Leonard D. Bronk v. John M. Cirilli

In the

United States Court of Appeals

For the Seventh Circuit

Nos. 13-1123 & 13-1516

IN RE: LEONARD D. BRONK,

Debtor.

JOHN M. CIRILLI, Trustee,

Plaintiff-Appellee/Cross-Appellant,

v.

LEONARD D. BRONK,

Defendant-Appellant/Cross-Appellee.

Appeals from the United States District Court

for the Western District of Wisconsin.

No. 11-cv-172-wmc — William M. Conley, Chief Judge.

ARGUED SEPTEMBER 19, 2013 — DECIDED JANUARY 5, 2015

Before MANION, KANNE, and SYKES, Circuit Judges.

SYKES, Circuit Judge. This bankruptcy appeal raises two

questions of first impression under a Wisconsin statute that

permits resident debtors to shield certain property from

execution by creditors. See generally 11 U.S.C. § 522(b); WIS.

2 Nos. 13-1123 & 13-1516

STAT. § 815.18. The first question concerns the scope of the

statutory exemption for state-qualified college savings ac-

counts. See WIS. STAT. § 815.18(3)(p) (exempting “[a]n interest

in a college savings account under s. 16.641”). The bankruptcy

judge read the statute narrowly to cover only the interest of

account beneficiaries, not account owners, and refused to allow

the debtor to exempt from his bankruptcy estate five college

savings accounts he had established for the benefit of his

grandchildren. The district court affirmed this ruling, and the

debtor appeals this aspect of the judgment.

Wisconsin’s exemption statute also protects certain retire-

ment benefits, see id. § 815.18(3)(j), as well as life-insurance and

annuity contracts, see id. § 815.18(3)(f). But the exemption for

life insurance and annuities is limited to $4,000 if the contract

in question was issued less than 24 months before the exemp-

tion is claimed. Id. § 815.18(3)(f)3. The debtor purchased an

annuity just a few months before filing his bankruptcy petition

and claimed a full exemption for it under section 815.18(3)(j).

The Chapter 7 trustee argued that the annuity didn’t qualify as

a “retirement benefit” under section 815.18(3)(j) and the debtor

could claim only the $4,000 exemption allowed under

section 815.18(3)(f)3. The bankruptcy judge rejected the

trustee’s argument, classified the annuity as a retirement

benefit, and allowed the exemption in full. The district court

affirmed, and the trustee cross-appeals this aspect of the

judgment.

We reverse in part and affirm in part. The college savings

accounts are exempt from execution under section 815.18(3)(p).

Account owners, not just account beneficiaries, may claim this

Nos. 13-1123 & 13-1516 3

exemption, and the lower courts erred in disallowing it here.

As for the annuity, the contract in question satisfies the basic

definition of an exempt “retirement benefit” under

section 815.18(3)(j)1, which broadly includes “[a]ssets held or

amounts payable under any … annuity … or similar plan or

contract providing benefits by reason of age, illness, disability,

death, or length of service.” The debtor’s annuity provides a

death benefit, so the lower courts properly allowed him to

exempt it in full under section 815.18(3)(j).

We note, however, that to qualify as a fully exempt retire-

ment benefit under section 815.18(3)(j), the plan or contract in

question must be either employer sponsored or comply with

the Internal Revenue Code. See § 815.18(3)(j)2. The annuity

clearly is not employer sponsored; whether it complies with

the Internal Revenue Code has not been established, but the

trustee raised this issue far too late in the proceedings and so

it is waived.

I. Background

Leonard Bronk is a retiree living in Stevens Point, Wiscon-

sin. He incurred significant debts providing for his wife’s

medical care before her death in 2007, and he himself suffered

a stroke in early 2009. With his medical debts mounting—they

exceeded $345,000 by the time he filed for bankruptcy—Bronk

sought the advice of an attorney about pre-bankruptcy

exemption planning. His assets included his home, which he

owned free and clear, and a certificate of deposit in the amount

of $42,000. On the advice of counsel, Bronk sought to protect

these nonexempt assets by converting them to exempt assets.

