Levine v. Weissing

PUBLISH
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
_______________
No. 96-2803
_______________
D. C. Docket No. 96-60-CIV-T-23B
Bankr. No. 91-327-8P7
IN RE: MYRON LEVINE, a.k.a. Mike Levine; JACQUELINE P. LEVINE,
a.k.a. Jackie Levine,
Debtors.
MYRON LEVINE, a.k.a. Mike Levine; JACQUELINE LEVINE, a.k.a.
Jackie Levine,
Plaintiffs-Appellants,
versus
CHARLES WEISSING, Trustee,
Defendant-Appellee.
______________________________
Appeal from the United States District Court
for the Middle District of Florida
______________________________
(February 3, 1998)
Before BIRCH, Circuit Judge, RONEY, Senior Circuit Judge, and
O’KELLEY*, Senior District Judge.
*
Honorable William C. O’Kelley, Senior U.S. District Judge for
the Northern District of Georgia, sitting by designation.
BIRCH, Circuit Judge:
This appeal requires that we examine and resolve several
issues relating to bankruptcy law as applied in Florida. Specifically,
we must decide whether (1) the conversion of funds from non-
exempt to exempt status through the purchase of annuities
constitutes a “transfer” for purposes of state law pertaining to
fraudulent transfers; (2) the act of converting or “transferring” funds
from non-exempt to exempt status can be isolated analytically from
the result of that transfer; and (3) Florida law provided for an action
to set aside fraudulent conveyances otherwise deemed exempt from
the reach of creditors prior to 1993. In addition, we must decide
whether, under the facts of this particular case, the trustee’s action
to set aside a fraudulent transfer is barred by the Bankruptcy Code’s
statute of limitations and whether the bankruptcy court’s factual
determinations are clearly erroneous. For the reasons that follow,
we conclude that the district court properly affirmed the bankruptcy
court’s order.
2
I. BACKGROUND
The debtors in this action, Myron and Jacqueline Levine (the
“Levines”), filed a voluntary petition for relief under Chapter 7 of the
United States Bankruptcy Code in 1991. Charles Weissing (the
“trustee”) was appointed trustee of the bankruptcy estate and,
shortly thereafter, filed a complaint pursuant to Fla. Stat. § 726.105to set aside as fraudulent the transfer of approximately $440,000.00
of non-exempt assets to several insurance companies for the
purchase of annuities which are exempt from the claims of creditors
under Florida law. The trustee alleged that these transfers were
effected with the intent to hinder, delay, or defraud a known creditor,
James A. Miller. It is undisputed that, several years prior to the
Levines’ declaration of bankruptcy, Miller had instituted an action for
fraud against the Levines in the state of California relating to the sale
of property by the Levines to Miller. The precise request for relief as
articulated in the trustee’s complaint is critical to our disposition of
this case and, therefore, is reproduced in relevant part:
3
Pursuant to the provisions of Florida
Statute Section 726.108 entitled remedies of
creditors, the Court may avoid a transfer found
to be fraudulent pursuant to the provisions of
Florida Statutes Section 726.105 to the extent
necessary to satisfy a creditor’s claim. In
addition, subject to applicable principles of
equity and in accordance with applicable Rules
of Civil Procedure, a creditor may obtain an
injunction against further disposition by the
Debtor or a transferee, or both, of the assets
transferred, or may obtain any other relief the
circumstances may require . . . .
....
WHEREFORE, the Trustee prays that this
Court enter a preliminary and permanent
injunction preventing FINANCIAL BENEFIT
LIFE INSURANCE COMPANY . . . [et al.] from
making further distributions to or for the
Debtors, and further preventing the Debtors
from accepting any distributions from
FINANCIAL BENEFIT LIFE INSURANCE
COMPANY . . . [et al.].
Exh. A at 3-4 and 7.
