Appeal from the United States District Court for the Central District of California Margaret M. Morrow, District Judge, Presiding D.C. Nos. 8:06-cv-01022-MMM & 8:06-cv-01022-MMM.
The opinion of the court was delivered by: Gould, Circuit Judge
Argued and Submitted May 8, 2009 -- Pasadena, California.
Before: Betty B. Fletcher, Raymond C. Fisher, and Ronald M. Gould, Circuit Judges.
Facing a civil judgment debt of more than $6.5 million, Lloyd Myles Rucker declared bankruptcy and tried to exempt his assets as belonging to private retirement plans under California Civil Procedure Code ("CPC") § 704.115. Rucker had previously placed the assets in pension and 401(k) plans funded by his wholly owned corporations. The bankruptcy court denied the exemption on the explicit ground that Rucker's retirement plans were not designed and used primarily for retirement purposes. The district court saw it otherwise and reversed this judgment. We conclude, after considering the totality of the circumstances, that the bankruptcy court's prior decision was not clear error, and we therefore reverse the district court. Because the applicable law was not free from doubt, we elaborate our reasons for disagreement with the district court's assessment.
In 1997 Ronald Cunning and Ronald Cunning D.D.S., Inc. (collectively "Cunning"), obtained a civil judgment against Rucker for $3.2 million. Rucker served 30 months in jail for his criminally fraudulent conduct that gave rise to the judgment. See United States v. Rucker, 132 F.3d 41 (9th Cir. 1997) (unpublished); United States v. Rucker, 107 F.3d 18 (9th Cir. 1996) (unpublished). With interest, Rucker now owes more than $6.5 million to Cunning on the judgment.
In 2001 Rucker established the Lloyd Rucker Defined Benefit Pension Plan (the "Pension Plan") and several 401(k) plans (the "401(k) Plans"). The Plans were associated with three of Rucker's wholly owned corporations (the "Controlled Corporations"), and Rucker was the sole employee beneficiary of his Plans. From 2001 to 2005 Rucker aggressively funded the Plans both personally and through his Controlled Corporations. In most of these years Rucker wilfully caused the Plans to be "overfunded," in that contributions to them exceeded the annual limits imposed by the Internal Revenue Code. See 26 U.S.C. § 401(a)(16) (stating that retirement plans must adhere to contribution limits to earn favorable tax treatment). The overfunding amount was about 20 percent of the total value of the Plans. Also, contributions to the Plans by the Controlled Corporations were markedly substantial in relation to the salaries the corporations paid to Rucker, in some instances exceeding his salary. For example, in 2001 and 2002 the Controlled Corporations contributed at least $30,000 more each year to Rucker's retirement plans than they paid to him in salary. And in 2003 and 2004 Plan contributions were about equal to Rucker's salary.
Rucker's Plan activities quite plainly violated several Internal Revenue Service ("IRS") rules. The bankruptcy court found that Rucker "repeatedly failed to accurately disclose" to the IRS contributions made by the Controlled Corporations. Between 2002 and 2004 Rucker contributed $160,000 more to the 401(k) Plans than he disclosed to the IRS, and in 2003 alone he contributed about $150,000 more to the Pension Plan than he first reported. The record also shows that in 2003 Rucker directed a wholly owned offshore corporation to contribute $120,000 to his Plans via a foreign bank account, even though the offshore corporation was not a plan sponsor permitted to contribute to the Plans. Finally, in 2003 the Pension Plan purchased property on which Rucker lived rent-free for six months. However, the total rental value of the property for that time period constituted less than four percent of the Plan assets. Apart from this relatively small constructive rent payment, Rucker has not borrowed or withdrawn money from his Plans. The general picture is that Rucker disregarded IRS rules in funding his Plans but that he generally did not withdraw money from his Plans for his personal use.
When Rucker filed for bankruptcy his Plans were worth about $1.2 million. By contrast, Rucker has paid Cunning virtually nothing on the judgment. Rucker has also said that he has no plans to pay any part of the judgment. Rucker explained: "It would be like paying into a black hole."
After Cunning increased his collection efforts in 2005, Rucker filed for Chapter 7 bankruptcy in Florida, but he did not meet the venue requirements and the case was transferred to the Central District of California. In the California federal bankruptcy court, Rucker declared as exempt his assets in all the Plans under CPC § 704.115(b), which exempts "all amounts held, controlled, or in process of distribution by a private retirement plan." Cunning objected to the exemption, claiming that the Plans were not exempt because they were not designed or used primarily for retirement purposes.
After a bench trial, the bankruptcy court sustained Cunning's objection and determined that the Plans were not exempt because Rucker designed and used the Plans primarily to shield his assets from Cunning. Instrumental in the bankruptcy court's reasoning were the facts that Rucker over-funded the Plans, that Rucker took at least one constructive rent payment, and that Rucker did not accurately disclose his contributions as required by IRS regulations. The bankruptcy court also found explicitly that Rucker lacked credibility.*fn1
Rucker appealed to the district court, which reversed the bankruptcy court and held that although Rucker may have created the Plans in part to shield assets, he was still entitled to the exemption because the Plans were designed and used primarily for retirement purposes. ...