Farm Credit Bank of Texas v. Guidry

• Citation: 110 F.3d 1147
• Decision Date: 14 April 1997
• Docket Number: No. 96-30623,96-30623
• Parties: FARM CREDIT BANK OF TEXAS, Plaintiff-Appellee, v. Lorita Richard GUIDRY, et al., Defendants, Lorita Richard Guidry & Patrick Guidry, in his capacity as Trustee of the Lorita R. Guidry Trust, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 1147

110 F.3d 1147

37 Fed.R.Serv.3d 641

FARM CREDIT BANK OF TEXAS, Plaintiff-Appellee, v. Lorita Richard GUIDRY, et al., Defendants Lorita Richard Guidry & Patrick Guidry, in his capacity as Trustee of the Lorita R. Guidry Trust Defendants-Appellants.

No. 96-30623.

United States Court of Appeals,Fifth Circuit.

April 14, 1997.

William C. Gambel, Mark Peter Dauer, Jean Marie Sweeney, Milling, Benson, Woodward, Hillyer, Pierson & Miller, New Orleans, LA, for Farm Credit Bank of Texas, Plaintiff-Appellee.

G. Allen Walsh, Baton Rouge, LA, for Defendants-Appellants.

William Shelby McKenzie, Harry Joseph Philips, Jr., Taylor, Porter, Brooks & Phillips, Baton Rouge, LA, for Lincoln National Life Insurance Co., Amicus Curiae.

Harry Alston Johnson, III, Phelps Dunbar, Baton Rouge, LA, for American Council of Life Insurance, Amicus Curiae.

Appeal from the United States District Court for the Middle District of Louisiana.

Before JOLLY, JONES and WIENER, Circuit Judges.

WIENER, Circuit Judge:

This is an appeal challenging the district court's determination that, at the time of its seizure under garnishment, i.e., during its initial, "accumulation" period, the "American Legacy II, Lincoln National Variable Annuity Account" (the Lincoln National account) previously purchased by Defendant-Appellant Lorita Guidry and transferred to her grantor trust, is not an "annuity" for purposes of Louisiana's seizure laws and therefore not exempt from garnishment by Guidry's judgment creditor. We affirm.

I FACTS AND PROCEEDINGS

In December, 1993, Plaintiff-Appellee Farm Credit Bank of Texas (FCBT) obtained a judgment in the Western District of Louisiana against Guidry for her default on two promissory notes. ¹ The judgment was in the principal amount of $389,458.76 plus interest, costs and attorney's fees. ² As both Guidry and the trustee of the trust that owned the Lincoln National account resided in the Middle District of Louisiana, FCBT registered its judgment in the district court there in May 1995, pursuant to 28 U.S.C. § 1963, preparatory to execution under Federal Rule of Civil Procedure 69.

After the judgment was so registered, Guidry's son Patrick (the trustee) was made garnishee in his capacity as trustee of the The trustee failed to answer the garnishment interrogatories within the time allowed, so in August 1995, FCBT filed a motion for judgment pro confesso. ⁴ Only then did Guidry and the trustee (collectively, the defendants) file answers to FCBT's garnishment interrogatories. In those answers the defendants asserted that (1) the property held for Guidry was exempt from seizure by virtue of the Trust ⁵ and (2) the only property in the Trust was an "annuity contract," which itself is exempt from garnishment under Louisiana law.

                Lorita Guidry Irrevocable Trust (Trust).  The Trust had been created by Guidry as sole grantor and beneficiary in April 1992, and the Lincoln National account is its only asset. 3  The trustee was served with garnishment interrogatories on June 21, 1995 and was ordered to file his answers within 15 days
                

In March 1996, after conducting an evidentiary hearing, the district court granted FCBT's motion and rendered the requested judgment pro confesso. In its judgment, the court held that the Lincoln National account is not yet (and may never become) an "annuity" within the intendment of the applicable provisions of Louisiana law, and is therefore subject to garnishment.

The defendants timely filed a motion to amend or vacate the judgment and a motion for new trial under Fed.R.Civ.P. 59, purporting to have discovered new evidence. The district court denied the defendants' motions some six weeks later, and this appeal followed.

