In Re: Orso

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

No. 98-31008

IN THE MATTER OF: PAUL WILLIAM ORSO,

Debtor.

_________________________

VALERIE CANFIELD,
Appellant,

v.

PAUL WILLIAM ORSO AND MARTIN A. SCHOTT,

Appellees,

Appeal from the United States District Court for the
Middle District of Louisiana

June 27, 2000

Before JONES, DeMOSS, and DENNIS, Circuit Judges.

EDITH H. JONES, Circuit Judge:

Valerie Canfield (“Canfield”) appeals the denial of her

objection to the claim by her former husband, Paul William Orso

(“Orso”), that certain annuities he receives as part of a

structured tort settlement are exempt from the property of his

bankruptcy estate under Louisiana law. La. R.S. 22:647. The

bankruptcy and district courts attempted to distinguish our

decision in Young v. Adler, 806 F.2d 1303 (5th Cir. 1987), which
held that certain types of annuities are not exempt. Although the

issue is close, we conclude that Young governs this case, and we

reverse and remand with instructions to include Orso’s annuities in

the property of his estate.

I. FACTUAL AND PROCEDURAL BACKGROUND

In November 1986, several months after Canfield and Orso

were married, Orso was involved in a serious automobile accident

which left him permanently and severely brain damaged. As a result

of his injuries, Orso became mildly mentally retarded with an I.Q.

of less than 70.

Orso and Canfield filed suit against several defendants

seeking damages for the injuries sustained by Orso in the accident.

In September 1989, the tort action was settled, and Orso and

Canfield entered into consent judgments with the defendants. Under

the terms of the settlement, both Orso and Canfield were to receive

lump sum payments. In addition, Orso was to receive monthly

payments for the rest of his life, with 30 years of payments

guaranteed to Orso or his designee, from two defendants and their

insurers (collectively the “defendants”). The defendants purchased

annuity contracts to provide Orso with the agreed upon monthly

payments.

In May 1990, Orso and Canfield obtained a judgment of

separation and entered into a settlement of community property

agreement. In December 1990, Canfield filed a petition in state

2
court to enforce certain provisions of the community property

settlement agreement. Orso and Canfield were formally divorced in

January 1991. In July 1994, the state court entered judgment in

favor of Canfield for $48,000 in arrearages and ordered Orso to pay

Canfield $1,000 per month for the succeeding five months.

Five days after entry of the state court order, Orso

filed a Chapter 7 bankruptcy petition. Orso listed as an asset the

periodic payments he received as a result of the structured

settlements from the 1987 tort action, but he claimed that these

payments were exempt from the bankruptcy estate as annuities under

La. Rev. Stat. Ann. § 22:647 (West 1995).

Canfield filed her proof of claim with the bankruptcy

court for $53,494.92, which represented the judgment entered by the

state district court for Orso’s arrearages. The bankruptcy court

denied Canfield’s motion for relief from the automatic stay, her

request that the court abstain from exercising jurisdiction, and

her motion to dismiss. Canfield also objected to Orso’s claim of

exemption for the annuity proceeds. The bankruptcy court upheld

the exemption after a lengthy analysis of Young and Louisiana’s

exemption statute for annuities. Canfield has appealed the district

court’s order affirming the claim of exemption.

II. ANALYSIS

The issue on appeal is whether Orso’s structured

settlement payments derive from annuities exempt from creditors’

3
claims pursuant to Louisiana law, or whether, as in Young, they are

de facto payments on a nonexempt debt owed to Orso.1

Once the debtor commences an action in bankruptcy, all

property in which the debtor has a legal or equitable interest

becomes property of the bankruptcy estate. 11 U.S.C.A. § 541 (West

1993); McManus v. Avco Financial Services of Louisiana, 681 F.2d

353, 354 (5th Cir. 1982). After all the property is subsumed

within the bankruptcy estate, the debtor may exempt certain

property, insulating it from most creditors’ claims. McManus, 681

F.2d at 354. Under the Bankruptcy Code, states can allow their

debtors to exempt (1) property included in the federal “laundry

list” of exemptions, 11 U.S.C.A. § 522(d), or (2) property

specified under Louisiana law and federal laws other than 11 U.S.C.

§ 522(d). Id. at 355. Since Louisiana “opted out” of the federal

laundry list of exempt property, Louisiana law governs whether

Orso’s structured settlement payments constitute exempt annuities.

At the time Orso filed his bankruptcy petition,

exemptions for annuities were covered by the old version of La.

Rev. Stat. Ann. § 22:647B, which states:

The lawful beneficiary, assignee, or payee,
including the annuitant’s estate, of an
annuity contract, heretofore or hereafter
effected, shall be entitled to the proceeds
and avails of the contract against the

1
This court reviews questions of bankruptcy law de novo. See Matter of
Cromwell, 138 F.3d 1031, 1033 (5th Cir. 1998)(citing In re Kennard, 970 F.2d
1455, 1457-58 (5th Cir. 1992)). We have jurisdiction over this appeal from the
grant of an exemption in bankruptcy, which is a final order.

4
 creditors and representatives of the annuitant
or the person effecting the contract, or the
estate of either, and against the heirs and
legatees of either such person, saving the
rights of forced heirs, and such proceeds and
avails shall also be exempt from all liability
for any debt of such beneficiary, payee, or
assignee or estate, existing at the time the
proceeds or avails are made available for his
own use.

Although § 22:647(B) was amended in 1999,2 federal law requires

this court to apply the state law in effect at the time the debtor

filed his bankruptcy petition. See 11 U.S.C. § 522(b)(2)(A)(“an

individual debtor may exempt from property of the estate ... any

property that is exempt under ... State or local law that is

applicable on the date of the filing of the petition....”). The

fact that the amendment is interpretive, and that the Louisiana

Legislature expressly intended the amendment to have retroactive

application, does not change our analysis. See In re John Taylor

Company (Taylor v. Knostman), 935 F.2d 75 (5th Cir. 1991). In

Taylor, this court held that the debtor could not avail herself of

an amendment to the Texas homestead exemption that was passed

subsequent to her filing for bankruptcy protection. As in the

present case, the amendment was “expressly made retroactive” and

2
Acts 1999, No.63, § 3, amended subsection B of § 647 to state that
“[t]he term ‘annuity contract’ shall include any contract which: ... (b) [s]tates
on its face or anywhere within the terms of the contact that it is an ‘annuity’
including but not limited to an immediate, deferred, fixed, equity indexed, or
variable annuity, irrespective of current pay status or any other definition in
Louisiana law.” La. Rev. Stat. 22:647(B)(2)(1999). According to § 4 of Acts
1999, No. 63, the foregoing amendment “is interpretive and shall apply to any
annuity contract or tax-deferred arrangement covered by the provisions of the Act
which is in existence on or prior to the effective date of this Act.”

5
merely changed how the exemption at issue was “defined.” Id. at

78. The Taylor court refused to apply the amendment, though, given

the explicit language of § 6 of the Bankruptcy Act of 1898, which

is almost identical to § 522(b)(2(A):3 “Texas law cannot, however,

change the post-bankruptcy rights of claimants and creditors as

determined by federal law, especially in the face of the explicit

language of § 6.” Id. Thus, in following Taylor, this court must

determine the scope of the Louisiana annuity exemption by reference

to the law existing at the time of the bankruptcy filing in 1994.

In its opinion, the bankruptcy court expressed its

understanding of the “proper” scope of unamended § 22:647

(hereinafter, simply Ҥ 22:467") as well as its dislike for Young.

Having found, as a matter of fact, that each stream of payments

constitutes an annuity under La. Rev. Stat. Ann. § 20:33, the

bankruptcy court held that the annuities were exempt under the

plain language of § 22:647. Alternatively, the bankruptcy court

purported to distinguish Young on grounds discussed later herein.

The district court agreed with the bankruptcy court’s reasoning:

“The conclusion that these contracts are indeed annuities mandates

that under Louisiana law ... each is exempt from seizure.”

By relying on their understanding of the “plain language”

of the statute, the lower courts declined to follow Young -- even

3
Section 6 of the Bankruptcy Act of 1898, formerly 11 U.S.C. § 24,
provided that the Bankruptcy Act “shall not affect the allowance to bankrupts of
the exemption which are prescribed ... by the State laws in force at the time of
the filing of the petition.”

6
though Young interpreted the statute at issue. In Young, this

court made an Erie guess as to how the Louisiana courts would

interpret § 22:647. Having made such a guess, neither the lower

courts nor this court is at liberty to ignore the precedential

value of this interpretation:

[W]hen our Erie analysis of controlling state
law is conducted for the purpose of deciding
whether to follow or depart from prior
precedent of this circuit, and neither a
clearly contrary subsequent holding of the
highest court of the state nor a subsequent
statutory authority, squarely on point, is
available for guidance, we should not
disregard our own prior precedent on the basis
of subsequent intermediate state appellate
court precedent unless such precedent
comprises unanimous or nearly unanimous
holdings from several -- preferably a majority
-- of the intermediate appellate courts of the
state in question.

Federal Deposit Ins. Corp. v. Abraham, 137 F.3d 264, 269 (5th Cir.

