Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_17-cv-00408/USCOURTS-casd-3_17-cv-00408-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (District or BAP)

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

MATTHEW J. CHILDS,

Appellant,

v.

LESLIE T. GLADSTONE, Chapter 7 

Trustee,

Appellee.

Case No.: 17cv408-JAH (BLM)

Bankruptcy No. 15-05416-LA7

ORDER VACATING THE 

BANKRUPTCY COURT’S RULING

AND REMANDING FOR FURTHER 

PROCEEDINGS

INTRODUCTION

Appellant Matthew Childs (“Claimant” or “Appellant”) appeals the Feb 13, 2017 

order of the United States Bankruptcy Court sustaining the United States’ Trustee, Leslie 

T. Gladstone’s (“the Trustee”) objection to Child’s claim for exemption in a purported 

retirement account. The order was issued after an evidentiary hearing in which the 

Bankruptcy Court ruled because Claimant did not provide information, pursuant to 11 

U.S.C. §521(4), he failed to carry his burden of proof to show that the funds in the SWS

Group /ML Stearn & Co. Deferred Compensation (“SWS Deferred Comp” or “Southwest 

Sterns”) account qualified for exemption under California Code of Civil Procedure 

§703.140(b)(10)(E). For the reasons set forth below, the Court VACATES the order of 

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the Bankruptcy court as to the SWS Deferred Comp account and REMANDS for further 

proceedings consistent with this order.

BACKGROUND

Childs filed a Chapter 7 bankruptcy petition on August 18, 2015 listing two pension 

or profit-sharing plans: A Morgan Stanley 401k Plan (“401k” ) in the amount of 

$57,922.00 and a Morgan Stanley IRA Rollover account (“IRA”) in the amount of 

$50,337.00. Bnkr. Doc. No. 24 at 1-3; Doc. No. 11-2 at 42-441. Childs amended the 

petition in September 2015, January 2016 and May 2016. The January 2016 amendment 

redesignated the IRA as exempt property. Bnkr. Doc. No. 24 at 3; Doc. No. 11-2 at 44. 

The May amendment added an insurance policy and two additional profit-sharing plans to 

Schedule B (“Personal Property”): (1) The National Securities Rollover account in the 

amount of $61,604.00 and (2) the SWS Deferred Comp account listing a balance of 

$35,400.00. Bnkr. Doc. No. 29 at 4; Doc. No. 5-1 at 4. Both profit-sharing plans were also 

added to Schedule C (“Property Claimed as Exempt”). Id at 7. The SWS Deferred Comp

account is the subject of this appeal.

The United States Trustee filed an objection to the exemptions claimed on the basis 

that the funds in the IRA account were misused, no statements for the period of April 1, 

2015 to August 18, 2015 were provided for the SWS Deferred Comp plan, and further 

investigation was required. Bnkr. Doc. No. 41-1 at 1-5; Doc. No. 5-1 at 11-15. Childs filed 

an opposition along with a Declaration Opposing Trustee’s Objection to Exemption. Bnkr. 

Doc. Nos. 43, 45; Doc. No. 5-1 at 32-38. Attached to the declaration as an exhibit was a 

screenshot of the SWS Deferred Comp Plan reflecting a 100% vested retirement account 

balance of $35,465.03 as of January 28, 2016. Bnkr. Doc. No. 45 at 5; Doc. No. 5-1 at 41. 

The screenshot included multiple tabs. Id. The SWS Deferred Comp plan appeared under 

the highlighted tab “My Plans.” Id. The user then selected the tab entitled “Balance.” Id. 

 

1 The bankruptcy court’s docket and this Court’s docket are cited contemporaneously as “Bankr. Doc. 

No.” and “Doc. No.” respectively.

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Additional options included: Performance, Investments, Transactions, Future Elections, 

Deferrals, Distributions, and More. Id. 

