IN RE: RICKY GOINS LAURA GOINS CASE NO. 00-61087
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
LONDON
IN RE:
RICKY GOINS
LAURA GOINS CASE NO. 00-61087
DEBTORS
J.G. WENTWORTH, SSC, LIMITED PARTNERSHIP PLAINTIFF
VS. ADVERSARY NO. 00-6067
LAURA GOINS DEFENDANT
AND
MAXIE HIGGASON, TRUSTEE INTERVENING PLAINTIFF
VS.
LAURA GOINS,
J.G. WENTWORTH SSC, LP
SAFECO LIFE INSURANCE COMPANY and
SAFECO ASSIGNED BENEFITS SERVICE CO. DEFENDANTS
MEMORANDUM OPINION
The plaintiff, J.G. Wentworth, SSC, Limited Partnership ("Wentworth"), the debtor, Laura Ann Goins, formerly Laura Ann Smith, ("Laura Goins" or "debtor") and the debtor's bankruptcy estate per Maxie Higgason, Trustee, all claim an ownership interest in past and future payments which the debtor received or is entitled to receive under terms of a structured settlement agreement in a wrongful death action.
While serving in the U.S. Marine Corps, the debtor's former husband, Christopher Mark Smith, died of injuries received when a Marine Corps CH-53E Sikorsky Sea Stallion helicopter crashed February 8, 1992 at Naval Air Station Cecil Field, Jacksonville, Florida.
In 1993 the debtor commenced an action in the U.S. District Court for the Middle District of Florida, Case No. 93-126-CIV-J-16, in behalf of herself; as administratrix of the estate of Christopher Mark Smith; as parent, guardian, and next of friend of their minor daughter, Rachel C. Smith, and as legal representative of her late husband's parents, against United Technologies and Sikorsky Aircraft, for damages, including personal injuries, death, medical expenses, pain and suffering, or loss of services arising out of the helicopter accident.
In July of 1994 the parties to the litigation entered into a General Release of Claims and Settlement Agreement (hereinafter "Settlement Agreement"), pursuant to which the debtor received a lump sum payment and structured future payments to be paid by defendants' indemnity insurer, Associated Aviation Underwriters, as follows:
In consideration for the full and complete release of further liability of both the Defendant and the Insurance Company, the Insurance Company agrees to make the following payments to the Plaintiffs:
A) Lump Sum.
Laura Smith has received Eight Hundred Thousand ($800,000) Dollars, receipt of which is hereby acknowledged.
B) Periodic Payments.
1. Monthly payments to Laura Smith: The sum of Six Hundred Seventy-one Dollars and Nine Cents ($671.09) shall be payable to LAURA SMITH on the first (1st) day of each and every month commencing July 27, 1994, and continuing for a period of 359 additional months, for a total of 360 payments, with the amount of such payments increasing at the rate of three (3%) percent per year compounded annually on the anniversary date. If LAURA SMITH dies before she has received all 360 payments, the remaining payments set forth herein shall be made to RACHEL SMITH or her estate, upon proof of death being furnished to the Insurance Company or its assignee.
After the Insurance Company or its assignee has paid the 360 monthly payments described above to LAURA SMITH, the Insurance Company or its assignee will continue to make such monthly payments to LAURA SMITH for the duration of her life under the terms described in the paragraph above.
2. Deferred Payments to Laura Smith:
In addition to the monthly periodic payments to LAURA SMITH described in Paragraph 1 above, the following lump sum payments shall be paid to LAURA SMITH on June 1, as follows:
$15,000 - 1999 (Age 30)
$20,000 - 2004 (Age 35)
$25,000 - 2009 (Age 40)
$30,000 - 2014 (Age 45)
$40,000 - 2019 (Age 50)
$50,000 - 2024 (Age 55)
If LAURA SMITH dies before she has received each of the above six (6) payments, the remaining payments set forth herein shall be made, as due, to RACHEL SMITH or her estate upon the proof of death being furnished to the Insurance Company or its assignee.
After deduction of attorney fees and expenses, the debtor's share of the $800,000 lump sum payment was between $50,000 and $100,000.
The Settlement Agreement also provided for monthly and deferred payments to Rachel Smith, the minor child of the debtor by her deceased former husband. These payments were not sold or assigned and are not at issue in this proceeding.
The Settlement Agreement provided with respect to the debtor's right to payments that the payments were not subject to execution or any legal process for any obligation of the debtor. The Agreement withheld from the debtor power to sell or mortgage or encumber the payments by assignment or otherwise, as follows:
C) Nature of Payments. All sums set forth in this Agreement constitute damages on account of personal injuries or sickness, arising from the Occurrence, within the meaning of section 104(a)(2) of the Internal Revenue Code of 1986, as amended.
D) Plaintiffs' Rights to Payments. Insurance Company shall not segregate or set aside any of its assets to fund the payments to Plaintiffs required herein, it being understood Plaintiffs are and shall be general creditors of the Insurance Company. Said payments cannot be accelerated, deferred, increased, or decreased by Plaintiffs and no part of the payments called for herein or any assets of Insurance Company are to be subject to execution or any legal process for any obligation in any manner, nor shall Plaintiffs have the power to sell or mortgage or encumber same, or any part thereof, nor anticipate the same, or any part thereof, by assignment or otherwise. (Underscoring provided.) (1)
The Settlement Agreement authorized the defendants' insurance carrier, Associated Aviation Underwriters, to make a "qualified assignment" of its liability for damages to SAFECO Assigned Benefits Service Company ("SABSCO") which agreed to fund the monthly and periodic damage payments through the purchase of an annuity policy issued by SAFECO Life Insurance Company ("SAFECO"). SAFECO agreed to guarantee the performance of payments by SABSCO. The relevant provisions of the agreement are as follows:
A) Qualified Assignment. The Parties hereto acknowledge and agree that Insurance Company may make a "qualified assignment" within the meaning of section 130(c) of the Internal Revenue Code of 1986, as amended, to SAFECO Assigned Benefits Service Company (hereinafter "SABCO") of Insurance Company's liability to make the periodic payments required herein. Any such assignment, if made, shall be accepted by Plaintiffs without right of rejection and shall completely release and forever discharge Defendant and Insurance Company from such obligations hereunder as are assigned to the assignee.
If the liability to make the periodic payments is assigned by way of a "qualified assignment," then:
1. The periodic payments from the assignee cannot be accelerated, deferred, increased or decreased by Plaintiffs;
2. The assignee's obligation for payment of the periodic payments is no greater than the obligation of the entity originally liable (whether by suit or agreement) for payment and from whom the obligation was assigned.
B) Right to Purchase an Annuity. Insurance company or its assignee reserves the right to fund its liability to make periodic payments through the purchase of an annuity policy issued by Safeco Life Insurance Company ("SAFECO"). SAFECO agrees to guarantee the performance of SABSCO as set forth in the document attached hereto as Exhibit A. Insurance Company or its assignee shall be the owner of the annuity policy, and shall have all rights of ownership. Insurance Company or its assignee may have the annuity carrier mail payments directly to Plaintiffs. Plaintiffs shall be responsible for keeping the annuity carrier informed of their proper mailing addresses and mortality information.
The other relevant provisions of the Settlement Agreement are as follows:
The obligation of the Insurance Company, the Insurance Company's assignee, or the annuity carrier shall be discharged upon the mailing of a valid check in the amount of such payment to the address designated by the party to whom the payment is required to be made under this Agreement.
The periodic payments to be received by Plaintiffs pursuant to this Agreement are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, or encumbrance by Plaintiffs. (Underscoring supplied.)
