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

Citations: 167 F.3d 470; 1999 WL 27488Docket: Nos. 98-55029, 98-55086

Court: Court of Appeals for the Ninth Circuit; January 25, 1999; Federal Appellate Court

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Appellant Howard M. Ehrenberg, the Chapter 7 bankruptcy trustee for Debtors Max and Marlene Moses, appeals a Bankruptcy Appellate Panel (BAP) decision that excluded Debtor Moses’ Keogh Plan from the bankruptcy estate. The appellees, Southern California Permanente Medical Group and its Retirement Committee, cross-appeal the BAP's ruling that the Plan lacked an enforceable anti-alienation provision under federal law. The court holds that under 11 U.S.C. § 541(c)(2) and California state spendthrift law, the Plan is excluded from the estate. As the Plan is entirely excluded under state law, the court does not address SCPMG’s cross-appeal. The factual background reveals that Debtor Moses, a physician, participates in a profit-sharing Keogh Plan established as a spendthrift trust, which restricts access to benefits until certain conditions are met, prohibits loans and amendments by participants, and includes a federal anti-alienation provision. The bankruptcy court initially included the Plan in the estate, but after appeals, the BAP reversed this decision, validating the anti-alienation provision and determining the Plan's complete exclusion from the estate. Ehrenberg and SCPMG filed separate appeals regarding these rulings.

The standard of review for this case is de novo, focusing on the decisions of the Bankruptcy Appellate Panel (BAP) and the interpretation of California Code of Civil Procedure § 704.115. The act of filing a bankruptcy petition initiates proceedings that create an estate of the debtor's legal and equitable interests, as defined by 11 U.S.C. § 541(a). However, property subject to an enforceable anti-alienation provision in a spendthrift trust is excluded from the bankruptcy estate under 11 U.S.C. § 541(c)(2). California law recognizes the validity of spendthrift trusts, with the key factor being whether beneficiaries exert excessive control over the trust. Such excessive control can invalidate the trust's protections, as outlined in In re Witwer.

California law prohibits self-settled trusts, preventing individuals from shielding property from creditors while benefiting from it, as stated in Cal. Prob. Code § 15304(a). The BAP determined that the anti-alienation provision in the Keogh Plan effectively separated the Debtors from control over the trust corpus. Notably, SCPMG, not the Debtors, was the settlor, and the Debtors could not amend or terminate the Plan. Access to the Plan was restricted until retirement, aligning with precedent that supports trusts preventing access until specific conditions are met.

The BAP's conclusion that the Keogh Plan constituted a valid spendthrift trust was consistent with circuit case law, which upholds trusts that limit access until employment-related events occur. It appears that Ehrenberg has conceded the validity of the spendthrift trust in his Reply Brief, and the Trustee's argument against this classification was not substantiated.

Ehrenberg asserts that the Bankruptcy Appellate Panel (BAP) improperly allowed Debtors to fully exclude their Keogh Plan from the bankruptcy estate, arguing that California Code of Civil Procedure § 704.115 only permits a partial exclusion of such plans. Section 704.115 defines "private retirement plan" and stipulates that amounts are exempt only to the extent necessary for the support of the debtor and their family upon retirement, considering all available resources. Ehrenberg claims this section conflicts with state spendthrift law, suggesting that the legislature intended for self-employed retirement plans to be partially included in the estate. However, the court disagrees, stating that exemption issues arise only if the Keogh Plan is deemed part of the bankruptcy estate. Since the Plan qualifies as a spendthrift trust under 11 U.S.C. § 541(c)(2), it can be fully excluded from the estate, rendering § 704.115 inapplicable. The court concludes that it need not determine a partial exemption under § 704.115 and emphasizes that the exclusion of the plans from the estate must first be addressed by the bankruptcy court before considering exemptions. Additionally, the court finds no conflict between § 704.115 and California spendthrift law, rejecting Ehrenberg's interpretation as unsupported by the statute's text or legislative history.

The Supreme Court's ruling in Patterson v. Shumate is pivotal for the current case. In Patterson, the Court addressed whether an anti-alienation provision in an ERISA-qualified pension plan restricted transfer under "applicable nonbankruptcy law." The petitioner contended that this phrase, found in § 541(c)(2), referred only to state law, thus implying that federally qualified plans with such provisions would not be fully excluded from the bankruptcy estate. The Court rejected this interpretation, affirming that "applicable nonbankruptcy law" encompasses both federal and state law, supported by the statute's plain language and legislative history. Consequently, the ERISA plan was excluded from the bankruptcy estate under 11 U.S.C. § 541(c)(2). 

The petitioner further argued that this interpretation would render 11 U.S.C. § 522(d)(10)(E) superfluous, as it provides limited exemptions for pension plans necessary for the debtor's support. The Court dismissed this claim, clarifying that § 522(d)(10)(E) covers a broader range of interests than § 541(c)(2), including pension plans not governed by ERISA. Thus, both provisions address different categories and do not overlap.

In the current case, Ehrenberg similarly argues that allowing full exclusion of a Keogh pension plan from the bankruptcy estate makes § 704.115(e) of the California Code of Civil Procedure redundant. This section allows a debtor to exempt a Keogh plan only to the extent necessary for their support. However, Ehrenberg's argument is deemed untenable for the same reasons the Patterson petitioner’s argument was rejected, as both statutes serve distinct functions.

§ 704.115 provides a broader exemption from the bankruptcy estate than California's spendthrift law, applying to interests regardless of a valid anti-alienation provision in Keogh Plans. While § 541(c)(2) does not permit exclusion of these plans due to insufficient transfer restrictions, they can be partially exempted under § 704.115. Ehrenberg argues that this section reverses spendthrift law and limits a debtor's ability to exclude a trust from their estate, but this argument lacks legislative support and contradicts California's principle against implied repeals. The legislature's placement of § 704.115 within the "Exemptions" subchapter indicates an intent to create exemptions rather than exclusions for self-employed retirement plans. The statute remains applicable beyond bankruptcy, protecting the corpus of a trust from creditors to ensure the debtor's support. The court concludes that Ehrenberg's assertions are unsupported by case law or the statutory language, affirming the decision to fully exclude the Debtors’ Keogh Plan from the bankruptcy estate. The court emphasizes that state spendthrift law and § 704.115 can coexist without conflict. The merits of SCPMG’s cross-appeal are not addressed, and the ruling is consistent with prior circuit decisions regarding the treatment of trusts lacking valid anti-alienation provisions.