Daniel, In re
| Decision Date | 20 September 1985 |
| Docket Number | No. 84-2412,84-2412 |
| Parties | 13 Collier Bankr.Cas.2d 793, Bankr. L. Rep. P 70,763, 7 Employee Benefits Ca 1096 In re Howard Douglas DANIEL, Debtor. Howard Douglas DANIEL, Debtor-Appellant, v. SECURITY PACIFIC NATIONAL BANK, Commercial Bank of San Francisco, Leasco Capital Corporation, and Capital Reserve Leasing Corporation, Creditors-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Appeal from the United States District Court for the Northern District of California.
Before POOLE, REINHARDT, Circuit Judges, and HAUK, * 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. Sec. 1334; that we have jurisdiction under 28 U.S.C. Sec. 1291 and 28 U.S.C. Sec. 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:
This court reviews the bankruptcy court's findings of fact by the clearly erroneous standard of F.R.Civ.P. 52(a). In re Comer, 723 F.2d 737, 739 (9th Cir.1984). But the bankruptcy court's conclusions of law are subject to de novo review.
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.
FACTS:
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. Sec. 1056(d)(1), and the Internal Revenue Code, 26 U.S.C. Sec. 401(a)(13), in order to qualify the plan as tax exempt. The plan was approved as "qualified" by the Internal Revenue Service on March 25, 1971.
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
On May 20, 1981, 1 the debtor borrowed $75,000 from the plan to buy a house, agreeing to repay the loan in one year with 10% annual interest. The loan represented most of the debtor's interest in the plan and was not secured except by the debtor's interest in the plan. The plan was not given a deed of trust to the property and was not named as an insured on the homeowner's insurance policy. The debtor borrowed from the plan on these terms without attempting to inquire whether, or on what terms, he could have financed his residence through a bank or savings and loan institution.
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.
PROCEEDINGS BELOW:
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.
Under the debtor protection provisions of the Bankruptcy Code, an individual who files a petition for relief is entitled to a number of "exemptions" whereby certain of his assets are excluded from bankruptcy administration and distribution to his creditors. 11 U.S.C. Sec. 522.
Section 522(b) 2 of the Code is structured to give the debtor an election or choice to exempt either the particular bankruptcy law assets specified by 11 U.S.C. Sec. 522(d) 3, as directed by Sec. 522(b)(1); 4 or those assets specified as exempt under the provisions of the debtor's local state law or under Federal non-bankruptcy law, as directed by Sec. 522(b)(2)(A). 5 Debtor elected to claim his vested interest in the pension and profit-sharing plan as exempt under then existing California law, former California Code of Civil Procedure Sec. 690.18(d) [former C.C.P. Sec. 690.18(d) ] 6, pursuant to 11 U.S.C. Sec. 522(b)(2)(A).
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. Having elected the state law exemption under Section 522(b)(2)(A) of the Bankruptcy Code, which also permits use of certain Federal non-bankruptcy exemptions, the debtor advanced both state law and Federal non-bankruptcy law arguments before the Bankruptcy Court.
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. Sec. 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. Sec. 522(b)(2)(A).
DISCUSSION:
I. DEBTOR'S PENSION AND PROFIT-SHARING PLAN WAS NOT EXEMPT UNDER CALIFORNIA STATE LAW.
In his brief, debtor/appellant argues for a broad construction of former C.C.P. Sec. 690.18(d) in favor of the...
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