It is understood and agreed that this Agreement is to be construed and interpreted in accordance with the laws of the State of Florida, and the Plaintiffs agree to submit to the jurisdiction of the Florida courts for any dispute arising out of this Agreement.
The references in the Settlement Agreement to section 104(a)(2) of the Internal Revenue Code, which exempts the annuity payments to the debtor from gross income and therefore from taxation as income, and to section 130(c) of the Internal Revenue Code, defining a qualified assignment for purposes of section 130 of the Internal Revenue Code, which exempts the amount received for agreeing to a qualified assignment from the gross income of an assignee/taxpayer that obtains and owns such annuity contract, clearly indicates the intention of both parties to structure the Settlement Agreement to enable the debtor and the assignee to take advantage of these provisions of the Internal Revenue Code.
On June 27, 1994, just prior to the execution of the Settlement Agreement, Safeco Assigned Benefits Service Company purchased an annuity contract from Safeco Life Insurance Company naming the debtor Laura Ann Smith as annuitant. SAFECO agreed to make annuity payments to Laura Ann Smith in the amount and on the due dates specified in the Schedule of Benefits incorporated in the policy. The schedule of benefits replicated the schedule of payments set out in the Settlement Agreement.
Concurrently, a similar annuity policy was obtained by SABSCO from SAFECO providing for periodic payments to the minor child Rachel C. Smith, in accordance with the terms of the Settlement Agreement.
The annuity contract provides the contract shall be construed in accordance with and amended to conform to the laws of the state in which the owner resides. The home office of the owner, SAFECO Assigned Benefits Company, is Redmon, Washington, which is also the location of the home office of Safeco Life Insurance Company.
The annuity contract precludes assignment of the benefit payments by the beneficiary as follows:
...Benefit payments may not be advanced, accelerated, committed or encumbered by the annuitant or any beneficiary.
An absolute assignment of this annuity contract will not make the assignee the new owner of the contract. We will not be bound by an assignment until written notice from the owner of the annuity contract is recorded in our home office.
No payment under this annuity contract may be accelerated, deferred, increased, or decreased, or anticipated, sold, assigned, or encumbered in any manner by the annuitant (or either joint annuitant) or any other recipient of the payment.
The beneficiary is as named in the application unless changed by the owner.
At the time of execution of the Settlement Agreement in July 1994 the debtor resided at Hendersonville, Davidson County, Tennessee. In August of 1995 she notified SAFECO of the change of her address from 1504 Williamsburg Drive, Hendersonville, Tennessee, an apartment, to 109 Jameston Place, Hendersonville, Tennessee, the location of a residence which she had purchased using a portion of her share of the lump sum payment she received pursuant to the Settlement Agreement.
In 1996 the debtor married Ricky Goins, the joint debtor in the bankruptcy case to which this adversary proceeding is related. After their marriage the debtor caused title to the residence in Hendersonville, Tennessee to be placed in their joint names..
In January, 1998 Ricky Goins obtained employment as a quality control engineer at the Tokico Manufacturing Company plant located near Berea, Madison County, Kentucky. Laura Ann Smith-Goins, and the couples' daughter, Amber Goins, born in 1997, moved to Berea, Kentucky in April of 1998. Their daughter, Rachel C. Smith, stayed with grandparents in Hendersonville, Tennessee a few weeks until the end of the school year, then joined the family at Berea.
Initially the family lived in a furnished rented apartment over a garage, while having a home built in Berea. The work on the new home had commenced in March of 1998, before the debtor and the children moved to Berea.
The residence in Hendersonville, Tennessee was listed for sale by the parties. Their furniture remained in the home in Hendersonville pending completion of the new home at Berea, Kentucky.
During this period the debtors experienced financial difficulties. They were making payments on the house in Hendersonville, on a $155,000 construction loan on the new home at Berea, plus rental payments on the apartment in which they were living.
They overspent in building the new home at Berea, and borrowed an additional $20,000 to $25,000 under the construction loan. When the house was completed they still owed $15,000 in construction bills. The bank holding the construction loan would not loan them additional monies to pay these bills.
The debtor, Laura Goins, saw a Wentworth TV commercial offering to purchase annuity payments such as she was receiving. She called her husband, Ricky, at work and gave him the telephone number displayed in the commercial.
Ricky Goins called the number and was informed Wentworth needed copies of the General Release of Claims and Settlement Agreement between Laura Goins and the defendants in the Florida litigation.
Someone at Wentworth called back and advised Ricky Goins of the number of annuity payments that would have to be paid to Wentworth in connection with the loan they were seeking.
Laura Goins was reluctant to enter into the proposed sale of annuity payments to Wentworth. She had been represented in the Florida litigation by the law firm of Senator Fred Thompson. She called the law firm and spoke to one of the attorneys involved in the Florida litigation. She was advised she could not sell the annuity payments; that she could not touch that money. Nevertheless, she was persuaded by Ricky Goins that selling the annuity payments was the only way they could get out of debt and save the new house they had moved into at Berea.
In a three-way telephone conversation between Laura Goins at home, Ricky Goins at work, and a representative of Wentworth, Laura Goins asked about the fact the General Release of Claims and Settlement Agreement provided she did not have the power to sell, mortgage, or encumber the annuity payments she was to receive under the agreement. The Wentworth representative did not respond directly to this inquiry.
In the first or second three-way telephone conversation the debtors informed the Wentworth representative they lived in Berea, Kentucky. The Wentworth representative told them that in order to make the agreement in the state of Kentucky they would have "to take it to court in front of a judge and get it okayed to do the transaction."
One of the debtors revealed in this conversation "[w]ell we have a home in Tennessee, we're not living in it but we have a home in Tennessee, just our belongings are sitting there." Rule 2004 exam of Laura Goins pg. 31. They were waiting on the movers to bring their "belongings" to Kentucky.
Laura Goins read the Wentworth representative the language of the Settlement Agreement "where it says do not sell, do not transfer and mortgage or encumber." The representative told her "this is not considered a sale...they just put that in there, don't worry about it."
They told the representative they would go ahead with the transaction. At her husband's urging Laura Goins agreed to borrow enough to pay off debts in addition to the amounts owed for work on the new house.
A Wentworth representative arranged an appointment for Laura Goins with William Cooper, an attorney in Knoxville, Tennessee. According to the testimony of Laura Goins the attorney "went over all the paperwork that J.G. Wentworth had sent him." The meeting with the attorney in Knoxville took place on September 11, 1998. On that date she signed the Purchase Agreement identifying Laura A. Smith-Goins as Seller and J.G. Wentworth as Buyer, providing "you now sell, transfer and assign to us all of your rights in the 'Assigned Assets.'" The purchase price was $45,500. In exchange, the debtor sold or assigned to Wentworth monthly and lump sum annuity payments aggregating in excess of $90,000 which she was entitled to receive from SAFECO as follows:
A) 9 monthly payments of $755.32 each, beginning on 10-27-98 and ending on 6-27-99, B) 75 monthly payments beginning at $777.98 each and increasing 3% annually beginning on 7-27-99 and ending on 9-27-05, C) 1 lump sum payment of $6,000.00 due on 6-1-99, D) 1 lump sum payment of $20,000.00 due on 6-1-2004.
Ricky Goins did not visit the Knoxville attorney's office with Laura Goins. His signature on the Purchase Agreement is dated September 15, 1998, although it appears to have been notarized by Mr. Cooper on September 11, 1998.
The Purchase Agreement lists the address of the debtors as 109 Jamestown Place, Hendersonville, Tennessee 37075, their former residence, which they had listed for sale. Paragraph 3h of the Purchase Agreement represented that Laura A. Smith-Goins had lived at this address the last one month.
