitation (to the extent necessary to provide support, etc.) on the amount exempt under Section 704.115(e)10 and private retirement plans and Internal Revenue Code section 403b retirement plan annuities exempt under Section 704.115(a) or (b).11 The Internal Revenue Code strictly limits how much ($2,000) an individual may contribute in any taxable year (26 U.S.C. sec. 408(a)(1)). Creditors are thus protected by the amount of assets a debtor may shelter in an IRA each year, and protected again by how much can be exempted once those assets become subject to the claims of creditors. By permitting Debtors to claim as exempt tax sheltered trusts that they control, the California Legislature in no way intended debtors to transfer substantially all of their assets to such a trust in order to claim them as exempt.
See In re Vigghiany, 74 B.R. 61 (Bankr.S.D.Cal.1987).
See In re MacIntyre, 74 F.3d 186 (9th Cir.1996).
Debtors also rely on numerous cases involving individuals who enjoy the benefits of section 704.115(a) via their own private retirement plans. But those cases all involve third parties, even though in some cases those third parties are wholly-controlled professional corporations of the debtors. In re Bloom, supra, involved a corporate retirement plan created eight years prior to bankruptcy. The debtor was one of two owners of the medical corporation that created the plan. In In re MacIntyre, supra, the debtors were two married physicians employed by a non-profit hospital that withheld from their paychecks contributions to an Internal Revenue Code sec. 403b retirement annuity. In re Witwer, 148 B.R. 930, 939 (Bankr.C.D.Cal.1992), concerned the debtor's own medical professional corporation as did In re Cheng, 943 F.2d 1114, 1116 (9th Cir.1991). In In re Crosby, 162 B.R. 276 (Bankr.C.D.Cal.1993), the debtor claimed exempt her interest in a profit sharing plan established by her wholly-owned corporation, CAT Productions.
More importantly, none of the cases relied on by Debtors involves assets which, prior to the transfer into the Retirement Plan, were available to satisfy the claims of the debtor's creditors. Absent some indication that assets found in those various plans were ever available to the creditors of the debtors in those cases, these decisions simply are not on point here.12 Accordingly, the court concludes that Debtors' Retirement Plan is a self-settled trust as identified and condemned by Nelson and California Probate Code section 15304(a).
Debtors' Post–Trial Brief attempts to suggest that this case is similar to other "self-settled, self-controlled, and self-administered retirement plans," citing Cheng, Witwer, Crosby, and Vigghiany. As stated, this case is not similar, since none of those cases involves self-settled retirement plans involving the same person(s) as sponsor, trustee, administrator and beneficiary.
c. Private Retirement Plan.
 As noted above, the California Legislature has not defined a "private retirement plan" as the term is used in Section 704.115 in any meaningful way. First, from the context of the statute, it is evident that the Legislature had in mind plans involving third parties since the statute refers, by way of example, to "union retirement plans." If it intended to exempt assets that debtors simply declare to be intended for retirement (as Debtors have done) it could have said so without reference to "plans." It could have simply declared as exempt all assets a debtor intends to use for retirement.
 Further, California Probate Code section 82(b)(13) exempts from the self-settled rule trusts for the primary purpose of paying salaries, wages, profits, pensions or employee benefits of any kind. Treating those Probate Code sections and Section 704.115 in a consistent manner leads to only one plausible conclusion, namely that plans providing for salaries, wages, profits, pensions or employee benefits are not the kind of devices identified by Nelson and reachable by creditors under Probate Code section 15304(a).
*203 As recognized by the parties in their briefs, the Ninth Circuit has been active in shaping the limits of Section 704.115. MacIntyre, holds that the purpose of that section is to safeguard a stream of income for retirees. MacIntyre, 74 F.3d at 188; Crosby, 162 B.R. at 283. Here the Debtors' Retirement Plan has no stream of income in any meaningful sense; at best the future liquidation of the Residence, reinvestment of its net proceeds, and dividends from the mutual funds might provide a source of revenue several years into the future, but it hardly can be said to provide payment of pensions or employee benefits since its sponsors had no employees and were obligated to pay no pensions. The Retirement Plan resembles in name only a private retirement plan intended for such purposes; names alone are not controlling. Bloom, 839 F.2d at 1378.
d. "Designed and Used" For Retirement Purposes.
In determining that a private retirement plan must be intended for such purposes, the Ninth Circuit in Bloom:
Emphasize[d] that [it was] not creating a uniform test or a comprehensive list of relevant factors. All factors are relevant; but no one is dispositive. Rather, all of them must be considered in light of the fundamental inquiry—whether the plan was designed and used for a retirement purpose.
