Sally F Bentley
Case Information
Dated: November 9, 2020
The following is ORDERED:
UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF OKLAHOMA In re: )
)
SALLY F. BENTLEY, ) Case No. 20-10381
) Chapter 7
Debtor. ) ORDER GRANTING IN PART AND DENYING IN PART TRUSTEE’S OBJECTION TO DEBTOR’S CLAIMED EXEMPTIONS WITH BRIEF IN SUPPORT WITH NOTICE OF OPPORTUNITY FOR HEARING AND NOTICE OF HEARING [DOC. 33]
On September 30, 2020, the Court conducted a telephonic hearing on the objections of Susan Manchester, chapter 7 trustee (“Trustee”), to the exemptions claimed by debtor Sally F. Bentley (“Debtor”). At the commencement of the hearing, the Court undertook to summarize what exemption claims were actually subject to objection by Trustee because the number and timing of amendments to Debtor’s claims of exemption subsequent to the filing of the Trustee’s Objection to Debtor’s Claimed Exemptions with Brief in Support with Notice for Opportunity for Hearing and Notice for Hearing [Doc. 33], filed on July 9, 2020 (as subsequently amended, the “Objection”), required this Court to diagram the assets claimed as exempt and the authority therefore as well as the resulting changes to Trustee’s Objection. The Court surmised, and the parties agreed, the following exemption claims remain subject to objection:
BancFirst checking account 3065 (the $70,256.08 $24,903.08 Okla. Stat. tit. 36, “ Bank Account”) § 3631.1 Bank Account $70,256.00 $45,353,00 42 U.S.C. 4071;
Okla. Stat. tit. 31, § 1.A.20 Northwestern Mutual Annuity 0092 $350,000.00 $350,000.00 Okla. Stat. tit. 36, (the “Annuity”) § 3631.1 Annuity $350,000.00 $0.00 Okla. Stat. tit. 31,
§ 1.A.20 Testimony was provided by Debtor, her son Nick Bentley, and Jim Lawson, an accountant hired by Trustee to analyze the deposits and withdrawals from the Bank Account (“Accountant”).
Other than to highlight the apparent lack of importance Debtor and her counsel placed on the accuracy of her Schedules and SOFA, Debtor’s testimony and that of her son were relatively unhelpful. The work product of the Accountant, Trustee Ex. 10 (the “Trustee Accounting”), was extremely helpful, with his testimony identifying his accounting background and the process he used to create the Trustee Accounting.
FINDINGS OF FACT 1. Debtor’s late husband owned an interest in Sarah Properties, LLC d/b/a Lucky Dog Lodge
(the “Business”) and envisioned the income stream from the Business to be a future source of income during his and Debtor’s retirement.
2. After he passed, Debtor sold the interest in the Business in 2018 and determined she
needed to convert the vast majority of the sale proceeds into an income stream for her retirement. Hence, she purchased the Annuity.
3. Debtor entered into a Single Premium Immediate Income Annuity with Northwestern
Mutual (“Northwestern”), effective July 10, 2018, with a single purchase payment of $350,000.00. Trustee Ex. 7, p. 1.
4. The Annuity has no cash surrender value or loan value and provides no cash refund on
Debtor’s death. Trustee Ex. 7, p. 6. 5. Ownership of the Annuity can be transferred, and the Annuity may be assigned as
collateral. Trustee Ex. 7, pp. 13 and 15.
6. The Annuity is a non-qualified annuity. [2]
7. The Annuity provides for a guaranteed monthly payment of $1,570.40 (“Guaranteed
Payment”) commencing August 1, 2018, for a five year period (the “Period Certain”). Trustee Ex. 7, p. 1. If Debtor dies during the Period Certain, her sons, as the named beneficiaries, will receive the remaining Guaranteed Payments due during the Period Certain. If Debtor dies after conclusion of the Period Certain, the Guaranteed Payments will cease, and no death benefits will be payable. Trustee Ex. 7, pp. 1, 11, and 12.
8. In addition to the Guaranteed Payments, Debtor is also entitled to receive dividends in the
amount of $603.94 per month effective August 1, 2019 (the “Dividend Payment”). Trustee Ex. 7, pp. 5 and 10. Accordingly, since August 1, 2019, Debtor has received a combined monthly payment of $2,174.34 from Northwestern.
