Simpson v. Burkhart

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN THE MATTER OF BRUCE EDWARD 

HOWARD SIMPSON,

Debtor. No. 07-15626

BAP No.

BRUCE EDWARD HOWARD SIMPSON,  EC-06-01198-

Appellant. DMoPa

v. OPINION

MICHAEL F. BURKART, Trustee,

Appellee.



Appeal from the Ninth Circuit

Bankruptcy Appellate Panel

Pappas, Montali, and Dunn, Bankruptcy Judges, Presiding

Argued and Submitted

October 20, 2008—San Francisco, California

Filed February 23, 2009

Before: J. Clifford Wallace, Sidney R. Thomas, and

Susan P. Graber, Circuit Judges.

Opinion by Judge Thomas

2129

2132 IN THE MATTER OF SIMPSON

COUNSEL

H. Lee Horner, Jr., Goldstein, Horner & Horner, Cortaro, Ari-

zona, for the debtor-appellant.

Michael F. Burkart, Chapter 7 Trustee, Carmichael, Califor-

nia, appellee pro se.

OPINION

THOMAS, Circuit Judge:

Debtor Bruce Simpson claims that his single-premium

annuity is exempt property. His bankruptcy trustee objected to

the exemption, the bankruptcy court sustained the objection,

and the Bankruptcy Appellate Panel (“BAP”) affirmed. We

conclude that, under the circumstances presented by the case,

the annuity does not qualify as exempt property, either as life

insurance or as a private retirement account, and we affirm.

IN THE MATTER OF SIMPSON 2133

I

Simpson paid his bankruptcy attorney, who also sells finan-

cial products, $10,000 for the purchase of a single-premium

annuity known as the Keyport Index Multipoint Annuity (“the

Keyport Annuity”). Simpson designated himself as the annu-

ity contract owner and the annuitant. He designated his two

sons as beneficiaries.

The Keyport Annuity is equity-indexed against the Stan-

dard & Poor’s 500 Index. Although the annuity’s interest rate

depends on the performance of stocks in the index, the annu-

ity has a “guaranteed minimum growth” of no less than 1.75%

on 90% of the premium paid. The annuity contract states that

the annuity is non-qualified for IRS purposes.1 The annuity

has no loan value, so Simpson could not borrow against any

part of the principal or accrued interest. The annuity contract

provides that Simpson would begin receiving payments on a

specified “Income Date.” Prior to the Income Date, Simpson

could surrender the annuity, but would be assessed an early

surrender penalty.

The annuity’s promotional materials refer to it as a retire-

ment savings tool with a taxable death benefit. The section

entitled “Death Benefit” provides that, if Simpson were to die

prior to the Income Date, his beneficiaries could surrender the

1

The Internal Revenue Code classifies annuities as either qualified or

non-qualified. A qualified annuity is purchased through an employer-

provided retirement plan or an individual retirement plan that meets cer-

tain requirements (such as an Individual Retirement Annuity or Simplified

Employee Pension Plan). 26 U.S.C.A. §§ 72(d)(1)(G), 4974(c)(2) (2006).

For example, an “Individual Retirement Annuity” cannot be transferable,

have fixed premiums, or have a premium that exceeds $6000 in any one

year. Id. § 408(b)(1)-(2) and 219(b)(5)(B). Contributions to a qualified

annuity may be deductible from the taxable income of the employee or

employer who made the contribution. Id. § 219(a). An annuity that does

not meet these requirements is non-qualified, and contributions to it are

not deductible. Id.

2134 IN THE MATTER OF SIMPSON

annuity without paying the ten percent penalty and would

receive the principal, along with all interest accrued up to that

point, as if it were fully vested. Alternatively, they could keep

the annuity, wait for it to mature, and then receive the pay-

ments Simpson would have received.

A few months after purchasing the Keyport Annuity, Simp-

son filed a voluntary petition in bankruptcy under Chapter 7

of the Bankruptcy Code. He claimed that the Keyport Annuity

was exempt under California Civil Procedure Code section

704.115, which pertains to “private retirement plans.” Simp-

son later filed an amended schedule, claiming that the annuity

was also exempt under California Civil Procedure Code sec-

tion 704.100, which pertains to life insurance policies.

