In re Soori-Arachi
This matter is before the Court on the objection of the Chapter 7 Trustee ("Trustee") to Debtor Marcus Soori-Arachi's ("Mr. Soori") second amended claim of exemption of a UTMA/UGMA account with Fidelity Investment Life Insurance under certain state exemption statutes. The account consists of a nonqualified, tax deferred annuity with a surrender value of $ 105,000. Mr. Soori opposed the Trustee's objection, and on January 23, 2019, the Court held a final hearing and took this contested matter under advisement. In reaching its determination, the Court has carefully considered the parties' relevant filings and respective arguments, their agreed statement of undisputed facts and attached exhibits, the various state exemption statutes in issue, and applicable case law. The Court concludes that the Fidelity account and the annuity it contains are not exempt from the bankruptcy estate under the Rhode Island statutes upon which Mr. Soori relies. He may, however, exempt $ 6,400 of the annuity's liquidated proceeds under R.I. Gen. Laws § 9-26-4(16), the state catch-all exemption.
I. Jurisdiction
The Court has jurisdiction over this matter under
II. Relevant Procedural Background
Despite the Court's urgings to the contrary, and except for a brief period, Mr.
Mr. Soori and his wife Stephanie Tamgho filed their joint voluntary petition under chapter 7 of the Bankruptcy Code
In accordance with her duties, the Trustee contacted various financial institutions to locate other potential accounts and obtain information about the Fidelity Account. In due course, the Trustee learned that the Fidelity Account actually contained a nonqualified, tax deferred variable annuity ("Annuity"). On June 6, 2018, with the assistance of counsel at the time, the Debtors filed their second amended bankruptcy schedules ("Second Amended Schedules," Doc. # 63). On Second Amended Schedule A/B, the Debtors accurately list the Fidelity Account as consisting of the Annuity. On Second Amended Schedule C, the Debtors elect state and federal non-bankruptcy exemptions under
On June 26, 2018, the Trustee objected to Mr. Soori's exemption of the Fidelity Account under these cited Rhode Island statutory exemptions ("Objection," Doc. # 65).
III. Findings of Fact
The facts relevant to the analysis of this matter are not in dispute. The Court makes the following findings of fact based on the Agreed Statement of Facts, Disputed Facts and Supporting Documents ("Agreed Statement," Doc. # 108) submitted by the parties, the exhibits attached to the Agreed Statement, which include the application for the purchase of the annuity
Mr. Soori was born on March 15, 1983. In Omaha, Nebraska, on April 1, 1998, Mr. Soori's father, Gamini S. Sooriyaarachchi, comрleted and submitted an application to purchase a "Variable and Fixed Annuity Issued and Administered by Fidelity Investment" for Mr. Soori's benefit ("Application," Doc. # 108, Exhibit A). On April 6, 1998, Mr. Soori's father opened the UGMA/UTMA Fidelity Account with Fidelity Investment Life Insurance ("Fidelity"), in the name of "Gamini S. Sooriyaarachchi as custodian for Marcus C.B. Soori-arachi," account number 323026826. That same day he purchased the non-qualified deferred variable Annuity for $ 10,040.77, which is held in the Fidelity Account. The terms of the Annuity are governed by the deferred annuity contract issued by Fidelity also on April 6, 1998 ("Annuity Contract," Doc. # 108, Exhibit B).
The Annuity Contract includes a death benefit payable to the designated beneficiary of the Annuity. The beneficiary receives the funds upon the death of the Annuity owner and Annuitant named on the Application. The Application and Annuity Contract identify Mr. Soori as the Annuity owner ("Owner") and his probate estate as the primary beneficiary ("Beneficiary") entitled to receive the Annuity proceeds upon his death. These designations have never been changed since the issuance of the Annuity Contract and the Annuity.
On October 17, 2017, the Trustee notified Fidelity of Mr. Soori's bankruptcy filing and requested that the ownership of the Fidelity Account be updated to reflect that Mr. Soori was no longer a minor. Based on this information, Fidelity amended the owner of the Fidelity Account from "Gamini S. Sooriyaarachchi as custodian for" Marcus Soori to simply Marcus Soori. This change was effective on October 30, 2017, and Mr. Soori, individually, was the
In summary, Mr. Soori is the Annuity Owner and Annuitant, and his probate estate is the designated Beneficiary of the Annuity and entitled to its proceeds upon Mr. Soori's death.