9. Debtor receives an IRS 1099 Form for the distributions she receives from the Annuity.
10. The Guaranteed Payments and the Dividend Payments are direct deposited into the Bank
Account.
11. The Bank Account is an interest-bearing checking account with BancFirst.
12. Debtor refers to the Bank Account as her retirement account, but it is not a “retirement”
account. It is simply a checking account into which she deposits retirement funds. 13. Debtor’s retirement funds are comprised of the following: Social Security Benefits; the
Guaranteed Payment and the Dividend Payment; and required minimum distributions from Debtor’s IRA (“RMDs”). All of these funds are deposited by the payor directly into the Bank Account. Debtor believed the funds in the Bank Account were all exempt retirement funds (other than the occasional deposit made by Debtor therein).
14. Debtor began having her monthly RMDs in the amount of $2,457.00 deposited directly
into the Bank Account in February, 2019. Trustee Ex. 7. 15. An additional $28,594.00 was also deposited into the Bank Account from non-retirement
funds. Trustee Ex. 9 and 10.
LEGAL CONCLUSIONS
Section 522 of the Bankruptcy Code permits a debtor to exempt certain property from the
estate and "place it beyond the reach of creditors." In re Crowl,
600 (10 th Cir. BAP 2005). The objecting party must prove by a preponderance of the evidence
that the exemption is improper. Crowl,
Roberts,
If the objecting party successfully rebuts the presumption of validity, the burden shifts to
the debtor to come forward to demonstrate the validity. Kennedy,
Friedheim (In re Friedheim),
Under 11 U.S.C. § 522(b)(1), Oklahoma opted out of the federal exemption scheme under
the Bankruptcy Code, thereby limiting the exemptions available to debtors in Oklahoma to those
allowed under state law. In re McMasters,
Consequently, the Oklahoma bankruptcy courts look to applicable Oklahoma law when
determining the validity of a debtor’s claim to a state law exemption. Williamson v. Hall (In re
Hall),
On a side note, at the hearing, both Trustee and Debtor got side-tracked, focusing on
issues not relevant to the exemption analysis. Trustee repeatedly wanted to highlight the number
of amendments to the Schedules and SOFA that had been made and remained to be made, and
consequently the obvious inaccuracies of the Schedules and SOFA as originally prepared, signed,
and filed by Debtor and her counsel. Trustee also attempted to taint Debtor’s efforts to create
and protect retirement funds as if such actions were relevant to the validity of her claims of
exemptions. However, the United States Supreme Court discredited the use of equitable
principles as a basis to disallow exemptions in Law v. Siegel,
(10 th Cir. 2016) (citing Law v. Siegel,
Along similar lines, Debtor repeatedly focused on her intent to create a retirement account
in the Bank Account and her intent to first use non-exempt funds from the Bank Account before
using any exempt funds. A debtor’s intent to make property exempt, does not, by itself make the
property exempt. In re Smith,
2006) (citing In re Ellis,
Setting aside these arguments, the Court will first address the RMDs’ exempt status. It will then address Debtor’s exemption claim in the Annuity and the Bank Account.
I. ONCE DEPOSITED, THE RMDs LOST THEIR EXEMPT STATUS.
Although this Court believed Debtor no longer claimed an exemption in her RMDs in the Bank Account, the Debtor’s Closing Argument asserts to the contrary. Debtor claims the funds in the Bank Account derived from the IRA are exempt pursuant to Okla. Stat. tit. 31, § 1.A.20. This Court disagrees for a simple reason. The unambiguous language of Section 1.A.20 is clear – what is exempt thereunder is “any interest in a retirement plan or arrangement qualified for tax exemption or deferment purposes.”
The task of interpreting Section 1.A.20 begins with the plain language of the statute and,
in this instance, it is also where the task ends. Arkla Expl. Co. v. Norwest Bank of Minneapolis,
Nat’l. Ass'n,
Section 1.A.20 discusses only an interest in the plan itself. Nowhere does it address proceeds, benefits, or distributions from a plan. Thus, Section 1.A.20 plainly exempts only an interest in a plan or arrangement and not the proceeds thereof.
