Central District Consumer Bankruptcy Attorney's Association

FYI ...
Law Office of Eric Alan Mitnick
21515 Hawthorne Boulevard, Ste. 1080
Torrance, California 90503
Telephone: (310) 792-5864
Facsimile: (310) 347-4353
Email: MitnickLaw@aol.com, MitnickLaw@gmail.com
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r.ca.gov>
To: MitnickLaw
Sent: Fri, Jun 10, 2016 9:30 am
Subject: ILC E-Bulletin: Cal. App. Rules 529 College Savings Funds are not Exempt from Execution
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June 10, 2016
Dear constituency list members of the Insolvency Law Committee:
The following is a case update prepared by Professor Dan Schechter, Loyola Law School, Los Angeles, analyzing a recent decision of interest:
SUMMARY:
A California appellate court has held that a judgment creditor has the power to execute on assets held within college savings accounts maintained by a judgment debtor for the benefit of his children because there is no express exemption for those accounts under the California statutes governing the enforcement of judgments. [OBrien vs. AMBS Diagnostics, LLC, 2016 Westlaw --- (Cal.App.).]
FACTS: A creditor obtained a large judgment against an individual debtor. The creditor sought to levy execution on the debtors investment accounts, including three college savings accounts that he maintained on behalf of his children. He invoked the exemption for retirement accounts under Calif. Code of Civil Procedure 704.115. The trial court ruled in his favor, and the judgment creditor appealed.
REASONING: The appellate court reversed, holding that although the accounts were authorized by 529 of the Internal Revenue Code, the creditor's ability to reach those accounts was governed by California law. Although retirement accounts are indeed exempt from execution, college savings accounts are not included under the California exemption statutes.
The judgment debtor argued that there were strong public policy reasons favoring the protection of college savings accounts, but the court noted that although 27 other states have statutorily exempted "529 accounts" from execution, California has not. The court held that it did not have the power to "create a brand-new exception from whole cloth, no matter how persuasive the policy reasons that might support it." The court concluded: "We leave that task where our Constitution put it with our Legislature."
AUTHORS COMMENT: I predict rapid Legislative action to overturn the result in this case. Although the court is certainly right that there is no statutory exclusion of 529 accounts under California law, I am not sure that the result in this case is correct because the property held in those accounts appears to be in the nature of trust assets that are not alienable by the debtor.
Under the Enforcement of Judgments Law (C.C.P. 680.010 et seq.), the only property that can be reached by a judgment creditor is property of the judgment debtor himself. See 695.010(a): "Except as otherwise provided by law, all property of the judgment debtor is subject to enforcement of a money judgment." Property that the judgment debtor does not have the power to transfer cannot be used to satisfy the judgment debtor's obligation under 695.030(a): "Except as otherwise provided by statute, property of the judgment debtor that is not assignable or transferable is not subject to enforcement of a money judgment."
In California, the treatment of 529 accounts is governed by the Golden State Scholarshare Trust Act, Education Code 69980 et seq. Section 69986(a) provides:
The participant shall retain ownership of all contributions made under any participation agreement up to the date of utilization for payment of higher education costs for the beneficiary, and all interest derived from the investment of the payments made by the participant shall be deemed to be held in Scholarshare trust for the benefit of the beneficiary. Neither the contributions, nor any interest derived therefrom, may be pledged as collateral for any loan.
That last sentence is critical: the participant (i.e., the judgment debtor who has created the 529 account) cannot use the property within the trust as collateral for any loan. Given that limitation, does it make sense to say that the assets within the account cannot be used as collateral for obligations owed to consensual creditors but can be reached by judgment creditors to satisfy judgment debts? The clear implication is that the judgment debtor cannot assign or transfer those assets. Therefore, under 695.030(a), that property may not be reachable by the judgment debtor's creditors.
Further, empowering judgment creditors to reach those assets and to deprive the beneficiaries of money set aside for their education would appear to violate the statutory purpose of the Scholarshare Trust Act. See Education Code 69994:
This act shall be construed liberally in order to effectuate its legislative intent. The purposes of this act and all of its provisions with respect to powers granted shall be broadly interpreted to effectuate that intent and purposes and not as to any limitation of powers.
But now to play devil's advocate: there is a counter-argument to my position. Look again at the language of 69986(a):
The participant shall retain ownership of all contributions made under any participation agreement up to the date of utilization for payment of higher education costs for the beneficiary, and all interest derived from the investment of the payments made by the participant shall be deemed to be held in Scholarshare trust for the benefit of the beneficiary. Neither the contributions, nor any interest derived therefrom, may be pledged as collateral for any loan.
First, it states that the "participant" (in our case, the judgment debtor who has established the 529 account) shall "retain ownership" of the contributions up until the date of utilization. That makes it sound as if the participant has unfettered discretion to dispose of those assets, even though the last sentence of that paragraph contradicts that notion. Second, note that the interest derived from the contributions "shall be deemed to be held in . . . trust" for the beneficiary. By negative implication, that could mean that the contributions themselves are not held in trust; if the Legislature had wanted all of those assets to be held in trust, it would have said so in this section of the statute.
Assuming that this decision is not reversed by the California Supreme Court and is not legislatively overturned, there may be a clumsy workaround: it seems possible that benefactors wishing to establish 529 accounts could create express irrevocable trusts for their intended beneficiaries, thereby completely insulating the assets in those accounts from the reach of the trustor's judgment creditors. In fact, it may be advisable for parents and grandparents who have existing 529 accounts to place those assets within a trust structure.
These materials were written by Professor Dan Schechter of Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them. Thank you for your continued support of the Committee.
Best regards,
Insolvency Law Committee
Co-Chair
Leib Lerner
Alston & Bird LLP
Leib.Lerner@alston.com
Co-Chair
Corey Weber
Brutzkus Gubner Rozansky Seror Weber LLP
cweber@brutzkusgubner.com
Co-Vice Chair
Asa S. Hami
SulmeyerKupetz, A Professional Corporation
ahami@sulmeyerlaw.com
Co-Vice Chair
Reno Fernandez
Macdonald Fernandez LLP
Reno@MacFern.com
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FYI ...
Law Office of Eric Alan Mitnick
21515 Hawthorne Boulevard, Ste. 1080
Torrance, California 90503
Telephone: (310) 792-5864
Facsimile: (310) 347-4353
Email: MitnickLaw@aol.com, MitnickLaw@gmail.com

Although this email and any attachments are believed to be free of any virus or other defect that might affect any computer system into which it is received and opened, it is the responsibility of the recipient to ensure that it is virus free and no responsibility is accepted by the sender for any loss or damage arising in any way from its use.

The information contained in this email message and any attached files may be privileged, confidential and protected from disclosure. If you are not the intended recipient, any dissemination, distribution or copying is strictly prohibited. If you think that you have received this email message in error, please notify the sender by reply email, and delete the email message you received and all of the attached files.
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To: MitnickLaw <MitnickLaw@aol.com>
Sent: Fri, Jun 10, 2016 9:30 am
Subject: ILC E-Bulletin: Cal. App. Rules 529 College Savings Funds are not Exempt from Execution
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