McFarland v. Wallace

Filing 14

ORDER affirming the Bankruptcy Court's September 29, 2012 and September 30, 2013 Orders; and directing that the Clerk shall terminate all deadlines and motions and close this case. Signed by Judge J. Randal Hall on 09/10/2014. (jah)

IN THE UNITED

STATES DISTRICT COURT FOR THE

SOUTHERN DISTRICT OF GEORGIA
AUGUSTA DIVISION

THOMAS J.

MCFARLAND,

Appellant,

l:13-CV-00209-JRH-BKE

vs

A.

STEPHENSON WALLACE,

Appeal in:
Chapter 7

Chapter 7 Trustee

Case No.

11-10218-SDB

Appellee.

ORDER

Thomas

J.

McFarland

("Appellant")

appeals

from

the

Bankruptcy Court's September 29, 2012, and September 30, 2013,

Orders

sustaining

A.

Stephenson

Wallace's

objection to Appellant's exemptions.

("Appellee")

This Court AFFIRMS the

Bankruptcy Court's Orders.

I.

This
U.S.C.
appeal,

§

JURISDICTION AND

Court

has

158(a)(1)
the

Court

appellate
and

STANDARD OF REVIEW

jurisdiction pursuant

Bankruptcy

reviews

the

Rules

8001

bankruptcy

et

to

sea.

court's

28
On

factual

findings for clear error and its legal conclusions de novo.
In re Globe Mfg. Corp., 567 F.3d 1291, 1296 (11th Cir. 2009) .

II.

This

appeal

presents

DISCUSSION

two

issues:

(1)

whether

the

Bankruptcy

Court

erred

in

determining

that

Appellant

was

limited to the $2,000.00 exemption for whole life insurance
set forth in O.C.G.A.

§ 44-13-100(a) (9) ; and

(2) whether the

Bankruptcy Court erred in finding that Appellant's retirement

annuity

was

not

exempt

pursuant

to

O.C.G.A.

§

44-13-

100(a)(2)(E).
A.

Whole Life Insurance

Appellant
exemption

for

argues
the

that

cash

limiting

surrender

him

value

to
of

the

$2,000.00

life

insurance

provided in O.C.G.A. § 44-13-100 violates the Supremacy Clause
and Bankruptcy Clause of the United States Constitution and

the Equal
Appellant
claimed

Protection Clause of the Georgia
also

under

urges

that

O.C.G.A.

§

the cash
33-25-11.

Constitution.1

surrender value may be
The

Court

reviews

the

Bankruptcy Court's legal conclusions on these issues de novo.
1. Background

Appellant filed for Chapter 7 bankruptcy as a result of

a personal injury judgment. Appellant, who was underinsured,
attempted to exempt the full cash surrender value of a whole
life insurance policy, approximately $13,445, under O.C.G.A.

§ 44-13-100(9) and O.C.G.A. § 33-25-11. Appellee,

a Chapter

7 trustee, sought to have the exemption disallowed entirely or

1 On appeal,
Appellant does not present an equal
protection argument under the United States Constitution.

limited to the $2,000.00 exemption amount provided in § 44-13100(9).

The Bankruptcy Court sustained Appellee's objection to
the

full

exemption

under

§

33-25-11

and

allowed a

exemption of $2,000.00 under § 44-13-100(9).

limited

The Court also

held that limiting debtors to the $2,000.00 exemption for the
cash value of life insurance provided in O.C.G.A. § 44-13-100
does not violate the Equal Protection Clause or the Supremacy

Clause

of

the

United

States

and

Georgia

Constitutions.

Further, the Bankruptcy Court concluded that Georgia debtors

in bankruptcy cannot exempt cash surrender values of whole
life insurance policies under O.C.G.A. § 33-25-11.
2. Supremacy Clause

Appellant challenges the Georgia bankruptcy statute under
the

Supremacy

Clause.

The

Supremacy

Clause

provides

that

"[t]his Constitution and the Laws of the United States which

shall be made in Pursuance thereof . . . shall be the supreme
Law of the Land . . . any Thing in the Constitution or Laws of
any State to the Contrary notwithstanding." U.S.

Const, art.

