In re Segovia, 404 B.R. 896 (2009).
United States District Court,
In re Maria O. SEGOVIA, Debtor.
Maria O. Segovia, Debtor/Appellant,
E. Lynn Shoenmann, Defendant/Appellee.
No. C 08–3075 PJH.
Bankr.Case No. 06–30387.
Adv. Case No. 05–3441.
March 30, 2009.
Attorneys and Law Firms
PAGE_900 Law Offices of Neal H. Konami, Oakland, CA, for Debtor.
ORDER AFFIRMING JUDGMENT OF THE BANKRUPTCY COURT
PHYLLIS J. HAMILTON, District Judge.
Plaintiff and appellant Maria Segovia ("Segovia") appeals the bankruptcy court's June 9, 2008 decision and order sustaining the chapter 7 trustee's ("trustee") objections to her claimed exemptions and exclusions in an employer compensation plan. For the reasons that follow, the court AFFIRMS the judgment of the bankruptcy court.
A. Factual and Procedural Background
On May 16, 2006, Segovia, currently fifty-three years-old, filed a voluntary chapter 7 bankruptcy petition. Prior to bankruptcy, Segovia worked at Wells Fargo Bank ("Wells Fargo") for more than thirty years. During that time, Segovia held numerous positions with the bank, from file clerk to corporate finance manager.1 On October 5, 2005, the bank notified Segovia that her job as a finance manager would be eliminated as of December 3, 2005. However, Segovia was placed on continuation of leave of service with Wells Fargo, which lasted until March 3, 2007. During the fifteen month leave, Segovia received her salary under a salary continuation or severance plan.
In a prior March 20, 2008 order, which is not the subject of the appeal here, the bankruptcy court found Segovia to be "a sophisticated businesswoman."
Throughout the course of her employment at the bank, Segovia received Wells PAGE_901 Fargo stock options pursuant to Wells Fargo's Long–Term Incentive Compensation Plan ("LTICP"). Prior to filing for bankruptcy, Segovia exercised stock options granted to her under the LTICP on three occasions, realizing a total of $205,591.63. She used the proceeds from those three exercises to pay for remodeling and construction costs to a residence that she owned with her sister and mother at 320–322 Maple Street in San Francisco, California.
At the time Segovia filed for bankruptcy, she owned additional unexercised stock options under the LTICP. In addition to the LTICP, Segovia also possessed a formal retirement or 401(k) plan with Wells Fargo worth $772,754.16.
In the schedules that Segovia filed with her bankruptcy petition on June 13, 2006, she listed the LTICP stock options as non-exempt personal property. She did, however, schedule her Wells Fargo 401(k) retirement plan in the amount of $772,754.16 as exempt. Additionally, in schedules that she amended on September 13, 2006, Segovia also scheduled $130,863.75 that she received under the Wells Fargo salary continuation plan as exempt. On November 30, 2006, the bankruptcy court subsequently ruled that the funds Segovia received under the salary continuation plan were indeed exempt in spite of the trustee's objection, concluding that the salary continuation plan constituted an ERISA welfare benefit plan.
Subsequently, on March 19, 2007, Wells Fargo and the trustee entered into a stipulation that allowed the trustee, as the legal representative of the debtor, to exercise the unexercised stock options Segovia held under the LTICP, and the bankruptcy court approved the stipulation on March 23, 2007. In response, on April 13, 2007, Segovia filed amended bankruptcy schedules in which she claimed that the stock options were exempt and not property of the bankruptcy estate because they constituted a qualified retirement account.
On May 9, 2007, the trustee objected to Segovia's characterization of the stock options in her amended schedules, asserting that the LTICP under which the options arose was not an ERISA-protected or qualified plan, nor was it a retirement plan exempt under California law. A week later, on May 16, 2007, the trustee and Wells Fargo entered into an amended stipulation to facilitate the trustee's ability to exercise the stock options, which was approved by the bankruptcy court on May 29, 2007. In that stipulation, Wells Fargo and the trustee agreed that the LTCIP, under which Segovia received the stock options, was not subject to ERISA, and did not constitute an Employee Stock Ownership Plan, commonly referred to as an "ESOP." They noted that their prior March 19, 2007 stipulation "appear[ed] to have incorrectly characterized the LTICP as a qualified employee stock ownership plan and mischaracterized the Debtor's stock options as qualified stock options." Appellee's Excerpts of Record ("E.R.") Exh. 8.
On June 5, 2007, Segovia filed a declaration in support of her claim that the stock options were exempt. On June 21, 2007, the trustee exercised the stock options pursuant to the May 29, 2007 stipulation and order, and realized net proceeds of $399,498.42, which the trustee held in a trust account in connection with Segovia's bankruptcy case. From June 2007 until June 2008, the parties prepared for trial before the bankruptcy court regarding Segovia's claimed exemption. During this time, on September 29, 2007, Segovia again amended her bankruptcy schedules and specifically claimed that the LTICP, under which the stock options arose, was an ERISA-defined "pension benefit plan" or "employee benefit plan," and was thus PAGE_902 wholly excluded from the chapter 7 bankruptcy estate. Segovia additionally claimed that the options constituted "retirement benefits," that were exempt under state law.
