UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 93-8207
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IN THE MATTER OF: CHARLES R. WALDEN, JR. and
LAURA H. WALDEN,
Debtors.
CHARLES R. WALDEN, JR., and
LAURA H. WALDEN, a/k/a
Laura Hill Walden,
Appellants,
versus
MAC H. McGINNES, JR.,
Appellee.
_________________________________________________________________
Appeal from the United States District Court
for the Western District of Texas
_________________________________________________________________
(January 13, 1994)
Before GOLDBERG, JOLLY, and BARKSDALE, Circuit Judges.
BARKSDALE, Circuit Judge:
Charles and Laura Walden appeal from the denial, by the
bankruptcy and district courts, of their claimed exemption for an
annuity pursuant to Tex. Ins. Code art. 21.22. We REVERSE and
RENDER judgment allowing the exemption.
I.
Prior to 1986, Charles Walden, Jr., was employed in his
family's funeral business, consisting of Cook-Walden Funeral Homes
(a partnership owning funeral homes) and Capital Parks, Inc. (a
corporation owning a cemetery).1 In December 1986, Golden Era
Services, Inc. (GES), purchased the assets of the partnership and
corporation. In connection with that purchase, GES entered into
employment agreements and non-competition agreements with three
"key employees": Walden, Walden's father, and Hortense Fisher.2
Walden's employment contract was for a period of ten years, in
an "executive capacity"; but the non-competition agreement was for
a period of 40 years. Under the latter, he was to receive $4,000
per month for 200 months, secured by mortgage liens on the funeral
home land and buildings, and a lien on the name "Cook-Walden
Funeral Homes".
Pursuant to the employment agreement, Walden began working for
GES on December 29, 1986. But, in October of the next year, he was
placed on an indefinite leave of absence, and GES ceased making
payments to him under the non-competition agreement.3 Walden, his
father, and Fisher sued GES in state court, claiming breaches of
the employment and non-competition agreements. The suit was
settled in 1988, with the parties entering into a settlement
agreement that April. That agreement provided that non-competition
payments would recommence, that Walden would resign from his
1
Walden was not a partner in Cook-Walden Funeral Homes, but
owned stock in Capital Parks.
2
Fisher also owned stock in Capital Parks.
3
In a letter to Walden, GES stated that it had placed him on
indefinite leave of absence to investigate a "possible breach of
[his] fiduciary duties" in connection with the discovery that money
was being taken from the business without authorization. GES did
not accuse Walden of taking money, but stated that he, as a "key
employee", may have been aware of the situation.
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executive position, effective retroactively to October 2, 1987, and
that the non-competition agreements would be amended to provide
that GES could substitute an annuity for the liens securing its
obligations under those agreements.4 Accordingly, the non-
competition agreement was then so amended (April 1988).
Neither the settlement agreement nor the amendment to the non-
competition agreement required GES to purchase annuities for Walden
or the other two key employees; nor did GES purchase annuities when
the settlement was finalized in April 1988. In October of that
year, however, GES purchased annuities for the three key employees,
thereby obtaining the release of all of the collateral securing its
obligations under the non-competition agreements.
Walden and his wife filed a bankruptcy petition in September
1991. They listed the annuity (with Principal Life Insurance
Company) as an asset, and claimed it as exempt. The exemption was
claimed under Article 21.22 of the Texas Insurance Code, which
allows an exemption for, inter alia, benefits received "under any
plan or program of annuities and benefits in use by any employer".
Tex. Ins. Code art. 21.22 (West Supp. 1991). The Trustee objected
to the exemption.
The bankruptcy court sustained the objection, holding that the
annuity did not qualify as exempt property because, inter alia, it
did not "represent a plan or program of annuities and benefits in
4
The settlement agreement also provided that GES would pay
Walden $61,500, in 12 monthly installments beginning April 30,
1988; and that Walden would return 50,000 shares of GES stock to
GES upon receipt of $275,000, to be paid in 12 monthly installments
commencing April 30, 1988. These payments are not in issue.
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use by any employer", in that it was purchased in connection with
the settlement of litigation and GES was not Walden's employer at
the time of purchase. In re Walden, 144 B.R. 54, 57 (Bankr. W.D.
