Filed: Oct. 01, 2008
Latest Update: Feb. 21, 2020
Summary: REVISED OCTOBER 1, 2008 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT United States Court of Appeals Fifth Circuit FILED September 12, 2008 No. 06-21004 Charles R. Fulbruge III Clerk In The Matter Of: ANDRES ALEJANDRO SOZA; MARY RACHEL C BUZO Debtors - ANDRES ALEJANDRO SOZA; MARY RACHEL C BUZO Appellees v. JOSEPH M HILL Appellant Appeal from the United States District Court for the Southern District of Texas Before JONES, Chief Judge, and WIENER, and CLEMENT, Circuit Judges. EDITH
Summary: REVISED OCTOBER 1, 2008 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT United States Court of Appeals Fifth Circuit FILED September 12, 2008 No. 06-21004 Charles R. Fulbruge III Clerk In The Matter Of: ANDRES ALEJANDRO SOZA; MARY RACHEL C BUZO Debtors - ANDRES ALEJANDRO SOZA; MARY RACHEL C BUZO Appellees v. JOSEPH M HILL Appellant Appeal from the United States District Court for the Southern District of Texas Before JONES, Chief Judge, and WIENER, and CLEMENT, Circuit Judges. EDITH H..
More
REVISED OCTOBER 1, 2008
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
September 12, 2008
No. 06-21004 Charles R. Fulbruge III
Clerk
In The Matter Of: ANDRES ALEJANDRO SOZA; MARY RACHEL C BUZO
Debtors
---------------------------------------------------------------------------------------
ANDRES ALEJANDRO SOZA; MARY RACHEL C BUZO
Appellees
v.
JOSEPH M HILL
Appellant
Appeal from the United States District Court
for the Southern District of Texas
Before JONES, Chief Judge, and WIENER, and CLEMENT, Circuit Judges.
EDITH H. JONES, Chief Judge:
The question presented in this bankruptcy appeal is whether an annuity
purchased by a debtor couple the day before they sought bankruptcy relief is,
under the facts here presented, exempt under Texas law, Tex. Ins. Code Ann.
§ 1108.051, or non-exempt because it was “a premium payment made in fraud
of a creditor . . . .” Tex. Ins. Code Ann. § 1108.053. According to the debtors’
No. 06-21004
repeated representations to the bankruptcy and district courts, this annuity was
purchased not simply “to maximize the debtors’ exemption claims” but to
manipulate an inheritance that the debtor Andres Alejandro Soza (“Soza”) may
ultimately share with his siblings. Because the debtors’ purpose in purchasing
this annuity had nothing to do with the rehabilitative goal of Texas’s exemption
laws, they could not legitimately claim the exemption. Accordingly, the
judgment of the district court, reversing the bankruptcy court’s denial of
exemption, must itself be reversed, and the case is remanded for further
proceedings.
On October 13, 2005, Soza and his wife, Mary Rachel C. Buzo, transferred
$30,000 into a Mutual of Omaha annuity. The next day they filed a voluntary
Chapter 7 bankruptcy petition.1 Joseph Hill was appointed Trustee of their
bankruptcy estate. The debtors’ bankruptcy schedules listed just under $30,000
in unsecured debt and $340 in non-exempt property. The debtors identified the
annuity as an asset valued at $30,000, and they claimed an exemption pursuant
to § 1108.051 of the Texas Insurance Code.
The trustee objected to the exemption because the statute does not apply
to “a premium payment made in fraud of a creditor.” Tex. Ins. Code Ann.
§ 1108.053. Relying on the debtors’ petition and schedules, the trustee argued
that their conversion of non-exempt property into an exempt annuity on the eve
of bankruptcy amounted to “constructive fraud” detrimental to the creditors. In
1
The debtors filed for bankruptcy just before the Bankruptcy Abuse Prevention and
Consumer Protection Act (“BAPCPA”) came into effect. Pub. L. No. 109-8, 119 Stat. 23 (2005)
(codified as amended in scattered sections of 11 U.S.C.). BAPCPA governs cases filed on or
after October 17, 2005. Since the debtors filed their bankruptcy petition before October 17,
2005, pre-BAPCPA law governs this case.
2
No. 06-21004
response, the debtors contended that the law permits them to maximize their
exemptions, and there was no proof that they intended to defraud the creditors.
At the hearing on the trustee’s objection, the debtors asserted for the first
time that the money with which they purchased the annuity had recently been
inherited from Soza’s father. Their attorney represented to the court that the
debtors used the inheritance to purchase the annuity for safekeeping until they
could decide how the inheritance was to be distributed among Soza and his
siblings. The attorney said his clients feared that unless the inheritance was
placed out of reach of the creditors by means of an annuity, the trustee would
attempt to litigate the debtors’ share of ownership or would pursue Soza’s
siblings for the transfer of their shares. Alternatively, counsel feared he would
have to delay the bankruptcy filing by one year to avoid the fraudulent transfer
provision of the Bankruptcy Code. 11 U.S.C. § 548(a)(1) (2005), amended by
Pub. L. No. 109-8, § 1402, 119 Stat. 23, 214 (effective Oct. 17, 2005).
The bankruptcy court and counsel for the trustee were taken aback by
these representations, which were contrary to the debtors’ sworn schedules
identifying the annuity as their property. The court rejected the debtors’
untimely attempt to offer the will and Soza’s testimony about it. Nevertheless,
all parties recognized a looming issue over the true ownership of the inheritance.
The court proceeded, however, to adjudicate the objection without reference to
the inheritance claim. The court held that § 1108.053 of the Texas Insurance
Code, although somewhat ambiguous, proscribes constructive as well as actual
fraud on creditors. It found, based on the pleadings and undisputed facts, that
the debtors’ conversion of non-exempt property into an exempt annuity on the
eve of bankruptcy amounted to constructive fraud. The court denied the
exemption.
3
No. 06-21004
The debtors appealed to the district court, reiterating their claim about the
inheritance in their brief:
The check was received in August 2005 and would have been shared
with [Soza’s] eight siblings and the children of the deceased brother,
but with the uncertainty of the October changes to the bankruptcy
law, [Soza] did not want to delay the bankruptcy a year to avoid the
possibility of the trustee trying to undo payments to family
members.
The district court upheld the bankruptcy court’s refusal to consider this
as an untimely contention, but it reversed the bankruptcy court and approved
the exemption under Texas law. Like the bankruptcy court, the district court
found no explicit textual guide to whether the statute depends on actual or
intended fraud of a creditor or whether “something less than intent is sufficient”
to violate the provision. Soza v. Hill (In re Soza), 358 B.R. 903, 907 (S.D. Tex.
