Elliott v. Pac. W. Bank (In re Elliott)

969 F.3d 1006

IN RE Edwin Earl ELLIOTT,

Edwin Earl Elliott, Appellant,

v.Pacific Western Bank, a California state-chartered bank, Appellee.

No. 18-17421

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 6, 2020 San Francisco, California

Filed August 12, 2020

David M. McKim (argued), Law Offices of David M. McKim, Santa Rose, California, for Appellant.

J. Alexandra Rhim (argued), Hemar Rousso & Heald LLP, Encino, California, for Appellee.

Before: Richard A. Paez and Carlos T. Bea, Circuit Judges, and Lynn S. Adelman,^* District Judge.

PAEZ, Circuit Judge:

A little over three months after a sheriff levied on Edwin Earl Elliott's individual retirement account ("IRA") funds, Elliott filed for chapter 7 bankruptcy. During the liquidation of his bankruptcy estate and later in the present adversary proceeding, Elliott claimed that his retirement funds were exempt from the bankruptcy estate.

In dismissing the adversary complaint for failure to state a claim, the bankruptcy court held that Elliott could not reclaim his retirement funds because he filed the bankruptcy petition after the execution lien had been satisfied. The district court summarily affirmed. Largely for the reasons stated by the bankruptcy court, we affirm the district court's judgment.

I.

Pacific Western Bank ("the Bank")’s predecessor in interest issued a loan on which Elliott was either the borrower or guarantor. The Bank eventually declared a default on the loan, at least in part because of nonrepayment. To recover the amount owed, the Bank sued Elliott in California Superior Court for the County of San Mateo and obtained a judgment in its favor. Following entry of the state-court judgment, the Bank obtained a writ of execution and instructed the San Mateo County Sheriff to levy on IRA Trust Services Company, which held Elliott's IRA funds.¹ The parties agree that this levy created an execution lien under California law. See Cal. Civ. Proc. Code ("CCP") § 697.710.

On December 2, 2016, the Sheriff levied $28,870.19 from Elliott's IRA account with IRA Trust Services. Before the Sheriff released the funds to the Bank, Elliott filed a claim of exemption in state court. He argued that the funds should be treated as a needs-based exemption under CCP § 704.115. That section shields from money judgments private retirement plans, profit-sharing plans designed for retirement purposes, and other forms of retirement assets. See CCP § 704.115(a) – (b). IRAs are exempt under the statute "only to the extent necessary to provide for the support of the judgment debtor when [he] retires ... taking into account all resources that are likely to be available[.]" McMullen v. Haycock , 147 Cal.App.4th 753, 54 Cal. Rptr. 3d 660, 660 (2007) (internal quotation marks omitted).

The superior court denied Elliott's exemption claim the following month. Shortly thereafter, on or about February 15, 2017, the San Mateo County Sheriff's Office released the levied funds to the Bank. The parties agree that the present litigation concerns only the levied funds; the balance of Elliott's IRA account consists of illiquid assets which remain in the possession of IRA Trust Services. The Bank claims no interest in those assets.

On March 13, 2017, Elliott filed his chapter 7 bankruptcy petition. He claimed all assets in his IRA were exempt from creditors under a different section of the California's exemption statutes, CCP § 703.140(b)(10)(E), and a provision of the Bankruptcy Code, 11 U.S.C. § 522(b)(3)(C). Both sections exempt certain retirement funds from being used to satisfy a money judgment. Section 703.140(b)(10)(E) provides that a debtor in a bankruptcy proceeding (like Elliott) may exempt his right to receive a "payment under a stock bonus, pension, profit-sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service[.]" Section 522(b)(3)(C) of the Bankruptcy Code exempts "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under" various provisions of the Internal Revenue Code.

The Bank did not object to Elliott's claimed exemptions because, in its view, "the Bank had completed its prepetition levy" on the IRA funds, and therefore the funds no longer "constitute[d] property of the Debtor or the estate." The Bank maintains that when the funds were paid to the Sheriff, the lien expired under CCP § 700.140, effectively terminating any rights Elliott had to the funds. Thus, the Bank argues, Elliott cannot claim an exemption on assets that were neither his nor part of the bankruptcy estate. See In re Hernandez , 483 B.R. 713, 720 (B.A.P. 9th Cir. 2012).

The chapter 7 trustee eventually filed a no-distribution report, and the bankruptcy court closed the case on June 21, 2017. Elliott filed the present adversary proceeding shortly thereafter. Before the bankruptcy court, he argued he could avoid the transfer of his levied IRA funds to the Bank under sections 522(h) or (f) of the Bankruptcy Code.

