In re Soza

Citation542 F.3d 1060
Decision Date12 September 2008
Docket NumberNo. 06-21004.,06-21004.
PartiesIn The Matter Of: Andres Alejandro SOZA; Mary Rachel C. Buzo, Debtors. Andres Alejandro Soza; Mary Rachel C. Buzo, Appellees, v. Joseph M. Hill, Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

Ira D. Joffe, Law Offices of David W. Barry, Houston, TX, for Appellees.

Timothy L. Wentworth, Cage, Hill & Niehaus, Houston, TX, for Appellant.

Appeal from the United States District Court for the Southern District of Texas.

Before JONES, Chief Judge, and WIENER, and CLEMENT, Circuit Judges.

EDITH H. JONES, Chief Judge:

The question presented in this bankruptcy appeal is whether an annuity purchased by a debtor couple the day before they sought bankruptcy relief is, under the facts here presented, exempt under Texas law, Tex. Ins. Code Ann. § 1108.051, or non-exempt because it was "a premium payment made in fraud of a creditor . . . ." Tex. Ins. Code Ann. § 1108.053. According to the debtors' repeated representations to the bankruptcy and district courts, this annuity was purchased not simply "to maximize the debtors' exemption claims" but to manipulate an inheritance that the debtor Andres Alejandro Soza ("Soza") may ultimately share with his siblings. Because the debtors' purpose in purchasing this annuity had nothing to do with the rehabilitative goal of Texas's exemption laws, they could not legitimately claim the exemption. Accordingly, the judgment of the district court, reversing the bankruptcy court's denial of exemption, must itself be reversed, and the case is remanded for further proceedings.

On October 13, 2005, Soza and his wife, Mary Rachel C. Buzo, transferred $30,000 into a Mutual of Omaha annuity. The next day they filed a voluntary Chapter 7 bankruptcy petition.1 Joseph Hill was appointed Trustee of their bankruptcy estate. The debtors' bankruptcy schedules listed just under $30,000 in unsecured debt and $340 in non-exempt property. The debtors identified the annuity as an asset valued at $30,000, and they claimed an exemption pursuant to § 1108.051 of the Texas Insurance Code.

The trustee objected to the exemption because the statute does not apply to "a premium payment made in fraud of a creditor." Tex. Ins. Code Ann. § 1108.053. Relying on the debtors' petition and schedules, the trustee argued that their conversion of non-exempt property into an exempt annuity on the eve of bankruptcy amounted to "constructive fraud" detrimental to the creditors. In response, the debtors contended that the law permits them to maximize their exemptions, and there was no proof that they intended to defraud the creditors.

At the hearing on the trustee's objection, the debtors asserted for the first time that the money with which they purchased the annuity had recently been inherited from Soza's father. Their attorney represented to the court that the debtors used the inheritance to purchase the annuity for safekeeping until they could decide how the inheritance was to be distributed among Soza and his siblings. The attorney said his clients feared that unless the inheritance was placed out of reach of the creditors by means of an annuity, the trustee would attempt to litigate the debtors' share of ownership or would pursue Soza's siblings for the transfer of their shares. Alternatively, counsel feared he would have to delay the bankruptcy filing by one year to avoid the fraudulent transfer provision of the Bankruptcy Code. 11 U.S.C. § 548(a)(1) (2005), amended by Pub.L. No. 109-8, § 1402, 119 Stat. 23, 214 (effective Oct. 17, 2005).

The bankruptcy court and counsel for the trustee were taken aback by these representations, which were contrary to the debtors' sworn schedules identifying the annuity as their property. The court rejected the debtors' untimely attempt to offer the will and Soza's testimony about it. Nevertheless, all parties recognized a looming issue over the true ownership of the inheritance. The court proceeded, however, to adjudicate the objection without reference to the inheritance claim. The court held that § 1108.053 of the Texas Insurance Code, although somewhat ambiguous, proscribes constructive as well as actual fraud on creditors. It found, based on the pleadings and undisputed facts, that the debtors' conversion of non-exempt property into an exempt annuity on the eve of bankruptcy amounted to constructive fraud. The court denied the exemption.

The debtors appealed to the district court, reiterating their claim about the inheritance in their brief:

The check was received in August 2005 and would have been shared with [Soza's] eight siblings and the children of the deceased brother, but with the uncertainty of the October changes to the bankruptcy law, [Soza] did not want to delay the bankruptcy a year to avoid the possibility of the trustee trying to undo payments to family members.

