In the Matter of Orso

• Citation: 214 F.3d 637
• Decision Date: 27 June 2000
• Docket Number: No. 98-31008,98-31008
• Parties: (5th Cir. 2000) IN THE MATTER OF: PAUL WILLIAM ORSO, Debtor. VALERIE CANFIELD, Appellant, v. PAUL WILLIAM ORSO AND MARTIN A. SCHOTT, Appellees,
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 637

214 F.3d 637 (5th Cir. 2000)

IN THE MATTER OF: PAUL WILLIAM ORSO, Debtor.

VALERIE CANFIELD, Appellant, v. PAUL WILLIAM ORSO AND MARTIN A. SCHOTT, Appellees,

No. 98-31008

UNITED STATES COURT OF APPEALS, FIFTH CIRCUIT

June 27, 2000

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

Before JONES, DeMOSS, and DENNIS, Circuit Judges.

EDITH H. JONES, Circuit Judge:

Valerie Canfield ("Canfield") appeals the denial of her objection to the claim by her former husband, Paul William Orso ("Orso"), that certain annuities he receives as part of a structured tort settlement are exempt from the property of his bankruptcy estate under Louisiana law. La. R.S. 22:647. The bankruptcy and district courts attempted to distinguish our decision in Young v. Adler, 806 F.2d 1303 (5th Cir. 1987), which held that certain types of annuities are not exempt. Although the issue is close, we conclude that Young governs this case, and we reverse and remand with instructions to include Orso's annuities in the property of his estate.

I. FACTUAL AND PROCEDURAL BACKGROUND

In November 1986, several months after Canfield and Orso were married, Orso was involved in a serious automobile accident which left him permanently and severely brain damaged. As a result of his injuries, Orso became mildly mentally retarded with an I.Q. of less than 70.

Orso and Canfield filed suit against several defendants seeking damages for the injuries sustained by Orso in the accident. In September 1989, the tort action was settled, and Orso and Canfield entered into consent judgments with the defendants. Under the terms of the settlement, both Orso and Canfield were to receive lump sum payments. In addition, Orso was to receive monthly payments for the rest of his life, with 30 years of payments guaranteed to Orso or his designee, from two defendants and their insurers (collectively the "defendants"). The defendants purchased annuity contracts to provide Orso with the agreed upon monthly payments.

In May 1990, Orso and Canfield obtained a judgment of separation and entered into a settlement of community property agreement. In December 1990, Canfield filed a petition in state court to enforce certain provisions of the community property settlement agreement. Orso and Canfield were formally divorced in January 1991. In July 1994, the state court entered judgment in favor of Canfield for $48,000 in arrearages and ordered Orso to pay Canfield $1,000 per month for the succeeding five months.

Five days after entry of the state court order, Orso filed a Chapter 7 bankruptcy petition. Orso listed as an asset the periodic payments he received as a result of the structured settlements from the 1987 tort action, but he claimed that these payments were exempt from the bankruptcy estate as annuities under La. Rev. Stat. Ann. § 22:647 (West 1995).

Canfield filed her proof of claim with the bankruptcy court for $53,494.92, which represented the judgment entered by the state district court for Orso's arrearages. The bankruptcy court denied Canfield's motion for relief from the automatic stay, her request that the court abstain from exercising jurisdiction, and her motion to dismiss. Canfield also objected to Orso's claim of exemption for the annuity proceeds. The bankruptcy court upheld the exemption after a lengthy analysis of Young and Louisiana's exemption statute for annuities. Canfield has appealed the district court's order affirming the claim of exemption.

II. ANALYSIS

The issue on appeal is whether Orso's structured settlement payments derive from annuities exempt from creditors' claims pursuant to Louisiana law, or whether, as in Young, they are de facto payments on a nonexempt debt owed to Orso.¹

Once the debtor commences an action in bankruptcy, all property in which the debtor has a legal or equitable interest becomes property of the bankruptcy estate. 11 U.S.C.A. § 541 (West 1993); McManus v. Avco Financial Services of Louisiana, 681 F.2d 353, 354 (5th Cir. 1982). After all the property is subsumed within the bankruptcy estate, the debtor may exempt certain property, insulating it from most creditors' claims. McManus, 681 F.2d at 354. Under the Bankruptcy Code, states can allow their debtors to exempt (1) property included in the federal "laundry list" of exemptions, 11 U.S.C.A. § 522(d), or (2) property specified under Louisiana law and federal laws other than 11 U.S.C. § 522(d). Id. at 355. Since Louisiana "opted out" of the federal laundry list of exempt property, Louisiana law governs whether Orso's structured settlement payments constitute exempt annuities.