Tex. 1992). After reviewing the record, the district court
affirmed, without rendering an opinion.
II.
We review the bankruptcy court's findings of fact for clear
error, but review freely questions of law. Bankruptcy Rule 8013;
Matter of Herby's Foods, Inc., 2 F.3d 128, 130 (5th Cir. 1993).
The relevant facts are not in dispute. The sole issue is one of
law, a question of statutory interpretation: whether the annuity
qualifies as exempt property under art. 21.22.
The parties have not cited, nor have we found, any Texas cases
interpreting the provisions of art. 21.22 in a context analogous to
the one at hand. Nevertheless, we are given more than firm
guidance in our interpretation by the Texas courts' longstanding
admonition that exemption statutes are to be liberally construed in
favor of the claimant. The Texas Supreme Court has stated that
"our exemption laws should be liberally construed
in favor of express exemptions, and should never be
restricted in their meaning and effect so as to
minimize their operation upon the beneficent
objects of the statutes. Without doubt the
exemption would generally be resolved in favor of
the claimant."
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Hickman v. Hickman, 149 Tex. 439, 234 S.W.2d 410, 413-14 (1950)
(quoting Carson v. McFarland, 206 S.W.2d 130, 132 (Tex. Civ. App.--
San Antonio 1947, writ ref'd).5
The Bankruptcy Code provides that, when a bankruptcy case is
commenced, all property in which the debtor has a legal or
equitable interest becomes property of the bankruptcy estate, 11
U.S.C. § 541, but that debtors may exempt certain property from the
claims of creditors. 11 U.S.C. § 522. Depending on state law,
debtors may claim either the federal exemptions enumerated in 11
U.S.C. § 522(d), or those available under applicable state or local
law. Matter of Volpe, 943 F.2d 1451, 1452 (5th Cir. 1991). Texas
debtors may elect either the state or federal exemptions. Id.
The Waldens elected the Texas exemptions. Among those
available under Texas law is art. 21.22, entitled "Unlimited
5
In Matter of Fernandez, 855 F.2d 218 (5th Cir. 1988), our
court observed that Texas' rule of liberal construction had led one
Texas court to conclude that
a dray is a "wagon" ... an automobile is a
"carriage" ... a piano is "household and kitchen
furniture" ... [and] the word "horse" includes a
bridle and saddle, as well as the shoes on its feet
and the rope and martingales around its neck....
And this spirit of liberal construction has been
indulged until [the courts] have held that an
unbroken colt is a "horse" ... and even that a
mule, removed as he is one degree by consanguinity,
is nevertheless a "horse." Furthermore, in their
effort to extend the humane and beneficial
character of [their] exemption statute, [Texas
courts] have become so blind to every other
consideration that they have looked upon the mule's
father and pronounced him -- voice, ears, and all
-- a horse.
Id. at 219 (quoting Patterson v. English, 142 S.W. 18, 19 (Tex.
Civ. App.--Amarillo 1911, no writ).
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Exemption of Insurance Benefits From Seizure Under Process", which
provides, in pertinent part:
Sec. 1. Notwithstanding any provision of this
code other than this article, all money or benefits
of any kind ... to be paid or rendered to the
insured or any beneficiary under any policy of
insurance issued by a life, health or accident
insurance company, ... or under any plan or program
of annuities and benefits in use by any employer,
shall:
(1) inure exclusively to the benefit of the
person for whose use and benefit the insurance is
designated in the policy;
(2) be fully exempt from execution,
attachment, garnishment or other process;
(3) be fully exempt from being seized, taken
or appropriated or applied by any legal or
equitable process or operation of law to pay any
debt or liability of the insured or of any
beneficiary, either before or after said money or
benefits is or are paid or rendered; and
(4) be fully exempt from all demands in any
bankruptcy proceeding of the insured or
beneficiary.
(Emphasis added.)6 As stated, the Waldens claimed that the annuity
payments were exempt under art. 21.22.7
6
For a discussion of the import of the emphasized opening
clause, see note 10, infra.
7
Article 21.22 was amended, effective September 1, 1993. Tex.
