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Investment Annuity Not Exempt, and Cash Value of Life Insurance Not Fully Exempt, from Bankruptcy Estate

Investment Annuity Not Exempt, and Cash Value of Life Insurance Not Fully Exempt, from Bankruptcy Estate

In re McFarland, 790 F.3d 1182 (11th Cir. 2015)

ERISA and Life Insurance News
(September 14, 2015)

McFarland filed bankruptcy and sought to exempt from the bankruptcy estate an annuity and the cash value of a life insurance policy.  The Trustee objected.

The annuity was purchased in 2006 when McFarland was 64 years of age.  It was funded by the transfer of $150,000 from a mutual fund.  McFarland's wife was designated as sole beneficiary. The commencement date for payments under the annuity was January 15, 2032. 

The whole life insurance policy was taken out by McFarland in 1984 and had a cash value of approximately $15,000.

Under Georgia law, a bankruptcy debtor may exempt "[a] payment under a pension, annuity, or similar plan or contract on account of illness, disability, death, age or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor."  O.C.G.A. § 44-13-100(a)(2)(E).  Further, a bankruptcy debtor may exempt his or her "aggregate interest, not to exceed $2000.00 in value, ... in any accrued dividend or interest under, or loan or cash value of, any unmatured life insurance contract ..." Id.,  § 44-13-100(2)(9).

The bankruptcy court concluded that the annuity did not qualify for exemption "because it was structured more like a future investment than a substitute for wages."  This was evidenced by the fact that McFarland had not withdrawn money from the annuity and acknowledged that he had no intention to do so until 2032, when he would be 90 years of age. 

The Georgia Supreme Court, in construing the pertinent exemption, had ruled that "in deciding whether a particular annuity is of the type intended to come within the ... exemption, the pertinent question is whether it provides income as a substitute for wages." Quoting Silliman v. Cassell, 292 Ga. 464, 738 S.E.2d 606, 610 (2013).

The Eleventh Circuit found the bankruptcy court's reasoning "sound" and the findings "not clearly erroneous."  McFarland has "never withdrawn any money from his Annuity and had no real plans to do so," the court wrote.  By contrast, in Silliman, where the annuity was found to qualify for exemption, the debtor had "purchased the annuity to replace her income ... at the time of the purchase," and already was receiving payments when she filed bankruptcy.  Id. at 611.

As to the life insurance policy, McFarland relied on an additional non-bankruptcy provision of Georgia law which provided that "[t]he cash surrender values of life insurance policies ... shall not in any case be liable to attachment, garnishment, or legal process in favor of any creditor of the person whose life is so insured ..."  O.C.G.A. § 33-25-11(c).  Based on that statute, McFarland argued that his exemption should not be limited to $2,000. 

The bankruptcy court concluded that the exemption was limited to $2,000, and the Eleventh Circuit affirmed.  Under Georgia law, "a specific statute will prevail over a general statute, absent any indication of a contrary legislative intent."  As a result, the specific bankruptcy statute controlled, limiting the exemption to $2,000.  There was no evidence that the passage of the general insurance statute, O.C.G.A.  § 33-25-11(c), was intended by the Georgia legislature to amend the bankruptcy provision.     

The Eleventh Circuit also rejected constitutional challenges to the $2,000 limit.  "Although Georgia treats bankruptcy debtors differently than other debtors, this distinction does not violate Georgia's Equal Protection Clause because it is rational and relates directly to the purpose of bankruptcy legislation," the court wrote.  "[B]ecause bankruptcy allows debtors to wipe their financial slate entirely clean, it is plausible that Georgia requires bankruptcy debtors to sacrifice more of their penumbral property (e.g., a life insurance policy) in order to obtain greater relief on property more central to a ‘fresh start' (e.g., a homestead exemption)," the court concluded.

Finally, the Eleventh Circuit held that the Georgia statute did not violate the Bankruptcy Clause of the United States Constitution and that "states are authorized by statute and permitted by the Constitution to distinguish between bankruptcy and non-bankruptcy debtors in crafting bankruptcy exemptions." 

H. Sanders Carter
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Andrea K. Cataland
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Kenton J. Coppage
T (404) 962-1065
F (404) 962-1256

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