At the time Orso filed his bankruptcy petition, exemptions for annuities were covered by the old version of La. Rev. Stat. Ann. § 22:647B, which states:

The lawful beneficiary, assignee, or payee, including the annuitant's estate, of an annuity contract, heretofore or hereafter effected, shall be entitled to the proceeds and avails of the contract against the creditors and representatives of the annuitant or the person effecting the contract, or the estate of either, and against the heirs and legatees of either such person, saving the rights of forced heirs, and such proceeds and avails shall also be exempt from all liability for any debt of such beneficiary, payee, or assignee or estate, existing at the time the proceeds or avails are made available for his own use.

Although § 22:647(B) was amended in 1999,² federal law requires this court to apply the state law in effect at the time the debtor filed his bankruptcy petition. See 11 U.S.C. § 522(b)(2)(A)("an individual debtor may exempt from property of the estate ... any property that is exempt under ... State or local law that is applicable on the date of the filing of the petition...."). The fact that the amendment is interpretive, and that the Louisiana Legislature expressly intended the amendment to have retroactive application, does not change our analysis. See In re John Taylor Company (Taylor v. Knostman), 935 F.2d 75 (5th Cir. 1991). In Taylor, this court held that the debtor could not avail herself of an amendment to the Texas homestead exemption that was passed subsequent to her filing for bankruptcy protection. As in the present case, the amendment was "expressly made retroactive" and merely changed how the exemption at issue was "defined." Id. at 78. The Taylor court refused to apply the amendment, though, given the explicit language of § 6 of the Bankruptcy Act of 1898, which is almost identical to § 522(b)(2(A): ³ "Texas law cannot, however, change the post-bankruptcy rights of claimants and creditors as determined by federal law, especially in the face of the explicit language of § 6." Id. Thus, in following Taylor, this court must determine the scope of the Louisiana annuity exemption by reference to the law existing at the time of the bankruptcy filing in 1994.

In its opinion, the bankruptcy court expressed its understanding of the "proper" scope of unamended § 22:647 (hereinafter, simply "§ 22:467") as well as its dislike for Young. Having found, as a matter of fact, that each stream of payments constitutes an annuity under La. Rev. Stat. Ann. § 20:33, the bankruptcy court held that the annuities were exempt under the plain language of § 22:647. Alternatively, the bankruptcy court purported to distinguish Young on grounds discussed later herein. The district court agreed with the bankruptcy court's reasoning: "The conclusion that these contracts are indeed annuities mandates that under Louisiana law ... each is exempt from seizure."

By relying on their understanding of the "plain language" of the statute, the lower courts declined to follow Young -- even though Young interpreted the statute at issue. In Young, this court made an Erie guess as to how the Louisiana courts would interpret § 22:647. Having made such a guess, neither the lower courts nor this court is at liberty to ignore the precedential value of this interpretation:

[W]hen our Erie analysis of controlling state law is conducted for the purpose of deciding whether to follow or depart from prior precedent of this circuit, and neither a clearly contrary subsequent holding of the highest court of the state nor a subsequent statutory authority, squarely on point, is available for guidance, we should not disregard our own prior precedent on the basis of subsequent intermediate state appellate court precedent unless such precedent comprises unanimous or nearly unanimous holdings from several -- preferably a majority -- of the intermediate appellate courts of the state in question.

Federal Deposit Ins. Corp. v. Abraham, 137 F.3d 264, 269 (5th Cir. 1998). Prior to Orso's filing, no Louisiana appellate court had questioned this court's interpretation of § 22:647.⁴ Furthermore, until § 22:647 was amended, neither the Louisiana Supreme Court nor the Louisiana legislature had questioned this court's interpretation of § 22:647. Thus, in determining the law that was in effect at the time of Orso's filing, this court is bound by Young's analysis of the unamended Louisiana statute.⁵

In Young, the debtor, an attorney, could not exempt payments received on an otherwise non-exempt debt for legal services by funding those payments with an annuity. The Young court held that even if the payments may "strictly speaking, [be] an annuity," this court must "pierce the veil of this arrangement to determine its true nature." Young, 806 F.2d at 1306. Thus, whether the payments are exempt depends on the nature of the stream of payments: "It is the substance of the arrangement rather than the label affixed to it that determines whether the payments are exempt under the Louisiana statutes as proceeds from an annuity, or accounts receivable, and part of the bankruptcy estate." Id. at 1307.

The court relied on several factors to determine the true nature of the arrangement. According to Young, annuities that are exempt under § 22:647 have the...