Neal et al v. First Alliance Bank et al

Filing 14

ORDER AFFIRMING the Bankruptcy Court's decision. Signed by Judge Samuel H. Mays, Jr on 10/22/2013.

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TENNESSEE
WESTERN DIVISION

James V. Neal, et al.,
Appellants,
v.
First Alliance Bank, et al.,

Defendants.

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No. 13-2522

ORDER

This matter comes before the Court on appeal from the
United States Bankruptcy Court for the Western District of
Tennessee.

Appellants Connie Neal and James Neal (“Debtors”)

appeal the Bankruptcy Court’s decision sustaining the Trustee’s
objection to the Debtors’ exemption of two annuities from the
bankruptcy estate.

(App. Brief, ECF No. 11 at 3-4.)

First

Alliance Bank, Bankplus Bank, and the Chapter 7 Trustee
(“Appellees”) respond that the annuities do not qualify under
the statutory exemption.

(Resp., ECF No. 12 at 10.)

For the

following reasons, the Bankruptcy Court’s decision is AFFIRMED.
I.

Background

The parties do not dispute the factual findings
Bankruptcy Court.

On or about May 24, 2012, the Debtors filed a

voluntary petition for Chapter 7 Bankruptcy.
No. 11 at 7.)

of the

(App. Brief, ECF

They listed two annuities on Schedule B (Personal

Property of Debtors) of their Bankruptcy Petition: Prudential
Annuities’ Services

account ending in 4160 in the amount of

$108,146.10 (“Annuity 4160”), and Prudential Annuities’ Services
account ending in 4524 in the amount of $110,233.09 (“Annuity
4524”) (the “Annuities”).

(Id. at 7.)

The Debtors included the

Annuities on Schedule C (Property Claimed as Exempt), claiming
that they were exempt under TENN. CODE ANN. § 26-2-11(1)(D).
The Chapter 7 Trustee objected.

(Id.)

(Id.)

The Debtors amended

Schedule C to claim exemption under TENN. CODE ANN. § 56-7-203.
(Id.)

Creditors First Alliance Bank and BankPlus joined the

Trustee’s Objection to Exemptions and adopted and incorporated
the Trustee’s legal position.

(Id. at 8.)

On the date the Chapter 7 Bankruptcy Petition was filed,
the structure of the annuities was:
A. Annuity 4160
a. Owner: James Neal
b. Annuitant: Connie Neal
c. Beneficiary: Connie Neal
B. Annuity 4524
a. Owner: Connie Neal
2

b. Annuitant: James Neal
c. Beneficiary: James Neal
(Id. at 10.)

According to the contracts for the Annuities, the

“owner” is “[t]he person or entity shown in the Schedule unless
later changed, that owns the master group contract under which
[the] Annuity is issued;” the “annuitant” is the person on whose
life the annuity payments are based; and the “beneficiary” is
“[t]he person designated as the recipient of the death benefit.”
(Annuity Schedule, Bankr. No. 12-25439-L, ECF No. 211-5 at 3,
4.)
On June 19, 2013, the Bankruptcy Court conducted a hearing
on the Trustee’s Objection to Exemptions.
11

at

3.)

The

Bankruptcy

Court

(App. Brief, ECF No.

sustained

the

Trustee’s

objection, holding that the Annuities did not qualify under TENN.
CODE ANN § 56-7-203 (“Bankruptcy Order”).

(Bankr. Order, Bankr.

No. 12-25439-L, ECF No. 233.)
The statutory exemption provides that:
The net amount payable under any policy of life
insurance or under any annuity contract upon the life
of any person made for the benefit of, or assigned to,
the spouse and/or children, or dependent relatives of
the persons, shall be exempt from all claims of the
creditors of the person arising out of or based upon
any obligation created after January 1, 1932, whether
or not the right to change the named beneficiary is
reserved by or permitted to that person.

3

TENN. CODE ANN. § 56-7-203.