The trustee objected to Simpson’s claimed exemptions for

the Keyport Annuity. At the hearing on the trustee’s objec-

tion, Simpson testified that he intended the annuity to provide

a supplemental retirement income and viewed the annuity as

an investment. He also testified that he viewed the annuity as

containing a death benefit because of its waived early-

surrender penalty and accelerated vesting provisions.

The bankruptcy court sustained the trustee’s objections to

Simpson’s claimed exemptions and froze the annuity pending

appeal. Simpson appealed to the BAP, which affirmed. Simp-

son v. Burkart (In re Simpson), 366 B.R. 64 (9th Cir. B.A.P.

2007). This timely appeal followed.

We independently review a bankruptcy court’s decision on

appeal from the BAP. Educ. Credit Mgmt. Corp. v. Nys (In re

Nys), 446 F.3d 938, 943 (9th Cir. 2006). We review a bank-

ruptcy court’s findings of fact for clear error, and review de

novo a bankruptcy court’s conclusions of law, including statu-

tory interpretations. Id.; DeMassa v. MacIntyre (In re MacIn-

tyre), 74 F.3d 186, 187 (9th Cir. 1996).

Whether the exemption statutes at issue apply to annuities

is a question of statutory interpretation. In re MacIntyre, 74

IN THE MATTER OF SIMPSON 2135

F.3d at 187. Whether the features of a specific annuity, when

considered together with the debtor’s intent, demonstrate that

the product’s primary purpose and effect are life insurance, a

retirement plan, or another financial instrument, is a factual

determination that we review for clear error. Jacoway v.

Wolfe (In re Jacoway), 255 B.R. 234, 237 (9th Cir. B.A.P.

2000).

[1] California has enacted legislation “opting out” of the

federal bankruptcy exemption scheme provided under 11

U.S.C. § 522. Cal. Civ. Proc. Code § 703.130 (2007). There-

fore, California law governs substantive issues regarding

claimed exemptions. Little v. Reaves (In re Reaves), 285 F.3d

1152, 1155-56 (9th Cir. 2002).

II

[2] The BAP and the bankruptcy court properly rejected

Simpson’s claim that the Keyport Annuity was exempt life

insurance under California Civil Procedure Code section

704.100(a),2 which provides:

Unmatured life insurance policies (including

endowment and annuity policies), but not the loan

value of such policies, are exempt without making a

claim.

2

Although the inquiry we describe applies to application of section

704.100 in general, subsections (b) and (c) are not at issue with regard to

Simpson’s claim. Subsection (b) is irrelevant because the Keyport Annuity

has no loan value. See Cal. Civ. Proc. Code § 704.100(b) (providing that

“[t]he aggregate loan value of unmatured life insurance policies (including

endowment and annuity policies) is subject to the enforcement of a money

judgment but is exempt in the amount of [$9,700]”). Subsection (c) is

irrelevant because Simpson does not argue that the Keyport Annuity is a

matured life insurance policy. See id. § 704.100(c) (providing that

“[b]enefits from matured life insurance policies (including endowment and

annuity policies) are exempt to the extent reasonably necessary for the

support of the judgment debtor and the spouse and dependents of the judg-

ment debtor”).

2136 IN THE MATTER OF SIMPSON

In deciding whether an annuity qualifies as exempt life

insurance under California law, we undertake two inquiries.

The first is a question of statutory interpretation, that is,

whether the claimed statutory exemption includes the asset at

issue. See Lieberman v. Hawkins (In re Lieberman), 245 F.3d

1090, 1091 (9th Cir. 2001) (“The scope of an exemption . . .

is a question of a law, which we review de novo.”). If the stat-

utory exemption categorically includes the questioned asset,

then the inquiry is at an end. If the asset is not categorically

embraced within the statutory exemption, then the question is

whether, as a factual matter, the particular financial instru-

ment qualifies for the exemption.3

A

In analyzing § 704.100, we conclude that the section

applies categorically only to life insurance and that annuities

are not included within the statute’s reach. Bernard v. Coyne

(In re Bernard), 40 F.3d 1028, 1032 (9th Cir. 1994); see also

Kennedy v. Pikush (In re Pikush), 157 B.R. 155, 159 (9th Cir.

B.A.P. 1993), aff’d, 27 F.3d 386 (9th Cir. 1994).