IV. Positions of the Parties
A. Exemption Under RIGL § 27-4-11
The Trustee objects to the exemption of the Fidelity Account under RIGL § 27-4-11, contending that it only applies to life insurance policies and is limited to protecting life insurance proсeeds from the claims of the insured's creditors. (Doc. ## 65, 114). In support, the Trustee refers to the separate definitions of "annuities" and "life insurance" in RIGL § 27-4-0.1(a) and (c). She also cites the Rhode Island Superior Court case of Rhode Island Hospital Trust National Bank v. Silverman , in which that court applied RIGL § 27-4-11 to prevent an insured's creditors from attaching the life insurance policy's unexercised cash surrender value. No. C.A. PC 1994-1182,
In opposition, Mr. Soori maintains that RIGL § 27-4-11 applies to any type of insurance product. (Doc. # 66). He initially argued that the Annuity was a life insurance policy covered by the statute because it contained a death benefit, but now asserts that the Annuity is exempt because it is a type of insurance and falls within the ambit of the statute. To bolster his argument, he relies on the first five words of the statute: "[i]f a policy of insurance ...," the use of the term "insurer" in the definition of annuities in RIGL § 27-4-0.1(a), as well as regulations of the Rhode Island Department of Business Regulation and information on the agency's website, which includes a discussion about annuities.
B. Exemption Under RIGL § 27-18-24
Next, the Trustee objects to Mr. Soori's exemption of the Fidelity Account under
It appears Mr. Soori has conceded this point. See Doc. ## 66, 73, 120. While he references RIGL § 27-18-24 in rejecting the Trustee's argument that an annuity is not an insurance policy, he does not address the statute in any further detail. Little discussion of this exemption claim is required by the Court. It is abundantly clear that the statute does not apply because the Annuity Contract is not an insurance policy covering loss resulting from "accident or sickness."
C. Exemption Under RIGL § 27-4-12
The Trustee's final argument is that RIGL § 27-4-12 does not protect the Annuity proceeds and surrender value from the claims of Mr. Soori's creditors because he is and has always been the Owner of the Annuity under the Annuity Contract, and the statute only protects the proceeds from the claims of the named Beneficiary's creditors. She also mаintains that informing Fidelity of Mr. Soori's attainment of the age of majority did not result in an improper change of ownership, nor did it impact his alleged "beneficiary status" under Nebraska's UTMA or the Annuity Contract.
Mr. Soori counters that the Fidelity Account is fully exempt under this statute because he was the UTMA/UGMA beneficiary of the Fidelity Account on the Filing Date. Citing Nebraska's Uniform Transfers to Minors Act codified in Neb. Rev. St. §§ 43-2701 to 43-2724 ("Nebraska's UTMA"), he argues that this statute controls his designation as the beneficiary of the Fidelity Account and "supersedes any definition of 'beneficiary' in the [A]nnuity [C]ontract." (Doc. ## 73, 120). The Trustee's post-petition actions resulting in the reissuance of the Annuity Contract in his name, he asserts, did not comply with Nebraska's UTMA. Thus, he posits that he was and remains the beneficiary of the Fidelity Account and the account is exempt under RIGL § 27-4-12.