2006). The court’s reasoning proceeded in three steps. First, the court noted
that the timing of the annuity purchase, standing alone, was not sufficient to
prove actual intent to defraud creditors. Second, the court analogized the
“constructive fraud” interpretation of the statute with the Texas Uniform
Fraudulent Transfer Act (“TUFTA”) provisions that invalidate a debtor’s
transfers made for less than reasonably equivalent value. See Tex. Bus. & Com.
Code Ann. § 24.005(a)(2). Because the annuity here was purchased for full
value, constructive fraud as defined in TUFTA could not exist. Third, the court
held that in the absence of a fiduciary duty relationship arising from other
circumstances, the common law doctrine of constructive fraud does not apply to
debtor-creditor relations in Texas. Relying, finally, on the principle that Texas
interprets debtors’ exemptions broadly, the court concluded that even if
constructive fraud is covered by § 1108.053, the trustee had not borne his burden
4
No. 06-21004
of proof.
Now finding themselves the appellees, the debtors no longer assert that
the payment for the annuity sprang from an inheritance in which Soza owns a
potentially small share. Instead, they vigorously defend the district court’s
opinion and criticize the trustee for having failed to present evidence to support
his attack on the exemption. The debtors do not, however, disavow their
counsel’s representation to both lower courts that the annuity was purchased not
to provide them a future stream of income, but to remove its corpus from the
bankruptcy court in order to avoid the uncertainty of bankruptcy litigation
involving them or Soza family members. This clever strategy, taken together
with other facts, provides a more complex backdrop for application of the Texas
annuity exemption laws than the simple eve of bankruptcy transfer on which the
bankruptcy and district court opinions were predicated. Although these
circumstances might not sustain a finding of actual intent to defraud the
debtors’ creditors, and the trustee did not so argue in the lower courts, they
highlight the importance of determining whether the exception to annuity
exemptions for a “premium payment made in fraud of a creditor” includes
intentional fraud as well as something less than intentional fraud.
5
No. 06-21004
At first glance, what the Legislature intended to describe as “fraud of a
creditor” seems unclear in the context of life insurance policies and annuities
obtained by debtors. There is no controlling Texas case law to provide guidance.2
Read in context with other Texas fraudulent transfer statutes, there is little
doubt that § 1108.053 must include intentional fraud as well as conduct less
than intentional fraud. The Texas legislature added the “in fraud of a creditor”
exception to the Texas Insurance Code’s exemption statute for life insurance and
annuity benefits in 1991. See Act of June 15, 1991, ch. 609, § 1, 1991 Tex. Sess.
Law Serv. 609 (recodified at Tex. Ins. Code. Ann. § 1108.053). This was two
years before the exemption was broadened to include annuity contracts
purchased by an individual. See Act of Sept. 1, 1993, ch. 685, § 20.20, 1993 Tex.
Sess. Law Serv. 685 (recodified at Tex. Ins. Code. Ann. § 1108.051). As of 1991,
at least three fraudulent conveyance provisions in state law required a showing
of actual intent to defraud. One of these appears in the Texas Property Code,
2
The district court discussed three non-bankruptcy cases involving the predecessor to
§ 1108.051: Marineau v. Gen. Am. Life Ins. Co., 898 S.W.2d 397 (Tex. Ct. App. 1995), Sun Life
Assurance Co. of Canada v. Dunn,
134 F. Supp. 2d 827 (S.D. Tex. 2001), and Leibman v.
Grand,
981 S.W.2d 426 (Tex. Ct. App. 1998). They are all clearly distinguishable from this
case and none of them assists us with interpreting the phrase “in fraud of a creditor.”
Marineau addressed whether the proceeds of an insurance policy that was purchased
with embezzled funds could be placed in a constructive trust for the owner of the embezzled
funds. The Texas exemption statute then applicable did not even contain an “in fraud of a
creditor” exception. See Marineau, 898 S.W.2d at 401 (citing Act of Mar. 12, 1987, ch. 5, § 1,
1987 Tex. Sess. Law Serv. 5).
Similarly, Sun Life addressed whether the proceeds of an insurance policy could be
placed in a constructive trust for a beneficiary of the policy whose share of proceeds was
wrongfully reduced in violation of a divorce decree. Sun Life never mentions, let alone
interprets, the “in fraud of a creditor” exception at issue here.
Finally, Leibman addressed whether sufficient evidence was presented at trial to
establish that a debtor had made annuity premium payments in fraud of a creditor. The court
determined that there was sufficient evidence to uphold the trial court’s finding that the debtor
had made payments with intent to defraud his ex-wife. The court provided no analysis of the
phrase “in fraud of creditor.”
6
No. 06-21004
which prohibits a debtor from converting non-exempt personal property into
exempt property “with the intent to defraud, delay, or hinder” a creditor. Tex.
Prop. Code Ann. § 42.004(a) (emphasis added).3 Since at least 1987, the Texas
Family Code has provided that an agreement between spouses to partition
marital property “is void with respect to the rights of a pre-existing creditor
whose rights are intended to be defrauded by it.” Tex. Family Code Ann.
§ 4.106(a) (emphasis added). Significantly, Texas adopted the TUFTA in 1987,
and it states that a debtor’s transfer “is fraudulent as to a creditor” if made with
“actual intent to hinder, delay, or defraud any creditor of the debtor” or if made
for a lack of “reasonably equivalent value” under certain additional conditions.
Tex. Bus. & Comm. Code Ann. § 24.005(a)(1)-(2) (emphasis added). Under
TUFTA, transfers made with either actual intent to defraud a creditor or
something less than actual intent (i.e., transfers made “without receiving a
reasonably equivalent value”) are included as “fraudulent” transfers.
The language of these sister statutes indicates that the Texas Legislature
clearly knew how to distinguish between provisions defining as fraudulent a
transfer made with intent to defraud a creditor and provisions defining a lesser
standard than intent to defraud. Because Tex. Ins. Code § 1108.053 uses the
general phrase “in fraud of a creditor” rather than specific language requiring
intent to defraud we conclude that it encompasses both intentional fraud and
conduct less than intentional fraud. The Texas Supreme Court has endorsed
this approach to interpretation in holding that “[i]t is a rule of statutory
construction that every word of a statute must be presumed to have been used
3
The “intent to defraud” language has been in § 42.004(a) since at least 1984. See Act
of Jan. 1, 1984, ch. 576, § 1, 1983 Tex. Sess. Law Serv. 3524.
7
No. 06-21004
for a purpose. Likewise, we believe every word excluded from a statute must
also be presumed to have been excluded for a purpose.” Laidlaw Waste Systems
(Dallas), Inc. v City of Wilmer, 904 S.W.2d 656, 659 (Tex. 1995) (internal
quotations and citations omitted).