The Bankruptcy Court interpreted

the exemption to apply only when the “annuity contract upon
the life of any person” (i.e., the annuitant) was “made for
the benefit of . . . dependant relatives” of the annuitant,
not for the benefit of the annuitant herself.
Order

at

becuase

13-15.)
Connie

The

Neal

Bankruptcy

was

both

Court

the

(Bankr.

concluded

annuitant

that,

and

the

beneficiary under Annuity 4160, and James Neal was both the
annuitant

and

the

beneficiary

under

Annuity

4524,

the

Annuities did not qualify under the statutory exemption.
II.

Jurisdiction and Standard of Review

“The

district

courts

of

the

United

States

shall

have

jurisdiction to hear appeals from final judgments, orders, and
decrees . . . of bankruptcy judges.”

28 U.S.C. § 158(a)(1).

A

district court reviews bankruptcy judges’ conclusions of law de
novo.

In re Desilets, 291 F.3d 925, 927 (6th Cir. 2002) (citing

In re Baker & Getty Fin. Services, Inc., 106 F.3d 1255, 1259
(6th Cir. 1997)).
Bankruptcy

Court

The only issue on appeal is whether the
correctly

interpreted

statutory exemption, a question of law.

and

applied

a

state

(See App. Brief, ECF

No. 11 at 7.)
III. Analysis
The Debtors argue that the Bankruptcy Court misinterpreted
the statutory exemption in § 56-7-203 and allowed the Trustee to
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include exempt property in the bankruptcy estate.

(Id. at 12.)

Under the Debtors’ reading of § 56-7-203, the exemption applies
to an annuity based on the life of “any person” that is created
for the benefit of that person.

(Id. at 16.)

The Debtors argue

that the Bankruptcy Court impermissibly “crafted” a new statute
by substituting “annuitant” for “any person” and “the persons”
in its analysis.
Appellees

(Id. at 13, 14; see Bankr. Order at 12.)
argue

that

the

Bankruptcy

Court

correctly

concluded that an annuity is exempt under § 56-7-203 “only if
the

designated

beneficiary

relative of the annuitant.”

is

a

spouse,

child

or

dependant

(Resp. Brief, ECF No. 12 at 10.)

Appellees argue that, because the annuitant and the beneficiary
are the same person in each of the Annuities, the exemption does
not apply, and the Annuities are justifiably included in the
bankruptcy estate.
Interpretation

(Id. at 12-13.)
of

a

statute

begins

with

its

text.

BP

America Production Co. v. Burton, 549 U.S. 84, 92 (2006).

The

statute provides that:
The net amount payable under any policy of life
insurance or under any annuity contract upon the life
of any person made for the benefit of . . . the spouse
and/or children, or dependent relatives
of
the
persons, shall be exempt . . . .
TENN. CODE ANN. § 56-7-203 (emphasis added).
the

company

it

keeps

(the

doctrine

of

“[A] word is known by
noscitur

a

sociis).”

Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 575 (1995).
5

A

reading of the words surrounding “any person” makes clear that
the Debtors’ interpretation is not tenable.

The text refers to

“any annuity contract upon the life of any person . . . .”
CODE ANN. § 56-7-203 (emphasis added).
meaning to “any person.”

See id.

TENN.

“Upon the life of” gives

An annuitant is defined in

the Annuities contracts as the person on whose life the annuity
payments are based.

(Annuity Schedule, Bankr. No. 12-25439-L,

ECF No. 211-5 at 3.)
“annuitant”

for

“any

obvious meaning.
The

The Bankruptcy Court’s substitution of
person”

is

consistent

with

the

text’s

Bankruptcy

Court

(See Bankr. Order at 12.)

Debtors

also

assert

that

the

impermissibly substituted “annuitant” for “the persons” in its
analysis

of

Although

the

the

statute.
Debtors

(App.
do

Brief,

not

ECF

suggest

No.

11

at

13).

an

alternative

interpretation of “the persons,” the parties in In re Demarco, a
prior bankruptcy decision in this district, argued that “the
persons” refers to the “spouse and/or children, or dependent
relatives . . .” of the annuitant.
(Bankr. W.D. Tenn. 2013).