The debtors had changed their mailing address to their new address at Berea, Kentucky. They had closed their bank account at Hendersonville and opened an account at Cumberland Valley National Bank, Berea, Kentucky. The $45,500.00 check from Wentworth was to be sent to Mr. Cooper's office in Knoxville. After expiration of the three-day cooling off period during which the Purchase Agreement could be rescinded, Mr. Cooper was to deduct his $300.00 fee and forward the proceeds to the debtors. They had given him their bank account number at the bank in Berea. Mrs. Goins could not remember whether the funds were forwarded to them by Mr. Cooper by wire transfer or check.
The Purchase Agreement is a contract of adhesion. The Agreement recites the transaction is not a loan or financing transaction; that if a court finds the sale was ineffective and created a loan and not a purchase and sale, the Agreement will serve as a security agreement under the U.C.C. whereby the debtor grants to Wentworth a first priority security interest in and lien on the assigned assets.
The agreement required Laura Goins to deliver to Wentworth a letter addressed to the annuity company directing that the assigned payments be sent to Wentworth.
Paragraph 3J of the Purchase Agreement provided that the debtor represented, by signing the agreement, that the agreement would not violate any promise or agreement she had made with anyone else. It is apparent that Wentworth, by reason of having been forwarded a copy of the General Release of Claims and Settlement Agreement, was fully informed otherwise and was not entitled to rely on this representation.
The Purchase Agreement cautioned the debtor that she might have to pay more taxes as a result of the agreement. She was advised in black letter type in several paragraphs of the agreement that any violation of her representations in the agreement would result in an act of fraud for which she could be held liable for damages.
The debtor was required to agree, despite the language of the Settlement Agreement and the Annuity Contract, not to claim, and to prevent any party from claiming, the assigned assets were not assignable.
The Purchase Agreement gave Wentworth the right to create and use a signature stamp from a specimen signature provided by the debtor to endorse annuity checks issued to the debtor.
The Purchase Agreement authorized confession of judgment against the debtor in favor of Wentworth by any attorney, prothonotary or clerk of any court of record in the Commonwealth of Pennsylvania following the occurrence of an event of default on the part of the debtor under the agreement. The debtor waived her right to a jury trial in respect to any litigation arising in connection with the agreement. It seems anomalous that a nonbusiness debtor who is not a resident of Pennsylvania can contract for entry without notice or hearing of a cognovit judgment by a court in that state.
Prior to the September 11, 1998 document signing session Laura A. Smith-Goins and Ricky L. Goins executed a Disclosure for Confession of Judgment acknowledging the Purchase Agreement between them and Wentworth contained a confession of judgment provision.
On September 11, 1998 Laura A. Goins executed a Special Irrevocable Power of Attorney in favor of J.G. Wentworth SSC Limited Partnership, a Delaware Limited Partnership, authorizing the partnership to assign and transfer ownership of payments covered by the Purchase Agreement, by endorsing and executing checks. The purchase agreement authorized Wentworth to institute, maintain, compromise, settle and terminate any litigation with respect to payments covered by the Purchase Agreement. The debtor also executed a Special Irrevocable Power of Attorney (for change of address only) authorizing the limited partnership to notify appropriate entities of a change in her personal address and authorizing the limited partnership to notify insurance companies and annuity companies to remit payments in her name to the new address.
On September 11, 1998 Laura A. Smith-Goins also executed UCC-1 Financing Statements to be filed as notice of Wentworth's security interest in the purchased payments.
On September 11, 1998 Laura Smith-Goins also signed a Disclosure Statement form acknowledging the transaction with Wentworth was a purchase and not a loan and that the effective discount rate for the transaction was 21%.
The debtor Laura Goins received the Wentworth loan proceeds which were deposited in the debtors' bank account at Cumberland Valley National Bank, Berea, Kentucky in September of 1998. The funds were used to pay the balance due contractors for work on the new home at Berea, and to pay other accumulated debts of the parties.
Laura Goins was under the impression the annuity payments she had assigned would be paid directly to Wentworth. When the October 27, 1998 check for $755.32 arrived in her mail in early November 1998 she called Wentworth's office and talked to Elana, a Wentworth employee. Elana gave the debtor the address in Philadelphia to which the checks were to be mailed. Then Elana arranged a three-way telephone conversation between herself, the debtor and Safeco. Elana remained silent while the debtor inquired whether Safeco had received the change of address notification of the Philadelphia address to which annuity checks were to be mailed. The person at Safeco stated the company had not received a change of address notification.
Wentworth arranged to have the October 27, 1998 check forwarded to the partnership's Philadelphia address by Federal Express.
When the November annuity check arrived at the debtor's home in December of 1998, she again contacted Elana at Wentworth. They did another three-way call to Safeco. As directed the debtor again inquired whether Safeco had received the change of address notification. The Safeco representative responded the company knew the debtor had sold her annuity payments. According to the testimony of the debtor, she made at least three unsuccessful attempts to accomplish a change of address notification whereby the annuity checks would be mailed directly to Wentworth's Philadelphia office.
Thereafter, the debtor, at the direction of John Simmons of Wentworth, FedExed the annuity checks to Wentworth as they were received until she received the check for the $15,000.00 lump sum payment due June 1, 1999, from which Wentworth was to receive a payment of $6,000.00. Rule 2004 exam of Laura Goins, pgs. 46-60. By this time the debtors were again experiencing financial difficulties. They were a month behind on their house payment. Ricky Goins had incurred a lot of credit card debt. He had purchased a boat; he had to have a new computer. They both had new vehicles. Ricky suggested they keep the annuity check.
Wentworth employees started calling about the check.
In late 1999 Ricky Goins lost his job at the Tokico USA, Inc. plant at Berea but found employment at Aisin Automotive Casting, at London, Kentucky. The new employer arranged for a mortgage company to take over the mortgage on the debtors' Berea home, as part of the employment process. By this time the debtors had sold their former home in Hendersonville, Tennessee. The debtors purchased a new home at 32 Elderbush Lane, London, Laurel County, Kentucky, which is where they resided when they filed their joint petition for relief under chapter 7 of the Bankruptcy Code in this court on October 10, 2000.
In the interim Wentworth had filed an action against the debtor Laura Goins in the Court of Common Pleas, Philadelphia, Pennsylvania Case No. 00-05998. See Statement of Financial Affairs to debtors' joint petition, Item 4a.
By amendment to the schedules to the bankruptcy petition the debtors listed the indebtedness to Wentworth as an unsecured claim in the amount of $87,248.72, apparently based on a confessed judgment, although the judgment is not part of the record before this court.
Wentworth timely filed a proof of claim as a secured claim in the amount of $79,838.57, apparently on the assumption Wentworth holds a security interest in the assigned annuity payments based on a UCC-1 Form filed with the Tennessee Secretary of State on October 14, 1998. The form lists the address of the debtor Laura A. Smith-Goins as 109 Jamestown Place, Hendersonville, Tennessee 37075. It is clear from the evidence Laura Goins had resided at Berea, Kentucky since March of 1998, a period of more than six months before this UCC-1 Form was filed, a fact of which Wentworth was fully aware.
In the schedules to the joint chapter 7 petition Laura Goins claimed an exemption in the amount of $250,000 pursuant to KRS 427.150(2)(f) in the annuity payments she is to receive from Safeco Insurance. This statute, which excepts certain pension benefits from claims of creditors, is not particularly applicable to the annuity benefits payable to the debtor under the structured settlement agreement entered into in settlement of the Florida litigation.