Ins. Code art. 21.22 (West Supp. 1994). The amended version, with
emphasis on the new language, provides, in pertinent part, for
exemption of
all money or benefits of any kind ... 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,
... or under any plan or program of annuities and
benefits in use by any employer or individual.
Id. (emphasis added). Because we "must apply the law in effect at
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A.
The Trustee claims that the annuity was created pursuant to
settlement of litigation, and was therefore not a "true annuity"
under Matter of Young, 806 F.2d 1303 (5th Cir. 1987). The debtor
in Young was an attorney who had represented the plaintiffs in a
death claim. Id. at 1304. Pursuant to a structured settlement of
that litigation, the debtor (attorney) was to receive monthly
payments from an annuity contract as attorney's fees. Id. at 1305.
The debtor claimed that the annuity was exempt under Louisiana
law.8 Id. at 1306.
Our court noted that, while the payments were, strictly
speaking, an "annuity", they also were accounts receivable;
accordingly, it "pierce[d] the veil of th[e] arrangement to
determine its true nature", id. at 1306, because "[i]t 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
the time that the debtors entered bankruptcy", Matter of Volpe, 943
F.2d at 1453, we do not apply this amended version. Nevertheless,
the nature of the changes to art. 21.22 indicates that the Texas
legislature intended to clarify its original intent with respect to
the exemption of annuities, rather than to alter the substantive
effect of art. 21.22. See id. Accordingly, the amendment comports
with our conclusion that the legislature intended to make available
an exemption for the annuity at issue.
8
The debtor relied on La. Rev. Stat. Ann. § 20.33 (West Supp.
1986) ("all proceeds of and payments under annuity policies and
plans" "shall be exempt from all liability for any debt"), and La.
Rev. Stat. Ann. § 22:647(B) ("[t]he lawful beneficiary, assignee,
or payee ... of an annuity contract ... shall be entitled to the
proceeds and avails of the contract against the creditors and
representatives of the annuitant ....").
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part of the bankruptcy estate". Id. at 1307. The funds that made
up the principal of the annuity were part of the payment the debtor
was entitled to receive as attorney's fees for services rendered;
but the debtor elected to receive the fees in regular monthly
payments over a 14-year period rather than in a lump sum.
Accordingly, our court concluded that the annuity payments
represented nothing more than installment payments on the debt owed
to the debtor for attorney's fees. Id. Because the debtor
retained a right against the purchaser of the annuity for the
remaining principal owed, until the debt for his attorney's fees
was paid in full, our court held that, in substance, the annuity
was "nothing more than an account receivable, and not exempt from
the bankruptcy estate". Id. at 1307.
Young is distinguishable in several respects. The most
obvious distinction is that it dealt with Louisiana, not Texas,
exemption statutes. Here, as noted, our interpretation is governed
by Texas' well-settled policy of liberal construction. The
litigation that was settled arose out of the employment
relationship between GES and Walden, including GES's alleged breach
of the non-competition agreement. And, most important, the annuity
payments claimed to be exempt are not "accounts receivable" for
services already performed by Walden. Rather, the annuity was
purchased by GES for the purpose of obtaining a release of the
liens securing its continuing (future) obligation -- as well as to
fund that obligation -- to pay Walden $4,000 per month in exchange
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for his continued (future) compliance with his agreement not to
compete.9
We conclude, therefore, that the settlement agreement, which
resolved Walden's lawsuit against GES and authorized GES to
substitute an annuity for the collateral securing its continuing
obligation under the non-competition agreement, does not preclude
the annuity from being exempt under art. 21.22. Although the
substitution of the annuity for the collateral was made possible by
the settlement agreement, the annuity payments represent GES's
obligations under the pre-existing non-competition agreement, the
validity of which was simply reaffirmed by the settlement
agreement.
B.
As stated, Walden's resignation was effective October 2, 1987;
the annuity was not purchased until October 1988, after the
employment relationship had ended. The bankruptcy court held that,
because there was no employment relationship between GES and Walden
at the time of purchase, the annuity was not "in use by" an
employer, as required by art. 21.22.
This analysis overlooks the fact that the annuity payments
represent GES's obligations under the non-competition agreement,
which was entered into at the inception of Walden's employment with
9
Daniels v. Pecan Valley Ranch, Inc., 831 S.W.2d 372 (Tex.