Still, exactly what conduct less than intentional fraud amounts to fraud
on creditors under § 1108.053 is unclear. The parties and the courts below
repeatedly describe this “something less than intention” standard as
“constructive fraud.” This term is a practical shorthand, but, since it appears
nowhere in the statutes, it lacks substantive content and is not susceptible to
precise definition.4 The TUFTA describes one species of “constructive fraud” in
stating that transfers made “without receiving a reasonably equivalent value”
are deemed in fraud of creditors. See also Tex. Bus. & Comm. Code Ann.
§ 24.006(a). Section 1108.053 of the Texas Insurance Code contains no such
limitation, nor does § 1108.053 reference TUFTA’s definition of “constructive
fraud.” There is, therefore, no reason to conclude that the more general
language of § 1108.053 is limited by TUFTA’s definition of “constructive fraud.”
In fact, it would be improper to construe § 1108.053 by attributing a limitation
that appears only in another statutory provision. The Texas Supreme Court so
held in Laidlaw: “When the Legislature employs a term in one section of a
statute and excludes it in another section, the term should not be implied where
excluded.” 904 S.W.2d at 659.
4
Because “constructive fraud” appears neither in § 1108.053 nor in Texas’s other
statutes regarding fraud on creditors, it seems highly unlikely that the Texas Legislature
intended to refer to common law “constructive fraud” cases as an interpretive standard for “in
fraud of a creditor.”
8
No. 06-21004
Ultimately, Texas courts will have to determine how much less than
actual intent to defraud suffices to deny exemptions for insurance policies and
annuities under § 1108.053. For present purposes, we glean some assistance
from the non-exclusive list of eleven factors, commonly known as “badges of
fraud”, that courts may consider in determining whether a debtor actually
intended to defraud creditors under TUFTA.5 It may appear contradictory to
consider facts used to infer actual intent to defraud in order to determine
“constructive” fraud. Any contradiction, however, is illusory. Factors relevant
to determining actual intent to defraud, a higher culpability standard, should be
equally probative where something less than actual intent will suffice. Factors
relevant to determining actual intent to defraud, a higher culpability standard,
5
Section 24.005(b) of the Texas Business & Commerce Code states:
In determining actual intent under [§ 24.005(a)(1)], consideration may be
given, among other factors, to whether:
(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the property transferred after
the transfer;
(3) the transfer or obligation was concealed;
(4) before the transfer was made or obligation was incurred, the debtor had
been sued or threatened with suit;
(5) the transfer was of substantially all the debtor’s assets;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
(8) the value of the consideration received by the debtor was reasonably
equivalent to the value of the asset transferred or the amount of the
obligation incurred;
(9) the debtor was insolvent or became insolvent shortly after the transfer
was made or the obligation was incurred;
(10) the transfer occurred shortly before or shortly after a substantial debt
was incurred; and
(11) the debtor transferred the essential assets of the business to a lienor
who transferred the assets to an insider of the debtor.
9
No. 06-21004
should be equally probative where something less than actual intent will suffice.
When analyzing facts under TUFTA, this court has noted that “[s]ince direct
proof of fraud often is not available, courts may rely on circumstantial evidence
to establish the fraudulent intent.” Roland v. United States, 838 F.2d 1400,
1402-03 (5th Cir. 1988). Not all, or even a majority, of the “badges of fraud”
must exist to find actual fraud. Indeed, “[w]hen several of these indicia of fraud
are found, they can be a proper basis for an inference of fraud.”
Roland,
838 F.2d at 1403.
Like TUFTA, the Bankruptcy Code also unwinds transfers made “with
actual intent to hinder, delay or defraud” creditors, 11 U.S.C. § 548(a)(1), and
may deny discharge on similar grounds. 11 U.S.C. § 727(a)(2). In this
connection, courts have identified various “badges of fraud” that tend to evidence
a transfer made with intent to defraud under § 548 and §727:
(1) the lack or inadequacy of consideration; (2) the family,
friendship or close associate relationship between the parties;
(3) the retention of possession, benefit or use of the property in
question; (4) the financial condition of the party sought to be
charged both before and after the transaction in question; (5) the
existence or cumulative effect of the pattern or series of transactions
or course of conduct after the incurring of debt, onset of financial
difficulties, or pendency or threat of suits by creditors; and (6) the
general chronology of events and transactions under inquiry.
Chastant v. Chastant (In re Chastant), 873 F.2d 89, 91 (5th Cir. 1989) (quoting
Schmit v. Schmit (In re Schmit),
71 B.R. 587, 590 (Bankr. D. Minn. 1987)). See
also, e.g., Max Sugarman Funeral Home, Inc. v. A.D.B. Investors,
926 F.2d 1248,
1254-55 (1st Cir. 1991); Salomon v. Kaiser (In re Kaiser),
722 F.2d 1574, 1582 (2d
Cir. 1983); FDIC v. Sullivan (In re Sullivan),
204 B.R. 919, 940 (Bankr. N.D.
10
No. 06-21004
Tex. 1995); In re Moore, 177 B.R. 437, 442 (Bankr. N.D. N.Y. 1994); Beckman v.
Staats (In re Beckman),
104 B.R. 866, 870 (Bankr. S.D. Ohio 1989).
Taking all the surrounding circumstances in this case into consideration,
several of the “badges of fraud” are evident here. We conclude that, even if
actual intent to defraud was lacking, the debtors’ annuity purchase constituted
a premium payment made “in fraud of a creditor.” Tex. Ins. Code § 1108.053.
They purchased the annuity on the eve of bankruptcy. Assuming the payment
came from their non-exempt property, the annuity was in an amount that would
have covered all of the debtors’ listed debts, and the purchase deprived the
creditors of all but $340 in non-exempt assets.
Significantly, the debtors retained full control of the property — an
annuity can always be cashed out. And while this feature is true of all annuities,
and thus would not ordinarily be proof of any fraud, here, the temporary and
contingent nature of the purchase was conceded. The debtors claimed the
annuity as their property on the bankruptcy schedules, yet their counsel assured
both lower courts, to the contrary, that the payment was funded by an
inheritance to which Soza’s entitlement was uncertain. Their counsel also
represented to both lower courts that the annuity was purchased in order to
place litigation over Soza’s and his siblings’ property interests in the inheritance
beyond the reach of the bankruptcy court.6
In 1993, Texas law was modified for the first time to permit personal
annuities to be shielded from the claims of creditors. Texas cases have to date
6
In ruling based on the “untimely” assertion by the debtors of their dubious ownership
of the inheritance with which they purchased the annuity, we are not deciding the question of
ownership. That remains to be decided on remand. Rather, we deem the admissions to the
lower courts as binding on what the debtors intended as the purpose of this annuity.
