Voidable Transactions And California Private Retirement Plans

CAPRP_UVTA CAPRP CaprpFraudulentTransferIssues

While the assets held in a California Private Retirement Plan may be exempt from creditors, those same creditors may still challenge the transfers which were made to the Plan under a voidable transaction (was: fraudulent transfer) theory. For information on voidable transactions generally, see https://voidabletransactions.com

While technically there are five tests for what constitutes a voidable transaction, in the private retirement plan context a voidable transaction claim will typically arise if the creditor can prove either of two facts:

(1) The debtor was insolvent at the time that the Plan was funded (insolvency test); or
(2) The debtor funded the Plan with the intention of defeating creditors, as opposed to planning for retirement (intent test).

Several court opinions illustrate creditor attacks on California Private Retirement Plans by way of voidable transaction theories:

Very simply, if a person who has creditor problems or is under financial distress funds a California Private Retirement Plan, the odds of it ultimately working to defeat creditors ranges from very low to non-existent. This hasn't stopped shameless promoters from pitching PRPs to their clients in these situations, since, after all, they still get paid even if it doesn't work for their client, or (as usually happens) puts their client into a worse posture than if the PRP had never been done at all.

Likewise, if a person overloads their California Private Retirement Plan, that can be evidence of an intent to defeat creditors, as opposed to fund the plan for retirement. The same can be true if unusual assets are placed in the Plan, such as an operating business or a personal residence. The truism "pigs get fat, hogs get slaughtered" should be heeded here on the conservative side.

That a promoter who markets California Private Retirement Plans as an asset protection tool was used by the debtor in forming such a Plan can constitute evidence of intent by the debtor that the Plan's primary purpose was to defeat creditors, and not for bona fide retirement purposes. Further caution that in voidable transactions cases, the attorney/client privilege is frequently vitiated -- meaning that normally protected attorney/client communications become discoverable to creditors. Thus, if there is evidence that the plan was designed primarily for asset protection purposes, such as might be found in planning memoranda, engagement letters, correspondence and e-mails, etc., a creditor might already be more than halfway to busting the Plan on a voidable transactions theory.

Having said all that, the law in California seems to be that if the PRP is set up and used exclusively for bona fide retirement purposes, a transfer to the plan of assets that might otherwise be a fraudulent transfer may be protected by the exemption, at least according to the language of the Schwartzman opinion below:

"The very purpose of the exemption is to permit a judgment debtor to place funds beyond the reach of creditors, so long as they qualify for the exemption under the law. (See Yaesu Electronics Corp. v. Tamura, supra, 28 Cal.App.4th at p. 13, 33 Cal.Rptr.2d 283.) Thus, a transfer which might otherwise be fraudulent is permitted if the funds qualify for an exemption. There is nothing in the statute, however, which would permit denial of an exemption on the ground that unrelated funds are ineligible and have been fraudulently transferred."

Schwartzman v. Wilshinsky, 50 Cal. App. 4th 619, 629, 57 Cal. Rptr. 2d 790, 797 (1996) (emphasis added).

This analysis will be very fact specific. Consider the following two illustrations:

Illustration 1. Debtor has a retirement account that his business has been regularly funding for some years. After negligently crashing into a busload of plastic surgeons resulting in a huge liability to debtor, the business continues to fund debtor's retirement account in the normal course according to actuarial calculations, etc. This might not be a fraudulent transfer under Schwartzman.

Illustration 2. Debtors crashed into a busload of plastic surgeons. Trying to move his assets beyond their reach, debtor has his business create a retirement plan for the first time and begins to fund it. A fact-finder could (but not be required to) infer that the purpose of the retirement plan was do defeat creditors, whereby it would not be entitled to the exemption at all and transfers to the retirement plan would be a fraudulent transfer. The problem that the creditor would have to navigate around, however, is that the business is not a "debtor" and therefore cannot make a voidable transaction; thus, the creditor would first have to get the court to first determine that the business is the debtor's alter ego.

Voidable Transactions And California Private Retirement Plans Topics And Opinions

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