Court: United States Bankruptcy Court, M.D. Florida; July 7, 1999; Us Bankruptcy; United States Bankruptcy Court
A Complaint to Determine Interest in Property and for Declaratory Judgment was filed on November 2, 1998, by Gordon P. Jones, Chapter 7 Trustee for Earle Elwin Berghman’s estate. The complaint targets Berghman, the Debtor, and J.G. Wentworth, S.S.C. Limited Partnership, to clarify the interest in annuity payments and seek declaratory relief under Federal Rule of Bankruptcy Procedure 7001. Berghman responded on December 1, 1998, and Wentworth filed its answer, counterclaim against the Plaintiff, and crossclaim against Berghman on December 15, 1998. A trial occurred on March 23, 1999, with subsequent submissions required from both parties.
The facts are largely undisputed: Berghman sustained personal injuries while employed by National Railroad Passenger Corporation on November 28, 1979. A General Release signed on April 25, 1984, discharged National Railroad from liability in exchange for a structured settlement, involving a payment of $114,151.00 to Prudential Insurance Company for an annuity. The annuity contract specified that ownership and control belonged to National Railroad and its assigns. Berghman received annuity payments for twelve years. In need of funds, he entered a Purchase Agreement with Wentworth on March 27, 1996, wherein he sold his rights to certain periodic payments outlined in the agreement. The Purchase Agreement included a schedule of the payments to be sold and confirmed that Berghman understood the transaction.
Seller transfers all rights, title, and interest in the Assigned Assets to Purchaser, which includes the right to receive payments under the Release, Settlement Agreement, and the payments listed in Exhibit A. The Assigned Assets encompass both current and future rights associated with the Schedule of Periodic Payments. The transaction is intended as a purchase and sale rather than a loan. Seller affirms ownership of the Assigned Assets free of any encumbrances and confirms competency to enter into the Agreement, having received advice during negotiations. Seller has valid reasons for opting to sell rather than use the Assigned Assets as collateral for a loan and has not previously assigned these rights.
Exhibit A details the specific payments being purchased, including 37 monthly payments of $500 starting on May 7, 1996, and a lump sum of $25,000 due on May 7, 1999. Amendments to the Purchase Agreement were made in 1996 and 1997, with Debtor instructing Prudential to redirect future payments to a new address managed by Wentworth. In a letter dated June 6, 1997, the Debtor referenced a new sale of a $50,000 lump sum payment due on May 7, 2004, indicating the sale was an addition to prior transactions. However, in September 1997, Debtor contacted Prudential without Wentworth's consent to redirect payments to their personal address, thereby retaining possession of the annuity payments instead of forwarding them to Wentworth.
On November 12, 1997, Wentworth initiated a Complaint and Confession of Judgment in the Philadelphia County Court of Common Pleas against Debtor Berghman, detailing a purchase agreement established between them for periodic annuity payments. The agreement, which underwent multiple amendments between March 1996 and June 1997, involved Wentworth paying Berghman $90,500 for the right to receive total payments of $219,000, including various monthly and lump-sum amounts.
A writ of execution was issued on November 19, 1997, instructing the Philadelphia County sheriff to garnish payments from Prudential Insurance Company to satisfy the judgment against Berghman. Between September 1997 and April 1999, Berghman received $14,500 in annuity payments instead of Wentworth. On September 11, 1998, Berghman filed for Chapter 7 bankruptcy, listing assets of $326,050 and liabilities of $319,620.39, with $290,179.28 classified as unsecured. He claimed his Prudential Annuity as exempt under Florida law, valuing it at $325,000, and listed Wentworth as an unsecured creditor with a claim of $196,000.
At trial, David Reape, a Wentworth vice president, clarified that Wentworth's role was to purchase payment rights, not to act as a lender. All sellers were required legal representation, and payments to Wentworth were made to a designated lockbox address. Reape reiterated that Wentworth sought garnishment due to interrupted payments prior to Berghman's bankruptcy filing and noted that Wentworth had no legal standing to sue Prudential, as the contract was solely with Berghman.