At the initial hearing on the objection, the Bankruptcy court ordered Claimant to 

provide full information for each account claimed. Bnkr. Doc. No. 48 at 1; Doc. No. 14-1

at 54. In addition, the Trustee requested statements for all retirement accountsfor the twoyear period preceding the filing of the 2015 Chapter 7 petition. In relation to the SWS 

account, Claimant emailed Trustee and attached to a declaration seven quarterly account 

statements for the periods of July 2013 through March 31, 2015. Bnkr. Doc. No. 50 at 95-

109; Doc. No. 5-1 at 156-170. Within each quarterly statement is a section labeled 

“Account Summary,” which separates funds in the “2009 In-Service Account ” from the 

funds in the “2004 Deferred Compensation Plan Retirement Account.” Id. Within the 

summary section are columns labeled: Event, Distribution Start Date, Payment Method

(lump sum or 10 annual), Beginning Balance, and Ending Balance. Id. The word 

“Retirement” is listed within the column titled Event for the 2004 Deferred Compensation 

Plan. Id. The quarterly statement period ending March 31, 2015 indicates a “Change of 

Control” as of January 1, 2015 for the “2009 In Service Account” and an Ending Balance 

of zero. Bnkr. Doc. No. 50 at 109; Doc. No. 5-1 at 170. The “2004 Deferred Compensation 

Plan” showed no disbursement dates and reflected an Ending balance of $38,430.54. Id. 

No statements were produced following the quarter in which control changed.

In preparation for the January 24, 2017 evidentiary hearing, the Trustee filed a brief

in support of her objections. Bnkr. Doc. No. 62 at 1-9; Doc. No. 5-2 at 71-79. In short, she 

argued Appellant “misused” the Morgan Stanley IRA and National Securities IRA, by 

receiving pre-retirement distributions totaling $237,755.00 and failed to deliver 

documentation regarding the SWS Deferred Comp account through the petition date to 

facilitate a determination “ whether the Debtor misused the funds in this Account.” Bnkr. 

Doc. No. 62 at 4; Doc. No. 5-2 at 74. Further, she argued that the withdrawals were not 

payments on account of any of the listed statutory triggering events and that the exemptions 

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in the Morgan Stanley Rollover IRA, National Securities IRA, and SWS Deferred Comp 

accounts should be denied.

At the evidentiary hearing, the Court began by setting the ground rules as to which 

party had the burden of proof. Citing In re Diaz, 547 B.R. 329 and referring to the 

California exemption laws, the Court determined that California state law must be applied 

inside the Bankruptcy proceeding and therefore the burden of proof lies with the Claimant 

rather than the Objector. Doc. No. 13-2 at 9. Claimant then requested clarification on the 

specific issue requiring proof. 

MR. WINFREE: The objection that has been raised has not challenged these 

accounts on anything other than the basis that they’re saying the debtor has abused 

his uses under the -- in taking out the particular funds, thus implying that – they’re 

not challenging whether it qualifies for tax exemption. They’re not qualifying 

whether it's covered by 408. They’re not challenging any of that. They’re primarily 

challenging that the conduct of the debtor in relation to the accounts disgorges his 

entitlement to the exemption. That’s what I would like to get some clarification. We 

are in fact addressing the issue of whether his conduct has abused those accounts or 

otherwise. 

Id. at 9-10.

As a result of Claimant’s request, the court asked the Trustee to clarify the grounds 

for objection. Id. 10. After hearing from the Trustee the court summarized: 

COURT: The question was whether it was principally used for retirement purposes 

or rather the withdrawals basically diminished the assets in the accounts to the [point 

they cannot] actually not serve for retirement -- long-term retirement. That’s 

basically the Jacoway test...

Id. at 11. Claimant then testified as to how and for what purpose he used the IRA 

disbursements. He also testified as to his understanding of the status of each account.

Q: We’re going to return to those retirement accounts... At the beginning I believe 

I heard that you said there was one account transferred three times. Can you explain 

what that means.

A: Ms. Gladstone...she’s saying there’s three separate retirement accounts. There’s 

not three separate retirement accounts. It’s one retirement account moved from firm 

to firm to firm. It went from Southwest as a 401(k) to Morgan Stanley as an IRA to 

National Securities as an IRA. It’s one account. It’s not three separate accounts.

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Q: I believe I understand the rollover from the Morgan Stanley IRA to the National 

Securities IRA. I don’t understand what happened to the Southwest Stearns Deferred 

Comp Plan. Where is that?

A: I don’t recall. And I don’t know... wait a minute. It may -- I don’t know. I’m not 

going to answer that.

