HAUK, Senior District Judge:
Appellant (debtor in the bankruptcy proceeding) is a physician employed by his own professional medical corporation, the Howard Douglas Daniel, M.D., Professional Corporation, and is the sole director and shareholder of said corporation. Appellees are creditors who successfully objected to debtor's claim of exemption, denied by Bankruptcy Court Order which was affirmed on appeal to the District Court.
JURISDICTION AND STANDARD OF REVIEW:
All parties agree that the District Court had Federal subject matter jurisdiction under former 28 U.S.C. 1471, now 28 U.S.C. § 1334; that we have jurisdiction under 28 U.S.C. § 1291 and 28 U.S.C. § 158(d); that the orders of the two lower courts (Bankruptcy and District) are "final" and appealable under In re Mason, 709 F.2d 1313, 1317 (9th Cir.1983); and that the appeal is timely.
The applicable standard of review in a bankruptcy appeal was set forth by this Court in In re American Mariner Industries, Inc., 734 F.2d 426, 429 (9th Cir.1984), as follows:
The general rule applied by this Circuit in the past was that interpretations of state law by a District Judge were entitled to deference and the District Court's determination was accepted on review unless shown to be "clearly wrong." Clark v. Musick, 623 F.2d 89, 91 (9th Cir.1980). However, last year in an en banc opinion, this Court adopted a new rule that "questions of state law are reviewable under the same independent de novo standard as are questions of Federal law." Matter of McLinn, 739 F.2d 1395, 1397 (9th Cir.1984). It is under this independent de novo standard that we have reviewed the District Court's decision and affirm it for the reasons now set forth.
In 1971, debtor's corporation formed a pension and profit-sharing plan which was managed and controlled by the debtor. The debtor was one of four beneficiaries of the plan. Section 8.05 of the debtor's plan contained the standard anti-alienation, anti-assignment clause required by ERISA, 29 U.S.C. § 1056(d)(1), and the Internal Revenue
The plan gave the debtor great latitude in withdrawing his beneficial interest, which became 100% vested and non-forfeitable after five years of employment. The plan provided that in the event of termination of the debtor's employment with the corporation, he would be entitled to payment of his accrued beneficial interest. The plan was also subject to amendment or discontinuance at will by the employer (i.e., the debtor). Finally, the debtor was entitled to "borrow" against his interest on an unsecured basis with virtually no constraints on repayment.
Between 1971 and 1982, the corporation made total contributions to the plan in the sum of $128,318.00, with fiscal year end amounts as follows:
Date of Plan Fiscal Year Contribution Ending Amount 3/15/71 3/31/71 $ 8,720.00 3/20/72 3/31/72 10,000.00 3/18/73 3/31/73 10,000.00 2/14/74 3/31/74 500.00 N/A 3/31/75 0.00 3/1/76 3/31/76 100.00 3/21/77 3/31/77 15,360.00 3/31/78 3/31/78 15,000.00 3/30/79 3/31/79 2,000.00 3/28/80 3/31/80 20,000.00 3/30/81 3/31/81 23,000.00 3/29/82 3/31/82 23,638.00
On May 20, 1981,
On August 4, 1981, the debtor amended the terms of the plan making himself the sole trustee. The corporation applied to the I.R.S. for approval of the amended plan and on May 10, 1982, the approval was issued.
When the $75,000 loan became due on May 20, 1982, the debtor rolled it over, giving the plan a new promissory note payable to himself, as trustee. The note bore a 12.5% annual interest and was payable "interest only in annual installments commencing May 20, 1983." No repayment of principal was due until May 20, 1987. Apparently no interest payments were ever made on the note.
On September 30, 1982, approximately two weeks before filing a petition in bankruptcy, the debtor caused his corporation to contribute a total of $39,000 to the plan, representing all the corporation's available cash.
The September 30, 1982 contribution, although within the I.R.S. guidelines, differed from earlier contributions in that it totalled nearly twice the largest contribution for any previous year. Even though all previous contributions had been made close to the end of each fiscal year (March 31st) and had been based on the corporation's profits, the September 30th, 1982 contribution was made in the middle of the fiscal year, long before any profit or loss could be ascertained, and was therefore not based on any profit calculation.
