Childs v. Gladstone

• Court: District Court, S.D. California
• Decided: September 30, 2019
• Docket: 3:17-cv-00408
• Status: Unknown

Opinion

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7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 Case No.: 17cv408-JAH (BLM) MATTHEW J. CHILDS, Bankruptcy No. 15-05416-LA7 12 Appellant, 13 ORDER VACATING THE v. BANKRUPTCY COURT’S RULING 14 AND REMANDING FOR FURTHER LESLIE T. GLADSTONE, Chapter 7 15 PROCEEDINGS Trustee, 16 Appellee. 17 18 INTRODUCTION 19 Appellant Matthew Childs (“Claimant” or “Appellant”) appeals the Feb 13, 2017 20 order of the United States Bankruptcy Court sustaining the United States’ Trustee, Leslie 21 T. Gladstone’s (“the Trustee”) objection to Child’s claim for exemption in a purported 22 retirement account. The order was issued after an evidentiary hearing in which the 23 Bankruptcy Court ruled because Claimant did not provide information, pursuant to 11 24 U.S.C. §521(4), he failed to carry his burden of proof to show that the funds in the SWS 25 Group /ML Stearn & Co. Deferred Compensation (“SWS Deferred Comp” or “Southwest 26 Sterns”) account qualified for exemption under California Code of Civil Procedure 27 §703.140(b)(10)(E). For the reasons set forth below, the Court VACATES the order of 28 1 the Bankruptcy court as to the SWS Deferred Comp account and REMANDS for further 2 proceedings consistent with this order. 3 BACKGROUND 4 Childs filed a Chapter 7 bankruptcy petition on August 18, 2015 listing two pension 5 or profit-sharing plans: A Morgan Stanley 401k Plan (“401k” ) in the amount of 6 $57,922.00 and a Morgan Stanley IRA Rollover account (“IRA”) in the amount of 7 $50,337.00. Bnkr. Doc. No. 24 at 1-3; Doc. No. 11-2 at 42-441. Childs amended the 8 petition in September 2015, January 2016 and May 2016. The January 2016 amendment 9 redesignated the IRA as exempt property. Bnkr. Doc. No. 24 at 3; Doc. No. 11-2 at 44. 10 The May amendment added an insurance policy and two additional profit-sharing plans to 11 Schedule B (“Personal Property”): (1) The National Securities Rollover account in the 12 amount of $61,604.00 and (2) the SWS Deferred Comp account listing a balance of 13 $35,400.00. Bnkr. Doc. No. 29 at 4; Doc. No. 5-1 at 4. Both profit-sharing plans were also 14 added to Schedule C (“Property Claimed as Exempt”). Id at 7. The SWS Deferred Comp 15 account is the subject of this appeal. 16 The United States Trustee filed an objection to the exemptions claimed on the basis 17 that the funds in the IRA account were misused, no statements for the period of April 1, 18 2015 to August 18, 2015 were provided for the SWS Deferred Comp plan, and further 19 investigation was required. Bnkr. Doc. No. 41-1 at 1-5; Doc. No. 5-1 at 11-15. Childs filed 20 an opposition along with a Declaration Opposing Trustee’s Objection to Exemption. Bnkr. 21 Doc. Nos. 43, 45; Doc. No. 5-1 at 32-38. Attached to the declaration as an exhibit was a 22 screenshot of the SWS Deferred Comp Plan reflecting a 100% vested retirement account 23 balance of $35,465.03 as of January 28, 2016. Bnkr. Doc. No. 45 at 5; Doc. No. 5-1 at 41. 24 The screenshot included multiple tabs. Id. The SWS Deferred Comp plan appeared under 25 the highlighted tab “My Plans.” Id. The user then selected the tab entitled “Balance.” Id. 26

27 28 1 The bankruptcy court’s docket and this Court’s docket are cited contemporaneously as “Bankr. Doc. 1 Additional options included: Performance, Investments, Transactions, Future Elections, 2 Deferrals, Distributions, and More. Id. 3 At the initial hearing on the objection, the Bankruptcy court ordered Claimant to 4 provide full information for each account claimed. Bnkr. Doc. No. 48 at 1; Doc. No. 14-1 5 at 54. In addition, the Trustee requested statements for all retirement accounts for the two- 6 year period preceding the filing of the 2015 Chapter 7 petition. In relation to the SWS 7 account, Claimant emailed Trustee and attached to a declaration seven quarterly account 8 statements for the periods of July 2013 through March 31, 2015. Bnkr. Doc. No. 50 at 95- 9 109; Doc. No. 5-1 at 156-170. Within each quarterly statement is a section labeled 10 “Account Summary,” which separates funds in the “2009 In-Service Account ” from the 11 funds in the “2004 Deferred Compensation Plan Retirement Account.” Id. Within the 12 summary section are columns