App.--San Antonio 1992), cert. denied, ___ U.S. ___, 113 S. Ct.
2944 (1993), cited by the Trustee, is inapposite. That case
involved a personal injury structured settlement annuity that the
annuitant claimed was exempt from garnishment. Id. at 375, 377.
The annuitant did not contend that it was an annuity as
contemplated by art. 21.22. Id. at 380 n.2.
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GES, and the validity of which was reaffirmed by the settlement
agreement. Under Texas law, a non-competition agreement is valid
only if it is ancillary to another relationship or transaction,
reasonable, and supported by consideration. Chenault v. Otis
Engineering Corp., 423 S.W.2d 377, 382 (Tex. Civ. App. 1967, writ
ref'd n.r.e.). Walden's employment relationship with GES is the
only relationship to which the non-competition agreement can be
ancillary.
The termination of Walden's employment relationship with GES
was deemed to have been effective on October 2, 1987, only because
the parties agreed to that through the settlement in 1988. When
that agreement was executed in April 1988, Walden was on an
indefinite leave of absence. Prior to execution of the settlement
agreement and amendment of the non-competition agreement (required
by the settlement), GES had no right to substitute an annuity for
the collateral securing its obligations under the non-competition
agreement. As noted, when GES obtained that right (through the
April 1988 settlement), Walden was still on indefinite leave of
absence from his employment with GES.
Therefore, the parties' April 1988 agreement to treat Walden's
employment with GES as having terminated on October 2, 1987, and
the fact that GES waited until October 1988 to purchase the
annuity, cannot change the fact that the annuity payments represent
GES' obligations to make monthly payments to Walden under the non-
competition agreement, which was ancillary to his employment with
GES. See Chenault, 423 S.W.2d at 382-83 (a covenant not to compete
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was ancillary to employment even though it was executed at the time
of termination of employment, and after the employee had gone to
work for another employer). As a result, we conclude that GES
purchased the annuity in its capacity as Walden's "employer", thus
satisfying art. 21.22's requirement that the annuity be "in use by"
an employer.
C.
Finally, the Trustee asserts that the annuity is not covered
by art. 21.22 because it is not part of a "plan or program of
annuities and benefits". Again, we disagree.
As noted, we must give a broad interpretation to the language
of art. 21.22. Black's Law Dictionary (6th ed. 1990) defines
"plan" as, among other things, "a method of design or action,
procedure, or arrangement for accomplishment of a particular act or
object". Likewise, "program" is defined as "a plan or system under
which action may be taken toward a goal". Webster's Ninth New
Collegiate Dictionary 940 (1990). Walden's annuity is one of three
purchased by GES in order to arrange for the accomplishment of a
particular "object" or "goal": funding the continuing/future non-
competition payments and securing the release of its assets from
the liens held by Walden and the other two key employees as
collateral for those payments.
Article 21.22 covers "any" plan or program of annuities and
benefits in use by an employer. Accordingly, it is not necessary
that the plan or program provide annuities for all employees, or
that it be of longstanding duration, or that it be of a particular
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type (such as for retirement10). See Hime v. City of Galveston, 268
S.W.2d 543, 545 (Tex. Civ. App.--Waco 1954, writ ref'd n.r.e.)
(emphasis in original) ("[P]articularly in construing statutes, the
word `any' is equivalent to and has the same force of `every' and
`all'"). In short, GES's provision of annuities to only three
former employees does not make it any less a "plan" or a "program"
within the meaning of art. 21.22.
Interpreting the statute liberally, as Texas law requires, we
are more than satisfied that the annuity is part of a requisite
"plan or program of annuities and benefits".
D.
Our interpretation is bolstered by other considerations. The
Waldens assert persuasively that equity requires exemption of the
annuity because, had GES not purchased it, the post-petition non-
competition payments would not have been property of the bankruptcy
estate under 11 U.S.C. § 541(a)(6), which provides that "earnings
from services performed by an individual debtor after the
commencement of the case" are not property of the estate.11 See In
10
The Trustee contends, based in large part on references to
other portions of the Texas Insurance Code, that "plan or program"
refers to retirement plans, not to the one in issue. Article
21.22's opening clause ("Notwithstanding any provision of this code
other than this article"), added when the statute was amended
effective June 15, 1991 (a few months prior to the Waldens'
bankruptcy petition), clearly directs that it be interpreted and
applied independent of any other provisions of the Insurance Code.
