>The US Court of Appeals in San Francisco found California law exempts pension plan assets from attachment by a debtor’s creditors. However, the Ninth Circuit stressed that a pension plan is ERISA-qualified only if it continues to provide retirement income to employees at the time of the bankruptcy filing, according to a report by the Commerce Clearing House.
A profit sharing plan was created in April 1992 that contained the establishing individual and one of his employees as the only beneficiaries, an employee who later became his wife. In October of 1992, IRA proceeds in the amount of $1.4 million was transferred from the individual’s IRA to the profit-sharing plan.
>In September of that year, the same individual was awarded a $4.5 million arbitration judgment stemming from a business dispute in 1991. The company that had secured the arbitration judgment against the individual later filed a fraudulent conveyance action in state court in July 1993, charging that the transfer of funds from the IRA to the profit-sharing plan was an effort to shield assets from creditors.
>Then in August of 1996, while the fraudulent conveyance action was pending, the individual filed for Chapter 7 bankruptcy.
>With this action, the creditors took the fraudulent conveyance action to bankruptcy court. However, the bankruptcy judge ruled the profit-sharing plan was an ERISA-qualified plan, the assets of which were exempt from the bankruptcy estate.
>Later, a federal trial court held the plan in
question was not an ERISA-qualified plan and the plan was
not excludable from the bankruptcy estate under state law.
However, the trial court agreed with the bankruptcy court
that the transfer of the debtor’s IRA assets to the profit
sharing plan was not a fraudulent conveyance and, thus, the
plan’s assets could not, under California law, be
distributed to the debtor’s creditors. The bankruptcy
trustee and the debtor appealed.
The Ninth Circuit court rejected the trustee’s argument, explaining “purposeful conversion of nonexempt assets to exempt assets on the eve of bankruptcy is not fraudulent per se.”