In re Davis, BAP No. CC-04-1333-PKMo.

• Decision Date: 31 March 2005
• Docket Number: Bankruptcy No. LA 03-15835-EC.,BAP No. CC-04-1333-PKMo.
• Parties: In re Carol E. DAVIS, Debtor. Rosendo Gonzalez, Chapter 7 Trustee, Appellant, v. Carol E. Davis, Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit

Page 732

323 B.R. 732

In re Carol E. DAVIS, Debtor Rosendo Gonzalez, Chapter 7 Trustee, Appellant, v. Carol E. Davis, Appellee.

BAP No. CC-04-1333-PKMo.

Bankruptcy No. LA 03-15835-EC.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on January 20, 2005.

Filed March 31, 2005.

Patrick K. McClellan, Irvine, CA, for Rosendo Gonzalez, Ch. 7 Trustee.

Cheryl Thomas, Santa Ana, CA, for Carol E. Davis.

Before PERRIS, KLEIN and MONTALI, Bankruptcy Judges.

OPINION

PERRIS, Bankruptcy Judge.

In this case, the bankruptcy trustee objected to debtor's claim of exemption under California law in her Keogh and Individual Retirement Account (IRA), arguing that they were not necessary for the support of debtor or her dependents in retirement.¹ Because we conclude that the bankruptcy court clearly erred in finding that the trustee had not met his burden of proving that the exemption was not properly claimed, we REVERSE.

FACTS

Debtor is an ophthalmologist. In 2002, she and her husband divorced. The dissolution judgment provided for the distribution of various retirement accounts held by debtor and her ex-husband.

When debtor filed her bankruptcy petition in March 2003, she claimed an exemption under California law in all of the retirement accounts, listing their total value at $198,000.² The trustee objected to the claim of exemption in three accounts held solely in debtor's name: two Keogh accounts and one IRA, arguing that the Keogh accounts are not exempt as a matter of law and that none of the accounts are necessary for debtor's support when she retires. The trustee did not object to any exemption that might be claimed in a distribution that debtor is entitled to receive from her ex-husband's retirement accounts pursuant to the dissolution judgment.

After a hearing, the court concluded that the trustee had not met his burden of proving that debtor had not properly claimed her exemptions, and overruled the trustee's objection. The trustee appeals the court's order overruling his objection to the claim of exemption.

ISSUES³

1. Whether the court erred in ruling that debtor's Keogh accounts could be exempt as a matter of law.

2. Whether the court clearly erred in finding that the trustee had not met his burden of proving that the retirement accounts are not necessary for debtor's support in her retirement.

STANDARD OF REVIEW

We review the scope of a statutory exemption de novo, as a question of law. In re Bloom, 839 F.2d 1376, 1378 (9th Cir.1988). The court's findings regarding the necessity of retirement accounts for debtor's support are reviewed for clear error. In re Spenler, 212 B.R. 625, 628 (9th Cir. BAP 1997). Clear error exists when, after examining the evidence, the reviewing court is left with a definite and firm conviction that a mistake has been committed. United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948).

DISCUSSION

1. Exemption of Keogh accounts

The trustee argued to the bankruptcy court that Keogh accounts are not exempt as a matter of law. The court never specifically addressed this argument, but impliedly rejected it when it overruled the trustee's objection to the claimed exemption. The cases cited by the trustee in support of this argument are all distinguishable.

In Hebert v. Fliegel, 813 F.2d 999 (9th Cir.1987), the court concluded that Keogh plans are not exempt under Oregon exemption law, which, at that time, provided for exemption of "pensions granted to any person in recognition by reason of a period of employment by ... [any] person, partnership, association or corporation...." ORS 23.170 (1985). The court explained that Keogh plans

are funded exclusively by the self-employed individual, who retains complete control over the amounts invested and the management of the funds. The individual also retains the right to terminate the plan and withdraw the funds at any time, subject only to a tax penalty.

813 F.2d at 1001.

The trustee argues that Hebert stands for the proposition that Keogh plans are not exempt as a matter of law, based on the court's "conclusion" that "the benefits to be derived from granting an exemption for self-funded plans are outweighed by the `strong public policy that will prevent any person from placing his property in what amounts to a revocable trust for his own benefit which would be exempt from the claims of his creditors.'" 813 F.2d at 1001. There are two problems with the trustee's reliance on Hebert, and on the quoted portion in particular. First, the court did not "conclude" that policy considerations precluded exemption of Keogh plans; the beginning of the sentence quoted above is, "Moreover, the majority of courts that have addressed the policy issues have concluded that" the benefits of exemption are outweighed by the policy against allowing debtors to put their assets beyond the reach of creditors. Id. The court went on to hold that, "[w]hatever the policy considerations, the issue is still governed by the Oregon statute." Id. at 1002. Thus, it did not rely on policy considerations at all.