4 Nos. 13-1123 & 13-1516

In May 2009, a few months before filing his Chapter 7

petition, Bronk borrowed $95,000 from Citizens Bank and

mortgaged his previously unencumbered home. He used these

funds to establish five college savings accounts for the benefit

of his grandchildren under section 529 of the Internal Revenue

Code. That section enables states to create “qualified tuition

program[s]” in the form of prepaid tuition plans and college

savings accounts that enjoy favorable federal tax treatment.

I.R.C. § 529(b). Wisconsin has enacted legislation creating both.

See WIS. STAT. § 16.641 (college savings accounts); id. § 16.64

(prepaid tuition plans).1

Account owners control the funds in these accounts (known

as “Edvest” accounts) and may designate and change account

beneficiaries. § 16.641(1), (3); see also EDVEST, PLAN DISCLOSURE

BOOKLET AND PARTICIPATION AGREEMENT I-2 (Oct. 29, 2012),

available at https://www.edvest.com/documents/wi_

disclosure.pdf (“[The account owner] may cancel th[e] [Edvest

Participation] Agreement at any time by requesting a 100%

distribution from [his or her] Account.”). Beneficiaries do not

control account assets. See WIS. ADMIN. CODE ADMIN. § 81.11(3)

(“A designated beneficiary may not authorize distribution or

withdrawal of account funds.”); see also Susan T. Bart, The Best

of Both Worlds: Using a Trust to Make Your 529 Savings Accounts

Rock, 34 ACTEC J. 106, 111 n.31 (2008) (“[U]nless the

beneficiary is the account owner, the beneficiary has only a

1

These statutes were renumbered during the pendency of this case. See

2011 Wis. Act 32 §§ 75–76. Section 16.641 (college savings accounts) was

previously codified at section 14.64. Section 16.64 (prepaid tuition plans)

was codified at section 14.63. We use the current statutory designations.

Nos. 13-1123 & 13-1516 5

mere expectancy, and does not have any property interest to

transfer.”).

In addition to creating the college savings accounts using

the equity in his home, Bronk converted the $42,000 certificate

of deposit into an annuity with CM Life Insurance Company.

The annuity contract was issued on May 4, 2009, and does not

begin making payments until January 3, 2035, but it also

includes a death benefit.

On August 5, 2009, Bronk filed for bankruptcy under

Chapter 7. The trustee objected to the college-fund and annuity

transactions, arguing that Bronk had transferred his property

with the intent to hinder, delay, or defraud his creditors and

thus should be denied a discharge. See 11 U.S.C. § 727(a)(2)(A).

The trustee also lodged individual objections to the exemptions

Bronk claimed for these converted assets. See WIS. STAT.

§ 815.18(10). To be more specific, Bronk sought an exemption

for the college savings accounts under section 815.18(3)(p),

which allows debtors to shield from creditors “[a]n interest in

a college savings account.” He also sought an exemption for

the annuity under section 815.18(j), which shields certain

qualifying retirement benefits from creditors. The parties

submitted the case on stipulated facts.

The bankruptcy judge first addressed the trustee’s argu-

ment for denial of discharge and rejected it, finding that there

was no evidence that Bronk had acted with intent to hinder,

delay, or defraud creditors. See In re Bronk, 444 B.R. 902, 908–17

(Bankr. W.D. Wis. 2011). Turning to the claimed exemptions,

the bankruptcy judge interpreted section 815.18(3)(p)—the

exemption for college savings accounts—as applying only to

6 Nos. 13-1123 & 13-1516

the beneficiary’s interest, not the account owner’s interest, and

on that understanding disallowed the claimed exemption for

the Edvest accounts Bronk had established for his grandchil-

dren. Id. at 918–24. But the judge accepted Bronk’s argument

about the annuity, holding that it was fully exempt as a

retirement benefit under section 815.18(3)(j) rather than only

partially exempt under section 815.18(3)(f)3, as the trustee had

argued. See id. at 925–26.