On June 5, 2008, the bankruptcy court held a hearing on Segovia's claimed exemption. Prior to the hearing, the parties submitted stipulated facts, in addition to twenty-six trial exhibits, including Segovia's bankruptcy schedules, transcripts of her deposition, transcripts of depositions of other Wells Fargo executives, the LTICP, tax forms, and other correspondence from Wells Fargo. There was no testimony at the hearing, nor was any new evidence introduced. The bankruptcy court decided the matter based on the evidence submitted, and on the parties' arguments at the hearing.
As mentioned, that evidence included deposition transcripts from two Wells Fargo executives, Paula Roe, the executive vice president of compensation and benefits, and Mary Morrow, the human resources manager. Appellee's E.R. Exh. 10. Roe testified that she has managed the team that is responsible for executive compensation and all of Wells Fargo's benefit programs for approximately twenty years. Roe herself makes day-to-day administrative decisions regarding the LTICP. Id. at 50. In determining which employees receive an award under the plan, recommendations are made to a committee, which approves or rejects them. Id. at 51.
In particular, Roe testified regarding the nature of Wells Fargo's LTICP, and also regarding the purpose of particular provisions of the plan. Roe explained that the options are viewed as part of an individual's competitive compensation package. Id. at 9. She testified that the intended benefit of the LTICP was to deliver compensation to employees, and to allow them to share in the success of Wells Fargo through its stock appreciation. Id. at 30. The awards have some element of deferred compensation because an employee has to earn a right to them; however, the LTICP is not a deferred compensation plan. Id. at 30, 32. Roe noted that Wells Fargo has a separate deferred compensation plan. Id. at 31.
Roe further testified that Wells Fargo did not view the stock options as a retirement benefit or subject to ERISA. Id. at 18. Nor, according to Wells Fargo, are they an ESOP, an employee stock ownership plan, because Wells Fargo actually has a different, separate ESOP, in which Segovia also participated. Id. at 19. Roe testified that those ESOP rights had nothing to do with the stock options under the LTICP. Id.
Roe further explained that non-qualified stock options, like those Segovia received under the plan, are the right to purchase a share of stock at a predetermined price over a defined period of time. Id. at 10. She noted that the vesting term for options varies according to the grant. Id. at 8. Roe testified that once Segovia's stock options vested, there was no limit on her ability to exercise the options as long as she continued "to be employed or satisfied employment, eligibility and disability or retirement and employment." Id. at 17. Additionally, she clarified that there was no requirement that Segovia needed to be retired in order to exercise the stock options. Id. at 17–18. Once the shares are exercised, then either the shares or the cash, depending on the type of exercise, are deposited into the participant's brokerage account, which is set up by the participant. Id. at 39.
If an employee ceases to be employed by Wells Fargo—other than as a result of death, retirement, or disability—the employee has three months from termination PAGE_903 to exercise her stock options, or if the options expire before the three months, then up until the expiration date. Id. at 19–20. When an employee actually retires, their stock options don't suddenly become somehow connected with ERISA or a retirement benefit. Id. at 55. In fact, an employee's retirement doesn't do anything under the LTICP with respect to the stock options other than extend the time for their exercise that the employee wouldn't have had had they simply left Wells Fargo for other reasons. Id. at 56. When an employee retires, they continue to hold the rights in the stock options until the options expire or until they exercise the options. Id. at 21.
In terms of retirement, an employee is the one who tells Wells Fargo that they're retiring, not the other way around. Id. at 47. And once the employee gives Wells Fargo a date, then the people responsible for managing the health plan administer those plans. Those people who manage the LTICP report up to Roe in the compensation department. Id. at 47.
Roe testified that the non-transferability provision was added to the LTICP not to turn it into a retirement plan, but instead to limit Wells Fargo's administration so that it was working with the stock option recipient, and "not various assorted people." Id. at 16.
As for Segovia, Roe testified that she was considered an "executive" in terms of the options she received, id. at 9, which is synonymous with "highly compensated individual." Id. at 40. Segovia received a total of six stock option grants. Id. at 23–24. Roe further testified that Wells Fargo documents show that Segovia retired on March 3, 2007, and that it is not possible for an employee at Wells Fargo to be on salary continuation leave and be retired at the same time. Id. at 28. That is because during the time that one is receiving salary continuation pay, that person continues to be an employee of Wells Fargo. Id. at 27.
Morrow, in turn, also testified that Wells Fargo's records showed that Segovia retired on March 3, 2007. Trial Exh. 23. She testified that at the time Segovia retired, she had approximately $100,000 in a pension plan, and $635,000 in a 401(k) plan.2
This $735,000 was exempt from the bankruptcy estate.