[3] It is true that the statute has an important parenthetical

reference to life insurance “including endowment and annuity

policies.” However, we agree with the BAP’s careful statutory

analysis in Pikush that this phrase “was intended to clarify

that life insurance that includes the essential features of an

annuity or endowment policy does not lose its exempt charac-

ter.” 157 B.R. at 157. As the BAP noted:

3

To the extent the BAP suggested that the analysis was limited to a fac-

tual inquiry reviewed for clear error, it was incorrect. See Simpson, 366

B.R. at 70-71 (“Whether an annuity contract qualifies as exempt life insur-

ance under California law is a factual determination that we review under

the clearly erroneous standard.”). Statutory interpretation and whether a

particular policy qualifies as a life insurance policy are questions of law

subject to de novo review. We do, however, review factual findings for

clear error.

IN THE MATTER OF SIMPSON 2137

Had the California legislature intended to create an

exemption for all endowment policies and annuity

policies, whether or not they are life insurance poli-

cies, it presumably would have enacted a statute that

exempted “matured life insurance, endowment and

annuity policies.”

Id. at 156.

[4] Consistent with this analysis, and with our examination

in Bernard, we conclude that single-premium annuities are

not included categorically within California’s statutory life

insurance exemption.

B

Because section 704.100 applies only to life insurance, we

next consider Simpson’s argument that, alternatively, the

Keyport Annuity is nonetheless exempt under the statute

because it is actually a life insurance policy. After a thorough

examination of the record, we conclude that the bankruptcy

court did not err in determining that the Keyport Annuity did

not constitute life insurance.

[5] A single-premium annuity that provides a guaranteed

stream of income and has no contingencies that can divest the

debtor or his beneficiaries of their right to payment is an

investment, not a life insurance policy. Bernard, 40 F.3d at

1032; Pikush, 157 B.R. at 159. To analyze whether a particu-

lar annuity falls within this rule, we examine the non-

exclusive factors identified by the BAP in Turner v. Marshack

(In re Turner), 186 B.R. 108, 117 (9th Cir. B.A.P. 1995),

namely: (1) whether the annuity is truly contingent; (2)

whether the debtor can accelerate the maturity date; (3)

whether the debtor can borrow against the policy; (4) who

owns the policy; (5) whether payment of the premium is con-

sistent with an investment or payment; (6) whether the seller

was licensed to sell life insurance in the debtor’s state; (7)

2138 IN THE MATTER OF SIMPSON

what, if any, is the opinion of testifying experts; (8) what pro-

visions of the application are also part of the policy; and (9)

whether a life insurance policy in the debtor’s state must con-

tain a death benefit.4 Id.

The BAP considered six of these factors and concluded that

the Keyport Annuity was not life insurance based on the fol-

lowing findings:

Unlike a life insurance policy, the payments under

the Keyport Annuity are not contingent upon the

debtor’s life . . . .

. . . The Keyport Annuity does not allow for the

debtor to accelerate the maturity date . . . .

The Keyport Annuity . . . does not allow the

debtor to borrow against it.[5] . . .

4

Our court in Turner did not characterize these factors as either exclu-

sive or required, and neither do we. See Turner, 186 B.R. at 117 (describ-

ing these questions as “issues which need to be addressed” upon remand

to the bankruptcy court for further findings in that specific case).

5

Section 704.100(a) protects debtors only from having to surrender a

life insurance policy for its cash value (often at a significant loss). It does

not exempt the policy’s loan value. Under section 704.100(b), any loan

value above $9700 must be applied to the debtor’s debts. Thus, it appears

the statute’s drafters attempted to balance a debtor’s accountability to his

creditors against wasteful disposition of his assets.

Although the BAP did not provide a detailed analysis under this factor,

presumably it recognized that allowing Simpson to claim the Keyport

Annuity as exempt life insurance would contradict that intent. The Key-

port Annuity has no loan value, while the surrender value is relatively high

— around 90% of the single premium Simpson paid. Applying the life

insurance exemption to this annuity would protect Simpson from having

to surrender the annuity, even though he could do so without incurring a

great loss, while providing no loan value to apply toward Simpson’s debts.

Such an interpretation would provide a result opposite of that the drafters

intended and cannot be deemed logical.

IN THE MATTER OF SIMPSON 2139

....