1998). Prior to Orso’s filing, no Louisiana appellate court had

questioned this court’s interpretation of § 22:647.4 Furthermore,

until § 22:647 was amended, neither the Louisiana Supreme Court nor

the Louisiana legislature had questioned this court’s

interpretation of § 22:647. Thus, in determining the law that was

4
Subsequent to Orso’s filing, only one Louisiana appellate court had
challenged the Young interpretation. See Welltech, Inc. v. Abadie, 683 So.2d 809
(La. Ct. App. 5 Cir. 1996). Since this court must apply the unamended version
of § 22:647 given Taylor and § 522(b)(2)(A), we do not reach the issue of whether
the amended version of § 22:647 constitutes “a subsequent statutory authority,
squarely on point” that would abrogate our prior holding in Young.

7
in effect at the time of Orso’s filing, this court is bound by

Young’s analysis of the unamended Louisiana statute.5

In Young, the debtor, an attorney, could not exempt

payments received on an otherwise non-exempt debt for legal

services by funding those payments with an annuity. The Young

court held that even if the payments may “strictly speaking, [be]

an annuity,” this court must “pierce the veil of this arrangement

to determine its true nature.” Young, 806 F.2d at 1306. Thus,

whether the payments are exempt depends on the nature of the stream

of payments: “It is the substance of the arrangement rather than

the label affixed to it that determines whether the payments are

exempt under the Louisiana statutes as proceeds from an annuity, or

accounts receivable, and part of the bankruptcy estate.” Id. at

1307.

The court relied on several factors to determine the true

nature of the arrangement. According to Young, annuities that are

exempt under § 22:647 have the following features: (1) they are

rights to receive fixed, periodic payments, either for life or for

5
In their brief, the Appellees contend that the bankruptcy court
applied the appropriate method of analysis — what they called the “civilian
lawyer’s method of analysis.” Apparently, this method involves looking at the
operative Louisiana statutes anew, independently of prior Fifth Circuit analysis:
“the real reason the Appellant’s argument fails is because the statute and its
lack of limitations is so clear.” But this court relies on strict stare decisis
rather than civilian analysis and cannot simply ignore the legal interpretation
of § 22:647 provided in Young. Even though the bankruptcy court believes this
court needs to re-think Young’s suggestion that the “retention of a claim against
an underwriter or purchaser of an annuity is equivalent to maintaining control
over the fund used to purchase the annuity,” In re Orso, 219 B.R. 402, 459 (M.D.
La. 1998), the bankruptcy court is not empowered to re-think and overturn Fifth
Circuit precedent on its own. As Taylor and Abraham make clear, this court is
bound to follow its prior Erie analysis of § 22:647.

8
a term of years, (2) the annuitant has an interest only in the

payments themselves and not in any fund, and (3) the annuitant

surrenders all right and title in and to the money he pays for the

annuity. Id. at 1306-07. A stream of payments constitutes a non-

exempt account receivable if: (1) the creditor has a claim against

the debtor, (2) the debtor agrees to pay the creditor in

installments at regular intervals, (3) the debt or principal sum is

due to the creditor although payable only in the manner agreed

upon, and (4) the creditor has a property interest in the debt or

principal sum. Id.

Although Young was owed an account receivable for

attorney’s fees and Orso is owed compensation for an injury, the

factors that were determinative in Young are also determinative in

the present case. Given the way the parties structured the

settlement, “the monthly payments made to [Orso] represent nothing

more than installment payments on debts to cover [the underlying

debt] owed by the [debtors].” Id. at 1307. Under the terms of the

agreement, Orso did not retain an ownership interest in the annuity

itself, but he remained a creditor of the parties who owed the

installment obligations.6 That is, the settlement of the

6
For example, Orso’s settlement agreement with Cook Construction
Company, Inc. and Liberty Mutual Insurance Company of Massachusetts states that
“the Insurer on behalf of the Defendant hereby agrees to pay the following sums
...
B. $1,180.00 per month for life with 30 years of said
payments guaranteed to him or to his designee
should he die before 30 years, said payments
beginning on October 15, 1989...

9
underlying tort action gave Orso a claim against the tortfeasors

and their insurers for specific amounts. The defendants agreed,

inter alia, to pay Orso $2,030.00 per month for 30 years or for

life, whichever was greater. Thus, the minimum amount to which

Orso was entitled is $730,800.00 (($2,030 * 12) * 30). As in

Young:

as each monthly payment is made it reduces by
a proportionate amount the [minimum] debt.
[Orso], therefore, retains a right against the
underwriters to the remaining principal until
the debt is fully extinguished... Retaining
such a right renders the so-called annuity, in
substance, nothing more than an account
receivable, and not exempt from the bankruptcy
estate.

Young, 806 F.2d at 1307. Unlike Young, if Orso lives longer than

30 years, Orso is entitled to continue receiving payments. But

this difference does not alter the Young analysis. Orso retains a

right in the minimum principal sum and in any payments due and

owing to him for living more than 30 years after the effective date

of the settlement agreement. This is sufficient to give Orso the

requisite “interest in not just the payments under the annuity, but

in ... the installment debt owed him by the [defendants].” Id.

Furthermore, as in Young, Orso did not deliver a sum of

money to anyone to fund the annuities, which is a central

Plaintiff is and shall be a general creditor to the Defendant and/or the
Insurer... The Defendant or the Insurer may fund Periodic Payments by purchasing
... an annuity policy... All rights of ownership and control of such annuity
policy shall be vested in the Defendant or the Insurer.” (emphasis added).
Orso’s settlement agreement with the State of Louisiana has similar language.

10
characteristic of an annuity.7 The annuity was funded by the

tortfeasors in exchange for Orso’s releasing the defendants from

tort liability for the 1986 accident. Thus, Orso’s settlement

agreements satisfy all the factors set out in Young: (1) Orso had

a claim against the debtors, (2) the debtors agreed to purchase an

annuity that would pay Orso installments at regular intervals,

(3) Orso is entitled to the payments but has no control over the

manner or timing of distribution, and (4) Orso has a property

interest enforceable against the tortfeasors and their insurers in

the payments due under the settlement agreements. Therefore, under

Young, the payments received by Orso are not exempt.8

The Appellees’ attempts to distinguish Young are

unpersuasive.9 The Appellees contend that the payments are exempt

because Orso constructively paid for the annuities. But the funds

7
This court also addressed what constitutes an annuity under Louisiana
law in Farm Credit Bank of Texas v. Guidry, 110 F.3d 1147 (5th Cir. 1997). The
court held that the general definition of an annuity, which governs the term as
it is applied elsewhere in the Civil Code, is set out in article 2793 of the
Louisiana Civil Code: “Article 2793 defines an annuity as follows: ‘The contract
of annuity is that by which one party delivers to another a sum of money, and
agrees not to reclaim it so long as the receiver pays the rent agreed upon.’
Under that definition, a fundamental characteristic of an annuity is the complete
divestiture by the annuitant of all ownership interest in the principal fund ...
an annuitant surrenders all right and title in and to the money he pays for it.”
Id. at 1150.
8
See also In re Rhinebolt, 131 B.R. 973, 976 (Bankr. S.D. Ohio 1991);
In re Johnson, 108 B.R. 240, 243 (Bankr. D.N.D. 1989).
9
The district court distinguished Young by stating that the contract
in Young was a different kind of contract than the one in this case. The
district court did not explain the ways in which the contracts differed. For the
reasons discussed above, this court rejects this cursory analysis and holds that
Orso’s structured settlement is sufficiently similar so as to be governed by this
court’s analysis in Young.

11
were no more constructively paid by Orso than by Young. And the

Young court did not consider constructive payment sufficient. In

fact, in order to be exempt, the court stated that Young should

have accepted his total fees at the time of settlement and then

purchased an annuity policy with the remainder. In so doing, Young

would have transferred his interest in the funds as consideration

for periodic payments. But neither Young nor Orso did this. As a

result, each had “an interest in not just the payments under the

annuity, but in a larger sense also in the principal fund or source

-- the installment debt owed him by the [defendants] -- just as if

he had left the money with the [defendants] and agreed to accept

payment in installments.” Id. at 1307.

In addition, contrary to the Appellees’ suggestion, the

fact that Young’s lump sum payment would have been taxable as

ordinary income, whereas Orso’s personal injury award would not

(see §§ 104 and 130 of the Louisiana Tax Code), is not dispositive.

Neither is the fact that Young was not the plaintiff in the suit

that gave rise to the settlement agreement. The Young court did

not predicate its interpretation of § 22:647 on tax considerations

or the “non-plaintiff” status of the person claiming an exemption;

rather, Young depends only on the factors discussed above. Instead

of accepting a lump sum settlement, Orso and Young “left the money

with the debtors” and permitted them to satisfy their obligation by

means of annuity contracts. The consequence of making such a

12
tactical decision during settlement negotiations is that the stream

of payments is not exempt.

IV. CONCLUSION

Given Taylor, the scope of the Louisiana annuity

exemption is “determined by reference to the law existing ... [at]

the time of the filing of the petitions.” 935 F.2d at 78. Since

§ 22:647 was amended after Orso filed his bankruptcy petition, this

court is bound to follow Young’s interpretation of unamended §

22:647. See Abraham, 137 F.3d at 269. Under Young, even though

the debt owed to Orso is funded by an annuity, this court must look

at the nature of the underlying stream of payments to determine

whether it is an exempt “annuity” or a non-exempt debt in the

nature of an account receivable.

