In re Orso

• Decision Date: 25 February 2002
• Docket Number: No. 98-31008.,98-31008.
• Citation: 283 F.3d 686
• Parties: In The Matter Of: Paul William ORSO, Debtor. Valerie Canfield, Appellant, v. Paul William Orso; Martin A. Schott, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

283 F.3d 686

In The Matter Of: Paul William ORSO, Debtor Valerie Canfield, Appellant, v. Paul William Orso; Martin A. Schott, Appellees.

No. 98-31008.

United States Court of Appeals, Fifth Circuit.

February 25, 2002.

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George L. Clauer, III (argued), Seale, Daigle & Ross, Baton Rouge, LA, for Appellant.

James M. Herpin (argued), Herpin & de Generes, Baton Rouge, LA, for Orso.

Martin A. Schott, Baton Rouge, LA, pro se.

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

Before KING, Chief Judge, and JOLLY, HIGGINBOTHAM, DAVIS, JONES, SMITH, WIENER, BARKSDALE, EMILIO M. GARZA, DeMOSS, BENAVIDES, STEWART, PARKER, and DENNIS, Circuit Judges.^*

WIENER and DENNIS, Circuit Judges:

In this appeal we decide whether, under the laws of Louisiana that establish exemptions from seizure, the proceeds of annuity contracts purchased by obligors to fulfill a personal injury settlement structured to comply with 26 U.S.C. §§ 104(a)(2) and 130¹ are exempt from claims of creditors of the payee who is a debtor in bankruptcy. A divided panel of this court² concluded that our opinion in Young v. Adler³ required it to hold the instant annuity payments are not exempt under the Louisiana exemption statute as it existed when bankruptcy proceedings were commenced, and that a post-petition, expressly-interpretive amendment of that statute could not be considered when ascertaining its meaning as of the date of filing for bankruptcy protection. A majority of the judges in active service voted to rehear the case en banc.⁴ Disagreeing with the panel majority, we affirm the bankruptcy and district courts' conclusion that the annuity payments in question are exempt from seizure, and thus exempt from claims asserted by Creditor-Appellant Valerie Canfield in Debtor-Appellee Paul William Orso's bankruptcy proceedings.

I. FACTS AND PROCEEDINGS

Orso suffered serious injuries in an automobile accident in November 1986, a few months after he and Canfield were wed. The closed-head injuries Orso sustained in the accident left him permanently and severely brain damaged, rendering him mildly mentally retarded, with an I.Q. of less than 70. In November 1987, Canfield and Orso sued for damages resulting from his injuries.

In September 1989, Orso and Canfield entered into a consent judgment with the defendants in the tort litigation. On the same day, the parties executed a settlement agreement, the pertinent provision of which specified that Orso would receive two payments each month for the longer of thirty years or his lifetime, one such payment for $1,180 and another for $850.

To ensure Orso's full and timely receipt of these periodic payments, annuity contracts ("the Annuities") were purchased. Orso is the named payee or annuitant in both contracts, but is not the owner of either; the defendant tortfeasors' insurers obtained the policies and retained ownership. The annuity contract that pays $1,180 per month was issued by Liberty Life Assurance Company of Boston in connection with Orso's settlement with one of the tortfeasors, Cook Construction Co., Inc., and its insurer, Liberty Mutual Insurance Co. The annuity contract that pays Orso $850 per month was issued by Western National Life Insurance Company in connection with his settlement with the State of Louisiana, having been purchased by the Conseco Annuity Guarantee Company, the company to which the State had assigned the obligation to make the periodic payments. The tortfeasors and their respective insurers were released from further tort liability but remained obligated for the periodic payments to Orso, who presumably could thereafter look to his original judgment debtors and their insurers in the unlikely event that the issuers of the Annuities should be unable or unwilling to continue making the specified monthly payments.

Orso and Canfield divorced in 1991. They entered into a property settlement under which Orso, who also receives U.S. Navy and Social Security disability benefits, agreed to pay Canfield $1,250 per month from September 1990 to August 1993 and $1,000 per month for the ensuing nine months. Orso defaulted; Canfield filed suit in state court late in 1990; Orso's mother, Janice Orso, filed interdiction proceedings in May of 1992 and was appointed as her son's curatrix in September; and, in July 1994, a state court rendered a judgment in favor of Canfield for Orso's arrearages under their property settlement agreement.