Second, the court's decision was based on the Oregon exemption statute, which did not include self-funded Keogh accounts. Its holding has no application in this case, where the exemption is claimed under a very different California exemption statute.

The other two cases on which the trustee relies are similarly inapplicable. In In re Shuman, 78 B.R. 254, 256 (9th Cir. BAP 1987), we held that a debtor's interest in profit-sharing and pension plans was included in the debtor's bankruptcy estate because, under Nevada law, the plans were not valid spendthrift trusts and therefore were not exempt under state law. The issue in this case is neither whether debtor's Keogh accounts are exempt under Nevada law, nor whether they are property of her bankruptcy estate.

The question in the portion of the decision in Schwartzman v. Wilshinsky, 50 Cal.App.4th 619, 57 Cal.Rptr.2d 790 (Cal.Ct.App.1996), to which the trustee refers was whether the appellant's 401(k) plan was "designed and used for retirement purposes" pursuant to Cal.Code Civ. Pro. § 704.115. There is no argument in this case that debtor's Keogh accounts are exempt under California law only if they were "designed and used for retirement purposes." The only factual issue in this case, as explained below, is whether the amounts held in debtor's retirement accounts are necessary to provide for her support after she retires. Thus, Schwartzman does not support the trustee's argument that the Keogh accounts are nonexempt as a matter of law.

The bankruptcy court did not err in implicitly rejecting the trustee's argument that Keogh accounts cannot be exempt as a matter of law.

2. Amounts necessary for the support of debtor in retirement

Debtor claims that the retirement accounts are exempt under Cal.Code Civ. Pro. § 704.115(b). That section exempts amounts held in self-employed retirement plans and IRAs, but "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." Cal.Code Civ. Pro. § 704.115(e).⁴ In determining whether the amounts held in the accounts are necessary for debtor's support when she retires, the court should consider various factors, including:

the debtor's present and anticipated living expenses and income; the age and health of the debtor and his or her dependents; the debtor's ability to work and earn a living; the debtor's training, job skills and education; the debtor's other assets and their liquidity; the debtor's ability to save for retirement; and any special needs of the debtor and his or her dependents.

In re Moffat, 119 B.R. 201, 206 (9th Cir. BAP 1990), aff'd, 959 F.2d 740 (9th Cir.1992)(addressing whether annuity was exempt under statute that exempted matured life insurance policies "to the extent reasonably necessary for the support of the judgment debtor and the spouse and dependents of the judgment debtor." 119 B.R. at 203).

Once the debtor claims an exemption on her bankruptcy schedules, "the objecting party has the burden of proving that the exemptions are not properly claimed." Fed. R. Bankr.P. 4003(c). Thus, in this case, the trustee had the burden to show that debtor had not properly claimed the exemption in her Keogh and IRAs.⁵

The trustee provided the declaration and testimony of Donald Fife, an accountant, who provided an analysis of debtor's income and expenses during debtor's projected work life and retirement. He concluded that debtor needed $123,308 in current retirement funds in order to support her in retirement, which would leave a $100,000 cushion at the end of debtor's life expectancy. His opinion took into account various facts and assumptions.

At the time of the hearing, debtor was 51 years old. She was a practicing ophthalmologist. Fife assumed that debtor could work through the age of 65, and projected debtor's income from her practice over the 15 remaining years of debtor's work life at $8,435 per month, which was based on debtor's bankruptcy schedules and 2002 tax return. From that amount, he deducted $3,414 in business expenses, a number he took from debtor's bankruptcy schedules. This resulted in annual projected income net of business expenses of $60,252 during debtor's working life. To this he added $2,400 for rental income that debtor also reported on her bankruptcy schedules, for a total annual income of $62,652.

From this amount, Fife deducted certain expenses. He arrived at the expenses by looking at debtor's bankruptcy schedules and then adjusting them based on Bureau of Labor statistics used by the Internal Revenue Service in considering offers of compromise. Fife eliminated debtor's expenses for insurance...