Applying the Young factors to this case, Orso’s payments

are non-exempt. Under the terms of the settlement agreements, Orso

received regular installments from annuities funded by the debtors.

Orso had no control over the annuities, but he was guaranteed to

receive monthly payments for at least 30 years, and he retained

rights against the tortfeasors if the annuities failed. Such

“installment payments of a debt ... do not constitute an annuity”

under Young and are not exempt from property of Orso’s bankruptcy

estate. Young, 806 F.2d at 1307. We reverse and remand with

instructions to include the annuities in Orso’s estate.

REVERSED AND REMANDED.

13
DENNIS, Circuit Judge, dissenting.

This is a state law question of whether the beneficiary of an

annuity contract is entitled to the proceeds and avails of the

annuity exempt from liability for any debt against all creditors.

The beneficiary’s right to the exemption depends on the statutes

and decisions of the law of the state by which it was created.

“[T]he law of the states [] issue[s], and has been recognized by

this court as issuing, from the state courts as well as from the

state legislatures. When we know what the source of the law has

said that it shall be, our authority is at an end.” Kuhn v.

Fairmont Coal Co., 215 U.S. 349, 372 (1910) (Holmes, J.,

dissenting).

Justice Holmes’s dissents in Kuhn and Black & White Taxicab &

Transfer Co. v. Brown & Yellow Taxicab & Transfer Co., 276 U.S. 518

(1928) were adopted by the Supreme Court as the correct view of the

rights which are reserved by the Constitution to the several states

in Erie Railroad Company v. Tompkins, 304 U.S. 64 (1938). For the

court, Justice Brandies wrote:

Except in matters governed by the Federal Constitution or
by acts of Congress, the law to be applied in any case is
the law of the state. And whether the law of the state
shall be declared by its Legislature in a statute or by
its highest court in a decision is not a matter of
federal concern. There is no federal general common law.
Congress has no power to declare substantive rules of
common law applicable in a state whether they be local in

14
 their nature or 'general,' be they commercial law or a
part of the law of torts. And no clause in the
Constitution purports to confer such a power upon the
federal courts. . . . [T]he constitution of the United
States[] recognizes and preserves the autonomy and
independence of the states,--independence in their
legislative and independence in their judicial
departments. Supervision over either the legislative or
the judicial action of the states is in no case
permissible except as to matters by the constitution
specifically authorized or delegated to the United
States. Any interference with either, except as thus
permitted, is an invasion of the authority of the state,
and, to that extent, a denial of its independence.

Id. at 78-79.

Recently, by Acts 1999, No. 63, § 3, the Louisiana Legislature

interpreted and clarified the exemption statute in question,

La.R.S.22:647(B), providing that: “[t]he term ‘annuity contract’

shall include any contract which: . . . (b) [s]tates on its face or

anywhere within the terms of the contract that it is an ‘annuity’

including but not limited to an immediate, deferred, fixed, equity

indexed, or variable annuity, irrespective of current pay status or

any other definition of ‘annuity’ in Louisiana law.” See La.R.S.

§ 22:647(B)(2)(West 1999). The act further provides that the

foregoing amendment “is interpretive and shall apply to any annuity

contract or tax-deferred arrangement covered by the provisions of

15
this Act which is in existence on or prior to the effective date of

this Act.” La. Acts 1999, No. 63, § 4.

In Louisiana, “[p]rocedural and interpretive laws apply both

prospectively and retroactively, unless there is a legislative

expression to the contrary.” La. Civ. Code art. 6 (1988). The

Louisiana Supreme Court, in Ardoin v. Hartford Accident and

Indemnity Co., explained that “interpretive legislation does not

create new rules, but merely establishes the meaning that the

interpreted statute had from the time of its enactment. It is the

original statute, not the interpretive one, that establishes rights

and duties.” 360 So.2d 1331, 1338 (La. 1978) (citing Gulf Oil

Corp. v. State Mineral Board, 317 So.2d 576 (La. 1974); 1 M.

Planiol, Treatise on the Civil Law, No. 251 (La.State

L.Inst.Transl. 1959); A. Yiannopoulos, Civil Law System 68 (1977));

circuit precedent in accord Pierce v. Hobart Corp., 939 F.2d 1305,

1308-09 (5th Cir. 1991); Harrison v. Otis Elevator Co., 935 F.2d

714, 719 (5th Cir. 1991); Louisiana World Exposition v. Federal Ins.

Co., 858 F.2d 233, 244-45 (5th Cir. 1988); Laubie v. Sonesta Int’l

Hotel Corp., 752 F.2d 165, 167-68 (5th Cir. 1985).

Consequently, our authority to “Erie guess” at the original

meaning of La. R.S.22:647(B) is foreclosed within the ambit of the

legislature’s interpretive act. As Justice Holmes said, “When we

know what the source of the law has said that it shall be, our

authority is at an end.” Kuhn, 215 U.S. at 372 (Holmes, J.,

16
dissenting). “‘The authority and only authority is the State, and

if that be so, the voice adopted by the State as its own (whether

it be of its Legislature or of its Supreme Court) should utter the

last word.’” Erie R. Co., 304 U.S. at 79 (quoting Black & White

Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co.,

276 U.S. 518, 535 (1928) (Holmes, J., dissenting). Except as to

matters by the constitution specifically authorized or delegated to

the United States, we have no “supervision over either the

legislative or the judicial action of the states.” Id. “[E]ven

the independent jurisdiction of the circuit courts of the United

States is a jurisdiction only to declare the law, at least, in a

case like the present, and only to declare the law of the state.

It is not an authority to make it.” Kuhn, 215 U.S. at 370 (Holmes,

J., dissenting). “The law of a state does not become something

outside of the state court, and independent of it, by being called

the common law”, id., stare decisis, or circuit precedent.

Because the constitution forbids our interference or invasion

of the authority of the state, I disagree strongly with the

assertion of my colleagues in the majority that this court’s

decision in In re John Taylor Company, 935 F.2d 75 (5th Cir. 1991),

limits the authority and independence of the State of Louisiana

through its legislature, as well as its supreme court, to interpret

and declare the original meaning of its own laws. I do not think

this court’s Erie guess as to how the Louisiana Supreme Court would

17
have decided the Young case is in conflict with the legislature’s

recent interpretive act. But, even if it is, the law of the state

does not become something outside of the state court or the state

legislature, and independent of it, by being interpreted

differently in an Erie guess. Furthermore, the In re John Taylor

Company decision does not hold that a state may not interpret the

original meaning of its law. On the contrary, the court in that

case simply held that a substantive change in the Texas state

constitution increasing the amount of property defined as a

homestead, which expressly stated that it was retroactive, could

not be substituted for the state exemption designated by the

Bankruptcy Act as applicable to a bankruptcy case filed prior to

the change in the substantive law. See In re John Taylor Co., 935

F.2d at 78. The Bankruptcy Act stated that it shall not affect

exemptions prescribed by the state laws in force at the time of the

filing of the petition. See id. This court stated that “Taylor is

entitled to the homestead exemption available at [the time of the

petition in 1979], not to the new homestead exemption put into

force in 1983.” Id. In the present case, in contrast with In re

John Taylor Company, there has been no substantive change in the

state law, which, if given full retroactive effect would conflict

with the bankruptcy law. There is no retroactive law at issue in

18
the present case.10 An interpretive act declares or clarifies the

original meaning of the statute; it is not a substantive change in

the law; it does not conflict with the federal bankruptcy law. If

there is a conflict between the interpretive act and the Young

decision based on an Erie guess, as the majority contends, it is a

disagreement over the interpretation of a state law, as to which,

the Supreme Court has held, the state shall have the “last word.”

Erie, 304 U.S. at 79.

I think it is clear beyond any reasonable doubt that if the

very broad interpretation of La.R.S.22:647 by Act 63 of 1999 were

to be applied to the present case, Orso would be entitled to

exemptions of the periodic payments derived from annuities related

to his structured settlements. None of the parties contends

otherwise, and I do not read the majority opinion as disagreeing

with that proposition either. This ought to suffice. For the sake

of completeness, however, I will point out additional factual and

legal grounds which I believe reinforce our Erie duty to uphold the

state law exemptions as interpreted by their source and affirm the

bankruptcy and district courts.

Young v. Adler, 806 F.2d 1303 (5th Cir. 1987), is so thoroughly

distinguishable, factually and legally, from Orso’s case, that

10
“‘In [the case of an interpretive act], there is an apparent rather than
real retroactivity, because it is the original rather than the interpretive law
that establishes rights and duties.’” Ardoin, 360 So.2d at 1338 (citing and
quoting A. Yiannopoulos, Civil Law System 68 (1977)). Moreover, Act 63 expressly
states that it “is interpretive and shall apply to any annuity contract or tax-
deferred arrangement covered by the provisions of this Act which is in existence
on or prior to the effective date of this Act.” La. Acts 1999, No. 63, § 4.

