June 27, 2009
9th Circuit Rules that Assets in "Single Owner" Corporate Pension Not Exempt under California Law
Cunning v. Rucker (In re Rucker), ---- F. 3d ----, 2009 WL ---------(9th Cir. June, 2009)
Issue: Did the bankruptcy court err when it found that the debtor’s contributions to a corporate pension plan were primarily made to shelter assets and avoid paying debts and therefore not exempt?
Holding: No. The test is one of clear error and the bankruptcy court did not commit clear error. The court should look to the totality of the circumstances when determining the debtor’s intent in making transfers to a corporate pension plan at least when seeking to exempt the assets under California.
Appeal from the district court
The debtor transferred assets of about $1 million to a corporate pension plan over a period of a few years. At the time of the transfers, he had a judgment against him for about $6 million. The corporations were “wholly owned” by the debtor and he was the only employee of each. He did not make any withdrawals from the plans during these years however he “overfunded” the plans to about 20% of the total assets per IRS regs. The contributions equaled or exceeded his compensation by the entities for those years. Rucker filed chapter 7 and claimed the assets exempt under CCP 704.115(b), “which exempts ‘all amounts held, controlled, or in process of distribution by a private retirement plan.’ [The judgment creditor] objected to the exemption, claiming that the Plans were not exempt because they were not designed or used primarily for retirement purposes.” The bankruptcy court conducted a trial and “determined that the Plans were not exempt because Rucker designed and used the Plans primarily to shield his assets from Cunning. Instrumental in the bankruptcy court’s reasoning were the facts that Rucker overfunded the Plans, that Rucker took at least one constructive rent payment, and that Rucker did not accurately disclose his contributions as required by IRS regulations.” The district court reversed.
The 9th Circuit reversed the district court and reinstated the ruling of the bankruptcy court that the funds were not exempt. It said that 9th Circuit “precedent establishes that ‘whether a plan is designed and used for retirement purposes is a question of fact that we review for clear error.’” “In deciding whether a plan is designed and used primarily for retirement purposes, ‘[a]ll factors are relevant; but no one is dispositive.’ Many factors previously considered by us and by California courts concern the extent of a debtor’s withdrawals or loans from the plan. Courts have also considered a debtor’s subjective intent in deciding whether the plans have a retirement purpose.”
“We conclude that the bankruptcy court did not commit clear error in determining that Rucker used his Plans primarily to hide assets from Cunning, and not primarily for retirement. Once we articulate the totality of circumstances standard, and recognize that a bankruptcy court decision on the fact-intensive issue of a retirement plan’s primary purpose is reviewed only for clear error, we conclude that the bankruptcy court’s initial decision on that issue must be here reaffirmed and the district court’s contrary conclusion reversed.”
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