Since the commencement of their joint chapter 7 bankruptcy case on October 11, 2000, the debtors apparently separated in January of 2001. The debtor Laura A. Goins, was granted a divorce from Ricky Goins in April 2001. Her maiden name of Laura A. Vick was restored. She and her three children now live in an apartment in Hendersonville, Tennessee. Ricky Goins is required to pay support for two children born of their marriage. The debtor receives social security and veterans benefits for the older child born of her marriage to her deceased former husband Christopher Mark Smith.
Safeco Insurance Company has withheld payment of annuity benefits to the debtor since the summer of 1999 pending the outcome of litigation over ownership of the assigned annuity payments.
The trustee in bankruptcy and Wentworth have objected to the exemption claimed by Laura Goins as payee of the annuity payments under the Safeco annuity policy.
This adversary proceeding was initiated by Wentworth's complaint filed December 29, 2000. Wentworth seeks to except from discharge under title 11 U.S.C. § 523(a)(2)(A) as a debt for money obtained by false pretenses, false representations, or actual fraud the amount of assigned annuity payments which the debtor received and failed to remit to Wentworth. The complaint further requests a declaratory judgment finding Wentworth is the rightful owner of all of the assigned annuity payments, or in the alternative, that Wentworth holds a perfected security interest in the assigned annuity payments.
The matter is before the court on Wentworth's motion for partial summary judgment finding the amount of the annuity payments which the debtor failed to remit is a nondischargeable debt, finding Wentworth is the rightful owner of the assigned annuity payments, that the debtor is not entitled to an exemption in the assigned annuity payments, and that neither the debtor nor her bankruptcy estate has any interest in the annuity payments sold to Wentworth.
By her answer to the complaint the debtor Laura Goins asserts she is the owner of all the annuity payments and that she is entitled to an exemption in all future annuity payments. She denies Wentworth has an ownership interest in or a security interest in the assigned annuity payments.
By his intervening complaint, Maxie Higgason, the trustee of Laura Goins' bankruptcy estate, alleges the sale and transfer of the assigned annuity payments to Wentworth is voidable by the trustee under title 11 U.S.C. §544(b) and is preserved for the benefit of the estate by title 11 U.S.C. § 551. The trustee alleges the transfer is voidable by named unsecured creditors in whose shoes he stands because the sale or transfer was not approved by the state circuit court as required by KRS 454.430 through 454.435 and because the sale was fraudulent under KRS 378.010, 378.020 as a transfer made with intent to hinder, delay or defraud creditors or, in the alternative, is constructively fraudulent because of the inadequacy of the consideration.
CONCLUSIONS OF LAW:
This matter might be viewed as a conflict of laws can of worms. The General Release of Claims and Settlement Agreement provides the agreement is to be construed and interpreted in accordance with the laws of the State of Florida. The Safeco Annuity Contract issued by Safeco Life Insurance Company provides it is to be construed in accordance with the laws of the state in which the owner resides at the time of the application. The owner of the annuity contract is Safeco Assigned Benefits Service Company. Both Safeco Life Insurance Company and Safeco Assigned Benefits Company are residents of Redmond, Washington. The annuitant Laura Ann Smith-Goins resided in Kentucky at the time she sold structured settlement annuity payments to Wentworth. Wentworth is a corporation organized under the laws of the State of Pennsylvania with its principal place of business at 300 Delaware Avenue, Suite 1704, Wilmington, Delaware. Apparently Wentworth is the general partner of the plaintiff J.C. Wentworth SSC, Limited Partnership, which maintains offices in Philadelphia, Pennsylvania. The Purchase Agreement pursuant to which the limited partnership purchased the annuity payments from Laura Ann Smith provides the agreement is to be governed, construed and enforced in accordance with the internal laws of the State of New Jersey.
As previously noted in the court's Findings of Fact, the Purchase Agreement authorizes functionaries acting pursuant to the power of attorney granted to the limited partnership by the debtor to confess judgment against the debtor in any court of record of the Commonwealth of Pennsylvania.
I
The court concludes the defendant debtor Laura A. Smith-Goins was domiciled in Kentucky at the time she sold the identified structured settlement annuity payments to J.G. Wentworth SSC Limited Partnership. Thus, she is protected by the provisions of KRS 454.430 to 454.455 which require judicial approval of a transfer of structured settlement rights of an annuitant "domiciled" in Kentucky, on application of the payee to the circuit court of the county in which the applicant resides.
The defendant debtor's husband had taken a job at a manufacturing plant at Berea, Madison County, Kentucky in January of 1998. She joined him in April of 1998. They lived in a rented furnished apartment while having a new home constructed at Berea, Kentucky. They listed their former home at Hendersonville, Tennessee for sale.
The husband had lived in Kentucky approximately nine months and the debtor, Laura Ann Smith-Goins, had lived in Kentucky approximately six months at the time she entered into the sale of certain of her structured settlement rights to Wentworth. According to the testimony of Laura A. Smith-Goins she had no intention of returning to Tennessee to live at the time she entered into the transaction with Wentworth. Rule 2004 exam of Laura Goins, pg. 31. Subsequently, when Ricky Goins lost his job at the plant at Berea, he found new employment at a plant at London, Kentucky. His new employer arranged for a mortgage company to take over the payments on the house at Berea. The parties purchased a new home at London, Kentucky, where they lived at the time of commencement of their bankruptcy proceeding. They had been domiciled in Kentucky approximately two years when they filed their joint petition for relief under chapter 7 of the Bankruptcy Code on October 11, 2000. They indicated on the petition they were domiciled in this judicial district. Subsequent to bankruptcy they separated in January 2001 and were divorced in April of 2001. The court cannot discern from the record whether the divorce was obtained in Kentucky or Tennessee. Subsequent to bankruptcy the defendant debtor Laura A. Smith-Goins returned to Hendersonville, Tennessee and is living in an apartment there. Apparently her parents live in Hendersonville. However, at the time of the sale of her structured settlement rights to Wentworth she was domiciled in Kentucky. Her return to Hendersonville, Tennessee was prompted by changed circumstances not within her contemplation at the time of the transaction with Wentworth.
II
An overriding issue is whether the antialienation provisions of the General Release of Claims and Settlement Agreement, the Uniform Qualified Assignment and Release (2), and the Safeco Annuity Contract precluded sale or assignment of the identified structured settlement payments by the debtor to J.G. Wentworth SSC Limited Partnership.
The defendant, Laura A. Smith-Goins, was domiciled in Kentucky at the time she sold the identified structured settlement annuity payments to Wentworth. The transfer of the structured settlement payment rights was subject to the provisions of KRS 454.430-454.435, the pertinent provisions of which are as follows:
No transfer of structured settlement payment rights [by a payee
domiciled in this state] shall be effective and no structured settle-
ment obligor or annuity issuer shall be required to make any pay-
ment directly or indirectly to any transferee of structured settlement
payment rights unless the transfer has been approved in advance
by an order of a court of competent jurisdiction [the Circuit Court
of the county where the applicant resides], based on the court's
express findings that:
(1) The transfer complies with the requirements of KRS
454.430 to 454.435 and does not contravene other
applicable law.
KRS 454.431 (3)
The Circuit Court is required to make several other pertinent findings as well.
Other applicable law within the meaning of that phrase as used in 454.431(1) includes KRS 304.14-330(2), which states:
(2) If [an annuity] contract so provides, the benefits, rights,
privileges or options occurring under the contract to a bene-
ficiary or assignee shall not be transferrable or subject to
commutation....
See also KRS 304.14-250(1).