II ANALYSIS

A. IS THE LINCOLN NATIONAL ACCOUNT AN ANNUITY UNDER LOUISIANA LAW?

1. Standard of Review

We review the district court's application of Louisiana law de novo. ⁶ Although variable annuities are not particularly recent financial innovations--they first appeared on the scene in 1952 and have been growing in popularity ever since--neither the legislature nor the courts of Louisiana have spoken on the questions whether and to what extent such products should be considered "annuities" for the purpose of shielding them from seizure by creditors. Consequently, we must make an "Erie-guess" as to how the Louisiana Supreme Court would rule. ⁷ "When making an Erie-guess in the absence of explicit guidance from the state courts, we must attempt to predict state law, not to create or modify it." ⁸

2. The Lincoln National Account

The Lincoln National account, labeled a "Variable Annuity Account" by the issuer, appears to be typical of the kinds of "variable annuities" offered primarily by insurance companies industry-wide. By its terms, the account has two distinct phases: the initial "accumulation period" and the final "annuity period." During the accumulation period Guidry directs the investment of her purchase payments into sub-accounts, selecting them from an array of various investment portfolios. Throughout this period Guidry The annuity period commences on the "Maturity Date," or "Annuitization Date." This is the title given to the date on which the accumulation period ends and the annuity period begins. The Maturity Date occurs automatically on Guidry's 85th birthday--April 4, 2018--unless before that time Guidry should unilaterally terminate the account, withdraw all funds, or exercise her option to accelerate the Maturity Date by giving 30 days' written notice.

retains the power to control the allocation of funds among the various sub-accounts, as well as the power to withdraw some or all of the presently invested funds and to terminate the account altogether. The income earned by these funds once invested remains free of United States income tax until such time as Guidry elects to withdraw it. ⁹

At all times during the accumulation period, i.e., before the Maturity Date, Guidry bears the risk of loss on her investments within the account, has the right to vote her shares, and, as noted, has the power to make withdrawals from or even close out her account. It is only during the annuity period, which commences on the Maturity Date, that (1) the risk of loss shifts to the issuer, (2) the issuer begins making regular annuity payments pursuant to whichever payment option Guidry shall have pre-selected, and (3) the power to vote her shares, direct the investment of funds in her account, withdraw any portion of the principal or interest from time to time, or terminate the account altogether no longer belongs to Guidry.

The district court reached the conclusion that the Lincoln National account is not an annuity under Louisiana law by breaking the account down into its two component phases and analyzing each. As a result, the court determined that, for purposes of exemption from seizure, the account would only become an annuity, if at all, after the Maturity Date. Although we ultimately reach the same conclusion, we believe that this case merits further explanation.

3. Louisiana's Exemption Statutes

Three separate Louisiana statutory provisions exempt annuities from seizure by creditors, but the Louisiana Insurance Code, LSA R.S. 22:647, is the one that applies to the Lincoln National account at issue here. Under that statutory provision, an account is exempt from garnishment if it qualifies as an "annuity contract." ¹⁰ The Louisiana Insurance Code does not define the term "annuity contract," but the parties are in agreement that the general definition of an annuity in article 2793 of the Louisiana Civil Code governs the term as it is applied elsewhere in the State's statutes. Article 2793 defines an annuity as follows:

The contract of annuity is that by which one party delivers to another a sum of money, and agrees not to reclaim it so long as the receiver pays the rent agreed upon.

Under that definition, a fundamental characteristic of an annuity is the complete divestiture by the annuitant of all ownership interest in the principal fund. An annuitant has an interest "only in the payments themselves and not in any principal fund or source from which they may be derived; an annuitant surrenders all right and title in and to the money he pays for it." ¹¹

Here, that clearly is not the case prior to the Maturity Date of the Lincoln National Account. According to the terms of her account The defendants contend that the account nevertheless should be treated as an "annuity contract" for exemption purposes because the account is (1) labeled a "variable annuity," (2) referred to as an "annuity" throughout the contract, and (3) approved for sale by the Louisiana Department of Insurance. The first two facets of that argument are clearly meritless, as "[i]t is the substance of the arrangement rather than the label affixed to it" that determines whether the account is an annuity and subject to exemption. ¹³ As for regulatory approval of the form of the account, the defendants fail to demonstrate how the Louisiana Department of Insurance's blessing signifies a determination that the contract is, in fact, an annuity. ¹⁴ Instead, in the absence of any indication to the contrary, we must assume on the basis of ordinary logic that approval of the Lincoln National account's form by the Department of Insurance signifies only that the account is not unlawful and its use is permissible. Such approval does not reflect that the Department of Insurance has passed judgment on the propriety--much less all of the legal implications--of labeling the account a "variable annuity." Thus, as the Lincoln National account does not purport by its terms to be exempt from seizure, its approval for sale by the Louisiana Department of Insurance has no bearing on our analysis.

                Guidry has retained the power to direct her investments, to vote the shares attributable to her investment, to withdraw funds from her account with impunity throughout the entire accumulation period, and

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