California Private Retirement Plans
In re Barnes, 275 B.R. 889 (Bk.E.D.Cal., 2002).
United States Bankruptcy Court, E.D. California, Sacramento Division.
In re James and Carol L. BARNES, Debtors.
April 12, 2002.
Attorneys and Law Firms
*892 Jan P. Johnson, Sacramento, CA, Chapter 13 Trustee.
Gregory J. Hughes, Roseville, CA, for Michael F. Burkhart, former Chapter 7 Trustee.
Al J. Patrick, Auburn, CA, for debtors.
MICHAEL S. McMANUS, Chief Judge.
Before the court is the motion of the chapter 13 trustee to reconvert the case to chapter 7 (motion control no. JPJ # 1), the objections of the chapter 13 trustee and the former chapter 7 trustee to the exemptions claimed by the debtors (motion control nos. JPJ # 2 and GJH # 1 respectively), and the objections of both trustees to the confirmation of the debtors' proposed chapter 13 plan (motion control nos. JPJ # 3 and GJH # 2).
The debtors challenge the right of the former chapter 7 trustee to appear in these matters. Their objection is overruled. The court previously awarded compensation to the former chapter 7 trustee as an administrative expense. Because of this award, he is a "party in interest" with standing to object to confirmation, object to exemptions, and move to convert the case.
The former chapter 7 trustee is appearing in these matters in order to protect his personal financial interest rather than as the representative of the estate. Cf. In re DeLash, 260 B.R. 4 (Bankr.E.D.Cal.2000). He is not a "creditor" because he did not hold a claim against the debtors that arose prior to the filing of the petition. 11 U.S.C. sec. 101(10)(A). However, 11 U.S.C. secs. 522(l ), 1307(c), 1324 permit a "party in interest," not just a creditor, to object to confirmation of a plan and exemptions and to move to convert the *893 case. The term "party in interest" is broad enough to include anyone whose financial interest may be affected by the outcome of a bankruptcy case. Cf. 11 U.S.C. sec. 1109(b). As an administrative claimant, the former chapter 7 trustee has the necessary financial interest to be considered a party in interest with standing to appear on the motion and objections. In re DeLash, 260 B.R. at 7–8; In re Wells, 87 B.R. 732, 736 (Bankr.N.D.Ga.1988).
The Debtors initially filed this case under chapter 7 of the Bankruptcy Code. While the case was pending under chapter 7, the chapter 7 trustee discovered that the debtors owned an annuity and the beneficial interest in two self-settled trusts. The debtors did not list these assets in their schedules. The assets held in the two trusts included a motor home used by the debtors as their residence and a secured $3,800.00 promissory note payable to the debtors.
[Omitted for brevity.]
The trustees also object to the debtors' exemption of the undisclosed assets.
The debtors are the settlors and the beneficiaries of two self-settled trusts which contain "spendthrift" provisions. That is, the trust instruments preclude the alienation, sale, transfer, assignment, pledge, encumbrance, garnishment, execution, or levy of any kind, either voluntary or involuntary, of the debtors' beneficial interest in the trust.
[Omitted for brevity.]
In 1998, prior to filing the petition, the debtors sold their home and used a portion of the sale proceeds to purchase an annuity. The debtors have failed to produce a copy of the annuity contract but they have described it in Mr. Barnes' declaration filed on October 24, 2001. As described, the debtors used cash realized from the sale of their home to purchase a future stream of income to be paid to them by Sun Life, the issuer of the annuity contract. If Mr. Barnes dies, Mrs. Barnes will receive the higher of the value of the account or the money paid by the debtors to Sun Life (less distributions) plus 5% per year through Mr. Barnes' eightieth birthday at which point the policy is convertible to an annuity.
On amended Schedule C, the debtors claimed the annuity as exempt pursuant to Cal.Civ.Proc.Code secs. 704.115 and 704.100(c). In responding to the trustees' objections, the debtors also maintain that the annuity is exempt pursuant to Cal.Civ.Proc.Code sec. 704.100(a).
Section 704.115(b) provides that:
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.
The term "private retirement plan" is defined in section 704.115(a)(1)–(3).
As noted by the bankruptcy court in In re Phillips, 206 B.R. 196, 200 (Bankr.N.D.Cal.1997), paragraph (1) of section 704.115(a) provides an unhelpful tautological definition: a private retirement plan consists of a "private retirement plan." The Ninth Circuit and other courts have filled this definitional void by providing an analytical framework to determine whether a plan qualifies as a private retirement plan under section 704.115(b), as defined by section 704.115(a)(1).
First, the court must consider the use of the word "plan" in section 704.115(a)(1). A plan requires more than the instantaneous transmutation of a lump sum of previously nonexempt money or other assets into an exempt retirement plan. It contemplates the gradual accumulation of money to fund a future retirement. This is supported by the language of the statute, which provides that a private retirement plan means "private retirement plans, including, but not limited to, union retirement plans." Cal.Civ.Proc.Code sec. 704.115(a)(1). Union retirement plans provide for a retirement income funded by employee and employer annual contributions made over a long period of time.