A similar statute was evaluated by the Tenth Circuit Court of Appeals in Gordon v.
Wadsworth (In re Gordon),
Debtor, perhaps in an effort to overcome the plain language of Section 1.A.20, suggests
Clark v. Rameker,
Based on the evidence, the Bank Account is not a “retirement plan or arrangement qualified for tax exemption or deferment purposes”; it is simply an interest-bearing checking account. And, while the IRA itself is exempt under Section 1.A.20, the RMDs, once distributed and deposited into the Bank Account, were not exempt under Section 1.A.20 based on its express language.
II. THE ANNUITY IS EXEMPT
Debtor claims the Annuity to be exempt under either Okla. Stat. tit. 31, § 1.20.A. or Okla. Stat. tit. 36, § 3631.1. Trustee objects, claiming the Annuity is not (I) “qualified for tax exemption” as required for Section 1.20.A. to apply, nor is it (ii) a policy of insurance, group annuity contract, plan or program of annuities or benefits as required for Section 3631.1 to apply. The Court agrees in part, finding the Annuity to be exempt under Section 3631.1 but not under Section 1.20.A.
A. The Annuity is Exempt under Okla. Stat. tit. 36, § 3631.1.
Okla. Stat. tit. 36, § 3631.1.A, provides:
All money or benefits of any kind, including policy proceeds and cash values, to be paid or rendered to the insured or any beneficiary under any policy of insurance issued by a life, health or accident insurance company, under any policy issued by a mutual benefit association, or under any plan or program of annuities and benefits, shall:
1. Inure exclusively to the benefit of the person for whose use and benefit the money or benefits are designated in the policy, plan or program;
2. Be fully exempt from execution, attachment, garnishment or other process;
3. Be fully exempt from being seized, taken or appropriated or applied by any legal or equitable process or operation of law to pay any debt or liability of the insured or of any beneficiary, either before or after said money or benefits is or are paid or rendered; and
4. Be fully exempt from all demands in any bankruptcy proceeding of the insured or beneficiary.
Trustee claims Section 3631.1 does not apply to the Annuity because it is not a policy of insurance issued by a life, health or accident insurance company, a policy issued by a mutual benefit association, or under any plan or program of annuities and benefits. In contrast, Debtor argues the plain language of Section 3631.1 clearly exempts the Annuity.
Contrary to Trustee’s varied arguments, the Annuity, Title 36, and the Oklahoma Supreme Court provide the necessary foundation for concluding the Annuity is covered by Section 3631.1. First, the Annuity itself was issued in Oklahoma and the applicable governing body is identified as the Oklahoma Department of Insurance. Trustee Ex. 7, p. 3. A quick search of Title 36 of the Oklahoma Statutes, which governs insurance in Oklahoma, reveals over 150 references to annuity or annuities therein. Article 40 of Title 36 specifically governs life insurance and annuities. Of equal significance is the Oklahoma Supreme Court’s recognition that:
[A]nnuities are considered generally as an insurance product and not as an investment. In our opinion, life annuity policies are of a risk-shifting character and contingent on the duration of one’s life, just as is the case with life insurance.
We regard an annuity as being included within the term ‘insurance’ as set forth in36 O.S. 1957 Supp. § 102 where such latter term is defined as a contract to pay a specified amount upon determinable contingencies. Such contingencies in the case of life annuities are that the policy-holders shall continue to live.
Hunt v. Equitable Life Asssurance Soc’y Of United States,
Trustee further argues the Annuity is not part of a “plan or program of annuities” and, therefore, does not fall within Section 3631.1 by artificially imposing a requirement that the plan or program be issued by an employer. Contrary to Trustee’s argument, however, nothing in Section 3631.1.A. requires a plan or program of annuities be issued by or related to an employer to fall within its purview. In fact, her recitation to several provisions in Title 36 linking the terms “plan” and “program” with employers serves to illustrate the Oklahoma legislature knew how to limit or otherwise condition those terms when desired. It is not the Court’s function to impose requirements or conditions in statutes where not otherwise imposed by the legislature. Cox v.
