In re Phillips
| Decision Date | 17 March 1997 |
| Docket Number | Bankruptcy No. 96-33445BDM. |
| Citation | 206 BR 196 |
| Court | U.S. Bankruptcy Court — Northern District of California |
| Parties | In re Charles PHILLIPS and Jean Phillips, Debtors. |
Matthew J. Shier, Poppin & Shier, San Francisco, CA, for Charles & Jean Phillips, Debtors.
Tobias S. Keller, Murphy, Weir & Butler, San Francisco, CA, for Scott & Kevin Mayer, Objecting Parties.
This case involves a clash of policies, pitting a tradition of generous California exemptions and a liberal attitude in favor of debtors who claim them against the time-honored notion that a person may not enjoy the use of his or her assets through a personal trust that attempts to insulate those assets from the trustor's creditors. This case also appears to be one of first impression, testing the limits of that liberal exemption policy by asking whether the court will permit debtors to create an exemption all by themselves, virtually out of whole cloth, under the guise of a "private retirement plan." The parties have not presented the court with any reported cases that go as far as the debtors wish. Were the court to adopt the debtors' theory of this case, it might just as well inform California creditors that there will be no more enforcement of judgments against individual debtors since all those debtors need to do to frustrate their creditors' efforts is claim that they have planned the use of their assets for their later (retirement) years. The court will not do that.
Although debtors claim another time-honored right, namely the freedom to convert in good faith non-exempt assets to exempt assets on the eve of bankruptcy, they have no exemption available to them at all through what they call their private retirement plan; if they do, their plan was not designed and used for retirement purposes and cannot help them here.
A trial was conducted on January 3, 1997 in this Chapter 13 case on objections filed by Scott and Kevin Mayer (collectively "the Mayers") to confirmation of the Chapter 13 plan filed by Charles Phillips and Jean Phillips ("Debtors"). Trial was limited to the claim by Debtors that their Phillips Retirement Plan and Phillips Retirement Trust (together the "Retirement Plan") was exempt under California law. The parties agreed that the determination of the exemption issue would influence whether or not the balance of Mayers' objections to confirmation of the Chapter 13 plan should be tried promptly or whether Debtors would have to revise their plan for further consideration.
Debtors appeared and were represented by Matthew J. Shier, Esq. of Poppin & Shier; Mayers appeared and were represented by Tobias S. Keller, Esq. of Murphy, Weir & Butler.
As indicated above, after reviewing the oral and documentary evidence presented and the pre- and post-trial authorities submitted by the parties, the court will sustain the Mayers' objections for the reasons stated below.1
As of the date of trial, Debtor Charles Phillips was 64 years old and self-employed. His wife, Jean Phillips, was 58 years old and employed as a registered nurse. They have been married for approximately 23 years and have no children.
Debtors purchased their first home, 1022 Powell Street, No. 1, San Francisco, California ("Powell Street") in 1977; they sold Powell Street to the Mayers in 1988. In 1986, Debtors purchased their current residence at 170 Ninth Avenue, San Francisco, California ("Residence").
Debtors contend that as early as 1977 they adopted an "informal retirement plan." There is no writing to evidence this intent and over the years they used several of the assets they purportedly transferred informally to this plan for a variety of purposes, none directly related to their retirement.
In 1985, Debtors executed the Charles and Jean Phillips Revocable Trust (the "Revocable Trust"), which was essentially a probate avoidance device and a technique for estate planning. There is nothing about retirement mentioned in the Revocable Trust. Rather, while Debtors (as trustors) are both alive, the Revocable Trust provides for them to reach the income and the principal of the trust for numerous non-retirement purposes.3 They did not use the Revocable Trust for retirement purposes. Powell Street is identified on Schedule A to the Revocable Trust as a trust asset, but there is no evidence that any deed transferring Powell Street to the trustees of the Revocable Trust was executed and recorded.
After Debtors purchased the Residence in 1986, they did not transfer it to the Revocable Trust. Subsequent to 1985, they used assets purportedly transferred previously for various purposes, including paying insurance expenses, making improvements at the Residence (expending as much as $50,000 for structural work, kitchen remodeling, and the construction of a deck), and paying expenses in connection with the Mayers litigation. At least one mutual fund account said to be in the Revocable Trust was specifically denominated as a "non-retirement account." Debtors did not consistently treat the assets purportedly transferred in 1985 as retirement assets and in fact failed to disclose the existence of any such retirement plan on financial statements subsequently provided to the Mayers.
