McFarland v. Wallace

Filing 15

ORDER denying as moot 14 Motion to Dismiss Case as Frivolous; denying 14 Motion for Sanctions. The Court affirms the Bankruptcy Court's Orders on res judicata grounds and on the merits of McFarland's exclusion argument. The Clerk shall terminate all deadlines and motions and close this case. Signed by Judge J. Randal Hall on 08/25/2016. (thb)

IN THE UNITED STATES
SOUTHERN

DISTRICT COURT

DISTRICT

AUGUSTA

IN

FOR THE

OF GEORGIA

DIVISION

RE:

THOMAS J.

*

MCFARLAND,

*

Debtor.

*

l:15-cv-190

*

Bankruptcy Case

THOMAS MCFARLAND,

Appellant,
No.

11-10218

v.

A. STEPHENSON WALLACE,
7 Trustee,

*

Chapter

*
*
*

Appellee.

ORDER

This bankruptcy appeal asks the Court to determine whether

Appellant-Debtor
bankruptcy estate

making

this

Thomas

McFarland's

annuity

argument.

annuity

part

of

his

and whether res judicata bars McFarland from

The

Bankruptcy

judicata barred McFarland's argument and,
that his

is

is property

Court

ruled

that

res

reaching the merits,

of the bankruptcy

estate.

The

Court AFFIRMS the Bankruptcy Court on both grounds.
I.

Debtor-Appellant

Thomas

BACKGROUND

McFarland

bankruptcy on February 2, 2011.

filed

(Bk. Doc. 1.)

for

Chapter

7

On February 15,

2011,

he filed his schedules listing his assets,

exemptions.
purchased

(Bk.
from

Doc.

The

10.)

McFarland

Hartford

in

2006

exclusions,

listed

as

an

On

subsequent

list

the

Doc.

amendments

141 at 3;

The

the

annuity

3.)1

§

an

Doc.

that

C,

asset.

on

(Id. at 5, 8.)

McFarland

(Bk.

he

Doc.

continued

47

at

2;

to

Bk.

256 at 6.)

the
or

Schedule

exempt

objected

18-4-22

to

McFarland's

annuity
§

was

claimed

not

exemption

exempted

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

(Bk.

by

on

either

Doc.

106

at

The Bankruptcy Court sustained the Trustee's objection and

ruled that
500

Bk.

Trustee

grounds

O.C.G.A.

as

to

annuity
property

personal

Schedule B and as an exempt asset on Schedule C.

and

B.R.

the

279,

287

and this Court

Court's

ruling.

2014), aff'd,

annuity was
(Bankr.

not
S.D.

exempt.
Ga.

McFarland v.

2014).

McFarland

McFarland v.

790 F.3d 1182

a motion

(Bk. Doc. 346.)

appealed,

and the Eleventh Circuit affirmed the Bankruptcy

Wallace,

(11th Cir.

516

B.R.

665

to

compel

(S.D. Ga.

2015).

After the Eleventh Circuit's opinion and order,

filed

Wallace,

McFarland to

turn

over

the Trustee

the

annuity.

McFarland responded by arguing that the annuity

was not property of the estate under 11 U.S.C. § 541(c).
Doc. 349.)

After a hearing on this issue,

(Bk.

the Bankruptcy Court

ruled that res judicata barred McFarland's argument because he

1 The Trustee also objected to other claimed exemptions which are
not relevant to this appeal.

could have raised it when he previously argued that his annuity
was

exempt

from bankruptcy.

Doc.

401 at 22-23;

the

merits

of

Order,

(Hearing

Bk.

McFarland's

Doc.

Transcript,

351.)

argument

property

Doc.

401

of

at

the

23-24,

reconsideration,
opinion
issues.

and

estate.

and

and

order

(Bk.

Bk.

Doc.

Doc.

the

that

(Hearing

determined

reached

356,

418.)

He

same
now

that

Bk.

appeals

the

5,

moved

substituted

conclusions

his

therefore,

Doc.

McFarland

Court

the

and,

Transcript,

351.)

Bankruptcy

5,

The Court also reached

annuity was not a "trust" as used in § 541(c)(2)
was

Doc.

on

Bk.
for

a

new

these

Bankruptcy

Court's Orders finding that the annuity was not a "trust" under

§

541(c)(2)

and

(Notice of Appeal,

finding
Doc.

issue

barred

1; Appellant's Br.,

II.

On appeal,

this

by

Doc.

res

judicata.

10.)