The bankruptcy court initially dismissed the complaint on the
ground that, in defining the parameters of a “transfer” of funds, both
the Bankruptcy Code and Florida law contemplated that the
transferor and the transferee necessarily be two distinct, identifiable
4
parties; as a result, according to the bankruptcy court’s reasoning,
there had been no transfer of funds that could be set aside as
fraudulent in this instance. More specifically, the bankruptcy court
determined that a transfer had not occurred “because the Debtors
still retain control and ownership of the assets acquired with funds
they obtained from disposition of their nonexempt assets, and the
fact that this conversion effectively removed the former assets from
the reach of the creditors is of no consequence.” In re Levine, 139
B.R. 551, 553 (Bankr. M.D. Fla. 1992). The district court, however,
reversed the bankruptcy court’s order dismissing the case and
concluded not only that there had been a transfer but, in addition,
that the trustee had stated a cause of action for fraudulent transfer
of funds. See R1-13 at Exh. 1.
On remand, the bankruptcy court held an evidentiary hearing
to ascertain whether the challenged annuities had been purchased
with fraudulent intent. In a memorandum order, the bankruptcy court
found that three of the named insurance companies had actually
5
repaid to the debtors the full amount of the funds transferred
according to the annuity contracts, Exh. B at 16, and thus could not
be held legally liable for the amounts received pursuant to the
purchase of those contracts. In addition, the court rejected any
personal liability on behalf of Financial Benefit Life Insurance
Company (“Financial”) regarding annuity contracts purchased by the
debtors from that institution. The court further determined, however,
that the purchase of annuities from Financial between June 1990
and September 1990 was motivated by “the specific intent to remove
non-exempt properties from the reach of creditors by converting the
proceeds of the sale to exempt properties.” Exh. B at 14. The court
noted that the Levines had discussed the exempt status of annuities
with an estate-planning lawyer knowing that Miller likely would obtain
a judgment against them1 and, within a short period of time,
liquidated their stock portfolio and purchased an annuity contract
1
It is undisputed that the bankruptcy court erred in stating
that, at the time the Levines consulted a lawyer regarding the
challenged annuities, Miller already had obtained a judgment
against them.
6
from Financial. Consistent with this determination, the court set
aside the annuities purchased from Financial, ordered that the
balance of funds in the annuity contracts be transferred back into the
bankruptcy estate, and enjoined any further distributions to the
Levines from these particular transferred funds. This decision was
affirmed summarily by the district court.
On appeal, the Levines ask that we reverse the district court’s
order affirming the bankruptcy court’s decision to set aside as
fraudulent those transfers that occurred between June and
September of 1990 to Financial. The Levines base their challenge
to the bankruptcy court’s decision on several contentions: First, they
reassert their argument, presented previously to the bankruptcy
court and the district court, that the conversion of funds from non-
exempt to exempt status does not constitute a transfer and, thus,
cannot be attacked under Florida law. Second, they posit that, even
if the conversion in question was a transfer, the funds currently are
exempt under Florida law and Fla. Stat. 726.105 cannot be used to
7
collaterally challenge the exempt status of these annuities. Third,
they suggest that specific non-retroactive statutory amendments to
Florida law enacted in 1993 address precisely the circumstances
presented in this case; consequently, we can infer that the Florida
legislature had not provided a remedy for the alleged violation at
issue prior to the enactment of these amendments. Fourth, they
contend that the trustee did not contest the exempt status of the
annuities within the applicable statute of limitations time period.
Fifth, they argue that the bankruptcy court’s factual determinations
are clearly erroneous. We address in turn each of the Levines’
arguments.
II. DISCUSSION
We review the bankruptcy court’s factual findings under the
clearly erroneous standard. General Trading v. Yale Materials
Handling Corp., 119 F.3d 1485, 1494 (11th Cir. 1997). We review
8
determinations of law, whether from the bankruptcy court or the
district court, de novo. Id.A. Was this a transfer?
As noted, the Levines argue that, because they essentially
transferred money to themselves by altering the status and form of
their own assets, there was no transfer for purposes of the
applicable Florida law.
We disagree. Florida law provides the following definition of a
“transfer”:
“Transfer” means every mode, direct or
indirect, absolute or conditional, voluntary or
involuntary, of disposing of or parting with an
asset or an interest in an asset, and includes
payment of money, release, lease, and creation
of a lien or other encumbrance.