11
No. 06-21004
upheld annuities sharing the characteristics that they were not self-settled and
they were intended to provide payments for the debtors and their families in the
future. See In re Foster, 360 B.R. 210, 215 (Bankr. E.D. Tex. 2006) (exempting
annuity created to disburse state lottery winnings); In re Alexander,
227 B.R.
658, 661 (Bankr. N.D. Tex. 1998) (exempting annuity created to pay out
structured tort settlement). Not so here. The purpose of these debtors’ purchase
was to remove a disputed inheritance from an inquiry, necessary to bankruptcy
administration, that would have determined the debtors’ property rights in that
inheritance. The annuity was a sham to stave off litigation, not a shield
authorized by Texas law to enable the debtor to gain a fresh start.7
No doubt Texas law encourages the broad construction of its exemption
laws, especially those provisions that lack limitations based on fraud of creditors.
See, e.g., NCNB Tex. Nat’l Bank (In re Volpe), 943 F.2d 1451, 1453 (5th Cir.
1991) (“Texas courts apply a liberal rule of construction to state exemption
statutes.”) (citing cases); Hickman v. Hickman,
234 S.W.2d 410, 414 (Tex. 1950)
(“[O]ur exemption statutes should be liberally construed in favor of express
exemptions, and should never be restricted in their meaning and effect so as to
minimize their operation upon the beneficent objects of the statutes. Without
doubt the exemption would generally be resolved in favor of the claimant.”). No
doubt courts must recognize that some pre-bankruptcy planning is permissible,
and that the mere conversion of assets from exempt to non-exempt property on
the eve of bankruptcy does not by itself suffice to prove an intent to defraud
creditors. First Tex. Sav. Assoc., Inc. v. Reed (In re Reed),
700 F.2d 986, 990-91
7
We do not here imply or hold that other types of annuities would fail the “in fraud of
a creditor” test. This case is limited to its particular, above-described facts.
12
No. 06-21004
(5th Cir. 1983).8 The exemption provided by the instant Texas statute, however,
contains its own limitation designed to prevent fraud on creditors, and its
standard is set at something less than intent to defraud. Here, there is
considerably more than mere timing to condemn the expedient use of an annuity
to thwart the bankruptcy court from determining the extent of the debtors’
interest in property.
CONCLUSION
Under Texas Insurance Code § 1108.053, the annuity purchased by these
debtors represented a payment made in fraud of a creditor, and the debtors could
not claim an exemption for the annuity. On remand, however, the bankruptcy
court will have to explore the extent to which Soza has an ownership interest in
the alleged inheritance.
REVERSED and REMANDED.
8
Note that in In re Reed actually dealt with the denial of discharge under the
Bankruptcy Code, for which actual intent to defraud creditors is the standard. 11 U.S.C.
§ 727(a)(2). In re Reed expressly declined to consider whether under Texas property law, an
exemption would be denied for the acquisition of personal property acquired with the intention
of defrauding creditors. In re Reed, 700 F.2d at 990 n.2 (citing predecessor to Tex. Prop. Code
Ann. § 42.004(a)).
13
No. 06-21004
WIENER, Circuit Judge, Specially Concurring:
I concur in the result reached by the panel majority, but I write separately
because, with respect, I disagree with part of its methodology for getting there.
Both the panel majority and I agree that applicability of section 1108.053 of the
Texas Insurance Code is not limited to instances of actual fraud, i.e., intentional
fraud, principally because the words used in the Texas Family1 and Property2
Codes to limit their coverages to intentional fraud are absent from the Insurance
Code.3 It is at this point, however, that the method of statutory construction I
would employ and the substantive content I would give to the Insurance Code’s
“in fraud of a creditor” provision diverge from the panel majority’s method and
content.
The panel majority relies on three state statutes — the Texas Uniform
Fraudulent Transfers Act (“TUFTA”),4 the Texas Family Code, and the Texas
Property Code — to determine how the non-intentional “fraud of a creditor”
(which we agree is embraced by the Insurance Code) should be defined. But it
is obvious to me that neither the Texas Property Code nor the Texas Family
Code offers any guidance here because they address only actual, i.e., intentional,
fraud and can therefore tell us nothing about the definitional elements of non-
intentional fraud for purposes of the Insurance Code — the core issue in this
case.
1
TEX. FAM. CODE ANN. § 4.106(a) (Vernon 2007).
2
TEX. PROP. CODE ANN. § 42.004(a) (Vernon 2007).
3
TEX. INS. CODE. ANN. § 1108.053 (Vernon 2007).
4
TEX. BUS. & COM. CODE ANN. § 24.005(a) (Vernon 2007).
14
No. 06-21004
The only Texas statute among the three relied on by the panel majority
that addresses anything other than actual (intentional) fraud is TUFTA.
Therefore, of the statutes cited by the panel majority, only TUFTA is even
potentially informative of the meaning of constructive or non-intentional “fraud
of a creditor.” Yet TUFTA’s definition of “fraudulent as to a creditor” expressly
recognizes only (1) intentional fraud (not applicable here) and (2) a transfer
lacking “reasonably equivalent value” (plus other factors).5 The panel majority
nevertheless purports to use TUFTA’s indicia of intent to cobble together a
version of non-intentional fraud,6 while ignoring the definition of non-intentional
fraud expressly provided in TUFTA — a transfer without reasonably equivalent
value. Either TUFTA should be used to inform the analysis, in which case we
should accept its definition of non-intentional fraud for purposes of the
Insurance Code, or it should not be so used, in which case we would have no
alternative but to resort to the common law. We cannot do both because,
logically, TUFTA cannot simultaneously be both (1) the panel majority’s starting
point and (2) the point at which the panel majority departs from TUFTA. Yet
the panel majority’s opinion schizophrenically uses TUFTA both ways at once.
5
See id.
6
As the panel majority seems to acknowledge by saying “exactly what conduct less
than intentional fraud amounts to fraud on creditors under section 1108.053 is unclear . . . .
Ultimately Texas courts will have to determine how much less than actual intent to defraud
suffices to deny exemptions,” this case was ripe for certification to the Texas Supreme Court.
TEX. CONST. art. V, § 3-c; TEX. R. APP. P. 58. It is quizzical to me that it was not certified,
given its clear fit into the certification jurisprudence. See Arizonans for Official English v.
Arizona,
520 U.S. 43, 76 (1997) (“Certification procedure . . . allows a federal court faced with
a novel state-law question to put the question directly to the State’s highest court, reducing
the delay, cutting the cost, and increasing the assurance of gaining an authoritative
response.”). Because I agree with the result reached by the panel majority, and believe the
Texas Supreme Court would as well, I do not insist that certification is required here, even
though that would be my preference.