The district court upheld the bankruptcy court's refusal to consider this as an untimely contention, but it reversed the bankruptcy court and approved the exemption under Texas law. Like the bankruptcy court, the district court found no explicit textual guide to whether the statute depends on actual or intended fraud of a creditor or whether "something less than intent is sufficient" to violate the provision. Soza v. Hill (In re Soza), 358 B.R. 903, 907 (S.D.Tex.2006). The court's reasoning proceeded in three steps. First, the court noted that the timing of the annuity purchase, standing alone, was not sufficient to prove actual intent to defraud creditors. Second, the court analogized the "constructive fraud" interpretation of the statute with the Texas Uniform Fraudulent Transfer Act ("TUFTA") provisions that invalidate a debtor's transfers made for less than reasonably equivalent value. See Tex. Bus. & Com. Code Ann. § 24.005(a)(2). Because the annuity here was purchased for full value, constructive fraud as defined in TUFTA could not exist. Third, the court held that in the absence of a fiduciary duty relationship arising from other circumstances, the common law doctrine of constructive fraud does not apply to debtor-creditor relations in Texas. Relying, finally, on the principle that Texas interprets debtors' exemptions broadly, the court concluded that even if constructive fraud is covered by § 1108.053, the trustee had not borne his burden of proof.

Now finding themselves the appellees, the debtors no longer assert that the payment for the annuity sprang from an inheritance in which Soza owns a potentially small share. Instead, they vigorously defend the district court's opinion and criticize the trustee for having failed to present evidence to support his attack on the exemption. The debtors do not, however, disavow their counsel's representation to both lower courts that the annuity was purchased not to provide them a future stream of income, but to remove its corpus from the bankruptcy court in order to avoid the uncertainty of bankruptcy litigation involving them or Soza family members. This clever strategy, taken together with other facts, provides a more complex backdrop for application of the Texas annuity exemption laws than the simple eve of bankruptcy transfer on which the bankruptcy and district court opinions were predicated. Although these circumstances might not sustain a finding of actual intent to defraud the debtors' creditors, and the trustee did not so argue in the lower courts, they highlight the importance of determining whether the exception to annuity exemptions for a "premium payment made in fraud of a creditor" includes intentional fraud as well as something less than intentional fraud.

At first glance, what the Legislature intended to describe as "fraud of a creditor" seems unclear in the context of life insurance policies and annuities obtained by debtors. There is no controlling Texas case law to provide guidance.2 Read in context with other Texas fraudulent transfer statutes, there is little doubt that § 1108.053 must include intentional fraud as well as conduct less than intentional fraud. The Texas legislature added the "in fraud of a creditor" exception to the Texas Insurance Code's exemption statute for life insurance and annuity benefits in 1991. See Act of June 15, 1991, ch. 609, § 1, 1991 Tex. Sess. Law Serv. 609 (recodified at Tex. Ins. Code. Ann. § 1108.053). This was two years before the exemption was broadened to include annuity contracts purchased by an individual. See Act of Sept. 1, 1993, ch. 685, § 20.20, 1993 Tex. Sess. Law Serv. 685 (recodified at Tex. Ins. Code. Ann. § 1108.051). As of 1991, at least three fraudulent conveyance provisions in state law required a showing of actual intent to defraud. One of these appears in the Texas Property Code, which prohibits a debtor from converting non-exempt personal property into exempt property "with the intent to defraud, delay, or hinder" a creditor. Tex. Prop. Code Ann. § 42.004(a) (emphasis added).3 Since at least 1987, the Texas Family Code has provided that an agreement between spouses to partition marital property "is void with respect to the rights of a pre-existing creditor whose rights are intended to be defrauded by it." Tex. Family Code Ann. § 4.106(a) (emphasis added). Significantly, Texas adopted the TUFTA in 1987, and it states that a debtor's transfer "is fraudulent as to a creditor" if made with "actual intent to hinder, delay, or defraud any creditor of the debtor" or if made for a lack of "reasonably equivalent value" under certain additional conditions. Tex. Bus. & Comm. Code Ann. § 24.005(a)(1)-(2) (emphasis added). Under TUFTA, transfers made with either actual intent to defraud a creditor or something less than actual intent (i.e., transfers made "without receiving a reasonably equivalent value") are included as "fraudulent" transfers.

The language of these sister statutes indicates that the Texas Legislature clearly knew how to distinguish between provisions defining as fraudulent a transfer made with intent to...

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