Bloom, 839 F.2d at pp. 1379–1380; quoted in Yaesu, 28 Cal.App.4th at 14, 33 Cal.Rptr.2d 283.
The facts are overwhelming that Debtors designed and used the Retirement Plan, not to provide for their later years, but to frustrate the Mayers in the enforcement of their state court judgment. In Daniel, the Ninth Circuit stated unequivocally that the shielding of assets is clearly not a proper retirement purpose. Daniel, 771 F.2d at 1358. Debtors have already shielded as much of their Residence as they could by their claimed homestead (see footnote 5), and their attempt to transfer only the equity in excess of the homestead amount to the Retirement Plan creates the powerful inference that they were attempting to shield the asset from creditors rather than positioning that asset for the enhancement of their retirement needs. Furthermore, the expenditure of funds in the Retirement Plan and the Revocable Trust for legal defense and other expenses of the Debtors is inconsistent with the utilization of those plans for retirement purposes.13
The court does not deem an improper expenditure of Revocable Trust assets the use of funds to improve the Residence. Remodeling, structural repairs, etc. are consistent with such a purpose. Thus, were the Retirement Plan to be upheld as exempt, the particular expenditures of this nature would not be second guessed by the court. Bloom, 839 F.2d at 1379.
e. No Shelter Of Proceeds Of Fraud.
The Mayers argue that Debtors, having received the Superior Court's decision, created the Retirement Plan and transferred their Residence and other assets into it, thus attempting to protect the proceeds of their fraud. The Residence was purchased by Debtors prior to their sale of Powell Street to Mayers, and thus there is no indication that the Residence represents any proceeds of Debtors' improper conduct viz-a-viz Mayers. As to the mutual fund accounts and other assets transferred into the Retirement Plan, the Mayers have not proven that those assets constituted proceeds of money received from them in connection with the sale of Powell Street in 1988. Thus, the court does not reach the question of whether the assets in the Retirement Plan must be denied their exempt status under cases such as Sampsell v. Anches, 108 F.2d 945 (9th Cir.1939) and In re White, 221 F.Supp. 64 (N.D.Cal.1963).
 In view of the foregoing, the Mayers' objections to Debtors' claim of exemption of assets in the Retirement Plan will be sustained. In reaching this result the court does not deprive Debtors of whatever exemptions exist apart from the Retirement Plan. For these purposes the Retirement Plan is a nullity and the assets in it could be reached by a Chapter 7 trustee as though the Retirement Plan did not exist at all. In other *204 words, to the extent Debtors' claims of exemption in the Residence and any other assets in the Retirement Plan are proper in all other respects (without regard to the Retirement Plan), they will be permitted to withstand objection in this case. In reaching this conclusion, the court rejects any contention by the Mayers that Debtors have forfeited their right to exemptions otherwise available to them. This case is neither an objection to discharge such as Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279 (9th Cir.1996), nor a fraudulent conveyance action such as Reddy v. Gonzalez, 8 Cal.App.4th 118, 10 Cal.Rptr.2d 55 (1992).
Finally, the court stresses that it is not engaging in a quantitative analysis whereby it disapproves of exemptions that exceed some imaginary dollar amount of reasonableness. It does not, for example, deny the exemptions because the Debtors are more like the debtor in Daniel and less like the debtor in Bloom. Similarly, the court declines to engage in the kind of analysis criticized by Chief Judge Arnold in his concurrence in Hanson v. First National Bank in Brookings, 848 F.2d 866 (8th Cir.1988) and his dissent in Norwest Bank Nebraska, N.A. v. Tveten, 848 F.2d 871 (8th Cir.1988). There Judge Arnold found fault with the notion that the court might somehow decide how much could be exempted, gleaning from the amounts at stake the fraudulent intent of the debtor or lack of fraudulent intent by the other debtor. In this case the court does not make such an economic analysis. It simply rejects the notion that a California resident, facing a substantial monetary judgment, can instantly create a retirement plan exemption by declaring such a plan to exist. This would be the court's decision on these facts regardless of the amount at stake.
Concurrent with the issuance of this Memorandum Decision, the court is issuing its Order Sustaining Objections To Exemptions.
In re Phillips, 218 B.R. 520 (N.D.Cal., 1998).
United States District Court,
In re Charles PHILLIPS and Jean Phillips, Debtors.
Charles PHILLIPS and Jean Phillips, Appellants,
Kevin C. MAYER and Scott D. Mayer, Appellees.