15
No. 06-21004
The panel majority’s opinion tries to finesse this inconsistency by stating:
“Section 1108.53 of the Texas Insurance Code contains no such limitation, nor
does § 1108.53 reference TUFTA’s definition of ‘constructive fraud.’”7 But this
defeats the purpose of turning to TUFTA for guidance in the first place. The
panel majority uses TUFTA’s “fraudulent as to a creditor” to define “in fraud of
a creditor” in the Insurance Code; but the exclusive definition of a non-
intentional fraudulent transaction in TUFTA, is “[a] transfer made . . . without
receiving reasonably equivalent value.” So, unless the panel majority is willing
simply to force-feed TUFTA’s receiving-reasonably-equivalent-value genre into
the Insurance Code, there is no constructive-fraud nexus to be found between the
two statutes.
In response to this objection, the panel majority pronounces the Insurance
Code’s provision to be more “general” than TUFTA’s. To me, it borders on
circularity to say simply that the Insurance Code’s provision is more “general”
7
The panel majority also attempts to draw a distinction between “constructive fraud,”
a well-defined common law term, and a new, nebulous concept that it labels “less-than-
intentional” fraud, which is neither fish nor fowl, i.e., neither common law constructive fraud
nor TUFTA’s statutory version of constructive fraud. It does this, in part, to claim that the
common law definition of constructive fraud is inapposite because the Insurance Code’s
statutory regime has created a new creature of non-intentional fraud. As a result, Texas law,
at least in this circuit, now has four flavors of fraud — (1) actual, (2) common law constructive,
(3) TUFTA’s lack-of-reasonably-equivalent-value-plus-other-factors, and (4) the Insurance
Code’s innominate fourth variety. As I explain below, I believe, as do commentators on
statutory construction, see, e.g., 2B SUTHERLAND STATUTES AND STATUTORY CONSTRUCTION §
50:3 (7th ed. 2008), that when a statute does not define a word, and that word has a well-
accepted common law meaning, the legislature is presumed to have had that common law
meaning in mind. Even if this were not so, I would find it questionable for the panel majority’s
opinion to manufacture an entirely new species of Texas fraud and then make no effort to
situate it among the other three varieties, except to say that it is none of the other types, and
that Texas will just have to work it out. If we decide that every Texas statute that uses the
term “fraud,” unqualified by the requirement that it be intentional, spawns a new species of
fraud, Texas law is in for a multi-faceted treatment in this circuit.
16
No. 06-21004
than TUFTA’s, so TUFTA does not restrict the Insurance Code. For the panel
majority to use TUFTA to inform its analysis of the Insurance Code, there must
be a substantial degree of similarity — if not identity — between the two
provisions. To baldly declare that such exists, and then inexplicably dismiss any
differences that actually exist, begs the question totally.
As I understand the panel majority’s method of statutory interpretation,
it proceeds thusly: “(1) We don’t know what X means, so to assist our
understanding we turn to Y, which we assume is close to X; (2) Y requires that
either A or B be present; (3) we conclude, though, that X requires neither A nor
B because X is not sufficiently close to Y.” Can it really be maintained that Y
has been used to meaningfully define X in this way? With X being the Insurance
Code’s “in fraud of a creditor,” Y being TUFTA, A being intentional fraud, and
B being a transfer made without receipt of reasonably equivalent value, the
panel majority is exposed as saying that “we don’t know what ‘in fraud of a
creditor’ is, so we turn to TUFTA; TUFTA requires either actual intent to
defraud or engaging in a transfer without receipt of equivalent value; ergo,
absent actual intent, whatever else ‘in fraud of a creditor’ might mean, it does
not require a transfer without equivalent value.” Go figure!
Again, I agree with the conclusion that Soza’s premium was a payment
made “in fraud of a creditor.” But I can only justify providing content to the
Insurance Code’s fraud provision by giving “fraud” its common law meaning, not
by torturing other incompatible statutes. Sutherland says:
All legislation must be interpreted in the light of the common law
and the scheme of jurisprudence existing at the time of its
enactment. Where there is a limitation by statute which is capable
17
No. 06-21004
of more than one construction the statute must be given that
construction which is consistent with common law. And where an
operative word is not defined in a statute the common law meaning
controls.8
As there is reasonable doubt about what the Texas legislature meant to include
when it provided an exception for “fraud of a creditor” in the Insurance Code —
something the panel majority’s opinion already acknowledges — I see the Texas
common law as the only defensible starting place for interpreting the statute at
issue.
Further, I do not believe that the phrase “of a creditor” creates a new term
of art, but simply cabins the universe of frauds to which this exception to the
Insurance Code’s exemption applies. I conclude, therefore, that the
interpretation of the “well-defined words and phrases in the common law” should
comport with the presumption that “[c]ommon-law meanings are assumed to
8
2 B SUTHERLAND STATUTES AND STATUTORY CONSTRUCTION § 50:1 (7th ed. 2008)
(footnotes omitted); see id. § 50:3 (“Although a statute may define the way in which a
particular word is used, the common-law background and origin of the word may be useful to
a proper understanding of the statute in cases of reasonable doubt.”). If common law meanings
of words can inform a statute’s interpretation even when a definition of a term is provided by
the legislature, they can, a fortiori, be used to define an undefined term. Texas appears to
follow this approach. See TEX. GOV’T CODE ANN. § 312.002(b) (Vernon 2007)(“If a word is . . .
used as a word of art, the word shall have the meaning given by experts in the particular
trade, subject matter, or art.”);
id. § 311.011(b) (“Words and phrases that have acquired a
technical or particular meaning, whether by legislative definition or otherwise, shall be
construed accordingly.”). This last point is important, of course, because Texas law governs
how we interpret the Insurance Code. Milligan v. Trautman (In re Trautman),
496 F.3d 366,
368 (5th Cir. 2007) (“This court [in interpreting a Texas bankruptcy exemption in the
Insurance Code] must interpret the statute as a Texas court would.”). Formally, it appears
Texas Government Code section 311.011 applies because section 1108.053 of the Texas
Insurance Code was acted on by the 60th or subsequent Texas legislature. See Font v. Carr,
867 S.W.2d 873, 881 n.4 (Tex. App.–Houston 1993, writ dism’d w.o.j.).
18
No. 06-21004
apply even in statutes dealing with new and different subject matter . . . in the
absence of evidence to indicate a contrary meaning.”9
For openers, Texas common law recognizes that there are two types of
fraud — “actual” and “constructive.”10 Actual fraud, which is not at issue in this
case, requires “intentional breaches of duty that are designed to injure another
or to obtain an undue and unconcientious [sic] advantage.”11 Constructive fraud
(being all non-intentional varieties of actionable fraud and therefore clearly at
issue here) involves “breaches that the law condemns as ‘fraudulent’ merely
because they tend to deceive others, violate confidences, or cause injury to public
interest.”12
9
2B SUTHERLAND STATUTES AND STATUTORY CONSTRUCTION § 50:3 (7th ed. 2008).