See

491 B.R. 236, 240

Under that interpretation, the text

would read:
The net amount payable under any policy of life
insurance or under any annuity contract upon the life
of [the annuitant] made for the benefit of . . . the
spouse . . . of the [spouse . . . of the annuitant],
shall be exempt . . . .

6

See TENN. CODE ANN. § 56-7-203; In re Demarco, 491 B.R. at 240.
The spouse of the spouse of an annuitant is the annuitant.

That

reading of the statute would not prohibit the annuitant and the
beneficiary

from

being

the

same

person.

Annuity

4160

and

Annuity 4524 would qualify for the exemption.
The

Bankruptcy

Court

rejected

that

interpretation

in

Demarco and in this case, holding that “the persons” refers back
to

the

annuitant.

See

(Bankr. Order at 12.)

In

re

Demarco,

491

B.R.

at

240-41;

Under the Bankruptcy Court’s view, the

statute reads:
The net amount payable under any policy of life
insurance or under any annuity contract upon the life
of [the annuitant] made for the benefit of . . . the
spouse . . . of the [annuitant], shall be exempt . . .
.
See TENN. CODE ANN. § 56-7-203; (See Bankr. Order at 12.)

In this

case, the Bankruptcy Court refers to and relies on the analysis
of the statute in Demarco.

(Bankr. Order at 9.)

In Demarco,

the court concluded that the plural reference to “the persons”
was “simply a matter of careless amendment.”
B.R. at 240 n.2.

In re Demarco, 491

The court opined that its interpretation that

“the persons” referred to the annuitant:
highlights the intended purpose of this statute: to
ensure that beneficiaries are not deprived of benefits
as the result of the claims of creditors of the
insured. The statute in its original form protected
policies of life insurance or annuity contracts upon
the life of “any person” made for the benefit of, or
assigned to, “the wife or children, or dependent
7

relatives of such persons.” [Lunsford et. al. v.
Nashville Savings & Loan Corp., 35 S.W.2d 395, 395
(Tenn. 1931).] Recall, of course, that when this
statute was enacted—1925—wives were considered the
dependents of their husbands. The statute was later
amended to substitute “spouse” for “wife,” to include
both
husbands
and
wives
as
possible
protected
beneficiaries; it was also amended to substitute
“and/or” for “or” to make clear that the policy or
contract might be made for the benefit of the “wife
and/or
children”
not
simply
for
the
“wife
or
children.” The result of these amendments created the
possible ambiguity in the [] instance of the use of
the term “persons.” In its original version, the
referent of the term “persons” is clearly “any person”
upon whose life a policy of life insurance or contract
of annuity is made.
In re Demarco, 491 B.R. at 242-43 (emphasis in original).
The Bankruptcy Court’s interpretation is correct.

It is

consistent with the original version of the statute and the most
natural reading of the current version.

It also furthers the

statute’s purpose, which is not to exempt insureds or annuitants
from creditors’ claims, but to provide an exemption for proceeds
payable to third-party dependents.

See Tenn. Code Ann. § 56-7-

203.
Under Annuity 4160, Connie Neal is both the annuitant and
the beneficiary.

Under Annuity 4524, James Neal is both the

annuitant and the beneficiary.
203

applies

only

when

Because the exemption in § 56-7-

beneficiaries

are

the

“spouse

and/or

children, or dependent relatives” of the annuitant, neither of
the Annuities qualifies for the exemption.

8

IV.

Conclusion

The Bankruptcy Court correctly concluded that the exemption
in TENN. CODE ANN. § 56-7-203 does not apply to annuities that have
the same annuitant and beneficiary.

For the foregoing reasons,

the decision of the Bankruptcy Court is AFFIRMED.
So ordered this 22nd day of October, 2013.
s/ Samuel H. Mays, Jr._____
SAMUEL H. MAYS, JR.
UNITED STATES DISTRICT JUDGE

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