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Payments Under 1981 Annuity Are Exempt Under New York Law, Says Federal Court

Annuities, Blogs

This post mentions the possibility that life insurance proceeds may be exempt in bankruptcy. A more recent judicial opinion, from the federal district court for the Northern District of New York, discusses the fact that bankruptcy exemptions may apply to annuities, and, in particular, to payments made under an annuity that funds periodic payments made under the structured settlement of a personal injury lawsuit.

The court in Morgan v. Gordon, No. 09-CV-6360 CJS, 2011 WL 1330865 (W.D.N.Y. Apr. 6, 2011), said that 11 U.S.C. § 522(b) provides that debtors may exempt certain property from their bankruptcy estate, and under New York Debtor & Creditor Law § 282 such exempt property includes “annuity contracts and the proceeds and avails thereof as provided in section three thousand two hundred twelve of the insurance law.” New York Insurance Law § 3212(d)(1) states, in part, that, “[t]he benefits, rights, privileges and options which, under an annuity contract are due or prospectively due the annuitant, who paid the consideration for the annuity contract, shall not be subject to execution.” This exemption is not absolute, since pursuant to Insurance Law § 3212(d)(2), “the court may order the annuitant to pay a judgment creditor or apply on the judgment in installments, a portion of such benefits that appears just and proper to the court, with due regard for the reasonable requirements of the judgment debtor and his family[.]”

The Morgan court briefly discussed the terms of the order that approved the 1981 structured settlement, including terms calling for pro tanto release of liability via periodic payments funded by an annuity, and then addressed whether the claimant in personal injury action provided consideration in exchange for the purchase of structured settlement annuity:

The Court finds that the subject asset is an exempt annuity for which Mrs. Morgan paid consideration, within the meaning of Insurance Law § 3212(d)(1). At the outset, it is well-settled that exemption provisions are to be construed liberally. See, In re Keil, 88 F.2d 7, 8 (2d Cir.1937) (“Exemption statutes are to be liberally construed.”); In re Glen,430 B.R. 56, 58 (Bkrtcy. N . D.N.Y.2010) (“Exemption statutes are to be construed liberally in favor of a debtor.”) (citations omitted). Moreover, as the objecting party, the Trustee has the burden of proving that the exemption is not properly claimed. See, Federal Rule of Bankruptcy Procedure 4003(c).

The Second Circuit recently clarified that a debtor is entitled to exempt annuity payments to which he is entitled, even if he, like Mrs. Morgan, does not own the annuity policy:

On appeal, the trustee maintains that Baker cannot rely on New York law to exempt the annuity at issue from the bankruptcy estate because he does not own it. The argument is flawed in conflating the annuity contract, which is owned by the insurance company, with the proceeds payable under that contract, which are due solely to Baker. New York law does not exempt only the annuity; it exempts the “proceeds and avails thereof,” N.Y. Debt. & Cred. Law § 282, specifically providing that “[t]he benefits, rights, [and] privileges” under the annuity contract are “not subject to execution,” N.Y. Ins. Law § 3212(d)(1). These provisions are broad enough to allow Baker to exempt future annuity payments from the bankruptcy estate.

In re Baker, 604 F.3d 727, 730 (2d Cir. 2010) (citation omitted). Additionally, a person who settles a personal injury action in exchange for the right to receive annuity payments is deemed to have “paid the consideration for the annuity” within the meaning of Insurance Law § 3212(d)(1). . . .

Thus, payments under annuities, including structured settlement annuities, may be exempt in bankruptcy, at least under New York law, although some commentators have pointed out that equivalent laws may apply in other states as well.