10
See In re Estate of Kuykendall, 206 S.W.3d 766, 770 (Tex. App.–Texarkana 2006, no
pet.); Cotten v. Weatherford Bancshares, Inc.,
187 S.W.3d 687, 702 (Tex. App.–Fort Worth
2006, pet. denied); Flanary v. Mills,
150 S.W.3d 785, 795 (Tex. App.–Austin 2004, pet. denied);
Chien v. Chen,
759 S.W.2d 484, 494-95 (Tex. App.–Austin 1988, no writ). It would be farcical
to maintain that the absence of the phrase “constructive fraud” from the statute itself
precludes a conclusion that the Texas legislature intended for it to be included. Things called
constructive are almost always unmentioned or incomplete; otherwise they would be actual,
rather than constructive.
11
Chien, 759 S.W.2d at 495 (emphasis in original).
12
Id. (emphasis in original). I have left unaddressed the panel majority’s problematic
use of indicia of intent, the central inquiry of actual fraud, to determine whether constructive
fraud is present. The panel majority says “[f]actors relevant to determining actual intent to
defraud, a higher culpability panel standard, should be equally probative where something less
than actual intent will suffice.” This need not be the case. Although proscriptions of
intentional fraud tend to police bad motives, proscriptions of constructive fraud police a set of
non-intentional activities that nevertheless violate public policy. Not all constructive frauds
are actual frauds, and it may be that not all actual frauds are constructive frauds (as under
TUFTA’s conceptualization of non-intentional fraud).
But even if all actual frauds are constructive frauds because proof of an intent to
deceive is always violative of public policy, it does not follow logically that all half-actual frauds
are constructive frauds. Indeed, the question why half-proof of intent (under some lesser
combination of the “badges of fraud” than would be necessary for an inference of intent)
19
No. 06-21004
Texas courts have recognized in a general sense that “[c]onstructive fraud,
as a concept, has fuzzier edges and is less susceptible of easy definition” than
actual fraud.13 Even though the contours of actual fraud have been neatly
staked out,
no such case has done the same for constructive fraud. Nor is such
a case possible, because the whole need for a doctrine of constructive
fraud rests on the lack of a well-defined common law tort to cover
the conduct at hand. The best the [Texas] [S]upreme [C]ourt has
been able to do is remark that “constructive fraud is the breach of
some legal or equitable duty.”14
Consistent with this definitional ambiguity, some Texas case law appears
to have read this formulation of constructive fraud to require a confidential or
fiduciary relationship.15 A review of the cases reveals that, consistent with the
suffices to prove constructive fraud is left wholly unexamined in the panel majority’s opinion.
I have also left unaddressed the panel majority’s use of the United States Bankruptcy
Code to inform its elaboration of Texas state law without any demonstration of the
persuasiveness of this authority. The flaw of this approach should be obvious to the reader.
(Texas is not an “opt-out” state, so the debtors in question had the option of electing federal or
state exemptions. Perry v. Dearing (In re Perry), 345 F.3d 303, 308 n.5 (5th Cir. 2003). As the
debtors have relied on state exemptions under 11 U.S.C. § 522(b)(3) (Supp. V 2005), state law
governs and we wear our Erie hats.
Trautman, 496 F.3d at 369.
13
Rosen v. Matthews Const. Co., Inc., 777 S.W.2d 434, 437 (Tex. App.–Houston 1989),
rev’d on other grounds,
796 S.W.2d 692 (Tex. 1990).
14
Id. at 437-38 (quoting Archer v. Griffith,
390 S.W.2d 735, 740 (Tex. 1965)).
15
See, e.g., Hubbard v. Shankle, 138 S.W.3d 474, 483 (Tex. App.–Fort Worth 2004, pet.
denied) (“Constructive fraud is the breach of a legal or equitable duty that the law declares
fraudulent because it violates a fiduciary relationship.”); Jean v. Tyson-Jean,
118 S.W.3d 1, 9
(Tex. App.–Houston 2003, pet. denied) (same); In re Estate of Herring,
970 S.W.2d 583, 586 n.3
(Tex. App.–Corpus Christi 1998, no pet.) (same); Shwiff v. Priest,
650 S.W.2d 894, 902 (Tex.
App.–San Antonio 1983, writ ref’d n.r.e.) (same); Thames v. Johnson,
614 S.W.2d 612, 614
20
No. 06-21004
flexible nature of equity, Texas has not construed constructive fraud so
narrowly.16 For example, although an intermediate Texas appellate court in
Hubbard v. Shankle noted in its constructive fraud inquiry that no fiduciary
relationship existed, it also explicitly referenced the absence of an additional
“legal or equitable duty.”17 The state appellate court in Jean v. Tyson-Jean noted
that a reasonable trier of fact could have concluded that there was no “breach .
. . [of] fiduciary duty . . . or conduct . . . that was unfair to the community
estate.”18
Among the Texas cases that I have examined,19 Shwiff v. Priest comes
(Tex. Civ. App.–Texarkana 1981, no writ) (same); Carnes v. Meador, 533 S.W.2d 365, 370
(Tex. Civ. App.–Dallas 1975, writ ref’d n.r.e.) (same).
16
See, e.g., Vickery v. Vickery, 999 S.W.2d 342, 377 (Tex. 1999) (“Constructive fraud is
most frequently found in a breach of a fiduciary or confidential relationship.” (emphasis added));
Johnson v. Brewer & Pritchard, P.C.,
73 S.W.3d 193, 204 (Tex. 2002) (noting that a
constructive fraud claim “is derivative, at least in part, of the breach of fiduciary duty claim.”