V. Applicable Bankruptcy Law
A. Property of the Estate
As with any bankruptcy exemption determination, the starting point is Bankruptcy Code § 541. "The moment a bankruptcy petition is filed, the debtor's bankruptcy estate is created." In re Seeling ,
Despite an anti-alienation clause, an annuity may still become property of the bankruptcy estate if it does not qualify as a trust under applicable nonbankruptcy law. Under Nebraska law, the mere inclusion of such an anti-alienation provision in an annuity contract does not alone bring it within the scope of § 541(c)(2). Novak v. Drake (In re Drake) , No. 07-21678 (ASD),
B. Exemption of Bankruptcy Estate Assets
Notwithstanding § 541(a), a debtor may exempt certain property from the bankruptcy estate under § 522. The purpose of this section is to "ensure that the individual does not emerge from bankruptcy destitute, and ... has the basic necessities" to obtain a fresh start. Olson ,
VI. Analysis of Mr. Soori's Exemption Claims
There is little to no Rhode Island case law analyzing and applying Mr. Soori's claimed exemptions under these state exemption statutes. Thus, Rhode Island's rules of statutory construction and other courts' application of similar exemption statutes will guide this Court's analysis. See In re Goldman ,
Rhode Island's overarching principal of statutory construction is:
"establishing and effectuating the intent of the Legislature .... [which is] accomplished [by examining] the language, nature, and object of the statute .... [andgiving] to the words in a statute their plain and ordinary meaning, unless а contrary interpretation is apparent." Howard Union of Teachers v. State , , 565 (R.I. 1984) (citations omitted) ... "[I]t is axiomatic that 'this Court will not broaden statutory provisions by judicial interpretation unless such interpretation is necessary and appropriate in carrying out the clear intent or defining the terms of the statute.' " [ State v. Santos , 478 A.2d 563 , 1032 (R.I. 2005).] 870 A.2d 1029
In re Carpenter ,
A. RIGL § 27-4-11 : Rights of Beneficiaries to Proceeds of Policy As Against Creditors
RIGL § 27-4-11 provides in relevant part:
If a policy of insurance is effected by any person on that person's own life or on another life in favor of a person other than himself or herself, ... the lawful beneficiary or assignee of the policy, other than the insured or the person effecting that insurance ..., shall be entitled to its proceeds and avails against the creditors and representatives of the insured and of the person effecting the insurance, whether or not the right to change the beneficiary is reserved or permitted ....
The statute protects the rights of an insured's beneficiary to the proceeds of an unexercised surrender value of a life insurance policy from the claims of the insured's creditors. Silverman ,
The key to applying RIGL § 27-4-11 is that the instrument under which such proceeds are payable must be a life insurance policy. The Annuity Contract before the Court is not a life insurance policy; ipso facto RIGL § 27-4-11 does not entitle Mr. Soori to exempt the Fidelity Account or the Annuity from his bankruptcy estate. Mr. Soori's argument that RIGL § 27-4-11 applies to any type of insurance, including annuities, is predicated upon on an overly broad reading of the statute's first five
RIGL § 27-4-11's exclusive application to life insurance policies is evidenced by qualifying words that Mr. Soori disregards. These critical words specifically refer to an insurance policy that "is effected by any person on that person's own life or on another life in favor of a person other than himself or herself." RIGL § 27-4-11 (emphasis added). This qualifying language reflects the legislature's goal of protecting a beneficiary's right to the proceeds and unexercised surrender value of a life insurance policy. Silverman ,
Mr. Soori incorrectly assumes that annuities and life insurance (or other types of insurance) are treated similarly under Rhode Island law or are structural equivalents. A state's "[t]reatment of annuities ... is contextual." See NationsBank of N.C., N.A. v. Variable Annuity Life Ins. Co. ,
Rhode Island law describes annuities as:
all agreements to make periodic payments for a certain period or where the making or continuance of all or some of a series of the payments, or the amount of any payment, depends on the continuance of human life, except payments made in connection with a life insurance policy ....
RIGL § 27-4-0.1(a) (emphasis added). Significantly, this definition expressly excludes "payments made in connection with a life insurance policy," demonstrating the General Assembly's intent to treat annuities as separate and functionally distinct agreements. This is further underscored by the definition of life insurance provided in RIGL § 27-4-0.1(c), which defines life insurance as "every insurance upon the lives of human beings and every insurance appertaining to that life" and omits any reference to annuities.
The Annuity's death benefit does not alter its structural distinction from life insurance or its treatment under this exemption statute. In Western Reserve Life Assurance Company of Ohio v. ADM Associates, LLC , the Rhode Island Supreme Court regarded "an annuity policy with an elective death benefit to be separate and distinct from a life insurance policy."
The General Assembly's treatment of annuities as facially and functionally distinct from life insurance policies is apparent when comparing Mr. Soori's Annuity to a typical life insurance policy. A life insurance policy provides "a guaranteed, set sum .... to a beneficiary or beneficiaries only upon the death of the insured."