Plaintiff requests a declaratory judgment asserting that the Debtor cannot assign annuity payments to Wentworth, thus claiming these payments are property of the estate. The Plaintiff argues that the annuity's language designates National Railroad as the owner, restricting assignment rights solely to it, rendering the purchase agreement invalid. Additionally, the Plaintiff seeks recognition of its entitlement to annuity payments due to an objection to Debtor's claim of exemption.
In response, Wentworth counterclaims to affirm that the Debtor properly assigned all rights to the annuity payments to it, or alternatively, that the transaction was a valid loan. Wentworth also crossclaims against the Debtor to exclude $196,036.99 from the Debtor’s discharge under specific provisions of the Bankruptcy Code.
The central legal issue before the Court is whether the annuity payments sold by the Debtor to Wentworth are considered property of the estate under federal bankruptcy law, specifically 11 U.S.C. § 541(a)(1). While the determination of property interests is a federal question, the nature of those rights is governed by state law. The Court references a similar case, In re Freeman, where the debtor's assignment of annuity payments was upheld despite an anti-assignment clause not being presented as evidence. In that case, the court found the assignment valid and ruled that the annuity payments were not property of the estate.
The Court notes that contract rights are generally assignable unless restricted by personal obligations, public policy, or explicit contract terms. The relevant contract stipulates that ownership and control belong to National Railroad, permitting it to exercise rights without third-party consent.
The Restatement (Second) of Contracts, 322(1) indicates that a term in a contract prohibiting assignment typically restricts only the delegation of performance duties but does not prevent the assignment of the right to receive payments. In Aldana v. Colonial Palms Plaza, Ltd., it is established that such prohibitions do not extend to payment rights unless stated otherwise. The Court finds that the Debtor's assignment of annuity payments, although potentially frustrating the structured settlement intent, is legally valid, as the annuity contract did not explicitly prohibit such an assignment. Furthermore, circumstances do not suggest an intention to restrict this assignment. The doctrine of equitable assignments supports the validity of recognizing the assignment to ensure fairness. The Court concludes that the transaction reflects the parties’ intent and would be unjust if deemed otherwise. As such, the right to receive payments is not part of the Debtor’s bankruptcy estate. The Court finds no ambiguity in the Purchase Agreement and notes that the Debtor had legal counsel review it prior to execution. Wentworth’s crossclaim seeks to exempt $196,036.99 from Debtor’s discharge under 11 U.S.C. 523(a)(2)(A), (a)(4), and (a)(6). The Court determines that since the payment rights belong to Wentworth and were misdirected to the Debtor, exceptions to discharge apply only to pre-petition payments not received by Wentworth. Although Wentworth primarily refers to 11 U.S.C. 523(a)(2)(A) and (a)(4) in its brief, the Court finds that the Debtor's actions meet the criteria for 11 U.S.C. 523(a)(6).
Annuity payments are deemed not to be part of the Debtor’s estate, and Wentworth seeks to have $14,500.00 excepted from the Debtor’s discharge. Under Section 523, certain debts, including those obtained through false pretenses, fraud, or willful and malicious injury, are excluded from discharge. The Bankruptcy Code aims to provide a fresh start for honest debtors while preventing misuse by dishonest ones. In this case, the elements of 11 U.S.C. 523(a)(2)(A) are met. The Debtor entered into a Purchase Agreement with Wentworth for future payments, initially honoring the agreement before redirecting payments to himself without any entitlement, constituting theft. Wentworth relied reasonably on the Debtor's representation that he would receive payments, resulting in a pre-petition loss of $14,500.00. The Supreme Court clarifies that 'willful' in 523(a)(6) means intentional injury rather than merely intentional acts leading to injury. The Debtor’s actions are classified as conversion, as he redirected payments he no longer had an interest in, thereby committing willful and malicious injury to Wentworth’s property. Consequently, Wentworth’s loss will be excepted from the Debtor’s discharge.
All post-petition annuity payments are recognized as belonging to Wentworth and must be immediately surrendered to them. Any shortfall in post-petition funds that the Debtor received and spent constitutes a debt owed to Wentworth, who may pursue collection in a suitable forum. The Court also addressed Wentworth's Objection to Exemptions, noting that annuities for structured settlement agreements do not qualify for Florida's exemptions under Florida Statutes 222.14, as established in Guardian Life Inc. Co. v. Solomon. However, given the unique circumstances of this case and the broad interpretation of annuities by the Supreme Court of Florida, the Court concluded that any interest not sold under the Purchase Agreement remains exempt property according to Florida Statutes 222.14.