In view of the fact the Settlement Agreement and annuity contract precluded transfer of payments the debtor is entitled to receive, a state court would have been unable to approve the transfer of the debtor's structured settlement payment rights in this instance.
The sections of the Kentucky Revised Statutes requiring prior judicial approval to effectuate a sale of structured settlement payment rights appear in chapter 454 entitled Miscellaneous Practice Provisions. This is a procedural matter governed by the law of the forum. It is settled law that contractual choice-of-law clauses incorporate only substantive law. Procedural matters remain governed by the law of the forum. Wallace Hardware Company, Inc. v. Abrams, 223 F.3rd 282, 396 (6th Cir., 2000); Cole v. Mileli, 133 F.3rd 433, 437 (6th Cir., 1998).
This court finds "other applicable law" includes not only KRS 304.14-330, but also encompasses Restatement (Second) of Contracts section 317 dealing with assignment of rights and section 322 dealing with prohibition of assignment of contract rights.
Section 317(2) Restatement (second) of Contracts provides:
A contractual right can be assigned unless:
(a) the substitution of the right of the assignor would materially
change the duty of the obligor, or materially increase the burden
of risk imposed on him by the contract, or materially impair his
chance of obtaining return performance, or materially reduce its
value to him, or
(b) the assignment is forbidden by statute or is otherwise
inoperative on grounds of public policy, or
(c) the assignment is validly precluded by contract.
Section 589(d) of the Victims of Terrorism Tax Relief Act of 2001, Pub.L. 107-134, Jan. 23, 2002, 25 U.S.C. §5891(d) provides a safe harbor from tax liability for the assignee of a qualified assignment under section 130 of the Internal Revenue Code in a structured settlement agreement entered into during the period beginning 30 days after the enactment of the foregoing Act and July 1, 2002, and thereafter with respect to structured settlements that comply with the Act. The Act does not appear to offer tax relief certainty to assignees of a qualified assignment under IRS §130 entered into in connection with a structured settlement agreement made prior to the effective date of the Act.
Uncertainty with respect to the IRS position on the issue of whether the sale of structured settlement rights results in the loss of favorable tax treatment accorded the assignee of a qualified assignment under IRS §130 has persuaded a number of courts that the sale of structured settlement rights by the beneficiary of such rights is precluded by Section 317(2)(a) of the Restatement (Second) of Contracts. Liberty Life Assurance Company of Boston, et al. V. Stone Street Capital, Inc., et al., 93 F.Supp. 2d 630 (D. Md. 2000); Grieve v. General American Life Insurance Company, et al., 58 F.Supp. 391 (D. Vt. 1999); Johnson v. First Colony Life Insurance Company, 26 F. Supp.2d 1227 (C.D. Cal. 1998); CVG Life Insurance Company, et al. v. Singer Asset Finance Company LLC et al., 553 S.E. 2d 8 (Ga. App. 2001); Henderson v. Roadway Express, et al. 720 N.E. 2d, 1108 (Ill. App. 1999). These courts were persuaded that sale of structured settlement rights by the annuitant beneficiary materially increased the burden of risk of adverse tax consequences of the assignee under a qualified assignment and materially reduced the value of the funding contract (the annuity contract) owned by the obligor/assignee. Some courts were not convinced of the materiality of such risks. Wonsey v. Life Insurance Company of North America, 32 F. Supp.2d 939 (E.D. Mich. 1998); Rubin v. Utica Mutual Insurance Co., et al., 757 A.2d 526 (Conn. S. Ct. 2000).
In the case before the court, the assignee, SAFECO Assigned Benefits Service Company, although named as a defendant in the trustee's Second Amended Complaint filed January 11, 2002 (Doc. No. 58), has not entered an appearance in this adversary proceeding. Thus, the issue of whether the sale by the debtor of her structured settlement payment rights jeopardized deductibility of the annuity payments made to the debtor as business expenses of SAFECO Assigned Benefits Service Company is not before the court.
Restatement (Second) of Contracts §317(b) and (c) prohibit assignment if the assignment is forbidden by statute, is inoperative on grounds of public policy, or is validly precluded by contract, all of which factors appear to be present in this case. The Release of Claims and Settlement Agreement and the annuity contract unambiguously provide that the annuity payments may not be sold, assigned, or enumbered by the debtor.
Kentucky statutes forbid the transfer of annuity payments by the recipient if the annuity contract so provides. KRS 304.14-330. A Kentucky statutes renders ineffective a sale of structured settlement payments entered into without prior court approval. KRS 454.431.
At a minimum, the latter statute renders a sale of structured settlement payment rights without prior court approval inoperative on grounds of public policy. These conclusions are reinforced by the decision in Wentworth v. Jones 28 S.W. 3rd 509 (Ky. App. 2000).
Presently 35 states have enacted laws requiring prior judicial or administrative authority approval of a transfer of structured settlement rights. These states are Arizona, California, Delaware, Florida, Georgia, Idaho, Illinois, Iowa, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia and West Virginia. See Exhibit A to this opinion.
All the states referred to in the contractual agreements at issue in this matter - Delaware, Florida, Kentucky, New Jersey, Pennsylvania, Tennessee and Washington - have now enacted laws requiring prior approval by a designated court of law or administrative agency of any sale of structured settlement payments rights. (4)
Moreover, as part of the Victims of Terrorism Relief Act of 2001, Congress has imposed a tax equal to 40 percent of the factoring discount on any person who acquires directly or indirectly structured settlement payment rights in a structured settlement factoring transaction unless the transfer of structured settlement rights is approved in advance by court order. Pub.L. 107-134, Jan. 23, 2002, 26 U.S.C. §5891. The purpose of this enactment is to discourage sale of a tort victim's structured settlement payment rights. A House Ways and Means Subcommittee on oversight briefing paper dated March 16, 1999, describes the sale of structures settlement payment rights as a "moral hazard" when costs covered by the structured settlement payment stream are thrust upon the taxpaying public.
The sale of the debtor's structured settlement rights under the circumstances presented in this case was contrary to the public policy of Kentucky, and perhaps public policy in general.
The Wentworth operatives who arranged the transaction with the debtor, Laura A. Smith-Goins, were aware of the Kentucky law requiring prior judicial approval of the sale of debtor's structured settlement rights. They arranged for the transaction to be concluded in Tennessee by an attorney of their choosing. They knew the debtor no longer resided in Tennessee. She was not represented by independent counsel of her own choosing. Wentworth cannot legitimately claim it was deceived by actions of the debtor which Wentworth orchestrated to avoid the applicability of the Kentucky statute requiring prior judicial approval of such a sale. A comparable Tennessee statute did not take effect until June 23, 2000.
The Purchase Agreement between Wentworth and the debtor is ineffective and for the reasons indicated by the court shall be set aside. The suspended and future annuity payments which have not been remitted to the debtor are not property of Wentworth.
III
The debtor was not domiciled in Tennessee when Wentworth filed the UCC-1 form with the Office of the Tennessee Secretary of State on October 14, 1998. Wentworth does not hold a perfected security interest in the unremitted annuity payments and is not a secured creditor with respect to such payments. Moreover, Article 9 of the Uniform Commercial Code is inapplicable. Courts have offered three major alternative rationales to support this proposition: (1) that such payments rights are not "accounts"; (2) that even if payment rights are deemed to be account, they are in the nature of an interest in an insurance policy; and (3) in any event, they arise out of a tort claim. Any one of these rationales is reasonable and alone is a sufficient basis for this conclusion. See Crespi; Selling Structured Settlements: The Uncertain Effect of Anti-Assignment Clauses, 28 Pepperdine Law Review, 1787, 792-794 (2000). The pertinent provisions of the U.C.C. as noted in this article are U.C.C. §§9-102(1), 9-102(1)(b), 9-104(g), 9-104(k), and 9-106.