19
Young’s Erie guess must be disregarded as affecting our Erie duty

to follow the legislature’s interpretive act, or our (perhaps

academic) guess as to how the Louisiana Supreme Court would decide

Orso’s claim to an exemption under Louisiana law and the facts of

this case.11 (1) In Young, this court affirmed decisions of mixed

facts and law by the bankruptcy and district courts, by Erie-

guessing on a slate clear of state cases, that the trustee (in a

state law creditor’s shoes), under state law, could “pierce” or

disregard the structured payment of the debtor’s attorney’s fees

funded by an annuity and disallow the lawyer Young’s claim to state

statutory exemptions of the periodic annuity funded payments. On

the contrary, in Orso we should affirm the bankruptcy and district

court’s Erie guess that the state’s highest court would find

Young’s piercing of an annuity used to fund payment of attorney’s

fees distinguishable and would not permit a creditor to “pierce” or

disregard Orso’s exemption of periodic annuity payments used to

fund a personal injury structured settlement under state law.12 (2)

11
La.R.S. 22:647(B) (1987) provides:
The lawful beneficiary, assignee, or payee, including the
annuitant’s estate, of an annuity contract, heretofore or hereafter
effected, shall be entitled to the proceeds and avails of the
contract against the creditors and representatives of the annuitant
or the person effecting the contract, or the estate of either, and
against the heirs and legatees of either such person, saving the
rights of forced heirs, and such proceeds and avails shall also be
exempt from all liability for any debt of such beneficiary, payee,
or assignee or estate, existing at the time the proceeds or avails
are made available for his own use.

12
Even if I am wrong in concluding that we are bound directly by the
legislature’s interpretive act, we now have new state law guidance that was
unavailable to the Young court: two recent decisions by a state court of appeal

20
The structured settlement of a personal injury claim (as in Orso)

is based on a historical (since 1918) public policy of excluding

tort-based damages or settlements from federal income taxes,

whether paid in lump-sum, installments, or funded by periodic

annuity payments.13 On the other hand, attorney’s fees are not

excludable from federal income taxes and attempted tax deferrals

through structured payments of attorney’s fees have been

disapproved by the IRS. (3) Louisiana law provides creditors’

actions and remedies to “pierce,” disregard and avoid debtors’

transactions made with constructive or actual intent to defraud or

defer his creditors’ claims. Conversely, Louisiana law has never

afforded any creditor an action to “pierce,” disregard or avoid a

solvent debtor’s transfer made without extrinsic evidence of

constructive or actual intent to defraud his creditors or to prefer

a particular creditor’s claim. Accordingly, in Young there was a

basis in state law for a bankruptcy trustee in a creditor’s shoes

to “pierce” and avoid the attorney debtor’s use of a structured

payment of attorney’s fees through purportedly exempt annuity

payments to unlawfully exclude and defer federal income taxes and

upholding the exemption of annuities (one of which was apparently used in a
personal injury structured settlement), the state supreme court’s evident
approval of the decisions, and the state legislature’s interpretation of the
exemption statute indicating that it was intended to include the annuities used
in Orso’s structured settlements.
13
Indeed, although not presented in this case, an argument could be made
that federal law has preempted the field with respect to the proper configuration
of tax free personal injury structured settlements so as to bar a state from
discriminating against them in the application of state exemption statutes.

21
to defraud, delay or hinder his creditors. Conversely, however,

Louisiana law provides no basis for a creditor or trustee to

“pierce,” disregard, or avoid Orso’s non-fraudulent, non-taxable,

properly configured, annuity funded structured settlement of his

personal injury claims in accordance with the Internal Revenue Code

and IRS Revenue Rulings. (4) Consequently, a decision by this

court to reverse the bankruptcy and district courts’ decisions that

the highest state court would not permit a creditor to “pierce” and

disregard Orso’s structured settlements, annuities, and state law

exemptions would amount to a drastic departure from two lines of

Circuit precedent. In Matter of Reed, 700 F.2d 986, 990 (5th Cir.

1983), which preceded the Young case and has been consistently

followed by this Circuit, we held that § 522 of the Bankruptcy code

does not permit federal courts to disallow state exemptions in the

absence of extrinsic evidence of fraud and a state law action to

disallow the exemption for fraud. In Walden v. McGinnes, 12 F.3d

445 (5th Cir. 1994), we upheld the state law exemption of periodic

payments funded by annuities as part of a structured settlement

under a Texas statute similar to Louisiana’s.

1.

Subsequent to Matter of Young at least one Louisiana Court of

Appeal has expressly ruled, with the Louisiana Supreme Court’s

22
clear implicit agreement, that, under La.R.S. 20:33,14 La.R.S.22:

647(B), and La.R.S. 13:3881(D)(1),15 payments to lawful

beneficiaries under annuity policies used to fund structured

settlements are exempt from seizure or liability for the debt of

the beneficiary or payee. See Welltech, Inc. v. Abadie, 666 So.2d

1237, 1239 (La.App. 5th Cir. 1996); see also Cashio v. Tollin, 712

So.2d 254, 255-56 (La.App. 5th Cir. 1998)(judgment debtor’s annuity

payments under an arrangement that was clearly a structured

settlement were exempt from garnishment under La.R.S. 13:3881(D)

and from seizure by creditors under La.R.S. 22:33 as “[i]t is clear

that the Louisiana Legislature intended to exempt the proceeds and

avails of annuities from any seizure.” (citing Abadie, 683 So.2d

809 (La.App. 5th Cir. 1986), writ denied, 712 So.2d 864 (La. 1998)).

The Louisiana Fifth Circuit held that, under Louisiana statutory

authority (including La.R.S. 22:647(B)), payments from annuity

14
La.R.S. 22:33 provides in pertinent part: “The following shall be exempt
from all liability for any debt except alimony and child support: (1) All
pensions, all proceeds of and payments under annuity policies or plans, all
individual retirement accounts, all Keogh plans, all simplified employee pension
plans, and all other plans qualified under Sections 401 or 408 of the Internal
Revenue Code. However, an individual retirement account, Keogh plan, simplified
employee pension plan, or other qualified plan is only exempt tot he extent that
contributions thereto were exempt from federal income taxation at the time of
contribution, plus interest or dividends that have accrued thereon.”
15
La.R.S. 13:3881(D)(1) provides: “The following shall be exempt from all
liability for any debt except alimony and child support: all pensions, all
proceeds of and payments under annuity policies or plans, all individual
retirement accounts, all Keogh plans, all simplified employee pension plans, and
all other plans qualified under Sections 401 or 408 of the Internal Revenue Code.
However, an individual retirement account, Keogh plan, simplified employee
pension plan, or other qualified plan is only exempt to the extent that
contributions thereto were exempt from federal income taxation at the time of
contribution, plus interest or dividends that have accrued thereon.”

23
policies purchased with funds representing attorneys fees owed to

Abadie for legal services he had rendered to clients were exempt

from seizure and from garnishment to satisfy a judgment against

Abadie. See Abadie, 666 So.2d at 1239. The Abadie court concluded

that the payments were exempt as annuity proceeds regardless of the

nature of the original obligation that the annuities were, in

effect, designed to discharge. See id. at 1241.

The judgment creditor petitioned for, and the Louisiana

Supreme Court granted, a writ of certiorari and review of the

appellate court decision. See 672 So.2d 698 (La. 1996). However,

after reviewing the case, the Supreme Court vacated the decision of

the court of appeal and remanded for consideration of “whether the

obligation (as opposed to the annuity payments) of the

Intermediaries to Abadie are exempt from seizure.” Id. Thus, the

Supreme Court reviewed and implicitly approved of the appeals

court’s holding that the annuity payments were exempt from seizure.

The Supreme Court vacated without expressing any disapproval and

remanded the case only for consideration of an additional unraised

and unaddressed issue. On remand, the state Fifth Circuit

reaffirmed its original ruling in favor of the beneficiaries of the

annuities and held that the intermediaries (the insurance companies

who had purchased the annuities to satisfy the obligation to pay

the attorneys fees) were also protected by the exemption statute.

See 683 So.2d 809, 811-12 (La.App. 5th Cir. 1996). The judgment

24
creditors again applied for writ of certiorari and/or review, and

the Louisiana Supreme Court denied the application. See 712 So.2d

864 (La. 1998).

Thus, the Supreme Court’s actions in Abadie evinced its clear

approval of the court of appeal’s decisions and not simply a

routine writ denial. In fact, the situation in the present case is

inverse to that presented by F.D.I.C. v. Abraham, 137 F.3d 264 (5th

Cir. 1998), upon which the majority relies. As in Abraham, “a

subsequent statutory authority [Act 63 of 1999], squarely on point,

is available for guidance[.]” Id. at 269. But contrary to the

situation in Abraham, in the present case the recent interpretive

act of the legislature, together with the state supreme court’s own

expressions and actions augur in favor of an eventual holding by

the Louisiana Supreme Court that would make preeminent the Abadie

court’s decisions.

2.

A very important distinction between the Young case and Mr.

Orso’s case grows out of the different purposes for which the

structured settlements and annuities were used in each case. The

structural settlement of a personal injury claim, an outgrowth of

the historic public policy of excluding tort-based recovery from

federal income taxes, is specifically approved and encouraged by

the Internal Revenue Code, IRS revenue rulings, and IRS tax

letters. The use of a structural settlement arrangement to defer

25
the payment of federal income taxes on attorney’s fees has not been

approved by tax laws and regulations but has been expressly

disapproved of by the IRS.

