In re John William STUTTERHEIM, Hazel Marion Stutterheim, Debtors.
Bankruptcy No. 87-40890-7.United States Bankruptcy Court, D. Kansas.
July 11, 1988.*1007 William H. Stowell, Phillipsburg, Kan., James H. Dodson, Beaver City, Neb., for debtors.
Dale L. Somers, Patricia Hamilton, Eidson, Lewis, Porter & Haynes, Topeka, Kan., for First State Bank of Almena.
ORDER GRANTING OBJECTION TO EXEMPTION
JAMES A. PUSATERI, Bankruptcy Judge.
This matter is before the Court on the objection of the First State Bank of Almena, Kansas to debtors' claimed exemption of a single premium deferred annuity contract. The debtors appear by William H. Stowell and James H. Dodson. The Bank appears by Dale Somers and Patricia Hamilton of Eidson, Lewis, Porter & Haynes.
By agreement of the parties this matter was submitted on the pleadings and briefs. The issues presented are:
1. Whether the Bank's objection is untimely.
2. Whether an annuity is an insurance policy.
3. Whether sanctions under Rule 11 should be imposed against the Bank for the filing of the objection.
BACKGROUND
On June 9, 1987, debtor filed a voluntary petition for chapter 7 relief. In his Schedule B-4, debtor claimed as exempt under K.S.A. 40-414 an American Investors Annuity dated March 6, 1986 and valued at $4,500.00. The Section 341 hearing was set for July 13, 1987. The Bank did not appear. On January 26, 1988, the Bank filed the instant objection, asserting an annuity is not an insurance policy.
The contract in question is entitled "Single Premium Deferred Annuity Policy." It was executed on March 6, 1986 by debtor John Stutterheim and issuer American Investors Life. The single premium was in the amount of $5,000.00. The contract provides that upon a maturity date of March 6, 1991, the issuer shall pay to annuitant the total accumulated value of the policy during the life of the annuitant according to certain payment options, including monthly payments or payments for a fixed number of years. In no event do payments continue after the death of annuitant.[1]
The total accumulated value of the policy is defined in relevant part as the single premium accumulated at the declared interest rate. (the rate of interest through January 1988 was guaranteed at a 11%.). In the event the annuitant dies before the maturity date, the annuity pays a so-called "Death Benefit" equal to the total accumulated value. In no event does the death benefit exceed the amount of the premium plus accumulated interest.
TIMELINESS OF OBJECTION
11 U.S.C. Section 522(l) provides:
the debtor shall file a list of property that the debtor claims as exempt under subsection (b) of this section. If the debtor does not file such a list, a dependent *1008 of the debtor may file such a list or may claim property as exempt from property of the estate on behalf of the debtor. Unless a party in interest objects, the property claimed as exempt on such list is exempt.
Bankruptcy Rule 4003(b) provides that the trustee or any creditor may file objections to the list of property claimed as exempt within 30 days after the conclusion of the meeting of creditors or the filing of any amendment to the list unless, within such period, further time is granted by the Court. Bankruptcy Rule 4003(c) provides the burden of proof is upon the objecting party.
In this case, debtors contend that the Court should interpret Section 522(l) to effectuate its literal meaning; that so long as no one timely objects, whatever debtors claim exempt, no matter how far removed from the exemption statutes, should be deemed exempt. The Court does not agree.
As the Bank points out, Section 522(l) presupposes that debtor has exempted legally allowable exemptions. This Court and the majority of courts thus construe Section 522(l) to permit untimely objections to exemptions where, as a matter of law, the debtors' claimed exempt property is not exempt. See In Re: Rollins, 63 B.R. 780, 784 (Bankr.E.D.Tenn.1986); Matter of Dembs, 757 F.2d 777, 780 (6th Cir. 1985); In Re: Borth, No. 83-1110 (Bankr. D.Kan. May 24, 1984) (Morton, J.). As a corollary of that principle, objections which raise questions of fact such as whether the value of the tool of trade exceeds $7,500.00 or whether debtors principal occupation is farming may not be raised untimely. See In Re: McMannis, No. 82-10776, Adv. No. 83-0052 (Bankr.D.Kan. July 20, 1983) (Pusateri, J.).
In this case it is clear that whether an annuity is an insurance policy is a question of law. Accordingly, the Court will consider the merits of the objection.
INSURANCE POLICY
K.S.A.1988 Supp. 40-414(a) provides:
If a life insurance company or fraternal benefit society issues any policy of insurance or beneficiary certificates upon the life of an individual and payable at the death of the insured, or in any given number of years, to any person or persons having an insurable interest in the life of the insured, the policy and its reserves, or their present value, shall inure to the sole and separate use and benefit of the beneficiaries named in the policy . . .
