Charles Burlingham v. Charles Crouse

• Decision Date: 28 April 1913
• Docket Number: No. 184,184
• Citation: 33 S.Ct. 564,228 U.S. 459,57 L.Ed. 920
• Parties: CHARLES C. BURLINGHAM, Arthur R. Peck, and Albert W. Bonynge, as Trustees of the Property, Assets, and Effects of Thomas A. McIntyre et al., Individually and Composing the Firm of T. A. McIntyre & Company, Appts., v. CHARLES M. CROUSE
• Court: U.S. Supreme Court

228 U.S. 459

33 S.Ct. 564

57 L.Ed. 920

CHARLES C. BURLINGHAM, Arthur R. Peck, and Albert W. Bonynge, as Trustees of the Property, Assets, and Effects of Thomas A. McIntyre et al., Individually and Composing the Firm of T. A. McIntyre & Company, Appts.,

v CHARLES M. CROUSE.

No. 184.

Argued March 12 and 13, 1913.

Decided April 28, 1913.

Messrs. Dorr Raymond Cobb, Winfred T. Denison, and Irving L. Ernst for appellants.

[Argument of Counsel from pages 460-464 intentionally omitted] Messrs. Levi S. Chapman, Harry E. Newell, and James E. Newell for appellee.

[Argument of Counsel from page 464 intentionally omitted] Mr. Justice Day delivered the opinion of the court:

The action was brought in the United States district court for the southern district of New York by the trustees of the firm of T. A. McIntyre & Company, and of the individual members of that firm, bankrupts, against Charles M. Crouse and the Equitable Life Assurance Society of the United States, to recover the sum of $90,698.32, the net proceeds of certain policies of insurance issued by the Equitable Life Assurance Society upon the life of Thomas A. McIntyre, one of the bankrupts, deceased. The proceeds of the policies were paid into court by the Society. The judgment of the district court in favor of Crouse was affirmed by the circuit court of appeals (104 C. C. A. 227, 181 Fed. 479), and the case has been appealed to this court.

It appears that on the 10th of April, 1902, Thomas A. McIntyre obtained two policies of life insurance in the Equitable Society. They were known as 'guaranteed cash-value, limited payment, life policies,' each providing that upon the death of the insured the company would pay to his executors, administrators, or assigns the sum of $100,000 in fifty annual instalments, or the sum of $53,000 in cash, a total of $106,000 for the two policies. On April 14, 1906, the policies were assigned absolutely to the firm of T. A. McIntyre & Company, and on April 24, 1907, they were by that firm assigned to the Equitable Society as collateral security for a loan of $15,370. On February 25, 1908, two months prior to the filing of the petition in bankruptcy, the policies were assigned by McIntyre & Company to the defendant, Charles M. Crouse, subject, however, to the prior assignment to the Equitable Society. A petition in involuntary bankruptcy was filed against McIntyre & Company and its individual members on April 25, 1908, and on May 9, 1908, the defendant Crouse paid the premiums on the policies, in the sum of $6,078.38. McIntyre & Company and the individual members thereof were adjudged involuntary bankrupts on May 21, 1908, and the trustees were elected on the 24th of July, 1908. On the 29th of July, 1908, Thomas A. McIntyre died, and the policies became payable.

It appears that the policies had a cash surrender value, which, at the time when the trustees qualified, was $15,370, or the amount of the loan of the Equitable Society upon the policies. It is therefore apparent that on the day when the petition was filed, as well as the day of the adjudication in bankruptcy, the cash surrender value would not have exceeded the loan and lien of the Society upon the policies. The circuit court of appeals for the second circuit held that, under the circumstances, the policies did not pass to the trustees as assets, and therefore the action which had been begun to set aside the transfer to Crouse, as a preference within the bankruptcy act, could not be maintained.