STANDARD OF REVIEW

the Court reviews the bankruptcy court's factual

findings for clear error, and its legal conclusions de novo.
re Globe Mfg. Corp.,

567 F.3d 1291, 1296 (11th Cir.
III.

In

2009).

DISCUSSION

A. Res Judicata

The

Bankruptcy

Court

found

that

res

judicata

barred

McFarland from arguing that his annuity was not property of the

bankruptcy estate.

(Bk. Docs.

351,

418.)

The Bankruptcy Court

reasoned that McFarland should have raised this argument when he

first
(Bk.

asserted
Doc.

In

that

the

annuity

was

exempt

from

bankruptcy.

418 at 8-10.)

the

Eleventh

res

Circuit,

judicata

possesses

the

following elements:

(1)
the
prior
decision
must
have
been
rendered
by
a
court
of
competent
jurisdiction;
(2)
there must have been a
final judgment on the merits; (3) both cases
must
involve
the
same
parties
or
their
privies; and (4) both cases must involve the
same

In

re

2001).

Piper
If

causes

of

Aircraft

those

Corp.,

four

claim

action.

244

elements

whether

the

advanced

brought

in

in the prior case.

F.3d

are
the

Id.

1289,

met,
second

If so,

1296

courts
case

(11th

then
could

Cir.

determine
have

been

res judicata bars the

claim or argument.

McFarland's brief,

res judicata issue,

which does not cite any authority on the

is not a model of clarity.

McFarland only

takes issue with whether the "property of the estate issue," as
he

characterizes

it,

could

or

should

have

been

argued

by

him

during the proceedings concerning the McFarland's claim that the
annuity

was

exempt

property.

At

first,

McFarland

appears

to

contend that res judicata would only apply "[i]f the § 541 issue

had actually been determined by the Trustee's objection to the
Debtor's claim of exemption,

at 17.)

He points

. . . ."

(Appellant's Br., Doc. 10

out that only the exemption

previously litigated in the bankruptcy, district,

question

was

and appellate

courts and that the "property of the estate" or exclusion issue
was never addressed.

This argument misses the mark.

In

fact,

the preclusion of claims which were not "actually litigated" in
a

prior

proceeding

is

res

judicata's

raison

d'etre.

Res

judicata requires parties to assert claims that arise out of the

same

transaction

other

things,

or

series

of

avoid piece-meal

transactions
litigation

together

to,

and promote

among

judicial

efficiency. Allen v. McCurry, 449 U.S. 90, 94 (1980).2
Later,

at

the

invokes
"could

McFarland argues that he

first

possible

res

judicata' s

have

been

opportunity.

This

requirement

brought"

conclusory fashion,

raised the exclusion issue

during

that
the

argument

the

prior

implicitly

claim

or

issue

proceeding.

In

he suggests that the first possible time for

him to raise this issue was

in response to the Trustee's motion

to compel.

As the Bankruptcy Court noted,

through

the

Eleventh

Circuit's

"from the 2011 petition date

order.

[McFarland]

argued the Annuity is exempt pursuant to O.C.G.A.
§

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

Docs.

10,

Circuit

is,

47,

126,

affirmed

141,

the

(Order,

256.)

Bk.

Doc.

It was

Bankruptcy

418

has

§ 18-4-22 and

at

10;

only after the

Court's

always

Orders

see

Bk.

Eleventh

concerning

2 Whether an issue was "actually litigated" in a prior proceeding
of course, an element of collateral estoppel.
Parklane Hosiery

Co. v. Shore,

439 U.S.

322,

327 n.5 (1979).

exemptions,
annuity,

and the Trustee moved to compel the turnover of the

that

excluded

from

541(c)(2).

a

Doc.

have

repeatedly

particular

517

of

the

estate

that

res

judicata

Wilson,

446 B.R.

held

their

asset

B.R.

has

that

is

543,
555,

schedules

548-49
563

that

exempt

(Bankr.

the

strikingly similar to
first

under

should

be

U.S.C.

§

11

In

bars

assert

M.D.

re

Fla.

Miller,

attempted to

debtors

new

Pa.

the

bar

See

concern

or

exemptions

Minn.

Stat.

271-72.

After

Shumate,

the

504 U.S.

Supreme

753

re

At least one

newly

asserted

269

(1993).

present

case.

In

Miller,

that

550.37,

their

Subd.

dependents.