VI, cl. 2. According to the United States Supreme Court, "any
state legislation which frustrates the full effectiveness of

federal

law

is

rendered

invalid by

Perez v. Campbell, 402 U.S. 637,

the

Supremacy

Clause."

652 (1971) . Appellant insists

that the Georgia legislature invaded an area of law that is

reserved for the federal government when it enacted O.C.G.A.

§ 44-13-100,

a bankruptcy specific statute.

Pursuant to O.C.G.A. § 44-13-100(b), Georgia "opted out"
of the federal bankruptcy exemptions provided in 11 U.S.C. §
522(d) and thus a debtor who files bankruptcy while domiciled
in

Georgia

is

O.C.G.A.

§

S.D.

limited

2012);

Ga.

S.D. Ga.
Ga.

44-13-100.

to

the

list

In re Sapp,

In re Ambrose,

of

exemptions

Case No.

179 B.R.

1995); In re Bovette, 250 B.R.

982,
822,

found

in

11-30468

(Bankr.

984 n.2

(Bankr.

824

(Bankr. S.D.

2000).

Many jurisdictions have held that state bankruptcy-only
exemption laws are consistent with the Supremacy Clause. In re

Joyner,

489

B.R.

292

(Bankr.

S.D.

Ga.

2012) (upholding

constitutionality of Georgia's bankruptcy statute);

Zeman

(In

re

Kulp) ,

949

F.2d

1106,

1109

n.3

the

Kulp v.

(10th

Cir.

1991)(Colorado's bankruptcy exemption does not conflict with
the federal scheme because 11 U.S.C. § 522 expressly delegates

to states the power to create bankruptcy exemptions);
Morell,

394 B.R.

In re

405 (Bankr. N.D. W. Va. 2008)(West Virginia

"admirably fulfilled its federal mandate in opting out of the
federal

exemptions"

exemption
(Bankr.

statute);

N.D.N.Y.

allowed states to

and

creating

In re Brown,

2007) (holding
use

its

bankruptcy

2007

WL

that

2120380,

Congress

their own exemptions

specific
at

*15

specifically

instead of

the

federal

exemptions

listed

in

§

522(d),

and

New

York's

bankruptcy only exemption scheme is not so inconsistent with
the

exemptions

listed in §

522(d)

as

to

render

it

invalid

under the Supremacy Clause); In re Shumaker, 124 B.R. 820, 826
(Bankr. D. Mont. 1991)("[T]he underlying premise . . . that it

is not permissible for states to seek two different levels of

exemptions,

one

applicable

simply misstates

the

in

bankruptcy

applicable

and

one

constitutional

without,

power

of

a

state to enact bankruptcy laws where Congress has not sought
to act.");

In re Vasko,

6 B.R.

317,

323-24

(Bankr. N.D.

Ohio

1980)(concluding that the state's bankruptcy-only exemption

law did not conflict with or frustrate the basic objectives of
Congress

to

provide

a

debtor

with

a

fresh

start

and

was

therefore not preempted); Sheehan v. Pevich, 574 F.3d 248, 252

(4th Cir. 2009)(Supremacy Clause did not render invalid West
Virginia's
Georgia

bankruptcy-specific

law

and

federal

law

exemption

are

not

in

statute).
conflict

Here,
because

Congress, through 11 U.S.C. § 522(b), expressly granted states
the power to opt-out of the federal exemptions and provide for

exemptions

under

state

laws.

Appellant's

Supremacy

Clause

argument therefore fails.
3. Bankruptcy Clause

Appellant

exemption

also

statute

challenges

under

the

the

Bankruptcy

Georgia

Clause.

bankruptcy

Under

the

Bankruptcy

Clause,

Congress

was

granted

the

power

to

"establish . . . uniform Laws on the subject of Bankruptcies."
U.S. Const, art.

I, sec. 8, cl. 4. The Bankruptcy Clause only

requires that bankruptcy laws apply uniformly among classes of

debtors. Wood v. U.S.

(In re Wood),

866 F.2d 1367, 1372 (11th

Cir. 1989). Appellant argues that limiting bankruptcy debtors
to the exemptions in O.C.G.A. § 44-13-100 while allowing non-

bankruptcy debtors the protections afforded in O.C.G.A. § 3325-11 violates the uniformity requirement of the Bankruptcy
Clause.