In this case, the debtors purchased the annuity with proceeds from a home sale. The annuity was not purchased for the debtors by an employer, nor does it represent the gradual investment of contributed funds.
Second, the amount exemptible in a private retirement plan under section 704.115(a)(1) is unlimited. That is, the exemption is not limited to what is necessary *897 to support a debtor. If the court were to permit the debtors' exemption of the annuity, then, any debtor could avoid a loss of all assets to a bankruptcy trustee or a levying judgment creditor by declaring that those assets are funding a private retirement plan. It would be strange indeed if a person with a substantial net worth could avoid paying any debts, forever, through this mechanism. Paragraph (a)(1) of section 704.115 "does not extend to protect anything a debtor unilaterally chooses to claim as intended for retirement purposes." In re Rogers, 222 B.R. 348, 351 (Bankr.N.D.Cal.1998). See also Lieberman v. Hawkins (In re Lieberman), 245 F.3d 1090, 1094 (9th Cir.2001) ("[I]f a debtor were permitted to exempt a fund created by himself under sec. 704.115(a)(1), ... 'the "necessary for support" limitation for plans created by the debtor under [sec. 704.115(a)(3) ] would be eviserated.' " Quoting Rogers.).
This case is nearly identical to the facts in Rogers. There, the debtor converted non-exempt equity from her home into an annuity on the eve of bankruptcy. The court sustained the objection to the exemption of the annuity pursuant to section 704.115(a)(1). Here, the debtors purchased an annuity under the same circumstances and asserted that the annuity is made exempt by the simple fact that they intend the annuity to fund, in part, their retirement. Subjective intent alone is not sufficient for the creation of an exemptible private retirement plan.
Third, the debtors' retirement plan was not established by a third party. In Lieberman the Ninth Circuit held:
The ... legislative history [of sec. 704.115(a)(1) ] leads to the conclusion that the legislature intended sec. 704.115(a)(1) to exempt only retirement plans established or maintained by private employers or employee organization, such as unions, not arrangements by individuals to use specified assets for retirement purposes.
Lieberman, 245 F.3d at 1094. No private employer, employee group, or similar organization created the debtors' asserted private retirement plan. The debtors created it. Therefore, the annuity is not a private retirement plan within the meaning of section 704.115(a)(1).
Paragraph (2) of section 704.115(a) provides that a private retirement plan includes a profit-sharing plan designed and used for retirement purposes. The debtors do not contend that the annuity comprises a profit-sharing plan and there is no indication that the annuity was purchased with the profits of a business or some other enterprise.
The debtors fare no better under section 704.115(a)(3). The annuity is not a self-employed retirement plan or an individual retirement annuity or account "provided for in the Internal Revenue Code of 1986, as amended, ... to the extent the plans, annuities, or accounts do not exceed the maximum amounts exempt from federal income taxation under that code." Cal.Civ.Proc.Code sec. 704.115(a)(3).
Section 704.115(a)(3) provides an exemption only if the self-employed retirement plan is provided for in the Internal Revenue Code of 1986. In other words, it must be a tax qualified plan.
A qualified retirement plan is one that satisfies specific requirements of the Internal Revenue Code, particularly I.R.C. sec. 401(a), entitling it to receive favorable tax advantages. Before 1962, self-employed individuals (sole proprietors and partners) could not participate in or obtain the tax benefits of such retirement plans. Keogh or "H.R. 10" pension plans were authorized by legislation enacted *898 as the Self–Employed Individuals Tax Retirement Act of 1962, Pub.L. No. 87–792, 76 Stat. 809 (1962). The act's purpose was to provide self-employed individuals with an opportunity to participate in retirement plans on a comparable basis to those offered corporate employees. S.Rep. No. 992 (1961), reprinted in 1962 U.S.C.C.A.N. 2964, 2971–2972. To this end, the act amended sec. 401 of the Internal Revenue Code "to provide that self-employed individuals may be covered under qualified pension and profit sharing plans." Id. at 2990. Initially, only individuals who were employees under common law could participate in such plans. The act expanded the definition of employee "to include, for any taxable year, a self-employed individual who has earned income ... for the taxable year." Id. at 2993. Further, since qualified plans had to be offered by "employers", the act expanded this definition as well, so that "an individual who owns the entire interest in an unincorporated trade or business" is treated as his own employer, and a partnership is treated as the employer of its partners. Id. at 2994.
So. Calif. Permanente Medical Group v. Ehrenberg (In re Moses), 215 B.R. 27, 30 (9th Cir. BAP 1997), affirmed, 167 F.3d 470 (9th Cir.1999).
Whether one is considering a Keogh plan, a 401(k) plan, a simplified employee pension, or an IRA, these tax qualified plans share one feature in common. They provide for the gradual accumulation of a finite amount of pretax annual income in a tax qualified account in order to fund a taxpayer's future retirement. In this case, the debtors made a large, one-time investment outside of any traditional tax qualified retirement vehicle.
