Daniel Holden v. Stratton

• Decision Date: 08 May 1905
• Docket Number: No. 209,209
• Citation: 198 U.S. 202,49 L.Ed. 1018,25 S.Ct. 656
• Parties: DANIEL L. HOLDEN and Lizzie Holden, Bankrupts, Petitioners, v. J. A. STRATTON
• Court: U.S. Supreme Court

198 U.S. 202

25 S.Ct. 656

49 L.Ed. 1018

DANIEL L. HOLDEN and Lizzie Holden, Bankrupts, Petitioners,

v J. A. STRATTON.

No. 209.

Submitted April 6, 1905.

Decided May 8, 1905.

Separate proceedings in bankruptcy were begun in the district court of the United States for the district of Washington, northern division, against Daniel N. Holden and Lizzie Holden, his wife. They were consolidated. Both the parties were adjudicated to be bankrupt, and J. A. Stratton became the trustee of both estates.

All the liabilities of the bankrupts were contracted between the first day of September and the first day of December, 1900, and the creditors of each were the same. There were two policies upon the life of Daniel N. Holden, one for $2,000, the other for $5,000, issued by the same company. Both bore date June 15, 1894, having been issued as the result of an arrangement by which the insured and his wife, as the beneficiary, surrendered a policy for $10,000, dated May 21, 1890.

The policy for $2,000 was a full-paid, nonparticipating one, and the amount became due only upon the death of the insured, and was then payable to the wife, or, in the event she did not survive her husband, to his executors, administrators, or assigns. The policy for $5,000 was on what was termed the semitontine plan. An annual premium of $233.80 was required to be paid for ten years from the date of the previous policy, which had been surrendered, that is, until May 21, 1900, and therefore, at the date when the bankrupts contracted the debts set forth in their schedules, and at the date of the adjudications in bankruptcy, this period had expired, and no further payment of premiums was necessary. Upon the death of the insured the amount of the policy was to be paid to the wife, as the beneficiary, or, in the contingency of her prior decease, to the executors, administrators, or assigns of the insured. It was provided, however, that upon the completion of the tontine dividend period of twenty years,—on May 21, 1910,—if the insured was then alive, he or his assigns, if creditors, might surrender the policy, and receive its full cash value, or a nonparticipating policy, payable to the original beneficiary, or if she was not alive, to the executors, administrators, or assigns of the insured, or the option was given to keep the policy in force, and to withdraw the surplus to the credit of the policy in cash, or use the same to purchase additional insurance.

The bankrupts made application to have these policies set aside to them, because, it was asserted, they were exempt by the law of the state of Washington. This was resisted by the trustee upon the ground that the policies had a cash surrender value of $2,200, which it was the duty of the bankrupts to pay to the trustee as a condition precedent to the exemption of the policies. The referee sustained the claim of the trustee. His ruling was reversed by the district court. On a petition for revision the circuit court of appeals held that the bankrupts were obliged to pay the cash surrender value as asserted by the trustee. 51 C. C. A. 97, 113 Fed. 141. An appeal was prosecuted to this court, and was dismissed. 191 U. S. 115, 48 L. ed. 116, 24 Sup. Ct. Rep. 45. This writ of certiorari was then allowed. 193 U. S. 672, 48 L. ed. 841, 24 sup. Ct. Rep. 854.

Messrs. P. P. Carroll and John E. Carroll for petitioners.

Messrs. Frederick Bausman and Hugh A. Garland for respondent.

[Argument of Counsel from pages 204-207 intentionally omitted] Mr. Justice White, after making the foregoing statement, delivered the opinion of the court:

The law of the state of Washington upon which the bankrupts relied to sustain the exemption of the policies was originally enacted in 1895, (Wash. Laws 1895, p. 336), and was re-enacted in 1897. Laws 1897, p. 70. The original act provided 'that the proceeds or avails of all life insurance shall be exempt from all liability for any debt,' and the amendment of 1897 enlarged this act by making it also applicable to accident insurance.

