Nadine F. Eilbert v. David Dennis Pelican ( 1997 )

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
______________
No. 97-6034SI
Nadine F. Eilbert, *
*
Appellant, *
*
v. * Appeal from the United States
* Bankruptcy Court for the
David D. Pelican; * Southern District of Iowa
Anita L. Shodeen, *
*
Appellees. *
Submitted: August 20, 1997
Filed: October 14, 1997
Before KRESSEL, SCHERMER, and DREHER, Bankruptcy Judges.
KRESSEL, Bankruptcy Judge.
Nadine F. Eilbert appeals from the bankruptcy court’s1 order
disallowing her claimed exemption in an annuity. We affirm.
1
Russell J. Hill, Chief Judge, United States Bankruptcy
Court for the Southern District of Iowa.
1
I. BACKGROUND
The debtor, Nadine F. Eilbert, is a seventy-seven-year-old widow.
On July 16, 1994, her husband, Raymond E. Eilbert, was involved in an
automobile accident with appellee David Pelican. Raymond Eilbert was
killed and Pelican sustained severe injuries. As a result of his
injuries, Pelican sued Raymond Eilbert’s estate and the debtor on August
26, 1994.2
Raymond’s estate was valued at $1,163,154.13, including $1,051,981
of jointly held property which passed outside of his probate estate.3
In the fall of 1994, the debtor began to liquidate much of her
property. Anticipating the entry of a large judgment against her, she
sought to transform her primarily non-exempt assets into exempt property
in the event she filed bankruptcy. Accordingly, on October 27, 1994,
the debtor used the liquidated proceeds to purchase a single premium
Pinnacle Variable Annuity Contract in the amount of $450,000.
On November 30, 1995, the jury returned a verdict for
2
The debtor was sued because she and her husband were joint
owners of the car Raymond Eilbert was driving.
3
According to the report and inventory, Raymond Eilbert
owned $562,065 of property jointly with his daughters and
$489,916 jointly with his wife. The debtor’s property consisted
mainly of bank account balances, farm machinery and tools and
crops.
2
Pelican in the amount of $662,502.06.4 The state court subsequently
entered a judgment against the debtor and her deceased husband’s estate.
On December 4, 1995, the debtor filed her Chapter 7 petition. On
Schedule C, the debtor claimed as exempt her interest in the annuity
payments and corpus under Iowa Code § 627.6(8)(e). Pelican and the
Chapter 7 trustee, Anita L. Shodeen, objected to the debtor’s claimed
objection.5
The bankruptcy court held an evidentiary hearing and subsequently
entered an order sustaining the objections. The court held that the
debtor’s interest in the annuity payments and corpus was not exempt,
since the payments were not made “on account of” the debtor’s age. The
court also determined that the debtor had not purchased the annuity with
the intent to hinder, delay or defraud creditors.6 The debtor appealed.
4
With pre-petition interest, Pelican’s judgment now stands
at nearly $700,000.
5
Pelican also objected to the exemption of other property,
but only the annuity is the subject of this appeal.
6
"The facts show that Debtor intended to engage in
legitimate pre-bankruptcy planning. She intended to invest in an
exempt annuity. The fact is that she failed in her lawful
intentions. Viewing her conduct in retrospect does not transform
her intent into fraud.” In re Eilbert, No. 95-3707-CH, slip op.
at 9 (Bankr. S.D. Iowa Mar. 25, 1997). The appellees do not
challenge this finding.
3
II. THE ANNUITY
The debtor purchased her single premium Pinnacle Variable Annuity
Contract for $450,000 on October 27, 1994. Under the terms of the
annuity, the debtor receives monthly payments at a ten percent annual
return for the duration of her life, with the balance to be divided at
her death between her daughter and one of her sons.
Pursuant to her directive, the debtor began receiving
disbursements on January 1, 1995. In 1995, she received a total of
$46,641 in monthly payments. The annuity averaged a sixteen percent
rate of return in its first year and, notwithstanding the monthly
payments, was valued at $480,820 at the petition date.
