Julia A. Christians, Trustee of the Bankruptcy Estate of Edward F. Dulas and Connie L. Dulas v. Edward F. Dulas Connie L. Dulas

95 F.3d 703, 1996 U.S. App. LEXIS 23892, 1996 WL 512198

• Court: Court of Appeals for the Eighth Circuit
• Decided: September 11, 1996
• Docket: 95-3614
• Status: Published

Opinions

BEAM, Circuit Judge.

Trustee Julia Christians appeals the district court’s order exempting an annuity belonging to Edward and Connie Dulas from the bankruptcy estate. We reverse.

I. BACKGROUND

In 1994, Edward and Connie Dulas (collectively the debtors) filed a voluntary petition under Chapter 7 of the Bankruptcy Code. They elected to use the exemptions provided by state law, instead of those provided by federal law.¹ The debtors then claimed that an annuity from which Connie receives monthly payments was exempt from the bankruptcy estate under Minnesota law.

The annuity was the result of the settlement of a personal injury action arising out of an automobile accident involving Connie Dulas. To effectuate the settlement, the débtors dismissed their legal action and released the defendants from further liability. In return, the defendants purchased an annuity payable to Connie Dulas. The annuity provides that Connie receive $450,000 in cash, monthly payments of $3,150 for the next forty years, and a lump sum of $200,000 on her sixty-fifth birthday. The annuity payments are guaranteed by an annuity insurance contract with the Life Insurance Company of North America.

The trustee objected to the claimed exemption on the ground that an annuity received in a pre-petition settlement of a personal injury claim is not an exempted personal injury right of action within the meaning of Minnesota law. The bankruptcy court allowed the exemption, however, and the district court summarily affirmed. The trustee appeals, arguing that the annuity was improperly exempted from the bankruptcy estate.

II. DISCUSSION

The district court determined that the annuity is exempt from the bankruptcy estate under Minnesota statute section 550.37, subdivision 22. That statute exempts “[rjights of action for injuries to the person of the debtor or of a relative whether or not resulting in death.” Minn.Stat. § 550.37(22). We must therefore determine whether the annuity constitutes a right of action under Minnesota law. On appeal, we review de novo the district court’s legal conclusion that the annuity is exempt from the bankruptcy estate. See In re Muncrief, 900 F.2d 1220, 1224 (8th Cir.1990).

The language of section 550.37(22) makes it clear that the Dulas annuity is not a right of action. See, e.g., In re Procter, 186 B.R. 466, 468 (Bankr.D.Minn.1995) (holding “[t]he term, ‘rights of action,’ is defined as ‘the right to bring suit; a legal right to maintain an action, growing out of a given transaction or state of facts and based thereon’ ”) (quoting Black’s Law Dictionary 1325 (6th ed. 1990)); In re Medill, 119 B.R. 685, 687 (Bankr.D.Minn.1990) (construing the term “rights of action” only to include future or pending claims). The statute exempts rights of action, not rights of payment.² See Medill, 119 B.R. at 687 n. 3. Although the debtors had a right of action when Connie was injured, they no longer have such a right. Instead, they have proceeds from the settlement of their personal injury action— no part of which was still pending at the time of the bankruptcy filing. By settling their claim, the debtors reduced their right of action to a right of payment. Consequently, the annuity is not a right of action under Minnesota law.

Had the Minnesota legislature wished to exempt proceeds resulting from personal injury claims, it could have done so. It has done so in numerous other instances. See, e.g., Minn.Stat. §§ 550.37(10) & (23) (exempting insurance proceeds); Minn.Stat. §§ 510.01, 510.02, 510.07 and 550.37(12) (exempting proceeds from sale of homestead); Minn.Stat. § 550.37(24) (exempting right to receive employee benefits); Minn.Stat. § 550.38 (exempting veteran’s benefits). As the Procter court stated:

Here, the legislature has not chosen to exempt settlement proceeds arising from a personal injury claim. The legislature has the ability and knows how to effectively provide exemption protection for proceeds of exempt property if it so chooses. Clearly then, the fact that the legislature omitted any inclusion of proceeds from personal injury claims indicates a deliberate choice not to do so.

Procter, 186 B.R. at 469.

This case is distinguishable from situations where a personal injury defendant pays a settlement amount over a period of time. There, the defendant has a continuing obligation to the plaintiffs; here, there is no such obligation. In this case, the defendants bought an annuity in 1984 for the benefit of the debtors. The defendants’ obligation ended at that time. Compare In re Gagne, 163 B.R. 819, 823 (Bankr.D.Minn.1994) (settlement proceeds from worker’s compensation claim not right of action for purpose of statute), rev’d on other grounds, 172 B.R. 50 (D.Minn.1994); Procter, 186 B.R. at 469 (settlement proceeds paid in full negate concept of right of action because the party paid has no further right against the defendant); with In re Carlson, 40 B.R. 746, 750 (Bankr.D.Minn.1984) (settlement proceeds from personal injury action were exempt because debtors had not yet released defendants from liability or received settlement payments). Only the third-party guarantor of the annuity remains obligated to the debtors here. At best, the debtors may in the future have a breach of contract action against the third-party annuity guarantor. Such an action would clearly not be an action “for injuries to the person” under Minnesota law. See Minn. Stat. § 550.37(22). Therefore, the annuity is not exempt from the bankruptcy estate.³

Finally, the bankruptcy court’s reliance on “policy considerations” does not support the annuity exemption on these facts. In stating that the denial of the exemption would deprive the debtors of their right to a “fresh start,” the bankruptcy court ignored the fact that the debtors could have elected to use the exemptions provided by the federal statutes. In re Dulas, 177 B.R. 897, 900 (Bankr.D.Minn.1995). In any event, the annuity at issue here is not exempt under Minnesota statute section 550.37, subdivision 22. We note, however, that today’s decision does not address the availability of other exemptions or protections found in the Bankruptcy Code.

¡II. CONCLUSION

Because the annuity here at issue was improperly exempted from the bankruptcy estate, we reverse the judgment of the district court.

1 . Bankruptcy debtors may elect to use either the exemptions set forth in the federal bankruptcy code or in the nonbankruptcy law of the debtors' domicile. Compare 11 U.S.C. § 522(d) with 11 U.S.C. § 522(b)(2).

2 . The legality of a "right of action” exemption under the Minnesota Constitution was determined by the Minnesota Supreme Court in Medill v. State, 477 N.W.2d 703 (Minn.1991). Dic-turn in the opinion may be construed as being supportive of the expanded definition of the exemption sought by the debtors. However, on the facts, Medill is inapposite here. Medill’s tort claim was pending trial at all relevant times. Thus, under any proposed definition, the "right of action” mentioned in the Minnesota statute was clearly in existence.

3 . Our conclusion is further supported by the legislative history of the federal and state exemption statutes. Currently, the Bankruptcy Code provides an exemption for rights of payment arising from a personal injury action. 11 U.S.C. § 522(d)(11)(D). This reflects a change in federal law, however, as rights of action instead of rights of payment were previously exempted. See § 70a(5) of the Bankruptcy Act of 1938 (formerly 11 U.S.C. § 110.A(5)) (reproduced in Collier on Bankruptcy ¶ 70.28, at 379 (14th ed. 1978)). After the change in federal law, Minnesota amended its exemption statute to protect rights of action. Minn.Stat. § 550.37(22) (historical notes). Because a person can elect the protection of either state or federal exemptions, Minnesota's amendment allowed bankruptcy debtors to choose between protecting rights of action or fights of payment. In this case, the debtors elected to use the exemption statute which protected rights of action. Their choice failed to protect the annuity from becoming part of the bankruptcy estate.