B. RIGL § 27-4-12 : Exemption from Encumbrance, Transfer, or Claims of Creditors
The last exemption Mr. Soori invokes is RIGL § 27-4-12. The Trustee argues that this statutory exemption is unavailing to Mr. Soori because it does not permit him as the Annuity Owner and Annuitant to shield the Fidelity Account and its proceeds from the claims of his creditors. In turn, Mr. Soori asserts that the exemption applies because he is a "beneficiary" under Nebraska's UTMA, and believes that the Trustee's post-petition actions improperly changed his designation from "beneficiary" to the Annuity Owner. Mr. Soori misunderstands Nebraska's UTMA and its application to the present case. Quite simply, his argument fails to account for the consequences of attaining the age of majority years before he filed bankruptcy.
1. Operation of the Nebraska UTMA
Nebraska's UTMA applies to transfers made after July 15, 1992, where, "at the time of the transfer the transferor, the minor, or the custodian is a resident of [Nebraska] or the custodial property is located in [Nebraska,]" and
[t]he instrument by which the transfer purports to have been made uses in substance the designation as custodian ... under the Uniform Transfers to Minors Act of any other state, and the application of the Nebraska Uniform Transfers to Minors Act is necessary to validate the transfer.
Neb. Rev. St. §§ 43-2703, 43-2722(2).
Custodial property is created and transferred "whenever ... [t]he ownership ... of a[n] ... annuity contract is ... [r]egistered with the issuer in the name of the transferor ... followed in substance by the words: as custodian for ... (name of minor) under the Nebraska Uniform Transfers to Minors Act ...."
The parties agree that Mr. Soori's father opened the Fidelity Account and purchased the Annuity in a custodial capacity under Nebraska's UTMA for Mr. Soori when he was a minor. The transaction irrevocably vested ownership of the Annuity in Mr. Soori while he was a minor.
2. The Annuity Contract
The interpretation of Mr. Soori's Annuity Contact is a matter of law. Renter v. Siedenburg ,
The definitional section of the Annuity Contract defines the owners of the Annuity as "[t]he person(s) who has (have) the ownership rights and privileges of the [Annuity] Contract." (Annuity Contract, Doc. # 108-2, at 11). "The [o]wner(s) is (are) named on the application and may be changed as provided in" the Annuity Contract.
Because the custodial property-the Fidelity Account, the Annuity, and the Annuity Contract-were indefeasibly vested in Mr. Soori and only managed by his custodian father until Mr. Soori's 19th birthday, the Trustee's post-petition notification to Fidelity of Mr. Soori's adulthood was entirely appropriate. Nor was the reissuance of the Annuity Contract to reflect Mr. Soori's exclusive ownership of the Annuity improper. Fidelity's actions did not constitute an actual or invalid change of ownership under the Annuity Contract as Mr. Soori asserts. Further, in no way did reissuance of the contract result in Mr. Soori's removal as a previously designated minor beneficiary under Nebraska's UTMA because the custоdianship was only effective while he remained a minor. Hence, the actions of the Trustee and Fidelity were administrative acts in compliance with Nebraska's UTMA requirements and in furtherance of its purpose.
3. Application of RIGL § 27-4-12
Having determined that Mr. Soori's designation as a minor beneficiary during the custodianship does not render him the Beneficiary under the Annuity Contract, the Court must now determine whether RIGL § 27-4-12 protects the Annuity proceeds from the claims of Mr. Soori's creditors. This statute states:
Any policy of life or endowment insurance or any annuity contract may provide that the proceeds of or payments under it shall not be subject to transfer, anticipation, or commutation or encumbrance by any beneficiary other than the insured or the purchaser of the annuity, and shall not be subject to the claims of a creditor of any beneficiary or any legal process against the beneficiary.
RIGL § 27-4-12.
This anti-alienation statute appears to be the only specific Rhode Island exemption that applies to nonqualified annuities such as Mr. Soori's Annuity. See RIGL § 9-26-4(11) and (12) (exempting certain qualified retirement annuities from claims of creditors). Although there is no Rhode Island case law or legislative commentary addressing RIGL § 27-4-12's application, the statute's plain and unambiguous language shows the legislature's intent to protect annuity proceeds and payments from improvident actions by beneficiaries and out of the reach of their creditors. Courts addressing similar "anti-alienation" exemption statutes enacted in other states share this view. See May ,
Placing such exemption statutes in their historical context is helpful. During the 1920s and 1930s, "legislatures across the country began passing two types of statutes to protect life insurance proceeds." May ,
The Court's review of case law interpreting similar state exemption statutes supports its conclusion that the protections provided by such statutes are limited to beneficiaries (whose rights are restricted under the annuity contract) and does not extend to the annuity owner or annuitant. Two cases in particular are most persuasive.