IV
The next issue to be addressed by the court is whether the structured settlement payment rights (the annuity payments the debtor is entitled to receive) are property of the debtors' bankruptcy estate.
Title 11 U.S.C. §541(a) and (c)(1) sweep into the bankruptcy estate all legal or equitable interests of the debtor in property, except as provided in subsection (b), which is not relevant, and in (c)(2), on which hinges the question of whether the annuity payments are excluded from the bankruptcy estate and thus remain property of the debtor.
Title 11 U.S.C. §541(c)(2) provides -
(2) a restriction on the transfer of a beneficial interest of the
debtor in a trust that is enforceable under applicable nonbankruptcy
law is enforceable in a case under this title. (Underscoring supplied.)
In Patterson v. Shumate, 112 S.Ct. 2242, 504 U.S. 723, 119 L.Ed.2d 519 (1992), the Supreme Court held the antialienation provision contained in an ERISA-qualified plan constituted a restriction on transfer enforceable under "applicable nonbankruptcy law," and accordingly a debtor may exclude his interest in such a plan from property of the bankruptcy estate. The court stated "The natural reading of [§541(c)(2)] entitles a debtor to exclude from property of the estate any interest in a plan or trust that contains a transfer restriction enforceable under any relevant nonbankruptcy law."
The decision resolved a split among the Circuit Courts of Appeals. A number of those courts and bankruptcy courts, relying on legislative history, had concluded §541(c)(2) entitled a debtor to exclude from the bankruptcy estate only the debtor's interest in a spendthrift trust containing restrictions on alienation enforceable under applicable state law. The Supreme court rejected this limited interpretation, holding the phrase "applicable nonbankruptcy law" encompasses any applicable nonbankruptcy law, including federal statutory law. The court also recognized that the phrase "a trust" includes an employee pension plan established in conformity with ERISA.
The forerunner of the Periodic Payment Settlement Act of 1982 was introduced in the Senate by Senator Baucus on December 10, 1981. The purpose of the Act was to facilitate structured settlements. According to Senator Baucus, lump sum settlements assume the injured parties will wisely manage large sums of money when in fact many such litigants dissipate their awards in a few years and are then left without means of support.
Senator Baucus stated:
Periodic payments...provide plaintiffs with a steady income
over a long period of time and insulate them from pressure to
squander their awards. Because of these advantages, so-called
structured settlements or periodic payment settlements are be-
coming nearly the norm in large personal injury cases, and prob-
ably will replace the lump sum form of settlement because of the
obvious tax advantage to all of the parties - namely increased
benefits to plaintiffs and reduced costs for the casualty insurers.
Typically, periodic payment settlements are accomplished
by a three-party arrangement involving the plaintiffs and the
defendants and the services of a third-party trustee who receives
funds from the defendant and makes agreed payments to the
plaintiff. The advantages of such system to the parties is clear.
What remains unclear, however, is how the periodic payments
are treated for tax purposes. (Underscoring supplied.)
Cong. Rec. - Senate, December 10, 1981, pg. 30462-53.
Senator Baucus characterization of the third-party assignee as a trustee indicates he envisioned a structured settlement periodic payment plan as a trust. Senator Baucus' bill was intended to make clear that the periodic payments in settlement of personal injury damage awards are not subject to taxation and that the third-party assignee/trustee is entitled to deduct payments made to the plaintiff as a business expense.
Ultimately, this legislation was enacted into law on January 14, 1983, under the short title Periodic Payments Settlement Act of 1982, as part of Public Law 97-473, Title I, §101(a), 96 Stat. 2605. The bill codified IRS rulings that IRS §104 which excludes from gross income payments for damages for personal injury or sickness, applies whether the damage claim is paid in a lump sum or in periodic payments.
Periodic payments are excludable from income only if the recipient taxpayer is not in constructive receipt of or does not have the current economic benefit of the sum required to provide the periodic payments. See Rev. Rul. 79-220 and 77-230.
This enactment added present section 130 to the Internal Revenue Code thereby formalizing the practice of making an assignment to a third-party trustee that agrees to accept liability for a damage award, to make periodic payments in satisfaction of the damage award, and to fund the periodic payments by purchasing an annuity contract from a licensed life insurance company. Any amount received by the assignee for the purchase of an annuity is excludable from the gross income of the assignee to the extent it is used to purchase an annuity to fund the periodic payments.
Internal Revenue Code §130 specifies the periodic payments must be fixed and determinable as to the amount and time of payment and that the periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient. The assignee must be subject to the same rights and liabilities as the person who assigned the liability, and the periodic payments must be excluable from gross income by the recipient as damages for personal injury or sickness under IRS §104(a)(2). See Senate Report No. 97-646, Oct. 1, 1982; Internal Revenue Code, §§104 (a)(2) and 130.
Section 130 of the Internal Revenue Code does not mandate that a "qualified assignment" or a "qualified funding asset" include language prohibiting sale or assignment of periodic payments by the recipient, nor does the statute forbid inclusion of such antialienation provisions in a qualified assignment agreement or in the annuity contract constituting the qualified funding asset.
In this instance, the third-party assignee, SAFECO Assigned Benefits Service Company, obtained the qualified funding asset, the annuity contract, from SAFECO Life Insurance Company. SAFECO Assigned Benefits Service Company assumed liability for the damage award in favor of the debtor and the obligation to see the periodic payments in satisfaction of the award were made through purchase of the annuity. SAFECO Life Insurance Company guaranteed the fulfillment of SAFECO Assigned Benefits Service Company's obligation to make the payments. The guarantee of SAFECO Life Insurance Company is in the nature of a bond. The annuity contract, the qualified funding asset, is owned and held in trust by SAFECO Assigned Benefits Service Company. The latter may be a shadow trustee, but nevertheless is a trustee.
The court concludes this funding arrangement qualifies as "a trust" within the meaning of Title 11 U.S.C. §541(c)(2). The elements of a trust are (1) a beneficiary, (2) a trustee, and (3) trust property. All three of these elements appear to be present in a structured settlement payment plan arrangement. The fact the assignee under a structured settlement agreement can delegate the assumed obligation to pay the debtor's damage claim by purchase of an annuity policy which the assignee holds in trust does not compel the conclusion the assignee is no longer a trustee.
The restrictions on transfer by the debtor of her right to the periodic payments as set out in the Release of claims and Settlement Agreement and Annuity Contract are enforceable under applicable nonbankruptcy law.
The unambiguous antialienation provisions of the Release of Claims and Settlement Agreement and the Annuity Contract are enforceable under Florida law and the law of the state of Washington. Troup v. Meyer, 116 So.2d 647 (1959); Brunswick Corp. v. Creel, 471 So. 2d 617 (1985); Hall v. O'Neil Turpentine Co., 47 So. 609 (Fla.S.Ct. 1908); Levinson v. Linderman, 322 P.2d 863 (1958); Terra Firma Development co. v. Duce, 85 Wash. App. 1056 (1997); Portland Electric and Plumbing Company v. City of Vancouver, 29 Wash.App. 292, 627 P.2d 1350 (1981).
Less stringent antialienation provisions are enforceable under Kentucky law. Wentworth v. Jones, 28 S.W.3rd, 309 (Ky. App.2000).
The Middle District of Florida Bankruptcy Court cases upholding pre-bankruptcy assignments of structured settlement payment rights are readily distinguishable.