Debtor's vested interest in the pension plan is now approximately $98,000.00 out of a total plan fund of $179,144.00.
On October 12, 1982, debtor/appellant filed his petition for relief under Chapter 7 of the Bankruptcy Code of 1978 in the United States Bankruptcy Court for the Northern District of California.
On December 8, 1982, pursuant to Bankruptcy Rule 4003, debtor/appellant's creditors, Security Pacific National Bank, Commercial Bank of San Francisco, Leasco Capital Corporation and Capital Reserve Leasing Corporation, filed an "Objection To Debtor's Claim of Exemption" with respect to the debtor's interest in the pension and profit-sharing plan. Two days of hearings on the objection to the claim of exemption were held before the Honorable Robert L. Hughes, United States Bankruptcy Judge.
On January 24, 1984, Judge Hughes entered an "Order Sustaining The Objection to The Claim of Exemption". The Bankruptcy Court held that Dr. Daniel's interest in the plan was not exempt under former C.C.P. § 690.18(d) because the debtor had not principally used the plan for retirement purposes. The effect of the Bankruptcy Court's order was to deny the claim of exemption for debtor's vested interest in the pension and profit-sharing plan and to require debtor to turn over his interest in the retirement plan to his trustee in bankruptcy for distribution to his creditors. Notice of Entry of the Order was filed on January 27, 1984. On the same day, appellant Daniel filed a timely Notice of Appeal to the District Court for the Northern District of California pursuant to Bankruptcy Rule 8002.
On July 27, 1984, the District Court entered its Memorandum Decision and Order, which affirmed the Bankruptcy Court's findings and conclusions on both Federal and state law grounds.
The District Court agreed that the debtor's self-interested handling of the plan defeated any exemption under California law and, in addition, concluded that Congress did not intend to include ERISA or Internal Revenue Code qualified pension plans as Federal non-bankruptcy exemptions under 11 U.S.C. § 522(b)(2)(A).
I. DEBTOR'S PENSION AND PROFIT-SHARING PLAN WAS NOT EXEMPT UNDER CALIFORNIA STATE LAW.
A. The Lower Courts Properly Held That Under Former C.C.P. § 690.18(d), The Debtor's Plan Was Exempt Only If "Used For Retirement Purposes."
In his brief, debtor/appellant argues for a broad construction of former C.C.P. § 690.18(d) in favor of the debtor. Appellant argues that under a liberal interpretation of the California statute "any private retirement plan" would be exempt from inclusion in the bankruptcy estate. Appellant contends that the language of this statute first sets forth an alleged unlimited exemption for any retirement plan and that the use of the phrase "including, but not limited to" after the broad exemption indicates that the rest of the plans described after those words are simply examples of some of the types of plans that qualify for exemption.
However, a careful analysis of former C.C.P. § 690.18(d), in effect on the date of the debtor's petition, does not lead to any such interpretation. Instead, it is clear that the then existing California statutory exemption applied to (1) money held, controlled or in the process of distribution by (a) any private retirement plan, including but not limited to union retirement plans or (b) any profit-sharing plan designed and used for retirement purposes; (2) the payment of benefits as an annuity, pension, allowance, disability payment or death benefit from (a) such retirement or (b) such profit-sharing plan; and to (3) all contributions and interest returned to any member of (a) any such retirement or (b) any such profit-sharing plan. Essentially, former C.C.P. § 690.18(d) covered two different types of plans — "retirement plans" and "profit sharing plans;" however, plans of the latter type were exempted only if designed and used for retirement purposes.
Under the explicit language of the California statute, a "profit-sharing plan designed and used for retirement purposes" is not a sub-species of "any retirement plan", but is its own separate and distinct type of plan. Indeed, the new
B. The Subject Profit-Sharing Plan Was Not "Used For Retirement Purposes."
The debtor has conceded since the start of the litigation that the plan is a profit-sharing plan. As previously emphasized, in order to qualify for an exemption, the profit-sharing plan had to be "designed and used for retirement purposes." Although the Bankruptcy Court and the District Court indicated that the plan may have been originally "designed" for retirement purposes, the basic issue there was, and here is, whether the plan was "used" for retirement purposes.
