Julia Christians v. Edward F. Dulas

___________

No. 95-3614
___________

Julia A. Christians, Trustee *
of the Bankruptcy Estate of *
Edward F. Dulas and Connie L. *
Dulas, *
*
Appellant, *
* Appeal from the United States
v. * District Court for the District
* of Minnesota.
Edward F. Dulas; Connie L. *
Dulas, *
*
Appellees. *
___________

Submitted: June 14, 1996

Filed: September 11, 1996
___________

Before BOWMAN, JOHN R. GIBSON, and BEAM, Circuit Judges.
___________

BEAM, Circuit Judge.

Trustee Julia Christians appeals the district court's order exempting
an annuity belonging to Edward and Connie Dulas from the bankruptcy estate.
We reverse.

I. BACKGROUND

In 1994, Edward and Connie Dulas (collectively the debtors) filed a
voluntary petition under Chapter 7 of the Bankruptcy Code. They elected
to use the exemptions provided by state law, instead of those provided by
federal law.1 The debtors then claimed that

1
Bankruptcy debtors may elect to use either the exemptions set
forth in the federal bankruptcy code or in the nonbankruptcy law of
the debtors' domicile. Compare 11 U.S.C. § 522(d) with 11 U.S.C.
§ 522(b)(2).
an annuity from which Connie receives monthly payments was exempt from the
bankruptcy estate under Minnesota law.

The annuity was the result of the settlement of a personal injury
action arising out of an automobile accident involving Connie Dulas. To
effectuate the settlement, the debtors dismissed their legal action and
released the defendants from further liability. In return, the defendants
purchased an annuity payable to Connie Dulas. The annuity provides that
Connie receive $450,000 in cash, monthly payments of $3,150 for the next
forty years, and a lump sum of $200,000 on her sixty-fifth birthday. The
annuity payments are guaranteed by an annuity insurance contract with the
Life Insurance Company of North America.

The trustee objected to the claimed exemption on the ground that an
annuity received in a pre-petition settlement of a personal injury claim
is not an exempted personal injury right of action within the meaning of
Minnesota law. The bankruptcy court allowed the exemption, however, and
the district court summarily affirmed. The trustee appeals, arguing that
the annuity was improperly exempted from the bankruptcy estate.

II. DISCUSSION

The district court determined that the annuity is exempt from the
bankruptcy estate under Minnesota statute section 550.37, subdivision 22.
That statute exempts "[r]ights of action for injuries to the person of the
debtor or of a relative whether or not resulting in death." Minn. Stat.
§ 550.37(22). We must therefore determine whether the annuity constitutes
a right of action under Minnesota law. On appeal, we review de novo the
district court's legal conclusion that the annuity is exempt from the
bankruptcy estate. See In re Muncrief, 900 F.2d 1220, 1224 (8th Cir.
1990).

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 The language of section 550.37(22) makes it clear that the Dulas
annuity is not a right of action. See, e.g., In re Procter, 186 B.R. 466,
468 (Bankr. D. Minn. 1995) (holding "[t]he term, `rights of action,' is
defined as `the right to bring suit; a legal right to maintain an action,
growing out of a given transaction or state of facts and based thereon'")
(quoting Black's Law Dictionary 1325 (6th ed. 1990)); In re Medill, 119
B.R. 685, 687 (Bankr. D. Minn. 1990) (construing the term "rights of
action" only to include future or pending claims). The statute exempts
2
rights of action, not rights of payment. See Medill, 119 B.R. at 687 n.3.
Although the debtors had a right of action when Connie was injured, they
no longer have such a right. Instead, they have proceeds from the
settlement of their personal injury action--no part of which was still
pending at the time of the bankruptcy filing. By settling their claim, the
debtors reduced their right of action to a right of payment. Consequently,
the annuity is not a right of action under Minnesota law.

Had the Minnesota legislature wished to exempt proceeds resulting
from personal injury claims, it could have done so. It has done so in
numerous other instances. See, e.g., Minn. Stat. §§ 550.37(10) & (23)
(exempting insurance proceeds); Minn. Stat. §§ 510.01, 510.02, 510.07 and
550.37(12) (exempting proceeds from sale of homestead); Minn. Stat. §
550.37(24) (exempting right to receive employee benefits); Minn. Stat. §
550.38 (exempting veteran's benefits). As the Procter court stated:

2
The legality of a "right of action" exemption under the
Minnesota Constitution was determined by the Minnesota Supreme
Court in Medill v. State, 477 N.W.2d 703 (Minn. 1991). Dictum in
the opinion may be construed as being supportive of the expanded
definition of the exemption sought by the debtors. However, on the
facts, Medill is inapposite here. Medill's tort claim was pending
trial at all relevant times. Thus, under any proposed definition,
the "right of action" mentioned in the Minnesota statute was
clearly in existence.

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 Here, the legislature has not chosen to exempt settlement
proceeds arising from a personal injury claim. The legislature
has the ability and knows how to effectively provide exemption
protection for proceeds of exempt property if it so chooses.
Clearly then, the fact that the legislature omitted any
inclusion of proceeds from personal injury claims indicates a
deliberate choice not to do so.

Procter, 186 B.R. at 469.