In In re May , the bankruptcy court analyzed the application of
Whenever, under the terms of any annuity or policy of life insurance, ... issued by any insurance company, dоmestic or foreign, lawfully doing business in this state, the proceeds are retained by such company at maturity or otherwise, no person, other than the insured, entitled to any part of such proceeds or any installment of interest due or to become due thereon shall be permitted to commute, anticipate, encumber, alienate, or assign the same, or any part thereof, if such permission is expressly withheld by the terms of such policy or supplemental agreement; and, if such policy or supplemental agreement so provides, no payments of interest or of principal shall be in any way subject to such person's debts, contracts, or engagements nor to any judicial processes to levy upon or attach the same for payment thereof.
Concluding that the third requirement was not met, the bankruptcy court emphasized that the statute gives the insured "alienation and assignment rights, but protects only those beneficiaries who have no such control over proceeds."
The bankruptcy court in In re Olson made the same determination when addressing a similar Michigan exemption statute,
(1) Any authorized life insurer shall have power to hold the proceeds of any life or endowment insurance or annuity contract issued by it (a) upon such terms and restrictions as to revocation by the insured and control by beneficiaries; (b) with such exemptions from legal process and the claims of creditors of beneficiaries other than the insured; and (c) upon such other terms and conditions, irrespective of the time and manner of payment of said proceeds, as shall have been agreed to in writing by such insurer and the insured or beneficiary.
...
(3) Any life or endowment insurance or annuity contract issued by a domestic, foreign or alien insurer may provide that the proceeds thereof or payments thereunder shall not be subject to the claims of creditors of any beneficiary other than the insured or any legal process against any beneficiary other than the insured; and if the said contract so provides, the benefits accruing thereunder to such beneficiary other than the insured shall not be transferable nor subject to commutation or encumbrance, or to process.
The Olson court explained that "[a] straightforward reading of this statute discloses that it does not protect the insured against claims his or her creditors make on the proceeds of the insurance or annuity fund."
Unfortunately for Mr. Soori, the bottom line is that RIGL § 27-4-12 does not exempt the Fidelity Account and the Annuity from the bankruptcy estate and his creditors. The Court agrees with the May and Olson courts' reasoning, and concludes that RIGL § 27-4-12's use of the term "insured" also encompasses an annuity owner. On the Filing Date, Mr. Soori was the adult Owner under the Annuity Contract with the contractual rights to assign the Annuity, designate beneficiaries under the Annuity, and surrender the Annuity and receive the liquidation proceeds. Because his probate estate is the named Beneficiary under the Annuity Contract, he may not avail himself of the benefits the Annuity Contract's Protection of Proceeds provision and RIGL § 27-4-12's protection afforded the Annuity Beneficiary. The Court's conclusion effectuates the terms of the Annuity Contract and the statute's limited application to named annuity beneficiaries. By excluding the "insured or the purchaser of the annuity" from the category of persons within the scope of an annuity anti-alienation provision, RIGL § 27-4-12 acknowledges the contractual rights of an annuity's owner, while limiting its protection of the annuity proceeds to the named annuity beneficiaries whо, as non-owners, lack the power to exercise dominion and control over an annuity policy.
VII. Conclusion
The Trustee's objection to the exemption of the Fidelity Account and the Annuity within it under RIGL §§ 27-4-11, 27-18-24, and 27-4-12 is SUSTAINED. The Trustee's limited objection to the exemption of the Fidelity Account under RIGL § 9-26-4(16) is SUSTAINED to the extent that the exempted amount exceeds $ 6,400.
Notes
The Trustee does not dispute Mr. Soori's entitlement to this exemption in this limited amount.