Nos. 96–33445 BDM, C97–2754 TEH.
Feb. 19, 1998.
Attorneys and Law Firms
*521 Matthew J. Shier, Poppin & Shier, San Francisco, CA, for Appellants.
Penn Ayers Butler, Tobias S. Keller, Murphy Weir & Butler, San Francisco, CA, for Appellees.
HENDERSON, District Judge.
This matter came before the Court on the appeal of appellants Charles Phillips and Jean Phillips, debtors in a Chapter 13 proceeding. Appellants ask that this Court reverse the bankruptcy court's decision refusing to allow appellants to claim an exemption for a private retirement plan pursuant to Cal.Code Civ. Proc. sec. 704.115(a)(1). Appellees request an award for costs and expenses, arguing that the appeal is frivolous. After careful consideration of the parties' written arguments, the Court hereby AFFIRMS the ruling of the bankruptcy court. The Court further DENIES appellees' request for costs and expenses.
Appellants Charles Phillips and Jean Phillips are 64 and 58 years old, respectively. Charles Phillips is self-employed and Jean is a registered nurse. Appellants have been married for approximately 23 years and have no children. Their combined monthly income is approximately $3,800.
Appellants purchased their first home in 1977, located at 1022 Powell Street, No. 1, San Francisco, CA. Appellants acquired their current residence in 1986, located at 170 Ninth Avenue, San Francisco, CA. In 1977, appellants adopted an "informal retirement fund." However, over the years, appellants used several of the assets transferred into the plan for a variety of purposes, none related directly to their retirement.
In 1985, appellants executed the Charles and Jean Phillips Revocable Trust to consolidate all of their investments and to accomplish certain estate planning purposes. The Trust provides that appellants (as trustors) have general access to the income and principal held in the Trust "for their support, comfort, health, education, and general welfare." Appellants subsequently withdrew funds from the Trust to pay for health insurance, property taxes, and attorney's fees incurred with respect to the underlying litigation. Appellants also expended $50,000 for home improvements, including structural work, kitchen remodeling, and deck construction. *522 In addition, at least one mutual fund account held in the Trust was specifically denominated as a "non-retirement account."
In 1986, appellants sold their Powell Street residence to Kevin and Scott Mayer, but the Mayers sued to rescind the sale of the property in 1993 based upon claims of fraud and misrepresentation. On March 29, 1996, the parties were informed by the Superior Court of San Francisco that judgment would be entered in the Mayers' favor in the amount of $411,079.56. Shortly thereafter, appellants consulted legal counsel and executed the documents necessary to formalize the Phillips Retirement Plan and the Phillips Retirement Trust. Appellants are the participants, sponsors, administrators, and trustees of the Retirement Plan.
On April 24, 1996, in anticipation of filing bankruptcy to deal with creditors' claims, appellants transferred their current Ninth Avenue residence and marketable investments into the Retirement Plan. The value of appellants' residence is approximately $350,000, of which $75,000 is claimed as a homestead exemption under Cal.Code Civ. Proc. sec. 704.710. The balance of $216,481 is claimed exempt as a private retirement plan pursuant to Cal.Code Civ. Proc. sec. 704.115(a)(1). The other assets in the Retirement Plan have a value of $74,308. In short, the Retirement Plan contains all but approximately $25,000 of appellants' assets, which were reachable by appellants upon Charles Phillips' 65th birthday in February 1997.
Appellants filed their voluntary Chapter 13 petition with the bankruptcy court on August 7, 1997. Creditors Kevin and Scott Mayer objected to appellants' claimed exemption under section 704.115(a)(1) for assets held in the Retirement Plan. Upon the parties' consent, the bankruptcy court bifurcated the plan confirmation issue, conducting a trial solely on the question of exemption. On March 4, 1997, the bankruptcy court issued a Memorandum Decision and Order sustaining the objections to the claimed exemption, which debtors now appeal.
A. Private Retirement Plan
The sole issue on appeal is whether the bankruptcy court erred in refusing to allow appellants to claim an exemption for a private retirement plan pursuant to Cal.Code Civ. Proc. sec. 704.115(a)(1). Under the standard of review, the factual findings of the bankruptcy court may be set aside only if they are "clearly erroneous." Fed.R.Bankr.Proc. 8013. Conclusions of law are reviewed de novo. In re Commercial Western Finance Corp., 761 F.2d 1329 (9th Cir.1985).