Q: Debtor’s Exhibit C. It talks about the Morgan Stanley 401(k) plan, and it looks 

like there’s a gross distribution of $55,365. Where did that money go?

A: I don’t recall.

Q: Is there anything left in that 401(k) plan?

A: Not to my knowledge.

Q: Do you have any other accounts, other than the National Securities IRA and 

perhaps the Southwest Stearns Deferred Comp, that you will use for your retirement?

A: No.

Appellant’s Ex: 12; Doc. No. 13-2 at 39-40. No other testimony or documentary evidence 

was presented at the hearing in support of Debtor’s claim of exemption in the SWS 

Deferred Comp account. During closing argument Claimant argued: 

MR. WINFREE: There has been no testimony whatsoever about the Bear sterns 

account....[T]here has been no Evidentiary presentation in relation to that in regards 

to this particular proceeding, so I think it’s -- probably seems to be off the table in 

this consideration.

Id. at 92. In response, the Trustee argued that because she didn’t have any information 

about the SWS account she couldn’t address whether it was eligible for exemption. Id. at 

93. She further claimed that the documents provided were insufficient and argued that the 

Debtor had not met his burden to prove that the fund qualified. Id. Claimant clarified that 

the SWS Deferred Comp statements previously supplied to the Trustee were also provided 

to the bankruptcy court and were contained in the record. Id. He explained that no 

additional statements were available. Id. at 94. Concluding the hearing, the Court reiterated, 

“[the SWS Deferred Comp documents] may have been given to [the Trustee] at some point, 

[but] it wasn’t presented in the evidentiary hearing. The burden was on the debtor.” Id. 

The matter was taken under submission. Id. at 95.

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After hearing the testimony, considering the arguments by counsel and the evidence 

presented, the court issued a memorandum decision sustaining in part and overruling in 

part the Trustee’s objections finding: that: (1) the Debtor carried his burden of proof 

regarding claims of exemption in the IRA accounts under CCP § 703.140 (b)(10)(E) by 

demonstrating that the IRA accounts were designed and principally used for retirement 

purposes as of the petition date; and (2) the Debtor did not carry his burden of proof 

regarding his claim of exemption in the SWS Deferred Comp account. Doc. No. 5-2 at 94, 

105. Citing In re Barnes, 275 B.R. 889, 898-99 (Bankr. E. D. Cal. 202), the Bankruptcy 

court held: 

As to the SWS Deferred Comp Account, the Debtor has never provided the Trustee 

with the documents sufficient to permit her to complete her investigation of whether 

this account is properly exempt under CCP § 703.140(b)(10)(E)....The Debtor is 

duty-bound under 11 U.S.C. §521(4) to provide the Trustee with the basic 

documents and records regarding this account. His failure to provide this information 

will be treated as a failure to carry his burden of proof as to his entitlement to exempt 

this account. 

Id. at 104. Claimant’s appeal from the order sustaining the Trustee’s objection to the claim 

of exemption for the SWS Deferred Comp account is now before the Court.

DISCUSSION

A. LEGAL STANDARD

The order of the Bankruptcy Court as to the right of a debtor to claim an exemption 

is a question of law and reviewed de novo. Elliott v. Weil (In re Elliott), 523 B.R. 188, 191 

(9th Cir. BAP 2014). In addition, the bankruptcy court’s interpretation of state exemption 

laws is reviewed de novo. Calderon v. Lang (In re Calderon), 507 B.R. 724, 728 (9th Cir. 

BAP 2014). The bankruptcy court’s factual findings, for purposes of determining the 

validity of a claimed exemption, are reviewed under the clearly erroneous standard. Id.

Factual determinations are clearly erroneous if “illogical, implausible, or without support 

in the record.” Rets v. Samson ( In re Retz), 606 F. 3d 1189, 1196 (9th Cir. 2010).

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B. BURDEN OF PROOF:FRBP 4003 AND CCP § 703.580(B)

Under the Federal Rules of Bankruptcy Procedure (“Fed. Rules Bankr. Proc.”) the 

objecting party has the burden of proving that the exemptions are not properly claimed. 

Fed. Rules Bankr. Proc Rule 4003(c). Section 522 of Title 11 of the United States Code 

provides a default list of exemptions but allows states to opt out of the federal scheme and 

define their own exemptions. California has opted out of the federal exemption scheme 

and limited Chapter 7 petitioners to the same exemptions debtors may claim in nonbankruptcy cases. Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193 (9th Cir. 2012). 