Court's

In

B.R.

reasonably necessary for

debtor and any of the debtors'

re

153

assert

§

for

In

2014);

interests

401k pension funds were exempt from bankruptcy under
§ 522(d) (10(E)

from

theories

2011).

principles

Miller

debtors

annuity

from bankruptcy.

M.D.

same

claims.

the

See

to

(Bankr.

exclusion

is

the

349).

held

amending

Gress,

court

asserted

property

(Bk.

Courts

why

McFarland

24,

the

decision

11 U.S.C.
which

support

Miller,

in

in

each

of

the

153 B.R.

at

Patterson

v.

(1992), the debtors asserted for the first

time that their interest in the pension fund was not property of
the

estate

found

that

under

the

11

U.S.C.

prior

second proceeding

§

541(c)(2).

proceeding

asserting

a

The

asserting

theory

of

exemptions

exclusion

"claims of entitlement to the pension plans."

at 275.

bankruptcy

Miller,

court

and

the

concerned
153 B.R.

"Essentially," the bankruptcy court explained,

"§ 522

and §

541

can be viewed as

asserted by
claims

of

the

Debtors

entitlement

bankruptcy
exclusion

court
actions

the basis

and the

to

the

concluded
arise

out

for variant

Trustee

pension

that
of

as

plan

"both

the

to

of relief

their

competing

funds."

the

same

forms

Id.

The

exemption

nucleus

of

and

operative

facts because they involve a determination of entitlement to the

vested

pensions

estates."

The

filing

between

the

Debtors

and

their

Id.

Court

judicata

to

sound.

Here,

§ 541(c)(2)

bankruptcy
was

at

is

persuaded

proceedings

Miller's

asserting

McFarland

excluded

that

could

the

application

exemptions

have

annuity

and exclusions

asserted

from

the

res

of

his

claim

property

of

is

that

the

estate when he previously claimed that the annuity

exempt from bankruptcy.

The Court,

therefore,

AFFIRMS the

Bankruptcy Court on res judicata grounds.

B. Property Excludable Under 11 U.S.C. § 542(c)

Even if McFarland's argument is not barred by res judicata,

the Court affirms the Bankruptcy Court's ruling that the annuity

constitutes property of the estate.

McFarland argues that the

proceeds from his annuity are excluded from the property of the
bankruptcy
provides:

estate

by

11 U.S.C.

§ 541(c)(2).

Section

541(c)

(c) (1)
of

Except

this

as

provided

subsection,

in

an

paragraph

interest

debtor

in property becomes

estate

under

subsection

of

property

(a)(1),

(2)
the

of

(a)(2),

the
or

(a) (5) of this section notwithstanding any
provision
in
an
agreement,
transfer
instrument, or applicable nonbankruptcy law(A)

that

transfer
debtor;

(B)

restricts

that

interest

is

or

the debtor,
case
under

appointment
a

such

of

conditions

by

the

on

the

or

insolvency

a

or

trustee

in

custodian

conditioned

financial

condition

of

on the commencement of a
this
title,
or
on
the

of
a

or

taking

case

under

before

such

possession

by

this

or

title

commencement,

and that effects or gives an option to
effect a forfeiture, modification,
or
termination

of

the

restriction

on

debtor's

interest

in

property.

(2)

A

beneficial

interest

the

of the

transfer

debtor

that
is
enforceable
under
nonbankruptcy law is enforceable
under this

11 U.S.C.

in

of
a

a

trust

applicable
in a case

title.

§ 541(c).

McFarland's arguments are similar to those put
In

re:

Mohr,

l:15-cv-184,

2016

WL

2869787

(S.D.

forward in

Ga.

May

16,

2016).

He

transfer

contends

of

that

the proceeds

O.C.G.A.

of

his

§ 541(c)(2).

on In re

F.3d 1209

Meehan

held

asset

is

that

But
is

a

a

statute

sufficient

§ 541(c)(2).

O.C.G.A.

102

He

trust

as

and

that

statute

the

and does

2016 WL 2869787,

holding,
trust

the

either

because

the

(11th Cir.

that

1997).

restricts

that

a

a

the

trust

the

In his
transfer

for

statute

at

view,
of

an

purposes
issue

of

here,

created such a trust.

in Mohr,
whether

transfer of an asset.
"held

the

Appellant bases his argument

create

reasons

§ 33-28-7,

just

to

restricts

annuity and thereby creates

trust under 11 U.S.C.
Meehan,

§ 33-28-73

Appellant
there

because
Internal

on

need to

at *3

Eleventh

a

confused whether

valid

restriction

there

on

the

Meehan addressed the latter question and

restriction

not

is

has

transfer

be

in the

(citing Meehan,

Circuit
the

assumed

parties

Revenue

Code

can

be

trust

contained

a

document."