labeled: Event, Distribution Start Date, Payment Method 13 (lump sum or 10 annual), Beginning Balance, and Ending Balance. Id. The word 14 “Retirement” is listed within the column titled Event for the 2004 Deferred Compensation 15 Plan. Id. The quarterly statement period ending March 31, 2015 indicates a “Change of 16 Control” as of January 1, 2015 for the “2009 In Service Account” and an Ending Balance 17 of zero. Bnkr. Doc. No. 50 at 109; Doc. No. 5-1 at 170. The “2004 Deferred Compensation 18 Plan” showed no disbursement dates and reflected an Ending balance of $38,430.54. Id. 19 No statements were produced following the quarter in which control changed. 20 In preparation for the January 24, 2017 evidentiary hearing, the Trustee filed a brief 21 in support of her objections. Bnkr. Doc. No. 62 at 1-9; Doc. No. 5-2 at 71-79. In short, she 22 argued Appellant “misused” the Morgan Stanley IRA and National Securities IRA, by 23 receiving pre-retirement distributions totaling $237,755.00 and failed to deliver 24 documentation regarding the SWS Deferred Comp account through the petition date to 25 facilitate a determination “ whether the Debtor misused the funds in this Account.” Bnkr. 26 Doc. No. 62 at 4; Doc. No. 5-2 at 74. Further, she argued that the withdrawals were not 27 payments on account of any of the listed statutory triggering events and that the exemptions 28 1 in the Morgan Stanley Rollover IRA, National Securities IRA, and SWS Deferred Comp 2 accounts should be denied. 3 At the evidentiary hearing, the Court began by setting the ground rules as to which 4 party had the burden of proof. Citing In re Diaz, 547 B.R. 329 and referring to the 5 California exemption laws, the Court determined that California state law must be applied 6 inside the Bankruptcy proceeding and therefore the burden of proof lies with the Claimant 7 rather than the Objector. Doc. No. 13-2 at 9. Claimant then requested clarification on the 8 specific issue requiring proof. 9 MR. WINFREE: The objection that has been raised has not challenged these accounts on anything other than the basis that they’re saying the debtor has abused 10 his uses under the -- in taking out the particular funds, thus implying that – they’re 11 not challenging whether it qualifies for tax exemption. They’re not qualifying whether it's covered by 408. They’re not challenging any of that. They’re primarily 12 challenging that the conduct of the debtor in relation to the accounts disgorges his 13 entitlement to the exemption. That’s what I would like to get some clarification. We are in fact addressing the issue of whether his conduct has abused those accounts or 14 otherwise. 15 Id. at 9-10. 16 As a result of Claimant’s request, the court asked the Trustee to clarify the grounds 17 for objection. Id. 10. After hearing from the Trustee the court summarized: 18 COURT: The question was whether it was principally used for retirement purposes or rather the withdrawals basically diminished the assets in the accounts to the [point 19 they cannot] actually not serve for retirement -- long-term retirement. That’s 20 basically the Jacoway test… 21 Id. at 11. Claimant then testified as to how and for what purpose he used the IRA 22 disbursements. He also testified as to his understanding of the status of each account. 23 Q: We’re going to return to those retirement accounts… At the beginning I believe I heard that you said there was one account transferred three times. Can you explain 24 what that means. 25 A: Ms. Gladstone…she’s saying there’s three separate retirement accounts. There’s 26 not three separate retirement accounts. It’s one retirement account moved from firm 27 to firm to firm. It went from Southwest as a 401(k) to Morgan Stanley as an IRA to National Securities as an IRA. It’s one account. It’s not three separate accounts. 28 1 Q: I believe I understand the rollover from the Morgan Stanley IRA to the National Securities IRA. I don’t understand what happened to the Southwest Stearns Deferred 2 Comp Plan. Where is that? 3 A: I don’t recall. And I don’t know… wait a minute. It may -- I don’t know. I’m not going to answer that. 4

