I first wrote about California private retirement plans seven years ago in my article, The California Private Retirement Plan: Separating Fact from Fiction (12/28/2015). That article predicted the misuse of private retirement plans as asset protection vehicles, and that California courts would make quick work of such abuse. In the case that will be summarized further, we would say play in real life.
In 2017, plaintiffs leased commercial property in Canoga Park, California for a period of five years to Dancool HVA Supply, and subsequent President Nick Sarkeesian executed a personal guarantee for the lease. But only three years into the lease, on February 1, 2020, Dancool stopped making payments on its lease and Sarkeesian refused to honor his personal guarantee. Ultimately, plaintiffs filed their suit against Dancool in March 2020, seeking $112,085 in damages. The following month, in April, plaintiffs sued Sarkeesian himself and sought a right-to-attach order and writ of attachment for Sarkeesian’s assets in the amount of approximately $775,000.
In June of 2020, just a few months after this latter lawsuit was filed, Sarkeesian enrolled in two California retirement plans, a private retirement plan (herein referred to as PRP) and a private retirement plan trust ( PRPT) which is owned by his corporation, Glendale Wholesale Electric Supply, Inc. was available through
Subsequently, and just a few days later, on June 29, Sarkeesian and his wife transferred ownership of their second home, known as the Mountain View property, from their living trust to a company called Lantem LLC, owned by Sarkeesian was. Subsequently, Sarkeesian transferred his interest in Lantum LLC to PRPT. Sarkeesian also transferred his other assets to the PRPT, including an unsigned promissory note secured by his first home, known as Heather Ridge. Thus, at the end of the day, PRPT held an interest in Lantem LLC, which had Sarkeesian’s Mountain View assets, a promissory note that would have made Sarkeesian’s Heather Ridge assets, and other assets available to collect against the plaintiffs.
In September of 2020, Sarkeesian filed a protest against the plaintiffs’ attachment papers, claiming, among other things, that she had princely exemptions in her Heather Ridge property and that her beneficial interest in the PRPT was exempt from collection. Nevertheless, on October 7 of that year, the California Superior Court of Los Angeles County denied Sarkeesian’s claim of exemption for his PRPT interests, issued the annexation orders and writs sought by the plaintiffs, and also issued a temporary protective order. done (possibly freezing Sarkeesian’s assets from further transfers). Sarkeesian then filed an appeal which resulted in the opinion that I belong next time.
The California Court of Appeals first took note of the California Constitution’s mandate that the debtor’s homestead and other assets be exempt from creditor collection. The court then moved to the specific statute that provides exemptions for private retirement plans, California Code of Civil Procedure (CCP) 704.115(b):
“(b) all amounts controlled, in the process of distribution by a private retirement plan, or in the process of distribution for the payment of benefits in the form of an annuity, pension, retirement allowance, disability payment, or death benefit from a private retirement plan There’s a discount.”
Although the court did not refer to it, what constitutes a private retirement plan is defined by 704.115(a)(1), which inappropriately states: “(a) as used in this section, ‘private retirement’ “Plan” means: (1) Private Retirement Plans, including but not limited to Union Retirement Plans.
For the exemption to apply, the plan must be primarily designed and used for retirement purposes at the time of levy. To this end, California courts often consider five factors to make this determination, as listed in the opinion:
“(1) the debtor’s subjective intent in making a personal retirement plan;
“(2) the chronology or timing of the formulation of the plan relative to other events;
“(3) the degree of control of the debtor over the funds in the scheme;
“(4) Whether the debtor has contributed to the plan in violation of Internal Revenue Service (IRS) rules or rules of the plan or compliance with the plan; and
“(5) If funds are withdrawn from the Scheme, whether they are used for retirement or, instead, for any other purpose.”
Importantly, it is the debtor who bears the burden of proving that the exemption applies.