On December 24, 1994, Orso's mother, acting in her capacity as curatrix of her interdicted son, filed a Chapter 7 bankruptcy petition on his behalf. The annuity payments were listed as assets of the estate but were claimed to be exempt under La.Rev.Stat. Ann. § 22:647, which in relevant part shields payments under annuity contracts from seizure. Canfield, who filed a $53,494.92 claim in Orso's bankruptcy for the arrearages under their property settlement agreement, objected to Orso's efforts to exempt the annuity payments, but the trustee supported Orso's claim of exemption. Almost three years later, the bankruptcy court rendered a lengthy opinion denying Canfield's objection. The district court affirmed.

A divided three-judge panel of this court reversed the district court, concluding that Orso's payments from the Annuities should not be exempt in his bankruptcy proceedings.⁵ The panel majority's judgment was then vacated when we voted to rehear the case en banc.⁶

II. ANALYSIS

A. Standard of Review

The bankruptcy court's denial of an objection to a debtor's claim of exemption is a final order, subject to immediate appeal.⁷ We have jurisdiction to hear this appeal of the district court's affirmance of the bankruptcy judgment.⁸ In a bankruptcy case, we review the decision of the district court in its capacity as an appellate court. We review the bankruptcy court's findings of fact affirmed by the district court for clear error, but review the district court's conclusions of law de novo.⁹

B. Framework

Reduced to its essentials, this case requires us to interpret a state statute in the context of bankruptcy. The elements that frame this inquiry are (1) interests in property owned by the debtor (2) on the date that his petition in bankruptcy was filed, (3) which property interests the debtor contends are exempt from the claims of his creditors (4) by virtue of exemptions specified in the applicable state statutes. The state law question requiring statutory interpretation within this framework is whether the property interests for which exemption is claimed — here, periodic payments from annuities obtained in a structured settlement of personal injury claims — come within the ambit of the subject state exemption statute, § 647 of the Louisiana Insurance Code ("§ 22:647").¹⁰

1. Bankruptcy Context

It is axiomatic that when a petition in bankruptcy is filed, thereby commencing bankruptcy proceedings, all property in which the debtor has a legal or equitable interest becomes property of the bankruptcy estate.¹¹ The debtor then may exempt property that is protected from creditors by applicable state or federal law.¹² Like the Bankruptcy Act before it, the Bankruptcy Code gives each state an option: A state may allow debtors to (1) exempt from their bankruptcy estates property included in the federal "laundry list" of exemptions,¹³ or (2) rely on state law and federal law other than the laundry list for allowable exemptions.¹⁴ Louisiana has chosen the latter course,¹⁵ so our decision today turns on interpretation of Louisiana law.¹⁶

Whether a particular property or interest in property of a debtor's bankruptcy estate is eligible for exemption is, like so many other questions in bankruptcy, determined strictly "as of" the date on which the petition in bankruptcy is filed. Regarding non-laundry list exemptions, § 522(b)(2)(A) specifies that the property for which exemption is claimed must be exempt under a federal, state, or local law "that is applicable on the date of the filing of the petition."¹⁷ We cannot emphasize too strongly that the day on which the bankruptcy petition is filed is the "as of" date for determining the applicability of exemption provisions. Even though, of necessity, the judicial decision-making process on exemption issues takes place subsequent to the filing of the petition, the court must take a retrospective "snapshot" of the law and the facts as they stood on the day the petition was filed. The Supreme Court's pronouncement on this point more than seventy-five years ago continues to be good law today:

When the law speaks of property which is exempt and of rights to exemptions, it of course refers to some point of time. In our opinion this point of time is the one as of which the general estate passes out of the bankrupt's control, and with respect to which the status and rights of the bankrupt, the creditors and the trustee in other particulars are fixed.... [O]ne common point of time is intended and that [] is the date of the filing of the petition.¹⁸

For purposes of substantive state law effecting exemptions from seizure, then, any changes that occur after the filing of the bankruptcy petition — including any changes designated as being retroactive — can have no direct effect on the court's determinations concerning exemption.¹⁹

2. Interpretation of Applicable State Law

For Orso to prevail, he must demonstrate that the payments produced by the particular annuities purchased by or on behalf of his tort debtors in the structured settlement of their consent judgment are covered by § 22:647. In determining whether the proceeds and avails of the structured settlement annuities fall within the Louisiana exemption, we resort to the acts of the state legislature and to the pronouncements of the state's courts as well.

Having established the applicable framework for resolution of the question whether Orso's proceeds from the Annuities are exempt, we now examine the Louisiana...