In Re Lynch
MEMORANDUM DECISION AND ORDER DENYING TRUSTEE’S OBJECTION TO EXEMPTION
Rоy Babitt, the Trustee (“Trustee”) of the chapter 7 estate of John J. Lynch (“Debtor”), objects to the exemption asserted by the Debtor in Schedule “C” to his Schedules and Statements of Affairs with respect to a certain annuity (the “Annuity”) in the amount of One Hundred Seventeen Thousand Five Hundrеd Seventy One ($117,571.00) Dollars.
Background
On September 20, 2004 (the “Petition Date”), the Debtor filed a voluntary petition (the “Petition”), for relief under chapter 7, title 11, United States Code (the “Bankruptcy Code”). The Debtor is a 78 year-old, semi-retired attorney. The Debtor asserted an exemption with respect to the Annuity pursuant to section 3212 of the New York Insurance Law. The Annuity was established in 2003 through CNA Structured Settlements in connection with the settlement of a personal injury action in which the Debtor had formerly represented the plaintiff. The Debtor agreed to *116 accept the Annuity as his portion of the legal fees incurred in the action.
The Trustee contends that the Annuity is not exempt because it is not an insurance policy. Rather, the Trustee contends that the Annuity is nothing more than a device employed by the Debtor to spread out a legal fee due to him whether for budgeting or tax planning purposes and thus, there is simply no reason why this asset should be put beyond the reach of the Debtor’s creditors. Accordingly, the Trustee requests that the exemption claimed by the Debtor be disallowed and the proceeds of the Annuity be treated as an account receivable and available for administration by the Trustee in the Debtor’s estate.
The Debtor argues that his monthly income, including the Annuity and social security payments, amounts to $3516.15 and his monthly expenditures amount to $3365.43. If the Annuity was invаded to pay creditors, it would create a hardship as he would not have enough income to pay necessary living expenses.
Discussion
As Congress has said:
The historical purpose of these exemption laws has been to protect a debtor from his creditors, to provide him with thе basic necessities of life so that even if his creditors levy on all of his nonexempt property, the debtor will not be left destitute and a public charge.
942 H.R.Rep. No. 595, 95th Cong., 1st Sess. 126 (1977)
reprinted in
1978 U.S.Code Cong. & Admin. News, 5797, 6087;
Greene v. Balaber-Strauss
Pursuant to section 522(b) of the Bankruptcy Code, the State of New York has elected to establish its own scheme for exemptions from property of a bankruptcy estate. Thus, in New York, personal bankruptcy exemptions are defined by Article 10-A of the Debtor and Creditor Law.
In re Tappan, 217
B.R. 491, 491-492 (Bankr.W.D.N.Y.2002). Section 282 of the New York Debtor and Creditor Law provides that an individual debtor may exempt from the property of his bankruptcy estate “insurance policies and annuity contracts and the proceeds and avails thereof as provided in section three thousand two hundred twelve of the insurance law.”
In re Trautman
The benefits, rights, privileges and options which, under any annuity contract are due or prospectively due the annuitant, who paid the consideration for the annuity contract, shall not be subject to execution.
In re Tappan,
An annuity contract includes any obligation to pay сertain sums at stated times, during life or lives, or for a specified term or terms, issued for a valuable consideration, regardless of whether such sums are payable to one or more persons, jointly or otherwise, but does not include payments under a life insurance pоlicy at stated times during life or lives, or for a specified term or terms. N.Y. Ins. Law § 3212(2). Contrary to the bare assertions of the Trustee, and pursuant to the plain meaning of the statute, the Annuity *117 need not be an insurance policy. N.Y. Ins. Law § 3212(2); N.Y. Debt. & Cred. Law § 282.
In bankruptcy, the debtor will be allowed only a $5,000 exеmption if the annuity contract was “initially purchased by the debtor within six months of the debtor’s filing a petition in bankruptcy” and “not purchased by application of proceeds under settlement options of annuity contracts purchased more than six months before the debtor’s filing a petition in bankruptcy or under settlement options of life insurance policies.” N.Y. Debt.
&
Cred. Law § 283(1). If purchased more than six months before a bankruptcy filing, depending upon the “reasonable needs of the judgment debtor and his family, if dependent upon him,” the debtor may be able to claim the entire annuity as exempt. 11 U.S.C. § 522. However, in the face of an objection, the bankruptcy court must then determine what amount of the annuity should go to the debtor’s bankruptcy estate for the benefit of creditors and what amount should remain proрerty of the debtor. Starr & Bandler,
Life Insurance and Annuities May Insulate Some Assets from Loss in Unexpected Bankruptcy Filings,
72 N.Y. St. B.J. 28, 30-31 (July/Aug. 2000). The court may order the debtor to “pay to a judgment creditor ... a portion of such benefits [under an annuity contact] that appears just and proper tо the court, with due regard for the reasonable requirements of the judgment debtor and his family, if dependent upon him.”
