I first wrote about California private retirement plans about seven years ago in my article, The California Private Retirement Plan: Separating Fact From Fiction (12/28/2015). This article foresaw the misuse of private pension plans as vehicles for asset protection, and that California courts would quickly make the work of such misuse. In the case that will be summarized next, we will say that take place in real life.
In 2017, the plaintiffs leased a commercial property in Canoga Park, California, for five years from Dancool HVA Supply, and Dancool HVA Supply’s president, Nick Sarkissian, signed a personal guarantee for the lease. But just three years into the lease, on February 1, 2020, Dancool stopped paying its 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 month, in April, the plaintiffs sued Sarkissian himself and sought a garnishment order and writ of garnishment for Sarkissian’s assets amounting to 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 scheme (the PRPT) which was available through his company, Glendale Wholesale Electric Supply, Inc.
Then, and a few days later, on June 29, Sarkissian 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 Sarkissian. Then Sarkissian transferred his stake in Lantem LLC to the PRPT. Sarkissian also transferred other of his assets into the PRPT, including an unsigned promissory note that was secured by his first home, known as Heather Ridge. Thus, at the end of the day, the PRPT held the stake in Lantem LLC which held Sarkissian’s Mountain View property, a promissory note which encumbered Sarkissian’s Heather Ridge property and other assets that would have been available to the plaintiffs to recover.
In September 2020, Sarkissian filed an objection 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 PTRP was exempt from collection. Nevertheless, on October 7 of that year, the California Superior Court of Los Angeles County denied Sarkissian’s request for exemption for his PRPT interests, issued the seizure order and subpoena requested by the plaintiffs. , and also issued a temporary protective order (presumably blocking Sarkissian’s assets from further transfers). Sarkissian then filed the appeal which resulted in the opinion which I will report next.
The California Court of Appeals first noted the mandate of the California constitution that the debtor’s homestead and other assets be exempt from collection by creditors. The court then turned to the specific law that provides an exemption for private pension plans, namely California Code of Civil Procedure (CCP) § 704.115(b):
“(b) All amounts 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 benefit or death from a private pension plan are exempt.”
Although the court did not mention it, what constitutes a private pension plan is defined by § 704.115(a)(1), which unnecessarily states: “(a) As used in this section, “plan private pension plans” means: (1) 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 designed and used primarily for retirement purposes. To that end, California courts have often considered five factors in making this decision, as noted in the notice:
“1° the subjective intention of the debtor to create the private pension plan;
“(2) the timeline or timing of the creation of the plan relative to other events;
“(3) the degree of control the debtor maintains over the plan funds;
“(4) if the debtor has violated or complied with the rules of the Internal Revenue Service (IRS) or the rules of the plan by contributing to the plan; and
“5° if funds are withdrawn from the plan, whether they were used for retirement or rather for other purposes.
It is important to note that the debtor bears the burden of proving 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 any 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, Sarkissian claimed that it was necessary to put almost all of his assets into the retirement plan because he had significant health issues, and that if those assets were not protected from creditors, he would essentially be financially wiped out.
At this point, the court found it necessary to observe that:
“the relevant legal question is whether the [particular retirement] plan was primarily or principally designed and used for retirement purposes. An investigation into the original purpose of the funds is legally separate from an investigation into the subject matter of a plan or account where the funds were subsequently placed; otherwise, funds originally placed in a plan or account for retirement purposes would forever be exempt; however, the law … is to the contrary.” [Emphasis in original.]
Here, it was not at all difficult to infer that Sarkissian funded his retirement plan because he wanted to protect his non-exempt assets from creditors; indeed, he had essentially admitted it. The timing of Sarkissian funding his retirement plan was more than suspicious, since his 17-year-old company didn’t bother to establish retirement plans until Sarkissian was held accountable for his personal guarantees.
Regarding control of the plans, Sarkissian, as co-owner and chief financial officer of Glendale Whole Electric, could terminate the plans at any time if he chose to do so, and thus regain direct control of the plan’s assets. . The court also dismissed Sarkissian’s argument that he took no assets out of the plan as not being a singularly material fact.
Thus, the California Court of Appeals upheld the Superior Court’s decision that Sarkissian was not entitled to the exemption for a private pension plan.
The planning that has been done here cannot be objectively described as anything other than 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 is that someone came to the terribly wrong conclusion that as long as they followed all the rules for setting up and funding a private pension plan, the exemption would apply. But this ignored that the surrounding circumstances painted a completely different and crystal clear picture: Faced with the liability of his personal guarantee, Sarkissian threw all his non-exempt assets into a retirement plan in an attempt to claim the exemption. No court will uphold the exemption when this happens, and it was foolish to think otherwise.
Worse still was the idea of putting a promissory note in the retirement plan and trying to use it to protect Heather Ridge’s primary residence from Sarkissian. This makes no sense from a retirement planning perspective, but it made even more obvious what was already obvious: Sarkissian was blatantly abusing his retirement plan not only to try to protect the assets he 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 make absolutely no sense. Worse still, the plaintiff in this case can now take the promissory note itself and use it to circumvent the otherwise good homestead exemption for this residence. That is to say that if we are going to try to use this tactic, it is better to make absolutely sure that the exemption from the pension plan will apply, otherwise we will have made the debtor’s situation even worse than s he had done nothing at all.
But even putting residences and other personal assets into retirement plans makes no sense, because if the retirement plan participant wants to use those assets for retirement, they can simply sell the asset and use the money. for his unrestricted retirement by the plan. . If a court sees a personal residence, primary or secondary residence, or whatever, in a retirement plan, that alone should be a red flag that the plan is being misused as a vehicle of protection. assets, as opposed to a authentic pension plan. This is also true for placing corporate shares and similar assets in the plan ⸺ it just doesn’t make sense no matter how you think about it.
This is not to say that the pension exemption is a very good and useful exemption, since it is used correctly, prudently and really for the purpose of retirement. In the appropriate situation, a company will make regular contributions to the plan for a period of time, and the monies that accumulate in the plan will be exempt.
But that’s a very different situation than someone trying to throw a bunch of personal assets into a PRP. This makes no sense from a retirement perspective, as they could just as easily liquidate those assets outside the plan and use the proceeds to fund their retirement. In other words, putting personal assets into a retirement plan accomplishes nothing except trying to turn those non-exempt assets into exempt assets within the plan ⸺ but that is exactly what is prohibited under the decision-making law crafted by the California Court of Appeals in many cases.
A final point on 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 any new questions of law. This means that the Court of Appeal considers the law in this area to be largely established, which, after numerous published opinions on the exemption of private pension plans, largely is. But, for some reason, the planners continue to ignore the ruling law regarding such plans and do planning that has absolutely no chance of working, like here. The courts have demonstrated time and time again that they will not allow the private pension plan exemption to be abused, and so planners must stop trying to abuse it as a vehicle for asset protection, which they just can’t be.
Gluck v. Sarkissian, 2021 WL 5407188 (Cal.App., 2nd Distr., Unpublished, November 19, 2012).