Judgment Creditor AMBS Diagnostics, LLC (“AMBS”) originally sought to collect on its money judgment by levying the assets held in judgment debtor Timothy O'Brien's (“O'Brien”) Individual Retirement Accounts (IRAs). In response, O'Brien filed a claim of exemption claiming the assets were fully exempt. The trial court ruled that the funds in O'Brien's IRAs were fully exempt from judgment. The Court of Appeal reversed the trial court's ruling, determining that the funds were only partially exempt under California Code of Civil Procedure 704.115(a)(3). (O'Brien v. AMBS Diagnostics, LLC (2016) 246 Cal.App.4th 942.) The Court of Appeal remanded the matter back to the trial court to determine the amount of O'Brien's IRAs necessary to provide for the support of the judgment debtor, his spouse, and dependents upon retirement as required by California Code of Civil Procedure 704.115(e).
Following the appeal court's decision, O'Brien formed a new limited liability company, had the new LLC form a 401(k) Plan, and then transferred all of the assets previously held in his IRAs into the newly formed 401(k) Plan. AMBS filed a notice of levy seeking the assets now held in the 401(k) Plan. The trial court determined that the assets were now fully exempt because they were held in a “private retirement plan” under CCP 704.115(a)(1). AMBS appealed the decision.
The appeal was filed by attorneys Paul D. Woodard and Marc Schechter of Butterfield Schechter LLP on behalf of AMBS. Although AMBS raised several arguments on appeal, the appellate court boiled down the arguments to two main issues to be decided:
- Is a 401(k) Plan that a debtor created and controls with the avowed purpose of protecting his assets from creditors a plan principally designed and used for retirement purposes thereby rendering the funds in that plan fully exempt from levy?
(2) If not, did the debtor's transfer of funds to that 401(k) Plan negate the partially exempt status those funds previously held while in the IRAs?
As to the first issue, the Court of Appeal ruled that that the 401(k) Plan was not principally or primarily designed and used for retirement purposes, so the plan was not a fully exempt “private retirement plan” within the meaning of Code of Civil Procedure section 704.115(a)(1).
As to the second issue, the Court of Appeal found that the default tracing rule applied, so the funds O'Brien transferred from his IRAs to the 401(k) Plan retained the partially exempt status they acquired when initially held in those accounts pursuant to Code of Civil Procedure section 704.115(a)(3). The case was remanded for the trial court to determine the amount necessary for O'Brien's retirement under Code of Civil Procedure section 704.115(e).
O'Brien v. AMBS Diagnostics, LLC, 38 Cal.App.5th 553, 251 Cal. Rptr. 3d 41 (2019)