Opinion ID: 739315
Heading Depth: 2
Heading Rank: 1

Heading: is the lincoln national account an annuity under louisiana law?

Text: 9 We review the district court's application of Louisiana law de novo. 6 Although variable annuities are not particularly recent financial innovations--they first appeared on the scene in 1952 and have been growing in popularity ever since--neither the legislature nor the courts of Louisiana have spoken on the questions whether and to what extent such products should be considered annuities for the purpose of shielding them from seizure by creditors. Consequently, we must make an Erie-guess as to how the Louisiana Supreme Court would rule. 7 When making an Erie-guess in the absence of explicit guidance from the state courts, we must attempt to predict state law, not to create or modify it. 8
10 The Lincoln National account, labeled a Variable Annuity Account by the issuer, appears to be typical of the kinds of variable annuities offered primarily by insurance companies industry-wide. By its terms, the account has two distinct phases: the initial accumulation period and the final annuity period. During the accumulation period Guidry directs the investment of her purchase payments into sub-accounts, selecting them from an array of various investment portfolios. Throughout this period Guidry retains the power to control the allocation of funds among the various sub-accounts, as well as the power to withdraw some or all of the presently invested funds and to terminate the account altogether. The income earned by these funds once invested remains free of United States income tax until such time as Guidry elects to withdraw it. 9 11 The annuity period commences on the Maturity Date, or Annuitization Date. This is the title given to the date on which the accumulation period ends and the annuity period begins. The Maturity Date occurs automatically on Guidry's 85th birthday--April 4, 2018--unless before that time Guidry should unilaterally terminate the account, withdraw all funds, or exercise her option to accelerate the Maturity Date by giving 30 days' written notice. 12 At all times during the accumulation period, i.e., before the Maturity Date, Guidry bears the risk of loss on her investments within the account, has the right to vote her shares, and, as noted, has the power to make withdrawals from or even close out her account. It is only during the annuity period, which commences on the Maturity Date, that (1) the risk of loss shifts to the issuer, (2) the issuer begins making regular annuity payments pursuant to whichever payment option Guidry shall have pre-selected, and (3) the power to vote her shares, direct the investment of funds in her account, withdraw any portion of the principal or interest from time to time, or terminate the account altogether no longer belongs to Guidry. 13 The district court reached the conclusion that the Lincoln National account is not an annuity under Louisiana law by breaking the account down into its two component phases and analyzing each. As a result, the court determined that, for purposes of exemption from seizure, the account would only become an annuity, if at all, after the Maturity Date. Although we ultimately reach the same conclusion, we believe that this case merits further explanation.
14 Three separate Louisiana statutory provisions exempt annuities from seizure by creditors, but the Louisiana Insurance Code, LSA R.S. 22:647, is the one that applies to the Lincoln National account at issue here. Under that statutory provision, an account is exempt from garnishment if it qualifies as an annuity contract. 10 The Louisiana Insurance Code does not define the term annuity contract, but the parties are in agreement that the general definition of an annuity in article 2793 of the Louisiana Civil Code governs the term as it is applied elsewhere in the State's statutes. Article 2793 defines an annuity as follows: 15 The contract of annuity is that by which one party delivers to another a sum of money, and agrees not to reclaim it so long as the receiver pays the rent agreed upon. 16 Under that definition, a fundamental characteristic of an annuity is the complete divestiture by the annuitant of all ownership interest in the principal fund. An annuitant has an interest only in the payments themselves and not in any principal fund or source from which they may be derived; an annuitant surrenders all right and title in and to the money he pays for it. 11 17 Here, that clearly is not the case prior to the Maturity Date of the Lincoln National Account. According to the terms of her account, Guidry has retained the power to direct her investments, to vote the shares attributable to her investment, to withdraw funds from her account with impunity throughout the entire accumulation period, and even to terminate the account and recover all remaining funds. 12 Moreover, the defendants do not argue, nor does the record on appeal indicate, that the types of annuities traditionally exempted from seizure under Louisiana law embody even one of the various rights and powers of ownership retained by Guidry over the Lincoln National account during the accumulation period. 