In one form or another, Congress has expressly excluded from

gross income tort damages received on account of personal injuries

since 1918. See Roemer v. Commissioner of Internal Revenue, 716

F.2d 693, 696 (9th Cir. 1983) (citing the Revenue Act of 1918 §

213(b)(6), 40 Stat. 1066). A “probable purpose” for this special

exclusion is that “Congress may have intended to confer a

humanitarian benefit on the victim or victims of the tort.”

Norfolk and Western Railway Co. v. Liepelt, 444 U.S. 490, 501

(1980)(Blackmun, J. dissenting); see also Epmeier v. United States,

199 F.2d 508, 511 (7th Cir. 1952).

The structured settlement of personal injury claims has been

approved as a method by which the claimants may receive the non-

taxable principal settlement amount in periodic payments and also

receive the benefit of earnings on the principal amount as tax free

enhancements of each periodic payment. In contrast, if a personal

injury claimant accepts a lump sum cash settlement and uses it to

purchase his own annuity, the interest or gains earned on the

principal sum of the annuity could not be excluded from the

claimant’s taxable income. By configuring a structured settlement

as one of those specifically approved by the Internal Revenue Code

26
and Revenue Rulings, however, the personal injury claimant may

accomplish the same end without incurring additional income taxes.16

As the Court of Appeals in Western Union Life Assurance Co.

v. Hayden, 64 F.3d 833, 839 (3rd Cir. 1995), explained:

Structured settlements are a type of settlement designed
to provide certain tax advantages. In a typical personal
injury settlement, a plaintiff who receives a lump-sum
payment may exclude this payment from taxable income
under I.R.C. S 104(a)(2) (providing that the amount of
any damages received on account of personal injuries or
sickness are excludable from income). However, any
return from the plaintiff's investment of the lump-sum
payment is taxable investment income. In contrast, in a
structured settlement the claimant receives periodic
payments rather than a lump sum, and all of these
payments are considered damages received on account of
personal injuries or sickness and are thus excludable
from income. Accordingly, a structured settlement
effectively shelters from taxation the returns from the
investment of the lump-sum payment. See Rev.Rul. 79-220,
1979-2 C.B. 74. See also Sen.Rep. No. 97-646, 97th
Cong., 2d Sess. reprinted in 1982 U.S.C.C.A.N. 4580, 4583
(explaining that Pub.L. No. 97-473, 96 Stat. 2605,
codified Rev.Rul. 79-220 at 26 U.S.C. S 104(a)(2)).

16
Structured settlements provide advantages for both the plaintiff, the
defendant, and the defendant’s liability insurers. Claimants can exclude all of
the payments from their gross income for federal tax purposes, and the payments
can be made dissipation-proof, secure, management-free, and the payments can be
configured so that the recipient cannot outlive them; defendants and liability
insurers can often secure settlements for less money than is required for all-
cash settlements, and they can assign their obligation to make periodic payments
to avoid a continuing liability to make the future payments. See Paul J. Lesti,
Structured Settlements § 1.1 (2d ed. 1993).

27
 In Revenue Ruling 79-220, the IRS held that the exclusion from

gross income provided by I.R.C. § 104(a) applied to the full amount

of the monthly payments received by the plaintiff in settlement of

a personal injury damage suit “because [the plaintiff] had a right

to receive only the monthly payments and did not have the actual or

constructive receipt or the economic benefit of the lump-sum amount

that was invested to yield that monthly payment[;]” and if the

plaintiff should die before the end of 20 years, the payments made

to the plaintiff’s estate under the settlement agreement are also

excludable from income under I.R.C. § 104. Rev.Rul., 1979-2 C.B.

74.

The configuration of the structured settlement at issue in

Revenue Ruling 79-220 has been closely followed in many subsequent

cases. In the situation addressed by the ruling, the plaintiff, an

individual, sued the defendant for damages for personal injuries.

Before trial, the plaintiff accepted an offer by the defendant’s

liability insurer to settle the suit for a lump-sum payment of

$8,000 and the liability insurer’s agreement to provide the

plaintiff with the discounted present value of the monthly payments

of $250 for plaintiff's lifetime or 20 years, whichever is longer,

the payments to be made to plaintiff's estate after plaintiff's

death if plaintiff should die before the end of 20 years.

Plaintiff had no right to monthly income (the present value of

which, at date of settlement, was less than the total monthly

28
payments to be provided) or to control the investment of that

amount. See Rev.Rul. 79-220.

To provide the monthly payments for the plaintiff, the

defendant’s liability insurer purchased a single premium annuity

contract from a life insurance company. The defendant’s liability

insurer advised the life insurance company issuing the annuity to

make payments directly to plaintiff. However, the defendant’s

liability insurer is the owner of the annuity contract and has all

rights of ownership, including the right to change the beneficiary.

“[The plaintiff] can rely on only the general credit of [the

defendant’s liability insurer] for collection of the monthly

payments.” Id. (emphasis added).17

The IRS concluded that under these circumstances, “there is a

continuing obligation by the defendant’s liability insurer to pay

$250 per month to plaintiff for the agreed period. The liability

insurer's purchase of a single premium annuity contract from the

17
The Liberty Mutual structured settlement agreement contained nearly
identical language regarding the obligation to make periodic payments: “Plaintiff
is and shall be a general creditor to the Defendant [Cook Construction] and/or
the Insurer [Liberty Mutual]. Said payments cannot be accelerated, deferred,
increased or decreased by the Plaintiff and no part of the payments called for
herein or any assets of the Defendant and/or the Insurer is to be subject to
execution or any legal process for obligation in any manner, nor shall the
Plaintiff 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.” It also provided that “The Defendant or the Insurer may fund Periodic
Payments by purchasing a ‘qualified funding asset,’ within the meaning of Section
130(d) of the Internal Revenue Code, in the form of an annuity policy from
Liberty Life Assurance Company of Boston. All rights of ownership and control
of such annuity policy shall be vested in the Defendant or the Insurer. The
Defendant or the Insurer may have the Annuity Carrier [Liberty Life] mail
payments directly to the Plaintiff.”
That this settlement agreement was designed to comport with the model
approved in Revenue Rule 79-220 could not be clearer.

29
[life] insurance company was merely an investment by the liability

insurer to provide a source of funds for the liability insurer to

satisfy its obligation to the plaintiff. . . . [and] the

arrangement was merely a matter of convenience to the obligor and

did not give the recipient any right in the annuity itself.” Id;

see also Rev. Rule 79-313 (same result where liability insurer “M”

agrees to make periodic payments without purchasing an annuity and

facts indicated that the personal injury plaintiff’s “rights

against M are no greater than those of M’s general creditors.”)

(emphasis added).

Until 1983, the utility of structured settlements was less

than it is today because of the credit risks recipients at that

time were required to assume. See Hayden, 64 F.3d at 840 (citing

William Winslow, Tax Reform Preserves Structured Settlements, 65

Taxes 22, 24 (1987)). Because the annuity was merely a matter of

convenience and did not give the recipient any right in the

annuity, in the case of the settling defendant's default the

plaintiff could not seek redress from the annuity issuer. See id.

This presented a problem if the settling defendant's general credit

risk was high. See id.

I.R.C. § 130 was enacted by Congress to solve this problem.

See Sen.Rep. No. 97-646, 97th Cong., 2d Sess. reprinted in 1982

U.S.C.C.A.N. 4580, 4583. Section 130 allows a tax-neutral

transaction in which the settling defendant assigns and a third

party assumes the obligation to make periodic payments under most

30
section 104(a)(2) structured settlements. See Hayden, 64 F.3d at

840. When the third party assignee, usually a company in the

business of assuming periodic payment obligations and financing

them by purchasing annuities from life insurance companies, has a

credit rating superior to that of the settling defendant, or the

defendant’s liability carrier, such an assignment and assumption

agreement benefits the plaintiff by allowing her to rely on the

assignee's superior credit. See id. (citing Winslow, supra).

A key characteristic of an IRS approved structured settlement

is that the beneficiary of the settlement does not have actual or

constructive receipt of the economic benefit of the lump-sum amount

that was invested to yield the monthly payments. See id. at 839-40

(citing Rev.Rul. 79-220). “[T]he arrangement [is] merely a matter

of convenience to the obligor and [does] not give the recipient any

right in the annuity itself.” Rev.Rul. 79-220. Significantly,

and contrary to the majority’s mistaken belief, the fact that a

plaintiff in a personal injury structured settlement “can rely on

only the general credit” of the defendant or its liability insurer

does not constitute “actual or constructive receipt or the economic

benefit of the lump sum amount” invested to yield the monthly

payments. See id. Moreover, also conflicting with the majority’s

notion, I.R.C. § 130(d) recognizes as a “‘qualified funding’ asset

. . . any annuity contract issued by a company licensed to do

business as an insurance company under the laws of any State, or

any obligation of the United States, if . . . such annuity contract

31
or obligation is used by the assignee to fund periodic payments

under any qualified assignment” and certain other requirements are

met. I.R.C. § 130. This court, of course, may not be bound for

all purposes to adopt the Internal Revenue Code’s concepts of

“actual or constructive receipt of the benefit of the lump sum

amount invested” or “annuity.” But we are Erie-bound to decide the

question of what constitutes an annuity under the state exemption

statute as the state supreme court would. I believe that it is

extremely unlikely that the Louisiana Supreme Court would decide

that an annuity recognized as appropriate for use in a personal

injury structured settlement configured in accordance with Revenue

Ruling 79-220, I.R.C. § 130, and other tax laws and regulations

does not also constitute an annuity for purposes of

La.R.S.22:647(B). See 2 A.N. Yiannopoulos, Louisiana Civil Law

Treatise: Property § 150 (Supp. 2000) (“For excellent analysis of

the nature of annuities and the governing law, see In re Orso, 219

B.R. 402 (Bankr. M.D. La. 1998) (property exempt from

bankruptcy)”).