Both sides appealed to the district court. The district judge

vacated the bankruptcy court’s decision while agreeing with

most of its reasoning. First, the district judge agreed that Bronk

was entitled to a discharge because the trustee had not proven

that the asset transfers were made with intent to hinder, delay,

or defraud creditors. That decision is not challenged on appeal,

so we say no more about it here. Second, the district judge

agreed with the bankruptcy judge’s interpretation of

section 815.18(3)(p) and upheld the decision to deny the

claimed exemption for Bronk’s Edvest accounts. Finally, the

judge narrowed the bankruptcy court’s interpretation of

“retirement benefit” under section 815.18(3)(j) and remanded

the case for additional fact-finding on whether the annuity

qualified under the narrower understanding of the statute.

On remand the bankruptcy judge again held that the

annuity was fully exempt as a retirement benefit under

section 815.18(3)(j). A new judgment was entered, and Bronk

again appealed to the district court to preserve issues previ-

ously decided for further review in this court. The parties

appeared in the district court and advised the judge that no

further proceedings were necessary. The district court then

Nos. 13-1123 & 13-1516 7

issued a summary order denying the appeal while “preserving

to the full extent possible the parties’ previous challenges

before the bankruptcy court and this court.”2

Bronk appealed, challenging the disallowance of the

exemption for his college savings accounts under

section 815.18(3)(p). The trustee filed a cross-appeal challeng-

ing the court’s ruling on the annuity.

II. Discussion

The Bankruptcy Code allows debtors to exempt certain

property from the bankruptcy estate under either federal law

or the law of their state of residence. See 11 U.S.C. § 522(b); In

re Geise, 992 F.2d 651, 653 n.4, 655–56 (7th Cir. 1993). As a

Wisconsin resident, Bronk sought two exemptions available

under state law, one for the college savings accounts under

section 815.18(3)(p) and another for the annuity under

section 815.18(3)(j).

2

Bronk argues that we lack jurisdiction over the trustee’s cross-appeal

because he did not file a separate appeal in the district court from the

bankruptcy court’s ruling on remand. We disagree. Both sides have

appealed from a judgment of the district court explicitly preserving all

issues raised and decided in the case. We have jurisdiction over the final

judgment of the district court, and “[t]he general rule is that an appeal from

a final judgment allows the appellant to challenge any interlocutory actions

by the district court along the way toward that final judgment.” Luevano v.

Wal-Mart Stores, Inc., 722 F.3d 1014, 1019 (7th Cir. 2013). The issues before

us now were presented to and decided by the district court in its initial

opinion, which became final and appealable upon entry of the final

judgment after the case returned following remand to the bankruptcy court.

8 Nos. 13-1123 & 13-1516

We begin with the text of Wisconsin’s exemption statute,

which provides in relevant part:

(3) EXEMPT PROPERTY. The debtor’s interest in

or right to receive the following property is

exempt … :

…

(f) Life insurance and annuities. …

2. Except as provided in subd. 3. and par. (j),

any unmatured life insurance or annuity contract

owned by the debtor and insuring the debtor …

and the debtor’s aggregate interest, not to

exceed $150,000 in value … .

3. a. If the life insurance or annuity contract

was issued less than 24 months before the appli-

cable date, the exemption under this paragraph

may not exceed $4,000.

…

(j) Retirement benefits. 1. Assets held or

amounts payable under any retirement, pension,

disability, death benefit, stock bonus, profit

sharing plan, annuity, individual retirement

account, individual retirement annuity, Keogh,

401–K or similar plan or contract providing

benefits by reason of age, illness, disability, death

or length of service and payments made to the

debtor therefrom.

Nos. 13-1123 & 13-1516 9

2. The plan or contract must meet one of the

following requirements:

a. The plan or contract complies with the

provisions of the internal revenue code.

b. The employer created the plan or contract

for the exclusive benefit … of some or all of the

employees, or their dependants or benefi-

ciaries … .

…

(p) College savings accounts. An interest in a

college savings account under s. 16.641.