5 Q: Debtor’s Exhibit C. It talks about the Morgan Stanley 401(k) plan, and it looks like there’s a gross distribution of $55,365. Where did that money go? 6 7 A: I don’t recall. 8 Q: Is there anything left in that 401(k) plan? 9 A: Not to my knowledge. 10 Q: Do you have any other accounts, other than the National Securities IRA and perhaps the Southwest Stearns Deferred Comp, that you will use for your retirement? 11 12 A: No. 13 Appellant’s Ex: 12; Doc. No. 13-2 at 39-40. No other testimony or documentary evidence 14 was presented at the hearing in support of Debtor’s claim of exemption in the SWS 15 Deferred Comp account. During closing argument Claimant argued: 16 MR. WINFREE: There has been no testimony whatsoever about the Bear sterns account.…[T]here has been no Evidentiary presentation in relation to that in regards 17 to this particular proceeding, so I think it’s -- probably seems to be off the table in 18 this consideration. 19 Id. at 92. In response, the Trustee argued that because she didn’t have any information 20 about the SWS account she couldn’t address whether it was eligible for exemption. Id. at 21 93. She further claimed that the documents provided were insufficient and argued that the 22 Debtor had not met his burden to prove that the fund qualified. Id. Claimant clarified that 23 the SWS Deferred Comp statements previously supplied to the Trustee were also provided 24 to the bankruptcy court and were contained in the record. Id. He explained that no 25 additional statements were available. Id. at 94. Concluding the hearing, the Court reiterated, 26 “[the SWS Deferred Comp documents] may have been given to [the Trustee] at some point, 27 [but] it wasn’t presented in the evidentiary hearing. The burden was on the debtor.” Id. 28 The matter was taken under submission. Id. at 95. 1 After hearing the testimony, considering the arguments by counsel and the evidence 2 presented, the court issued a memorandum decision sustaining in part and overruling in 3 part the Trustee’s objections finding: that: (1) the Debtor carried his burden of proof 4 regarding claims of exemption in the IRA accounts under CCP § 703.140 (b)(10)(E) by 5 demonstrating that the IRA accounts were designed and principally used for retirement 6 purposes as of the petition date; and (2) the Debtor did not carry his burden of proof 7 regarding his claim of exemption in the SWS Deferred Comp account. Doc. No. 5-2 at 94, 8 105. Citing In re Barnes, 275 B.R. 889, 898-99 (Bankr. E. D. Cal. 202), the Bankruptcy 9 court held: 10 As to the SWS Deferred Comp Account, the Debtor has never provided the Trustee with the documents sufficient to permit her to complete her investigation of whether 11 this account is properly exempt under CCP § 703.140(b)(10)(E)….The Debtor is 12 duty-bound under 11 U.S.C. §521(4) to provide the Trustee with the basic documents and records regarding this account. His failure to provide this information 13 will be treated as a failure to carry his burden of proof as to his entitlement to exempt 14 this account. 15 Id. at 104. Claimant’s appeal from the order sustaining the Trustee’s objection to the claim 16 of exemption for the SWS Deferred Comp account is now before the Court. 17 DISCUSSION 18 A. LEGAL STANDARD 19 The order of the Bankruptcy Court as to the right of a debtor to claim an exemption 20 is a question of law and reviewed de novo. Elliott v. Weil (In re Elliott), 523 B.R. 188, 191 21 (9th Cir. BAP 2014). In addition, the bankruptcy court’s interpretation of state exemption 22 laws is reviewed de novo. Calderon v. Lang (In re Calderon), 507 B.R. 724, 728 (9th Cir. 23 BAP 2014). The bankruptcy court’s factual findings, for purposes of determining the 24 validity of a claimed exemption, are reviewed under the clearly erroneous standard. Id. 25 Factual determinations are clearly erroneous if “illogical, implausible, or without support 26 in the record.” Rets v. Samson ( In re Retz), 606 F. 3d 1189, 1196 (9th Cir. 2010). 27 28 1 B. BURDEN OF PROOF: FRBP 4003 AND CCP § 703.580(B) 2 Under the Federal Rules of Bankruptcy Procedure (“Fed. Rules Bankr. Proc.”) the 3 objecting party has the burden of proving that the exemptions are not properly claimed. 4 Fed. Rules Bankr. Proc Rule 4003(c). Section 522 of Title 11 of the United States Code 5 provides a default list of exemptions but allows states to opt out of the federal scheme and 6 define their own exemptions. California has opted out of the federal exemption scheme 7 and limited Chapter 7 petitioners to the same exemptions debtors may claim in non- 8 bankruptcy cases. Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193 (9th Cir. 2012). 9 Section 703.140(b)(10)(E) of California Civil Procedure protects the debtor’s right to 10 receive “a payment under a stock bonus, pension, profit-sharing, annuity, or similar plan 11 or contract on account of illness, disability, death, age, or length of service, to the extent 12 reasonably necessary for the support of the debtor and any dependent of the debtor....” 13 Section 703.580(b) provides: “At a hearing under this section, the exemption claimant has 14 the burden of proof.” Cal. Civil P. Code § 703.580(b). 15 Appellant relies heavily on In re Carter, a Ninth Circuit case holding that a claimed 16 exemption is “presumptively valid” under Rule 4003 and that it is the objecting party’s 17 burden to prove the exemption is not properly claimed. 182 F.3d 1027 (9th Cir. 1999). 18 Since then, numerous decisions from the various California district courts and at least one 19 published decision from the Bankruptcy Appellate Panel (BAP) of the Ninth Circuit have 20 addressed this conflict.2 Most notably in 2016, the Ninth Circuit BAP pointed out that 21 Carter was decided prior to a U.S. Supreme Court case holding that the burden of proof is 22 a substantive element of a claim and that “bankruptcy does not alter the burden imposed 23 24 2 In re Sinclair, 563 B.R. 554, 558 (Bankr. E.D. Cal. 2017) (“Debtor has the burden of proof supporting 25 his claimed exemption.”); In re Williams, 556 B.R. 456, 460 (Bankr. C.D. Cal. 2016) (same); In re Barnes, 275 B.R. 889, 898 n.2 (Bankr. E.D. Cal. 2002) (same). In re Tallerico, 532 B.R. 774 (Bankr. 26 E.D. Cal. 2015) (holding 4003(c) is invalid in California under the Bankruptcy Rules Enabling Act, 28 27 U.S.C. § 2075, which “forbids rules that alter substantive rights.”); In re Pashenee, 531 B.R. 834, 839 (Bank. E.D. Cal. 2015) (relied on by the court in the instant case for the holding that the debtor, as the 28 exemption claimant, bears the burden of proof to establish the asset as exempt and the extent to which it 1 by the substantive law.” Diaz v. Kosmala (In re Diaz), 547 B.R. 329, 337 (B.A.P. 9th Cir. 2 2016) (citing Raleigh v. Illinois Dep’t of Revenue, 530 U.S. 15, 20-21 (2000)) 3. In turn, 3 the Ninth Circuit BAP concluded in Diaz that “where the state law exemption statute 4 specifically allocates the burden of proof to the debtor, Rule 4003(c) does not change that 5 allocation.” Diaz, 547 B.R. at 337; See also In re Ziegler, No. 8:13-BK-20257-CB, 2016 6 WL 3267387, at *4 (B.A.P. 9th Cir. June 6, 2016)(reasserting the holding in Diaz and 7 concluding that the burden was on the debtor to show that his amended wildcard exemption 8 for the sale proceeds was proper). In light of Raleigh, Diaz, and Ziegler, the Court finds 9 Claimant’s reliance on In re Carter is misplaced and that the Claimant bears the burden of 10 proof to establish entitlement to an exemption in the SWS Deferred Comp account under 11 Cal. Civ. Code § 703.140(b)(10)(E). 12 C. FACTUAL FINDINGS OF THE BANKRUPTCY COURT 13 The term “burden of proof” incorporates two distinct burdens: the burden of 14 persuasion and the burden of production. See, e.g., Schaffer v. Weast, 546 U.S. 49, 56, 126 15 S.Ct. 528, 163 L.Ed.2d 387 (2005). The burden of production is a party’s duty to introduce 16 “evidence sufficient as a matter of law to enable a rational fact finder to find that particular 17 proposition of fact is true” and to find in favor of the producing party. Corpus Juris 18 Secundum, Evidence § 189. As Claimant candidly highlights, “there ha[d] been no 19 evidentiary presentation,” with regard to the SWS Deferred Comp account. The bankruptcy 20 court determined that the testimonial evidence regarding the possibility that the SWS 21 Deferred Account was rolled over into the National Securities IRA lacked credibility. Great 22 deference is given to the bankruptcy court when factual findings are based on the credibility 23 of witnesses, In re Retz, 606 F.3d 1189, 1196 (9th Cir. 2010). However, in this instance, 24 the court did not base its determination on credibility. Nor did the court’s written decision 25 26