11
The record on appeal, which includes the briefs submitted by
the Waldens in the bankruptcy and district courts, does not reflect
that this point was presented to either of those courts. However,
at oral argument, Waldens' counsel stated that it was presented
during oral argument in district court; Trustee's counsel did not
controvert that representation. Obviously, this point should have
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re Hammond, 35 B.R. 219 (Bankr. W.D. Okla. 1983) (holding that,
because future non-competition payments were conditioned on the
debtor's compliance with the covenant not to compete, and the
debtor could not be compelled to perform services for the benefit
of his creditors, post-petition non-competition payments were not
property of the estate).12
We express no opinion whether, in the absence of an annuity,
Walden's post-petition non-competition payments could have been
excluded from the estate pursuant to § 541. Nevertheless, we are
persuaded that sound practical reasons, as well as equitable ones,
support our conclusion that the annuity is exempt.
been presented more fully in the bankruptcy court and presented in
the briefs in district court. But, because it is not a separate
issue, and instead is simply additional legal authority to consider
in reaching our decision, we consider it here. See United States
v. Vontsteen, 950 F.2d 1086, 1091 (5th Cir.) (en banc) ("We
ordinarily have the discretion to decide legal issues that are not
timely raised"), cert. denied, ___ U.S. ___, 112 S. Ct. 3039
(1992); e.g., Atlantic Mut. Ins. Co. v. Truck Ins. Exch., 797 F.2d
1288, 1293 (5th Cir. 1986) ("An issue raised for the first time on
appeal generally is not considered unless it involves a purely
legal question or failure to consider it would result in a
miscarriage of justice").
12
Hammond was distinguished in In re Bluman, 125 B.R. 359, 367
(Bankr. E.D.N.Y. 1991). The non-competition payments in Bluman
were not conditioned upon compliance with the covenant not to
compete, but instead became due upon the transfer of the debtor's
business. Id. The Bluman court disagreed with Hammond's
conclusion that a court may not compel compliance with a covenant
not to compete, pointing out that courts may enforce, by negative
injunction, reasonable covenants not to compete. Id. It therefore
held that the covenant not to compete was not a personal services
contract and that the consideration paid for the covenant was not
tantamount to earnings from services performed by the debtor. Id.
Under the facts in the case before us, Hammond is the more
persuasive authority.
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The non-competition agreement provides that GES's obligation
to make monthly payments to Walden is "subject to performance by
[Walden]" of the covenant not to compete. Thus, payments to Walden
under the annuity are subject to his future compliance with his
agreement not to compete with GES. If Walden's creditors receive
the annuity payments, Walden will have little, if any, incentive to
refrain from competing with GES, thereby possibly depriving GES of
the benefit of its bargain. Unless the Trustee is able to obtain
the present value of the annuity in a lump sum, it is possible that
GES could obtain judicial relief, terminating future monthly
payments in the event that Walden breaches the covenant. Even if
we assume, arguendo, that GES could be protected by an order
compelling Walden to comply with the non-competition agreement, the
result might well be considered inequitable, because it would
deprive Walden of the ability to work in his chosen profession in
the area where he resides, without any compensation for that
deprivation.
In sum, these considerations support our interpretation of
art. 21.22 as being consistent with Texas' policy of liberal
construction of exemption statutes "to the end that the laborer
should be allowed means of obtaining a livelihood, and thus prevent
him and his family from becoming a charge on the public", J.M.
Radford Grocery Co. v. McKean, 41 S.W.2d 639, 640 (Tex. Civ. App.--
Fort Worth 1931, no writ), as well as the bankruptcy policy of
providing debtors with a "fresh start". See, e.g., Hammond, 35
B.R. at 223.
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III.
For the foregoing reasons, the judgment of the district court
is REVERSED; and judgment allowing the exemption is hereby
RENDERED.
REVERSED and RENDERED
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