In re Soza, Civil Action No. H-06-0466.

• Decision Date: 17 November 2006
• Docket Number: Bankruptcy No. 05-92131-111-7.,Civil Action No. H-06-0466.
• Citation: 358 B.R. 903
• Parties: In re Andres Alejandro SOZA, et al., Debtors. Andres Alejandro Soza, et al., Appellants, Joseph M. Hill, Trustee, Appellee.
• Court: U.S. District Court — Southern District of Texas

358 B.R. 903

In re Andres Alejandro SOZA, et al., Debtors.

Andres Alejandro Soza, et al., Appellants,

Joseph M. Hill, Trustee, Appellee.

Civil Action No. H-06-0466.

Bankruptcy No. 05-92131-111-7.

United States District Court, S.D. Texas, Houston Division.

November 17, 2006.

COPYRIGHT MATERIAL OMITTED

Ira D. Joffe, Attorney at Law, David W. Barry, Law. Offices of David W. Barry, Houston, TX, for Debtors.

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

MEMORANDUM AND ORDER

MILLER, District Judge.

Andres Alejandro Soza and Mary Rachel C. Buzo appeal the bankruptcy court's order sustaining the trustee's objection to their annuity exemption and reclassifying the annuity as nonexempt property. Based on a careful review of the briefs, the record, and the applicable law, this court reverses the bankruptcy court's order for the reasons that follow.

BACKGROUND

On October 13, 2005, one day prior to filing for bankruptcy, appellants Andres Alejandro Soza and Mary Rachel C. Buzo transferred $30,000 into a Mutual of Omaha Annuity through First Bank & Trust. Subsequent to filing for bankruptcy, appellants scheduled the annuity as exempt under section 1108.051 of the Texas Insurance Code. On January 4; 2006, the trustee filed his objection to the exemption. The trustee alleged that the conversion was "in fraud of creditors," and therefore, in accord with section 1108.053, the annuity should be classified as non-exempt property. On January 31, 2006, a hearing was held before the bankruptcy court. Considering only the pleadings, the court ruled in favor of the trustee on the basis that the conversion constituted constructive fraud.

ANALYSIS

This court has jurisdiction of the appeal under 28 U.S.C. § 158(a)(1). Determining whether an exemption applies to property that otherwise would be part of a debtor's bankruptcy estate is a core proceeding. See 28 U.S.C. § 157(b)(2)(B); In re Stonebridge Technologies, Inc., 430 F.3d 260, 267 (5th Cir.2005) ("A proceeding is core `if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy: ") (quoting In re Wood, 825 F.2d 90, 97 (5th Cir.1987)). When reviewing a bankruptcy court's decision in a core proceeding, the district court functions as an appellate court and applies the standard of review generally applied in federal-court appeals. See Webb v. Reserve Life Ins. Co., 954 F.2d 1102, 1103-04 (5th Cir.1992). A bankruptcy court's findings of fact are reviewed for clear error, with proper deference to that court's opportunity to make credibility determinations. FED. R. BANKR.P. 8013; In re McDaniel, 70 F.3d 841, 842-43 (5th Cir. 1995). A finding of fact is clearly erroneous if, after review of all the evidence, the court is left with a firm and definite conviction that the bankruptcy court erred. In re McDaniel, 70 F.3d at 843. Legal conclusions, as well as mixed questions of law and fact are reviewed, de novo. Id.; In re Herby's Foods, Inc., 2 F.3d 128, 130 (5th Cir.1993). Under de novo review, this court will make a judgment independent of that of the bankruptcy court and without deference to that court's analysis and conclusions. See Coston v. Bank of Malvern, 987 F.2d 1096, 1099 (5th Cfr.1992). The trustee as the objecting party bears the burden of proving, by a preponderance of the evidence, that the debtor is not entitled to an exemption. FED. R. BANKR.P. 4003(c).

This appeal presents two issues: (1) whether the bankruptcy court erred when it entered an order denying the debtors' exemption while refusing to take testimony and no evidence was presented; and (2) whether the bankruptcy court erred when it denied the debtors' exemption on the basis that a transfer on the "eve of a bankruptcy" is in fraud of creditors under the constructive fraud standard. The court will first consider whether the bankruptcy court's "failure to examine evidence outside of the pleadings was erroneous.

1. Refusal to Consider Evidence Outside of the Pleadings

Appellants argue that the bankruptcy court erred when it entered an order denying the debtors' exemption while refusing to take testimony and no evidence was presented, The admission of evidence is committed to the sound discretion of the bankruptcy court, subject to review for abuse of that discretion. See In re SGSM Acquisition Co., 439 F.3d 233, 239 (5th Cir.2006); In re Charter Co., 125 B.R. 650, 654 (M.D.Fla.1991) (citing Miller v. Universal City Studios, Inc., 650 F.2d 1365, 1374 (5th Cir.1981)). "A trial court abuses its discretion when its ruling is based on an erroneous view of the law or a clearly erroneous assessment of the evidence." Bocanegra v. Vicmar Servs., Inc., 320 F.3d 581, 584 (5th Cir.2003).

