Opinion
NOT FOR PUBLICATION
ORDER ON TRUSTEE'S OBJECTION TO CLAIM OF EXEMPTIONS
PETER W. BOWIE, Chief Judge United States Bankruptcy Court
On or about April 2, 2010 Thomas and Melanie Seelig filed a joint Chapter 7 petition. On Schedule B they listed interests in Mr. Seelig's pension from Honeywell and two Allianz IRAs, one valued at $39,000 and the other at $113,000. On Schedule C, they claimed all three as exempt. The Allianz IRAs were claimed exempt under California Code of Civil Procedure § 704.115(a)(3), (b), (e) .
On June 28, 2010 the Chapter 7 trustee filed and served her notice of objection to the claims of exemption for the two Allianz IRAs on the ground that they were "simple premium annuities that are not exempt under C.C.P. § 7 04.115." Prior to filing her objection, the IRAs were a subject of discussion at the § 341(a) meeting of creditors, and of document production. Mr. Seelig was in hospice care, and died on or about May 21, 2010. Subsequently, Mrs. Seelig responded to the trustee's objection through counsel, and set out the history of Mr. Seelig's IRA which was rolled over into the Allianz annuity contracts in 2003 when he retired from Honeywell.
In late August, 2010 the trustee served her reply, stating that her ground for continuing objection was that "the entire amount is not reasonably necessary to provide for the support of Mrs. Seelig, taking into account all resources that are available for her support." Mrs. Seelig promptly filed her own declaration, setting out that after her husband's death her income dropped by about $1,740 per month because of the elimination of her dependent Social Security income (she stepped into her late husband's share to receive his benefits), plus a reduction in the Honeywell pension income. Her expenses were approximately the same, and left her with a monthly shortfall of $1,069 per month. She stated she was 69 years old, and had not worked outside the home since 1964. Moreover, she has two artificial knees, which need periodic replacement, with associated uncovered copays of about $2,000 each time.
Meanwhile, around late summer 2010, after Mr. Seelig died, Mrs. Seelig met with the family financial advisor, Mr. Epstein. He recommended that Mrs. Seelig take advantage of the "high water value" of the Allianz contracts which was a form of special death benefit, as well as move the funds from the Allianz contracts, which had variable interest exposure, to no-risk annuity-contracts, one for a fixed term of six years, and the second deferred until the first expired and a lifetime monthly benefit thereafter. Apparently, approximately $12,300 was taken as a distribution by Mrs. Seelig at the time of conversion to help with repaying burial expenses, among other things. Allianz also charged almost $6,000 as a fee at conversion.
The Court has subject matter jurisdiction over these proceedings pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
Both sides point to the 1990 decision of the Bankruptcy Appellate Panel in In re Moffat, 119 B.R. 201. There, after noting the absence of authority on the phrase "reasonably necessary for support", the court developed a non-exhaustive list of factors for courts "to use in determining whether a given asset is reasonably necessary for the debtor's support." 119 B.R. at 206.
These factors include the following: the debtor's present and anticipated living expenses and income; the age and health of the debtor and his or her dependents; the debtor's ability to work and earn a living; the debtor's training, job skills and education; the debtor's other assets and their liquidity; the debtor's ability to save for retirement; and any special needs of the debtor and his or her dependents.
Id.
The trustee called as an expert witness accountant Dean Johnson, who testified that if the funds invested in the annuity contracts received at least a five per cent annual rate of return over Ms. Seelig's lifetime, while she only took monthly payments of $700 per month, the residual balance at the end of her projected life expectancy would have actually increased because the 5% rate of return on the principal would exceed the monthly draws. From that notion, the trustee argued that funds could be withdrawn over a three year period without penalty -although with tax liability - reducing the principal but still paying Ms. Seelig the monthly draw while also providing some return to the unsecured creditors of the estate. No one disagreed with Mr. Johnson's math. Rather, the disagreements came over what he was asked by the trustee to assume.
At the center of the disagreement is the use of the amount Ms. Seelig is to receive monthly from the sequential annuity contracts as an amount that is sufficient, together with her other sources of income, to meet her monthly expenses. The uncontroverted testimony is to the contrary, regardless of whether her actual expenses are used or a version of IRS allowances similar to a Means Test calculation is employed, as one of the debtor's experts testified, particularly when the need to pay tax on the withdrawn funds is factored in.
The trustee correctly points out that a small amount of debtor's expenses are associated with a vacant lot in Michigan. However, the trustee tried unsuccessfully to sell the lot, and has abandoned it. Moreover, those expenses do not make a material difference in the calculation. Mr. Martin, testifying for debtor, testified if the annuity contract was surrendered at its contractual surrender value, it would only yield about $94,000, before taxes of about $15,000. If the trustee received $34,000 of the net proceeds, there would be about $45,000 to invest in a new contract, and without a guaranteed interest rate of even 2.25%. If Ms. Seelig took only $700 per month starting in 2016, the funds would be exhausted well short of her projected life span. More to the point, that $700, plus $1,203 from the Honeywell pension, and $1,567 in Social Security, together each month is about $270 per month less than her regular monthly expenses. The trustee provided information that the surrender value in June 2011 will increase to $103,000, but the rest of the numbers do not change enough to persuade the Court that Ms. Seelig's regularly monthly expenses can be met by her income, especially if a component of it is diminished by drawing down on the fund from which a portion of the monthly income is derived.
The Court has in the foregoing narrative addressed most of the Moffat factors, virtually all of which favor Ms. Seelig's position in the case. At least one of the issues that has been troubling to the trustee, and concerns the Court as well, is that after the bankruptcy was filed, and after Mr. Seelig died, the trustee filed her objection to the debtors' claim of exemptions in what was then the Allianz contracts. Knowing that the trustee claimed an interest in the funds represented by those contracts on behalf of the bankruptcy estate, Ms. Seelig met with Mr. Epstein and agreed to restructure those contracts to take advantage of the "high water mark" form of death premium while also reducing risk from a variable interest contract, without notice to the trustee or court authorization. Debtor acted as if the trustee's objection to her claim of exemption had already-been resolved in debtor's favor and that the estate had no interest in the Allianz contracts. The debtor has not explained how that came about, and the Court remains troubled by that unauthorized conduct.
That said, however, what is currently before the Court is the trustee's objection to debtor's claim of exemption. The debtor has persuaded the Court that her current income, including the annuity distribution, is insufficient to meet her regular monthly expenses, and therefore both the current distribution and the deferred one are reasonably necessary for Ms. Seelig's support in light of all her other sources of income, and her expenses.
Accordingly, the Court finds and concludes that the trustee's objection to debtor's claim of exemption in the annuity contracts should be, and hereby is overruled.