I first wrote about California’s private retirement plans about seven years ago in my article, The California Private Retirement Plan: Separating Fact From Fiction (12/28/2015). This article predicted the misuse of private pension plans as asset protection vehicles, and that the California courts would do a quick job on such misuse. In the case which will be summarized next, we will say that is played out in real life.
In 2017, the plaintiffs leased commercial property in Canoga Park, Calif., For five years from Dancool HVA Supply, and the latter’s president, Nick Sarkissian, signed a personal guarantee for the lease. But only three years after the start of the lease, on February 1, 2020, Dancool stopped paying on his lease and Sarkissian refused to honor his personal guarantee. Ultimately, the plaintiffs filed their lawsuit in March 2020 against Dancool and sought $ 112,085 in damages. The following April, the plaintiffs sued Sarkissian himself and sought a right of seizure order and a writ of seizure for the assets of Sarkissian in the amount of nearly $ 775,000.
Just months after this latest lawsuit was filed, in June 2020, Sarkissian enrolled in two California pension plans, the first being a private pension plan (here called PRP) and the second being a plan trust. pension plan (the PRPT) that was available through his company, Glendale Wholesale Electric Supply, Inc.
Then, and a few days later, on June 29, Sarkisian and his wife transferred the ownership of their second home, known as the Mountain View property, from their trust to a company called Lantem LLC, which Sarkisian owned. Sarkissian then transferred its stake in Lantem LLC to PRPT. Sarkisian also transferred other of his assets to the PRPT, including an unsigned promissory note that was secured by his first house, known as Heather Ridge. So, ultimately, the PRPT held the stake in Lantem LLC which held the Sarkissian property in Mountain View, a promissory note that encumbered the Sarkissian property in Heather Ridge and other assets that would have been available to the applicants to recover their money.
In September 2020, Sarkissian filed an opposition to the plaintiff’s foreclosure documents, claiming, among other things, that he had a homestead exemption in his Heather Ridge property and that his beneficial interest in the PRPT was exempt from collection. Nonetheless, on October 7 of the same year, the California Superior Court for the County of Los Angeles denied Sarkisian’s request for exemption for his PRPT interests, issued the seizure order and the writ requested by the plaintiffs, and also issued a temporary protection order (presumably freezing Sarkissian’s holdings from other transfers). Sarkissian then filed the appeal which resulted in the opinion that I will report below.
The California Court of Appeals first noted the California Constitution mandate that homestead and other debtor’s assets be exempt from collection by creditors. The court then moved on to the specific law that provides an exemption for private pension plans, namely California Code of Civil Procedure (CCP) Â§ 704.115 (b):
“(B) All sums held, controlled or in the process of being distributed by a private pension scheme, for the payment of benefits in the form of an annuity, pension, retirement allowance, disability or death benefit. ‘a private pension scheme are exempt. “
Although the court did not mention it, what constitutes a private pension plan is defined by Â§ 704.115 (a) (1), which unnecessarily states: Private pension plans, including, but not limited to , union pension plans. “
For the exemption to apply, at the time of withdrawal, the plan must be primarily designed and used for retirement purposes. To this end, California courts have often considered five factors in making this decision, as noted in the notice:
â(1) the subjective intention of the debtor in creating the private pension plan;
â(2) the timeline or timing of the creation of the plan relative to other events;
â(3) the degree of control the debtor has over the plan funds;
â(4) whether the debtor has violated or complied with Internal Revenue Service (IRS) rules or plan rules by contributing to the plan; and
â(5) if funds are withdrawn from the plan, whether they have been used for retirement or, instead, for other purposes. “
It is important to note that the onus is on the debtor to prove that the exemption applies.
The plaintiffs argued that the private pension plans were a sham and a bad faith attempt to protect assets otherwise not exempt from collection. Sarkissian replied that Glendale had developed two pension plans through Trust-CFO, which is an independent plan administrator, and that neither Sarkissian nor his wife had made withdrawals from the plan since they had it. funded. However, when Sarkissian presented copies of his plan documents, all signature lines were left blank.
Nonetheless, Sarkisian claimed that it was necessary to put almost all of his assets into the pension plan because he had significant health issues and if those assets were not protected from creditors, he would essentially be wiped out financially.
