In re Howerton

• Decision Date: 14 July 1982
• Docket Number: Bankruptcy No. 481-00571.
• Citation: 21 BR 621
• Court: U.S. Bankruptcy Court — Northern District of Texas
• Parties: In re James Douglas HOWERTON & wife, Blanche Howerton, Debtors.

21 B.R. 621 (1982)

In re James Douglas HOWERTON & wife, Blanche Howerton, Debtors.

Bankruptcy No. 481-00571.

United States Bankruptcy Court, N.D. Texas, Fort Worth Division.

July 14, 1982.

Thomas D. Powers, Fort Worth, Tex., interim trustee.

Jimmie C. Dixon, Granbury, Tex., for debtors.

MEMORANDUM OPINION

JOHN FLOWERS, Bankruptcy Judge.

The Debtors, James and Blanche Howerton, established Individual Retirement Annuity (I.R.A.) contracts pursuant to 26 U.S.C. § 408 through Dixie National Life Insurance Company in 1977. They now claim that the cash surrender value of their I.R. A.s is not property of the estate, or, alternatively, that it is exempt property under Texas law. The Trustee objects and claims the cash surrender value of both contracts as non-exempt property of the estate.

Initially the Debtors contend their I.R. A.s are not property of the estate based on provisions of their contracts and 26 U.S.C. § 408 which restrict the ability of the annuity contract owner to transfer the contract. Section 541(a) and (c) of the Bankruptcy Code make virtually all property interests of a debtor property of the estate despite any restriction imposed on transfer of the interest. 4 Collier on Bankruptcy ¶ 541.22 (15th ed. 1982). The Debtors rely on § 541(c)(2) which creates an exception to the general rule for spendthrift trusts enforceable under applicable non-bankruptcy law. See House Report No. 95-595, 95th Cong., 1st Sess. 368 (1977) and Senate Report No. 95-989, 95th Cong., 2d Sess. 83 (1978), U.S.Code Cong. & Admin.Code 1978, p. 5787.

The property interests in issue are not held in trust. 26 U.S.C. § 408 provides several ways to establish retirement plans. Although under § 408(a) an individual retirement account may be held in trust, the Debtors hold individual retirement annuities established under § 408(b). The statute distinguishes between a trust and an annuity as two different methods of establishing retirement plans. Since neither § 408(b) nor the Debtors' contracts provide that the funds are to be placed in trust, § 541(c)(2) does not apply and the annuities are property of the estate despite restrictions on their transfer.¹ The Trustee may reach these funds for the benefit of unsecured creditors unless the funds are exempt under some applicable law.

Debtors present two arguments regarding exemption. First they contend that the I.R. A.s are actually life insurance policies the cash surrender value of which is exempt under Vernon's Ann.Civ.St. Art. 3836(a)(6). They argue that V.A.T.S. Insurance Code, Art. 3.54 mandates that every policy issued by an insurance company operating under Chapter Three of the Texas Insurance Code is necessarily a life, health or accident policy. Since Dixie National operates under Chapter Three, the contracts must be insurance policies despite contractual recitals that they are pension contracts.

The Debtors' reliance on Art. 3.54 is misplaced. Chapter Three clearly contemplates that companies operating thereunder will write annuity contracts. The Art. 3.01 definition of life insurance company includes a company paying under a contract for annuities. Article 3.42 provides that no annuity contract shall be issued by a life insurance company unless the policy form is first approved by the State Board. The policy is not necessarily a life insurance policy simply because a life insurance company issued it.

Debtors also urge that the I.R. A.s pay benefits based on the continued life of the insured and are therefore life insurance policies. Both life insurance and annuity contracts may take various forms but the heart of the distinction between them is this: life insurance is a promise to pay a sum certain on the death of the insured and an annuity is essentially a form of investment which pays periodically during the life of the annuitant or during a term fixed by contract rather than on the occurrence of a future contingency. See generally Daniel v. Life Ins. Co. of Virginia, 102 S.W.2d 256 (Tex.Civ.App. — Austin, 1937, no writ hist.). Here, the only benefits paid are based on the net cash value of the I.R.A. contract at its maturity date. The funds are held at a guaranteed interest rate of 3½% compounded annually. The Debtors choose a settlement option under which they receive the return on their investment in the form of annuity payments. No special benefits are paid to a beneficiary or the Debtors' estates by reason of the Debtors' deaths.² Therefore, the I.R.A. contracts are not life insurance policies and art. 3836(a)(6) is inapplicable.

Debtors also argue that under the provisions of their contracts, 26 U.S.C. § 408(b), and V.A.T.S. Insurance Code art. 21.22, their interest in the I.R.A.s are nonassignable and, as such exempt under § 522(b)(2) which allows the exemption from the estate of property exempt under applicable state law.³ The argument hinges on a line of Texas cases providing ". . . that no interest in property is subject to sale under . . . process unless the debtor has power to pass title to his interest by his own act." Moser v. Tucker, 26 S.W. 1044, 1045 (Tex.1894). See also Shaw v. Frank, 334 S.W.2d 476 (Tex.Civ.App. — El Paso 1959,...