Bloom, In re

• Decision Date: 24 February 1988
• Docket Number: No. 87-5502,87-5502
• Citation: 839 F.2d 1376
• Parties: 9 Employee Benefits Ca 1845 In re Edith BLOOM, M.D., Debtor. Edith BLOOM, M.D., Appellant, v. Gilbert ROBINSON, Chapter 7 Trustee, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1376

839 F.2d 1376

9 Employee Benefits Ca 1845

In re Edith BLOOM, M.D., Debtor Edith BLOOM, M.D., Appellant, v. Gilbert ROBINSON, Chapter 7 Trustee, Appellee.

No. 87-5502.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Dec. 9, 1987.

Decided Feb. 24, 1988.

Richard M. Moneymaker, Moneymaker & Kelley, Los Angeles, Cal., for appellant.

Douglas D. Kappler, Robinson, Diamant, Brill & Klausner, Los Angeles, Cal., for appellee.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel.

Before SNEED, PREGERSON and KOZINSKI, Circuit Judges.

SNEED, Circuit Judge:

Edith Bloom appeals from the Bankruptcy Appellate Panel's decision, 68 B.R. 455 (1986) that her retirement plans are not exempt from being distributed to her creditors. We reverse.

I. FACTS AND PROCEEDINGS BELOW

Edith Bloom, a physician specializing in obstetrics and gynecology, filed for bankruptcy under Chapter 7 in September 1985. She was a fifty percent owner of "Tobie N. Chroman, M.D. and Edith Bloom, M.D., a Medical Corporation." In 1977, this corporation created a private retirement plan and a profit-sharing plan with Bloom and Chroman as the sole trustees.

At the time she filed for bankruptcy, Bloom's stated interest in the plans was approximately $475,000. However, the plans had made a number of loans to Bloom between 1978 and 1982, which totaled nearly $300,000 with accrued interest. Bloom gave the plans only unsecured promissory notes for the loans. Although Bloom made interest payments on the loans, she did not repay any principal. Thus, the assets of the plans to a substantial extent were Bloom's unsecured notes.

Bloom seeks to keep the plans out of her creditors' hands by excluding the plans from the administration of her assets in bankruptcy. She relies on California statutory law that exempts pension plans and profit-sharing plans set up for retirement purposes. Her Trustee argued successfully to a bankruptcy judge that Bloom's extensive borrowing from the plans made them lose their exempt status. ¹ The Ninth Circuit Bankruptcy Appellate Panel agreed with the bankruptcy judge and the Trustee. Bloom now appeals from that panel's decision.

II. JURISDICTION

Our jurisdiction rests upon 28 U.S.C. Sec. 158(d) (Supp. II 1984).

III. STANDARD OF REVIEW

The scope of the statutory exemption is a question of law, which we review de novo. See In re Commercial W. Fin. Corp., 761 F.2d 1329, 1333 (9th Cir.1985).

IV. DISCUSSION

The Bankruptcy Code allows debtors to exempt some of their assets from inclusion in the bankruptcy estate. 11 U.S.C. Sec. 522. Section 522(b) requires debtors to choose either the federal or state statutory exemption scheme. Bloom, who resides in California, has chosen to look to California's exemption scheme. See Sec. 522(b)(2)(A).

California Civil Procedure Code Sec. 704.115(a) (West 1987) provides an exemption for "Profit-sharing plans designed and used for retirement purposes" and for "Private retirement plans." Bloom argues that her two plans are covered by these two exemptions. The Trustee argues that Bloom's heavy borrowing indicates that she did not use the plans for a retirement purpose. Instead, he contends, they became a type of tax-free savings account, from which Bloom could take money at will.