The

Bankruptcy

bankruptcy-specific

Court's

legislation

conclusion
does

not

that

run

Georgia's

afoul

of

the

Bankruptcy Clause is sound.

Even

though

Georgia

law

treats

bankruptcy

differently from non-bankruptcy debtors,

constitutional

muster

under

a

debtors

the statute passes

Bankruptcy

Clause

inquiry

because it applies uniformly to all debtors in bankruptcy.
Numerous

jurisdictions

have

held bankruptcy-only

exemption

statutes to be consistent with the uniformity requirement of
the

Bankruptcy

Clause.

See,

e.g. ,

Kulp,

949

F.2d

at

n.3

(Colorado's bankruptcy-only exemption statute, which creates

a

bankruptcy

Colorado

debtors,

requirement
1001

exemption

which

meets

is

the

for bankruptcy laws);

(Bankr.

W.D.

Ark.

not

available

Constitution's

In re

1988)(Arkansas'

Holt,

to

other

uniformity

84

opt-out

B.R.

991,

exemption

scheme does not violate the uniformity requirements of the
Bankruptcy Clause of the U.S. Constitution),
997

aff'd,

91 B.R.

(W.D. Ark. 1988), aff'd, 894 F.2d 1005 (8th Cir. 1990); In

re Brown. 2007 WL 2120380, *8 (Bankr. N.D.N.Y. 2007)(upholding
New York's bankruptcy laws under the Bankruptcy Clause and
Supremacy Clause); In re Shumaker,

124 B.R.

820,

823 (Bankr.

D. Mont. 1991)(Montana statute providing exemption rights in
Individual Retirement Accounts for bankrupt debtor but not for
non-bankrupt debtor did not violate the doctrine of geographic

uniformity

or

exemption

statute

requirement

of

equal

the

protection
is

principles).

consistent

Bankruptcy

with

Clause

The

the

because

Georgia

uniformity
the

statute

applies uniformly to all debtors in bankruptcy.
4. Equal Protection Clause of the Georgia Constitution
Appellant

further

argues

that

the

classifications

of

bankruptcy debtor and non-bankruptcy debtor violate the Equal
Protection Clause of the Georgia Constitution.
Under

the

Georgia

Constitution,

a

statutory

classification will withstand an equal protection challenge if
it

is

"reasonable,

not

arbitrary,

and must

rest

upon

some

ground of difference having a fair and substantial relation to
the object of the legislation,
circumstanced shall

be

v.

2d 635,

Conkle,

436 S.E.

so that all persons similarly

treated alike."

638

(Ga.

See Mack Trucks,

1993).

Inc.

The same rationale used in the Bankruptcy Clause analysis

can be used here. Georgia's exemption statute, which applies
only to debtors in bankruptcy but treats all of those debtors
equally, is constitutional under an equal protection inquiry.
As

the

Bankruptcy Court

noted,

citing Menchise

v.

Akerman

Senterfitt. 532 F.3d 1146, 1151 (llch Cir. 2008), the rational
basis

for

bankruptcy

providing

is

to

separate

serve

the

exemptions

for

overriding

purposes

purposes

of

of

the

bankruptcy laws: "to collect all of the assets and liabilities

of

an

entity,

to pay the creditors of

fullest

extent

start."

Georgia's

serves

these

bankruptcy

possible,

and

to

classification

purposes.

debtors

Also,

are

not

give
is

the bankrupt to

the

reasonable

bankruptcy

in

Debtor

similar

a

the

fresh

because

debtors

and

circumstances

it

non-

and

therefore the Georgia Constitution does not require that they
receive equal treatment. Appellant's equal protection argument
fails.

5. Availability of O.C.G.A. § 33-25-11

Appellant also raises the issue of whether a debtor may

exempt

the

full

cash

surrender

value

of

a

life

insurance

policy under § 33-25-11, which in his case is approximately
$13,445,

or whether he is limited to the $2,000.00 exemption

set forth in § 44-13-100(a)(9). Section 33-25-11 of Georgia's

Insurance

Code

protects

the

cash

surrender

values

of

Georgians' life insurance policies from creditors. There is no

limit or cap to the amount of cash value that may be protected

under

that

provision.