Two discrete transactions viewed together led the Bankruptcy and District Judges to conclude that the debtor did not "use" the plan principally for retirement purposes. First in May, 1981 the debtor, acting as trustee of the plan, made a $75,000 unsecured loan to himself so that he could purchase a home. While this transaction did not violate any federal tax provisions or ERISA requirements, the debtor did not establish his ability to obtain funds commercially on as favorable a basis and therefore did not establish that the loan benefited the plan's retirement purpose.
Although debtor argues that the plan benefited from the interest on the loan, nevertheless, the unsecured nature of the loan at a favorable interest rate, the fact that the loan amount was substantially equal to the debtor's interest in the plan, and the fact that the debtor rolled over his repayment to the plan — all certainly support the inference that the transaction was more a withdrawal than a loan, thereby negating a retirement "use" purpose. If debtor's real concern had been retirement, rather than buying a residence with pre-tax dollars, he would surely have invested the funds in assets which would yield a competitive money market return, would provide adequate security, and would preserve and enhance the capital of the plan.
Second, the transfer of $39,000 from the corporation to the plan on the eve of bankruptcy further demonstrates that the debtor's use of the plan was not for retirement purposes. The plan provided for deposits, at the employer's discretion, at year-end based on profit calculations. Although earlier deposits may have complied with these plan provisions, this final contribution was made at mid-year and in the absence of any profit calculations.
Debtor contends that the $39,000 which was transferred to the plan was a corporate asset which would not have been otherwise available to the creditors. However, since the transfer of all of the corporation's available cash lowered the value of the corporation's stock, which was an asset of the bankruptcy estate available to creditors, the plan was used to shield and hide debtor's assets from his creditors.
Thus, the plan essentially operated to meet debtor's short-term personal needs by lending money or shielding and hiding funds from creditors. Moreover, the debtor has failed to show how his transactions with the plan, by virtue of his role as trustee, were in furtherance of legitimate long-term retirement purposes.
In light of the evidence, the lower courts were amply justified in finding that the debtor's plan was not principally "used for retirement purposes," as required by former C.C.P. § 690.18(d).
C. The Plan Is Not An "Account" Subject To Exemption Under Former C.C.P. § 690.18(d).
Appellant argues that the second sentence of former C.C.P. § 690.18(d)
However, it is clear that the phrase "individual retirement" modifies "accounts" as well as "annuities". Thus the statute does not exempt all "accounts ... provided for in the Internal Revenue Code", but only that kind of individual retirement account commonly known as an IRA.
The debtor's interest in the plan cannot be an IRA. The plan was established by the debtor's corporation under IRC § 401(a), while an IRA, by contrast, must be established pursuant to IRC § 219. See 26 U.S.C. § 219. Moreover, section 219(b)(2)(A)(i)
It follows then, that since appellant's interest in the corporate plan was not an IRA, it did not qualify for exemption under the second sentence of former California C.C.P. § 690.18(d).
II. THE DEBTOR'S PENSION AND PROFIT SHARING PLAN WAS NOT EXEMPT FROM THE BANKRUPTCY ESTATE UNDER FEDERAL NON-BANKRUPTCY LAW.
Appellant/debtor argues that the anti-alienation, anti-assignment prohibitions in 29 U.S.C. § 1056(d)(1)
In the Matter of Goff, 706 F.2d 574 (5th Cir.1983), upon which the District Court relied, the Fifth Circuit explicitly considered the types of exemptions and exclusions envisaged by both 11 U.S.C. § 522(b)(2)(A) and 11 U.S.C. § 541(c)(2). The Goff case makes it clear that Congress never intended for the ERISA and IRC anti-alienation provisions to create exemptions or exclusions for pension plans under either the federal non-bankruptcy exemption of 11 U.S.C. § 522(b)(2)(A) or the non-bankruptcy exclusions of 11 U.S.C. § 541(c)(2).
The reasoning and results in the Goff case have been followed by every other Circuit which has considered the issue of whether IRC or ERISA qualified plans are properly excluded or exempted under either 11 U.S.C. § 541(c)(2) or 11 U.S.C. § 522(b)(2)(A). See In re Graham, 726 F.2d 1268 (8th Cir.1984) and In re Lichstrahl, 750 F.2d 1488 (11th Cir.1985).