We recently considered a similar argument. In In re Daniel, 771 F.2d 1352 (9th Cir.1985), cert. denied, 475 U.S. 1016, 106 S.Ct. 1199, 89 L.Ed.2d 313 (1986), we discussed California Civil Procedure Code Sec. 690.18(d), the predecessor of Sec. 704.115. ² There the debtor had established a medical corporation, which in turn had created a pension and profit-sharing plan. Daniel managed and controlled the plan. Acting as the plan's trustee, he made a $75,000 unsecured loan to himself so that he could buy a house. The loan, which "was substantially equal to the debtor's interest in the plan," id. at 1357, was secured only by Daniel's interest in the plan. He never made interest or principal payments on the loan; and when the original note came due, he rolled it over. Two weeks before filing bankruptcy, he deposited "all the corporation's available cash," $39,000, in the plan. Id. at 1354. We held that because "the plan essentially operated to meet debtor's short-term personal needs by lending money or shielding and hiding funds from creditors," it was not principally used for retirement purposes. Id. at 1358. We therefore denied the exemption.

Bloom does not deny that profit-sharing plans must be designed and used for retirement purposes in order to be exempt. She argues, however, that retirement plans need not be held to the same standard. Apparently she would have us hold that any plan declared to be a "private retirement plan" is exempt merely by virtue of its name. It is true that Sec. 704.115 does not explicitly require private retirement plans to be "designed and used for retirement purposes" in order to be exempt. But we believe the absent phrase is implicit in the term "retirement plans," while it is not in that of "profit-sharing plans." Our reason is simple. Many profit-sharing plans are not used and designed for retirement purposes. The same cannot be said of retirement plans. Without regard to its label, a plan not used and designed for retirement purposes is not a retirement plan. Therefore, we apply the "designed and used for retirement purposes" standard to Bloom's retirement plan as well as her profit-sharing plan.

We note that other versions of the problem of pension plan exemption exist in other areas of the law. The Internal Revenue Code, for example, exempts from taxation pension and profit-sharing plans that meet certain requirements. See 26 U.S.C.A. Sec. 401(a) (West Supp.1987). One of the requirements is that the plan must be "for the exclusive benefit" of the employees. Id. The Internal Revenue Service, in focusing on investment policies, has stated that an investment is consistent with the exclusive benefit rule if: (1) the cost of the investment does not exceed fair market value at the time of purchase; (2) a fair return is provided; (3) sufficient liquidity is maintained to permit distributions in accordance with the plan; and (4) the safeguards and diversity that a prudent investor would adhere to are present. Rev.Rul. 73-532, 1973-2 C.B. 128; Rev.Rul. 69-494, 1969-2 C.B. 88. However, there has been some reluctance on the part of the Tax Court to give these rulings the force of law, in particular, the prudent investor and diversification requirements. See, e.g., Winger's Dep't Store, Inc. v. Commissioner, 82 T.C. 869, 881-82 (1984); Shelby U.S. Distribs., Inc. v. Commissioner, 71 T.C. 874, 882 (1979).

Another version of the exemption problem appears in the Employment Retirement Income Security Act of 1974 (ERISA). ERISA does require adherence to the prudent investor standard and the diversification requirement. 29 U.S.C. Sec. 1104(a)(1) (1982). The source for this stricter standard is "the prudent person test as developed in the common law of trusts." Donovan v. Mazzola, 716 F.2d 1226, 1231 (9th Cir.1983), cert. denied, 464 U.S. 1040, 104 S.Ct. 704, 79 L.Ed.2d 169 (1984).

These provisions of the Bankruptcy Code, the Internal Revenue Code, and ERISA have similar purposes. All seek to protect retirement plans; but the standard appropriate to one is not necessarily appropriate to all. In particular, we are reluctant to read a prudent investor standard into the phrase "designed and used for retirement purposes." ERISA and the Internal Revenue Code are concerned with protecting employees' rights in pension plans. But the Bankruptcy Code exemption is concerned only with safeguarding those assets of the debtor from the grasp of the creditors that he or she has set aside for retirement. It need no more concern itself with the financial safety of those assets than with any other asset of the debtor. The key requirement for bankruptcy purposes is that the plan be used for retirement purposes. Therefore, it...