Morrow testified regarding retirement eligibility under the LTICP, and specifically regarding the "80 point" requirement. Section 2.1(y) of the LTICP defines "retirement" under the Plan as follows:
.... For all awards granted subsequent to November 2, 1998, "Retirement" means termination of employment after reaching the earlier of (i) age 55 with 10 completed years of service, or (ii) 80 points (with one point credited for each completed age year and one point credited for each completed year of service), or (iii) age 65. For purposes of this definition, a Participant is credited with one year of service after completion of each full 12–month period of employment with the Company or an Affiliate as determined by the Company or Affiliate.
Id. at 18 (emphasis added).
Morrow's team is the one responsible for calculating whether an employee has 80 points and is entitled to retire. Morrow testified that the 80 point retirement test generally only comes into play if an employee is retiring at an age younger than 55. Id. The 80 point calculation refers to age at the time of retirement, and also completed years at the time of retirement. Morrow testified that Segovia was 50 at the time she retired, and that she would have had 84 points at that time.
PAGE_904 Morrow, like Roe, also testified that when an employee, like Segovia, is placed on salary continuation leave, they continue to be an employee of Wells Fargo. On the other hand, if the employee chose to take a lump sum severance payment, then they would no longer be an employee and could be considered retired if they were retirement eligible. Roe reiterated that Segovia chose the salary continuation leave as opposed to a lump sum severance payment.
B. Segovia's Long–Term Incentive Compensation Plan ("LTICP")
The pertinent provisions of the LTICP are as follows.
Section one, entitled "Purpose" provides in pertinent part:
The purpose of Wells Fargo & Company' Long–Term Incentive Compensation Plan (the "Plan") is to motivate key employees to produce a superior return to the stockholders of Wells Fargo & Company by offering them an opportunity to participate in stockholder gains, by facilitating stock ownership and by rewarding them for achieving a high level of corporate financial performance. The Plan is also intended to facilitate recruiting and retaining talented executives for key positions by providing an attractive capital accumulation opportunity.
Appellee's E.R. Exh. 1.
The Plan's Prospectus reiterates the above purpose, and further provides under "General Information," that "[t]he Plan is not qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the 'Code'), and is not subject to [ERISA]." Appellee's E.R. Exh. 2.
Section five sets forth limits on "participation" in the Plan, and provides in pertinent part:
Participation in the Plan shall be limited to Employees of the Company or an Affiliate selected by the Committee. Options intending to qualify as Incentive Stock Options may only be granted to employees of the Company or any subsidiary within the meaning of the Code. Participation is entirely at the discretion of the Committee, and is not automatically continued after an initial period of participation.
Section ten concerns options granted under the plan and provides in pertinent part as follows:
Options. The Committee may grant an Option or provide for the grant of an Option, either from time-to-time in the discretion of the Committee or automatically upon the occurrence of specified events, including, without limitation, the achievement of performance goals (which may include Qualifying Performance Criteria). Except to the extent provided herein, no Participant (or Beneficiary of a deceased Participant) shall have any rights as a stockholder with respect to any Shares subject to an Option granted hereunder until said Shares have been issued. Options granted pursuant to the Plan need not be identical, but each Option must contain and be subject to the terms and conditions set forth below.
10.1 Type of Option; Number of Shares. Each Option shall be evidenced by an Award Agreement identifying the Option represented thereby as an Incentive Stock Option or Non–Qualified Stock Option, as the case may be, and the number of Shares to which the Option applies.
10.3 Exercisability. The Committee shall have the right to make the timing of the ability to exercise any Option subject to continued employment, PAGE_905 the passage of time and/or such performance requirements as deemed appropriate by the Committee, provided that in no event shall any Option awarded to a Participant provide for full vesting in a period of less than one year, other than as a result of or upon the death, disability or Retirement of the Participant or a change in control of the Company.
10.8 Termination of Employment.
(a) Due to Death, Disability, or Retirement. If a Participant ceases to be an Employee by reason of his death, permanent disability or Retirement, each outstanding Option shall become exercisable to the extent and for such period or periods determined by the Committee but not beyond the expiration date of said Option. If a Participant dies before exercising all outstanding Options, the outstanding Options shall be exercisable by the Participant's Beneficiary.
(b) Other than Death, Disability, or Retirement. Unless the Committee provides otherwise, in the event a Participant ceases to be an Employee for any reason other than his death, permanent disability or Retirement, all rights of the Participant under this Plan shall immediately terminate without notice of any kind.
The Plan Prospectus further speaks to the exercise of stock options, and provides in pertinent part:
Stock options may be exercised during a period of time fixed by the Committee except that no stock option may be exercised more than ten years after the date of grant.... Once exercisable, a person entitled to exercise an option may, subject to its terms and the terms of the Plan, exercise it in whole at any time, or in part from time to time, by delivery of notice of exercise in the manner provided in the award communication, specifying the number of shares with respect to which the option is being exercised, accompanied by payment of the purchase price of the shares to be purchased. Payment for shares of stock acquired on exercise of a stock option may be made in cash, in shares of Common Stock having a fair market value as of the date of exercise equal to the purchase price, or a combination thereof, as the Committee determine.
