DocketNumber： 07-bk-03238-SSC
Judges： Sarah Sharer Curley
Filed Date： 3/31/2008
Status： Precedential
Modified Date： 11/2/2024
United States Bankruptcy Court, D. Arizona.
*47 Carolyn J. Johnsen, Danelle G. Kelling, Jennings, Strouss & Salmon, P.L.C., Phoenix, AZ, for Debtors.
SARAH SHARER CURLEY, Bankruptcy Judge.
This matter comes before the Court pursuant to a "Motion For Order Determining That Annuities Are Not An Asset of the Estate" ("Annuities Motion") filed with the Court by Kimberly Ann Kent & Gregg Terry Kent, the Debtors herein, on December 12, 2007. The Debtors assert in their Annuities Motion that two annuities; one from American General Annuity Service Corporation ("AGASC Annuity"), and the other from MetLife Tower Resources Group, Inc. ("MetLife Annuity") (collectively the "Annuities"), are not assets of the estate pursuant to Bankruptcy Code § 541(c)(2), because the Annuities constitute valid spendthrift trusts under Arizona law.[1]See A.R.S. § 14-7701. In response, Kent & Wittekind, P.C. and Osborn Maledon, P.A., filed their Objections on January 8, 2008, claiming that the Annuities were indeed property of the bankruptcy estate. At the initial hearing on January 15, 2008, the Court instructed the parties to file their Stipulated Facts. On January 29, 2008, this Court rendered its decision on the record, advising the parties that a formal written decision would be forthcoming.
After conducting the hearing in the matter on January 29, 2008, taking into consideration the arguments of each of the parties, the documents filed, and the entire record before the Court, this Decision shall constitute the Court's finding of fact and conclusions of law pursuant to Fed. R.Bank.P. 7052. The Court has jurisdiction over this matter, and this is a core proceeding. 28 U.S.C. §§ 1334 and 157. (West 2007).
The Debtors filed their Chapter 11 *48 bankruptcy petition on July 10, 2007.[2] On August 15, 2007, the Debtors filed their Schedules and Statement of Financial Affairs.[3]
On December 12, 2007, the Debtors filed their "Motion for Order Determining That Annuities Are Not An Asset Of The Estate." In the motion, the Debtors specifically argued that the Annuities were not assets of the estate and were exempt pursuant to Bankruptcy Code § 541(c)(2), because the Annuities constituted valid spendthrift trusts under A.R.S. § 14-7701.[4] After the hearing, on January 15, 2008, the parties submitted the following Stipulated Facts:[5]
1. Kimberly Kent, an attorney, represented a minor and her parents, with respect to personal injury claims. At the time Kimberly Kent negotiated the separate settlement agreements for the clients, the clients had fee agreements with Kent & Associates P.L.L.C. The settlements resulted in the purchase of the two Annuities that are the subject of this dispute.
2. One settlement was entered into on or about June 8, 2004. As a result of that settlement, a "Single Premium Immediate Annuity Policy" was purchased by the settling defendant from American General Life Insurance Company. Exhibit A is an American General Life Insurance Company Single Premium Immediate Annuity Contract (the "AGASC Annuity").
3. The owner of the AGASC Annuity is American General Annuity Service Corporation. Kimberly Kent is the measuring life for the AGASC Annuity. As the measuring life, and with no other designated payee, Kimberly Kent is the payee under the AGASC Annuity. The beneficiary of the AGASC Annuity is the "Estate of Kimberly Kent." The beneficiary is entitled to payments under the AGASC Annuity, in the event the payee dies prior to the completion of the payments.
4. The AGASC Annuity provides for a payment in the amount of $25,000.00 every other year, commencing on May 1, 2009, and ending on May 1, 2017. The AGASC Annuity further provides for a payment of $31,585.54 on May 1, 2019.
5. The AGASC Annuity states that it is a "legal contract between the Owner and American General Life Insurance Company." Payment under the AGASC Annuity is guaranteed by AGC Life Insurance Company. The AGASC Annuity provides that: "No Payee or Beneficiary of this policy has the power to assign any payments or benefits of this annuity policy. Any attempt to make an assignment is void."