Orso entered two personal injury structured settlements to be

funded with annuities and configured in accordance with I.R.C. §

130 and Revenue Ruling 79-220. Orso settled with Cook Construction

Company and its liability insurer, Liberty Mutual Insurance Company

for a cash sum paid at settlement and Liberty’s obligation to make

periodic monthly payments to Orso or to his death beneficiary for

30 years. Orso agreed that Cook Construction Company or Liberty

32
Mutual may fund the periodic payments by purchasing a “‘qualified

funding asset’, within the meaning of Section 130(d) of the

Internal Revenue Code, in the form of an annuity policy from

Liberty Life Assurance Company of Boston.” Subsequently, Liberty

Mutual purchased such an annuity from Liberty Life in accordance

with the structured settlement. The structured settlement

agreement provided that Orso is and shall be a general creditor to

Cook Construction Company and Liberty Mutual. As Revenue Ruling

79-220 and I.R.C. § 130 make clear, however, Orso’s general

creditor status does not constitute his actual or constructive

receipt or the economic benefit of the lump-sum amount or prevent

the annuity from being a valid annuity and “qualified funding

asset.” The structured settlement between Orso, Valerie Canfield

Orso (Orso’s wife at that time), and The State of Louisiana

followed the configuration authorized by I.R.C. § 130. The Orsos

agreed to release the State and the State agreed to make periodic

monthly payments to Orso for thirty years. The parties also agreed

that the State would assign the obligation to make periodic

payments to Conseco Annuity Guarantee Company in substitution for

the State’s obligation and that Conseco would fund the obligation

by purchasing an annuity from Western National Life Insurance

Company. In accordance with the structured settlement agreement,

Conseco purchased an annuity from Western National Life. The

settlement agreement provides that Conseco, as owner of the annuity

contract, possesses the sole authority to designate a change of

33
beneficiary, but that such a request by the payee shall not be

unreasonably withheld.

Both of the structured settlement agreements entered by Orso

with the state and with Cook Construction and Liberty Mutual

provided that the periodic payments cannot be accelerated,

anticipated, assigned, alienated, seized, executed upon, or

subjected to other legal process. As the bankruptcy court

correctly found, Orso’s personal injury structured settlements with

the State of Louisiana and with Cook Construction Company were

funded by annuities and “structured so as to fall within the

protection of §§ 104 and 130 of the Internal Revenue Code, so that

as broadly as possible, the proceeds of the annuities would be

excluded from Orso’s gross annual income for tax purposes, and the

other parties could receive any benefits afforded by the Code.” 219

B.R. at 452; see also id. at n.89.

Although attorney’s fees, unlike plaintiffs’ personal injury

recovery, are includable in gross income for federal income tax

purposes, some attorneys representing claimants have attempted to

defer their fees when settling a case involving structured

settlements. However, the IRS has specifically targeted this type

of deferred compensation. See Lesti, supra, at § 15:10.

In IRS National Office Technical Advice Memorandum, Letter

9134004 (May 7, 1991), an attorney’s fee was included in the

current taxable year even though he did not own the annuity, only

the ability to receive the payments. The settlement agreement of

34
a personal injury lawsuit directed part of the payments that were

to paid to the plaintiff to be paid to the attorney. These

payments directed to the attorney were in full discharge of the

plaintiff’s obligation to pay the lawyer for services. The

liability insurer assigned its obligation to an assignee insurance

company and paid a lump sum amount sufficient for the assignee to

purchase an annuity contract to cover the future payments as stated

in the settlement agreement. For the attorney’s payments an

annuity policy was purchased by the assignee insurance company and

the attorney was designated as both the annuitant and payee. See

Lesti, supra, at § 15:10.

The Technical Memorandum reviewed the economic benefit

doctrine under which a service recipient’s creation of a fund in

which a service provider has vested rights will result in immediate

inclusion of the amount funded in the service provider’s gross

income. If the service provider’s interest is nonforfeitable, a

fund is created when an amount is irrevocably deposited with a

third party. Because the promise to pay the attorney his fee was

funded, secured and guaranteed by the payment of consideration to

an unrelated third party, the attorney’s right to receive the

annuity’s payments were nonforfeitable property under Section 83 of

the IRS Code and made his entire fee taxable in the year the

annuity was purchased. See id.

On the other hand, in Childs v. Commissioner, 103 T.C. 634

(1994), aff’d, 89 F.3d 856 (11th Cir. 1996), the Tax Court held in

35
two cases that attorney beneficiaries of structured settlements

were entitled to favorable tax treatment. The factual situations

were similar. The liability carriers were the obligors, the policy

owner was the assignment company, the attorneys were only the

beneficiaries of the policies, the owner could change the annuity

beneficiaries, the payments could not be accelerated, deferred,

increased or decreased by the recipients, and the attorneys had

only general creditorship rights against the assignment company.

See id. at 651. The Tax Court concluded that in one case since the

attorneys did not own the policies, and because the owner could

change annuitants or beneficiaries without the attorneys’ consent,

the promises to pay the attorneys under the structured agreement

were not funded promises. See id. In the second case the Tax

Court found that since the attorneys were neither the owners nor

were they irrevocable beneficiaries, this meant the annuities were

unfunded. See id.; see also Lesti, supra, at §15.10.1 (Cum.Supp.

1999).

Consequently, Young’s attempt to exclude and defer his taxable

income open attorney’s fee account with an annuity in a structured

payment arrangement was generically different from Orso’s I.R.C.

and IRS approved structured settlements. In the Orso settlements,

which were carefully configured in accordance with Revenue Ruling

79-220 and I.R.C. § 130, annuities were purchased and owned by the

obligor and the assignee solely for their convenience to fund

their obligation to make periodic payments of initially non-taxable

36
personal injury damages recovery to Orso, the personal injury

plaintiff. Orso had no constructive receipt or economic interest

in the lump-sum amount invested by others, no right to accelerate

or control the periodic payments, and no interest in the annuity.

On the other hand, Young’s structured arrangement, if not a

complete sham or simulation as the Young courts indicated, was in

all probability not a lawful deferment of taxable income, but

instead appeared to be an attempt by Young to enjoy tax breaks

while at the same time refusing to discharge his clients from their

attorney fee obligation and retaining the right to treat the

annuity as an exigible open account receivable.

3.

In the present case, neither the bankruptcy judge nor the

district court found fraud or any other fact justifying the

disallowance of Mr. Orso’s exemption. As there is no evidence to

warrant reversing for clear error on these factual determinations,

the district and bankruptcy court judgments should be affirmed.

On the other hand, the bankruptcy court’s decision to disallow

the debtor’s exemption, affirmed by the district and by this court

in Young v. Adler, 806 F.2d 1303 (5th Cir. 1987), was arguably

supported by evidence of the debtor’s income tax chicanery and

constructive or actual intent to defraud his creditors. Mr. Young,

an attorney, filed a voluntary petition for relief under Chapter 7

of the Bankruptcy Code on July 20, 1984. He did not list in his

schedules income in the sum of $1,875.00 per month from First

37
Colony Life Insurance Company paid pursuant to an annuity contract

dated July 1, 1982.18 The Trustee moved that the owner of the

contract, a structured settlement company, be directed to pay all

future annuity payments to the Trustee, and that Mr. Young be

required to turn over the sum of $11,250.00 which he had received

pursuant to the annuity contract subsequent to the filing of the

petition. See id. at 1304-05. The Debtor subsequently amended his

Statement of Financial Affairs including the annuity as personal

property in Schedule B-2 and claiming such property as exempt in

Schedule B-4. The Debtor listed the annuity in his "Summary of

Debts and Property" as having a zero value because he claimed to

have no interest in the annuity since he is only the beneficiary

not the owner of the annuity. See id. at 1304.

The bankruptcy court decided that the monthly payments were

seizable and not exempt under La.R.S. 20:33 and 22:647 as payments

under an annuity contract, that the owner of the contract should be

directed to remit all future payments to the Trustee, and that the

Debtor should turn over to the Trustee the sum of eleven thousand

two hundred and fifty and no/100 ($11,250.00) dollars which he had

18
The annuity contract resulted from Mr. Young's representation of the
surviving spouse and children of a Mr. Fanguy in a death claim against an
offshore logistics company, affiliated companies and their insurance
underwriters. A structured settlement was entered into by and between all
parties in interest, including Mr. Young as counsel of record. This agreement
provided Mr. Young $25,000 immediately, and monthly payments of $1,875 for the
period of fourteen years, beginning on August 1, 1982 and terminating on July 1,
1996. The monthly payments were to come from an annuity contract, purchased by
Gerald J. Sullivan & Associates, a structured settlement firm, from First Colony
Life Insurance Company, for the benefit of Mr. Young. See id.