Stock options are exercisable only by the participant or his or her guardian or legal representative and only while the participant is an employee of the Company or an affiliate, except in the case of death, permanent disability, or Retirement ... or as provided in Section 15 of the Plan, or as otherwise determined by the Committee.
A non-qualified stock option granted under the Plan may include the right to acquire a reload stock option ("Reload Option"), formerly known as an "Accelerated Ownership Non–Qualified Stock Option" ("AO")....
Appellee's E.R. Exh. 2, at 2–3.
Section twelve of the Plan, which was amended in 2005, specifies that the rights under the Plan are generally nontransferable. It provides in pertinent part:
12. Nontransferability of Rights. Unless the Committee provides otherwise, (i) no rights under any Award will be assignable or transferable and no Participant or Beneficiary will have any power to anticipate, alienate, dispose of, pledge or encumber any rights under any Award, and (ii) the rights and the benefits of any Award may be exercised and received during the lifetime of the Participant only by the Participant or by the Participant's legal representative....
PAGE_906 Section sixteen of the Plan clarifies that the options and other awards under the Plan may be conditioned on an employee's performance.
The Prospectus summarizes the federal income tax consequences to participants who receive awards under the plan, based on the IRC. It provides as follows regarding non-qualified stock options:
A participant who receives a non-qualified stock option grant will not recognize income and the Company will not be allowed a deduction at the time such an option is granted. When a participant exercises a non-qualified stock option, the difference between the option price and any higher fair market value of the stock on the date of exercise will be ordinary income to the participant and will be allowed as a deduction for federal income tax purposes to the Company or its subsidiary. The capital gain holding period of the shares acquired will begin one day after the date such stock option is exercised. When a participant disposes of shares acquired by the exercise of the option, any amount received in excess of the fair market value of the shares on the date of the exercise will be treated as short-term or long-term capital gain, depending on the holding period of the shares. If the amount received is less than the fair market value of the shares on the date of exercise, the loss will be treated as short-term or long-term capital loss, depending on the holding period of the shares.
Appellee's E.R. Exh. 2, at 7.
C. Bankruptcy Court's Decision
Following the June 5, 2008 hearing, on June 9, 2008, the bankruptcy court issued a written order, ruling in the trustee's favor, and holding that Segovia's interests in her LTICP were not exempt or excludable from the bankruptcy estate. Appellee's E.R. Exh. 12. In a fairly summary order, the court concluded that the LTICP did not constitute a private retirement plan under California law, did not constitute a retirement plan under ERISA, and also did not constitute a valid spendthrift trust.
In support, the bankruptcy court found that the purpose of the LTICP "is to encourage key employees to work for the long-term health of the company by providing pre-retirement income linked to the future value of the company stock." It noted that "[t]he stated purpose of the LTCIP was to motivate key employees to share in the future success of Wells Fargo." Id. The court further found that
To induce the employee to make continued efforts on behalf of the company, the options generally do not vest immediately, the options may not be sold, and the employee must remain employed by Wells Fargo. If an employee is fired for cause, all unexercised options are revoked. If the employee quits, all vested options are lost if not exercised within three months, and unvested options are lost. If employment ceases upon death, retirement, or disability, however, all unvested options immediately become vested and be exercised at any time within their stated term. The LTICP provides that options may not be transferred and must be exercised by the employee or his or her personal representative.
Segovia subsequently appealed and elected to have the appeal heard by this court rather than the Ninth Circuit Bankruptcy Appellate Panel ("BAP").
Segovia's papers were hardly a model of clarity in terms of setting forth the issues. In her statement of issues ("SOI") filed June 30, 2008, Segovia asserted that she PAGE_907 was raising seventeen issues on appeal, including:
1. Whether the bankruptcy court erred in sustaining the trustee's objection to her claimed exclusion/exemption claim in the Wells Fargo LTICP stock options without fully addressing all of her ERISA-based claims?
2. Whether the bankruptcy court erred in finding the LTICP is not a private retirement plan because it was not designed or used as a retirement plan?
3. Whether the bankruptcy court erred in finding that Segovia did not use the LTICP as a retirement plan, or whether this was even relevant to the legal issues at hand?
4. Similar to 3., above, whether the bankruptcy court erred in assuming that expending option proceeds on Segovia's home was not for a retirement purpose?
5. Whether the bankruptcy court erred in finding the LTICP is not a retirement plan under ERISA?
6. Whether the bankruptcy court erred in finding that the LTICP does not provide retirement benefits or defer income within the meaning of 29 U.S.C. sec. 1002(2)(A)?
