Moses, In re

• Decision Date: 06 October 1998
• Docket Number: 98-55086,Nos. 98-55029,s. 98-55029
• Parties: , 22 Employee Benefits Cas. 2364, 99 Cal. Daily Op. Serv. 699, 99 Daily Journal D.A.R. 883, Pens. Plan Guide (CCH) P 23951M, 3 Cal. Bankr. Ct. Rep. 36 In Re: Max R. MOSES; Marlene E. Moses, Debtors. Howard Ehrenberg, Chapter 7 Trustee, Appellant, v. Southern California Permanente Medical Group, Appellee. In Re: Max R. Moses; Marlene E. Moses, Debtors. Southern California Permanente Medical Group, Appellant, v. Howard Ehrenberg, Chapter 7 Trustee, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 470

167 F.3d 470

33 Bankr.Ct.Dec. 1042, 22 Employee Benefits

Cas. 2364,

99 Cal. Daily Op. Serv. 699,

99 Daily Journal D.A.R. 883,

Pens. Plan Guide (CCH) P 23951M,

3 Cal. Bankr. Ct. Rep. 36

In Re: Max R. MOSES; Marlene E. Moses, Debtors.

Howard Ehrenberg, Chapter 7 Trustee, Appellant, v. Southern California Permanente Medical Group, Appellee.

In Re: Max R. Moses; Marlene E. Moses, Debtors.

Southern California Permanente Medical Group, Appellant, v. Howard Ehrenberg, Chapter 7 Trustee, Defendant-Appellant.

Nos. 98-55029, 98-55086.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 6, 1998-San Francisco, CA.

Decided Jan. 26, 1999

Edward M. Wolkowitz, Robinson, Diamant & Brill, Los Angeles, California, for the appellant-cross-appellee.

Victoria A. Graff, O'Melveny & Myers, Los Angeles, California, for the appellees-cross-appellants.

Before: SNEED, HALL, and RYMER, Circuit Judges.

SNEED, Circuit Judge:

Appellant Howard M. Ehrenberg ("Ehrenberg"), Chapter 7 bankruptcy trustee for Max Moses ("Debtor Moses") and Marlene Moses (collectively the "Debtors"), appeals from the decision of the Bankruptcy Appellate Panel ("BAP") which concluded that Debtor Moses' Keogh Plan ("Keogh Plan" or "Plan") was excluded from the bankruptcy estate.

Appellees and cross-appellants Southern California Permanente Medical Group and the Retirement Committee for the Southern California Permanente Medical Group Retirement Plan (collectively "SCPMG") cross-appeal from the decision of the BAP which concluded that Debtor Moses' Keogh Plan did not contain an enforceable anti-alienation provision under federal law.

We hold that, pursuant to 11 U.S.C. § 541(c)(2) and California state spendthrift law, the Plan is not property of the bankruptcy estate. Because the Plan is excluded in its entirety under California state spendthrift law, we need not reach the merits of SCPMG's cross-appeal. Accordingly, we affirm the decision of the BAP excluding the Keogh Plan from the bankruptcy estate.

I. FACTUAL AND PROCEDURAL BACKGROUND

Debtor Moses is a physician who elected to participate in a Keogh Plan offered by SCPMG to its partner physicians. The profit-sharing plan was established as a spendthrift trust and its benefits are payable only upon a participant's termination of employment, retirement, disability or death. More than 2,400 partner physicians participate in the Keogh Plan. A twelve-member committee administers the Plan; Debtor Moses is not a member of the committee, although he can vote in elections for one committee member.

Debtor Moses can participate in the Plan so long as he is a partner physician with SCPMG. He must, under the Plan's terms, contribute a percentage of his income-an amount predetermined by the terms of the Plan and the Internal Revenue Code ("I.R.C."). Debtor Moses cannot borrow funds from the Plan and cannot receive a distribution until one of the preconditions described above (i.e., termination of employment, retirement, disability or death) occurs. Debtor Moses cannot terminate or amend the Plan.

The Plan contains the following anti-alienation provision, as mandated by § 401(a)(13) of the I.R.C.:

11.4 Alienation.

(a) None of the benefits, payments, proceeds or claims of any Participant or Beneficiary shall be subject to any creditors and, in particular, the same shall not be subject to attachment or garnishment or other legal process by any creditor, nor shall any such Participant or Beneficiary have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments or proceeds which such Participation or Beneficiary may except to receive, contingently or otherwise, under this Plan.

Debtors filed for bankruptcy on February 21, 1997. A hearing was held before the bankruptcy court to determine how to distribute the Debtors' estate. The bankruptcy court held that the disposition of the Keogh Plan was governed by California Code of Civil Procedure § 704.115(e), and concluded that the Plan should be included in full with the bankruptcy estate. SCPMG filed a motion for reconsideration on August 22, 1996, and on August 23, 1996, filed a notice of appeal from the bankruptcy court's order. On September 9, 1996, the bankruptcy court denied SCPMG's motion for reconsideration.