Mohr,

102 F.3d at 1212).

In so

the

IRA

stipulated
defines

an

at

issue

that

it

IRA

as

O.C.G.A. § 33-28-7 provides:

The proceeds of annuity, reversionary annuity, or
pure endowment contracts issued to citizens or
residents of this state,
upon whatever form,
shall not in any case be liable to attachment,
garnishment, or legal process in favor of any

creditor of the person who is the beneficiary of
such annuity contract unless the annuity contract

was assigned to or was effected for the benefit
of such creditor or unless the purchase,

sale, or

transfer of the policy is made with the intent to
defraud creditors.

in

was
was

a

a
or

trust.

Meehan,

102 F.3d at 1211, n.4 (citing 26 U.S.C.

McFarland's counsel's benefit,

§ 408(a)).

For

footnote four is worth citing in

full:

Apparently
only
beneficial
interests
in
trusts qualify for the § 541(c)(2) exclusion
. 11 U.S.C.A. § 541(c)(2) (referring to " [a]
restriction

on

the

transfer

of

a

beneficial

interest of the debtor in a trust") . No
argument is made that Meehan fs IRA is not a
trust. Moreover, by definition, an IRA is a
trust. 26
U.S.C.A.
§
408(a) r[T]he
term
*individual

retirement

account'

means

a

trust....").

Id.4

Meehan,

therefore,

provides

no support

for

McFarland's

argument that a statutory restriction on transfer is sufficient
to create a trust under § 541(c)(2).

Moreover,
clear

that

a

as

this

transfer

under § 541(c)(2).

Court

explained

restriction

In general,

does

*3;

rule,

see

§

11

U.S.C.

541(c)(2)

§ 541(c)(1)(A).

enforces

Mohr,

not

§

create

541(c)
a

"transfer restrictions

enforceable in bankruptcy proceedings."
at

in

Mohr,

on

"trust"

are

not

2016 WL 2869787,

Contrary to

restrictions

is

that

general

transferring

4 See In re Allen, No. 10-50827, 2010 WL 395871,
(Bankr. M.D. Ga. Oct. 4, 2010) (noting this assumption).

a

at *6, n.13
The Supreme

Court appears to have made the same assumption in Patterson v.
Shumate, 504 U.S. 753, 759 (1992) (citing 26 U.S.C. § 401 (a) (13) (A) ).
The Court
effort to

finds it noteworthy that McFarland's counsel has made no
address footnote four in Meehan, which indicates it was

litigated on the assumption that IRAs are trusts.
The Court finds
this
particularly
curious
since McFarland's
counsel
was
also
appellant-debtor's counsel in Mohr and is therefore aware that the

assumption was important to the Court's determination that Meehan did
not apply.

10

debtor's

beneficial

Bankruptcy

J

exception

541.27

to

the

(16th

general

transfer]

is

preserves

restrictions

of

the

invalid is

debtor

exclusion

of

in

an

in

interest

a

a

ed.
rule

trust.

2010)

Collier

("[t]he

that

stated in

See

every

[11 U.S.C.

one

asset

under

In
§

short,

a

541(c) (2)

is

express

[restriction

§ 541(c)(2)],

on the transfer of a beneficial

trust") .

on

the

which

interest

prerequisite
that

on

to

the

asset

is

a

is

a

trust.

The

Court

trust.

now

turns

to

whether

McFarland's

annuity

The Revised Georgia Trust Code of 2010 defines a "trust"

as "an express trust or an implied trust but shall not include
trusts

created

O.C.G.A.

by

statute

§ 53-12-2(13).

intention

by

property,

a

ascertainable

An

settlor

(3)

to

...
at

the

or

the

express

create

A trustee;

and

time

provided by law."
either

a

(5)

O.C.G.A. § 53-12-2(5).
trust

such

a

of

the

of

trust

or

Georgia

courts

11

An

Trust

reasonably
a

trust

or

perpetuities;

specified in writing or

§ 53-12-20.

as

such

"(1)

(2)

is

the rule against

Trustee duties

Georgia."

trust,

who

creation

of

requires

beneficiary

O.C.G.A.

resulting

trust

a

reasonably ascertainable within
(4)

Constitution

a

An implied trust is
constructive
have

long

trust.

described

a

an equitable obligation either express or
implied resting upon a person by reason of a
confidence reposed in him, to apply or deal
with property for the benefit of some other
person or for the benefit of himself and
another
or
others
according
to
such
confidence.