27 28 3 The Supreme Court held that when the matter in dispute is governed by non-bankruptcy substantive 1 refer to Claimant’s failure to present evidence regarding the “misuse” of the SWS Deferred 2 Comp account. 3 Here, the Bankruptcy judge’s factual finding was based entirely upon the Trustees 4 closing argument. The court held that “[d]ebtor has never provided the Trustee with the 5 documents sufficient to permit her to complete her investigation of whether th[e] account 6 is properly exempt under CCP §703.140(b)(10(E)” and the failure to do so was “treated 7 as a failure to carry his burden of proof.” Doc. No. 5-2 at 104. Regardless of which party 8 carries the burden of proof at the hearing, statements made within the parties’ briefs or in 9 closing argument are not admissible evidence. § 101:1 Scope of Rules, Bankr. Evid. 10 Manual § 101:1 (2018 ed.); In re Seare, 515 B.R. 599, 616 (B.A.P. 9th Cir. 2014) (brief 11 consisted only of argument, not admissible evidence); See also In re Hurley, 258 B.R. 15, 12 23 (Bankr. D. Mont. 2001) (An attorney’s argument is not evidence). U.S. v. Velarde- 13 Gomez, 224 F.3d 1062, 1073 (9th Cir. 2000), rev’d on reh’g en banc, 269 F.3d 1023 (9th 14 Cir. 2001). 15 Although the Trustee filed written objections to the claim of an exemption in the 16 SWS Deferred Comp account based on lack of information and the need for further 17 investigation, she changed the nature and scope of her objection at the hearing from that 18 which was presented in her pleadings. At the onset of the hearing, the bankruptcy court, 19 at the request of Claimant, inquired as to the specific grounds for the objection. The Trustee 20 represented that the issue as to each account was “whether the principal purpose is to 21 provide for retirement or to provide for current needs.” The scope of the evidentiary 22 hearing was effectively limited to those issues raised under the Jacoway test. The direct 23 testimony presented was limited to whether Claimant knew “what happened to the 24 Southwest Stearns Deferred Comp Plan” as of the date of the evidentiary hearing. During 25 closing arguments however, the Trustee represented that it was Debtor’s burden to prove 26 eligibility, despite having limited the scope of the hearing to misuse. 27 No testimony or documentary evidence was presented by either party on whether 28 statements and records were provided to the Trustee, the dates for which those statements 1 and records covered, the terms and restrictions indicated by the documents, or whether the 2 information, including the contacts for the plan administrator, was sufficient for the Trustee 3 to complete her investigation. However, the record indicates that a screenshot of the SWS 4 Deferred Comp account was attached to Claimant’s declaration in opposition to the 5 Trustee’s objection which supported the need for an evidentiary hearing. The screenshot 6 reflected a 100% vested retirement account as of January2016, its balance, along with 7 multiple tabs where one could ascertain any disposition of how the account was utilized. 8 At best, the record reflects the representations in the Trustee’s closing argument misstated 9 the record regarding the production of documents. 10 Had the bankruptcy judge sustained the Trustee’s objection upon the ground that 11 Claimant had not met his burden of proof as to the use or misuse of the SWS Deferred 12 Account, or that Claimant’s testimony was not credible with regard to the belief that the 13 three retirement accounts had been rolled over into one, there would be no question as to 14 whether the record supported such a ruling. However, here the ruling is based on a factual 15 finding not supported by the record. Accordingly, the Court finds the bankruptcy court 16 committed clear error. United States v. Hinkson, 585 F.3d 1247, 1261–62 & n. 21 (9th 17 Cir.2009). 18 // 19 // 20 21 22 23 24 25 26 27 28 l CONCLUSION 2 For the reasons set forth above, the Court VACATES the Bankruptcy court’s order 3||Sustaming the Trustee’s objection to the claim of exemption for the SWS Deferred Comp 4||account and REMANDS the case for further proceedings to determine whether Debtor provided the Trustee with documents sufficient to permit her to complete her investigation 6||into whether (1) the SWS Deferred Comp account qualifies for exemption under Cal. Civ. 7||Code § 703.140(b)(10)(E) and (2) whether Claimant misused the funds in the SWS 8 || Deferred Comp account. 9 IT IS SOORDERED. 10 1] || DATED: September 30, 2019 2 ste 13 Won. JOHNA.HOUSTON JUNITED STATES DISTRICT JUDGE

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