UNITED STATES BANKRUPTCY COURT
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NORTHERN DISTRICT OF CALIFORNIA
BRIAN and DONNA PORTERFIELD, No. 97-12737
Memorandum of Decision
Chapter 7 debtor Donna Porterfield's deceased father had been a participant in his employer's
ERISA-qualified pension plan. He opted to take smaller benefits during his life so that benefits would
continue to be paid to a beneficiary of his choice for ten years after his death. Before his death, he
established a trust and named the trust as the beneficiary of the pension benefits. Donna Porterfield is a
one-third beneficiary of this trust. She has claimed her distributions from this trust as exempt. These
amount to 30 payments of $805.00 each, totaling $23,345.00. The Chapter 7 trustee objects.
II. Property of the Estate
The trust established by Porterfield's father contains no spendthrift provisions. Because ERISA-qualified pensions plan benefits are inalienable, they are not property of a bankruptcy estate. Patterson
, 504 U.S. 753, 119 L.Ed.2d 519 (1992). If Porterfield had been made a direct beneficiary
of the pension plan, she would have a good argument that her benefits were not property of the estate,
even though she is only in her thirties and not near retirement age, because the benefits were not
property of the estate. Likewise, if the trust her father created had contained a spendthrift provision
then her interest in the trust would not be property of the estate.
However, since the trust is not a spendthrift trust her interest in it is property of the estate. 11
U.S.C. § 541(c). The court sees no relevance in where the trust obtained its corpus. Many trusts are
set up to be beneficiaries of other trusts; the mere fact that a prior trust contained spendthrift provisions
does not automatically turn all downstream trusts into spendthrift trusts.
In order for any property to be exempt, it must first be property of the estate. 11 U.S.C. §
522(b). Property of the estate consists of all legal or equitable interests of the debtor as of the
commencement of the case. 11 U.S.C. § 541(a)(1). Under modern California trust law, a beneficiary
of a trust has equitable title to trust assets, and not merely a personal right against the trustee to enforce
the trust. 11 Witkin, Summary of California Law
Ed.), Trusts, § 159(b); 60 Cal.Jur. 3d (Rev),
Trusts § 69 ["A beneficiary's estate is an equitable estate or beneficial interest in trust property, which is
regarded by equity as the real ownership"]. Therefore, Porterfield's interest in the payments from her
father's retirement plan are property of the estate, and may be exempted if there is an applicable statute,
notwithstanding that they are distributed to her through a trust rather than directly. According to her,
there is such a statute.
Porterfield relies on California Code of Civil Procedure § 704.115(b), which provides:
(b) All amounts held, controlled, or in the 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
At the time the bankruptcy petition was filed, all the funds in question were being held or were
in the process of distribution as a death benefit from a private retirement plan. As Porterfield points
out, the statute does not limit the exemption to the retiree. Under the plain language of the statute
(which, in any event, is to be liberally interpreted in favor of the debtor), Porterfield is entitled to the
The trustee argues that In re Friedman
, 220 B.R. 670 (9th
Cir.BAP 1998) compels that the
exemption be disallowed, but the court does not agree. In Friedman
, the Appellate Panel held that the
term "payment of benefits" in the statute did not apply to loans from a retirement account. 220 B.R. at
672. In this case, the payments are clearly benefits.
The court's initial reaction to this matter, as expressed at the hearing, was that the exemption
must be denied because the trust from which Porterfield receives the payments has no spendthrift
provision. However, a review of the current state of California trust law revealed that a trust
beneficiary has equitable ownership rights in the assets of the trust. This means that the pension benefits
are property of the bankruptcy estate even though they are distributed through a trust.
Once it is clear that the benefits are property of the estate, the right to exempt them is
compelling. There is no basis for the trustee's assertion that only the retiree can make a claim under
CCP § 704.115(b). Accordingly, the trustee's objection will be overruled. Counsel for Portefield shall
submit an appropriate form of order.
Dated: February 18, 1999 ____________________________
United States Bankruptcy