The Court expressed sympathy for the Debtor’s financial difficulties but found no grounds to consider the Debtor's right to annuity payments as part of the bankruptcy estate at the time of filing. The facts supported the conclusion that the Debtor had improperly redirected payments from an annuity that had already been sold to Wentworth. The Debtor's remaining interest in the annuity is deemed exempt under state law.
A separate Order will be issued based on these findings. The Court ruled on a Complaint regarding property interest filed by Gordon P. Jones, Chapter 7 Trustee. Wentworth counterclaimed against the Plaintiff and crossclaimed against the Debtor. The Court ordered that: (1) the Debtor's right to annuity payments was validly sold to Wentworth; (2) any payments not included in the Purchase Agreement are exempt property of the Debtor; (3) the Debtor owes Wentworth $14,500, which is non-dischargeable; and (4) a Preliminary Injunction from May 4, 1999, is lifted.
Furthermore, the Motion by Wentworth seeking relief from the automatic stay was deemed moot based on the previous findings confirming that the Debtor's annuity rights were sold to Wentworth.
Debtor's counsel, Robert Altman, submitted a cover letter indicating reliance on Trustee’s counsel, Raymond R. Magley, regarding the classification of annuity payments as property of the estate. The structured settlement includes multiple payment terms: an initial $10,000 upon release execution, followed by monthly payments of $500 for ten years, increasing to $1,500 for the next ten years, and $2,500 until the Debtor's death. Additional lump sum payments are scheduled at five-year intervals, culminating in a final $100,000 payment after thirty years.
In his application to sell the annuity payments, the Debtor cited needs for tools and a home down payment. However, during trial, he claimed his financial needs were due to a civil loss in Maine and responsibilities toward his family. The Debtor contacted Colonial Finance Services, Inc. (CFS) after seeing an advertisement. Despite his claims, the Court found his rationale unconvincing, noting inconsistencies in his testimony regarding his financial needs, including references to purchasing a motorcycle and tools, while ultimately determining that his true motive was to fund gambling activities. The Debtor acknowledged significant gambling losses, claiming at least $30,000 from the initial $75,000 received from Wentworth.
Wentworth argues that the transaction in question was an irrevocable prepetition transfer, not a sale. Additional correspondence from Mr. Smith to Wentworth on June 25, 1997, confirmed the verification of the Debtor's location for UCC-1 filings. The evidence presented, including a check from Smith to the Debtor, was not persuasive enough to support the Debtor's claim that the transaction constituted a loan rather than a property interest sale.
The Purchase Agreement clarifies that the transaction was not intended as a loan, which the Debtor acknowledged. On May 12, 1999, the Court issued an Order granting a Preliminary Injunction to J.G. Wentworth S.S.C. Limited Partnership, requiring the Debtor to transfer a $25,000 annuity payment received in May 1999 to the Chapter 7 Trustee, along with $750 from each $1,500 monthly annuity payment starting that month. The Debtor receives $1,500 monthly from a structured annuity that has been levied upon by Wentworth. Although the Debtor is a defendant, the Plaintiff indicated at trial that both he and the Debtor agree on whether the annuity payments are part of the estate. The referenced Purchase Agreement includes amendments from 1996 and 1997. The Freeman case involved a Motion for Sanctions against Wentworth for not releasing a Writ of Garnishment on annuity payments claimed as property of the estate. The Court found the Debtor's claim that the agreement was a loan to be unconvincing, with other evidence suggesting otherwise. Wentworth bears the burden of proving that the debt should not be discharged. Florida Statutes 222.14 protects cash surrender values of life insurance policies and annuity proceeds from creditor claims unless the policy or contract was created for the creditor's benefit. The Solomon case is distinguished from the current case, as the Debtor is the 'Annuitant' in the annuity contract, unlike in Solomon, where payments were directed to a creditor rather than the debtor.
