I first wrote about California private retirement plans some 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 the California courts would make quick work of such misuse. In the case that shall next be summarized, we will say that play out in real life.
In 2017, the plaintiffs leased commercial property in Canoga Park, California, on a five-year term to Dancool HVA Supply, and the latter’s President, Nick Sarkissian, executed a personal guarantee for the lease. But only three years into the lease, on February 1, 2020, Dancool stopped paying on its lease and Sarkissian refused to honor his personal guarantee. Ultimately, plaintiffs filed their lawsuit in March, 2020, against Dancool and sought $112,085 in damages. The following month, April, the plaintiffs sued Sarkissian himself and sought a right-to-attach order and a writ of attachment for Sarkissian’s assets in the amount of almost $775,000.
Just a couple of months after this latter lawsuit was filed, in June of 2020, Sarkissian enrolled in two California retirement plans, the first being a private retirement plan (here referred to as the PRP) and the second being a private retirement plan trust (the PRPT) which was available through his corporation, Glendale Wholesale Electric Supply, Inc.
Next, and just a few days later on June 29, Sarkissian and his wife transferred the ownership of their second home, known as the Mountain View property, from their living trust to a company called Lantem LLC, which Sarkissian owned. Next, Sarkissian transferred his interest in Lantem LLC to the PRPT. Sarkissian also transferred into the PRPT other of his assets, including an unsigned promissory note which was secured by his first home, known as Heather Ridge. Thus, at the end of the day, the PRPT held the interest 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 collect against.
In September of 2020, Sarkissian filed an opposition to the plaintiff’s attachment papers, 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 that year, the California Superior Court for Los Angeles County denied Sarkissian’s claim of exemption for his PRPT interests, issued the attachment order and writ sought by the plaintiffs, and also issued a temporary protective order (presumably freezing Sarkissian’s assets from further transfers). Sarkissian then filed the appeal which resulted in the opinion that I shall next relate.
The California Court of Appeals first noted the mandate of the California constitution that homestead and other property of the debtor be made exempt from creditor collection. The court then moved to the specific statute that provides for an exemption to private retirement plans, being California Code of Civil Procedure (CCP) § 704.115(b):
“(b) All amounts held, controlled, or in process of distribution by a private retirement plan, for the payment of benefits as an annuity, pension, retirement allowance, disability payment, or death benefit from a private retirement plan are exempt.”
Although the court did not mention it, what constitutes a private retirement plan is defined by § 704.115(a)(1), which unhelpfully 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, at the time of the levy the plan must be primarily designed and used for retirement purposes. To this end, the California courts have often looked at five factors to make this determination, as listed in the opinion:
“(1) the debtor’s subjective intent in creating the private retirement plan;
“(2) the chronology or timing of the plan’s creation relative to other events;
“(3) the degree of control the debtor maintains over the funds in the plan;
“(4) whether the debtor violated or complied with Internal Revenue Service (IRS) rules or the plan’s rules in contributing to the plan; and
“(5) if funds are withdrawn from the plan, whether they were used for retirement or, instead, some other purpose.”
Importantly, it is the debtor who carries the burden of proving that the exemption applies.
The plaintiffs argued that the private retirement plans was simply a sham and a bad faith attempt to shield otherwise non-exempt assets from collection. Sarkissian responded that Glendale developed two retirement plans through Trust-CFO, which is an independent plan administrator, and that neither Sarkissian or his wife had made any withdrawals from the plan since they funded it. However, when Sarkissian presented copies of his plan documents, all the signature lines were left blank.
Nonetheless, Sarkissian claimed that it was necessary to put nearly all his assets into the retirement plan because he had significant health concerns, and that if these assets were not protected from creditors then he would essentially be wiped out financially.