Peach

Ct.

Consol.

App.

(Ga.

("A

2006)

1965)

1898)));

Props.,

LLC

(quoting

v.

Carter,

Smith

v.

628

S.E.2d

Francis,

(quoting McCreary v. Gewinner,
Trust,

see also

fiduciary

144

29

regarding

S.E.

property

682

S.E.2d

Black's Law Dictionary

relationship

680,

960,

(Ga.

439,

444

963

(Ga.

(10th ed.

and

2014)

charging

the

person with title to the property with equitable duties to deal
with it for another's benefit.").

By

contrast,

"annuity"

as

stipulated

"a

the

Georgia

contract

payment

or

by

which

payments

Insurance
one

Code

party

promises

defines

in

return

to

pay

an

for

a

periodic

installments for a stated certain period of time or for the life
or

lives

of

the

§

33-28-1(1).

O.C.G.A.

person

or

persons
Further,

specified
"[t]he

in

the

relationship

insurer and an annuitant is not a fiduciary one."
No.

10-50827,

2010)
Cty.
Supp.

2010

WL

(citing 3B C.J.S.
Hosp.
614,

Auth.

v.

619-20

3958171,

at

*6

contract."

(Bankr.

M.D.

of

an

In re Allen,
Ga.

Oct.

4,

Annuities § 34 (2010)); see also Chatham

John

Hancock Mutual

(S.D.Ga.1971).

Life

("Annuity

Ins.

Co. , 325

agreements

F.

create

only the relation of debtor and creditor, not a trust.")

McFarland

argues

that

annuity

elements of a trust because "the Debtor

12

documents

satisfy

the

(the settlor intended to

create

a trust,

a

trust

property is

identified

(funds

invested

in the Annuity),

the beneficiary was readily ascertainable,

Annuity

was

company

specified in
Br.,

Doc.

trustee,

writing the duties

10

argument.

the

at

16.)

(Doc.

The

11,

Ex.

and

of

Annuity

the Trustee."

annuity

D) .

the

The

contract
Court,

the

document

(Appellant's

itself

belies

therefore,

his

concludes

that McFarland's annuity is a typical contract forming a debtorcreditor relationship and not a trust.
In

sum,

§ 541(c)(2)

to

be

excluded

from

bankruptcy

estate,

requires that the property at issue be "a beneficial

interest of the debtor in a trust."

Court

the

agrees

with

McFarland

11 U.S.C.

that

§

O.C.G.A.

541(c)(2).

§ 33-28-7

The

is

a

nonbankruptcy law that restricts the transfer of the proceeds of
an annuity.
a

trust.

§ 541(c)(2)

But that section of Georgia's code does not create
Because

McFarland's

does not apply,

estate under 11 U.S.C.

annuity

is

not

a

trust,

and it is property of the bankruptcy

§ 541(a)(1).

C. The Trustee's Motion for Sanctions

On August 11, 2015,

McFarland's
McFarland.
dismiss
the

as

Court's

appeal
(Doc.

14.)

MOOT.
review

case has been

as

As
of

the Trustee filed a motion to dismiss

frivolous

and

for

sanctions

against

The Court DENIES the Trustee's motion to
for

the

the

particularly

Trustee's

record

request

reveals

that

for

sanctions,

this

bankruptcy

complex and contentious.

13

As

the

court more
the

familiar with the

Bankruptcy Court

sanctions

are

is

details of the

proceedings below,

better positioned to

warranted.

Accordingly,

the

determine

Court

whether

DENIES

the

Trustee's motion for sanctions.

IV.

As
Court's

discussed
Orders

McFarland's
Trustee's

August,

res

exclusion

motion

terminate all

ORDER

on

above,

for

the

Court

judicata

sanctions.

at

and motions

Augusta,

AFFIRMS

grounds

argument.

deadlines

ENTERED

CONCLUSION

and

the

on

Bankruptcy

the

The

Court

also

(Doc.

14.)

The

and CLOSE this

Georgia,

this

merits
DENIES

Clerk

shall

<^j?JT^ day

RANDAL HALL

UNITEDySTATES DISTRICT JUDGE
SOUTHERN DISTRICT OF GEORGIA

14

the

case.

2016.

HONORABpEfJ.

of

of