State ex rel. Oklahoma Dep’t Of Human Services,
Judge Terrence Michael from the Northern District of Oklahoma reached the same conclusions in Crowl, wherein the issue was “whether an annuity unrelated to a life insurance policy qualifies as exempt under Oklahoma law” specifically Section 3631.1. The trustee in Crowl sought to limit the application of Section 3631.1 to annuities connected to a life insurance policy. Judge Michael rejected the argument by referring to the Oklahoma rules of statutory construction and the language of Section 3631.1. itself:
1.
Federal courts interpret a state’s laws according to the state’s rules of statutory
construction. Under Oklahoma law, the rule is simple, look first to the statute –
where the statute is plain and unambiguous, there is no room for judicial
construction that will extend or limit the reach of a statute beyond the plain and
unambiguous language. Crowl,
This Court agrees; Section 3631.1 is plain and unambiguous. “When a statute is plain and
unambiguous, there is no need to resort to statutory construction nor does any justification exist
for the use of interpretive devices to fabricate a different meaning. Rouse v. Oklahoma Merit
Prot. Comm’n,
2005)). Where the legislature has clearly expressed its intent, the use of additional rules of construction are almost always unnecessary and the statute should be applied as written.
Samman v. Multiple Injury Trust Fund,
1998)). “So we will not look beyond the statute’s text if “the language of the statute is plain and
unambiguous.”” Stokes,
2019)). [9]
The Court rejects Trustee’s request to certify the question of whether the Annuity is
exempt under Section 3631.1. First, the decision to certify a question of state law to the state’s
highest court rests within the discretion of the federal court. Oliveros v. Mitchell,
“Although certification may be appropriate in certain cases, it ‘is never compelled[.]’” Odom v.
Penske Truck Leasing Co., LP,
Second, certification should not be routinely invoked whenever a federal court is faced with a state statute that has not been interpreted by the state’s highest court. Colony Ins. Co. v.
Burke,
Judicial Review v. Stout,
Here the path is clear and straightforward. The statutory language of Section 3631.1 is plain and unambiguous. Following the rules of statutory construction spelled out by the Oklahoma Supreme Court results in only one possible interpretation of Section 3631.1 – that the Annuity is exempt thereunder. While the Oklahoma Supreme Court has not had the opportunity to interpret the scope of the exemption in Section 3631.1 as it applies to an annuity such as the Annuity , the Court believes the Oklahoma Supreme Court would agree with the Court’s interpretation of the scope of Section 3631.1 and find the Annuity to be exempt thereunder. [11]
Accordingly, the Annuity is exempt under Section 3631.1.
B. The Annuity is not Exempt under Okla. Stat. tit. 31, § 1.A.20. Okla. Stat. tit. 31, § 1.A.20 provides:
A. Except as otherwise provided in this title and notwithstanding subsection B of this section, the following property shall be reserved to every person in the state, exempt from attachment or execution and every other species of forced sale for the payment of debts, except as herein provided:
. . .
20. Subject to the Uniform Fraudulent Transfer Act, Section 112 et seq. of Title 24 of the Oklahoma Statutes, any interest in a retirement plan or arrangement qualified for tax exemption or deferment purposes under present or future Acts of Congress; provided, any transfer or rollover contribution between retirement plans or arrangements which avoids current federal income taxation shall not be deemed a transfer which is fraudulent as to a creditor under the Uniform Fraudulent Transfer Act. “Retirement plan or arrangement qualified for tax exemption purposes” shall include without limitation, trusts, custodial accounts, insurance, annuity contracts and other properties and rights constituting a part thereof. By way of example and not by limitation, retirement plans or arrangements qualified for tax exemption or deferment purposes permitted under present Acts of Congress include defined contribution plans and defined benefit plans as defined under the Internal Revenue Code (“IRC”), individual retirement accounts, individual retirement annuities, simplified employee pension plans, Keogh plans, IRC Section 403(a) annuity plans, IRC Section 403(b) annuities, Roth individual retirement accounts created pursuant to IRC Section 408A, educational individual retirement accounts created pursuant to IRC Section 530 and eligible state deferred compensation plans governed under IRC Section 457. This provision shall be in addition to and not a limitation of any other provision of the Oklahoma Statutes which grants an exemption from attachment or execution and every other species of forced sale for the payment of debts. This provision shall be effective for retirement plans and arrangements in existence on, or created after April 16, 1987[.]