The BAP heard SCPMG's appeal on June 18, 1997, and filed its Order on November 14, 1997, reversing the decision of the bankruptcy court. The BAP concluded that (1) the Keogh Plan was excluded in full from the Debtors' estate because section 11.4 of the Plan was a valid anti-alienation provision in an enforceable spendthrift trust and (2) § 401(a)(13) of the I.R.C. did not have an enforcement provision as required by § 504(c)(2) of the Bankruptcy Code, and therefore could not be relied upon to exclude the Keogh Plan from the Debtors' estate.

On December 5, 1997, Ehrenberg, the trustee for the estate, appealed from the decision of the BAP regarding the trust's exclusion in full from the estate. On December 18, 1997, SCPMG cross-appealed from the decision of the BAP regarding the panel's interpretation of § 401(a)(13) of the I.R.C.

II. STANDARD OF REVIEW

This case involves a review of the decision of the BAP and construction of California Code of Civil Procedure § 704.115. The Court reviews each de novo. See In re MacIntyre, 74 F.3d 186, 186 (9th Cir.1996) (questions of California statutory construction); In re Johnston, 21 F.3d 323, 326 (9th Cir.1994) (review of BAP decisions).

III. DISCUSSION

A. California Spendthrift Trust Law.

The act of filing a petition under the Bankruptcy Code commences bankruptcy proceedings and creates an estate comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a) (1988). The Code, however, excludes from the estate property that contains a "restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law." 11 U.S.C. § 541(c)(2). Under Bankruptcy Code § 541(c)(2), an anti-alienation provision in a valid spendthrift trust created under state law is an enforceable "restriction on the transfer of a beneficial interest of the debtor" and thus serves to exclude the trust corpus from the bankruptcy estate. See Patterson v. Shumate, 504 U.S. 753, 757-58, 112 S.Ct. 2242, 2246, 119 L.Ed.2d 519 (1992).

California law recognizes the validity of spendthrift trusts. See In re Neuton, 922 F.2d 1379 (9th Cir.1990) (citing Cal. Prob.Code §§ 15300 et seq. (West 1987)). The critical inquiry in determining whether a spendthrift trust is valid under California law is whether the trust's beneficiaries exercise excessive control over the trust. See In re Witwer, 148 B.R. 930, 937 (Bankr.C.D.Cal.1992). California law does not allow a participant with excessive control over his or her trust to shield that trust with an anti-alienation provision lacking true substance. See id.

In addition, under California law, a settlor of a spendthrift trust cannot also act as beneficiary of that trust (i.e., California law prohibits "self-settled" trusts). See Cal. Prob.Code § 15304(a) (West 1987). California law voids self-settled trusts to prevent individuals from placing their property beyond the reach of their creditors while at the same time still reaping the bounties of such property. See Nelson v. California Trust Co., 33 Cal.2d 501, 202 P.2d 1021, 1021 (Cal.1949).

In this case, the BAP properly concluded that the anti-alienation provision in the Keogh Plan sufficiently divorced the Debtors from control over the trust corpus. First, the trust was not self-settled because SCPMG, not the Debtors, was the settlor of the trust. See id. Second, SCPMG created and administered the Plan. Third, Debtors did not have the ability to terminate or amend the Plan. Once Debtor Moses decided to join the plan, that decision was irrevocable. Finally, Debtors did not have access to the Plan until Debtor Moses' retirement. The decision of the BAP in this case is entirely consistent with case law from this circuit. Instruments that preclude debtors from accessing a trust's corpus until termination of employment, retirement, death or disability have been upheld as valid spendthrift trusts, see In re Kincaid, 917 F.2d 1162, 1168 (9th Cir.1990), whereas instruments that allow debtors unfettered access to a trust's funds have not, see Witwer, 148 B.R. at 938.

The record supports the BAP's conclusion that the Keogh Plan was a valid spendthrift trust with an enforceable anti-alienation provision because Debtors did not exercise excessive control over the trust's corpus. In fact, it appears that Ehrenberg concedes this issue in his Reply Brief: "Appellees have suggested that the Trustee has ... abandoned his argument [sic] below that the Plan

                is not a valid spendthrift trust....  This was never the Trustee's argument."   Appellant's Reply Brief at p. 3 (internal quotation marks omitted)
                

B. California Code of Civil Procedure § 704.115.

Ehrenberg also contends that the BAP should not have allowed Debtors to exclude the Keogh Plan in full from the bankruptcy estate. Ehrenberg argues that the BAP failed to consider California Code of Civil Procedure § 704.115 which, he argues, only allows Debtors to exclude a portion of the trust corpus from the bankruptcy estate. Section 704.115, in pertinent part, reads as follows:

(a) As used in this section, "private retirement plan" means:

....

(3) Self-employed retirement plans and individual retirement annuities or accounts provided for in the Internal Revenue Code of 1954 as amended, to the extent the amounts held in the plans, annuities, or accounts do not exceed the maximum amounts exempt from federal income taxation under that code....

(e) Notwithstanding subdivision (b) and (d) ... the amounts described in paragraph (3) of subdivision (a) are exempt only to the extent necessary to provide for the support of the judgment debtor...