7. Whether the bankruptcy court erred in finding that the LTICP is not a trust?
8. Whether the LTICP granted Segovia contractual rights in the stock options which once vested as retirement benefits imposed trust obligations upon the LTICP administrators enforceable by ERISA?
9. Whether the bankruptcy court erred by failing to apply the standards used by the federal district courts in determining whether an employer arrangement is "subject to" ERISA?
10. Whether the bankruptcy court erred by failing to recognize and apply the criteria used by federal district courts to interpret the provisions of an ERISA plan?
11. Whether the bankruptcy court erred by failing to address Segovia's argument that the original and amended stipulations between Wells Fargo and the trustee amount to an admission that the LTICP's "nontransferability of rights" provision is enforceable for both taxation and ERISA purposes?
12. Whether the bankruptcy court erred by effectively ruling that the LTICP stock options are not "double-insulated" by California's broader "private retirement plan" exemption scheme, and therefore are not preempted and excluded from the bankruptcy estate by ERISA?
13. Whether the debtor qualifies for equitable relief under ERISA sec. 502(a)(3), assuming the bankruptcy court erred in its determination that the LTICP is not subject to ERISA?
14. Whether the bankruptcy court erred by essentially using a pre-Patterson v. Schumate analysis of the LTICP?
15. Whether the bankruptcy court or the trustee has met their burden of proof that the LTICP is not subject to ERISA?
16. Whether this case has broader public policy implications given the large number nationally of Wells Fargo employees and future retirees, as well as the interest of the general public and retirees as a PAGE_908 whole, in seeing to it that ERISA is properly applied and enforced?
17. Whether the rendering of an appellate opinion in this bankruptcy court appeal will make a significant contribution to ERISA's remedial policy goal of seeing the federal district courts forge a body of consistent "federal common law" regarding the sensible application and evenhanded enforcement of ERISA
However, in her opening brief filed September 3, 2008, Segovia stated that she was raising six issues, including:
1. Whether the LTICP's non-qualified stock options are exempt as private retirement plan benefits under California Code of Civil Procedure sec. 704.115?
2. Whether the LTICP's non-qualified stock options provide retirement income to employees or otherwise operate to defer the income of employees for periods extending to the termination of covered employment or beyond?
3. Whether the LTICP's non-qualified stock options are subject to ERISA as a defined "pension plan"?
4 Whether the LTICP's "non-transferability of rights" or anti-alienation provision is not only enforceable for federal income tax qualification purposes, but also enforceable for ERISA purposes to exclude the stock options from Segovia's bankruptcy estate pursuant to sec. 541(c)(2)?
5. Whether ERISA preempts California's Code of Civil Procedure sec. 704.115 to the extent the California statute speaks to pensions regulated exclusively by ERISA?; and
6. Whether Segovia qualifies for equitable relief under ERISA sec. 502(a)(3), assuming that the bankruptcy court erred in its determination that the LTICP's non-qualified stock options are not subject to ERISA?
The court finds that Segovia's lack of clarity and organization extends beyond her inability to coherently and consistently set forth the issues. It was a enormous challenge for the court not only to ascertain the true issues on appeal, but also to ascertain what Segovia's arguments were regarding many of the issues she raised. This was in part due to Segovia's failure to provide the court with a cohesive and comprehensive statement regarding the background facts and the bankruptcy court's ruling, in addition to the controlling legal standards regarding the issues raised. It was also due in large part to the fact that Segovia didn't bother to address many of the issues that she raised in her statement of issues in her opening brief.
Nevertheless, after extensive efforts, the court finds that the issues raised by Segovia generally fall into four categories: (1) whether the LTICP's non-qualified stock options are exempt as private retirement plan benefits under California Code of Civil Procedure sec. 704.115; (2) whether the LTICP is a pension plan subject to ERISA and excludable from the bankruptcy estate: (3) whether the LTICP qualifies as a spendthrift trust under 541(c)(2); and (4) other related issues. The court has addressed the above issues in its discussion of each of the four categories.
Specifically, the court finds that SOI issues 1, 2, and 3, and issue 1 in Segovia's opening brief pertain to the private retirement plan issue. SOI issues 5, 6, 9, 19, 11, 13, 14, 15, 16, and 17, and issues 2, 3, and 4, and 6 in Segovia's opening brief pertain to the ERISA-related issue. SOI issues 7 and 8 pertain to the trust issue. SOI issue PAGE_909 12 and Segovia's opening brief issue 5 pertain to other related issues. Because the standards of review differ depending on the issue, the court has addressed those below in its discussion of each of the four categories.