Trustee claims Section 1.A.20 does not exempt the Annuity while Debtor claims it does. Based on a recent decision of the Oklahoma Supreme Court on a certified question from this Court, the Annuity is not exempt under Section 1.A.20.
In In re Adams,
Adams,
In this instance, the Annuity expressly states it is “non-tax qualified.” Trustee Ex. 7, p. 1. And, Debtor presented no evidence suggesting the Annuity was otherwise qualified for tax exemption or deferment. Under Adams, this ends the discussion, and the Annuity is not exempt under Section 1.A.20. [12]
III. A PORTION OF THE BANK ACCOUNT IS EXEMPT.
Debtor claims an exemption in the entirety of the balance of the Bank Account under two statutory provisions: Okla. Stat. tit. 36, § 3631.1 (proceeds from Annuity) [13] and 42 U.S.C. § 407 (Social Security benefits). [14] These two provisions exempt the Annuity proceeds and the Social Security benefit proceeds in the Bank Account. The challenge arises because: (I) other monies were deposited into the Bank Account which are not exempt, specifically the RMDs from Debtor’s IRA and miscellaneous deposits made by Debtor; and (ii) Debtor also took periodic withdrawals from the Bank Account.
All is not lost, however. Exempt funds held by a debtor in a bank account and
commingled with non-exempt funds will remain exempt provided the exempt funds are
reasonably traceable to their exempt source. In re Tydings,
Mo. 2020) (citing In re Wood,
Several methods of tracing exist, none of which perfectly address every situation;
consequently, courts must exercise their discretion “to select the method best suited to achieve a
fair and equitable result on the facts before them.” Henshaw,
The most commonly used methods of tracing are: the lowest intermediate balance test (“LIBT”);
the percentage or pro rata approach; and the first in, first out method (“FIFO”). Tydings, 2020
WL 1510025. The bankruptcy court in Tydings summarized the three methods as follows:
LIBT
– LIBT is typically applied where a debtor commingles his
own funds with funds he is holding in trust for another. If the
account balance drops to zero, the trust funds are lost and
subsequent deposits are considered non-trust funds. If the account
drops to a balance less than the amount of trust funds, but greater
than zero, the trust funds are limited to the lowest intermediate
balance in the account. Thus, this test is based on the fiction that
the debtor would withdraw the non-trust funds first, retaining as
much as possible of the trust funds in the account. Tydings, 2020
WL 1510025 (citing In re Marve,
Percentage
– The percentage approach requires the determination
of the exempt funds to the account total when the deposit is made.
That percentage is then applied to the disputed funds (i.e., the
balance in the account on the petition date) to determine the
portion of exempt funds and non-exempt funds in the account.
Tydings,
FIFO – FIFO is a standard accounting method. The initial fact which must be established is the balance in the account immediately preceding the deposit of the exempt funds. Tydings,2020 WL 1510025 (citing Marve,484 B.R. at 741 ). From there, FIFO assumes the first funds deposited in a commingled account are also the first funds withdrawn from that account. Tydings,2020 WL 1510025 (citing In re Christensen,149 P. 3d 40 , 50 (Nev. 2006)). [15]
In selecting a method of tracing, the policy underlying the exemption, and the general rule that
exemption statutes are to be liberally construed, must be considered. In re Lantz,
LIBT is most often used by courts when tracing funds in the context of conversion or
breach of trust. Tydings,
Nor is the percentage or pro rata method of tracing appropriate. The Bank Account
contains deposits from other sources, i.e. the RMDs from the IRA as well as Debtor’s periodic
deposits. The percentage method is, therefore, also inapplicable. Tydings,
2006)).