. . . [T]he Keyport Annuity is in the nature of an

investment . . . [because], “[i]nstead of creating an

immediate estate for the benefit of others, the annui-

tant [reduced his] immediate estate in favor of future

contingent income.”

....

[S]imply because the Keyport Annuity contains a

death benefit does not make it the equivalent of a life

insurance policy . . . . These limited death benefits

do not change the fundamental purpose of the Key-

port Annuity — to provide the debtor with fixed,

periodic payments for life or a stated period of time,

without requiring his death to trigger Sun Life’s obli-

gation to pay.

. . . Sun Life is authorized to sell life insurance . . .

[but this is] not dispositive as to whether the annuity

contract qualifies as life insurance exempt under

California law.

Simpson, 366 B.R. at 72-74 (quoting Payne, 323 B.R. at 728

(alteration in original omitted)). There is no error in the

BAP’s conclusions based on the bankruptcy court’s findings,

which are sufficient to support the conclusion that the Key-

port Annuity is not a life insurance policy.6

[6] Simpson’s primary basis for claiming that the Keyport

Annuity is life insurance is that it contains a “death benefit.”

6

The tax status of the Keyport Annuity’s “Death Benefit” is telling. The

annuity materials repeatedly state that the death benefit provided to the

beneficiaries of the Keyport Annuity is taxable upon receipt. Proceeds

paid under a life insurance policy, however, are generally not taxable as

income to the recipient. 26 U.S.C.A. § 101 (2006).

2140 IN THE MATTER OF SIMPSON

However, we agree with the BAP that the waiver of the early-

surrender penalty and accelerated vesting of accrued interest

provide a death benefit that is “limited” at best, and those fea-

tures do not change the “fundamental purpose” of the Keyport

Annuity. Id. at 74.

Although we are not the final authority on California law,

there is no indication that the California Supreme Court

would decide otherwise. As early as 1951, the California state

appellate courts described the key differences between annui-

ties and life insurance and explicitly held the two are not the

same. See Kuchel v. McCormack (In re Barr’s Estate), 231

P.2d 876, 878-79 (Cal. Ct. App. 1951) (explaining that the

risk assumed in an annuity contract is to pay as long as the

annuitant lives, whereas the risk in a life insurance contract is

to pay upon the insured’s death). Nowhere did the court indi-

cate that the presence of a nominal death benefit was disposi-

tive of its analysis.

Finally, we must reject Simpson’s argument that the Cali-

fornia Insurance Code settles this matter. While he is correct

that it defines life insurance to include the granting, purchas-

ing, or disposing of annuities, the California Supreme Court

has expressly held that this statutory classification is only for

the purpose of regulating annuities under the Insurance Code,

but does not require classification of annuities as insurance

for other purposes. Id. at 879. Thus, this definition is not dis-

positive here.

C

[7] In sum, a single-premium annuity does not qualify cate-

gorically as life insurance under California Civil Procedure

Code section 704.100(a), and the bankruptcy court did not err

in concluding that this particular instrument did not qualify as

exempt life insurance under California law.

IN THE MATTER OF SIMPSON 2141

III

The BAP and the bankruptcy court did not err in conclud-

ing that the Keyport Annuity does not qualify as an exempt

private retirement plan under California law. In examining

this contention, we employ the same analytical framework as

applied to the life insurance exemption: we first examine as

a matter of statutory interpretation whether the asset qualifies

categorically and, if it does not, we then examine as a factual

matter whether this particular instrument qualifies as such.7

A

[8] The annuity does not qualify categorically as an exempt

private retirement plan under California Civil Procedure Code

section 704.115(b). That section allows a debtor to shield the

assets that he has accumulated in a private retirement plan

from the bankruptcy estate. Section 704.115(b) provides:

All amounts held, controlled, or in process of dis-

tribution by a private retirement plan, for the pay-

ment of benefits as an annuity, pension, retirement

allowance, disability payment, or death benefit from

a private retirement plan are exempt.

A “private retirement plan” is not a generic term referring

to any retirement plan. Rather, in order to be a “private retire-

ment plan,” the asset must meet one of the three possible defi-

nitions specified in subsection (a) of the statute:

(1) Private retirement plans, including, but not

limited to, union retirement plans.

(2) Profit-sharing plans designed and used for

retirement purposes.

