In re May

478 B.R. 431

In re David Keith MAY, Karen Sue May, Debtors.

No. 11–26492 EEB.

United States Bankruptcy Court, D. Colorado.

Aug. 15, 2012.

James T. Anest, Parker, CO, for Debtors.

ORDER SUSTAINING OBJECTION TO EXEMPTION

ELIZABETH E. BROWN, Bankruptcy Judge.

THIS MATTER comes before the Court on the Trustee's Objection to Debtors' Claim of Exemption, filed by Harvey Sender, Chapter 7 trustee (the “Trustee”), the Debtors' Response, and briefs filed by both parties. The Debtors David and Karen May have claimed an exemption in an annuity contract, purchased by Mrs. May, which names Mr. May as a beneficiary in the event of Mrs. May's death.¹ The Debtors have claimed the annuity as exempt under Colo.Rev.Stat. § 10–7–106. The Trustee argues, among other things, that this statute is not an exemption statute and, even if it were construed to be such, it would not allow Mrs. May, as the “insured,” to claim its proceeds as exempt from her creditors. The Court hereby finds and concludes that this statute does exempt an annuity from the reach of a beneficiary's creditors when the conditions of the statute have been satisfied, but the Court agrees with the Trustee that the statute does not allow an “insured” to claim this exemption. Mrs. May is an “insured” as that term is used in the statute.

I. BackgroundA. Annuities in General

Before interpreting the statute in question, it is important to recognize the distinction between annuities and life insurance. In the exemption context, courts have held that a specific exemption for life insurance does not apply to annuities. In re Raymond, 132 B.R. 53, 56 (Bankr.D.Colo.1991) (concluding that debtor's annuity was not exempt as life insurance proceeds under Colo.Rev.Stat. § 13–54–102(1)( l )). The historical purpose served by each investment vehicle is different and this difference bears on the interpretation of the statute in question.

Generally speaking, annuities are “contracts under which the purchaser makes one or more premium payments to the issuer in exchange for a series of payments, which continue either for a fixed period or for the life of the purchaser or a designated beneficiary.” NationsBank of North Carolina, N.A. v. Variable Annuity Life Ins. Co., 513 U.S. 251, 254, 115 S.Ct. 810, 130 L.Ed.2d 740 (1995). Historically, most annuities were “fixed,” in the sense that the “annuitant” ( i.e. the recipient of annuity payments) would receive a fixed periodic payment for the remainder of his or her life. Id. Similar to the calculation of premiums on life insurance, the calculation of annuity benefits uses actuarial methodologies based on assumed life expectancies of an annuitant, such that “the size of the benefit provided for each premium dollar is a relative function of the age of the annuitant at the time the policy is sold, the time at which payment of the periodic benefits commences, and the compounded rate of interest applied.” 4–10 Harnett & Lesnick, The Law of Life and Health Insurance § 10.01 (Matthew Bender, rev. ed. 2011).

In recent decades, annuities have become vastly more complex. Many annuities are now “variable” rather than fixed, and contemplate that the premiums collected will be invested in stocks or other equities, and that benefit payments to the annuitant will vary with the success of the annuity's investment policy. See SEC v. Variable Annuity Life Ins. Co. of America, 359 U.S. 65, 70–71, 79 S.Ct. 618, 3 L.Ed.2d 640 (1959) (describing advent of variable annuities). In other words, the annuitant is not guaranteed a fixed level of benefits, rather the payment amount will vary depending upon the value of the stock portfolio upon maturity. Such variable annuities are considered akin to an investment contract, because they place all the investment risk on the annuitant and “guarantee nothing to the annuitant except an interest in a portfolio of common stocks or other equities-an interest that has a ceiling but no floor.” Id. at 72, 79 S.Ct. 618. Many modern annuity products, both fixed and variable, no longer feature a life term, but instead provide for payments over a term of years and, if the annuitant dies before the term ends, the balance is paid to the annuitant's estate or beneficiary. NationsBank, 513 U.S. at 262–63, 115 S.Ct. 810.

Annuities are sometimes generally categorized as a type of life insurance, but annuities serve different purposes than life insurance. Robert H. Jerry, II, 1–1 New Appleman on Insurance, Law Library Edition § 1.08[2][b] [vi] (2011). A person normally purchases a life insurance policy to provide security for his or her family members in the event of a premature death. On the other hand, a person typically purchases an annuity to avoid the risk associated with living an unexpectedly long life and running short of financial resources. Although life insurance and annuities have similarities in that they both provide protection from certain risks, an annuity is generally not considered insurance because it is payable during the life of the annuitant rather than upon some future contingency (such as the death of the insured). See1 Couch on Insurance § 1:22 (rev. ed. 2011). Modern annuities especially are considered more of an investment than a type of insurance. See NationsBank, 513 U.S. at 259, 115 S.Ct. 810 (“[A]nnuities are widely recognized as ... investment products.”).

