Albracht v. Hamilton State Bank (In re Albracht)

• Decision Date: 20 December 2013
• Docket Number: Bankruptcy No. 12–12360–WHD.,Adversary No. 12–1061.
• Citation: 505 B.R. 347
• Parties: In the Matter of Craig Loren ALBRACHT, Debtor. Craig Loren Albracht, Plaintiff, v. Hamilton State Bank, as Assignee of Douglas County Bank, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

505 B.R. 347

In the Matter of Craig Loren ALBRACHT, Debtor.Craig Loren Albracht, Plaintiff,

v.Hamilton State Bank, as Assignee of Douglas County Bank, Defendant.

Bankruptcy No. 12–12360–WHD.

Adversary No. 12–1061.

United States Bankruptcy Court,

N.D. Georgia,

Newnan Division.

Signed Dec. 20, 2013.

J. Nevin Smith, Smith Conerly LLP, Carrollton, GA, for Plaintiff.

David R. Sicay–Perrow, Sicay–Perrow, Knighten, Bohan, P.C., Atlanta, GA, for Defendant.

ORDER

W. HOMER DRAKE, Bankruptcy Judge.

The above-styled Chapter 11 case comes before the Court on Cross–Motions for Summary Judgment (hereinafter collectively the “Motion(s)”), submitted by Craig Loren Albracht (hereinafter the “Debtor” or “Movant”) and Hamilton State Bank, successor in interest to Douglas County Bank ¹ (hereinafter the “Creditor” or “Respondent”). The Motions were filed in relation to the Debtor's Complaint for Declaratory Judgment and Other Relief (hereinafter the “Complaint”) filed on September 10, 2012, seeking a determination by the Court as to the validity and extent of an allegedly secured lien attached to certain property of the Debtor. By virtue of 28 U.S.C. §§ 1334 and 157(a), this Court has subject matter jurisdiction over this matter pursuant to 28 U.S.C. § 157(b)(1) as a core proceeding defined under 28 U.S.C. §§ 157(b)(2)(K). Accordingly, this Court has the statutory and constitutional authority for hearing and determining this matter. Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).

INTRODUCTION.

The case before the Court involves a myriad of law. State choice of law, state secured transaction law, and state contract law entangle themselves around federal tax law, as it pertains to tax-deferred accounts and annuities. As far as the Court is aware, the exact question before it is a novel issue, as neither the Court nor counselhave found precedent that directly resolves the controversy. With this in mind, the Court disposes of the issue as follows.

BACKGROUND.

Although certain facts in this case are disputed, those that are material to the outcome appear to be agreed upon. Moreover, often the documents in this case speak for themselves, despite a party's attempt to persuade the Court otherwise.

On October 17, 2001, the Debtor ² purchased an Individual Retirement Annuity (hereinafter the “Annuity”) from MetLife Investors USA Insurance Company, formerly Security First Life Insurance Company (hereinafter “MetLife”). The principal of the Annuity was significantly increased in July of 2004, when, upon cessation of his employment with a company called Abbott Laboratories, the Debtor caused certain assets, originally in an employee 401(k), to be rolled over into the Annuity.

The agreement between MetLife and the Debtor (hereinafter the “Annuity Contract”) consists of generic annuity terms,³ but as modified by nine (9) riders and one (1) endorsement. Accompanying the Annuity Contract was also an “IRA Disclosure Statement.” ⁴ The Individual Retirement Annuity Endorsement (hereinafter the “Endorsement”) provides:

THE FOLLOWING PROVISIONS APPLY TO A CONTRACT WHICH IS ISSUED ON A QUALIFIED BASIS IF THE APPLICATION INDICATES IT IS TO BE ISSUED UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, (“CODE”) SECTION 408. THE PROVISIONS OF THE APPLICABLE QUALIFIED RETIREMENT PLAN TAKE PRECEDENCE OVER THE PROVISION OF THIS CONTRACT. IN THE CASE OF A CONFLICT WITH ANY PROVISION IN THE CONTRACT OR ANY OTHER ENDORSEMENTS OR RIDERS, THE PROVISIONS OF THIS ENDORSEMENT WILL CONTROL. THE CONTRACT IS AMENDED AS FOLLOWS: ...

2. This Contract is not transferable.

3. This Contract, and the benefits under it, cannot be sold, assigned or pledged as collateral for a loan or as security for the performance of an obligation or for any other purpose to any person other than to the issuer of the Contract.

The IRS Disclosure Statement uses similar language, but appears to qualify it by including a section that explains the consequences when prohibited transactions, such as assignment or use as collateral, occur.

