McFarland v. Wallace (In re McFarland)

• Decision Date: 22 June 2015
• Docket Number: No. 14–14514.,14–14514.
• Parties: In re Thomas J. McFARLAND, Debtor. Thomas J. McFarland, Plaintiff–Appellant, v. A. Stephenson Wallace, Defendant–Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

790 F.3d 1182

In re Thomas J. McFARLAND, Debtor.Thomas J. McFarland, Plaintiff–Appellant

v.A. Stephenson Wallace, Defendant–Appellee.

No. 14–14514.

United States Court of Appeals, Eleventh Circuit.

June 22, 2015.

Todd Boudreaux, Shepard Plunkett, Evans, GA, for Plaintiff–Appellant.

David B. Bell, David B. Bell, PC, Arthur Stephenson Wallace, A. Stephenson Wallace, PC, Augusta, GA, for Defendant–Appellee.

Appeal from the United States District Court for the Southern District of Georgia.

Before TJOFLAT, WILLIAM PRYOR, and BALDOCK,^* Circuit Judges.

Opinion

BALDOCK, Circuit Judge:

After filing for bankruptcy in 2011, Thomas McFarland claimed a number of exemptions from his bankruptcy estate. This appeal concerns two such claims, which are opposed by Trustee A. Stephenson Wallace. Before us, McFarland requests exemption for: (1) an annuity worth well over $150,000; and (2) the nearly $15,000 cash surrender value of a whole life insurance policy. The bankruptcy and district courts denied McFarland both exemptions. Exercising jurisdiction under 28 U.S.C. § 158(d), we affirm.

I. BACKGROUND

A. Bankruptcy law

Under federal law, when a debtor files for bankruptcy his property becomes part of the bankruptcy estate and is thereby exposed to creditors. See 11 U.S.C. § 541(a)(1). The debtor, however, may exempt certain types of property from this exposure. See id. § 522; Rousey v. Jacoway, 544 U.S. 320, 325, 125 S.Ct. 1561, 1565–66, 161 L.Ed.2d 563 (2005). That said, the Bankruptcy Reform Act of 1978 permitted states to opt out of the exemptions in 11 U.S.C. § 522(d). See 11 U.S.C. § 522(b)(2). If a state opts out, debtors in that state cannot utilize the § 522(d) exemptions, though they may take advantage of “any exemptions available under state or local law and federal, non-bankruptcy law.” Sheehan v. Peveich, 574 F.3d 248, 251 (4th Cir.2009) ; id. § 522(b)(3). In general, courts may not refuse to honor an exemption—state or federal—“absent a valid statutory basis for doing so.” Law v. Siegel, ––– U.S. ––––, 134 S.Ct. 1188, 1196, 188 L.Ed.2d 146 (2014).

Back in 1980, Georgia opted out and created its own exemptions “for purposes of bankruptcy.” Ga.Code Ann. § 44–13–100 ; Silliman v. Cassell, 292 Ga. 464, 738 S.E.2d 606, 609 (2013). Two Georgia exemptions are at issue here. First, under Georgia Code § 44–13–100(a)(2)(E), a bankruptcy debtor may exempt

[a] payment under a pension, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor[.]

Ga.Code Ann. § 44–13–100(a)(2)(E) (emphases added). Under § 44–13–100(a)(9), a bankruptcy debtor may exempt

[t]he debtor's aggregate interest, not to exceed $2,000.00 in value, ... in any accrued dividend or interest under, or loan or cash value of, any unmatured life insurance contract owned by the debtor under which the insured is the debtor or an individual of whom the debtor is a dependent[.]

Id. § 44–13–100(a)(9) (emphases added). Also key here is a non-bankruptcy provision from the Georgia Code—section 33–25–11(c) —which states that

[t]he cash surrender values of life insurance policies issued upon the lives of citizens or residents of this state, upon whatever form, shall not in any case be liable to attachment, garnishment, or legal process in favor of any creditor of the person whose life is so insured....

Id. § 33–25–11(c) (emphases added). Title 33 contains the Georgia Insurance Code, which “extensively and exhaustively regulates, at the state level, all aspects of the insurance industry in Georgia.” Cotton States Mut. Ins. Co. v. DeKalb Cnty., 251 Ga. 309, 304 S.E.2d 386, 389 (1983).

B. Facts

Many years ago, while serving in the United States Army, Thomas McFarland obtained a mutual fund. Then, in 1984, McFarland took out a $30,000 whole life insurance policy. In 2006, at the age of 64, McFarland transferred $150,000 from his mutual fund into a newly created annuity from The Hartford company (hereinafter the “Annuity”). The Annuity contract designated McFarland's wife as the sole beneficiary, and it stated that the Annuity's “Commencement Date”—i.e., the date the Annuity would begin disbursing payments—was January 15, 2032.

In February 2011, McFarland declared Chapter 7 bankruptcy. He eventually claimed, inter alia, the following two exemptions under the law of Georgia, where he was domiciled. First, McFarland claimed the full cash surrender value (approximately $13,445) of his whole life insurance policy was exempt under Georgia Code § 33–25–11(c). Second, McFarland claimed his Annuity (by then worth around $170,000) was exempt under § 44–13–100(a)(2)(E). A. Stephenson Wallace, the Trustee, objected. The bankruptcy court restricted McFarland's life insurance exemption to the $2,000 limit found in § 44–13–100(a)(9), In re McFarland, 481 B.R. 242 (Bankr.S.D.Ga.2012), and it denied the Annuity exemption in its entirety, Wallace v. McFarland (In re McFarland ), 500 B.R. 279 (Bankr.S.D.Ga.2013). The district court affirmed. McFarland v. Wallace, 516 B.R. 665 (S.D.Ga.2014).