18 The defendants contend that the account nevertheless should be treated as an annuity contract for exemption purposes because the account is (1) labeled a variable annuity, (2) referred to as an annuity throughout the contract, and (3) approved for sale by the Louisiana Department of Insurance. The first two facets of that argument are clearly meritless, as [i]t is the substance of the arrangement rather than the label affixed to it that determines whether the account is an annuity and subject to exemption. 13 As for regulatory approval of the form of the account, the defendants fail to demonstrate how the Louisiana Department of Insurance's blessing signifies a determination that the contract is, in fact, an annuity. 14 Instead, in the absence of any indication to the contrary, we must assume on the basis of ordinary logic that approval of the Lincoln National account's form by the Department of Insurance signifies only that the account is not unlawful and its use is permissible. Such approval does not reflect that the Department of Insurance has passed judgment on the propriety--much less all of the legal implications--of labeling the account a variable annuity. Thus, as the Lincoln National account does not purport by its terms to be exempt from seizure, its approval for sale by the Louisiana Department of Insurance has no bearing on our analysis. 19 Amici Curiae Lincoln National Life Insurance Company (which issued the account) and the American Council of Life Insurance offer additional arguments in support of the general proposition that variable annuities should be held to be exempt from seizure under Louisiana law. But FCBT is not taking issue with the idea that an account may be classified as an annuity even though rents are to be paid in some form other than fixed annual payments. 15 In fact, FCBT concedes that an account should not be disqualified from classification as an annuity simply because it permits the annuitant to share a portion of the investment risks and rewards, or otherwise permits the annuitant to take advantage of the prospect of a growing marketplace by agreeing to tie the size of annuity payments to the market value of investments in which the principal has been placed. Rather, FCBT argues, the salient issue in the instant appeal is whether an investment account like the Lincoln National account can be characterized as an annuity contract under Louisiana law at any time during the period in which the investor retains not only some but virtually all of the incidents of control over the principal fund, as is the case here throughout the accumulation period of the account. FCBT takes particular umbrage with the unfettered withdrawal provisions in the Lincoln National account. 20 The thrust of the argument of Amicus American Council is that there is nothing inconsistent between Louisiana's definition of an annuity contract and the existence of a withdrawal feature. To support its argument, American Council points to Louisiana Civil Code article 2796, which provides that annuities are essentially redeemable. We interpret article 2796, however, to contemplate redemption only by the entity or person who sold the annuity contract, not by the annuitant. Article 2796 reads in its entirety: 21 Constituted annuity is essentially redeemable. 22 The parties may only agree that the same shall not be redeemed prior to a time which can not exceed ten years, or without having warned the creditor [annuitant] a time before, which they shall limit. (emphasis added) 23 Although the wording of that provision is somewhat arcane, related provisions of the Louisiana Civil Code shed additional light on its meaning. 24 Article 2797, entitled Compulsory redemption against debtor, permits the annuitant to compel the other party to redeem the annuity if that party (1) ceases fulfilling his obligations during three years or (2) fails to give the annuitant the securities promised by the contract. This provision is noteworthy for two reasons: First, rather than permitting an annuitant to redeem an annuity, it only permits an annuitant to compel the other party, i.e., the seller, to redeem the annuity; but second, and more importantly, it permits an annuitant to compel redemption only in situations that comport with Louisiana's statutory definition of an annuity--i.e., when the other party either fails to pay the rent agreed upon or fails to perform his contractual duties. 16 Thus, even though article 2797 does not explicitly prohibit an annuitant from redeeming an annuity or from compelling redemption in circumstances other than those provided for in article 2793, we are not persuaded that, without further indication to the contrary, the redemption provision in article 2796 was intended by the Louisiana legislature to alter the basic principle that an annuitant, according to Louisiana's statutory definition, must relinquish at least some dominion and control over the account principle. 25 We find additional support for this conclusion in Louisiana's general definition of the right of redemption, which, as applied to annuities, contemplates redemption only by the party who sold the annuity contract. The right of redemption is defined in article 2567, which states: The parties to a contract of sale may agree that the seller shall have the right of redemption, which is the right to take back the thing from the buyer. 