Section 703.140(b)(10)(E) of California Civil Procedure protects the debtor’s 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, to the extent 

reasonably necessary for the support of the debtor and any dependent of the debtor....” 

Section 703.580(b) provides: “At a hearing under this section, the exemption claimant has 

the burden of proof.” Cal. Civil P. Code § 703.580(b). 

Appellant relies heavily on In re Carter, a Ninth Circuit case holding that a claimed 

exemption is “presumptively valid” under Rule 4003 and that it is the objecting party’s 

burden to prove the exemption is not properly claimed. 182 F.3d 1027 (9th Cir. 1999). 

Since then, numerous decisions from the various California district courts and at least one 

published decision from the Bankruptcy Appellate Panel (BAP) of the Ninth Circuit have 

addressed this conflict.2 Most notably in 2016, the Ninth Circuit BAP pointed out that 

Carter was decided prior to a U.S. Supreme Court case holding that the burden of proof is 

a substantive element of a claim and that “bankruptcy does not alter the burden imposed 

 

2 In re Sinclair, 563 B.R. 554, 558 (Bankr. E.D. Cal. 2017) (“Debtor has the burden of proof supporting 

his claimed exemption.”); In re Williams, 556 B.R. 456, 460 (Bankr. C.D. Cal. 2016) (same); In re 

Barnes, 275 B.R. 889, 898 n.2 (Bankr. E.D. Cal. 2002) (same). In re Tallerico, 532 B.R. 774 (Bankr. 

E.D. Cal. 2015) (holding 4003(c) is invalid in California under the Bankruptcy Rules Enabling Act, 28 

U.S.C. § 2075, which “forbids rules that alter substantive rights.”); In re Pashenee, 531 B.R. 834, 839 

(Bank. E.D. Cal. 2015) (relied on by the court in the instant case for the holding that the debtor, as the 

exemption claimant, bears the burden of proof to establish the asset as exempt and the extent to which it 

applies.) 

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by the substantive law.” Diaz v. Kosmala (In re Diaz), 547 B.R. 329, 337 (B.A.P. 9th Cir. 

2016) (citing Raleigh v. Illinois Dep’t of Revenue, 530 U.S. 15, 20-21 (2000)) 3. In turn, 

the Ninth Circuit BAP concluded in Diaz that “where the state law exemption statute 

specifically allocates the burden of proof to the debtor, Rule 4003(c) does not change that 

allocation.” Diaz, 547 B.R. at 337; See also In re Ziegler, No. 8:13-BK-20257-CB, 2016 

WL 3267387, at *4 (B.A.P. 9th Cir. June 6, 2016)(reasserting the holding in Diaz and 

concluding that the burden was on the debtor to show that his amended wildcard exemption 

for the sale proceeds was proper). In light of Raleigh, Diaz, and Ziegler, the Court finds 

Claimant’s reliance on In re Carter is misplaced and that the Claimant bears the burden of 

proof to establish entitlement to an exemption in the SWS Deferred Comp account under 

Cal. Civ. Code § 703.140(b)(10)(E).

C. FACTUAL FINDINGS OF THE BANKRUPTCY COURT

The term “burden of proof” incorporates two distinct burdens: the burden of 

persuasion and the burden of production. See, e.g., Schaffer v. Weast, 546 U.S. 49, 56, 126 

S.Ct. 528, 163 L.Ed.2d 387 (2005). The burden of production is a party’s duty to introduce 

“evidence sufficient as a matter of law to enable a rational fact finder to find that particular 

proposition of fact is true” and to find in favor of the producing party. Corpus Juris 

Secundum, Evidence § 189. As Claimant candidly highlights, “there ha[d] been no 

evidentiary presentation,” with regard to the SWS Deferred Comp account. The bankruptcy 

court determined that the testimonial evidence regarding the possibility that the SWS 

Deferred Account was rolled over into the National Securities IRA lacked credibility. Great 

deference is given to the bankruptcy court when factual findings are based on the credibility 

of witnesses, In re Retz, 606 F.3d 1189, 1196 (9th Cir. 2010). However, in this instance, 

the court did not base its determination on credibility. Nor did the court’s written decision 

 

3 The Supreme Court held that when the matter in dispute is governed by non-bankruptcy substantive 

law, the burden of proof is dictated by that same law.