II. STANDARD OF REVIEW

“We review the district court's decision to affirm the bankruptcy court de novo, which allows us to assess the bankruptcy court's judgment anew, employing the same standard of review the district court itself used.” In re Globe Mfg. Corp., 567 F.3d 1291, 1296 (11th Cir.2009). “Thus, we review the bankruptcy court's factual findings for clear error, and its legal conclusions de novo. ” Id.

Generally speaking, courts construe bankruptcy exemption statutes—both state and federal—liberally in favor of bankruptcy debtors. See, e.g., Lampe v. Williamson (In re Lampe ), 331 F.3d 750, 754 (10th Cir.2003) ; Caron v. Farmington Nat'l Bank (In re Caron ), 82 F.3d 7, 10 (1st Cir.1996) ; Silliman v. Cassell (In re Cassell ), 443 B.R. 200, 203 (Bankr.N.D.Ga.2010).¹ And under Rule 4003(c) of the Federal Rules of Bankruptcy Procedure, the burden is on the party objecting to exemptions to prove, by a preponderance of evidence, “that the exemptions are not properly claimed.” Thus, we will construe the exemptions here liberally in favor of McFarland, and we will look to Wallace for a demonstration that the exemptions are inapplicable.

III. ANNUITY EXEMPTION

McFarland contends there is no valid statutory basis for ruling that Georgia intended to limit the relevant exemption statutes in ways unfavorable to him. Our analysis of his arguments begins with the Hartford Annuity.

To review, Georgia Code § 44–13–100(a)(2)(E) allows a debtor to exempt, from the bankruptcy estate, a payment under an “annuity” or a “similar plan or contract.” McFarland argues his Annuity qualifies under this statute. The bankruptcy and district courts disagreed. Thus, we must first determine whether McFarland's Annuity falls within the statutory definition of the term “annuity.” In our view, it does not.

Helpfully, the Supreme Court of Georgia recently defined “annuity” as the word is used in § 44–13–100(a)(2)(E). See Silliman, 738 S.E.2d at 606–10 ; Silliman v. Cassell (In re Cassell ), 688 F.3d 1291 (11th Cir.2012) (certifying this issue to the Georgia Supreme Court). The court concluded that an “annuity” under § 44–13–100(a)(2)(E) “is an obligation to pay an amount at regular intervals for a certain or uncertain period of time.” Silliman, 738 S.E.2d at 610 (emphasis added); see also

Rousey, 544 U.S. at 330, 125 S.Ct. at 1569 (“[A]n annuity is ‘an amount payable yearly or at other regular intervals....' ” (citation omitted)). Moreover, the court explained, “in deciding whether a particular annuity is of the type intended to come within the ... § 44–13–100(a)(2)(E) exemption, the pertinent question is whether it provides income as a substitute for wages. ” Silliman, 738 S.E.2d at 610 (emphasis added). A trustee must therefore show “that the payments were not intended to substitute for wages.” Id. at 612. Wallace has easily done so.

The bankruptcy court found (and the district court affirmed) that McFarland's Annuity did not qualify under § 44–13–100(a)(2)(E) because it was structured more like a future investment than a substitute for wages. See In re McFarland, 500 B.R. at 285. The bankruptcy court emphasized that McFarland had never—not once—drawn money from the Annuity, and that he did not intend to withdraw any funds during his lifetime. See id. at 282, 285–86.

This reasoning is sound, and the bankruptcy court's findings of fact are not clearly erroneous. Indeed, McFarland concedes on appeal that he has never drawn money from the Annuity and says he was not planning on doing so until 2032 at the earliest —when he would be 90 years old. At a hearing before the bankruptcy court in September 2011, McFarland made similar admissions:

[Wallace:] Have you taken any payments out from the annuity?

[McFarland:] No, sir. I got that annuity mainly for my wife when I passed.

[Wallace:] In fact, you don't intend to take any payments out of that annuity, do you?

[McFarland:] I hope not. I'm trying to save it for my wife. I'm seven years older than she is and according to the Vietnam mortality tables, my [life] expectancy is only 2017.

Aplt's App., Exhibit 7, at 15. As if that was not enough, earlier in 2011 McFarland made similar statements at three separate examinations. See Aple's App., Exhibit 1–32, at 45–46 (June 2011 bankruptcy examination) (“[Wallace:] Do you intend to withdraw any money from this [Annuity] in your lifetime? [McFarland:] No, sir.”); id., Exhibit 1–33, at 26 (August 2011 deposition) (“[McFarland:] “I considered the annuity to be critical to [my wife's] future.”); id., Exhibit 1–34, at 25–26 (March/April 2011 creditor meeting) (“[Bell:] But [the Annuity is] just the way you chose to invest your money for retirement? [McFarland:] Yes. [Wallace:] Have you started drawing funds down from the annuity? [McFarland:] No.”).² These multiple, explicit concessions plainly preclude McFarland from this exemption, as they...