6. The payee is the person who receives the income payments. The Annuity provides that to the maximum extent permitted by law, payments will not be subject to: (1) transfer (any attempt to make such transfer is void); (2) assignment (any attempt to make such assignment is void); (3) alteration (except for misstatement of age or sex); (4) claims by creditors before any payment is due; (5) encumbrance by creditors or beneficiaries; (6) judicial or legal process by creditors.
7. Another settlement was reached in 2006. As a result of this settlement, an annuity was purchased by the settling defendant *49 from Metropolitan Life Insurance Company (the "MetLife Annuity"). Exhibit B is the MetLife Annuity.
8. The MetLife Annuity provides that payments are payable to Kimberly Kent, commencing on February 1, 2016, at the rate of $5,107.00 per month, for ten (10) years only. The beneficiary is the "Estate of Kimberly Kent."
9. On the MetLife Annuity, the beneficiary receives payments only in the event of the death of the "measuring life." The measuring life is Kimberly Kent. MetLife Tower Resources Group, Inc. is the owner of the MetLife Annuity. The MetLife Annuity Contract provides that the payments are non-assignable, and are exempt from the claims of creditors to the maximum extent permitted by law.
10. The AGASC and the MetLife Annuity provide for certain payments to be made by the respective Annuity owner to Kimberly Kent, or, if she is deceased, to her Estate or designated beneficiary, if any.
11. Each Annuity contains provisions that the payments due thereunder are not assignable and shall not be subject to transfer, assignment, alteration, or the claims, encumbrances, or judicial process of creditors.
12. Neither Annuity makes mention of a trust, a settler, a trustee, or a trust beneficiary.
Additional unnumbered Stipulated Fact:
According to the AGC Life Insurance Corporate Guarantee, AGC Life Insurance states that:
[AGASC, a] Texas corporation, is empowered to act as assignee with respect to qualified assignments of structured settlements, as provided in Section 130(c) of the Internal Revenue Code of 1986, as amended ...
AGASC has entered into the above-referenced Qualified Assignment for the Claimant.
The AGC Life Insurance Corporate Guarantee lists the Debtor as the Claimant. No similar language is set forth in the MetLife Annuity.
Upon the filing of a bankruptcy petition, an estate is created consisting of all of the legal and equitable interests of the debtor in property. 11 U.S.C. § 541(a)(1) (West 2007). This is true notwithstanding "any provision in the agreement, transfer instrument, or applicable non-bankruptcy law that restricts or conditions transfer" of an interest of the debtor in property by the debtor except that "a restriction on a transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable under title 11." 11 U.S.C. §§ 541(c)(1)(A) and (c)(2) (West 2007). In other words, § 541(c)(1) brings all of the debtor's property into the estate in a one-time transfer without regard to restrictions or conditions on the transfer, unless the property is within the parameters of § 541(c)(2).
Since Arizona is an opt-out jurisdiction under A.R.S. § 33-1133,[6] it is clear that *50 the Debtors are not entitled to the federal exemptions provided in 11 U.S.C. § 522(d).[7] A.R.S. § 33-1126 (West 2007), which deals with the exemption of annuity contracts under Arizona law, has previously been determined by this Court as not applicable to the subject Annuities. Hence, the Debtors' current Motion to exclude the Annuities from the estate.
The Debtors assert that the Annuities fall under the exception of § 541(c)(2). According to the documents, the Debtors are not the owners of the Annuities and the beneficial interests of the Debtors are non-assignable. Given this information, the Debtors argue that the Annuities constitute valid spendthrift trusts under A.R.S. § 14-7701, because the documents provide that the beneficial interest is non-assignable and because the Debtor, Kimberly Kent is, as a matter of law, not the settlor of either spendthrift trust pursuant to A.R.S. § 14-7705(D).