Debtor does not suggest any recognized method of tracing to determine the exempt
portion of the Bank Account. Rather, Debtor simply states she spent the non-exempt funds first,
i.e. the RMDs and her periodic deposits. Consequently, because the amount of the withdrawals
exceeds the amount of the RMDs and periodic deposits, Debtor argues everything remaining in
the Bank Account on the Petition Date is exempt. The Court rejects Debtor’s suggestion – had
Debtor sought to only use non-exempt funds, she should have put exempt funds in a segregated
account. But she did not. “If one were to implement sound pre-bankruptcy planning in relation
to the issue of utilization of exempt funds, or deposit of exempt funds into a bank account, it
would be a relatively easy matter to segregate the exempt funds into a separate account so that
they could be entirely traced to that account and their use totally accounted for. That would be a
perfect world of pre-bankruptcy planning, a world which – let's face it – does not exist.” In re
Marve,
Additionally, it is disingenuous at best for Debtor to suggest she intended to first use her
periodic deposits and the RMDs. At the time the RMDs were deposited into, and when Debtor
made her withdrawals from the Bank Account, Debtor testified she believed, although wrongly,
the RMDs, like the Social Security benefits and the Annuity distributions, to be exempt. When
Debtor filed this bankruptcy case, based on her Schedule C, as amended, and through July 20,
2020, Debtor believed the RMD proceeds in the Bank Account to be exempt. If Debtor believed
the RMD distributions to be exempt, she would have no reason to spend those funds first – it is
paradoxical to her stated position that all funds deposited in the Bank Account, except her
periodic deposits, were exempt retirement funds. Thus, the Court rejects Debtor’s suggested,
albeit unrecognized, method of tracing as unsupported by the facts and the law. See In re
Wharton-Price, No. 9,
The Court agrees with the Marve court that LIBT method and the percentage method
“create an encapsulation of exempt funds which does not in fact exist as the account owner’s
intent” and creates a “preference for exemption construction beyond its boundary.”
Marve,
Accordingly, based on a FIFO analysis, the balance of the Bank Account on the Petition Date is allocated between exempt and non-exempt funds as follows:
SOURCE EXEMPT NOT EXEMPT Social Security benefits $17,476.00
Annuity proceeds 16,790.78
IRA RMDs $21,772.79 Other deposits 13,594.28 Interest [17] 279.08 290.47 TOTAL $34,545.86 $35,657.54 The exempt funds traceable to the Social Security benefits and the Annuity distributions total $34,545.86; the remaining $35,657.54 is not exempt as traceable to the RMDs from the IRA and the miscellaneous deposits made by Debtor.
CONCLUSION For the reasons set forth above, the Objection is GRANTED in part and DENIED in part. The Annuity and the distributions therefrom are exempt under Okla. Stat. tit. 36, § 3631.1. The monies in the Bank Account are exempt under Okla. Stat. tit. 36, § 3631.1 and 42 U.S.C. § 407 in the amount of $34,657.54, with the remaining $35,657.54 in the Bank Account on the Petition Date not exempt.
IT IS SO ORDERED.
# # #
Notes
[1] Determining the exemptions claimed and the objections thereto would not have been such a daunting task had Debtor and her counsel taken seriously Debtor’s obligation to complete her schedules (as amended, “Schedules”) and Statement of Financial Affairs (as amended, “SOFA”) completely and accurately. The fact the Bankruptcy Code requires debtors to execute schedules and statements of financial affairs under penalty of perjury is “neither coincidence or accident. Administration of a bankruptcy case is greatly impaired unless these documents are prepared carefully, thoughtfully and accurately.” Woolman v. Wallace (In re Wallace), 289 B.R. 428, 435 (Bankr. N.D. Okla. 2003). As of this hearing, Trustee was still waiting on amendments to the Schedules, and Debtor and her counsel were less than diligent in fully completing her Schedules and SOFA. No trustee, creditor, or court should be forced to solve a puzzle like the one created by Debtor and her counsel in this case due to their lack of preparation and frank and diligent discussion between Debtor and her counsel when preparing the Schedules and SOFA, and such conduct will not be tolerated in the future.
[2] “In the context of retirement plans and arrangements, ‘qualified’ has a specific meaning.
In re Adams,
[3] Initially, Debtor claimed the RMDs deposited in the Bank Account as exempt, and
Trustee objected to such claim of exemption based on Carbaugh v. Carbaugh (In re Carbaugh,
[3] (...continued) exemption for the RMDs in the Bank Account. Nevertheless, in her Closing Arguments, Debtor, once again, claims the RMDs to be exempt.