This case is distinguishable from situations where a personal injury
defendant pays a settlement amount over a period of time. There, the
defendant has a continuing obligation to the plaintiffs; here, there is no
such obligation. In this case, the defendants bought an annuity in 1984
for the benefit of the debtors. The defendants' obligation ended at that
time. Compare In re Gagne, 163 B.R. 819, 823 (Bankr. D. Minn. 1994)
(settlement proceeds from worker's compensation claim not right of action
for purpose of statute), rev'd on other grounds, 172 B.R. 50 (D. Minn.
1994); Procter, 186 B.R. at 469 (settlement proceeds paid in full negate
concept of right of action because the party paid has no further right
against the defendant); with In re Carlson, 40 B.R. 746, 750 (Bankr. D.
Minn. 1984) (settlement proceeds from personal injury action were exempt
because debtors had not yet released defendants from liability or received
settlement payments). Only the third-party guarantor of the annuity
remains obligated to the debtors here. At best, the debtors may in the
future have a breach of contract action against the third-party annuity
guarantor. Such an action would clearly not be an action "for injuries to
the person" under Minnesota law. See Minn. Stat. § 550.37(22). Therefore,
the annuity is not exempt from the bankruptcy estate.3

3
Our conclusion is further supported by the legislative
history of the federal and state exemption statutes. Currently,
the Bankruptcy Code provides an exemption for rights of payment
arising from a personal injury action. 11 U.S.C. § 522(d)(11)(D).
This reflects a change in federal law, however, as rights of action
instead of rights of payment were previously exempted. See §
70a(5) of the Bankruptcy Act of 1938 (formerly 11 U.S.C. §
110.A(5)) (reproduced in Collier on Bankruptcy ¶ 70.28, at 379
(14th ed. 1978)). After the change in federal law, Minnesota
amended its exemption statute to protect rights of action. Minn.
Stat. § 550.37(22) (historical notes). Because a person can elect

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 Finally, the bankruptcy court's reliance on "policy considerations"
does not support the annuity exemption on these facts. In stating that the
denial of the exemption would deprive the debtors of their right to a
"fresh start," the bankruptcy court ignored the fact that the debtors could
have elected to use the exemptions provided by the federal statutes. In
re Dulas, 177 B.R. 897, 900 (Bankr. D. Minn. 1995). In any event, the
annuity at issue here is not exempt under Minnesota statute section 550.37,
subdivision 22. We note, however, that today's decision does not address
the availability of other exemptions or protections found in the Bankruptcy
Code.

III. CONCLUSION

Because the annuity here at issue was improperly exempted from the
bankruptcy estate, we reverse the judgment of the district court.

JOHN R. GIBSON, Circuit Judge, dissenting.

I respectfully dissent.

I would affirm the judgment of the district court affirming the
bankruptcy court order exempting the annuity, which was a portion of the
structured settlement.

the protection of either state or federal exemptions, Minnesota's
amendment allowed bankruptcy debtors to choose between protecting
rights of action or rights of payment. In this case, the debtors
elected to use the exemption statute which protected rights of
action. Their choice failed to protect the annuity from becoming
part of the bankruptcy estate.

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 In my view, the court today gives far too little weight to Medill v.
State, 477 N.W.2d 703 (Minn. 1991). In Medill the Supreme Court of
Minnesota emphasized that there were strong social policies in favor of
exempting damage awards resulting from personal injuries. The Minnesota
Supreme Court stated:

These policies [of protecting debtors from "absolute want"]
apply with even more force to the personal injury right of
action exemption because it deals not so much with the debtor's
property, but with the debtor's human capital. . . . The
debtor who suffers serious personal injury is deprived of using
his or her human capital in getting a fresh start.

Id. at 708. The Minnesota Supreme Court drew no distinction between a
debtor's interest in a personal injury claim already reduced to settlement
or judgment and his interest in a pending claim. The Minnesota court's
policy arguments apply equally to both situations. Indeed, Medill stated:

We can find no reason why the creditor should be able to attach
a structured settlement any more than a homestead. To allow it
is to place the burden on the tax-paying public while the
creditors benefit from the award. . . . Here, the social
policy to exempt the recovery is even stronger [than in the
case of homestead]."

Id. at 709 (emphasis added).

It is true that Medill deals with the constitutionality of the
exemption statute, and does not speak to the precise issue before us, and
that the statements in the opinion are dictum. On the other hand, the
statements are powerful expressions by the state supreme court en banc of
state public policy at the heart of the question before us. The question
of exemption is one of state law, and when an issue has not been decided
by the Supreme Court of a state, it is our responsibility to predict how
that court would decide the case before us. I know of no clearer indicator
of the

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direction the Minnesota Supreme Court would take than a statement by that
court en banc, dictum though it may be.

The court states that "Medill's tort claim was pending trial at all
relevant times." Supra at __ n.2. The Minnesota Supreme Court did not say
anything to indicate that it relied on the fact that the claim was pending,
rather than reduced to judgment, at any particular "relevant time." The
Medill decision itself reflects that judgment on the tort claim had been
entered on March 15, 1989, before the Minnesota Supreme Court rendered its
opinion approving the exemption on November 22, 1991. Id. at 704.

I believe that these statements of the Minnesota Supreme Court en
banc in Medill show that it would apply the exemption in this case.
Accordingly, I would affirm the judgment of the district court affirming
the order of the bankruptcy court.

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.

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