 Appellants argue that the Retirement Plan constitutes a "private retirement plan" under the meaning of section 704.115(a)(1), and is therefore exempt from creditor claims. However, it is well settled that a "private retirement plan" is not exempt by mere virtue of its name. Bloom v. Robinson (In re Bloom), 839 F.2d 1376, 1378 (9th Cir.1988); Yaesu Electronics Corp. v. Tamura, 28 Cal.App.4th 8, 14, 33 Cal.Rptr.2d 283 (1994)(adopting Bloom ). The Ninth Circuit has interpreted the statute as requiring that a retirement plan be "designed and used" for retirement purposes. Id. Thus, the threshold question before this Court is whether the bankruptcy court's factual finding that the Phillips' Retirement Plan was not "designed and used" for retirement purposes is "clearly erroneous." Fed.R.Bankr.Proc. 8013. If it is not, then this Court must affirm the bankruptcy court's ruling, and the Court need not address the remaining issues raised by the parties.
 Having carefully reviewed the record, the Court finds, for the reasons explained below, that the bankruptcy court's determination that the Retirement Plan was not "designed and used" for retirement purposes is supported by the record, and is not "clearly erroneous." First, we agree with the bankruptcy court that appellants' earlier activities between 1977 and 1985 do not support the claim of exemption under section 704.115(a)(1). Although appellants assert that they intended to set aside funds for retirement purposes as early as 1977, there is no concrete evidence of this intent. Their "informal retirement plan" was never reduced to writing and funds were used for a *523 variety of purposes, none related directly to retirement.
In 1985, appellants did make some manifestation of their intent to set aside funds in the Revocable Trust; however, appellants again treated the matter very informally. The Trust provides that appellants (as trustors) have general access to funds "for their support, comfort, health, education and general welfare." Indeed, appellants utilized the monies for a variety of purposes, such as for payment of health insurance, property taxes, home improvements, and legal expenses incurred in connection with the underlying litigation. In addition, at least one mutual fund account said to be in the Trust was specifically denominated as a "non-retirement account."
On April 24, 1996, shortly after being informed about the judgment entered against them by the Superior Court, appellants executed the documents necessary to establish the Phillips Retirement Plan and the Phillips Retirement Trust. At that time, appellants transferred their current residence and all marketable investments into the Retirement Plan. Appellants claimed $75,000 of their residence as a homestead exemption pursuant to Cal.Code Civ. Proc. sec. 704.710(a)(1), and transferred the excess amount of their assets into the Retirement Plan. This left $25,000 in the reach of creditors. Given these facts, and the previous actions of appellants discussed above, the bankruptcy court inferred that appellants were attempting to shield their assets from creditors rather than enhance their retirement needs.
 It has not been shown to this Court's satisfaction that the bankruptcy court erred in determining that the 1996 Retirement Plan was not "designed and used" for retirement purposes. It is not the role of this Court to substitute its own judgment for that of the bankruptcy court short of "clear error." Indeed, here there is a substantial basis in the record to support the findings of the bankruptcy court. Therefore, the Court upholds the bankruptcy court's Memorandum Decision and Order, sustaining objections to appellants' proposed Chapter 13 plan.
B. Appellees' Request for Costs and Expenses
 Appellees request an award for costs and expenses, including attorneys fees, arguing that the appeal is frivolous and was pursued for purposes of delay. Appellees contend that sanctions are appropriate pursuant to Fed.R.Civ.P. 11, Fed.R.Bankr.Proc. 9011, Fed.R.App.Proc. 38, and 28 U.S.C. sec. 1927. However, the Court is not persuaded that all of the above rules and statutes are necessarily applicable to a district court reviewing a bankruptcy appeal. In any event, the Court declines to impose sanctions given the absence of any showing of bad faith on the part of appellants.
For the foregoing reasons, the Court finds that the bankruptcy court did not err in refusing to allow appellants to claim an exemption for a private retirement plan pursuant to Cal.Code Civ. Proc. sec. 704.115(a)(1). Accordingly, and for good cause shown, the judgment of the bankruptcy court is hereby AFFIRMED. The Court further ORDERS that appellees' request for costs and expenses be DENIED.
IT IS SO ORDERED.
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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.
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 page.
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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© 2021 by Jay D. Adkisson. All Rights Reserved. No claim to original government works. The information contained in this website is for general educational purposes only, does not constitute any legal advice or opinion, and should not be relied upon in relation to particular cases. Use this information at your own peril; it is no substitute for the legal advice or opinion of an attorney licensed to practice law in the appropriate jurisdiction. Questions about this website should be directed to jay [at] jayad.com or by phone to 702-953-9617 or by fax to 877-698-0678. This website is https://privateretirementplans.com