B. Mrs. May's Annuity

The Debtors filed bankruptcy on July 12, 2011. In their schedules, they listed and exempted a Sun Life Annuity with a value of $16,818 (the “Annuity”). Sun Life Assurance Company issued the Annuity to Mrs. May in 2004. The Annuity certificate lists Mrs. May as both the “certificate owner” and the “annuitant,” which is defined as “[t]he natural person to whom any annuity payments will be made.” Annuity at 2, 3. Debtor David May is listed as the “beneficiary,” who is entitled to receive certain benefits upon Mrs. May's death. Annuity at 9, cover page. It appears that the Annuity is a type of hybrid product known as a “fixed index annuity.” See generally American Equity Inv. Life Ins. Co. v. SEC, 613 F.3d 166, 168 (D.C.Cir.2010) (describing fixed index annuities). This type of annuity is like a traditional fixed annuity in that it guarantees that a minimum interest rate on the amount of the premium Mrs. May initially paid to purchase the Annuity, but it also offers a rate of return based on the performance of a security index, namely the Standard & Poor's 500 Index.

The Annuity has an initial term of ten years. At the end of that term, it provides that Mrs. May may renew for another term or surrender the Annuity and receive its full indexed value. Annuity at 5. Mrs. May also has the right to fully or partially surrender the Annuity certificate at any other time, although she would be entitled only to a “surrender value” (not the indexed value), which imposes a 10% surrender penalty. Annuity at 7. No matter when she chooses to surrender the Annuity, Mrs. May can elect to have those benefits paid to her in one lump sum or as annuity payments over time. ²Annuity at 5, 7–8. If Mrs. May dies while the Annuity is still in force, benefits are paid to her designated beneficiary (Mr. May) either in a lump sum or over time as an annuity, depending on Mrs. May's preference. Annuity at 10.

The Annuity gives Mrs. May, as the owner, the right to assign the annuity at any time and to change beneficiaries (assuming she does not make an irrevocable designation). Annuity at 15. The Annuity also contains a “Protection of Proceeds” provision that states:

No beneficiary or payee may commute or assign any payments under this certificate before they are due. To the extent permitted by law, no payments shall be subject to the debts of any beneficiary or payee or to any judicial process for payment of those debts.

Annuity at 16.

II. DiscussionA. Ascertaining the Underlying Policy Behind Colo.Rev.Stat. § 10–7–106

Section 10–7–106 is not the most artfully written piece of legislation. As noted by one court, this section consists of a single, 143–word sentence. In re Brown, 387 B.R. 611, 612 (D.Colo.2008). To aid in its interpretation, the Court has highlighted the operative language below:

Whenever, under the terms of any annuity or policy of life insurance, or under any written agreement supplemental thereto, issued by any insurance company, domestic or foreign, lawfully doing business in this state, the proceeds are retained by such company at maturity or otherwise, no person, other than the insured, entitled to any part of such proceeds or any installment of interest due or to become due thereon shall be permitted to commute, anticipate, encumber, alienate, or assign the same, or any part thereof, if such permission is expressly withheld by the terms of such policy or supplemental agreement; and, if such policy or supplemental agreement so provides, no payments of interest or of principal shall be in any way subject to such person's debts, contracts, or engagements nor to any judicial processes to levy upon or attach the same for payment thereof.

Colo.Rev.Stat. § 10–7–106 (emphasis added). Clearly, this statute prohibits a beneficiary, other than an “insured,” from assigning an interest in an annuity or life insurance policy. It provides further that the proceeds of either an annuity or life insurance policy shall not be subject to “such person's debts.” The phrase “such person” refers to the earlier reference to a “person” who is “entitled to any part of such proceeds or any installment of interest,” but once again, it expressly excludes the “insured” from this category of “persons.” Thus, this statute clearly protects the proceeds from a beneficiary's creditors.

But the statute does not clearly answer two questions. First, what does it mean when it states that the proceeds must be retained by the insurer? Does the inclusion of a lump sum payment option in an annuity or contract violate this requirement? Second, what is the definition of an ...