In re Payne, BAP No. NC-04-1102-MaSP.

• Decision Date: 30 March 2005
• Docket Number: Bankruptcy No. 03-12246.,BAP No. NC-04-1102-MaSP.
• Parties: In re Barbara Marie PAYNE, Debtor. Estate of Dean Short, Appellant, v. Barbara Marie Payne; Charles E. Sims, Chapter 7 Trustee, Appellees.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit

323 B.R. 723

In re Barbara Marie PAYNE, Debtor.

Estate of Dean Short, Appellant, v. Barbara Marie Payne; Charles E. Sims, Chapter 7 Trustee, Appellees.

BAP No. NC-04-1102-MaSP.

Bankruptcy No. 03-12246.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on November 17, 2004.

Filed March 30, 2005.

COPYRIGHT MATERIAL OMITTED

Michael C. Fallon, Santa Rosa, CA, for Estate of Dean Short.

George A. Weinkauf, Nelson & Weinkauf, San Rafael, CA, for Barbara Marie Payne.

Before MARLAR, SMITH and PERRIS, Bankruptcy Judges.

OPINION

MARLAR, Bankruptcy Judge.

INTRODUCTION

Before us is the bankruptcy court's order allowing the debtor's claimed exemption in a guaranteed minimum annuity with a life contingency feature as "life insurance." An objecting creditor, joined by the chapter 7 trustee, maintained that the annuity was merely an investment and therefore did not qualify as life insurance under the relevant California exemption statute. The bankruptcy court determined that both parties to the annuity contract had assumed risks and that such risks qualified the annuity as exempt life insurance.

We hold that, while risk is one characteristic of life insurance, the bankruptcy court applied an incorrect legal standard in that it failed to consider other relevant factors, including the primary purpose of the annuity, in making a determination as to whether it was exempt life insurance. Therefore we reverse the bankruptcy court's order, and remand for application of the correct legal standard.

FACTS

Debtor filed a voluntary chapter 7¹ petition on September 16, 2003. At the time, she was 78 years old, single and lived in a mobile home park in Novato, California.

Debtor's largest scheduled debt was an unsecured personal loan debt of $139,773 owing to the Estate of Dean F. Short ("the Estate").

Included in Debtor's monthly income was an annuity payment of $1,032.70. Debtor claimed a full exemption in the annuity as a "matured life insurance policy," as that term is defined in California Civil Procedure Code ("Cal.Civ.Proc.Code") § 704.100(c). In 2002, at age 77, Debtor had purchased the single-premium annuity for $125,000 from Cova Financial Life Insurance Company, a/k/a MetLife Investors Insurance Company ("MetLife").

The Estate, joined by the chapter 7 trustee filed a timely objection to the claimed exemption on the grounds that the annuity did not qualify as life insurance. They conceded, however, that the annuity was necessary for Debtor's support.

Debtor responded that the annuity was a life insurance policy, and declared that its purpose was to provide support for herself as well as death benefits for a relative.²

The detailed terms of the annuity were as follows. Debtor applied on a "single premium immediate annuity" form. The policy cover page stated, on the top line: "Single Premium Annuity Contract." But, farther down on the page, it read: "YOU HAVE PURCHASED A LIFE INSURANCE POLICY." The contract schedule page described the plan as a "life annuity with period certain." Under "Income Options," the checked box was entitled "Life Income With 10 Years Guaranteed" — an option "with a life contingency."

Thus, the annuity was a "period certain guaranteed minimum" annuity. See Moffat v. Habberbush (In re Moffat), 119 B.R. 201, 204 n. 4 (9th Cir. BAP 1990), aff'd, 959 F.2d 740 (9th Cir.1992). See also Cal. Ins. Law & Prac. § 20.21[2][b] (Matthew Bender 2004).³ The guaranteed ten-year payments of $123,924 ($1,032.70 × 120 months) were slightly less than the $125,000 single premium payment.

After a hearing on the exemption objections, the bankruptcy court issued a decision that the annuity qualified as life insurance because the total payments were contingent on Debtor living beyond the ten years. The court opined:

[Debtor] bet MetLife ... that she would live more than ten years. If she does so, she wins her bet and MetLife must pay her more than she paid for the annuity. If she dies in less than ten years, MetLife wins the bet and enjoys the interest-free use of the remaining balance of [Debtor's] premium. There is no doubt that calculating the odds of this bet involved complex considerations including both interest rate factors and actuarial tables to determine the probability that [Debtor] would live more than ten years.

Memorandum Decision (February 6, 2004), at 2.

The order overruling the objection to exemption was entered on February 13, 2004, and was timely appealed by the Estate.