The correctness of this decision depends primarily upon the construction of § 70a of the bankruptcy act, which reads:

'The trustee of the estate of a bankrupt, upon his appointment and qualification, and his successor or successors if he shall have one or more, upon his or their appointment and qualification, shall in turn be vested by operation of law with the title of the bankrupt, as of the date he was adjudged a bankrupt, except in so far as it is to property which is exempt, to all (1) documents relating to his property; (2) interests in patents, patent rights, copyrights, and trademarks; (3) powers which he might have exercised for his own benefit, but not those which he might have exercised for some other person; (4) property transferred by him in fraud of his creditors; (5) property which, prior to the filing of the petition, he could by any means have transferred, or which might have been levied upon and sold under judicial process against him: Provided, that when any bankrupt shall have any insurance policy, which has a cash surrender value payable to himself, his estate, or personal representatives, he may, within thirty days after the cash surrender value has been ascertained and stated to the trustee by the company issuing the same, pay or secure to the trustee the sum so ascertained and stated, and continue to hold, own, and carry such policy free from the claims of the creditors participating in the distribution of his estate under the bankruptcy proceedings; otherwise the policy shall pass to the trustee as assets; and (6) lights of action arising upon contracts or from the unlawful taking or detention of, or injury to, his property.' [30 Stat. at L. 565, chap. 541, U. S. Comp. Stat. Supp. 1911, p. 1511.]

The part of the section particularly to be considered is subdiv. 5 and its proviso. Subdivision 5 undertakes to vest in the trustee property which, prior to the filing of the petition, the bankrupt could by any means have transferred, or which might have been levied upon or sold under judicial process against him. Then follows the proviso with reference to insurance policies which have a cash surrender value, permitting a bankrupt, when the cash surrender value has been ascertained and stated, to pay or secure such sum to the trustee, and to continue to hold, own, and carry the policies free from the claims of creditors; otherwise the policies to pass to the trustee as assets.

Two constructions have been given this section, and the question, as presented in this case, has not been the subject of direct determination in this court. The one favors the view that only policies having a cash surrender value are intended to pass to the trustee for the benefit of creditors The other, conceding that the proviso deals with this class of policies, maintains that policies of life insurance which have no surrender value pass to the trustee under the language of § 70a immediately preceding the proviso, which reads: 'Property which, prior to the filing of the petition, he could by any means have transferred, or which might have been levied upon and sold under judicial process against him.'

To determine the congressional intent in this respect requires a brief consideration of the nature of the rights dealt with. Life insurance may be given in a contract providing simply for payment of premiums on a calculated basis which accumulates no surplus for the holder. Such insurance has no surrender value. Policies, whether payable at the end of a term of years or at death, may be issued upon a basis of calculation which accumulates a net reserve in favor of the policy holder, and which forms a consequent basis for the surrender of the policy by the insured, with advantage to the company upon the payment of a part of this accumulated reserve. This feature of surrender value was discussed by Judge Brown of the

Re Buelow, 98 Fed. 86; Re Josephson, 121 Fed. 142; Gould v. New York L. Ins. Co. 132 Fed. 927: Morris v. Dodd, 110 Ga. 606, 50 L.R.A. 33, 78 Am. St. Rep. 129, 36 S. E. 83.

Re Becker, 106 Fed. 54; Re Slingluff, 106 Fed. 154; Re Welling, 51 C. C. A. 151, 113 Fed. 189; Re Coleman, 69 C. C. A. 496, 136 Fed. 818; Re Hettling, 99 C. C. A. 87, 175 Fed. 65; Re Orear, 30 L.R.A.(N.S.) 990, 102 C. C. A. 78, 178 Fed. 632 southern district of New York, in Re McKinney, 15 Fed. 535, 537:

'The first of these elements, the surrender value of the policy, arises from the fact that the fixed annual premium is much in excess of the annual risk during the earlier years of the policy,—an excess made necessary in order to balance the deficiency of the same premium to meet the annual risk during the latter years of the policy. This excess in the premium paid over the annual cost of insurance, with accumulations of interest, constitutes the surrender value. Though this excess of premiums paid is legally the sole property of the company, still in practical effect, though not in law, it is moneys of...