The debtors' interest in the annuity is also not exemptible pursuant to section 704.100.
Section 704.100(a) permits a debtor to exempt an unmatured life insurance policy, but not the loan value of such a policy. Section 704.100(c) exempts benefits from matured life insurance policies to the extent they are reasonably necessary for support.
The court first notes that in amended Schedule C, filed on August 21, 2001, the debtors claimed the annuity exempt pursuant to section 704.100(c). This means that the annuity must be a benefit from a matured life insurance policy and that the stream of income is necessary for the support of the debtors.
Such exemption is impermissible. First, the policy has not matured because Mr. Barnes is still alive. Second, there is no indication that the annuity payments are necessary for the debtors' support. Amended Schedules I and J show that the debtors are able to provide for their support without the annuity payments.
Finally, at the hearing on the objection to this exemption, counsel for the debtors conceded that they claim the exemption pursuant to section 704.100(a). This means that the annuity must be an unmatured life insurance policy.
To the extent the debtors claim the annuity as exempt under section 704.100(a), the objection is disallowed without prejudice because they have claimed no such exemption in Schedule C. Also, the debtors have not produced the annuity contract for the court. While the trustees have the burden of proving under Fed. R. Bankr.P. 4003(c) that the debtors are not entitled to the exemption,2 the debtors are *899 duty bound by 11 U.S.C. sec. 521(4) to provide a copy of the contract to the chapter 13 trustee. The court will not place the trustees in the impossible position of objecting to the exemption without knowing what is in the annuity contract.3
The allocation of the burden of proof in Rule 4003(c) may run afoul with the Supreme Court's recent decision in Raleigh v. Illinois Department of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000). In Raleigh, the debtor was the president of a defunct corporation that owed state use taxes. When the taxes were not paid, the state assessed them to the debtor as the responsible corporate officer. The assessment meant that the state believed the debtor was the person who had willfully failed to direct the corporation to pay the taxes. When the debtor filed a chapter 7 petition, the state filed a proof of claim based on its prior assessment. The trustee objected to the proof of claim on the ground that the state had not proven that the debtor was liable for payment of the tax. The Supreme Court rejected this argument, reasoning that outside of the bankruptcy court the corporate officer would have to prove that he was not the person responsible for filing returns and paying taxes for the corporation. Inside bankruptcy court the burden still rests with the debtor, or the trustee as the representative of the debtor's estate. The Supreme Court held, then, that when the matter in dispute is governed by nonbankruptcy substantive law, the burden of proof is dictated by that same nonbankruptcy law.
Under California law, the party claiming an exemption has the burden of proof when claiming or defending the exemption. See Cal.Civ.Proc.Code sec. 703.580(b). This includes exemptions that must be claimed and those that apply even absent a claim of exemption. See Cal.Civ.Proc.Code sec. 703.510(b). Since California has opted out of the federal exemption scheme, the debtors must claim California exemptions. See 11 U.S.C. sec. 521(b)(1); Cal.Civ.Proc.Code sec. 703.130. The burden of proof, then, is determined by California law and not the Bankruptcy Code or the Bankruptcy Rules. In this case, the debtors have not met the burden of proving their entitlement to an exemption under section 704.100(a).
The court also sustains the former chapter 7 trustee's objection to the evidence offered as a substitute for the contents of the annuity policy. See Objection filed October 29, 2001.
And, there is ample reason for the trustees to be concerned about the debtors' right to exempt the annuity. Most courts which have considered the applicability of section 704.100(a) to annuity contracts have concluded that annuities are not life insurance policies. See e.g., Bernard v. Coyne (In re Bernard), 40 F.3d 1028, 1032 (9th Cir.1994), cert. denied, 514 U.S. 1065, 115 S.Ct. 1695, 131 L.Ed.2d 559; Kennedy v. Pikush (In re Pikush), 157 B.R. 155 (9th Cir. BAP 1993), affirmed, 27 F.3d 386 (9th Cir.1994).
For the foregoing reasons, the court concludes that the annuity is not exemptible under section 704.100(a).
Having disallowed the exemption of the motor home and the annuity, the court finds it unnecessary to address the additional objections raised by the trustees. In the event the debtors amend their exemptions again, the court, if timely requested to do so, will address the remaining objections.
The objections of the trustees to the confirmation of the proposed plan are sustained to the extent discussed below.
[Omitted for brevity.]
For the foregoing reasons, the court will grant the motion to reconvert the case to chapter 7, sustain in part the objections to the exemptions of the mobile home and the annuity, and deny confirmation of the plan.
Counsel for the trustees shall lodge conforming orders. Upon their entry, the case will be re-transferred to Judge Klein and a status conference will be scheduled in Adversary Proceeding No. 01–2202.
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.
MORE INFORMATIONAL WEBSITES BY JAY ADKISSON
© 2020 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. Other. 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