ISSUE

The sole issue is whether the period certain guaranteed minimum annuity, under which Debtor will receive monthly payments for the longer of ten years or her lifetime, but in either event no less than approximately what she paid for the annuity,⁴ is exempt life insurance pursuant to Cal.Civ.Proc.Code § 704.100(c).

STANDARD OF REVIEW

Whether the correct legal standard was applied is an issue of law which is subject to de novo review. Anastas v. Am. Sav. Bank (In re Anastas), 94 F.3d 1280, 1283 (9th Cir.1996).

The scope of an exemption under California law is a legal question which we review de novo. Sticka v. Casserino (In re Casserino), 290 B.R. 735, 737 (9th Cir. BAP 2003), aff'd, 379 F.3d 1069 (9th Cir.2004). Contract interpretation is also a question of law, which we review de novo. Renwick v. Bennett (In re Bennett), 298 F.3d 1059, 1064 (9th Cir.2002); Smyth v. USAA Prop. & Cas. Ins. Co., 5 Cal.App.4th 1470, 1474, 7 Cal.Rptr.2d 694, 696 (1992) (interpretation of an insurance policy, like any other contract, is a matter of law).

Whether an annuity is exempt life insurance under the California exemption statute is a factual determination which we review under the clearly erroneous standard. See Turner v. Marshack (In re Turner), 186 B.R. 108, 117 (9th Cir. BAP 1995) (determination of whether an annuity is exempt life insurance requires a factual analysis); Duckor Spradling & Metzger v. Baum Trust (In re P.R.T.C., Inc.), 177 F.3d 774, 782 (9th Cir.1999) (factual findings are reviewed for clear error).

DISCUSSION

Exemption Law and Annuities

California has opted out of the federal exemption scheme; therefore we apply California exemption law. See 11 U.S.C. § 522(b)(1); Cal.Civ.Proc.Code § 703.130. The California exemption statutes are liberally construed, for their manifest purpose is to protect income and property needed for the subsistence of the judgment debtor. See Turner, 186 B.R. at 113.

California's exemption law for "Life Insurance Policies" provides, in pertinent part:

Benefits from matured⁵ life insurance policies (including endowment and annuity policies) are exempt to the extent reasonably necessary for the support of the judgment debtor and the spouse and dependents of the judgment debtor.

Cal.Civ.Proc.Code § 704.100(c).

The parties have already agreed that the annuity was necessary for the support of Debtor. The open question is whether a period certain guaranteed minimum annuity, i.e., one which continues for the longer of a specified number of years or the annuitant's life, qualifies as life insurance under Cal.Civ.Proc.Code § 704.100(c). This is a matter of first impression in our circuit.

The Ninth Circuit has held that Cal.Civ.Proc.Code § 704.100(c)'s parenthetical reference to "endowment and annuity policies" does not create an independent exemption for endowments and annuities in general. Rather, it merely clarifies that life insurance policies that possess significant features of an endowment or annuity will not lose their exempt character. See Kennedy v. Pikush (In re Pikush), 157 B.R. 155, 157 (9th Cir. BAP 1993), aff'd, 27 F.3d 386 (9th Cir.1994). An example would be a life insurance policy that provides for the beneficiary's receipt of payments in the form of an annuity, rather than a lump sum, upon the death of the insured. Id. at 157-58.

In California, life insurance is defined as "`a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event' "where "the contingent or the unknown event is mortality." Pikush, 157 B.R. at 156, quoting California Insurance Code ("Cal.Ins.Code") § 22. Its purpose has been described as follows:

The basic purpose of life insurance is to address the risks associated with human mortality. Life insurance serves not only a protective function, but also, with certain types of policies, a savings function. In its protective function, life insurance provides funds for estate purposes, income for family members after the death of the insured, and special needs such as the payment of a mortgage.[] In its savings function, certain types of life insurance products allow individuals to accumulate savings[] and provide the policyholder with the ability to borrow against those savings or to obtain the cash surrender value of the policy. The various types of life insurance products emphasize different aspects of the protective and savings functions in varying degrees to serve individual needs.

Cal. Ins. Law & Prac., supra, § 20.01[1] (footnotes omitted).

"An annuity, by contrast, is a right to receive fixed, periodic payments, either perpetually or for life or a stated period of time.... Thus, annuities are more in the nature of investments rather than insurance." Pikush, 157 B.R. at 156-57 (citation omitted).

More specifically:

With an annuity, the person designated as the recipient (the annuitant) is usually the person paying the money. The annuitant pays a fixed sum, in return for which the company must then perform a series of obligations over a period of years, at designated times. The hazard of loss is no longer upon the company, but upon the recipient, who may die before any benefits are received. Instead of creating an immediate estate for benefit of others, the annuitant has reduced the annuitant's immediate estate in favor of future contingent income. Annuity contracts must, therefore, be recognized as investments rather than as insurance.

Cal. Ins....