Section

44-13-100

of

Georgia's

Bankruptcy Code, on the other hand, protects only $2,000.00 of
the

cash

surrender

policies.

value

of

Georgians'

life

insurance

This provision applies specifically to debtors in

bankruptcy proceedings. Not surprisingly, Appellant seeks an
exemption

under

bankruptcy

the

insurance

provision.

The

provision

Bankruptcy

rather

Court

than

the

rejected

his

argument, based on traditional statutory construction and case
law,

and the Court agrees.
When

two

statutes

conflict,

prevail over a general statute,
contrary legislative intent.
(Bankr.

S.D.

Ga.

2012);

(quoting Vines v. State,

a

statute

will

absent any indication of

In re

Sapp.

In re Allen,

Case No.

632

Inc.,

(Ga.

a

11-30468

2010 WL 3958171,

499 S.E.2d 630,

also Morales v. Trans World Airlines,

(1992). As mentioned,

specific

at *3

1998)); see

504 U.S.

374, 385

§ 44-13-100 is the statute specific to

bankruptcy exemptions and therefore it prevails over the more
general provisions of O.C.G.A. § 33-25-11. Several bankruptcy
courts have reached the same conclusion.

In re Sapp,

Case No.

11-30468 (Bankr. S.D. Ga. 2012)(Georgia debtors in bankruptcy
cannot exempt cash surrender values of whole life insurance

policies
423854

under O.C.G.A.

§

33-25-11);

In

re

Ryan,

(Bankr. S.D. Ga. 2012)(O.C.G.A. § 33-25-11(c)

2012

WL

does not

provide the debtor an exemption from the bankruptcy estate);
In

re

Allen,

2010

WL

Section 33-25-11(c)

3958171

(Bankr.

M.D.

Ga.

2010) ("if

is construed to provide an exemption in

bankruptcy cases, then it will be in conflict with Section 44-

13-100.") . The Bankruptcy Court did not err in concluding that
O.C.G.A. § 33-25-11 does not provide the debtor an exemption
from the bankruptcy estate.
B. The Annuity

In

addition

to

the

life

insurance

exemption

issue,

Appellant argues that his annuity is exempt under O.C.G.A. §
44-13-100 (a) (2) (E) .

After

considering

the

nature

of

the

annuity and the circumstances surrounding the purchase of the

annuity, the Bankruptcy Court found that his annuity does not
fit within the scope of O.C.G.A. § 44-13-100(a) (2) (E) because

his

annuity

was

not

intended

or

designed

to

be

a

wage

substitute. The Court reviews this factual finding for clear
error.

1. Background

In March 2006, when Appellant was sixty-four years old,

he purchased a Hartford flexible premium variable annuity from
his

son

and

$150,000.00.

financial
As

a

advisor

for

variable annuity,

a

one-time

it

payment

of

allows Appellant

to

participate in the market and lock in high water marks while

protecting

against

market

fluctuations.

10

Appellant

is

both

annuitant

and

the

contract

owner

while

his

wife

is

the

beneficiary. As currently structured, Appellant has deferred
payment

the

maximum

number

of

years

until

his

ninetieth

birthday in order to increase the death benefit to his wife.

The annuity does not provide for fixed,

regular payments to

Appellant but instead gives Appellant the ability to access

the money at any time subject to withdrawal charges. As owner
and annuitant, Appellant is free to change the contract owner
and the beneficiary and may cancel the annuity at any time. He
may

also

withdraw

all

or

some

of

the

contract

value

and

premiums paid subject to charges assessed by Hartford.
In

an

Order

dated

September

29,

2012,

the

Bankruptcy

Court, among other things, stayed the determination of whether
Appellant

may

exempt

the

annuity

under

O.C.G.A.

§

44-13-

100(a) (2) (E) until the Georgia Supreme Court responded to the
certified questions related to annuities in In re Cassell, 688

F.3d 1291 (11th Cir. 2012) . See Silliman v. Cassell, 738 S.E.2d

606

(Ga. 2013);

In re Cassell,

713 F.3d 81

Upon resolution of that legal question,

held,

(11th Cir.