The Bankruptcy Code does not define what constitutes a trust for purposes of 11 U.S.C. §§ 541(c)(2). Although an interpretation of this Subsection is dependent upon a review of federal law, Patterson v. Shumate, 504 U.S. 753, 112 S. Ct. 2242, 119 L. Ed. 2d 519 (1992), the Court must analyze applicable state law, Butner v. U.S., 440 U.S. 48, 55, 99 S. Ct. 914, 918, 59 L. Ed. 2d 136 (1979), to determine the meaning of the term "trust," since the Debtors argue that their Annuities are excluded from the estate as a result of the Arizona spendthrift trust statutes. The Debtors' citations to Arizona statutory provisions concentrate on the operation and access of creditors to spendthrift trusts, but do not consider the formation, existence, or nature of a trust.
In defining what a trust is under Arizona law, the Courts refer to the Restatement of Trusts for guidance. See In the Matter of the Naarden Trust, 195 Ariz. 526, 990 P.2d 1085 (2000); and Brooks v. Valley National Bank, 113 Ariz. 169, 173, 548 P.2d 1166, 1170 (1976). Therefore, this Court will rely on the Restatement (Third) of Trusts to determine if the Debtors' Annuities are indeed trusts.
Pursuant to the Restatement (Third) of Trusts § 2 (2003), "a trust is a fiduciary relationship with respect to property, arising from a manifestation of intention to create that relationship and subjecting the person who holds title to the property to duties to deal with it for the benefit of charity or for one or more persons, at least one of whom is not the sole trustee." The Courts interpreting Arizona law have been clear that the essential elements of a valid trust include a competent settlor, a trustee, a clear and unequivocal intent to create a trust, an ascertainable trust res, and sufficiently certain beneficiaries. See Doss v. Kalas, 94 Ariz. 247, 252, 383 P.2d 169, 173 (1963), citing Carrillo v. Taylor, 81 Ariz. 14, 299 P.2d 188 (1956).
In this particular case, the Debtors are not the owners of the Annuities, and the *51 Debtors concede that they are not the settlors. According to the Annuity documents, the owners are American General Annuity Service Corporation and MetLife Tower Resources Group, Inc. The beneficiary is stated as the "Estate of Kimberly Kent," not the Debtors. Kimberly Kent, however, is the measuring life. While the documents state that the Debtor, Kimberly Kent, is the payee, the documents do not incorporate any language indicating who is the settlor or trustee. The documents do not have any provisions concerning the duties or responsibilities of the trustee. Neither Annuity has a provision stating that it constitutes the res of a trust. The documents do not state that the funds that were utilized to set up the Annuities were transferred to American General Annuity Service Corporation or MetLife Tower Resources in trust for either of the Debtors. The Debtors have shown no clear and unequivocal intent in the documents to create a trust. Given the information provided in the Annuity documents and the parties' Stipulated Facts, this Court concludes that the essential elements to create a trust have not been shown under Arizona case law or the Restatement (Third) of Trusts.[8]
Without addressing the fundamental issue of whether they have created a trust under Arizona law, the Debtors place great reliance on A.R. S § 14-7701 et seq. (West 2007), for their argument that the Annuities nevertheless constitute a spendthrift trust. Because Kimberly Kent is, as a matter of law, not the "settlor" of the Annuities, and the Annuities contain anti-alienation provisions, the Debtors believe they are within the parameters of the Arizona spendthrift trust provisions. First, to be within said provisions, the Debtors must have created a trust; that has not happened. Second, in reviewing the provisions cited by the Debtors, the Court concludes that the Debtors' reliance is misplaced.
Section 14-7701(A) (West 2007) states:
Except as provided in this article, if a trust instrument provides that a beneficiary's interest in income is not subject to voluntary or involuntary transfer, the beneficiary's interest in income under the trust shall not be transferred and is not subject to enforcement of a money judgment until paid to the beneficiary.
This Subsection outlines the limited access of creditors to a spendthrift trust, if certain provisions are placed in the trust documents. However, it assumes that there is a trust instrument and a beneficiary's interest to be protected. In this case, there is an Annuity and Ms. Kent is a payee. This Subsection does not refer to the creation of a trust, and the Debtors may not use the language therein to somehow create one for themselves.