The alleged prohibition of assignment was not introduced into evidence in In re Freeman, 232 B.R. 497 (Bkrtcy. M.D. Fla. 1999). The case was decided based on the assumption there was no prohibition of assignment.
In In re Bergman, 235 B.R. 683 (Bkrtcy. M.D. Fla., 1999), the National Railroad Annuity Contract did not specifically prohibit assignment of structured settlement payment rights by the annuitant.
Accordingly, in each of these cases, the court held the annuity payments sold by the debtors prior to bankruptcy were not property of their bankruptcy estates.
Western United Life Assurance Co. v. Hayden, 64 F.3rd 833 (3rd Cir., 1999) likewise is distinguishable. In that case, neither the settlement agreement nor the annuity contract proscribed assignment of annuity payments by the annuitant. The court declined to infer a proscription on assignment from ambiguous provisions of these two documents. The court upheld the validity of an assignment of annuity rights executed by the debtor prior to filing for relief under chapter 13. The court excluded the previously sold annuity payments as a source of funding the debtor's chapter 13 plan.
In In re Sloma, 43 F. 3rd 637 (11th Cir., 1995), the court relied on Guidry v. Sheet Metal Workers' National Pension Fund, 39 F.3rd 1078 (10th Cir., 1994), which was reversed by the Supreme Court. See Guidry v. Sheet Metal Workers National Pension Fund, 493 U.S. 365, 110 S. Ct. 680, 107 L.Ed. 2d 782 (1990).
These cases do not offer guidance in deciding the case before the court wherein both the Settlement Agreement and Annuity Contract contain language which unambiguously precludes assignment of the debtor's structured settlement payment rights.
V
The court rejects the Trustee's argument that the debtor's structured settlement payment rights are reachable by creditors because the settlement amounts to a trust created by the debtor with her own money for her own benefit. The Release of Claims and Settlement Agreement recites the defendants deny any liability to the debtor. See page 4 of Settlement Agreement. The defendants and their insurer agreed to a structured settlement as a means of reducing their up-front outlay in settlement of litigation. The defendant's insurer, not the debtor, deposited the settlement monies with SAFECO Assigned Benefits Service Company for the purchase of the annuity contract pursuant to which the annuity payments are to be made. The debtor agreed to this arrangement but did not have and does not have access to the settlement monies other than through the periodic payments provided for by the Settlement Agreement and the Annuity Contract. The arrangement was made in conformity with federal statutory law designed to protect personal injury claimants from squandering settlement proceeds. Viewing the debtor as the settlor of this trust would undercut the purpose of federal law encouraging this form of settlement in personal injury tort cases.
To the extent Kentucky's spendthrift trust statute might be applicable, the court notes the statute does not require any specific language to create such a trust; it is sufficient the instrument manifest an intention to create a spendthrift trust. KRS 381.180.
The structured settlement agreement in this instance manifests an intention by the parties to create a trust with antialienation provisions intended to protect the debtor by denying the debtor and creditors access to the annuity payments in advance of the programmatic distributions to the debtor.
Accordingly, for the reasons indicated, the court concludes the structured settlement agreement is not a trust established by the debtor for her own benefit.
VI
The previous conclusion that the debtor's structured settlement rights are not property of her bankruptcy estate renders moot the question of the extent of the debtor's exemption in the identified annuity payments covered by the Wentworth Purchase Agreement as well as other future payments she is entitled to receive.
The exemption issue will arise only if an appellant court concludes that SAFECO Assigned Benefit Service Company, as assignee of a "qualified assignment," does not hold the "qualified funding asset," the annuity policy, in trust, and therefor the typical structured settlement such as is involved in this case does not create "a trust" within the meaning of that phrase as used in Bankruptcy Code §541(c)(2).
Title 11 U.S.C.§522(b)(2) directs that the debtor's exemption rights are to be determined by the law of the state of the debtor's domicile on the date of the filing of the petition for relief under the Bankruptcy Code.
The General Release of Claims and Settlement Agreement provides it is to be construed and interpreted in accordance with the laws of the State of Florida. Were the debtor a citizen or resident of Florida, the annuity payments she is entitled to receive would be totally exempt from the claims of creditors. In re McCollam, 955 F.2d 678 (11th Cir., 1982), 986 F.2d 436 (11th Cir., 1983). However, it seems unlikely a debtor who is not a resident of Florida can contract to have her exemption rights determined by the law of that state.
The applicable Kentucky exemption statutes are as follows:
304.14-330. Exemption of proceeds, annuity contract -
Assignability of rights.
(1) The benefits, rights, privileges and options which under any
annuity contract heretofore or hereafter issued are due or
prospectively due the annuitant, shall not be subject to execu-
tion nor shall the annuitant be compelled to exercise any
such rights, powers, or options, nor shall creditors be allowed
to interfere with or terminate the contract, except:
(a) ...
(b) The total exemption of benefits presently due and payable
to any annuitant periodically or at stated times under all
annuity contracts under which he is an annuitant, shall not
at any time exceed $350 per month for the length of time
represented by such installments, and that such periodic
payments in excess of $350 per month shall be subject to
garnishee execution to the same extent as are wages and
salaries.
(c) If the total benefits presently due and payable to any
annuitant under all annuity contracts under which he is
an annuitant, shall at any time exceed payment at the rate
of $350 per month, then the court may order such annuitant
to pay to a judgment creditor or apply on the judgment, in
Installments, such portion of such excess benefits as to
the court may appear just and proper, after due regard
for the reasonable requirements of the judgment debtor
and his family, if dependent upon him, as well as any
payments required to be made by the annuitant to other
creditors under prior court orders.
(2) If the contract so provides, the benefits, rights, privileges or
options accruing under such contract to a beneficiary or
assignee shall not be transferable not subject to commuta-
tion, and if the benefits are payable periodically or at
stated times, the same exemptions and exceptions con-
tained herein for the annuitant, shall apply with respect to
such beneficiary or assignee. (5)
(3) An annuity contract within the meaning of this section shall
be any obligation to pay sums at stated times, during life or
lives, or for a specified term or terms, issued for a valuable
consideration, regardless of whether or not such sums are
payable to one (1) or more persons, jointly or otherwise, but
does not include payments under life insurance contracts
at stated times during life or lives, or for a specified term or
terms.
(Enact. Acts 1970, ch. 301, subtitle 14, §33.)
In Wentworth v. Jones, 28 S.W.3rd 309 (Ky. App. 2000), the court held that under KRS 304.14-330(a)(c), the trial court in its discretion may exempt the portion of annuity payments exceeding $350.00 per month, after due regard for reasonable requirements of the judgment debtor and his family. The trial court had exempted the entire amount of the annuity payments to which the debtor was entitled.
KRS 304.14-330(c) apparently would permit the court to take into account the effect of inflation on the $350.00 figure fixed by the state legislature in 1970, more than 30 years ago. In this sense, the statute governing exemption of annuities is not inconsistent with the other applicable exemption statutes as follows:
427.150. Property totally or partially exempt.
(1) To the extent reasonably necessary for the support of
an individual and his dependents in addition to property
totally exempt under subsection (2) of this section, that
individual shall be entitled to exemption of money or
property received and rights to receive money or prop-
erty for alimony, support, or separate maintenance.
(2) An individual shall be entitled to exemption of the follow-
ing property:
(a) ...
(b) A payment on account of the wrongful death of an
individual of whom the debtor was a dependent, to
the extent reasonably necessary for the support of
the debtor and any dependent of the debtor;
(c) ...