I. Whether the LTICP's Stock Options are Exempt as Private Retirement Plan Benefits under California Code of Civil Procedure sec. 704.115
A debtor in bankruptcy is entitled to exempt certain assets from the bankruptcy estate. 11 U.S.C. secs. 522, 541; see also Jacoway v. Wolfe (In re Jacoway), 255 B.R. 234, 237 (9th Cir. BAP 2000). Under Bankruptcy Code sec. 522(b), states can prohibit their citizens from choosing the exemptions set out in section 522(d), or in other words, "opt out" of the federal exemptions, and instead limit their citizens to the exemptions available under applicable state and federal nonbankruptcy law. 4 Collier on Bankruptcy sec. 522.01 (15th ed. rev'd 2007). California is one of thirty-four states that has opted out of the federal exemption system. Id.; see also In re Simpson, 557 F.3d 1010, 1014 (9th Cir.2009); Jacoway, 255 B.R. at 237 (citing Cal.Code Civ. Proc. sec. 703.130).
Here, Segovia claims that the unexercised stock options under the LTICP are exempt because the LTICP constitutes a "private retirement plan" under California Code of Civil Procedure section 704.115.
Section 704.115 provides:
(a) As used in this section, "private retirement plan" means:
(1) Private retirement plans, including, but not limited to, union retirement plans.
(2) Profit-sharing plans designed and used for retirement purposes.
(3) Self-employed retirement plans and individual retirement annuities or accounts provided for in the Internal Revenue Code of 1986, as amended, including individual retirement accounts qualified under Section 408 or 408A of that code, to the extent the amounts held in the plans, annuities, or accounts do not exceed the maximum amounts exempt from federal income taxation under that code.
(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.
The California Legislature has not defined a "private retirement plan" as the term is used in section 704.115 in any meaningful way. In re Phillips, 206 B.R. 196, 202 (Bankr.N.D.Cal.1997). "The purpose of the section 704.115 exemption for the corpus of private retirement plans is to safeguard a stream of income for retirees at the expense of bankruptcy creditors." In re MacIntyre, 74 F.3d 186, 188 (9th Cir.1996).
However, even if a plan constitutes a "private retirement plan" under section 704.115, the next question is whether it was "designed and used" for the debtor's retirement purposes. Bloom v. Robinson (In re Bloom), 839 F.2d 1376 (9th Cir.1988) (noting that "[i]t is true that sec. 704.115 does not explicitly require private retirement plans to be 'designed and used for retirement purposes' in order to be exempt [b]ut ... that the absent phrase is implicit in the term 'retirement plans' "). If both questions are answered in the affirmative, then all assets in the plan are exempt. In re Phillips, 206 B.R. at 200.
PAGE_910 The Ninth Circuit has held that the purpose of this second inquiry is distinct and limited. In re Simpson, 557 F.3d 1010, 1017–18. "It does not allow the debtor to circumvent the statutory definitions and categorize the asset as an exempt private retirement plan." Id. Rather, the inquiry seeks only to determine whether an asset that fits the definition of a "private retirement plan" should nonetheless be excluded from exemption because the debtor treats it as something other than a retirement asset. Id. Thus, while the debtor's subjective intent cannot create an exemption, it may take one away. Id. (citing In re Lieberman, 245 F.3d 1090, 1095 (9th Cir.2001)) (a debtor's subjective intent for or use of the asset is irrelevant to the analysis).
A retirement account need not be used solely for retirement purposes to be exempt under sec. 704.115, but must be used primarily for retirement purposes. Jacoway, 255 B.R. at 239. The plan may have two purposes, one to supplement current income and the other to provide for retirement. Id. The Ninth Circuit has held that "[p]articularly in light of the liberal construction given to exemption statutes, where a plan is designed and used for dual purposes, the court should consider whether the principal purpose is to provide for retirement or to provide for current needs." Id. (citing Spencer v. Lowery, 235 Cal.App.3d 1636, 1639, 1 Cal.Rptr.2d 795 (Cal.Ct.App.1991)); accord Dudley v. Anderson (In re Dudley), 249 F.3d 1170, 1176–77 (9th Cir.2001).
Segovia argued summarily in her trial brief before the bankruptcy court that the LTICP stock options were wholly exempted by section 704.115. The trustee countered that testimony from a Wells Fargo executive, along with the LTICP itself, demonstrated that the stock options were an incentive provided to employees and not a retirement benefit. She asserted that this was further demonstrated by the fact that Segovia exercised some of the options pre-petition, realizing significant profits, and that the exercise of the options was not restricted by the LTICP or any other source, nor were there any tax issues or penalties related to their exercise.
Following the hearing, the bankruptcy court held that the LTICP was not exempt under section 704.115 as a private retirement plan because it was not designed or used as a retirement plan. The court found that "[t]he purpose of the plan is to encourage key employees to work for the long-term health of the company by providing pre-retirement income linked to the future value of the company stock." It found that "[t]he fact that vesting of the options may be accelerated upon retirement [was] merely incidental to the [incentivizing] purpose." The court also found that the Segovia did not use the LTICP as a retirement plan, but instead "generally exercised the options promptly upon vesting and expended the proceeds on improving her home."