The debtor enjoyed almost unfettered discretion in tailoring the
terms of the annuity. The enrollment form for the annuity contains a
box in which the applicant is asked to provide a retirement age “in
years.” The retirement age is the age at which disbursements begin. In
this case, the debtor left the box blank and instead wrote a date--
January 1, 1995--in the margin. The retirement age may be changed at
any time before distribution. Furthermore, the debtor can withdraw the
entire corpus at any time, subject to contractual penalties ranging from
seven to two percent during the first six years.7
7
Penalties for early withdrawals are assessed against
principal in the following amounts: Seven percent in the first
year, six percent in the second year, five percent in the third
year, four percent in the fourth year, three percent in the fifth
year, two percent in the sixth year, and no penalty thereafter.
4
III. DISCUSSION
In this appeal, the debtor seeks to exempt both the corpus8 and
payments received under an annuity contract pursuant to Iowa Code §
627.6(8)(e).9 This statute provides an exemption for a debtor’s
interest in “[a] payment or a portion of a payment under a pension,
annuity, or similar plan or contract on account of illness, disability,
death, age or length of service. . . .” Iowa Code § 627.6(8)(e). The
debtor argues that her annuity payments are exempt because they are “on
account of” her age.
The exemptibility of annuities under Iowa Code § 627.6(8)(e) is an
ill-defined area of law of comparatively recent origin. Over the past
decade, courts have struggled to supply meaning to
8
There is some debate regarding a debtor’s entitlement to
exempt corpus under Iowa law. In Huebner v. Farmers State Bank
(In re Huebner), 986 F.2d 1222 (8th Cir. 1993), the debtor sought
to exempt the entire corpus of an annuity from which he had
received no disbursements. The Eighth Circuit disallowed the
debtor’s exemption, stating that Iowa Code § 627.6(8)(e) provides
exemptions only for payments: “In § 627.6(8)(e), the Iowa
Legislature has limited its exemption to ‘rights in’ an annuity
payment. Unlike other states . . . Iowa has no statute granting
an exemption for all or any part of the undistributed corpus of
an annuity contract.” Id. at 1224. While we recognize the
controversy regarding corpus, our resolution of the current
appeal renders this issue moot.
9
Under 11 U.S.C. § 522(b), a debtor may utilize either the
federal exemptions listed in § 522(d) or the applicable state
exemptions, unless the state has opted out of the federal scheme.
Iowa has opted out of the federal scheme. See Iowa Code §
627.10. Therefore, the debtor’s entitlement to an exemption in
this case turns on Iowa law.
5
the imprecise phraseology of this provision. The Bankruptcy Court for
the Northern District of Iowa first addressed the issue in In re
Gilbert, 74 B.R. 1 (Bankr. N.D. Iowa 1985).10
In In re Gilbert, the debtors purchased an immediate annuity
policy and sought to exempt payments which commenced only one month
after the purchase date. Defining the issue as “whether the annuity
payments are ‘on account of . . . age,’” the court identified two
possible constructions for the statutory language:
The vague “on account of” language of Section 627.6(9)(e) could
be construed in two possible ways. One construction would hold
the words “on account of” virtually synonymous with “triggered
by.” Under such a construction an annuity would be exempt if
payments were commenced because the debtor obtained a specified
age. . . . Another possible interpretation of the words “on
account of” is to construe them as meaning “based on.”
Id. at 2.
Citing caselaw endorsing the liberal construction of exemption statutes,
the court adopted the “based upon” analysis and allowed the debtors’
exemption.
In In re McCabe, 74 B.R. 119 (Bankr. N.D. Iowa 1986), the court
was again called upon to construe Iowa Code § 627.6(9)(e). In In re
McCabe, the debtors sought to exempt payments from an annuity which
contained no express provision conditioning payment on age, but which
calculated payments based upon the age of the
10
“[T]his Court faces a matter of first impression regarding
the interpretation of subparagraph (9)(e).” In re Gilbert, 74
B.R. at 2. Iowa Code § 627.6(9)(e) is the predecessor to the
current exemption statute.
6
annuitants. Citing In re Gilbert, the court noted the multiple
interpretations of the statutory language. “[T]he language ‘on account
of’ is capable of several interpretations. . . . [T]he phrase could be
construed to mean ‘triggered by’‚ or could be construed to mean ‘based
upon’. . . . Any of those definitions are reasonable and are logical
meanings for the phrase ‘on account of.’” McCabe, 74 B.R. at 120.
Following Gilbert, the court construed the statute in favor of the
debtors and allowed their exemption.11
Finally, in In re Huebner, 141 B.R. 405 (N.D. Iowa 1992), aff’d,
986 F.2d 1222 (8th Cir. 1993), the court expressly rejected the Gilbert
line of cases and adopted an alternative interpretation. “[T]his court
respectfully disagrees with the reasoning of Gilbert and the cases
following Gilbert. This court finds that ‘on account of’ is more
appropriately interpreted to mean ‘triggered by.’” Huebner, 141 B.R. at
409.