See
N.Y. Ins. Law § 3212(d)(2).
1
The Court of Appeals for the Fifth Circuit had a case before it with facts very similar to this one. The Fifth Circuit denied the claimed exemption in that case but subsequently overruled itself.
Young v. Adler (In re Young),
The Bankruptcy Court held that the monthly payments to the debtor-attorney made by a client for lеgal services were not exempt under the Louisiana exemption statute
2
because they were not a true annuity and the District Court affirmed.
In re Young,
annuitant has an interest only in the payments themselves and not in any principal fund or source from which they may be derived. The purchase of the annuity surrenders all right and title in and to the money he pays for it. On the other hand, where a debtor agrees to pay his creditor in installments at regular intervals, the debt or principal sum itself is due to the creditor although payable only in manner agreed upon; “it is an account receivable in which he has a property interest. Therefore, installment payments of a debt, or payments of interest on a debt, do not constitute an annuity.”
Id.
at 615, (citing
inter alia Commonwealth v. Beisel,
In its first iteration construing the annuity issue, the Fifth Circuit affirmed the District Court’s decision, holding that it is the “substance of the arrangement rather than the label affixed to it that determines whether the payment are exempt.”
The Fifth Circuit subsequently revisited the issue in
Canfield v. Orso (In re Orso),
In an unwrittеn decision, rendered from the bench on March 14, 2002, Judge Ei-senberg followed the Orso decision in the case of In re Stahlman, Case No. 01-82000-478 (Bankr.E.D.N.Y.2001). See Robert L. Pryor, Exemptions for Personal Injury Structured Settlements, New York Law Journal, (9/21/2004 NYLJ 16, col. 1). In Stahlman, the Court found that notwithstanding the fact that the annuity emanated from a structured settlement of a personal injury award, it nevertheless qualified as an annuity with the meaning of section 3212 of the New York Insurance Law and was therefore exempt. The Court determined that the requirement that the exemption could only be taken by the person “who paid consideration for the annuity contract” was met by the fact that the debtor had relinquished her rights against the defendant and аgreed to accept her payment over time instead of in a lump sum.
*119
The Court also addressed the issue that such an expansive interpretation of the annuity statute could be utilized by a debt- or to promote a “head start” rather than a “fresh start” concluding that in thе event a trustee could establish that such a structured settlement was funded by the purchase of an annuity with the intent to hinder, delay or defraud creditors, such intent might taint the exempt status of such annuity.
3
Id. See also In re Robinson,
The Second Circuit Court of Appeals has held that a transfer before bankruptcy of non-exempt assets does not ipso facto сompel the conclusion that there was an actual intent to hinder, delay, or defraud creditors; rather, intrinsic evidence of an actual intent to hinder, delay, or defraud creditors must be established beyond the mere fact of the transfer.
In re Adlman,
At the hearing on this motion, Trustee’s counsel admitted that he had no basis to allege fraud. Instead his sole objection to the exemption was that it did not fit within the meaning of the New York Insurance Law. In additiоn, Trustee’s counsel conceded that he had no grounds to challenge the Debtor’s claim that the Annuity is required for necessary living expenses.
Conclusion
Accordingly, for the reasons set forth, the Trustee’s motion to deny the Debtor’s Annuity exemption is denied.
IT IS SO ORDERED.
Notes
. As an initial matter, in view of this authority, сoupled with Trustee’s counsel’s statement on the record to the effect that he does not question the need for the annuity to cover the Debtor's necessary living expenses, it is unclear why the Trustee lodged this objection at all.
. § 647. Exemption of proceeds; ... аnnuity The lawful beneficiary ... or payee ... of an annuity contract ... shall be entitled to the proceeds and avails of the contract against the creditors and representatives of the annuitant ... and such proceeds and avails shall also be exempt frоm all liability for any debt of such beneficiary, payee ... existing at the time the proceeds or avails are made available for his own use ...
. In determining whether there is evidence of extrinsic fraud involving the conversion of non-exempt assets to exempt assets, сourt have examined several factors, including (1) whether there was fair consideration paid; (2) whether the debtor was rendered insolvent as a result of the transfer or whether the debtor was insolvent at the time of the transfer; (3) the amount of the transfer; (4) whether there is a gеnuine purpose for the transfer aside from avoiding creditors; (5) the length of time between the transfer and the filing of bankruptcy; (6) the amount of nonexempt property which the debtor had after the transfer; (7) the debtor’s failure to provide available evidence and to testify with significant preciseness as to the pertinent details, of his activities shortly before filing the bankruptcy petition.
In re Robinson