IN RE: LEONARD D. BRONK, Debtor.
LEONARD D. BRONK, Defendant-Appellant/Cross-Appellee JOHN M. CIRILLI, Trustee, Plaintiff-Appellee/Cross-Appellant,
Argued September 19, 2013.
Appeals from the United States District Court for the Western District of Wisconsin. No. 11-cv-172-wmc -- William M. Conley, Chief Judge.
For In the Matter of: LEONARD D. BRONK, Debtor - Appellant (13-1123, 13-1516): Jared C. Redfield, Attorney, Redfield Law Offices, Stevens Point, WI.
For John M. Cirilli, Trustee - Appellee (13-1123, 13-1516): John M. Cirilli, Attorney, Cirilli Law Offices, Rhinelander, WI; Claire Ann Resop, Attorney, Steinhilber Swanson & Resop, Madison, WI.
For Bankruptcy, Insolvency And Creditors' Rights Section of The State Bar of Wisconsin, Amicus Curiae (13-1123): Leonard G. Leverson, Attorney, Leverson & Metz, Milwaukee, WI.
Before MANION, KANNE, and SYKES, Circuit Judges.
Sykes, Circuit Judge.
This bankruptcy appeal raises two questions of first impression under a Wisconsin statute that permits resident debtors to shield certain property from execution by creditors. See generally 11 U.S.C. § 522(b); Wis. Stat. § 815.18. The first question concerns the scope of the statutory exemption for state-qualified college savings accounts. See Wis. Stat. § 815.18(3)(p) (exempting " [a]n interest in a college savings account under s. 16.641" ). The bankruptcy judge read the statute narrowly to cover only the interest of account beneficiaries, not account owners, and refused to allow the debtor to exempt from his bankruptcy estate five college savings accounts he had established for the benefit of his grandchildren. The district court affirmed this ruling, and the debtor appeals this aspect of the judgment.
Wisconsin's exemption statute also protects certain retirement benefits, see id. § 815.18(3)(j), as well as life-insurance and annuity contracts, see id. § 815.18(3)(f). But the exemption for life insurance and annuities is limited to $4,000 if the contract in question was issued less than 24 months before the exemption is claimed. Id. § 815.18(3)(f)(3). The debtor purchased an annuity just a few months before filing his bankruptcy petition and claimed a full exemption for it under section 815.18(3)(j). The Chapter 7 trustee argued that the annuity didn't qualify as a " retirement benefit" under section 815.18(3)(j) and the debtor could claim only the $4,000 exemption allowed under section 815.18(3)(f)(3). The bankruptcy judge rejected the trustee's argument, classified the annuity as a retirement benefit, and allowed the exemption in full. The district court affirmed, and the trustee cross-appeals this aspect of the judgment.
We reverse in part and affirm in part. The college savings accounts are exempt from execution under section 815.18(3)(p). Account owners, not just account beneficiaries, may claim this exemption, and the lower courts erred in disallowing it here. As for the annuity, the contract in question satisfies the basic definition of an exempt " retirement benefit" under section 815.18(3)(j)(1), which broadly includes " [a]ssets held or amounts payable under any ... annuity ... or similar plan or contract providing benefits by reason of age, illness, disability, death, or length of service." The debtor's annuity provides a death benefit, so the lower courts properly allowed him to exempt it in full under section 815.18(3)(j).
We note, however, that to qualify as a fully exempt retirement benefit under section 815.18(3)(j), the plan or contract in question must be either employer sponsored or comply with the Internal Revenue Code. See § 815.18(3)(j)(2). The annuity clearly is not employer sponsored; whether it complies with the Internal Revenue Code has not been established, but the trustee raised this issue far too late in the proceedings and so it is waived.
Leonard Bronk is a retiree living in Stevens Point, Wisconsin. He incurred significant debts providing for his wife's medical care before her death in 2007, and he himself suffered a stroke in early 2009. With his medical debts mounting--they exceeded $345,000 by the time he filed for bankruptcy--Bronk sought the advice of an attorney about pre-bankruptcy exemption planning. His assets included his home, which he owned free and clear, and a certificate of deposit in the amount of $42,000. On the advice of counsel, Bronk sought to protect these nonexempt assets by converting them to exempt assets.