Unless otherwise indicated, the terms "Bankruptcy Code," "chapter," "section," and "§" refer to Title 11 of the United States Code,
Unless otherwise indicated, hereafter "RIGL" refers to R.I. Gen. Laws, 1956.
As previously indicated, the Trustee's Objection to the exemption of the Fidelity Account under RIGL § 9-26-4(16)'s catch-all exemption is limited to the extent that the amount claimed as exempt exceeds $ 6,400, as the statutory limit is $ 6,500 and Mr. Soori used $ 100 of that amount to exempt cash on hand.
The parties' Agreed Statement lists only one disputed fact: whether Mr. Soori had access to and control over the Fidelity Account, because the insurance company would not respond to him or his requests to liquidate the Annuity. At the January 23rd hearing, the Court asked Mr. Soori if he wanted an evidentiary hearing to resolve this disputed fact prior to the Court's determination of the exemption issue. He unequivocally declined, stating that the resolution of this one factual issue was not necessary and the Court should determine that he is entitled to the exemption based on the undisрuted facts and the law he relies on. The Court agrees with Mr. Soori that the listed disputed fact does not factor into the exemption analysis.
Although the Annuity Contract provided by the parties is dated March 29, 2018, the parties' Agreed Statement clarifies that this date is not the date of the document, but rather the date Fidelity provided a copy of it to Mr. Soori.
Three additions to the Annuity Contract terms were added in the form of endorsements but they are not relevant to the issues presently before the Court. These endorsements include: (i) a Death Benefit Accumulation Period document, (ii) a Table of Surrender Charges, and (iii) a Change of Address.
The Court finds that the parties erroneously referred to the date of October 30, 2019, in paragraph 22 of the Agreed Statement. It is clear from the related agreed facts and the parties' arguments that they intended to stipulate to the date of October 30, 2017.
In light of this proceeding's twists and turns, which include Mr. Soori's numerous filings in the form of letters addressed to the Court, this summary of the parties' respective positions has been culled from the following filings: Trustee's Objection to Exemption of Fidelity Account (Doc. # 65); Debtor's Response to Trustee's Objection ("Response," Doc. # 66); Debtor's Supplemental Response to Trustee's Objection (Doc. # 73); Trustee's Supplemental Response/Objection (Doc. # 114); and Debtor's Motion to Compel Trustee to Subpoena Custodian for Accounting (Doc. # 120). At some point in the proceeding, Mr. Soori indicated that he did not want the Court to consider arguments madе in the Response filed by his former counsel because he did not think they presented the best arguments in support of his exemption claims. See Doc. # 90, ¶ 6. Mindful of Mr. Soori's pro se status, the Court has considered the arguments in the Response, but to the extent such arguments conflict with those subsequently made by Mr. Soori, the Court will treat them as withdrawn. At any rate, neither set of arguments prevails.
Specifically, Mr. Soori cites the "State of Rhode Island and Providence Plantations Department of Business Regulation's Insurance Regulations" definition of annuity. Additionally, he points to that department's "Buyer's Guide for Deferred Annuities" and its explanation that "[a]n annuity is a contract with an insurance company." (Doc. # 73).
RIGL § 27-18-24 bars the use of "proceeds, avails, and benefits to be paid by virtue of any policy of accident and sickness insurance ... to pay any debt or liability of the [policy] owner, insured, beneficiary, or any person who may have any right under the policy[,]" provided certain conditions are met. RIGL § 27-18-24. The Rhode Island legislature construes the phrase "policy of accident and sickness insurance" to "include[ ] any policy or contract covering against loss resulting from sickness or from bodily injury or death by accident, or both." RIGL § 27-18-1. See also RIGL § 27-18-19(4) (listing types of insurance exempt from the scope of section 18, including annuity contracts containing only certain provisions relating to accident and sickness insurance).
This section provides: "No person shall procure or cause to be procured any insurance contract upon the lifе or body of another individual unless the benefits under the contract are payable to the individual insured or his or her personal representatives, or to a person having, at the time when the contract was made, an insurable interest in the individual insured." RIGL § 27-4-27(a).
Although Mr. Soori's father completed the Application "as custodian" for Mr. Soori, the omission of the magic words "under Nebraska Uniform Transfers to Minors Act" does not negate the validity of the inter-vivos gift under the statute. See Pepmeyer ,