Fla. Stat. § 726.102(12). Although the Florida legislature has never
explicitly defined an “annuity,” the Florida Supreme Court, in a case
certified by our court, has looked to various decisions of bankruptcy
courts to provide a useful definitional guide in the absence of a clear
9
legislative directive; to this end, that court has defined an annuity as,
inter alia, “a form of investment which pays periodically during the
life of the annuitant or during a term fixed by contract rather than on
the occurrence of a future contingency . . . .” In re McCollam, 986
F.2d 436, 438 (11th Cir. 1993) (emphasis added). Borrowing directly
from Florida’s statutory language regarding the scope of the term
“transfer,” we readily conclude that, in purchasing an annuity, the
purchaser voluntarily parts with an interest in an asset in exchange
for a guaranteed monetary return on his investment; indeed, the
purchase of an annuity is a contractual arrangement whereby each
party is bound by specific rights and obligations. Although the
record does not reveal the precise terms of the annuities at issue
here, virtually all annuity contracts provide that the annuitant will be
permitted to withdraw amounts of money in pre-determined intervals
and achieve a measure of return at a fixed interest rate in exchange
for placing his assets in the hands of a financial institution -- in this
case, an insurance company -- that will invest his money. Similarly,
10
an annuitant generally may not withdraw money at a greater amount
or with greater frequency than what has been specified in the
annuity contract without incurring financial penalties. See Fla. Stat.
§ 625.121(6)(c)(3)(e) (establishing permissible annuity plans under
Florida law regarding the rate at which a policyholder may withdraw
funds without incurring penalty); Werner v. Dept. of Ins., 689 So.2d
1211, 1212 (Fla. Dist. Ct.) (“[agent] did not inform [plaintiff] that
certain interest would be forfeited if she withdrew more than ten per
cent of the principal in any one of the first seven years of the
annuity’s existence.”), review denied, 698 So.2d 849 (1997).
Consequently, although an individual who purchases an annuity
remains the technical owner of the asset, he does not retain total
control over that asset and does not have unfettered access to the
full amount of his own “property.” As a result, the purchase of an
annuity, as in the instant action, does constitute a “transfer” for
purposes of Florida law regarding fraudulent transfers. The Levines,
therefore, did transfer assets from non-exempt to exempt status in
11
purchasing annuities from Financial during the time period identified
by the bankruptcy court.2
2
It is interesting to note that, in a case involving a
trustee’s objection to a debtor’s claimed exemption of an annuity
purchased prior to the filing of a Chapter 7 bankruptcy petition,
the same bankruptcy court that originally had decided, in the
Levines’ case, that such a purchase did not constitute a “transfer”
concluded:
[W]hen the Debtor’s right to exemption is
challenged on the grounds that the Debtor
converted non-exempt property to exempt
property, it is appropriate to inquire into
the circumstances surrounding the transfer, as
there is substantial and respectable authority
to support the denial of the Debtor’s right to
exemptions upon a showing by extrinsic
evidence that the Debtor converted non-exempt
property into exempt property with the
specific intent to defraud his or her
creditors. . . .
. . . .
As a final comment, it should be noted that
this Court is receding in part from its
holding in In re Levine, supra, that
converting non-exempt property to exempt
property is not per se fraudulent and
conversion of such property for the purpose of
placing such property out of the reach of
creditors will not deprive a debtor of an
exemption to which the debtor would otherwise
be entitled. After further research and
consideration, this Court is satisfied that a
showing that the conversion of a non-exempt
asset into an exempt asset for the specific
purpose of placing the asset out of the reach
of creditors is sufficient to deprive a debtor
of his right to claim that property as exempt.
In re Schwarb, 150 B.R. 470, 472-7 (Bankr. M.D. Fla. 1992).
Although Schwarb concerns the validity of a claimed exemption
rather than the transfer that gave rise to the exempt asset, it
nonetheless provides valuable insight into the bankruptcy court’s
striking shift in perspective regarding a critical question in this
case -- that is, whether the Levines’ purchase of annuities could
be characterized as a “transfer” for purposes of bankruptcy law
prohibiting fraudulent transfers.
12
b. Has Fla. Stat. § 726.105 properly been invoked?
The Levines further argue that, assuming that a transfer did
occur in this instance, the annuities are now exempt and cannot be
contested collaterally through §726.105. That statutory provision
states, in relevant part:
(1) A transfer made or obligation incurred by a
debtor is fraudulent as to a creditor, whether
the creditor’s claim arose before or after the
transfer was made or the obligation was
incurred, if the debtor made the transfer or
incurred the obligation:
(a) With actual intent to hinder, delay, or
defraud any creditor of the debtor; or
(b) Without receiving a reasonably equivalent
value in exchange for the transfer or obligation,
and the debtor:
1. Was engaged or was about to engage in a
business or a transaction for which the
remaining assets of the debtor were
unreasonably small in relation to the business
or transaction; or
2. Intended to incur, or believed or reasonably
should have believed that he or she would
13
incur, debts beyond his or her ability to pay as
they became due.