§ 815.18(3).

The statute contains its own rule of construction: “This

section shall be construed to secure its full benefit to debtors

and to advance the humane purpose of preserving to debtors

and their dependents the means of obtaining a livelihood, the

enjoyment of property necessary to sustain life and the

opportunity to avoid becoming public charges.” WIS. STAT.

§ 815.18(1). Because this case presents questions of statutory

interpretation, our review is de novo. Pickett v. Sheridan Health

Care Ctr., 610 F.3d 434, 440 (7th Cir. 2010).

A. The College Savings Accounts

Wisconsin’s exemption statute allows debtors to exempt

“[a]n interest in a college savings account under s. 16.641” from

execution by creditors. § 815.18(3)(p). The term “interest” is not

10 Nos. 13-1123 & 13-1516

specifically defined in the statute or by regulation,3 but an

“interest” is generally defined as “[a] legal share in something;

all or part of a legal or equitable claim to or a right in prop-

erty.” BLACK’S LAW DICTIONARY 934 (10th ed. 2014). Bronk

clearly has a legal interest in each of the Edvest college savings

accounts. He owned the accounts and could at any time select

and change beneficiaries, transfer funds between accounts,

receive distributions from the accounts, and (subject to certain

limitations) remove funds from the accounts. See

§ 16.641(3)(a)–(b). Indeed, if Bronk lacked a legal or equitable

interest in the accounts, they would not have been part of the

bankruptcy estate in the first place. See 11 U.S.C. § 541(a)(1)

(including in the property of the estate “all legal or equitable

interests of the debtor in property”).

The trustee insists nonetheless that the statute is ambiguous

and must be understood as simply incorporating by reference

the exemption contained in section 16.641, the enabling statute

for Wisconsin’s Edvest program. Section 16.641 contains an

exemption to protect the beneficiary’s interests in a college

savings account: “A beneficiary’s right to qualified withdraw-

als under this section is not subject to garnishment, attachment,

execution, or other process of law.” § 16.641(7).

Both lower courts agreed with the trustee that

section 815.18(3)(p) is ambiguous and thus embarked on an

elaborate examination of legislative history and similar

legislation in other states to determine the relationship between

3

See WIS. STAT. § 815.18(2) (defining certain terms in the statute); see also

WIS. ADMIN. CODE ADMIN. § 81.02.

Nos. 13-1123 & 13-1516 11

the two exemptions. This foray into matters extrinsic to the

statute led both judges to conclude that the general exemption

in section 815.18(3)(p) covers only the beneficiary’s interest in a

college savings account, not the account owner’s interest.

Venturing into legislative history was unnecessary, as was

the search for guidance from other states. The presence of a

beneficiary-specific exemption in section 16.641—the enabling

statute for Wisconsin’s college-savings program—does not

mean that the general exemption in section 815.18(3)(p) is

ambiguous. The general exemption statute is succinct and

straightforward: A debtor may exempt “an interest in a college

savings account under s. 16.641” from execution by creditors.

The lower courts read this text as if it said that a debtor may

exempt “[a]n interest in a college savings account that is exempt

under s. 16.641.” That reading adds language that is not there,

making section 815.18(3)(p) superfluous—a mere duplication

of the beneficiary-specific exemption in section 16.641(7).

The test for statutory ambiguity in Wisconsin looks

to “whether the statutory … language reasonably gives rise to

different meanings.” State ex rel. Kalal v. Circuit Court for Dane

Cnty., 681 N.W.2d 110, 124 (Wis. 2004) (internal quotation

marks omitted). And “[s]tatutory language is read where

possible to give reasonable effect to every word, in order to

avoid surplusage.” Id. The trustee finds ambiguity in

section 815.18(3)(p) only by adding language and turning it

into mere surplusage. That’s not a reasonable interpretation of

the statute.

The general exemption for college savings accounts in

section 815.18(3)(p) would have no work to do if it is limited to

12 Nos. 13-1123 & 13-1516

the beneficiary’s interest in the account, which is separately

protected by section 16.641(7). Indeed, the trustee’s interpreta-

tion of section 815.18(3)(p) actually undermines the interests of

college-fund beneficiaries, making section 16.641(7) ineffective.