A.R.S. § 14-7705, which also addresses "settlors as beneficiaries," is of no assistance. First, the Debtors have conceded that they are not the settlors of the Annuities. *52 Moreover, in reviewing the Section, Subsection D states as follows:
For purposes of this section, amounts contributed to a trust by any corporation, professional corporation, partnership, governmental entity trust, foundation or other entity are not deemed to have been contributed by its directors, officers, shareholders, partners, employees, beneficiaries or agents. Powers, duties or responsibilities granted to or reserved by the settlor pursuant to the trust and any actions or omissions taken pursuant to the trust are deemed to be the powers, responsibilities, duties, actions or omissions of the settlor and not those of its directors, officers, shareholders, partners, employees, beneficiaries or agents. [emphasis added].
It is clear that for purposes of A.R.S. § 14-7705(D)(West 2007), a settlor may be a professional corporation, such as a law firm, and any contributions to a spendthrift trust by such an entity is not considered to be a contribution of the law firm partner. However, if the Debtors are arguing that Ms. Kent's law firm is somehow the "settlor" of the Annuities, there must be some type of acknowledgment in the documents as to who the settlor is and what "powers, duties or responsibilities," if any, are reserved by it. As stated in the parties' Stipulated Facts, neither Annuity makes mention of a settlor or even a trustee or trust beneficiary. Therefore, although the Debtors assert that Ms. Kent is not the settlor for purposes of meeting the requirements under A.R.S. § 14-7705(D), they have failed to show that there is such a party.
More fundamentally, the Debtors have failed to show that they have a spendthrift trust under A.R.S. § 14-7701, et seq. (West 2007). There is no trust instrument. There is no trustee. There is individual or entity that has agreed to take on the task of trust administration, using the appropriate fiduciary standard to act in the interests of the trust beneficiary. There is no settlor. There is no transfer of funds into the Annuities as a res for a trust. Moreover, the Debtor, Kimberly Kent, is simply a payee under the relevant documents. Such a term does not create the concomitant duty of any individual or entity acting on behalf of the Annuity to provide the normal fiduciary relationship of a trustee to a beneficiary.[9]
The Debtors also place a great deal of reliance on the decision of Patterson v. Shumate, 504 U.S. 753, 112 S. Ct. 2242, 119 L. Ed. 2d 519 (1992), and its progeny, in support of their argument that a broad interpretation should be placed on the term "trust," as utilized in Section 541(c)(2). In the Patterson decision, the United States Supreme Court considered whether the debtor's interest in an employer's pension plan that was set up as a trust and contained the requisite anti-alienation provision to be a tax-qualified plan under the Employee Retirement Income Security Act of 1974 (ERISA), could be excluded as an asset of the bankruptcy estate. If the debtor held a beneficial interest in a trust that had an anti-alienation provision which was enforceable under "applicable non-bankruptcy law," the beneficial interest could be excluded. The Supreme Court held that the aforesaid phrase was not just limited to state law, but encompassed any relevant non-bankruptcy law, including federal law such as ERISA. Patterson at 759, 112 S. Ct. 2242. *53 However, the Supreme Court reached its decision in the context of a pension plan that was set up as a trust. A trustee was appointed under the plan and administered the plan for the benefit of the employees. The plan also contained an anti-alienation provision and the other indicia of a spendthrift trust.[10] According to the Supreme Court, this anti-alienation provision constituted an enforceable transfer restriction for purposes of § 541(c)(2), given that under ERISA, the plan trustees or fiduciaries were required to discharge their duties "in accordance with the documents and instruments governing the plan." Patterson, at 760, 112 S. Ct. 2242 (citing 29 U.S.C. § 1104(a)(1)(D)).
