Walden, Matter of

Decision Date13 January 1994
Docket NumberNo. 93-8207,93-8207
Citation12 F.3d 445
PartiesIn The Matter Of Charles R. WALDEN, Jr. and Laura H. Walden, Debtors. Charles R. WALDEN, Jr., and Laura H. Walden, a/k/a Laura Hill Walden, Appellants, v. Mac H. McGINNES, Jr., Appellee.
CourtU.S. Court of Appeals — Fifth Circuit

Ronald Edward Ingalls, Alvis, Carssow, Cummins, Hoeffner & Botsford, P.C., Austin, TX, for appellants.

Harvey D. Caughey, Austin, TX, for appellee.

Appeal from the United States District Court for the Western District of Texas.

Before GOLDBERG, JOLLY and BARKSDALE, Circuit Judges.

BARKSDALE, Circuit Judge:

Charles and Laura Walden appeal from the denial, by the bankruptcy and district courts, of their claimed exemption for an annuity pursuant to Tex.Ins.Code art. 21.22. We REVERSE and RENDER judgment allowing the exemption.


Prior to 1986, Charles Walden, Jr., was employed in his family's funeral business, consisting of Cook-Walden Funeral Homes (a partnership owning funeral homes) and Capital Parks, Inc. (a corporation owning a cemetery). 1 In December 1986, Golden Era Services, Inc. (GES), purchased the assets of the partnership and corporation. In connection with that purchase, GES entered into employment agreements and non-competition agreements with three "key employees": Walden, Walden's father, and Hortense Fisher. 2

Walden's employment contract was for a period of ten years, in an "executive capacity"; but the non-competition agreement was for a period of 40 years. Under the latter, he was to receive $4,000 per month for 200 months, secured by mortgage liens on the funeral home land and buildings, and a lien on the name "Cook-Walden Funeral Homes".

Pursuant to the employment agreement, Walden began working for GES on December 29, 1986. But, in October of the next year, he was placed on an indefinite leave of absence, and GES ceased making payments to him under the non-competition agreement. 3 Walden, his father, and Fisher sued GES in state court, claiming breaches of the employment and non-competition agreements. The suit was settled in 1988, with the parties entering into a settlement agreement that April. That agreement provided that non-competition payments would recommence, that Walden would resign from his executive position, effective retroactively to October 2, 1987, and that the non-competition agreements would be amended to provide that GES could substitute an annuity for the liens securing its obligations under those agreements. 4 Accordingly, the non-competition agreement was then so amended (April 1988).

Neither the settlement agreement nor the amendment to the non-competition agreement required GES to purchase annuities for Walden or the other two key employees; nor did GES purchase annuities when the settlement was finalized in April 1988. In October of that year, however, GES purchased annuities for the three key employees, thereby obtaining the release of all of the collateral securing its obligations under the non-competition agreements.

Walden and his wife filed a bankruptcy petition in September 1991. They listed the annuity (with Principal Life Insurance Company) as an asset, and claimed it as exempt. The exemption was claimed under Article 21.22 of the Texas Insurance Code, which allows an exemption for, inter alia, benefits received "under any plan or program of annuities and benefits in use by any employer". Tex.Ins.Code art. 21.22 (West Supp.1991). The Trustee objected to the exemption.

The bankruptcy court sustained the objection, holding that the annuity did not qualify as exempt property because, inter alia, it did not "represent a plan or program of annuities and benefits in use by any employer", in that it was purchased in connection with the settlement of litigation and GES was not Walden's employer at the time of purchase. In re Walden, 144 B.R. 54, 57 (Bankr.W.D.Tex.1992). After reviewing the record, the district court affirmed, without rendering an opinion.


We review the bankruptcy court's findings of fact for clear error, but review freely questions of law. Bankruptcy Rule 8013; Matter of Herby's Foods, Inc., 2 F.3d 128, 130 (5th Cir.1993). The relevant facts are not in dispute. The sole issue is one of law, a question of statutory interpretation: whether the annuity qualifies as exempt property under art. 21.22.

The parties have not cited, nor have we found, any Texas cases interpreting the provisions of art. 21.22 in a context analogous to the one at hand. Nevertheless, we are given more than firm guidance in our interpretation by the Texas courts' longstanding admonition that exemption statutes are to be liberally construed in favor of the claimant. The Texas Supreme Court has stated that

"our exemption laws should be liberally construed in favor of express exemptions, and should never be restricted in their meaning and effect so as to minimize their operation upon the beneficent objects of the statutes. Without doubt the exemption would generally be resolved in favor of the claimant."