This Court found no cases specifically construing the term "policy of insurance" as used in K.S.A. 40-414 and the parties cited none. As pointed out by the Bank, however, the term "insurance" has been judicially defined as "any contract whereby one party promises for a consideration to indemnify the other against certain risks." State, ex rel., v. Anderson, 195 Kan. 649, 662, 408 P.2d 864 (1965).
In this case, the Court believes that under any definition of insurance, the annuity contract at issue cannot be termed a policy of life insurance. First, the annuity contract does not appear to fall within the plain provisions of K.S.A. 40-414. The contract is not "payable at the death of the insured" and is not payable "to any person or persons having an insurable interest in the life of the insured", but is payable to the annuitant himself. The contract contains none of the provisions affording traditional coverage for the death of the insured, such as payment to the spouse or other dependents, and does not pay an amount sufficient to compensate defendants for the loss of the services and companionship of the insured and/or burial expenses. By contrast, the annuity contract is a simple investment vehicle that offers a guaranteed return of the investment. The term "death benefit" appears to have been added solely as a means to clothe the contract with the trappings of a true policy of insurance.
As this Court in dicta stated in In Re: Barash, 69 B.R. 231 (Bankr.D.Kan.1984) (Pusateri, J.), a creditor can make a valid objection to a debtor's claimed exemption *1009 of an insurance policy where the policy is not shown to be a policy of insurance within the meaning of K.S.A. 40-414.
"This would be the case if the circumstances surrounding the purchase of the policies showed that the purchaser had no intent to provide for payment to his beneficiaries of sum certain, in the event of his untimely death, in return for moderate premium payments. For example, an endowment policy payable to the insured does not qualify as a policy of insurance, In Re: Bray, 8 F.Supp. 761, 763 (D.N.H.1934); nor do disability benefits payable to the insured, Legg v. St. John, 296 U.S. 489, 56 S.Ct. 336, 80 L.Ed. 345 (1936); also an annuity contract that pays periodically during the life of the annuitant or during a term fixed by contract with a death benefit representing a payment of the unpaid portion of the purchasers investment is not an insurance policy. In Re: Howerton, 21 B.R. 621 (Bankr.D.Tex.1982).
As a final matter, the parties make much ballyhoo over an old Kansas Supreme Court case and whether this Court is bound by any state court dicta in that case. The Court believes that only two points need be made. First, Equitable Life Assurance Society v. Hobbs, 154 Kan. 1, 114 P.2d 871 (1941) concerned only whether the term "premium" in a statute requiring companies to pay taxes on premiums included consideration received from annuity contracts. The court held that it did. In so reaching its holding, the Supreme Court stated:
"This is an original action in this court and it is duty and responsibility to find the facts. A majority of this Court concluded there is sufficient evidence to support the conclusion the instant contracts are contracts of insurance. The real question, however, is, What did the lawmakers intend by the use of the "premium"? If they intended thereby to include "considerations receivable for annuity contracts," then it becomes immaterial whether the instant contracts constitute insurance contracts or annuity contracts. In the opinion of a majority of this Court it is clear the lawmakers intended that "premium" should include "consideration for annuity contracts." In view of this conclusion it is unnecessary to prolong the opinion.
Such a statement is dicta, and federal law has traditionally provided that a federal court is bound to follow state court dicta. Curtis Publishing Company v. Cassel, 302 F.2d 132 (10th Cir.1962). However, that rule only applies where the dicta is "a clear and unequivocal exposition of law and does not conflict with other decision." Id. at 135. By contrast, as it applies to this case the statement in Equitable is neither clear nor unequivocal; the court expressly refused to hold the annuity contracts were contracts of insurance, and the court was only considering whether annuities are policies of insurance within the terms of the taxing statutes. Furthermore, there was a rigorous dissent in Equitable which casts doubt on whether the Supreme Court would reach the same decision today. Finally, as mentioned above, the dicta in Equitable would appear to conflict with the plain terms of K.S.A. 40-414. Accordingly, this Court is not bound by the dicta in Equitable and holds that as a matter of law the annuity contract in this case is not a policy of insurance within the meaning of K.S.A. 40-414.
SANCTIONS
The parties go to great lengths to set forth the history of their relationship in the context of the bankruptcy proceeding and in the context of two dischargeability complaints that were filed by the Bank. However, the Court need not involve itself in the parties' disputes about the relative merits of their positions as set forth in other proceedings. Suffice it to say that whatever the Bank's motive, the objection in the instant matter was filed with support of the law. Accordingly, the Court concludes that no sanctions under Rule 9011 are warranted.
IT IS SO ORDERED.
NOTES
[1] The only exception is if the joint and last survivor option is chosen, which provides for payment to the survivor for the life of the survivor only.