In May 2009, a few months before filing his Chapter 7 petition, Bronk borrowed $95,000 from Citizens Bank and mortgaged his previously unencumbered home. He used these funds to establish five college savings accounts for the benefit of his grandchildren under section 529 of the Internal Revenue Code. That section enables states to create " qualified tuition program[s]" in the form of prepaid tuition plans and college savings accounts that enjoy favorable federal tax treatment. I.R.C. § 529(b). Wisconsin has enacted legislation creating both. See Wis. Stat. § 16.641 (college savings accounts); id. § 16.64 (prepaid tuition plans).
Account owners control the funds in these accounts (known as " Edvest" accounts) and may designate and change account beneficiaries. § 16.641(1), (3); see also Edvest, Plan Disclosure Booklet and Participation Agreement I-2 (Oct. 29, 2012), available at https://www.edvest.com/documents/wi_disclosure.pdf (" [The account owner] may cancel th[e] [Edvest Participation] Agreement at any time by requesting a 100% distribution from [his or her] Account." ). Beneficiaries do not control account assets. See Wis. Admin. Code Admin. § 81.11(3) (" A designated beneficiary may not authorize distribution or withdrawal of account funds." ); see also Susan T. Bart, The Best of Both Worlds: Using a Trust to Make Your 529 Savings Accounts Rock, 34 ACTEC J. 106, 111 n.31 (2008) (" [U]nless the beneficiary is the account owner, the beneficiary has only a mere expectancy, and does not have any property interest to transfer." ).
In addition to creating the college savings accounts using the equity in his home, Bronk converted the $42,000 certificate of deposit into an annuity with CM Life Insurance Company. The annuity contract was issued on May 4, 2009, and does not begin making payments until January 3, 2035, but it also includes a death benefit.
On August 5, 2009, Bronk filed for bankruptcy under Chapter 7. The trustee objected to the college-fund and annuity transactions, arguing that Bronk had transferred his property with the intent to hinder, delay, or defraud his creditors and thus should be denied a discharge. See 11 U.S.C. § 727(a)(2)(A). The trustee also lodged individual objections to the exemptions Bronk claimed for these converted assets. See Wis. Stat. § 815.18(10). To be more specific, Bronk sought an exemption for the college savings accounts under section 815.18(3)(p), which allows debtors to shield from creditors " [a]n interest in a college savings account." He also sought an exemption for the annuity under section 815.18(3)(j), which shields certain qualifying retirement benefits from creditors. The parties submitted the case on stipulated facts.
The bankruptcy judge first addressed the trustee's argument for denial of discharge and rejected it, finding that there was no evidence that Bronk had acted with intent to hinder, delay, or defraud creditors. See In re Bronk, 444 B.R. 902, 908-17 (Bankr. W.D. Wis. 2011). Turning to the claimed exemptions, the bankruptcy judge interpreted section 815.18(3)(p)--the exemption for college savings accounts--as applying only to the beneficiary's interest, not the account owner's interest, and on that understanding disallowed the claimed exemption for the Edvest accounts Bronk had established for his grandchildren. Id. at 918-24. But the judge accepted Bronk's argument about the annuity, holding that it was fully exempt as a retirement benefit under section 815.18(3)(j) rather than only partially exempt under section 815.18(3)(f)(3), as the trustee had argued. See id. at 925-26.
Both sides appealed to the district court. The district judge vacated the bankruptcy court's decision while agreeing with most of its reasoning. First, the district judge agreed that Bronk was entitled to a discharge because the trustee had not proven that the asset transfers were made with intent to hinder, delay, or defraud creditors. That decision is not challenged on appeal, so we say no more about it here. Second, the district judge agreed with the bankruptcy judge's interpretation of section 815.18(3)(p) and upheld the decision to deny the claimed exemption for Bronk's Edvest accounts. Finally, the judge narrowed the bankruptcy court's interpretation of " retirement ...