In Huebner, the debtor purchased two annuity policies ten years
before filing bankruptcy. At the time of filing, the debtor was sixty-
four-years-old and intended to begin receiving payments when he reached
retirement age. Notwithstanding the
11
See also Production Credit Ass’n v. Lilienthal (Matter of
Lilienthal, 72 B.R. 277, 299 (S.D. Iowa 1987) (affirming
bankruptcy court’s decision that annuity payments which commenced
during debtor’s retirement years satisfied the “on account of
age” requirement, even though the payments were not triggered by
age).
7
debtor’s subjective intent to begin receiving payments at age sixty-
five, the court held that the annuities were not exempt since they were
not “triggered by” the debtor’s age. “Debtor’s right to payment . . .
is not triggered by any specific event.” Id. In reaching its decision,
the court noted that the debtor--not the terms of the annuity contract--
determined the time of disbursement.
On appeal, the Eighth Circuit affirmed the district court.
“Huebner’s present right to receive annuity payments does not depend
upon his having reached age sixty-five, nor upon the occurrence of any
of the other triggering events enumerated in
§ 627.6(8)(e).” In re Huebner, 986 F.2d 1222, 1225 (8th Cir. 1993)
(emphasis added). Furthermore, the court noted that Huebner’s annuity
failed to comport with the statutory framework because the debtor
maintained “unfettered discretion” to control the timing of
disbursements. “Huebner’s access to and complete control over the
timing of annuity payments mean that any payments received under the
contracts would not be ‘on account of’ his age.” Id.
We do not think that the Eighth Circuit’s use of the word
“triggering” was meant to resolve the statutory construction debate.
The court made no reference to the two lines of cases and used the word
“triggering” in reference to all of the events listed in the statute,
not just as a definition of the phrase “on
8
account of.” Rather, the court focused on a factual inquiry into the
amount of control the debtor exercised over the initial acquisition of
the contract, the amount and timing of the payments, and the right to
exercise control over the corpus.
The Eight Circuit’s opinion in Huebner requires a two-tiered
analysis. First, the bankruptcy court must determine if the claimed
exempt asset belongs to the class of exempt investments enumerated in
Iowa Code § 627.6(8)(e). Iowa Code § 627.6(8)(e) exempts payments
“under a pension, annuity, or similar plan or contract. . . .” Iowa
Code § 627.6(8)(e) (emphasis added). Second, if the asset is of the
sort contemplated by Iowa’s exemption statute, then the bankruptcy court
must determine whether the payments are received “on account of illness,
disability, death, age or length of service. . . .” Iowa Code §
627.6(8)(e)(emphasis added).
A. Similar Plan or Contract12
Under Iowa Code § 627.6(8)(e), payments are exempt only if they
are received pursuant to a “pension, annuity, or similar plan or
contract. . . .” Iowa Code § 627.6(8)(e) (emphasis added). The debtor
argues that she satisfies the statutory contingency since her asset is
in the form of an annuity.
12
This analysis applies to payments on account of age or
length of service and not necessarily to those made on account of
illness, disability or death.
9
However, “annuity” is a purely generic term which refers to the method
of payment and not to the underlying nature of the asset.
Determining whether an asset satisfies the “similar plan or
contract” language is a peculiarly factual inquiry. We mention a number
of factors to be considered, but none are necessarily dispositive nor is
it a matter of counting the factors on either side. As we mentioned, it
is a factual inquiry depending on the particular payments at issue.
1. Contributions Over Time
Iowa Code § 627.6(8)(e) is primarily designed to protect those
payments which serve as wage substitutes after retirement. Accordingly,
the statute targets payments received under pensions, annuities, or
“similar” plans or contracts--payments which are the result of periodic
payroll deductions or self-directed contributions. Iowa’s exemption
statute clearly contemplates an on-going course of investment and
contribution over time. Therefore, the longer the period of
participation by the debtor, the more likely the investment falls within
the ambit of Iowa Code § 627.6(8)(e). As a corollary, the period
between investment and distribution must be of sufficient duration to
convince a court that the debtor’s participation is the result of a
long-standing retirement strategy, not merely a recent change in the
nature of the asset.