In her opening brief on appeal, Segovia argues that the bankruptcy court erred because LTICP section 2.1(y), defining retirement, evidences Wells Fargo's intent to design a "retirement" plan. She contends that:
the LTICP's applicable '80 pt.' retirement scheme criteria was the retirement 'finish line' that [she] would have to cross in order to have a vested retirement right to exercise her unexpired ten-year stock options beyond her employment termination or "retirement date." Had [she] not crossed that finish line her only contractual obligation under the express terms of the LTICP would have been to exercise all of her unexercised stock options prior to her 'non-retirement' termination date.
PAGE_911 Opening Br. at 6. Segovia further notes that contrary to Phillips, a case cited by the bankruptcy court in its order, the LTICP was designed and operated by her employer, and not by herself.
Segovia also contends that there is no evidence that she attempted to elude creditors with the exercise of her stock options, and suggests that she actually had no control over them. She acknowledges that she exercised approximately 31% of her total stock options prior to retirement, but suggests that this does not negate the fact that they were still used primarily for retirement purposes.
In opposition, the trustee argues that the bankruptcy court's findings were correct. She notes that section one of the LTICP expressly states that its purpose is "to motivate key employees to produce a superior return to the stockholders of Wells Fargo & Company by offering them an opportunity to participate in stockholder gains, by facilitating stock ownership and by rewarding them for achieving a high level of corporate financial performance." Appellee's E.R., Ex. 1 at 1. The trustee also relies on a district court decision cited by the bankruptcy court below, International Paper Co. v. Suwyn, 978 F.Supp. 506, 509–12 (S.D.N.Y.1997). In Suwyn, the district court held that a key factor in determining whether plans are primarily designed for retirement purposes includes whether benefits are paid on a current basis before retirement age, or are otherwise available periodically during the course of employment, or whether any payments that may, in fact, be made after termination or retirement are merely incidental. Id. Here, the trustee points out that Segovia's options vested prior to the termination of her employment.
The trustee also argues that Segovia did not in fact use the plan as a retirement plan, noting that she generally exercised her options immediately upon vesting, while actively employed and prior to retirement. She argues that Segovia's exercise of 31% of the options granted to fund home improvements was neither de minimus nor an isolated occurrence.
On appeal, the issue of whether a plan is designed and used for retirement purposes is a question of fact that this court reviews for clear error. In re Jacoway, 255 B.R. at 237. "A factual determination is clearly erroneous if the appellate court, after reviewing the record, has a firm and definite conviction that a mistake has been committed." Wall St. Plaza, LLC v. JSJF Corp. (In re JSJF Corp.), 344 B.R. 94, 99 (9th Cir. BAP 2006) (citing Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)).
Here, the court need not decide the first prong—whether or not the LTICP constitutes a "private retirement plan" under section 704.115—because it concludes that even if the plan did in fact satisfy the statutory language of that section, it is nevertheless not exempt from the bankruptcy estate because the LTICP was not "designed and used" for Segovia's retirement purposes.
First, the court agrees with the bankruptcy court, that based on the language of the LTICP and the testimony of Roe and Morrow, the plan was not "designed" for retirement purposes. The LTICP could be no clearer that its purpose is to incentivize and to retain employees, and Roe confirmed that this was the case. Additionally, the fact that Wells Fargo already provided employees with pension and 401(k) plans expressly designed for retirement purposes further demonstrates that the LTICP was not also designed for such a purpose.
Second, concerning Segovia's "use" of the LTICP, the court finds that, in spite PAGE_912 of the fact that the LTICP was maintained by Segovia's employer, this case is nevertheless similar to the Ninth Circuit's decision in In re Daniel.3 771 F.2d 1352, 1357–58 (9th Cir.1985), abrogated on other grounds by Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992). In Daniel, the debtor was a physician who was employed by his own professional corporation. Id. at 1354. The corporation formed a pension and profit-sharing plan, which the debtor managed and controlled. Id. The debtor took an unsecured loan of $75,000 from the plan, which represented most of the debtor's interest in the plan. Id. Although he agreed to repay the loan at 10% interest, when the loan became due, the debtor rolled it over to another promissory note and never made any payments. Id. Two weeks before the debtor filed his bankruptcy petition, he caused his corporation to contribute $39,000 to the plan, which was all of the corporation's available cash. Id.
Segovia is erroneous in her suggestion in her SOI that her "use" of the LTICP was not relevant.
Considering the claim of exemption in the plan under California's predecessor to sec. 704.115, which contained provisions similar to those contained in the current statute, the Ninth Circuit concluded that the debtor had not used the plan "principally" for retirement purposes. Id. at 1357–58. The court noted that the debtor's unsecured $75,000 loan to himself from the plan, which depleted nearly the entire value of the plan, was "more a withdrawal than a loan, thereby negating a retirement 'use' purpose." Id. at 1357. The court continued: "If debtor's real concern had been retirement, rather than buying a residence with pre-tax dollars, he would surely have invested the funds in assets which would yield a competitive money market return, would provide adequate security, and would preserve and enhance the capital of the plan." Id. The court also determined that "the transfer of $39,000 from the corporation to the plan on the eve of bankruptcy further demonstrate[d] that the debtor's use of the plan was not for retirement purposes." Id. The Daniel court further stated:
_ [T]he plan essentially operated to meet debtor's short-term personal needs by lending money or shielding and hiding funds from creditors. Moreover, the debtor has failed to show how his transactions with the plan, by virtue of his role as trustee, were in furtherance of legitimate long-term retirement purposes.
