A Rhode Island bankruptcy court has ruled that the owner of an annuity could not claim an exemption for the annuity under a Rhode Island law exempting life insurance from the claims of creditors because the annuity was not life insurance.
The Case
After Marcus Soori-Arachi and his wife Stephanie Tamgho filed a joint voluntary petition under Chapter 7 of the Bankruptcy Code, they claimed an exemption under R.I. Gen. Laws § 27-4-11 in a nonqualified, tax deferred variable annuity with a surrender value of $105,000. Mr. Soori was the designated owner and annuitant of the annuity, and his estate was the designated beneficiary of the annuity and was entitled to its proceeds on his death.
The debtors' Chapter 7 trustee objected to the exemption under Section 27-4-11, contending that an exemption under that section of Rhode Island law applied only to life insurance policies and was limited to protecting life insurance proceeds from the claims of the insured's creditors.
Mr. Soori maintained that Section 27-4-11 applied to any type of insurance product and that the annuity was exempt because it was a type of insurance.
The Bankruptcy Court's Decision
The bankruptcy court sustained the trustee's objection to Mr. Soori's claimed exemption in the annuity under Section 27-4-11.
In its decision, the bankruptcy court explained that Section 27-4-11 protects the rights of an insured's beneficiary to the proceeds of a life insurance policy from the claims of the insured's creditors. Its “plain meaning,” the bankruptcy court continued, was to safeguard the rights and interests of an insured's beneficiary from the insured's creditors by exempting life insurance policies from their reach.
The bankruptcy court then noted that the key to applying Section 27-4-11 was that the instrument under which such proceeds were payable “must be a life insurance policy.” However, it ruled, Mr. Soori's annuity was not a life insurance policy and, as a result, Section 27-4-11 did not entitle Mr. Soori to exempt the annuity from his bankruptcy estate.
According to the bankruptcy court, Mr. Soori incorrectly assumed that annuities and life insurance (or other types of insurance) were treated similarly under Rhode Island law or were structural equivalents. The bankruptcy court noted that Rhode Island law describes annuities as “all agreements to make periodic payments for a certain period or where the making or continuance of all or some of a series of the payments, or the amount of any payment, depends on the continuance of human life, except payments made in connection with a life insurance policy. . . .” R.I. Gen. Laws § 27-4-0.1(a) (emphasis added).
The bankruptcy court ruled that the annuity's death benefit did not alter its structural distinction from life insurance or its treatment under Section 27-4-11. The annuity, the bankruptcy court concluded, was “akin to an investment vehicle,” providing for both the liquidation of the annuity to obtain the accumulated increase in value over time (with the risk of loss of value) and periodic payments during Mr. Soori's life payable on the date stated in the annuity.
The case is In re Soori-Arachi, No. 17-10570 (Bankr. D.R.I. March 26, 2019). Attorneys involved include: For Stacy B. Ferrara, Trustee: Stacy B. Ferrara, Nolan, Brunero, Cronin & Ferrara Ltd., Coventry, RI.
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].