Fla. Stat. § 726.105(1). The Levines posit that, notwithstanding the
language of this statutory provision concerning fraudulent transfers
or transactions, Florida law historically has held legally-created
exemptions to be sacrosanct and has declined to place an exempt
financial instrument or arrangement –regardless of the motivation of
the debtor – within the reach of creditors. The Levines are correct
that such a body of decisional law has evolved in Florida, although
within the context of the constitutionally-protected homestead
exemption rather than the statutorily-created exemption for
annuities. In Hill v. First Nat’l. Bank of Marianna, 84 So. 190, 193
(1920), for example, the Florida Supreme Court refused to subject
property protected by the homestead exemption to the payment of
debts, noting that to do so “would permit defendants to do indirectly
what they are enjoined from doing directly, and thereby defeat the
beneficial purpose of the law.” Similarly, in Heddon v. Jones, 154
14
So. 891, 891-92 (1934), the Florida Supreme Court again declined
to interfere with the homestead exemption regardless of the debtor’s
intent:
The fact that the appellee may have
moved on the homestead property prior to
judgment for the express purpose of
‘homesteading’ it is not legal fraud which per se
affords ground for holding the homestead claim
subordinate to the lien of a judgment rendered
in a suit pending prior to the time the
homestead character attached. Nor is it
material that the property later claimed as a
homestead was held out as a possible asset
upon which credit was obtained before the
homestead attempt was perfected.
See also West Fla. Grocery Co. v. Teutonia Fire Ins. Co., 77 So.
209, 212 (1917) (stating that the homestead exemption “applies not
only to formal and technical process, but to any judicial proceedings,
of law or in equity, which seek the appropriation of the property to
the payment of debts.”).
The trustee, on the other hand, points to more recent decisional
law applying §726.105 specifically to bankruptcy cases analogous
15
to this one: In re Gefen, 35 B.R. 368 (Bankr. S.D. Fla. 1984), for
instance, concerned a finding by the bankruptcy court that the debtor
had transferred money from an individual retirement account into an
annuity for the purpose of defrauding a creditor. In upholding the
bankruptcy court’s application of § 726.105, the district court in
Gefen noted that
[t]he debtor could have chosen numerous
investment vehicles with high rates of return for
the proceeds of his I.R.A., or he could have
applied them toward payment of the Final
Judgment, but instead he chose a rollover into
a deferred annuity. . . .
....
The Court finds that the aforementioned
transfer of funds made by the debtor had the
legal effect and result of hindering, delaying, or
defrauding creditors . . .
Accordingly, the transfer of funds is void
and of no effect and the trustee may withdraw
the cash value of the debtors’ I.R.A . . . .
Gefen, 35 B.R. at 372; see also In re Marks, 131 B.R. 220, 222 (S.D.
Fla. 1991) (rejecting as lacking merit debtor’s contention that
debtor’s “termination of his Keogh accounts and his subsequent use
16
of liquidated funds to purchase the two annuity contracts” did not
constitute a transfer subject to Florida prohibition on fraudulent
transfers.), aff’d, 976 F.2d 743 (11th Cir. 1992).
We note that the sources of authority cited by the Levines and
the trustee are, to a degree, in tension: Florida law appears to view
exemptions (or more specifically, the homestead exemption, not at
issue in this case) as inviolable, regardless of their provenance;
Florida courts also, however, have refused to countenance the
purchase of an exempt instrument such as an annuity for the
purpose -- or with the result -- of defrauding creditors to a
bankruptcy estate.