If account owners may not invoke the general exemption in

section 815.18(3)(p), as the trustee suggests and the lower

courts held, then a college savings plan can be reached by an

account owner’s creditors, impairing the beneficiary’s right to

qualified withdrawals.

The plain-meaning interpretation of section 815.18(3)(p) is

the only reasonable one. It’s the only reading of the statute that

gives reasonable effect to both exemptions. The general

exemption in section 815.18(3)(p) complements the more

specific exemption in section 16.641(7), completing the protec-

tion for college savings accounts. Accordingly, we hold that

section 815.18(3)(p) applies to an account owner’s interest in a

section 16.641 college savings account. Bronk was entitled

under that section to exempt his interest in the Edvest accounts

from the bankruptcy estate.

B. The Annuity

The extent to which Bronk’s annuity is exempt depends on

how it is classified. The exemption statute defines “annuity”

generally as “a series of payments payable during the life of

the annuitant or during a specific period.” WIS. STAT.

§ 815.18(2)(am). Two subsections in section 815.18 apply to

annuities, though one is more limited than the other.

Nos. 13-1123 & 13-1516 13

An annuity may be fully exempt as a “retirement benefit”

under section 815.18(3)(j), which covers the following assets:

Assets held or amounts payable under any

retirement, pension, disability, death benefit,

stock bonus, profit sharing plan, annuity, indi-

vidual retirement account, individual retirement

annuity, Keogh, 401–K or similar plan or contract

providing benefits by reason of age, illness,

disability, death or length of service and pay-

ments made to the debtor therefrom.

§ 815.18(3)(j)1. To qualify for full exemption under this subsec-

tion, the retirement plan or contract must meet one of two

additional requirements: (1) it must be employer sponsored; or

(2) it must comply with the Internal Revenue Code.

§ 815.18(3)(j)2.

A more general exemption applies to “life insurance and

annuities,” but only up to $150,000 in value.4 § 815.18(3)(f)2.

And if the annuity contract was issued less than 24 months

prior to the date the exemption is claimed, the exemption is

limited to $4,000. See § 815.18(3)(f)3.a.

Two criteria differentiate annuities covered under subsec-

tion (3)(j) from those under subsection (3)(f). The first is how

benefits are paid. Subsection (3)(f) applies to “any

unmatured … annuity,” but the exemption for retirement

benefits only covers annuities “providing benefits by reason of

4

This subsection of the exemption statute initially covered only life

insurance, but annuities were added in 2003. See 2003 Wis. Act 304.

14 Nos. 13-1123 & 13-1516

age, illness, disability, death or length of service,”

§ 815.18(3)(j)1. So to qualify for full exemption as a retirement

benefit under subsection (3)(j), an annuity must distribute

benefits because of or conditioned on age, illness, disability, death,

or length of service.

The term “by reason of” is synonymous with “because of”

or “on account of.” WEBSTER’S THIRD NEW INTERNATIONAL

DICTIONARY 194 (1961) (defining “because of” as “by reason of :

on account of”). It requires a causal connection between the

phrase preceding it—“providing benefits”—and the list of

factors that comes after it. Cf. Rousey v. Jacoway, 544 U.S. 320,

326–27 (2005) (“We have interpreted the phrase ‘on account of’

elsewhere within the Bankruptcy Code to mean ‘because of,’

thereby requiring a causal connection between the term that

the phrase ‘on account of’ modifies and the factor specified in

the statute at issue.”). Accordingly, for any of the listed

retirement products, the statute requires that one of the listed

conditions triggers payment of benefits.