7

To the extent that the BAP suggested that the review was purely one

of fact, it was incorrect.

2142 IN THE MATTER OF SIMPSON

(3) Self-employed retirement plans and individual

retirement annuities or accounts provided for in the

Internal Revenue Code of 1986.

Id. § 704.115(a).

[9] The statute does not indicate that whether an asset is

“designed and used for retirement purposes” has any bearing

on whether it constitutes a “private retirement plan” under

section 704.115(b). Rather, if the annuity does not meet any

of the statutory definitions for private retirement plan, it is not

exempt under the statute. Single-premium annuities do not

qualify categorically as private retirement plans under the

statute.

[10] We reject Simpson’s argument that the California

Supreme Court would interpret the provision broadly to

include assets acquired by the individual outside of an

employment-related retirement plan. While the California

Supreme Court has not expressly held that the statute limits

“private retirement plans” to those “established or main-

tained” by an employer, it has applied the exemption only to

such plans. See, e.g., Mejia v. Reed, 74 P.3d 166, 174 (Cal.

2003) (construing the exemption in the context of a formal

retirement account accumulated through a medical practice).

[11] Because the California Supreme Court has not had

occasion to consider this issue, we look to the holdings of

California’s intermediate appellate courts as indicative of how

the highest court would decide this issue. Klein v. United

States, 537 F.3d 1027, 1032 (9th Cir. 2008). A survey of

recent California Court of Appeal cases construing the statute

does not reveal a single instance in which that court has inter-

preted section 704.115(a)(1) to include independent retire-

ment investments. See, e.g., McMullen v. Haycock, 54 Cal.

Rptr. 3d 660 (Ct. App. 2007) (funds held through an

employer); Schwartzman v. Wilshinsky, 57 Cal. Rptr. 2d 790

(Ct. App. 1996) (plan established by debtor’s employer);

IN THE MATTER OF SIMPSON 2143

Yaesu Elecs. Corp. v. Tamura, 33 Cal. Rptr. 2d 283 (Ct. App.

1994) (funds derived from a “defined benefit pension plan”).

Given these holdings, we do not believe that California would

conclude that a single-premium annuity would qualify cate-

gorically under California law as a private retirement plan.

B

The second question is whether the particular asset, based

on the debtor’s subjective intent and the product’s true nature,

demonstrates that it is primarily intended or used for retire-

ment purposes. Daniel v. Sec. Pac. Nat’l Bank (In re Daniel),

771 F.2d 1352, 1356 (9th Cir. 1985). However, the purpose

of this inquiry is distinct and limited. It does not allow the

debtor to circumvent the statutory definitions and categorize

the asset as an exempt private retirement plan. Rather, the

inquiry seeks only to determine whether an asset that fits the

definition of a “private retirement plan” should nonetheless be

excluded from exemption because the debtor treats it as some-

thing other than a retirement asset. Thus, while the debtor’s

subjective intent cannot create an exemption, it may take one

away. Id.

[12] Simpson’s sole argument in support of his claimed

exemption is that the annuity constitutes a private retirement

plan under section 704.115(a)(1), because he subjectively

intended to use it as one. As we have noted, a debtor’s subjec-

tive intent for or use of the asset is irrelevant to this analysis.

Lieberman, 245 F.3d at 1095. Rather, section 704.115(a)(1)

applies only to retirement plans set up by private employers,

“not by individuals acting on their own, outside of the

employment sphere.” Simpson, 366 B.R. at 74 (citing Lieber-

man, 245 F.3d at 1093). As we explained in Lieberman:

[T]he legislature intended § 704.115(a)(1) to exempt

only retirement plans established or maintained by

private employers or employee organizations, such

2144 IN THE MATTER OF SIMPSON

as unions, not arrangements by individuals to use

specified assets for retirement purposes.

245 F.3d at 1095.

[13] The Keyport Annuity was not established for Simpson

by an employer. Rather, Simpson purchased it as an individ-

ual. Thus, regardless of his intentions, Simpson is not entitled

to claim an exemption for the annuity as a private retirement

plan under section 704.115(b).

IV

Because the single-premium annuity does not qualify under

California law either as life insurance or a private retirement

plan, the BAP and the bankruptcy court correctly concluded

that the property was not exempt property under federal bank-

ruptcy law.

AFFIRMED.