While acknowledging this tension, we conclude that the Gefen
case more closely resembles the circumstances with which we are
confronted in the instant action and effectively should govern our
resolution of this issue. Although we must respect the reluctance of
Florida courts to interfere with exempt assets, we also must be
guided by those courts that have relied on the unambiguous
17
language of § 726.105 to set aside transfers from non-exempt to
exempt status when such transfers were effected in order to defraud
creditors. The Levines’ citation to precedent regarding the sacred
nature of the homestead exemption, while noteworthy, ultimately has
little bearing on this case. As is apparent from the complaint, the
trustee does not challenge the exempt status of the annuities and
does not seek to reverse any rulings as to the exemption; rather, as
articulated repeatedly by the trustee, the thrust of this action is to set
aside the transfer itself and return the transferred funds to the
bankruptcy estate. Although the Levines correctly observe that the
distinction between setting aside a transfer as fraudulent and
declaring an otherwise exempt asset to be non-exempt achieves,
from their perspective, the same outcome, it is also a very real
distinction that is provided for by Florida law, as embodied in §
726.105, and that has been applied by both Florida bankruptcy
courts and federal district courts. We similarly find that there exists
an arguable distinction between the act of transferring funds from
18
non-exempt to exempt status and the exempt nature of the
transferred funds. Where, as in this case, there is an allegation that
the transfer itself was fraudulent and should therefore be set aside
(as opposed to an allegation that the transfer was fraudulent and the
assets therefore should be declared non-exempt), § 726.105 may
properly be invoked.
c. Legislative amendments
The Levines next argue that, because a 1993 amendment to
the Florida Code anticipates precisely the circumstance present in
this case, we necessarily must infer that, prior to the enactment of
this amendment, the legislature had not provided a remedy for this
type of fraud. The amendment to which the Levines refer indeed
addresses the conversion of an asset from non-exempt to exempt
status and states, in pertinent part:
Any conversion by a debtor of an asset
that results in the proceeds of the asset
becoming exempt by law from the claims of a
19
creditor of the debtor is a fraudulent asset
conversion as to the creditor, whether the
creditor’s claim to the asset arose before or
after the conversion of the asset, if the debtor
made the conversion with the intent to hinder,
delay, or defraud the creditor.
Fla. Stat. § 222.30(2).
Although the language of this provision, enacted after the
events giving rise to this action occurred, embraces the allegations
set forth in the trustee’s complaint, we decline to assume or infer
from this fact alone that, prior to the amendment’s enactment, the
Florida legislature did not intend a remedy to exist for fraudulent
transfer of funds from non-exempt to exempt status; in fact, at least
one court has held that, prior to the adoption of § 222.30, the
statutory provision at issue in this case, § 726.105, governed any
type of fraudulent transfer including those transfers resulting in
exempt funds. In re Davidson, 178 B.R. 544 (S.D. Fla. 1995),
involved the debtors’ transfer of funds held in a non-exempt joint
bank account to an exempt annuity one day before final judgment
20
entered against the debtors in a pending lawsuit. In reversing the
bankruptcy court’s order overruling the trustee’s objection to the
debtors’ claimed annuity exemption, the district court noted:
Because Section 222.30 only applies to a
transfer or conversion occurring on or after
October 1, 1993, and the Annuity purchase in
this case occurred prior to this date, the
Bankruptcy Court concluded that:
At the time this case was initiated,
there was no Florida law providing
that a debtor forfeits her right to an
exemption as a consequence for
fraudulent conduct.
This legal conclusion is incorrect in light of
the following statutes. Florida Statutes §
726.105 and § 726.108, effective at the time of
the Annuity purchase, would appear to enable
Ameritrust to avoid the transfer or Annuity
purchase.
Id. at 552 (internal citation omitted).
We conclude, as did the district court in Davidson, that prior to
the adoption of § 222.30, § 726.105 governed allegations of
fraudulent transfers regardless of whether the challenged transfers
resulted in exempt assets. Given the tension in the decisional law,
21
identified earlier, concerning the absolute nature of exemptions and
the possibility of distinguishing the act of transferring funds from their
eventual exempt status, thereby avoiding transfers that create
exemptions we construe § 222.30 to be an effort by the legislature
to provide a clearer, more direct remedy to fraudulent transfers of
the sort alleged in this case. Moreover, § 222.30 expressly adopts
the definitional section from § 726 “unless the application of a
definition would be unreasonable.” Fla. Stat. § 222.30(1). This
explicit cross-referencing of the two statutory provisions further
suggests not only that they are to be read in tandem but, more
importantly, that § 222.30 is a subset of the causes of action outlined
in § 726. We determine that the legislative amendment embodied
in § 222.30 does not preclude reliance on § 726.105 regarding
causes of action that accrued prior to the amendment’s enactment.