The circuit court of appeals held that the policies were not exempt, even although embraced by the state exemption, because of the requirements of § 70 of the bankrupt act of 1898 [30 Stat. at L. 565, chap. 541, U. S. Comp. Stat. 1901, p. 3451]. This was sustained upon the theory that § 6 of the bankrupt act, adopting the exemption laws of the several states, was modified, as to life insurance policies, by a proviso found in § 70a. In addition, in this court it is insisted, on behalf of the trustee, that, even although the construction of the bankrupt act adopted by the circuit court of appeals was a mistaken one, nevertheless the policies were not exempt, first, because the law of Washington making the exemption was in conflict with the Constitution of that state; and, second, because the law, even if valid, did not authorize the exemption of policies of the character of those here involved.

As § 6 of the bankrupt act gives effect to the exemptions allowed by the state law, it follows that the contentions that there was no valid state law exempting insurance policies, or that the exemption here claimed is not embraced within the state law, if such law be valid, lie at the threshold of the case, and must be disposed of before we come to consider the true interpretation of the bankrupt law.

To decide the contentions involves purely state, and not Federal, considerations. No decision of the supreme court of the state of Washington holding the exemption law to be invalid because repugnant to the state Constitution has been referred to. On the contrary, in Re Heilbron, 14 Wash. 536, 35 L. R. A. 602, 45 Pac. 153, the exemption law in question was considered and upheld by the supreme court of Washington. In that case the court maintained the contention that to cause the provisions of the statute to retrospectively apply to debts which had been contracted prior to the passage of the act would render the act unconstitutional, both from the point of view of the Federal as well as the state Constitution, and therefore that the law must be construed as having only a prospective operation. All the reasoning, however, of the opinion of the court by which the conclusion referred to was reached, assumed, as a matter of course, that the law, if operating prospectively, was not an unconstitutional exercise of power by the legislature. And it is also worthy of remark that the amendment including accident insurance was adopted by the legislature of Washington subsequent to the decision in Re Heilbron. Of course, as the question of the repugnancy of the statute to the Constitution of Washington upon the grounds now asserted was not presented in that case, the decision cannot be said to be conclusive of the question. But it has its due persuasive force.

Considering the contention, however, as an original question, we think its unsoundness is quite clear. The fallacy which the proposition embodies consists in presupposing that because the Constitution of the state of Washington provides that the legislature 'shall protect by law from forced sale a certain portion of the homestead and other property of all heads of families,' thereby a limitation was imposed upon the general power of the legislature to determine the amount and character of property which should be exempt. Two cases are referred to as supporting the contention. How v. How, 59 Minn. 415, 61 N. W. 456; Skinner v. Holt, 9 S. D. 427, 62 Am. St. Rep. 878, 69 N. W. 595. But those cases were based upon constitutional provisions widely different from the one here relied upon. To the contrary, in California, where a constitutional provision obtains identical with the one we are considering (Cal. Const. art. 17, § 1), it has been decided that the character and amount of property which shall be exempt from execution is 'purely a question of legislative policy.' Spence v. Smith, 121 Cal. 536, 66 Am. St. Rep. 62, 53 Pac. 653. And it is further to be observed that the legislature of California has acted under that assumption, and has in effect exempted life insurance policies from execution. Thus it is provided in the Civil Code of California as follows:

'Sec. 3470. Property exempt.—Property exempt from execution, and insurances upon the life of the assignor, do not pass to the assignee by a general assignment for the benefit of creditors, unless the instrument specially mentions them, and declares an intention that they should pass thereby. En. March 21, 1872.'

Conceding the constitutionality of the statute, it is next insisted that it does not embrace an exemption of the avails of the policies in question. The arguments supporting this contention are somewhat involved, but are all embraced in the following propositions: First, life insurance, it is said, in its strictest and technical sense, relates only to a fund realizable by death, and therefore the words 'all life insurance,' in the Washington statute, must be given that restricted meaning; hence the statute is inapplicable to one of the policies which partakes of the nature of an endowment. Second, exemptions of life insurance policies, it is asserted, do not generally protect the avails of insurance from pursuit by creditors of the insured where the proceeds of the policies are payable to his estate, nor do they protect the avails of insurance from pursuit by the creditors of the wife of the insured, or other beneficiary. The application of these propositions is based upon the fact that in both of the policies the wife—one of the bankrupts—was named as a beneficiary in the event of surviving her hus- band, and in one of the policies the husband was entitled, if he survived the twenty-years' period, to surrender the policy, and receive its cash value.

To support the propositions the...