The plaintiffs argued that private retirement plans were merely a sham and a bad faith practice of saving otherwise non-exempt assets from collection. Sarkeesian responded that Glendale developed two retirement plans through the trust—the CFO, who is an independent plan administrator, and that neither Sarkeesian or his wife had made any withdrawals from the plan because they funded it. However, when Sarkeesian submitted copies of his plan documents, all the signature lines were left blank.
Still, Sarkeesian claimed that it was necessary to put nearly all of his assets into a retirement plan because he had significant health concerns, and would inevitably be financially wiped out if these assets were not secured from creditors. .
At this point, the Court found it necessary to observe that:
“The relevant legal question is whether NS [particular retirement] Plan Designed and used primarily or primarily for retirement purposes. an investigation of the initial purpose of Fund a. the purpose of the investigation is legally different from plan or account where the money was later kept; otherwise the fund which was initially held in any scheme or account for the purposes of retirement shall be exempted forever; However, the law … is to the contrary.” [Emphasis in original.]
Here, it was not at all difficult to guess that Sarkeesian funded his retirement plan because he wanted to protect his non-exempt assets from creditors; In fact, he had admitted essentially as much. The timing of Sarkeesian’s funding for his retirement plan was more than just questionable, as his 17-year-old company didn’t bother to set up retirement plans until Sarkeesian faced an obligation on his personal guarantee.
For control of the plans, Sarkeesian, as part owner and CFO of Glendale Hole Electric, could terminate the plans at any time, and thus gain direct control of the plan’s assets. The court also rejected Sarkeesian’s argument that he had not taken any assets from the scheme as it was not a singular fact.
Thus, the California Court of Appeals upheld the Superior Court’s decision that Sarkeesian was not entitled to an exemption for a private retirement plan.
No one can objectively describe what was planned here except as utter folly. This should never have been planned; Not only did it fail to work, but it also didn’t get a fair chance to work in the first place. What happened here is that someone very wrongly concluded that as long as they followed all the rules for setting up and funding a private retirement plan, the exemption would apply. But it overlooked that the surrounding circumstances painted an entirely different and crystal-clear picture: When faced with an obligation on his personal guarantee, Sarkeesian tried to claim exemption from his personal guarantee. Put all non-exempt assets into a retirement plan. No court is going to uphold the exemption if that happens, and it was foolish to think otherwise.
Even worse was the idea of trying to put a promissory note in the retirement plan and use it to protect Sarkeesian’s Heather Ridge primary residence. That doesn’t make sense from a retirement planning standpoint, but it adds to what’s already clear: Sarkeesian was openly abusing his retirement plan, not just trying to protect that wealth. was what he had put in it, but also trying to abuse his retirement plan to protect external assets.
I’ve seen these promissory arrangements before, and they don’t make any sense. Worse, in this case the plaintiff can now tax the promissory note itself and use it to defeat an otherwise good homestead exemption for that residence. That is to say, if someone was going to try to use that strategy, they made absolutely sure that the retirement plan exemption was going to apply or else they made the debtor’s situation worse. What if he hadn’t done anything.
But even putting housing and other personal assets into retirement plans doesn’t make sense, for the reason that if the retirement plan participant wants to use those assets for retirement, the participant can simply sell the assets. and can access the funds for retirement unrestricted by the plan. , If a court looks into a retirement plan as an individual residence, primary or second home or whatever, that should only be a bright red flag that the plan is being misused as an asset protection vehicle, as opposed to one. Is authentic retirement plan. The same holds true for holding corporate stock and similar assets in the plan – no matter how one thinks about it.
This is not to say that the retirement plan exemption is a very good and useful exemption, as it is used correctly, conservatively and actually for retirement purpose. In the appropriate case, a business will make regular contributions to the plan over a period of time, and the money that builds into the plan will be exempt.
But it is a very different situation where someone tries to throw a bunch of personal assets into the PRP. It doesn’t make sense from a retirement point of view as they can easily liquidate those assets outside the plan and…