(emphasis added)); Seaside Indus., Inc. v. Cooper,
766 S.W.2d 566, 568 (Tex. App.–Dallas 1989,
no writ)(“We need not decide if the [defendants] violated a legal duty. Constructive fraud also
arises when an equitable duty is violated. . . . By taking a ‘flexible fact-specific approach
focusing on equity,’ [a] court upheld the finding of a sham to perpetrate a fraud.” (emphasis in
original) (citation omitted) (quoting Castleberry v. Branscum,
721 S.W.2d 270, 273 (Tex. 1986),
superceded by statute on other grounds, TEX. BUS. CORP. ACT art. 2.21(A)(2) (Vernon 2007));
Hudspeth v. Stoker,
644 S.W.2d 92, 94 (Tex. App.–San Antonio 1982, writ ref’d)
(“[C]onstructive fraud usually involves a breach of trust or confidential relationship . . . . ”
(emphasis added)); see also 32 C.J.S. Fraud § 7 (2008) (“[A]lthough there is authority to the
contrary, it has been held that constructive fraud does not require the existence of a fiduciary
or confidential relationship.” (footnote omitted)).
17
138 S.W.3d at 483.
18
118 S.W.3d at 9 (emphasis added).
19
I would be remiss if I did not note that only the trustee saw fit to discuss some of the
cases examined here; the debtors’ brief contains no analysis of the case law on constructive
fraud in Texas. Further, the precedents in this circuit interpreting the requirements for
constructive fraud under Texas law, Monnig’s Dep’t Stores, Inc. v. Azad Oriental Rugs, Inc. (In
re Monnig’s Dep’t Stores, Inc.), 929 F.2d 197, 201 (5th Cir. 1991), Permian Petroleum Co. v.
21
No. 06-21004
closest to requiring a confidential or fiduciary relationship to support a finding
of constructive fraud.20 The Shwiff opinion, however, contains no reasoning
beyond a mere citation to a case dealing with the duties owed by the spouses to
community property as support for its contention that a fiduciary duty is
required; and even this holding was not essential to the state court’s conclusion
Petroleos Mexicanos, 934 F.2d 635, 644 (5th Cir. 1991), and Brooks, Tarlton, Gilbert, Douglas
& Kressler v. U.S. Fire Insurance Co.,
832 F.2d 1358, 1369 (5th Cir. 1987), were completely
ignored by both parties. In In re Monnig’s, while discussing the requirements for a
constructive trust, this court said that constructive fraud “usually involves a breach of trust
or confidential
relationship.” 929 F.2d at 201 (emphasis added). Permian quoted the Archer
formulation. 934 F.2d at 644. In Brooks, we noted that “[t]he benchmark of constructive
fraud, as defined by Archer, is the existence of a fiduciary relationship,” but this was not
essential to our holding, which concerned interpretation of the word “fraud” in an insurance
contract. 832 F.2d at 1369.
We have also apparently drawn a distinction between constructive fraud and breach
of fiduciary duty. Cf. Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, Poirot
and Wansbrough, 354 F.3d 348, 358 n.45 (5th Cir. 2003) (“[O]ur precedent interpreting Texas
law as it relates to constructive trusts has not been altogether consistent. In some cases, we
have interpreted Texas law as requiring a showing of actual fraud or breach of fiduciary duty
. . . . More recently, we held that it was sufficient under Texas law for a plaintiff to show
merely constructive fraud . . . . ”). Some of the confusion over the concept of constructive fraud
appears to result from our confusion over its cousin, the constructive trust. The imposition of
a constructive trust is not at issue in this case because the Texas Insurance Code provides its
own remedy for “fraud of a creditor,” namely, denial of the exemption. TEX. INS. CODE ANN.
§ 1108.053 (Vernon 2007).
We did say, in an unpublished opinion, that Texas “appellate courts frequently intimate
that [constructive fraud] occurs only where there is a fiduciary relationship between the
parties.” Joslin v. Pers. Invs., Inc., No. M03-40200, 2004 WL 436001, at *5 (5th Cir. Mar. 8,
2004) (unpublished). In another unpublished opinion, we also upheld a district court’s
dismissal of constructive fraud claims because no fiduciary or “special” relationship existed
between the parties. Independence Hill, Ltd. v. Puller Mortgage Assocs., Inc.,
33 F.3d 1378
(5th Cir. Aug. 10, 1994) (table). Consistent with Fifth Circuit Rule 47.5.4, we are not bound
by these determinations, which are equivocal in any event. Furthermore, both should be
rejected on the facts of this case and as a correct interpretation of Texas law.
20
650 S.W.2d at 902-03. Connell v. Connell,
889 S.W.2d 534, 542 (Tex. App.–San
Antonio 1994, writ denied), also appears to equate constructive fraud with breach of fiduciary
duty, but whether this was essential to the holding of the case, rather than simple dicta, is
difficult to discern from the opinion.
22
No. 06-21004
that there was no constructive fraud, 21 as the court also found that there had
been no harm.22
Although “a decision by an intermediate appellate state court is a datum
for ascertaining state law which is not to be disregarded by a federal court,” we
are empowered to reach the conclusion that we believe the state’s highest court
would reach if we are “convinced by other persuasive data that the highest court
of the state would decide otherwise.”23 And, the clearest pronouncement on
constructive fraud by the Texas Supreme Court is not limited by the necessity
of a fiduciary or confidential relationship.24 As noted above, its other cases hint
at the expansive nature of the concept. A survey of Texas case law reveals that
a fiduciary or confidential relationship is not a prerequisite for a finding of
constructive fraud; there need only be a violation of a legal or equitable duty,
determined according to a flexible and fact-specific approach.
Klein v. Sporting Goods, Inc., is an excellent example of this flexible
approach.25 There, the owner of a gun store, the Gun Exchange, had pledged his
inventory as security for a bank loan. He was also indebted to unsecured trade
creditors. After the bank gave notice of its intention to foreclose on the
inventory, the store owner (1) incorporated a second company, the Gun Store, (2)
21
Shwiff, 650 S.W.2d at 902.
22
Id. at 903.
23
First Nat’l Bank of Durant v. Trans Terra Corp. Int’l, 142 F.3d 802, 809 (5th Cir.
1998) (internal quotation marks omitted).
24
See Archer v. Griffith, 390 S.W.2d 735, 740 (Tex. 1965). Cases like Vickery v. Vickery,
999 S.W.2d 342 (Tex. 1999), also demonstrate how flexible the concept of constructive fraud
can be in Texas when they use words like “most frequently” and “ordinarily.”
25
772 S.W.2d 173, 175 (Tex. App.–Houston 1989, writ denied).
23
No. 06-21004
secured a line of credit from a different bank, and (3) had the new corporation
purchase the inventory of his former business, the Gun Exchange. He had the
new corporation pay more than market value for the inventory to avoid personal
liability to the first bank, which held his personal guarantee in addition to a
security interest in the inventory. The unsecured trade creditors were paid
nothing after the owner transferred all assets of the Gun Exchange to his new
corporate alter ego, the Gun Store. The trade creditors commenced suit against
the now judgment-proof Gun Exchange.