17 Thus, we agree with FCBT that the level of control retained by Guidry is a strong indication that--at least during the accumulation period--her account does not qualify as an annuity for purposes of exemption from seizure under Louisiana law. 18 26 On the other hand, FCBT overstates its position by arguing that the Lincoln National account is nothing more than a thinly-disguised mutual fund. For example, unlike a mutual fund, the earnings of Guidry's account qualify for deferred income tax treatment. 19 In this and other respects, the account is more closely analogous to an Individual Retirement Account (IRA), albeit the IRA is a creature of Congress, not private industry as are annuities and mutual funds. 27 Amicus Lincoln National notes that IRA's are exempt from garnishment under Louisiana law even though the owner/investor retains significant control over his account, including the right of immediate access to the corpus of the account. Thus, argues Lincoln National, the fact that Guidry retains similar rights under the Lincoln National account should not preclude its protection from garnishment as an annuity. A brief review of the history surrounding the exemption of IRA's under Louisiana law demonstrates the fundamental flaw in Lincoln National's logic. 28 In 1981, in In re Talbert, 20 a bankruptcy court ruled that IRA's were not exempt from seizure under Louisiana law. In so holding, the court noted the high potential for abuse that would result if a debtor were permitted to convert non-exempt funds into an exempt IRA and thereby avoid garnishment or attachment, despite the IRA's remaining freely revocable at the debtor's discretion. Two years later, in response to Talbert, the Louisiana legislature amended its statute to exempt IRA's from seizure. 21 In so doing, however, the legislature was careful to protect against the type of abuse envisioned by the bankruptcy court in Talbert, placing a low threshold cap on the amount of funds that may be shielded from creditors: IRA's are now exempt in Louisiana only to the extent that contributions thereto were exempt from federal income taxation at the time of contribution, plus interest or dividends that have accrued thereon. 22 Thus far, the Louisiana courts have adopted a strict, literal interpretation of that limitation. Just last year, for example, an intermediate appellate court in Louisiana held that the statute exempts only tax-deductible IRA contributions plus accrued interest or dividends, but that an IRA's capital gains are subject to seizure. 23 29 It is at least conceivable that our opinion today might prompt the Louisiana legislature into action akin to that taken in response to Talbert--at least once those who lobby for the sellers of variable annuities receive this wake-up call. And, as investing in variable annuities has become a widespread method of retirement planning and financial management, such investments might be deemed to be deserving of protection from seizure. It is equally conceivable, however, that bank and creditors' lobbies might mount a counteroffensive. 30 Be that as it may, the instant appeal presents a situation in which financial innovation appears to have outstripped legal evolution. We are convinced that the present state of Louisiana's exemptions from seizure cannot be stretched far enough to extend the exemption of traditional annuities to variable annuities of the kind exemplified by the Lincoln National account, at least not before the Maturity Date arrives and the annuity period clutches in. For the duration of the accumulation period, the Lincoln National account simply fails to embody the fundamental characteristics of an annuity as that term is defined by the Louisiana Civil Code; its creative features actually broaden the gap between it and traditional annuities. 24 31 Moreover, in contrast to IRA's, Louisiana law does not presently limit the amount of funds that may be placed in annuities and thereby enjoy exemption from garnishment. Although the Louisiana legislature may well enact new legislation exempting just such variable annuities from garnishment or attachment, we speculate that--in light of the IRA experience post-Talbert--the legislature is not likely to do so without, as a trade-off, imposing limitations on such exemptions. 32 As noted, in making our Erie-guess, we must attempt to predict state law, not to create or modify it. Stretching beyond the statutory definition of an annuity to declare variable annuities exempt from garnishment would require us to encroach on the exclusive province of the Louisiana legislature to create new law. Given Louisiana's Civil Law tradition of the primacy of legislation over jurisprudence, we are especially sensitive to our lack of authority to expand Louisiana's statutory definition of an annuity to include accounts over which investors retain virtually absolute dominion and control, including the right to withdraw any or all of the principal at any time. The potential for abuse is too great for us to decide cavalierly, and without clear support from Louisiana's statutes or case law, to shield the assets of such investment vehicles from creditors of the owner, particularly in the absence of ameliorating caps or other limitations on the quantum of such exemptions, such as those that the Louisiana legislature has imposed on IRA's. 33