Given the characteristics of the ERISA-qualified plan in Patterson, the Supreme Court held that the debtor's interest in the plan might be excluded from the property of the bankruptcy estate. Patterson, at 765, 112 S. Ct. 2242. It recognized that it vigorously had enforced ERISA's prohibition on the assignment or alienation of pension benefits, and declined to recognize any exceptions to ERISA's anti-alienation provision. Id. at 760, 112 S. Ct. 2242 (citing Guidry v. Sheet Metal Workers Nat. Pension Fund, 493 U.S. 365, 110 S. Ct. 680, 107 L. Ed. 2d 782 (1990)). The Supreme Court's decision to exempt the ERISA-qualified pension plan trust from the bankruptcy estate was, in essence, giving appropriate effect to ERISA's goal of protecting pension benefits. Id. at 765, 112 S. Ct. 2242.
The Debtors rely on the Patterson case, asserting that the exclusion from the property of the estate in § 541(c)(2) for a "trust" and a "restriction" on the transfer of a debtor's interest therein should be interpreted broadly to include any plan and any broad anti-alienation language contained in the documents. As a result, the Debtors state that a "trust" for purposes of § 541(c)(2), may be more than a traditional trust created by trust documents under applicable law and should encompass the Annuities herein as well. More particularly, the Debtors focus on Page 758 of the Patterson case, which states, "The natural reading of the provision [§ 541(c)(2)] entitles a debtor to exclude from property of the estate any interest in a plan or trust that contains a transfer restriction enforceable under any relevant nonbankruptcy law." [emphasis added]. Patterson, at 758, 112 S. Ct. 2242.
Of critical concern to this Court is the disparity between the facts of the Patterson decision and those set forth in this case. First, the statement that the Debtors rely on is dicta. It was not critical to the decision of the Court. As noted, the Supreme Court, in Patterson, dealt with a specific pension plan that was set up as a trust, that had a trustee acting as a fiduciary on behalf of the employees, as the beneficiaries under the plan, and that trust also included the anti-alienation provisions required under ERISA. The sole focus of the Court was to interpret the phrase "under applicable non-bankruptcy law," and whether that phrase also encompassed federal *54 law. Clearly the Debtors must have entered into something more than a contract with an anti-alienation provision in it, since Section 541(c)(1)(A) states that agreements which generally restrict a transfer by a debtor under applicable law are still property of the estate. But the Debtors have not shown anything more. The Annuities are contracts which contain anti-alienation provisions.
There is also a policy reason for excluding such contracts as the Annuities from the parameters of Section 541(c)(2). A debtor could draft or enter into an agreement that provided an ongoing payment stream to the debtor, outside of the reach of creditors because of a restriction on the transfer of the interest, yet the agreement would not have the necessary third party acting independently as a fiduciary/trustee for the benefit of the debtor as a beneficiary. As noted, there is a specific exemption, under Arizona law, for annuity contracts. It is impossible for this Court to ignore that specific exemption and state that although the Debtors failed under Arizona law to qualify for the exemption, they are nevertheless able to have the same contract qualify as a "trust" under federal law and Section 541(c)(2). If the Court agrees with the Debtors' argument, then what is the purpose of the statutory language in Section 541(c)(2) which excludes contracts that contain such restrictions on transfers and allows the contracts, or the property to which they refer, to be included as property of the estate? The Debtors' analysis allows the limited exception of Section 541(c)(2) concerning a trust to be expanded to include any type of contract with the requisite anti-alienation language. This Court cannot accept the Debtors' broad interpretation of the trust language contained in Section 541(c)(2).
The Debtors also argue that Kent & Associates P.L.L.C. caused the Annuities in question to be purchased as a part of a retirement benefit for the Debtors.[11]See "Debtor's Additional Brief Regarding Motion For Order That the Annuities Are Not An Asset Of The Estate," filed on January 25, 2008, page 4. However, nowhere in the parties' Stipulated Facts is it indicated that the Annuities were purchased as a part of a retirement benefit for the Debtors. Rather, the facts state that the Annuities resulted from settlement agreements entered into by the clients of Kent & Associates. The Annuities allowed for the payment of attorneys' fees and costs arising from the settlements to be paid over a period of time. However, as noted, the Debtors already have retirement plans in place as their respective employments, and these Annuities have not been established as the type of trust with the protections in place to create a type of pension plan where the goal is to protect pension benefits. Therefore, this Court is not dealing with the type of policy issues that were inherent in the Patterson decision.
