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Florida’s broad debtor protections are not without constraints.  Section 222.14 of the Florida Statutes exempts the proceeds of annuity contracts from garnishment or legal process by the creditors of the annuitant or beneficiary.  However, Section 222.30 provides that transfers of non-exempt assets are not protected if made with the intent to hinder, delay or defraud a creditor.  The scope of the annuity exemption, and particularly which facts inform a finding of intent, remains elusive.

Annuities are well-recognized asset protection vehicles.  The clearer cases of fraud often involve debtors self-funding annuities for their or a family member’s benefit.  But what if the annuity is funded for the debtor’s benefit through a personal injury settlement?  Annuity contracts are popular vehicles for funding these settlements.  See, e.g., 26 U.S.C. § 130 (2012) (exempting qualified annuity for personal injury settlement from gross income); see also In re Benedict, 88 B.R. 387 (Bankr. M.D. Fla. 1988) (subsequent deposits of traceable annuity payments into a checking account will not erode the protections).

A creditor must prove that the debtor caused a transfer with the intent to hinder, delay or defraud creditors.  § 222.30(2), Fla. Stat. (2016); see In re Levine, 134 F.3d 1046, 1050 (11th Cir. 1998) (“the purchase of an annuity is a transfer for purposes of the Florida fraudulent transfer statute”).  The burden is on a creditor who objects to a debtor’s claim of exemption to establish by a preponderance of the evidence that the debtor is not entitled to the exemption claimed.  See Fed. R. Bankr. P. 4003(c) (2015); see also In re Ehnle, 124 B.R. 361, 363 (Bankr. M.D. Fla. 1991).

The outcome of a hearing on a creditor’s objection to the exemption hinges on the debtor’s intent, which can be shown through certain statutory, non-exclusive “badges of fraud.”  §§ 726.105-106, Fla. Stat. (2016); see In re Stewart, 280 B.R. 268, 279 (Bankr. M.D. Fla. 2001) (badges are non-exclusive and the court may consider other factors when determining intent); compare In re Jennings, 332 B.R. 465 (Bankr. M.D. Fla. 2005) (debtor “retained control” of assets when annuity redeemable with 10% penalty was purchased shortly before entry of judgment, purportedly for retirement planning despite having no prior interest in doing so); and In re Mart, 88 B.R. 436 (Bankr. S.D. Fla. 1988) (annuity purchased 13 months prior to bankruptcy when debtor was solvent, financial downfall due to defalcations of another, and debtor did not anticipate insolvency at the time).

In the personal injury settlement context, a debtor’s stated intent of “planning for future medical expenses” may be offered as evidence that the transfer into the annuity was conclusively non-fraudulent.  After all, section 222.18 of the Florida Statutes also exempts disability income benefits from legal process.  See also 11 U.S.C. § 522(d)(10)(E) (2015) (exemption of annuity payments on account of disability “to the extent reasonably necessary for the support of the debtor and any dependent of the debtor”).

At least one court applying Florida law has found that payments from a personal injury settlement are not entirely protected by Florida’s disability income exemption.  See In re Chesley, 526 B.R. 888 (M.D. Fla. 2014) (lump sum personal injury settlement did not also fund annuity).  The mere fact that an automobile accident allegedly rendered the debtor disabled did not mean that the proceeds he received pursuant to a general settlement with the alleged tortfeasor were exempt “disability income benefits.”  Id. at 895.  The settlement did not allocate payments between the debtor’s medical expenses and other claims, and the debtor did not demonstrate that the proceeds of the general release were derived from a disability insurance policy or were specifically for disability income benefits.   Id. at 895-96; see In re Solomon, 95 F. 3d 1076 (11th Cir. 1996) (finding that contract did not amount to an annuity and remanding to district court, which initially held that the portion of the settlement payment earmarked as attorney’s fees did not qualify for an exemption).  In fact, the debtor used a portion of his lump sum settlement to pay off his home mortgage, purchase a truck, repair his home and pay friends and family members.  In re Chesley, 526 B.R. at 889.

Therefore, it will often be necessary to determine the apportionment of any settlement payment between the claimant’s medical expenses and other compensation in assessing the extent to which an annuity was funded with fraudulent intent.  The mere existence of a post-settlement annuity stemming from personal injury claims is not determinative on the issue of your ability to collect against the debtor.

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