Hickman v. Hickman, 149 Tex. 439, 234 S.W.2d 410, 413-14 (1950) (quoting Carson v. McFarland, 206 S.W.2d 130, 132 (Tex.Civ.App.--San Antonio 1947, writ ref'd )). 5

The Bankruptcy Code provides that, when a bankruptcy case is commenced, all property in which the debtor has a legal or equitable interest becomes property of the bankruptcy estate, 11 U.S.C. Sec. 541, but that debtors may exempt certain property from the claims of creditors. 11 U.S.C. Sec. 522. Depending on state law, debtors may claim either the federal exemptions enumerated in 11 U.S.C. Sec. 522(d), or those available under applicable state or local law. Matter of Volpe, 943 F.2d 1451, 1452 (5th Cir.1991). Texas debtors may elect either the state or federal exemptions. Id.

The Waldens elected the Texas exemptions. Among those available under Texas law is art. 21.22, entitled "Unlimited Exemption of Insurance Benefits From Seizure Under Process", which provides, in pertinent part:

Sec. 1. Notwithstanding any provision of this code other than this article, all money or benefits of any kind ... to be paid or rendered to the insured or any beneficiary under any policy of insurance issued by a life, health or accident insurance company, ... or under any plan or program of annuities and benefits in use by any employer, shall:

(1) inure exclusively to the benefit of the person for whose use and benefit the insurance is designated in the policy;

(2) be fully exempt from execution, attachment, garnishment or other process;

(3) be fully exempt from being seized, taken or appropriated or applied by any legal or equitable process or operation of law to pay any debt or liability of the insured or of any beneficiary, either before or after said money or benefits is or are paid or rendered; and

(4) be fully exempt from all demands in any bankruptcy proceeding of the insured or beneficiary.

(Emphasis added.) 6 As stated, the Waldens claimed that the annuity payments were exempt under art. 21.22. 7


The Trustee claims that the annuity was created pursuant to settlement of litigation, and was therefore not a "true annuity" under Matter of Young, 806 F.2d 1303 (5th Cir.1987). The debtor in Young was an attorney who had represented the plaintiffs in a death claim. Id. at 1304. Pursuant to a structured settlement of that litigation, the debtor (attorney) was to receive monthly payments from an annuity contract as attorney's fees. Id. at 1305. The debtor claimed that the annuity was exempt under Louisiana law. 8 Id. at 1306.

Our court noted that, while the payments were, strictly speaking, an "annuity", they also were accounts receivable; accordingly, it "pierce[d] the veil of th[e] arrangement to determine its true nature", id. at 1306, because "[i]t 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 funds that made up the principal of the annuity were part of the payment the debtor was entitled to receive as attorney's fees for services rendered; but the debtor elected to receive the fees in regular monthly payments over a 14-year period rather than in a lump sum. Accordingly, our court concluded that the annuity payments represented nothing more than installment payments on the debt owed to the debtor for attorney's fees. Id. Because the debtor retained a right against the purchaser of the annuity for the remaining principal owed, until the debt for his attorney's fees was paid in full, our court held that, in substance, the annuity was "nothing more than an account receivable, and not exempt from the bankruptcy estate". Id. at 1307.

Young is distinguishable in several respects. The most obvious distinction is that it dealt with Louisiana, not Texas, exemption statutes. Here, as noted, our interpretation is governed by Texas' well-settled policy of liberal construction. The litigation that was settled arose out of the employment relationship between GES and Walden, including GES's alleged breach of the non-competition agreement. And, most important, the annuity payments claimed to be exempt are not "accounts receivable" for services already performed by Walden. Rather, the annuity was purchased by GES for the purpose of obtaining a release of the liens securing its continuing (future) obligation--as well as to fund that obligation--to pay Walden $4,000 per month in exchange for his continued (future) compliance with his agreement not to compete. 9

We conclude, therefore, that the settlement agreement, which resolved Walden's lawsuit against GES and authorized GES to substitute an annuity for the collateral securing its continuing obligation under the non-competition agreement, does not preclude the annuity from being exempt under art. 21.22. Although the substitution of the annuity for the collateral was made possible...

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