10
Under this test, the debtor’s lump-sum, accelerated investment is
suspect. In the instant case, the debtor purchased her annuity policy
outright, with one lump payment, when she was already seventy-four-
years-old. Furthermore, the debtor began drawing upon her investment
less than two months after the purchase date.
2. Contributions By Others
Iowa Code § 627.6(8)(e) contemplates not merely multiple
contributions, but also multiple contributors. Investments which are
purchased in isolation, outside the context of workplace contributions,
are less likely to qualify as exempt under Iowa Code § 627.6(8)(e).
Therefore, a court may examine the participant base to determine whether
a particular investment satisfies Iowa’s exemption statute.
In this case, the debtor did not acquire her asset as a member of
an employee pool or in conjunction with employer contributions. She
purchased an investment to which she alone contributed.
3. Return On Investment
Courts may also look to the debtor’s return when deciding whether
a particular investment satisfies Iowa Code § 627.6(8)(e). For example,
an investment which returns only the
11
debtor’s initial contribution with earned interest or income--no more
and no less--is more likely to be a non-exempt investment. By contrast,
investments which compute payments based on the participant’s estimated
life span, but which terminate upon the participant’s death or the
actual life span, more closely resemble the exempt investments
enumerated in Iowa Code § 627.6(8)(e).
In this case, the terms of the debtor’s annuity entitle her to
recover only her initial investment plus interest at a rate of ten
percent. The debtor cannot enjoy a windfall if she outlives her life
expectancy, nor will she be penalized if she dies prematurely.
4. Control Over Annuity
Finally, a court should examine the amount of control which the
debtor exercises over the claimed exempt asset. If, for example, the
investment imposes limitations on the debtor’s right to withdrawal, then
the asset is more likely to fall within the ambit of Iowa Code §
627.6(8)(e). However, if the debtor has complete discretion to withdraw
the entire corpus, then the contract resembles a non-exempt investment.
In this case, the terms of the debtor’s annuity were entirely
self-directed. The debtor designated the date of disbursement and she
enjoyed unfettered discretion to liquidate
12
the corpus at any time, subject only to contractual penalties assessed
against principal. A contractual or tax penalty is not necessarily a
limitation on withdrawal.
B. On Account of Age
Once the bankruptcy court has made a finding that the claimed
exempt asset falls within the category of investments enumerated in Iowa
Code § 627.6(8)(e), the court must then decide whether payments received
pursuant to the investment are in accordance with specific statutory
contingencies. To be exempt, payments must be “on account of illness,
disability, death, age or length of service. . . .” Iowa Code §
627.6(8)(e) (emphasis added).
The Eighth Circuit’s opinion in Huebner suggests that only those
annuities which contain express contractual language conditioning
payment on the attainment of a specific age will satisfy the “on account
of” requirement: “Huebner could have invested his savings in retirement
annuities that prevented him from withdrawing funds prior to his
reaching retirement age. . . .” Huebner, 986 F.2d at 1225.
In this case, the debtor’s annuity contract contains no language
conditioning payment on the annuitant’s age. Under the terms of
enrollment, the annuitant was free to begin receiving disbursements at
any age. Furthermore, the debtor’s annuity
13
payments were not received on account of age, but on a date she
specified herself. According to her own election, the debtor began
receiving payments on January 1, 1995. In other words, the debtor did
not begin to receive payments once she attained a specific age (e.g.,
seventy-five), but only on a specific date--January 1, 1995.13
IV. CONCLUSION
Under the Eighth Circuit’s analysis in Huebner and the factors we
have set out, the debtor’s annuity fails to satisfy Iowa Code §
627.6(8)(e). The debtor’s annuity does not fall within the category of
exemptible investments enumerated in Iowa Code § 627.6(8)(e).
Furthermore, the debtor’s annuity payments were not payable “on account
of” age. Therefore, we conclude that the debtor’s annuity payments are
not exempt. Accordingly, the decision of the bankruptcy court is
AFFIRMED.
A true copy.
Attest:
CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE
EIGHTH CIRCUIT.
13
Strictly speaking, the payments which the debtor receives
are not on account of her age or even the date, but on account of
her investment in the annuity See In re Gagne, 166 B.R. 362
(Bankr. D. Minn. 1993) (holding that payments were not on account
of age when they were received under an annuity purchased with
proceeds from insurance policies).
14