38
received post-petition pursuant to the payments on the debt owed

him by the Underwriters. See Matter of Young, 64 B.R. 611, 612

(Bankr. E.D. La. 1986). The district court affirmed after the

debtor appealed. See id. at 616.

On further appeal, this court held that “[w]hile the payments

Debtor claims to be exempt are, strictly speaking, an ‘annuity,’

they are also accounts receivable. We must, therefore, pierce the

veil of this arrangement to determine its true nature.” 806 F.2d

at 1306 (emphasis added). Thus, Young’s threshold determination as

an Erie court necessarily was to decide whether the bankruptcy and

district courts had properly used Louisiana law to “pierce” or

disregard the structured settlement and the annuity so as to

consider whether the attorney debtor had improperly converted or

disguised his open account of earned attorney’s fees in order to

defraud creditors or avoid taxes.

Under Louisiana law, the term “piercing” or “piercing the

veil” is used to describe an extraordinary remedy in which the

courts permit a creditor to disregard or set aside his debtor’s

fraudulent transfer or simulated transfer to a third person. This

remedy is the Louisiana counterpart to the Uniform Fraudulent

Conveyance Act and the Uniform Fraudulent Transfer Act, although

the Louisiana remedies are divided into three distinct actions.

“Piercing” and “piercing the veil” have also been used for the

process of disregarding the legal fiction that a corporation is a

legal person separate from its owners or agents. “Piercing” legal

39
forms under Louisiana law, as in other jurisdictions, is an

extraordinary remedy, to be granted only rarely to prevent and

deter fraud or other abuses of juridical entities or transactions.

For example, the Louisiana Supreme Court has said that, in

general, courts have “disregard[ed] the corporate entity, or in

synonymous terms ‘pierce[ed] the corporate veil,’ when corporate

form has been used to ‘defeat public convenience, justify wrong,

protect fraud, or defend crime.’” Glazer v. Commission on Ethics

for Public Employees, 431 So.2d 752, 757 (La. 1983) (quoting United

States v. Milwaukee Refrigerator Transit Co., 142 F. 247, 255

(E.D.Wis. 1905)); see generally, 8 Glenn G. Morris and Wendell H.

Holmes, Louisiana Civil Law Treatise: Business Organizations §

32.01, et seq. (1999); 1 Fletcher, Corporations §§ 41-48 (perm. ed.

1974).

Judge Albert Tate, Jr., as a Louisiana appellate jurist, used

the term “piercing” to denote the technique of disregarding or

setting aside either corporate forms or legal transfers. See

Albert Tate, Jr., The Revocatory Action In Louisiana Law, Essays on

The Civil Law of Obligations, 133 (Joseph Dainow, ed. 1969); Tech

Concrete, Inc. v. Moity, 168 So.2d 347, 353 (La.App.3rd Cir.

1965)(“The very purpose of actions in declaration of simulation is

to pierce through self-serving acts and statements of the parties

to the simulation, in order to prove a sham what these parties have

attempted, by their pretended acts and declarations, to set up as

40
a real and bona fide transaction. . . . “[T]he corporation itself

may be simulated and actually an alter ego of the Moitys.”).

Under Louisiana law at the time of the Matter of Young , there

were three basic actions through which a creditor could “pierce,”

avoid or disregard his debtor’s fraudulent transfers: the

revocatory action, see La. Civ. Code, arts. 1969-1994 (1870), the

oblique action, see La. Civ. Code, art. 1990 (1870), and the action

in declaration of simulation.19 See La. Civ. Code, art. 2239

(1870); see generally Tate, supra; Raymond Landry, The Revocatory

Action in the Quebec Civil Code: General Principles, Essays on The

Civil Law of Obligations, id. at 115; Saúl Litvinoff, The Action in

Declaration of Simulation in Louisiana Law, id. at 139.

Of these the revocatory action is the most frequently used,

especially as an additional remedy to those provided for directly

by the Bankruptcy Code. See Tate, supra, at 138. It may be

brought by a creditor who is prejudiced at the time by a fraudulent

transfer made by his debtor to revoke or undo the transfer. To

show prejudice the creditor must establish that the transfer caused

or increased the debtor’s insolvency. See La. Civ. Code arts.

1970-1971 (1870). The remedy cannot be exercised by a person who

only becomes a creditor of the transferee after the transfer. See

19
In Matter of Young, the annuity contract was entered and the bankruptcy
petition was filed prior to the January 1, 1985 effective date of the 1984
revision of the Louisiana Civil Code Articles on conventional obligations or
contracts. The revised provisions for these actions are now codified under
different articles of the Civil Code. See La. Civ. Code arts. 2025-28 (action
in declaration of simulation), 2036-2043 (revocatory action), 2044 (oblique
action) (1985).

41
id. art. 1993. The transfer to be set aside must have been made

with fraudulent intent or with fraud as a matter of law. See id.

art. 1978. The action must be brought within a year from the time

the transfer was made, in a case of an unfair preference or

constructive fraud, or within a year from the time the judgment was

obtained by the creditor, in a case of actual intent to defraud.

See id. arts. 1987, 1994; Gast v. Gast, 19 So.2d 138, 141 (La.

1944).

The action in declaration of a simulation could be brought by

a creditor to set aside or pierce a purported transfer in order to

collect from the property as still belonging to the debtor.20 See

La. Civ. Code art. 2239 (1870); see also Tate, supra at 133;

Litvinoff, supra at 141-42. A contract was a simulation when, by

mutual agreement, it did not express the true intent of the

parties. See Exposé Des Motifs of the Projet of Titles III and IV

of Book III of the Civil Code of Louisiana 54. Under the revised

articles the essence of a simulation is unchanged. See Matter of

Zedda, 103 F.3d 1195 (5th Cir. 1997) (explaining “simulation” under

La. Civ. Code arts. 2025-26 (1985)).

If a debtor caused or increased his insolvency by failing to

exercise a right, the right could be exercised by the creditor

20
The action in declaration of simulation is not always well understood
because at common law the objectives of the revocatory action and action to
declare a simulation are dealt with together under the heading of fraudulent
conveyances. See Litvinoff, supra, at 139.

42
through an oblique action unless the right is strictly personal to

the obligor. See id. art. 1990.

The Young courts must have used the revocatory action or the

action to declare a simulation, or both, to pierce or disregard the

annuity contract because these were the only remedies under

Louisiana law by which the debtor’s transfer or conversion of

assets could have been disregarded, avoided or declared non-

existent by the trustee. This court virtually said as much by

declaring that it must “pierce the veil” of the structured

settlement-annuity arrangement to determine that its “true nature”

was nothing more than the open account for attorney’s fees that

Young had before the conversion.

Thus, reading Matter of Young as applying Louisiana law in the

context of the Civil Code, doctrine, and jurisprudence of the

revocatory action and action to declare a simulation provides a

greater understanding of the bankruptcy and district courts’

decisions in Young and the principles this court must have used to

justify the piercing or disregarding of the annuity contract in

that case for purposes of disallowing the exemption. The Trustee

could not have prevailed using the remedies supplied directly by

the Bankruptcy Code. The conversion of Young’s open account to an

annuity occurred more than one year pre-petition, ruling out the

use of § 548 to have it avoided or disallowed. But § 544

authorized him to step into the shoes of a person who became a

creditor prior to the transfer and still bring a timely revocatory

43
action or action to declare a simulation in order to avoid the

transfer of the account receivable and/or pursue the property as if

it were still belonging to the debtor by disallowing the exemption.

4.

Section 522 of the Bankruptcy Code adopts the position that

the conversion of non-exempt property, without more, will not

deprive the debtor of the exemption to which he would otherwise be

entitled. See Matter of Reed, 700 F.2d 986, 990 (5th Cir. 1983);

See also Matter of Swift, 3 F.3d 929, 930 (5th Cir. 1993); Matter

of Perez, 954 F.2d 1026, 1029 (5th Cir. 1992); Matter of Bowyer, 932

F.2d 1100, 1102 (5th Cir. 1991); Matter of Moreno, 892 F.2d 417, 419

(5th Cir. 1990); Matter of Chastant, 873 F.2d 89, 90-91 (5th Cir.

1989); Matter of Smiley, 864 F.2d 562, 566 (7th Cir. 1989); Norwest

Bank Nebraska, N.A. v. Tveten, 848 F.2d 871, 874 (8 th Cir. 1988);

Ford v. Poston, 773 F.2d 52, 54-55 (4th Cir. 1985); In re Coates,

242 B.R. 901, 905 (Bankr. N.D. Tex. 2000); In re Rothrock, 96 B.R.

666, 669 (Bankr. N.D. Tex. 1988); In re Moody, 77 B.R. 566, 578

(S.D.Tex. 1987), aff’d, 862 F.2d 1194 (5th Cir. 1989), cert. denied,

503 U.S. 960 (1992); In re Ford, 1986 WL 14997, at *3-4 (S.D.Tex.

Dec. 19, 1986); 4 Collier on Bankruptcy ¶ 522.08[4](15th rev. ed.