The Debtors also rely on the decision of In re Laher, 496 F.3d 279 (3rd Cir.2007), which held that a tax-deferred annuity retirement plan, with a restriction on transfers, was a spendthrift trust under New York law. The Laher Court held that the Patterson case should be read broadly, concluding that "Patterson does not opine as to the meaning of ``trust,' but it does employ language that could be interpreted to mean that § 541(c)(2) is not limited to literal trusts or trusts formed explicitly." Id. The Laher Court focused on the nature of the fund, not the label, and rejected the *55 argument that an annuity could not be a trust. The Debtors, therefore, rely on the Laher decision to support their position that the Annuities, with a restriction on transfers, could be considered spendthrift trusts.
However, there are factual dissimilarities between Laher and this case. First, in Laher, the Court addressed a certain tax-deferred annuity retirement plan, in which pre-tax contributions were taken from the debtor's paycheck and accumulated into a sum that would be used to purchase a contract that would pay the debtor an annuity, over time, after retirement. Id. at 280. The debtor's salary contributions and the employer's contributions were fixed as percentages of the employee's salary. Id. Under the plan, 3% of an employee's compensation was withheld from the debtor's paychecks, and the employer contributed an amount equal to 7% of the employee's compensation. Id. Participation in the plan was mandatory. Id. In addition, the manager of this plan was the Teacher Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF). Id. at 281. Moreover, the plan included a "Retirement Transition Benefit," whereby, at retirement, a participant "[might] elect to receive up to 10% of his or her Accumulated Accounts in TIAA or CREF in a lump sum" prior to their conversion to retirement income. See footnote 3 at 281. A plan member could only begin to receive plan benefits after retirement or employment termination. Id. at 281. There was also no dispute that the annuities, in the Laher case, qualified under § 403(b) of the Internal Revenue Code.[12]See id., n. 2.
Carefully reading the facts of the case, this Court concludes that it not dealing with the same type of pension plan structure as in Laher. The Court, in Laher, described the factors necessary for what it thought was an ERISA-qualified annuity plan, based on specific provisions and characteristics of the annuities. However, those same provisions and characteristics are not in place in this case. We are not dealing with the specific structure created to provide retirement benefits. We are not dealing with a plan that is mandatory for the Debtors, or that requires salary or employer contributions. We are not dealing with an annuity that is qualified under § 403(b) of the Internal Revenue Code, and, thus, exempt under 11 U.S.C. § 541(b)(7).[13] There is no long-term manager of the funds to provide investment decisions for a group of individuals as they approach retirement. The Stipulated Facts provided by the parties and the underlying Annuities have no managers or participants; only a payee. Therefore, the controls set up in the Laher case simply do not exist in the case at hand.
*56 The Laher court also relied on New York law to determine whether the tax-deferred annuity retirement plan constituted a trust. The Laher court concluded that all four elements had been shown under applicable state law, finding that the debtors had proven "(1) a designated beneficiary, (2) a designated trustee, who is not the same person as the beneficiary, (3) a clearly identifiable res, and (4) the delivery of the res by the settlor to the trustee with the intent of vesting title in the trustee." In re Laher, 496 at 288 (citing Agudas Chasidei Chabad of U.S. v. Gourary, 833 F.2d 431, 433-34 (2d Cir.1987)). However, as has been discussed, Arizona law requires that different elements be shown to create a trust. The Debtors have not show those requisite elements.