[4] The Tenth Circuit Bankruptcy Appellate Panel found similarly in Carbaugh,
[4] (...continued)
not to funds already paid. Carbaugh,
[5] The Oklahoma legislature knows how to extend the protection of exemption statutes to specifically cover proceeds. Reference can be made to Okla. Stat. tit. 36, § 3631.1 which specifically includes “policy proceeds” . . . “either before or after said money or benefits is or are paid or rendered” within the scope of such exemption.
[6] Section 522(b)(3)(c) is not applicable to Debtor as Oklahoma has opted out of the federal exemptions.
[7] The definition of “Insurance” remains the same today, “a contract whereby one undertakes to indemnify another or to pay a specified amount upon determinable contingencies.” Okla. Stat. tit. 36, § 102. And, “[l]ife insurance” means contracts that incorporate mortality risk, including annuity and pure endowment contracts, and as may be specified in the valuation manual.” Okla. Stat. tit. 36, § 1510.
[8] When interpreting an Oklahoma statute, federal courts use Oklahoma’s “rules of
statutory construction.” Stokes v. United States,
[9] This interpretation is consistent with Oklahoma’s liberal interpretation of Section
3631.1's exemption. Courts presume “the Legislature expressed its intent to grant the broadest
possible exemption with this language, and it intended what it expressed.” Carts & Parts, Inc. v.
Rosales,
[10] Trustee places great importance on the decision of the Oklahoma Court of Civil Appeals
in State of Oklahoma, ex rel. University Hospitals v. Annesley,
[10] (...continued) University Hospitals, found the annuity in question bore “little resemblance to the various forms of periodic “insurance” payments governed by the Oklahoma insurance code and protected from creditor claims by [Section] 3631.1.” Based on the true nature of the asset, i.e. the “fruit of a claim for “personal bodily injury,” the Court found the annuity was subject to the limited exemption under Okla. Stat. tit. 31, § 1.A.21 rather than Section 3631.1. In this Court’s opinion, the plain language of Section 3631.1, the clear intent of the legislature to subject annuities such as the Annuity to the provisions of Title 36 of the Oklahoma Statutes, and the Hunt decision mandate a different result in this case.
[11] This conclusion is buttressed by the prior holding of the Oklahoma Supreme Court that annuities based on the life of the owner, such as the Annuity purchased by Debtor, are an insurance product. Hunt,399 P.2d at 498 .
[12] Debtor testified her husband intended the Business to be an income source during their retirement. However, that is where the similarity to a retirement plan or arrangement ends. When Debtor sold her interest in the business, she received the sale proceeds and paid taxes on the sale proceeds. Then, Debtor paid the $350,000 single payment premium to purchase the Annuity and began receiving the Guaranteed Payment almost immediately and the Dividend Payment approximately a year later.
[13] Section 3631.1 specifically exempts all money or benefits to be paid or rendered under the Annuity either before or after it is paid or rendered. Okla. Stat. tit. 36, § 3631.1.A.3.
[14] Section 407 specifically exempts Social Security benefits paid or payable from execution, levy, attachment, garnishment or other legal process. 42 U.S.C. § 407.
[15] A fourth method, “last-in, first out” (“LIFO”), exists pursuant to which withdrawals
against the commingled fund reduce the most recent deposits first. In re Wiltsie,
[16] In rejecting the LIBT and percentage tracing methodology for tracing commingled exempt and non-exempt funds, one bankruptcy court noted: There is always a tension in cases involving co-mingled funds in any context – a tension between who is ultimately entitled to portions of the fund at issue. In the context of this case, the tension (continued...)
[16] (...continued)
is between the debtor claiming exemption, and creditors of the
debtor who stand to benefit if funds are not determined to be
exempt.
While it is true that exemptions are to be literally construed in favor of the debtor, in this
court's view that principle ceases to be operative when exempt funds are co-mingled with
non-exempt funds. At that point the actual use of co-mingled funds – i.e., the manner in
which people use fungible deposits into a bank account – controls. The LIBT method and
the proportional use method create an encapsulation of exempt funds which does not in
fact exist as the account owner's intent, and continue the preference for exemption
construction beyond its boundary.
Marve,
[17] Interest was allocated among each category of funds as follows: 25% Social Security benefits; 24% Annuity distributions; 31% IRA RMDs; and 20% miscellaneous deposits.