(d) A payment in compensation of loss of future earnings
of the debtor or an individual of whom the debtor is or
was a dependent, to the extent reasonably necessary
for the support of the debtor and any dependent of the
debtor;
(Enact. Acts. 1980, ch. 236 §8, effective April 9, 1980, ch. 220,
§2, effective July 13, 1990; 1998, ch. 376, §1, effective July 15,
1998.)
There is insufficient evidence in the record for the court to make a determination of the extent to which the debtor's interest in her structured settlement payment rights might be exempt. This issue may have to be revisited if the court's conclusion that the debtor's structured settlement payment rights are not property of the debtor's bankruptcy estate should be set aside.
VII
Wentworth invoked the jurisdiction of this court by filing a complaint seeking a determination of the dischargeability of a portion of its debt represented by annuity payments which the debtor failed to forward to Wentworth, by seeking a determination that it is the owner of or in the alternative holds a security interest in the identified annuity payments which it purchased. Wentworth alleges the unremitted identified annuity payments are not property of the debtor's bankruptcy estate, and Wentworth has objected to the debtor's claim of an exemption in the unremitted payments.
The bankruptcy court has exclusive jurisdiction of a complaint to except a debt from discharge under title 11 U.S.C. §523(a)(2). 11 U.S.C. §523(c)(1). The court has exclusive jurisdiction over property of the debtor and property of the estate. 28 U.S.C. §1334(c). Consequently, the court has jurisdiction to determine the interests of the parties to this action in the debtor's structured settlement payment rights.
VIII
Wentworth's reliance on the judgment of the First Judicial District of Pennsylvania Court of Common Pleas of Philadelphia County Trial Division attached as an exhibit to counsel's Memorandum of Law filed October 31, 2001 [Doc. No. 37] and to counsel's Brief in Support of Wentworth's Objections to Debtor's Claim of Exemptions filed February 21, 2001 in the debtors' joint bankruptcy case [Doc. No. 18] is misplaced.
The Opinion in that case styled In re Wentworth Litigation, September Term, 2000, Master Docket No. 0001, recites in paragraph 12 that Wentworth obtained judgments against the individual defendants in these cases between September, 1996 and September, 1998, and issued attachments or garnishments against SAFECO.
Laura A. Smith-Goins did not enter into a structured settlement agreement with Wentworth until September 11, 1998. The debtor forwarded annuity payments to Wentworth until arrival of the $15,000 lump sum payment due June 1, 1999. Wentworth did not file an action against the debtor until the year 2000. There is no evidence in the record of a garnishment having been issued against SAFECO in Wentworth's action against the debtor. Obviously, she was not an individual defendant in the case styled Master Docket No. 0001. Moreover, the judgment was entered in that case on December 28, 2000, well after the filing of the debtors' joint bankruptcy petition on October 10, 2000, at which time this court acquired jurisdiction of all interests of the debtors in their property. Such judgment, if it affected Laura Going, would have been entered in violation of the automatic stay and would be voidable as to the interest of Laura A. Smith-Going in the annuity payments in question. The decision in this Pennsylvania case, grounded in laches, based on the failure of SAFECO to timely question garnishments of payments of the debtors named in that action, is of no consequence to the decision of the court in this case.
IX
Wentworth contends that by virtue of the representations she made in paragraphs 5(e) and 10 of the Wentworth Purchase Agreement, the debtor waived her right to contest the validity of the sale and assignment of the identified structured settlement annuity payments to Wentworth, which prepetition waiver would be binding on the trustee.
The court has determined the contract in its entirety is ineffective because it was entered into without the judicial scrutiny required by KRS 454.430-454.435. This statute and the similar state and federal statutes are designed to protect a debtor from an improvident sale of structured settlement payment rights. Because the agreement in its entirety is ineffective, the waiver of rights provisions are likewise ineffective.
In Swarb v. Lennox, 92 S.Ct. 767, 405 U.S. 191, 31 L.Ed. 2d 139 (1972) and the companion case, D.H. Overmyer Co., Inc. of Ohio v. Frick Company, 92 S.Ct. 775, 405 U.S. 174, 31 L.Ed.2d 124 (1972) the Supreme Court recognized that due process may require a hearing before entry of judgment on a contract of adhesion where there is great disparity in bargaining power, and where the debtor receives nothing for the cognovit provision in the contract. Statutes requiring judicial approval of any sale of structured settlement payment rights are consistent with this observation of the Supreme Court, because, as evidenced by the purchase agreement in this case, such agreements often are grossly over-reaching, are harmful to debtors and society if an improvident sale results in the debtor becoming a ward of the state supported by taxpayers.
Kentucky has outlawed use of a power-of-attorney to confess judgment. KRS 372.140. It seems unlikely the Kentucky courts would accord full faith and credit to a cognovit judgment on a contract of adhesion.
X
Title 11 U.S.C. §551 automatically preserves for the benefit of the estate any transfer avoided under section 544 of title 11 but only with respect to property of the estate. (Underscoring supplied.)
The trustee's avoidance actions under §544(b) utilizing KRS 454.030 - 454.035 and KRS 378.010 - 378.030, as incorporated by reference in §544(b), insofar as these actions seek to avoid undistributed annuity payments (those sold and not sold) for the benefit of the estate appear to be an exercise in futility. The court has determined these payments are held in trust and are not property of the estate.
The debtor received and remitted to Wentworth several monthly annuity payments of $755.32. The total amount remitted to Wentworth was between $6,000 and $7,000, for which the debtor received $45,500. There is no evidence these payments were made with actual intent to hinder, delay or defraud creditors. The debtor received from Wentworth $45,500. She has repaid $6,000 or $7,000. There is no factual basis to support a finding of constructive fraud.
The trustee cannot accomplish indirectly through bankruptcy that which creditors cannot accomplish directly absent bankruptcy.
Because the structured settlement agreement created a trust with antialienation provisions enforceable under applicable nonbankruptcy law, the avoidance of the Purchase Agreement by the trustee would not result in preservation of the debtor's structured settlement rights for the benefit of the bankruptcy estate, and creditors in general.
On the facts of this case, the nullification of the Wentworth purchase agreement preserves the structured settlement rights for the debtor. Wentworth must suffer the consequences of its nefarious overreaching and circumvention of applicable state law.
Dated:
By the Court -
JUDGE
Copies to:
R. Gregory Lathram, Esq.
John O. Morgan, Jr., Esq.
Chrisandrea Turner Ingram, Esq.
Maxie E. Higgason, Esq.
William J. Clarke, Esq.
William J. Becket, Esq.
John P. Reisz, Esq.
Mary L. Fullington, Esq.
Thomas G. Rohback, Esq.
1. Some case law makes a distinction between a limitation on an annuitant's "right" to assign and "power" to assign payments. Ramblin v. Utica Mutual Ins. Co.; 757 A 2d 526 (2000). In the present case, the "power" to sell the annuity payments is withheld from the annuitant.
2. The Uniform Qualified Assignment and Release says it is subject to the conditions of Section 130(c) of the Internal Revenue Code which provides "periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments."
3. In a case involving structured settlement payment rights sold by the payee before the July 15, 1998 effective date of the foregoing statute, the Kentucky Court of Appeals sustained a trial court's finding that such rights were not assignable by the payee. Wentworth v. Jones, 18 S.W. 3rd 309 (Ky. App. 2000).
4. 10 Del. C. §6601; F. S.A. §626.99276; N.J. S.A. 24A:16-63; 40 P.S. §§4001-4009; T.C.A. §47-18-2603-2607; R.C.W.A. 19.205.010-060
5. Under KRS 427.010, a maximum of 25 percent of wages and likewise 25 percent of the debtor's annuity payments would be subject to sequestration by garnishment.