2000). The rationale behind this congressional decision was summed

up by this court as follows: “The result which would obtain if

debtors were not allowed to convert property into allowable exempt

property would be extremely harsh, especially in those

jurisdictions where the exemption allowance is minimal.” Reed, 700

44
F.2d at 990 (citing and quoting 3 Collier on Bankruptcy, ¶

522.08[4] (15th ed. 1982)). Nevertheless, because of the

legislative history of § 522 approving prior disallowance for

fraud jurisprudence, it is well settled that the apparently blanket

approval of conversion is qualified, allowing courts to deny

exemptions under the Act if there was extrinsic evidence of actual

intent to defraud and if the state law permits disallowance of the

exemption for fraud.21 See id.

In Reed, this court approved of the bankruptcy court’s

application of state law to determine both what property was exempt

and whether the exemption was defeated by the eleventh-hour

conversion. See id. at 990. Further, the Reed court recognized

that the Texas constitutional and statutory protection of the

homestead is absolute, and that there was state jurisprudential

authority for the bankruptcy judge’s interpretation of Texas law to

allow the exemption in full regardless of Reed’s intent. See id.

at 990-91 and n.2. Because the allowance of the exemption was not

challenged on appeal, however, this court stated that it did not

need to determine whether under Texas law the exemption would be

denied to property acquired with the intention of defrauding

creditors. See id. at 991 and n.2.

21
See 4 Collier on Bankruptcy ¶ 522.08[4] (15th rev. ed. 2000) (“The
analytical problem with the cases that deny the debtor’s exemption in these
matters is that they often reach this conclusion without regard to the state law
that governs those exemptions. If the state law creating the exemption does not
provide for its denial on these grounds, it is questionable that denial is
proper.”)

45
 Several remedies are possible when a conversion of nonexempt

to exempt property with actual or constructive fraudulent intent

has occurred: (1) the transfer can be avoided under § 548; (2) the

case, if filed as a Chapter 7, can be dismissed for substantial

abuse under 707 or the debtor can be denied a discharge under

§727(a)(2); (3) the debtor can be denied the exemption if state law

permits disallowance for fraud; or (4) an equitable lien can be

imposed on the exempt property. See 2 Norton Bankruptcy Law and

Practice 2d § 46:31 (1997)(citing authorities).

The bankruptcy trustee is given the special ability, under

section 544(a) of the Code, which gives the trustee the status of

a hypothetical creditor or bonafide purchaser, to step into the

shoes of such purchaser or a creditor of the debtor and utilize

applicable state law to avoid a transaction that the creditor could

have avoided but for the intervening bankruptcy case. Section

544(b) gives the trustee the right to use applicable state law to

avoid a fraudulent transfer, separate and apart from the avoidance

rights given the trustee under section 548. This significantly

expands the scope of the trustee’s avoiding powers by enabling the

trustee to utilize generally longer statutory reachback periods

than the one year time frame permitted under section 548. See 5

Collier on Bankruptcy ¶ 548.01[4].

The fact findings of the bankruptcy judge, affirmed by the

district court, are to be credited by this court unless clearly

erroneous. See Reed, 700 F.2d at 992 (citing Northern Pipe Line

46
Constr. Co. v. Marathon Pipeline Co., 458 U.S. 50, 55 n.5 (1982);

Matter of Gary Aircraft Corp., 681 F.2d 365, 375 n.14 (5th Cir.

1982); Matter of Osterle, 651 F.2d 401, 403 (5th Cir. 1981), cert.

denied, 456 U.S. 989 (1982)); see also, Matter of Swift, 3 F.3d

929, 931 (5th Cir. 1993); Matter of Bowyer, 932 F.2d 1100, 1101-02

(5th Cir. 1991). Lower court findings as to whether the conversion

of non-exempt property to exempt property was impermissible are

critical. Because fraud is a factual finding, it will be reversed

only if clearly erroneous. Few, if any, of these cases have been

reversed on appeal. See 2 Norton Bankruptcy Law and Practice 2d

§46:30.

Thus, federal courts have the power to disallow or disregard

state exemptions if there is extrinsic evidence of fraud and if the

state law permits disallowance of the exemption for fraud.

Consequently, if the state exemption cannot be avoided or

disregarded for fraud under state law, the exemption cannot be

denied by application of state law in a bankruptcy proceeding by a

bankruptcy court or other federal court.

The facts of the Orso case do not present any justification

for “piercing” or disregarding the exemption of his annuity

payments or the annuity contract under Louisiana law. First, for

the reasons stated earlier, it is extremely unlikely that Mr. Orso

entered the structured settlement funded by the annuities with the

intent to delay, hinder or defraud his creditors. Mr. Orso’s

accidental injuries caused him to become mentally retarded. The

47
structured settlement agreements – signed not only by Mr. Orso but

also by Ms. Canfield (the instant creditor) – authorizing creation

of the annuity contracts were entered into in September of 1989, a

full five years before the Chapter 7 petition was filed. Moreover,

Mr. Orso had been interdicted two years before the bankruptcy was

filed, and his mother was appointed his curatrix because he was

incompetent to handle his financial affairs.

Second, the structured personal injury settlements and the

annuity contracts of which Mr. Orso is the beneficiary were

standard, genuine transactions. Unlike Mr. Young, Mr. Orso did not

convert an open account to an annuity with intent to delay, hinder

or defraud creditors. Nor did Mr. Orso retain an exigible right to

full and immediate payment of an open account debt against the

defendants as Mr. Young perhaps did by not releasing his clients

and the defendants in the structured settlement. Mr. Orso has an

exigible right only to the periodic payments as set forth in the

structured settlement release. Mr. Orso has no interest in the

principal fund or source of the annuities such as the bankruptcy

court in Matter of Young found that Mr. Young had retained.

We ought not wait for other Louisiana courts of appeal to

follow the state Fifth circuit. The Louisiana Legislature has

interpreted La.R.S. 22:647 so broadly as to exempt the proceeds and

avails of annuities meeting I.R.C. § 130's definition of qualified

funding assets in personal injury and sickness structured

settlements. There is no Louisiana authority contrary to Abadie

48
and Cashio. The Supreme Court has clearly implied its approval of

the Louisiana Fifth Circuit’s decisions in Abadie and Cashio. Our

Young decision is very clearly distinguishable from the present

case.

Walden v. McGinnes, 12 F.3d 445 (5th Cir. 1994), in which we

held that payments to a beneficiary under this type of annuity are

exempt under an exemption statute of the same stripe as the one

here, is in accord with the only pertinent Louisiana court

opinions. In Walden, this court held exempt, under a Texas statute

exempting payments of benefits from annuities to employees used by

any employer, payments from an annuity used to fund a breach of

contract settlement.13 Similarly, the district court in In re

Alexander, 227 B.R. 658 (Bankr. N.D. Tex. 1998) held that payments

from an annuity used in a structured tort settlement were exempt

under the same Texas statute as amended in 1994 to unqualifiedly

exempt any annuity issued by certain types of insurance companies

from seizure by the annuitant’s creditors; this statute is

virtually identical to Louisiana’s § 647(B) in every respect

material to this case.14 The Eleventh Circuit, in In re McCollam,

13
“The exemption was claimed under Article 21.22 of the Texas Insurance
Code, which allows exemption for, inter alia, benefits received ‘under any plan
or program of annuities and benefits in use by any employer.’” Walden, 12 F.3d
at 448 (citing and quoting Tex.Ins.Code art 21.22 (West Supp. 1991)) (emphasis
in original).
14
Tex.Ins.Code art. 21.22 (West Supp.1994) provides:
[A]ll money or benefits of any kind, including policy proceeds and
cash values, to be paid or rendered to the insured or any
beneficiary under any policy of insurance or annuity contract issued
by a life, health or accident insurance company, including mutual
and fraternal insurance, or under any plan or program of annuities

49
986 F.2d 436 (11th Cir. 1993), held that annuity payments in a

structured tort settlement were exempt under a Florida statute

closely similar to the Louisiana statute.15 Mr. Orso’s situation

is not legally or factually distinguishable from countless other

personal injury cases throughout the nation, as well as in

Louisiana, Texas, and Mississippi in which claimants have

innocently and in good faith entered bona fide structured

settlements funded by genuine annuities. The exemption statutes in

all of these states are virtually identical. So far as I have been

able to determine, no court in the United States has disallowed the

claim of an innocent personal injury or breach of contract claimant

to a state exemption of his periodic payments funded by an annuity

under a structured settlement.

For the foregoing reasons, I dissent.

and benefits in use by any employer or individual, shall:
....
(2) be fully exempt from execution, attachment, or garnishment or
other process; [and]
....
(4) be fully exempt from all demands in any bankruptcy proceeding
of the insured or beneficiary.
15
Section 222.14, Florida Statutes (1989) provides:
The cash surrender values of life insurance policies issued upon the
lives of citizens or residents of the state and the proceeds of
annuity contracts issued to citizens or residents of the state, upon
whatever form, shall not in any case be liable to attachment,
garnishment or legal process in favor of any creditor of the person
whose life is so insured or of any creditor of the person who is the
beneficiary of such annuity contract, unless the insurance policy or
annuity contract was effected for the benefit of such creditor.

50
51