The Lichstrahl case, which is the most recent decision by a Circuit Court reviewing and approving the Goff and Graham holdings, contains an excellent and succinct discussion of the very issues raised by Appellant in this appeal. As in the present case, the debtor in Lichstrahl was a surgeon who was the sole director and stockholder of his professional medical corporation. His corporation created pension plans pursuant to 29 U.S.C. § 1001 et seq (1982) (ERISA) and 26 U.S.C. § 401 (IRC). The plans contained prohibitions on assignment or alienation of the beneficiaries' interests. The Lichstrahl Court held that the plans were not properly excluded under 11 U.S.C. § 541(c)(2) and could not be exempted under 11 U.S.C. § 522(b)(2)(A). Id. at 1489.
Addressing the issue of Federal non-bankruptcy exclusions in view of the legislative history of 11 U.S.C. § 541(c)(2)
Relying primarily on legislative history, courts have generally interpretated the section's reference to "applicable nonbankruptcy law" as applying only to state law concerning spendthrift trusts. See, e.g., Matter of Goff, 706 F.2d 574 (5th Cir.1983); see also In re Graham, 726 F.2d 1268 (8th Cir.1984); [further citations omitted]. But see In re Pruitt, 30 B.R. 330 (Bankr.D.Colo.1983). We too hold that "applicable nonbankruptcy law" refers only to state spendthrift trust law. Therefore, ERISA-qualifying pension plans containing anti-alienation provisions are excluded pursuant to section 541(c)(2) only if they are enforceable under state law as spendthrift trusts. See Matter of Goff, 706 F.2d 574 (5th Cir.1983) [Emphasis added and footnote omitted]
Thus, following the Goff, Graham and Lichstrahl cases, this court holds that the phrase "applicable non-bankruptcy law" in 11 U.S.C. § 541(c)(2) was intended to be a narrow reference to state "spendthrift trust" law and not a broad reference to all other laws, including ERISA and IRC, which prohibit alienation. Therefore, the ERISA and IRC anti-alienation provisions in debtors pension and profit sharing plan does not create a Federal non-bankruptcy exclusion under 11 U.S.C. § 541(c)(2).
The Lichstrahl court also focused its examination on whether IRC and ERISA approved plans could be exempted pursuant to 11 U.S.C. § 522 (1982). As concluded in Lichstrahl at 1491:
Furthermore, excluding ERISA-qualified pension plans from the list of property exempted under federal law is consistent with an important distinction between exempted property and property covered by ERISA. Despite the similarity between the anti-alienation provisions of ERISA and some of the listed statutes, the "pensions, wages, benefits and payments included in the ... list are all peculiarly federal in nature, created by federal law or related to industries traditionally protected by the federal government. In sharp contrast, ERISA regulates private employer pension systems." In re Graham, 726 F.2d at 1274. It is this "peculiarly federal nature" shared by the cited statutes that identifies and determines which federal statutes are to be included within the "other federal law" exemption of § 522 and which, like ERISA, are to be excluded. See Matter of Goff, 706 F.2d at 586. The failure to mention ERISA in the legislative history accompanying § 522(b)(2)(A) is, therefore, both purposeful and reasoned. [Footnote omitted]
Appellant's reliance on the Ninth Circuit case of Franchise Tax Board v. Construction Laborers et al., 679 F.2d 1307 (9th Cir.1982), is misplaced since it was reversed by the Supreme Court.
Although there are a few Bankruptcy Court decisions outside this Circuit to the contrary, the holdings of our sister circuits in Goff, Graham, and Lichstrahl are controlling and should be adopted by this Circuit. Thus, pursuant to the solid weight of authority of Goff and its progeny, we hold that the anti-alienation provisions of ERISA and the Internal Revenue Code do not create Federal non-bankruptcy exemptions for ERISA qualified plans under 11 U.S.C. § 522(b)(2)(A).
IRC Reg. 1.401(a) — (13)(b)(1) provides:
See S.Rep. No. 989, 95th Cong., 2d Sess. 75, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5861; H.R.Rep. No. 595, 95th Cong., 2d Sess. 360, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5963, 6316.