The Bank moved to dismiss the adversary complaint. It argued that Elliott could not state a claim under either section 522(h) or (f) and, even if he could, the action was timebarred under section 550(f) or should be dismissed for lack of subject-matter jurisdiction under Federal Rule of Bankruptcy Procedure 7012(b)(1). Elliott then moved to reopen the bankruptcy case, which the court granted. The bankruptcy court mentioned the time-bar argument but, in ruling for the Bank, rested its holding entirely on Elliott's failure to state a claim under sections 522(h) or (f).² On appeal, the district court summarily affirmed the dismissal.

Elliott appeals the district court's and bankruptcy court's rulings, arguing that the bankruptcy court erred in concluding that the transfer of the IRA funds was not avoidable under sections 522(h) or (f).

II.

A.

We have jurisdiction over the district court's order affirming the bankruptcy court's judgment under 28 U.S.C. § 158(d)(1). The Bank sought dismissal of the adversary complaint under Federal Rule of Bankruptcy Procedure 7012(b)(1) and (b)(6), which incorporate Federal Rules of Civil Procedure 12(b)(1) and (b)(6). We review de novo a district court's decision on appeal from a bankruptcy court. In re Smith's Home Furnishings, Inc. , 265 F.3d 959, 962–63 (9th Cir. 2001).

B.

We first address whether the district court erred in affirming the bankruptcy court's determination that Elliott failed to state a claim under 11 U.S.C. § 522(h). When a trustee does not seek avoidance of transferred property, a debtor may step into the role of the trustee under section 522(h) of the Bankruptcy Code and attempt to avoid certain transfers of exempt property. In re DeMarah , 62 F.3d 1248, 1250 (9th Cir. 1995).

Under section 522(h), a debtor may "avoid," i.e., undo, a transfer of exempt property made before the filing of a bankruptcy petition. Section 522(h) states:

The debtor may avoid a transfer of property of the debtor or recover a setoff to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if—

(1) such transfer is avoidable by the trustee under section ... 547... of this title ...; and

(2) the trustee does not attempt to avoid such transfer.

We have explained that section 522(h) requires a debtor to establish five conditions to shield his property from the bankruptcy estate:

(1) the transfer cannot have been a voluntary transfer of property by the debtor; (2) the debtor cannot have concealed the property; (3) the trustee cannot have attempted to avoid the transfer; (4) the debtor must exercise an avoidance power usually used by the trustee that is listed within § 522(h) ; and (5) the transferred property must be of a kind that the debtor would have been able to exempt from the estate if the trustee (as opposed to the debtor) had avoided the transfer pursuant to one of the statutory provisions in § 522(g). See 11 U.S.C. §§ 522(g) and (h).

In re DeMarah , 62 F.3d at 1250. The first four factors are not in dispute: Elliott did not voluntarily transfer the IRA funds, there is no evidence he attempted to conceal it or that the trustee attempted to avoid the transfer, and Elliott's avoidance power—assuming the money at issue can still be considered his property—is one the trustee could have exercised under section 522(h).

To establish the fifth condition, Elliott argues that "the transferred property [was] of a kind that [he] would have been able to exempt from the estate," id ., because the transfer would have been avoidable by the trustee under section 547. See 11 U.S.C. § 522(h)(1).

Section 547 allows the bankruptcy trustee (or, the debtor, when he is acting in the place of the trustee) to set aside "preferential" transfers and recapture the transferred property. To establish a preferential transfer, the trustee or debtor must show that the transfer, among other things, "enables such creditor to receive more than such creditor would receive" if (A) "the case were a case under chapter 7" of the Bankruptcy Code; (B) "the transfer had not been made"; and (C) "such creditor received payment of such debt to the extent provided by the provisions" of the Bankruptcy Code. 11 U.S.C. § 547(b)(5). The bankruptcy court held that Elliott failed to establish a preferential transfer because "the Bank did not receive more than it would have received in liquidation, a prerequisite to any preferential transfer liability."

1.

We must evaluate, then, whether Elliott can establish that the Bank received more from the prepetition levy than it would have received from his chapter 7 liquidation. The section 547(b)(5) inquiry is called the "greater amount test." In re Tenderloin Health , 849 F.3d 1231, 1235 (9th Cir. 2017). It requires " ‘the court to construct a hypothetical chapter 7 case and determine what the creditor would have received if the case had proceeded under chapter 7’ without the alleged...