From November 14, 2008 to February 4, 2009, the Debtor entered into a series of loan transactions with Douglas County Bank, in the amounts of $35,200, $155,000, and $29,700. Each of these loan transactions consisted of a promissory note and a commercial security agreement, and each of those documents identified the assignment of Debtor's Annuity policy as collateral for the loan proceeds. Additionally, on November 7, 2008—prior to the loan transactions—the Debtor signed and executed an “Assignment of Life Insurance or Annuity Policy as Collateral” in favor of Douglas County Bank and identified the Annuity policy as the assigned collateral. MetLife never endorsed or approved of the assignment. Prior to receiving approval or disapproval, written or otherwise, of the assignment from MetLife, the Respondent funded the three loans.

Beginning on February 6, 2009, Plaintiff received three (3) letters from MetLife informing him that MetLife did not allow the collateral assignment of the Annuity. No correspondence was directed to the Creditor, either from the Debtor or MetLife, until after August 10, 2010 in response to the Creditor's demand that MetLife distribute the proceeds of the Annuity in satisfaction of Debtor's defaulted loan. At that time, the Creditor was informed that MetLife, in accordance with the terms of the Annuity Contract and the Internal Revenue Code (hereinafter “IRC”), had rejected the assignment and had not processed it.

On December 28, 2009, the Debtor filed for bankruptcy under Chapter 7 of the Code. The Debtor listed the Annuity as property of the estate on Schedule B and claimed it as exempt under the Official Code of Georgia Annotated (hereinafter “O.C.G.A.”) § 44–13–100(a)(2)(F).⁵ During the pendency of the case, Douglas County Bank sought and was granted relief from the automatic stay to pursue state remedies with regard to the Annuity. The Debtor received a discharge on November 29, 2010 ⁶.

On December 29, 2010, the Creditor filed suit in the Superior Court of Fulton County, Georgia against the Debtor and MetLife, seeking to foreclose on its interests in the assigned Annuity. On August 15, 2012, after nearly two years of litigation in the Superior Court and before any resolution occurred, the Debtor again filed for relief under the Bankruptcy Code, seeking protection under Chapter 11. On September 10, 2012, the Debtor commenced the instant adversary proceeding, claiming that the Creditor never had a valid security interest in the collateral and that as a result of the Debtor's previous Chapter 7 case, the unsecured liability was discharged.

RESPECTIVE LEGAL POSITIONS.

I. Debtor's Legal Position.

The Debtor believes that the Creditor never established a valid security interest because the security interest never attached to the Annuity. Under Georgia's version of the Uniform Commercial Code (hereinafter the “UCC”), a “security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral....” O.C.G.A. § 11–9–203(a). The Georgia UCC further providesthat “a security interest becomes enforceable as against the debtor and third parties with respect to the collateral only if: (1) [v]alue has been given; (2) [t]he debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and (3) ... [t]he debtor has authenticated a security agreement that provides a description of the collateral....” O.C.G.A. § 11–9–203(b). The Debtor contends that because he never had the right to transfer, assign, or provide the Annuity as security, the Creditor is unable to satisfy the second element of the Georgia UCC. Primarily, the Debtor argues that the Creditor had knowledge of the anti-assignment provision,⁷ that the language was clear, and that it forbade the Debtor from assigning his rights in the Annuity. Conjointly, the Debtor argues that the IRA, not the Debtor, owned the Annuity and that it was held in trust by the custodian/trustee, who alone had the power to pledge the annuity as collateral.⁸

II. Creditor's Legal Position.

The Creditor argues that, as the “owner” of the Annuity, the Debtor had rights in the collateral, sufficient to satisfy the Georgia UCC. Additionally, the Creditor urges the Court to recognize that the anti-alienation provision was merely included in the Annuity Contract so that the contract “specifically complied” with the requirements for tax-deferred status under the IRC. Creditor further contends that a comprehensive look at the provision within the context of the IRC reveals that its violation only results in the Annuity's losing its tax-deferred character.

Section 408 of the IRC directs that an “Individual Retirement Annuity” meet the following requirements: “(1) the contract is nontransferable by the owner; ... (4) the entire interest of the owner is nonforfeitable. 26 U.S.C. § 408(b). Additionally, an ‘Individual Retirement Annuity’ does not include such an annuity contract for any taxable year of the owner in which it is disqualified on the application of subsection (e) or for any subsequent taxable year.” Id.

As discussed, subsection (e) establishes the circumstances whereby an IRA or an “Individual Retirement Annuity” loses its tax-deferred character. 26 U.S.C. § 408(e). Paragraph (2) of Subsection (e) provides that the entirety of an “Individual Retirement Annuity” loses the IRC protection, as of the first day of such taxable year, where “the individual for whose benefit any individual retirement account [or annuity] is established, that individual or his beneficiary engages in any transaction prohibited by section 4975 with respect to such account....” 26 U.S.C. § 408(e)(2). Section 4975 of the IRC prohibits a “disqualified person” from any “act ... whereby he deals with the income or assets of a plan in his own interest or for his own account....” 26 U.S.C. § 4975(c)(1)(E). A “disqualified person” is...