The Annuities are similar to the structured settlements established in the decision of In re Sparks, 2005 WL 1669609 (Bkrtcy.W.D.Tenn.2005). The Court, in Sparks, evaluated a settlement agreement executed between the debtor and an unnamed party that provided for the payment to the debtor of certain periodic payments as damages on account of personal injury or sickness. Id. By virtue of a Qualified Assignment, the obligation to make the settlement payments to the debtor was assigned to and assumed by American General Assignment Company ("AGAC"). Id. AGAC purchased an annuity contract from American General Annuity Insurance Company ("AGAIC") to fund this liability. Id. Pursuant to the Qualified Assignment, the debtor was entitled to receive a series of payments commencing on February 1, 2008, in the amount of $1,310.71 per months for ten years. Id. The Qualified Assignment also had an anti-alienation provision. Id. at *2. The Sparks Court determined that the debtor's interest in the Qualified Assignment was a contractual right, because the interest that the debtor held immediately preceding the filing of her bankruptcy case was her contractual right to receive payments from AGAC under the Qualified Assignment. Id. at *3. Immediately preceding the filing of her bankruptcy case, the debtor held no rights under the annuity contract, because the annuity contract was purchased for the use and convenience of AGAC in discharging its obligation to the debtor under the Qualified Assignment. Id.
Similar to Sparks, in this case, a "Single Premium Immediate Annuity Policy" was purchased from AGC Life as a result of a settlement. According to the AGASC Annuity document, AGC Life represented that AGASC is "empowered to act as assignee with respect to qualified assignment of structured settlement", as provided in Section 130(c) of the Internal Revenue Code of 1986, as amended, and that "AGASC has entered into the above reference [sic] Qualified Assignment for the Claimant." Not only is the Claimant stated as the Debtor, Ms. Kimberly Kent, but the actual AGASC Annuity document is clearly similar to the Qualified Assignment in the Sparks case. Therefore, it appears the AGASC Annuity, and its assignment, are consonant with the contracts which were reviewed in the Sparks case. Looking at the substance of the transaction, what this Court is analyzing is a contract which is similar to a structured settlement, not a spendthrift trust.
The Sparks Court also stated that even if it were to conclude that the presence of a trust is not strictly required for application of § 541(c)(2), AGAC and AGAIC pointed to no applicable state or federal law that prohibited the transfer of the debtor's interest in the Qualified Assignment. Id. at *4. Nothing in federal law prohibits the transfer of the debtor's right to receive payments pursuant to a structured settlement agreement. Id. In fact, *57 the Court in Sparks stated that in order to encourage the use of structured settlements in personal injury cases, Congress provided favorable tax treatment for certain transactions involving such agreements. Id., citing 26 U.S.C. §§ 104(a)(2), 130(a). Moreover, pursuant to the Tennessee Structured Settlement Act, TENN.CODE ANN. § 47-18-2601-2607, even if anti-alienation language were contained in the settlement, the debtor was not prohibited from voluntarily transferring the rights under a structured settlement agreement. Id. at *3. The state law provided specific procedures and guidelines for the approval of such transfers. Id. The Act required disclosure to the payee and prior court approval of the transfer. Ultimately, the Sparks Court concluded that given the specific provisions under applicable state law that allowed for the transfer of the debtor's interests under a structured settlement agreement, the debtor's right to payment became property of the estate by virtue of § 541(c)(1)(A) notwithstanding the language in the Qualified Assignment prohibiting transfer. Id. at *4.
Arizona law also provides for a process to transfer the rights of a debtor in a structured settlement. See A.R.S. §§ 12-2902 and 2903 (West 2007). Thus, there is no policy prohibiting the Debtors, in this case, from structuring their right to receive payments, over a period of time, from a third party. Because Ms. Kent's clients had entered into settlements of their personal injury claims similar to the structured settlements reviewed in the Sparks case, it is not surprising that Ms. Kent's receipt of her attorneys' fees, for services rendered to her clients, would assume a similar payment scheme as a structured settlement. With no specific prohibition or absolute restriction on the transfer of the Debtors' interests under a structured settlement agreement in either federal or state law, the Debtors' right to payment under the Annuities became property of the estate by virtue of § 541(c)(1)(A), notwithstanding the anti-alienation clauses in the Annuities.
Based upon the foregoing, the Court finds that the Debtors' Annuities are indeed property of the bankruptcy estate, and are not excluded from the estate pursuant to 11 U.S.C. § 541(c)(2). The Court will execute a separate Order incorporating this Decision and denying the Debtors' Motion for Order Determining That Annuities Are Not An Asset of the Estate.