2013).

the Bankruptcy Court

in an Order dated September 30, 2013, that Appellant's

"annuity" is not exempt under O.C.G.A. § 44-13-100(a) (2) (E) .
2. Legal Analysis
Section 44-13-100(a)(2)(E)

that

any

debtor

who

is

a

provides,

natural

11

in pertinent part,

person

may

exempt,

for

purposes of bankruptcy,

the debtor's right to receive:

(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.
annuity

§

44-13-100 (a) (2) (E) .

under

requirements:

this

provision,

For
the

a

debtor

annuity must

meet

an

three

(2) the right to receive the annuity

payments must be "on account of illness,
or

exempt

(1) it must be an "annuity" as that term is used

in the Georgia statute;

age,

to

length

of

service";

and

(3)

disability,

the

payments

death,
must

be

reasonably necessary to support Appellant or his dependents.
Id.;

In re Cassell,

Cassell,

738

688 F.3d at 1294-95;

S.E.2d at

609.

The Georgia Supreme Court
first

time,

how

see also Silliman v.

courts

are

to

recently announced,
determine

whether

for the

the

first

requirement is met; that is, what exactly an "annuity" is for
purposes

of

O.C.G.A.

Cassell,

738

S.E.2d

at

§

44-13-100(a)(2)(E).

609.

An

annuity

comes

Silliman

within

v.

that

statute if it "provides income as a substitute for wages."
Id.

at 610.

To make this determination,

courts must consider

the nature of the contract giving rise to the annuity, as well
as the facts and circumstances surrounding the purchase of the

annuity.

Id. at 610-11. Soon after Silliman was decided, the

Eleventh

Circuit

adopted

Silliman's

12

interpretation

of

the

Georgia
Court.

statute
See

Here,

in

a

case

In re Cassell,

the

similar

713

Bankruptcy

to

F.3d at

Court

the

one

before

this

law,

this

81-82.

applied

which

required a fact intensive inquiry, and found that Appellant's
"annuity" does not fit within the scope of O.C.G.A. § 44-13-

100(a)(2)(E).

In reaching the conclusion that Appellant's

"annuity" was not intended to provide income as a substitute
for

wages

and

therefore

falls

outside

the

statute,

the

Bankruptcy Court considered the following facts:
(a) By electing to defer payment the maximum number of
years, Appellant made it clear that he did not intend for the

annuity income to act as a replacement for wages;
(b) Appellant's financial advisor and son testified that

the annuity was not created for wage replacement;
(c) The structure of the annuity does not contemplate a
payment at regular intervals;

(d) Appellant's annuity is a variable annuity adjusting
to

the

market

and

therefore

is

more

akin

to

an

investment

policy rather than a wage replacement;
(e) Appellant's payments from the annuity have not yet

begun and Appellant has retained control over the annuity and

its corpus,

including withdrawing all or part of the funds;

and

(f)

Appellant has also retained the right to terminate

13

the contract

and receive the surrender value

taken

form of a

in the

of the contract

cash settlement.

Upon consideration of these facts,

the Bankruptcy Court

concluded that Appellant's annuity more closely resembles a
nonexempt investment rather than a substitute for wages. This
determination is reasonable based on the facts presented and

is not clearly erroneous.2

III.

For

September

the

29,

reasons

set

CONCLUSION

forth,

the

2012 Order and September

Bankruptcy

30,

Court's

2013 Order

are

AFFIRMED.

The Clerk shall TERMINATE all deadlines and motions

and CLOSE

this

case.

ORDER ENTERED at Augusta, Georgia, this
September,

/^^day of

2014.

.e J\

Randal

Hall

States District Judge
Southern District of Georgia

2 Appellant raises a legal argument for the first time on
appeal which was not considered by the Bankruptcy Court: even
if his annuity is not an "annuity" within the meaning of
O.C.G.A. § 44-13-100(a) (2) (E), his annuity is a "similar plan
or contract" under that provision and therefore may be exempt.
The Court does not address that here because it was not raised
below.
14