Id. at 1358. The Ninth Circuit thus concluded that "the lower courts were amply justified in finding that the debtor's plan was not principally 'used for retirement purposes [.]' " Id.
Similar to the plaintiff in Daniel, Segovia also exercised her vested stock options pre-petition for a non-retirement purpose. The court rejects Segovia's contention that the remodeling of her home could somehow be characterized as having a "retirement purpose." Here, as correctly noted by the bankruptcy court, Segovia developed a pattern of exercising her stock options as they vested, as opposed to saving or investing them for retirement purposes.
This case is unlike Bloom, in which the Ninth Circuit held that the debtor's retirement plans were not so abused as to lose their retirement purpose. 839 F.2d at 1379. In Bloom, the debtor had taken loans from her private retirement and profit sharing plans, which had been created PAGE_913 by the medical corporation of which she was a 50% owner. Id. at 1377. At the time she filed bankruptcy, the debtor's interest in the plans was approximately $475,000. Id. This amount included $300,000 the debtor owed on promissory notes for loans she had taken from the plan. Id. The debtor had made interest payments on the loans, but had not repaid any principal. Id. The court concluded that "Bloom's plans were not so abused as to lose their retirement purpose," based on four circumstances. Id. at 1379.
First, it found that debtor followed the procedures set out in the plan for obtaining loans. Id. Second, the debtor was charged a reasonable rate of interest on the loans. Id. Third, she regularly made the interest payments due, over a period of several years. The court found that these three factors indicated that, unlike the debtor in Daniel, the transactions were not "more a withdrawal than a loan." Id. (citing Daniel, 771 F.2d at 1357). Fourth, the court found that there was no indication that the debtor used the plan to hide otherwise ineligible assets from bankruptcy administration, as did the debtor in Daniel. In sum, the court held that the debtor did not cease to treat her plans as retirement plans. Id.
Here, as Roe attested, unlike Bloom, the LTICP does not contain any limits on a participant's exercise of stock options once they have vested. Segovia did not have to take a promissory note on the $205,591.63 worth of options that she exercised to remodel her home. Like Daniel, the options that Segovia exercised pre-petition were much more in the nature of "a withdrawal than a loan." 771 F.2d at 1357. Furthermore, Segovia's exercise of her vested stock options, which represented more than one-third of the value of the options she held under the LTICP, could hardly be considered "de minimus." See Jacoway, 255 B.R. at 240.
For these reasons, the court AFFIRMS the bankruptcy court on this issue, and finds that it did not commit clear error in determining that the LTICP was not designed for or used by Segovia for retirement purposes. Accordingly, all of the claims related to this issue fail.
II. Whether the LTICP is a Pension Plan Subject to ERISA and Excludable from the Bankruptcy Estate under Bankruptcy Code sec. 541(c) (2)
_ [Omitted for brevity.]
PAGE_924 III. Whether the LTICP Qualifies as a Spendthrift Trust under Bankruptcy Code sec. 541(c)(2)
_ [Omitted for brevity.]
IV. Other Related Issues
As noted, in her SOI and opening brief, Segovia raised issues regarding whether the LTICP stock options were "double-insulated," and also whether ERISA preempts California's Code of Civil Procedure sec. 704.115, governing private retirement plans. The court is understandably unclear as to Segovia's argument regarding the "double insulation" issue since she failed to address the issue in her briefs on appeal. However, having reviewed her trial brief, the court was able to ascertain that Segovia is arguing simply that the LTICP is both an ERISA plan and a private retirement plan. She asserts that to the extent it is both, ERISA would preempt California's Code of Civil Procedure sec. 704.115. Accordingly, the "double insulation" issue adds nothing new to the issues already addressed above. Because the court finds that the LTICP is neither an ERISA plan nor a private retirement plan, the argument fails.
As for the preemption issue, Segovia argues simply in her opening brief that "[o]nce the LTICP is determined to be an exempt private retirement plan under California law, it is then nevertheless preempted and excluded pursuant to 11 U.S.C. sec. 541(c)(2) by the LTICP's valid and enforceable anti-alienation provision under ERISA." Opening Br. at 8. Again, because the court finds that the LTICP is neither an ERISA plan nor a private retirement plan, the argument fails as well.
For the reasons set forth above, the court AFFIRMS the judgment of the bankruptcy court sustaining Wells Fargo's objections to Segovia's claimed exemptions and/or exclusions from the bankruptcy estate.
IT IS SO ORDERED.