d. Statute of Limitations
22
We briefly address the Levines’ contention that the trustee is
barred from contesting the exempt status of the annuities by virtue
of the applicable statute of limitations. The Federal Rules of
Bankruptcy Procedure mandate that objections to listing of property
to be claimed as exempt must be filed within thirty days after the
creditors’ meeting. Fed. R. Bank. P. 4003. As previously noted,
however, the trustee in this action does not seek to contest the
exemptions per se; rather, this is an adversary action filed pursuant
to 11 U.S.C. § 544, which permits the trustee to “avoid any transfer
of the property of the debtor . . . .” 11 U.S.C. § 544(a). The
Bankruptcy Code provides that an adversary action filed under this
provision may be filed within two years after the entry of the order for
relief. See 11 U.S.C. § 546(a)(1)(A). It is undisputed that the
trustee has complied with the two-year limitation on the filing of this
action. Having determined that the statute of limitations governing
objections to exemptions does not control this case, we conclude
23
that the trustee’s action to contest the transfer of funds is not time-barred.
e. Factual determinations
Finally, our independent review of the record indicates that the
bankruptcy court did not clearly err in finding that the Levines
purchased the annuities in question with the intent to hinder or
defraud a known creditor. In determining whether a debtor actually
intended to hinder, delay, or defraud a creditor, a bankruptcy judge
may consider, inter alia, whether:
(a) The transfer or obligation was to an insider.
(b) The debtor retained possession or control
of the property transferred after the transfer.
(c) The transfer or obligation was disclosed or
concealed.
(d) Before the transfer was made or obligation
was incurred, the debtor had been sued or
threatened with suit.
(e) The transfer was of substantially all the
debtor’s assets.
(f) The debtor absconded.
(g) The debtor removed or concealed assets.
(h) The value of the consideration received by
the debtor was reasonably equivalent to the
24
value of the asset transferred or the amount of
the obligation incurred.
(I) The debtor was insolvent or became
insolvent shortly after the transfer was made or
the obligation incurred.
(j) The transfer occurred shortly before or
shortly after a substantial debt was incurred.
(k) The debtor transferred the essential assets
of the business to a lienor who transferred the
assets to an insider of the debtor.
Fla. Stat. § 726.105(2).
Based on the record evidence and testimony provided at an
evidentiary hearing, there exists sufficient evidence to affirm that the
Levines converted non-exempt assets to annuities that are exempt
under Florida law shortly after learning that such a transfer would be
beyond the reach of Miller, a creditor whom the Levines had reason
to believe likely would prevail in a lawsuit filed against them. Giving
due regard to the bankruptcy court’s opportunity to observe and
evaluate the credibility and demeanor of the witnesses, see In re
Englander, 95 F.3d 1028, 1030 (11th Cir. 1996) (per curiam), cert.
denied, U.S. , 117 S. Ct. 1469, 137 L. Ed. 2d 682 (1997), we
25
conclude that the bankruptcy court’s factual determinations are
supported by the record and, therefore, are not clearly erroneous.
III. CONCLUSION
In this bankruptcy action, the Levines contend that the
bankruptcy court erred in both determining that the transfer of funds
from non-exempt to exempt status through the purchase of annuities
constituted an attempt to defraud a known creditor and avoiding that
transfer; they further contend that the district court erred in affirming
that decision. We hold that (1) the Levines’ purchase of annuities
was a “transfer” under the pertinent Florida law; (2) Fla. Stat. §
726.105 properly was invoked and relied upon to challenge the
nature of the transfer; (3) the amendment to Florida’s statutory
scheme regarding the fraudulent conversion of assets embodied in
Fla. Stat. § 222.30 does not necessarily suggest that no remedy for
transfer of assets from non-exempt to exempt status for the purpose
of defrauding a creditor existed prior to the enactment of the
26
amendment in 1993; (4) the trustee is not precluded from filing this
adversarial action by virtue of the statute of limitations pertaining to
actions to contest claimed exemptions; and (5) the bankruptcy
court’s factual determinations are not clearly erroneous.
Accordingly, we AFFIRM.
27