The bankruptcy judge took a more expansive view of

section 815.18(3)(j), relying on reasoning from In re Bogue,

240 B.R. 742, 749 (Bankr. E.D. Wis. 1999), in which another

bankruptcy judge in Wisconsin read the statute to include any

retirement product that was purchased by reason of age, death,

etc. The trustee, on the other hand, argues for an interpretation

that narrows the reach of the retirement-benefits exemption, at

least where annuities are concerned. He proposes that to

qualify for exemption as a “retirement benefit” under

section 815.18(3)(j), an annuity must “provide[] income as a

substitute for wages upon the withdrawal from occupation or

Nos. 13-1123 & 13-1516 15

active working life” rather than “operat[ing] merely as a

savings account.”

Both interpretations stray from the statutory text. By its

terms, the statute requires that the retirement product

“provid[e] benefits” by reason of age, illness, death, etc., not that

it be “purchased” by reason of age. Moreover, there is no special

test for annuities.

Bronk’s annuity begins paying on a fixed date—January 3,

2035—and thus does not pay benefits because of age, length of

service, or the onset of an illness or disability. But the annuity

also contains a death benefit. That feature brings it under the

umbrella of section 815.18(3)(j).

There is a second requirement, however. To qualify for full

exemption as a “retirement benefit,” a retirement product must

be either employer sponsored or “compl[y] with the provisions

of the internal revenue code.” § 815.18(3)(j)2.a. Bronk’s annuity

is not employer sponsored, so it must comply with the Internal

Revenue Code to be exempt under section 815.18(3)(j). What it

means to comply with the Internal Revenue Code is an

important legal question not clearly answered by the text of the

statute.

One possible meaning is that the retirement product must

comply with Internal Revenue Code §§ 401–409, which govern

tax treatment of certain retirement plans. But Wisconsin

bankruptcy courts have uniformly interpreted the exemption

as simply requiring that an annuity be tax deferred under

16 Nos. 13-1123 & 13-1516

Internal Revenue Code § 72.5 This approach originated prior to

the addition of annuities to the life-insurance exemption in

section 815.18(3)(f) in 2003, and we question whether it

survives the change in the law. Many annuities that have

nothing to do with retirement in fact provide benefits by

reason of age or death, and if the requirement that an annuity

comply with the Internal Revenue Code means only that it be

tax deferred, a large swath of nonretirement annuities may fall

under section 815.18(3)(j), making the annuity exemption

under section 815.18(3)(f) largely redundant.

Despite these reservations, we do not reach the question

whether Bronk’s annuity “complies with” the Internal Revenue

Code as required by section 815.18(3)(j)2.a. The trustee raised

this issue for the first time in the district court, and even then

simply asserted—without developing an argument—that

Bronk’s annuity was not tax qualified. The district judge

5

See, e.g., In re Woller, 483 B.R. 886, 900–01 (Bankr. W.D. Wis. 2012) (“The

Wisconsin legislature did not expressly mandate compliance with the

requirements of §§ 401–409 of the IRC (which cover pension, profit-sharing,

stock bonus, and other retirement plans), and the Court will not write such

a requirement into the exemption statute.”); In re Vangen, 334 B.R. 241, 244

(Bankr. W.D. Wis. 2005) (“All that is required for an annuity to be exempt

under this section is that it qualify for tax-deferred status under the Federal

Internal Revenue Code.”); In re Bogue, 240 B.R. 742, 746 (Bankr. E.D. Wis.

1999) (“The Wisconsin retirement benefits exemption statute does not limit

its application to ‘traditional’ retirement plans, ‘qualified’ annuities, or

annuities which comply with IRC §§ 401–409.”); In re Bruski, 226 B.R. 422,

424 (Bankr. W.D. Wis. 1998) (“It is not whether the annuity is taxable in

accordance with the code, but whether the tax is deferred in accordance

with the code. If so, the annuity qualifies for the exemption.”).

Nos. 13-1123 & 13-1516 17

considered the argument waived and we agree. See Judge v.

Quinn, 612 F.3d 537, 557 (7th Cir. 2010).

Accordingly, for the foregoing reasons, we REVERSE the

judgment of the district court to the extent that it affirmed the

disallowance of the exemption for the college savings plans. In

all other respects, the judgment is AFFIRMED.