At this stage, the court found it necessary to observe that:
“The relevant legal question is whether the [particular retirement] plan was primarily or primarily designed and used for retirement purposes. An investigation into the original purpose of the funds is legally distinct from an investigation into the subject of a plan or account where the funds were subsequently invested; otherwise, funds that were originally placed in a plan or account for retirement would be forever exempt; however, the law (…) is contrary. ” [Emphasis in original.]
Here it was not at all difficult to infer that Sarkissian funded his pension plan because he wanted to protect his non-exempt assets from creditors; in fact, he basically admitted it. The timing of Sarkisian funding his pension plan was more than just suspect, as his 17-year-old company didn’t bother establishing pension plans until Sarkissian was indebted for his personal guarantees.
As for the control of the plans, Sarkissian, as co-owner and CFO of Glendale Whole Electric, could at any time terminate the plans if he had chosen to do so, and thus regain direct control of the assets of the plan. The court also dismissed Sarkissian’s argument that he had not removed any assets from the plan as not being a particularly decisive fact.
For example, the California Court of Appeals upheld the Superior Court ruling that Sarkisian was not entitled to the exemption for a private pension plan.
One cannot objectively describe the planning that has been done here other than as completely stupid. This planning should never have been done; Not only did it not work, it never even had a reasonable chance of working in the first place. What happened here was that someone came to the woefully wrong conclusion that as long as they followed all the rules for establishing and funding a private pension plan, the exemption s ‘would apply. But that ignored the fact that the surrounding circumstances painted a completely different and crystal-clear picture: Faced with the liability of his personal collateral, Sarkissian threw all of his non-exempt assets into a pension scheme in an attempt to claim the exemption. No court will uphold the exemption when that happens, and it was foolish to think otherwise.
Worse yet, the idea of ââpromissory note in the pension plan and trying to use it to protect Sarkisian’s primary residence at Heather Ridge. This makes absolutely no sense from a retirement planning perspective, but it made it even more obvious what was already evident: Sarkissian was blatantly abusing his retirement plan not only to try to protect his assets. he had invested there, but was also trying to abuse his pension plan to protect outside assets as well.
I’ve seen these promissory note arrangements before, and they just don’t make any sense. Worse yet, the plaintiff in this case can now take off the promissory note itself and use it to defeat the homestead exemption otherwise valid for that residence. That is to say that if we are going to try to use this tactic, it is better to absolutely ensure that the exemption from the pension plan will apply otherwise we will have worsened the debtor’s situation than if he had done nothing at all.
But even putting residences and other personal assets in pension plans makes no sense, for the reason that if the pension plan member wants to use those assets for retirement, then the member could just sell the asset. and use the money for retirement unrestricted by the plan. If a court sees a personal residence, primary or secondary residence or whatever, in a pension plan, that alone should be a red flag that the plan is being misused as an instrument of asset protection rather than a authentic pension plan. This is also true for placing company stocks and similar assets in the plan – it just doesn’t make sense no matter what you think.
This is not to say that the pension plan exemption is a very good and useful exemption, since it is used correctly, prudently and genuinely for retirement purposes. In the appropriate situation, a company will make regular contributions to the plan over a period of time, and the amounts accumulated in the plan will be exempt.
But it’s a very different situation than someone trying to throw a bunch of personal assets into a PRP. This makes absolutely no sense from a retirement perspective, as they might as well liquidate those assets outside of the plan and use the proceeds to fund their retirement. In other words, putting personal assets in a retirement plan accomplishes nothing except to try to turn those non-exempt assets into exempt assets within the plan â¸º but this is exactly what is prohibited under elaborate decision-making law. by the California Court of Appeals in many cases.
A final point about the fact that this opinion is not published, which means that it has no precedent value, but which also means that it does not resolve new questions of law. This means that the Court of Appeal considers that the law in this area is largely settled, which, after numerous opinions published on the exemption of private pension plans, is largely so. But, for some reason, planners continue to ignore the decision-making law regarding such plans and make planning that has absolutely no chance of working, like here. Courts have repeatedly shown that they would not allow the abuse of the private pension plan exemption, so planners must stop trying to abuse it as a vehicle for asset protection. that they just can’t be.
Gluck vs. Sarkissian, 2021 WL 5407188 (Cal.App., 2nd Distr., Unpublished, November 19, 2012).