At this point, the court found it necessary to observe that:
“the pertinent legal question is whether the [particular retirement] plan was principally or primarily designed and used for retirement purposes. An inquiry into the initial purpose of the funds is legally distinct from an inquiry into the purpose of a plan or account where the funds were subsequently placed; otherwise funds that were initially placed in a plan or account for retirement purposes would be forever 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 as much. The timing of Sarkissian’s funding of his retirement plan was more than just merely suspicious, since his 17-year old company didn’t bother to establish retirement plans until Sarkissian faced liability on his personal guarantees.
As for control over the plans, Sarkissian as the part owner and CFO of Glendale Whole Electric could at any time terminate the plans had he chosen to do so, and thus regain direct control of the plan assets within. The court also discounted Sarkissian’s argument that he had not taken any assets out of the plan as not being a singularly-dispositive fact.
Thus, the California Court of Appeals upheld that the Superior Court’s determination that Sarkissian was not entitled to the exemption for a private retirement plan.
One cannot objectively describe the planning that was done here as other than being completely stupid. This planning should never have been done; it not only failed to work, but it never even had a reasonable chance of working in the first place. What happened here is that somebody came to the terribly mistaken conclusion that so long as they followed all the rules for setting up and funding a private retirement plan then the exemption would apply. But this ignored that the surrounding circumstances painted a completely different and crystal-clear picture: When faced with liability on his personal guarantee, Sarkissian dumped all his non-exempt assets into a retirement plan to try to claim the exemption. No court is going to sustain the exemption when that happens, and it was dumb to think otherwise.
Even worse was the idea of putting a promissory note into the retirement plan and trying to use that to protect Sarkissian’s Heather Ridge primary residence. That makes utterly no sense from the view point of retirement planning, but it made even more obvious that which already obvious: Sarkissian was blatantly misusing his retirement plan to not only try to protect the assets that he had place into it, but was also trying to misuse his retirement plan to protect outside assets as well.
I’ve seen these promissory note arrangements before, and they make utterly no sense. Worse, the plaintiff in this case can now levy on the promissory note itself and use that to defeat the otherwise good homestead exemption for that residence. Which is to say that if one is going to try to use that tactic, they had better make absolutely sure that the retirement plan exemption is going to apply or else they will have made the debtor’s situation even worse than if they had done nothing at all.
But even putting residences and other personal assets into retirement plans makes no sense, for the reason that if the retirement plan participant wants to use those assets for retirement, then the participant could simply sell the asset and use the money for retirement unrestricted by the plan. If a court sees a personal residence, primary or second home or whatever, in a retirement plan that alone should be a bright red flag that the plan is being misused as an asset protection vehicle as opposed to a bona fide retirement plan. This is true for placing corporate stock and similar assets into the plan as well ⸺ it just makes no sense no matter how one thinks of it.
This is not to say that the retirement plan exemption is a very good and useful exemption, since it is when used correctly, conservatively, and actually for the purpose of retirement. In the appropriate situation, a business will make regular contributions to the plan over a period of time, and the moneys that build up in the plan will be exempt.
But that is a very different situation than where somebody attempts to throw a bunch of personal assets into a PRP. That makes utterly no sense from a retirement perspective since they could just as easily liquidate those assets outside the plan and use the proceeds to fund their retirement. Otherwise stated, putting personal assets into a retirement plan accomplishes nothing except to try to make those non-exempt assets into exempt assets within the plan ⸺ but that is exactly what is prohibited under the decisional law developed by the California Court of Appeals in numerous cases.
A final point about this opinion being unpublished, which means that it has no precedential value, but which also means that it is not resolving any new issues of law. This means that the Court of Appeals considers the law in this area to be largely settled, which, after numerous published opinions about the private retirement plan exemption, largely it is. But, for whatever reason, planners continue to ignore the decisional law regarding such plans and do planning that has utterly no chance of working, as here. The courts have repeatedly demonstrated that they are not going to allow the private retirement plan exemption to be abused, and so planners need to quit trying to abuse them as an asset protection vehicle, which they simply cannot be.
Gluck v. Sarkissian, 2021 WL 5407188 (Cal.App., 2nd Distr., Unpublished, Nov. 19, 2012).