In this case, appellants attempted to offer evidence that the money used to purchase the annuity was inherited and that entitlement to the money was not clearly established on the face of the will. The trustee objected to the admission of this evidence on the basis that the will's existence and ambiguity were being addressed for the first time at the hearing. The bankruptcy court sustained the objection, refusing to allow the appellants an opportunity to testify. Because evidence as to the source of the money "used to purchase the annuity was offered for the first time at the bankruptcy hearing, the court's refusal to hear this testimony is not an abuse of discretion. See In re Allied Physicians Group, PA, 2004 WL 2965001, at *6 (N.D.Tex.2004) (finding a bankruptcy, court's refusal to, consider new evidence tendered for the first time at the hearing not an abuse of discretion because there was ample time to offer the evidence prior to the hearing).

2. Intent to, Defraud Creditors

Appellants argue that the bankruptcy court erred when it denied the debtors' exemption on the basis that a transfer on the "eve of a bankruptcy" is in fraud of creditors under the constructive fraud standard. At issue is whether section 1108.051, which provides an exemption for insurance and annuity benefits, applies and exempts the annuity from a debtor's bankruptcy estate. Section 1108.051 provides:

(a) Except as provided by Section 1108.053, this section applies to any benefits, including the cash value and proceeds of an insurance policy, to be provided, to an insured or beneficiary under;

(1) an insurance policy or annuity contract issued by a life, health, or accident insurance company, including a mutual company or fraternal benefit society; or

an annuity or benefit plan used by au employer or individual

TEX. INS.CODE ANN. § 1108.051 (Vernon 2006) (emphasis added). However, "[t]he exemptions provided by Section 1108.051 do not apply to ... a premium payment made in fraud of a creditor. . . ." Id. § 1108,053.

The appellants argue that their purchase of the annuity one day prior to filing for bankruptcy was not intentionally fraudulent. Therefore, appellants urge this court to reverse the bankruptcy court's denial of the annuity exemption. The trustee, in turn, asks the court to affirm the, `bankruptcy court's decision on the basis that the purchase was either a fraudulent transfer or on the theory that section 1108.053's "in fraud of creditors" may be found by a showing of constructive fraud on the part of a debtor. Neither section 1108.051 nor section 1108.053 speaks directly to whether a purchase of an annuity one day prior to filing for bankruptcy is clearly "in fraud of creditors." Rather, section 1108.051 makes neither a distinction on when the annuity was purchased nor for how much Money that annuity was purchased. Additionally, section 1108.053 does not instruct the court on whether something less than intent is sufficient to satisfy the "in fraud of creditors" condition to the exemption exception.

No court to date has examined section 1108.051 or section 1108.053. However, the predecessor to these sections, Insurance Code article 21.22, contained the same annuity exemption found today in section' 1108.051, as well as the same "in fraud of creditors" exception that is found in `section 1108.053.¹ Controlling Texas case law establishes that, article 21.22 does not apply "when used as a shield to fraud." Sun Life Assurance Co. of Canada v. Dunn, 134 F.Supp.2d 827, 836 (S.D.Tex. 2001) (citing Marineau v. Gen. Am. Life Ins. Co., 898 S.W.2d 397, 402 (Tex.App.— Fort Worth 1995, no writ)). In Marineau v. General American Life Insurance Company, the court addressed whether an insurance policy that had been purchased with embezzled funds could be placed in constructive trust. Id. The court held that article 21.22 was not a bar to the imposition of a constructive trust because the insurance policy was obtained through fraudulent methods. Id. Therefore, Texas law precludes the application of article 21.22 to shield wrongful acts when doing so would deprive the rightful owner of her property. Id. In an earlier case, a Texas court examined whether sufficient evidence was presented at trial to establish that "premium payments were made in fraud of [a creditor]." Leibman v. Grand, 981 S.W.2d 426, 430 (Tex.App.—El Paso 1998, no pet.). More specifically, Leibman challenged the sufficiency of the evidence for purposes of showing that the annuity premium payments were made with intent to defraud the creditor. Id. In Leibman, the evidence demonstrated that following a North Carolina equitable distribution judgment and alimony arrearage judgment, the debtor, residing at the time in Texas, sold a boat and real property for $17,000 less than he had paid for them, and sold a vehicle for $6,000. Id. at 432. Moreover, within one month after the foreign judgments were registered in Texas, Leibman invested $35,000 of non-exempt funds into an exempt annuity, destroyed most of the records pertaining to these transactions, and later testified that he held no intention to pay the judgments. Id. Based on this evidence, the court held that intent to...