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[1] The Court previously ruled at a hearing on October 4, 2007, that the Annuities were not exempt assets pursuant to Arizona law. A.R.S. § 33-1126. The Court refers the parties to that prior decision on the exemption issue. It is not discussed herein. See Docket Entry Nos. 80 and 85. Kent & Wittekind, P.C.'s objection to the Debtors' claim of exemption was sustained.
[2] See Docket Entry No. 1.
[3] See Docket Entry No. 32.
[4] The Debtors also mistakenly used the expression that the Annuities were "exempt." As noted, the Court previously ruled on the issue, and if the assets are not part of the estate, there is no need to consider whether the assets are exempt. The Debtors may use properly excluded assets as they wish.
[5] See Docket Entry No. 151.
[6] A.R.S. § 33-1133(B) states, in pertinent part, that "[i]n accordance with 11 U.S.C. 522(b), residents of this state are not entitled to the federal exemptions provided in 11 U.S.C. (d)."
[7] 11 U.S.C. § 522(d) sets forth property and amounts that may be exempted under § 522(b)(2). Subsection (b)(2) provides that exempt property "listed in this paragraph is property that is specified under subsection (d), unless the State law that is applicable to the debtor under paragraph (3)(A) specifically does not so authorize." As a result, the Debtors are unable to avail themselves of Section 522(d)(10), which provides an exemption for a "payment under ... annuity ... on account of illness, disability, death, age, or length of service of the debtor ..."
[8] Ms. Kent is an experienced litigator in Arizona, and this Court has already explored, at other hearings, the numerous retirement planning devices established by the Debtors and the creation of accounts to set aside funds for the education of the Debtors' children. The Debtors have exhibited a sophistication in creating and maintaining estate planning and other devices to save appropriately for themselves and their children. For instance, the Court has already ruled that the Debtors may continue to make payments to the retirement plans that each maintains at their place of employment. It is also true that Kent & Associates PLLC, the same entity that apparently was involved with the creation of these Annuities, assisted the Debtors in setting up the Section 529 Accounts for the education of the Debtors' children. Thus, the Court is reluctant to go beyond the four corners of these Annuity contracts and somehow create one or more trusts when the Debtors have manifested no clear and unequivocal intent to create a trust.
[9] Of further concern is that although there is a beneficiary, the estate of Kimberly Kent, that beneficiary has no access to the funds so long as the payee is alive.
[10] The decision states:
Section 206(d)(1) of ERISA, which states that ``[e]ach pension plan shall provide that benefits provided under the plan may not be assigned or alienated,' 29 U.S.C. § 1056(d)(1), clearly imposes a ``restriction on the transfer' of the debtor's ``beneficial interest' in the trust. The coordinate section of the Internal Revenue Code, 26 U.S.C. § 401(a)(13), states as a general rule that "[a] trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that benefits provided under the plan may not be assigned or alienated,' and thus contains similar restrictions".
Patterson, at 759, 112 S. Ct. 2242.
[11] The Court has already discussed, at length, why the Annuities are not trusts under Arizona law.
[12] Section 403(b) of the Internal Revenue Code specifically addresses the taxability of a beneficiary under an annuity purchased by section 501(c)(3) organizations (non-profit organizations) or public schools.
[13] The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 did not amend § 541(c)(2), but did add Section 541(b)(7), which created protection for annuities. That provision states that the property of the estate does not include "any amount... withheld by an employer from the wages of employees for payment as contributions... to ... a tax-deferred annuity under section 403(b) of the Internal Revenue Code of 1986," as well as "any amount ... received by an employer from employees for payment as contributions... to ... a tax-deferred annuity under section 403(b) of the Internal Revenue Code of 1986." § 541(b)(7)(A)-(B). This Court has already determined, in yet another decision, that the Debtors do have appropriate retirement plans through their respective firms or employers, into which they have been making contributions and which are not property of the estate under Section 541(b)(7).