In 1993, the Mayers discovered facts which caused them to sue to rescind the sale of Powell Street. Thereafter, for approximately 2-1/2 years, the Mayers and Debtors litigated that action in the Superior Court of San Francisco. On March 29, 1996, that court issued a tentative decision against the Debtors4 and notified Debtors that it would enter judgment in favor of the Mayers. Not long after receipt of the tentative decision, Debtors consulted with Poppin & Shier, a San Francisco bankruptcy law firm; not long after that consultation, Debtors consulted an estate planning specialist in the San Francisco law firm of Steinhart & Falconer. The documents creating the Retirement Plan were prepared and executed shortly thereafter.
The Retirement Plan is reflected in two documents, the Phillips Retirement Plan and the Phillips Retirement Trust. In those documents, Debtors are the participants, the sponsors, the administrators and the trustees of the Retirement Plan. Unlike the situations in numerous cases relied on by Debtors, there are no third parties who played any role in the implementation and operation of the Retirement Plan. Also, unlike the facts of those cases, no assets were used to fund the Retirement Plan other than assets of the Debtors, all of which presumably were subject to the claims of creditors (including the Mayers), subject only to proper exemptions available to Debtors.
On or about April 25, 1996, Debtors transferred the Residence5 and marketable investments to the Retirement Plan. According to Schedules C and D, the Residence has a value of $350,000 and is subject to a deed of trust in favor of Union Bank securing a debt of $39,226. Of the Debtors' equity, $75,000 is claimed as exempt as a homestead under California Code of Civil Procedure section 704.710, with the balance ($216,481) claimed as exempt as a private retirement plan under Code of Civil Procedure section 704.115. The other assets in the Retirement Plan, characterized as being in various mutual funds and related investments, have a value of $74,308 as of the petition date.
The Residence is not a revenue or income producing asset as it is occupied by Debtors, who maintain it as their primary residence. They do not pay any rent to themselves as trustees of the Retirement Plan although they do pay the mortgage payments on the Residence. Under the terms of the Retirement Plan, the assets therein are reachable upon Charles Phillips' 65th birthday, February 16, 1997.
According to Debtors, the purpose of the transfers of assets to the Retirement Plan was to have the assets there and available. In their mind, transfer of substantial assets to the Retirement Plan seemed the prudent thing to do. In fact, Mrs. Phillips expressly conceded that funds were put into the Retirement Plan "to protect them" as they were in jeopardy.
Debtors filed their voluntary Chapter 13 petition on August 7, 1996.
As things stand today the Retirement Plan contains all but approximately $25,000 of the Debtors' assets, the latter amount having been expressly withheld in anticipation of filing bankruptcy to deal with creditors in the Chapter 13 case. No additional contributions to the trust are likely6 and the Debtors project selling the Residence in the year 2003, investing the net proceeds and living on the income produced by the investments in the Retirement Plan, together with whatever is available to them as social security benefits.
The critical question for the court to decide is whether the Retirement Plan constitutes a "private retirement plan" as provided in subparagraph (1) of California Code of Civil Procedure section 704.115(a) ("Section 704.115"), which section curiously and unhelpfully defines "private retirement plan" as a "Private retirement plan". There apparently is no legislative history to help the court determine whether Debtors may create such a plan entirely on their own.
Subparagraph (b) of Section 704.115 provides that:
All amounts held . . . by a private retirement plan, for the payment of benefits as an annuity, pension, retirement allowance . . . from a private retirement plan are exempt. (Emphasis added.)
If the Retirement Plan is a "private retirement plan" under Section 704.115, the next question is whether the Retirement Plan was "designed and used" for Debtors' retirement purposes. Bloom v. Robinson (In re Bloom), 839 F.2d 1376 (9th Cir.1988); Daniel v. Security Pacific National Bank (In re Daniel), 771 F.2d 1352 (9th Cir.1985); Yaesu Electronics Corp. v. Tamura, 28 Cal.App.4th 8, 33 Cal.Rptr.2d 283 (1994). If both questions are answered in the affirmative, then all...
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