Relying on a theory of constructive fraud, the trade creditors, with whom
no fiduciary relationship is evident from the opinion or from the typical trade
creditor-debtor relationship, sought to have the corporate fiction of the Gun
Exchange disregarded and to make the owner personally liable for its debts. On
appeal, the court had little difficulty affirming the jury’s finding of constructive
fraud. It noted that although the corporate fiction will typically insulate
shareholders, officers, and directors from liability, “when the corporate form has
been used as part of a basically unfair device to achieve an inequitable result,”
such insulation disappears.26 The court further noted that the Texas Business
and Commerce Code imposes a duty of good faith on all covered dealings and
that the complex machinations of the Gun Store owner failed that test. As the
duty of good faith was violated, and “[c]onstructive fraud is the breach of some
26
Id. at 175. The Texas legislature has abolished shareholder liability as the remedy
for constructive fraud. See Willis v. Donnelly,
199 S.W.3d 262, 271-72 (Tex. 2006). Although
the Texas legislature has decided that constructive fraud should no longer result in the same
remedy, the elaboration of what constitutes constructive fraud by Texas courts should not have
been disturbed by this legislative action. This is also why constructive fraud cases from other
areas of the law, like domestic relations, are useful elaborations of the concept. Constructive
fraud as a concept, like many of the broad remedies of equity, can be found in diverse
substantive fields of law.
24
No. 06-21004
legal or equitable duty which, irrespective of moral guilt, the law declares
fraudulent,” the court affirmed the finding of constructive fraud.27 Using
corporate forms “as a method to avoid creditors . . . was legally and factually
sufficient to support the jury’s finding of constructive fraud.”28
As no special relationship between the debtors and their creditors in the
instant case appears from the record, such legal duties as, for example, good
faith and fair dealing, do not provide a basis for a finding of constructive fraud.29
Taking all the surrounding circumstances in this case into consideration,
however, I am convinced that, under Texas common law, the debtors’ annuity
purchase violated an equitable duty. The factors recounted in the panel
majority’s opinion are worth repeating here. The debtors purchased the annuity
on the eve of bankruptcy, an equitable proceeding.30 Although the nature of the
federal proceeding does not alter our Erie inquiry, it does inform the
circumstances in which a Texas court would determine whether an equitable
duty exists. Assuming the annuity was acquired with the debtors’ non-exempt
property, it was in an amount that would have covered all of the debtors’ listed
debts, leaving the creditors with only $340 in non-exempt assets. The debtors
also retained control of the property because it appears this annuity, like almost
27
Klein, 772 S.W.2d at 175.
28
Id. at 176.
29
See El Paso Natural Gas Co. v. Minco Oil & Gas, Inc., 8 S.W.3d 309, 312-13 (Tex.
1999).
30
See TNB Fin. Inc. v. James F. Parker Interests (In re Grimland, Inc.), 243 F.3d 228,
234 (5th Cir. 2001) (“[T]he bankruptcy court is a court of equity and it must undertake an
analysis of equitable considerations.”); United States v. AWECO, Inc. (In re AWECO, Inc.),
725
F.2d 293, 300 (5th Cir. 1984) (“Equitable considerations should be preeminent in the exercise
of bankruptcy jurisdiction.”).
25
No. 06-21004
all, could be cashed out. And even though this feature is common to annuities,
and thus cannot be proof of fraud in the ordinary case, here, the debtors
conceded the temporary and contingent nature of the purchase.31
Klein provides support for the proposition that the debtors violated an
equitable duty, yet because of the duty of good faith in that case, it is not on all
fours with the present situation. At least one Texas court of appeals has,
however, decided a case similar to Klein without reference to a legal or equitable
duty of good faith. In Speed v. Eluma International, Inc., the owner of a
corporation claimed that the corporation was in arrears on rent owed to him,
giving him a lessor’s lien on which he immediately foreclosed, permitting him to
transfer the entirety of the corporation’s assets to a third party for a prearranged
sum.32 This deal structure was used to circumvent a temporary restraining
order that the creditors of the company had obtained to enjoin the very sale that
31
In a related context, we recently said:
Exempting all money traceable to a [whole-life insurance policy, exempt under
section 1108.51 of the Texas Insurance Code] would allow people to use such
policies merely to avoid creditors. People could place their money in a whole-life
policy . . . . Sometime later — presumably even after only a few days — they
could withdraw some of the money, or even all of it, forever shielding the money
from creditors. That can’t be the law. Less insidiously, someone desiring to
have a whole-life policy actually for insurance reasons nonetheless could put her
extra money into the policy simply to shield it from creditors. That also can’t be
the law.
Milligan v. Trautman (In re Trautman), 496 F.3d 366, 370 (5th Cir. 2007). Similarly, it surely
cannot be the law here that whether in an effort to “maximize the debtors’ exemptions” or to
prevent litigation of their share of a possibly disputed inheritance that the debtors are
permitted to shield all but $340 from their creditors. “We certainly have no quarrel with [the]
contention that the federal courts should bend every effort to prevent the bankruptcy statutes
from being used as a cloak for fraud.” Piedmont Ice & Coal Co. v. Am. Serv. Co.,
130 F.2d 78,
80 (4th Cir. 1942).
32
757 S.W.2d 794, 797-98 (Tex. App.–Dallas 1988, writ denied), disapproved of on other
grounds by Donwerth v. Preston II Chrysler-Dodge, Inc.,
775 S.W.2d 634 (Tex. 1989).
26
No. 06-21004
the owner carried out through a different mechanism. The court concluded that
this violated an equitable duty and refused to reverse the jury’s finding of
constructive fraud.33
As in Klein and Speed, the annuity in the instant case has been used to
achieve an inequitable result through machinations that have deprived the
creditors of satisfaction for their claims and the bankruptcy court of the ability
to adjudicate ownership of assets that might belong to the estate. Under the
foregoing common law interpretation of the Insurance Code’s constructive fraud
provision, the bankruptcy court was justified in looking through the sham of the
annuity to the real source of the money, just as the courts in Klein and Speed
used constructive fraud to prevent inequity. But this justification, I emphasize,
is found in Texas common law, not in some tortured construction of dissimilar
Texas statutes. It is for these reasons that, with respect, I specially concur in
the panel majority’s judgment.
33
Id. at 798; see id at 797 (“[T]he [Texas] [S]upreme [C]ourt upheld a finding of
constructive fraud when a contract debtor manipulated corporate assets so that a contract
creditor’s claim could be not be satisfied out of corporate assets.” (citing Castleberry v.
Branscum,
721 S.W.2d 270 (Tex. 1986), superceded by statute on other grounds, TEX. BUS.
CORP. ACT art. 2.21(A)(2) (Vernon 2007)).
27