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refer to Claimant’s failure to present evidence regarding the “misuse” of the SWS Deferred 

Comp account. 

Here, the Bankruptcy judge’s factual finding was based entirely upon the Trustees 

closing argument. The court held that “[d]ebtor has never provided the Trustee with the 

documents sufficient to permit her to complete her investigation of whether th[e] account

is properly exempt under CCP §703.140(b)(10(E)” and the failure to do so was “treated 

as a failure to carry his burden of proof.” Doc. No. 5-2 at 104. Regardless of which party 

carries the burden of proof at the hearing, statements made within the parties’ briefs or in 

closing argument are not admissible evidence. § 101:1 Scope of Rules, Bankr. Evid. 

Manual § 101:1 (2018 ed.); In re Seare, 515 B.R. 599, 616 (B.A.P. 9th Cir. 2014) (brief 

consisted only of argument, not admissible evidence); See also In re Hurley, 258 B.R. 15, 

23 (Bankr. D. Mont. 2001) (An attorney’s argument is not evidence). U.S. v. VelardeGomez, 224 F.3d 1062, 1073 (9th Cir. 2000), rev’d on reh’g en banc, 269 F.3d 1023 (9th 

Cir. 2001). 

Although the Trustee filed written objections to the claim of an exemption in the 

SWS Deferred Comp account based on lack of information and the need for further 

investigation, she changed the nature and scope of her objection at the hearing from that 

which was presented in her pleadings. At the onset of the hearing, the bankruptcy court, 

at the request of Claimant, inquired as to the specific grounds for the objection. The Trustee 

represented that the issue as to each account was “whether the principal purpose is to 

provide for retirement or to provide for current needs.” The scope of the evidentiary 

hearing was effectively limited to those issues raised under the Jacoway test. The direct 

testimony presented was limited to whether Claimant knew “what happened to the 

Southwest Stearns Deferred Comp Plan” as of the date of the evidentiary hearing. During 

closing arguments however, the Trustee represented that it was Debtor’s burden to prove 

eligibility, despite having limited the scope of the hearing to misuse. 

No testimony or documentary evidence was presented by either party on whether 

statements and records were provided to the Trustee, the dates for which those statements 

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and records covered, the terms and restrictions indicated by the documents, or whether the 

information, including the contactsfor the plan administrator, was sufficient for the Trustee 

to complete her investigation. However, the record indicates that a screenshot of the SWS 

Deferred Comp account was attached to Claimant’s declaration in opposition to the 

Trustee’s objection which supported the need for an evidentiary hearing. The screenshot 

reflected a 100% vested retirement account as of January2016, its balance, along with 

multiple tabs where one could ascertain any disposition of how the account was utilized. 

At best, the record reflects the representations in the Trustee’s closing argument misstated 

the record regarding the production of documents.

Had the bankruptcy judge sustained the Trustee’s objection upon the ground that

Claimant had not met his burden of proof as to the use or misuse of the SWS Deferred 

Account, or that Claimant’s testimony was not credible with regard to the belief that the 

three retirement accounts had been rolled over into one, there would be no question as to 

whether the record supported such a ruling. However, here the ruling is based on a factual 

finding not supported by the record. Accordingly, the Court finds the bankruptcy court 

committed clear error. United States v. Hinkson, 585 F.3d 1247, 1261–62 & n. 21 (9th 

Cir.2009). 

//

//

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CONCLUSION

For the reasons set forth above, the Court VACATES the Bankruptcy court’s order 

sustaining the Trustee’s objection to the claim of exemption for the SWS Deferred Comp 

account and REMANDS the case for further proceedings to determine whether Debtor 

provided the Trustee with documents sufficient to permit her to complete her investigation

into whether (1) the SWS Deferred Comp account qualifies for exemption under Cal. Civ. 

Code § 703.140(b)(10)(E) and (2) whether Claimant misused the funds in the SWS 

Deferred Comp account. 

IT IS SO ORDERED.

DATED: September 30, 2019 

 

_________________________________

HON.JOHN A. HOUSTON

UNITED STATES DISTRICT JUDGE

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