Garcia v. Warfield (In re (Deceased)

• Decision Date: 07 February 2017
• Docket Number: No. CV16–02835–PHX DGC,BK NO. 0:15–bk–06493–BMW,CV16–02835–PHX DGC
• Citation: 567 B.R. 168
• Parties: In the MATTER OF: Juan D. GARCIA (deceased) and Teresa A. Garcia, Debtors. Teresa A. Garcia, Appellant, v. Lawrence J. Warfield, Appellee.
• Court: U.S. District Court — District of Arizona

567 B.R. 168

In the MATTER OF: Juan D. GARCIA (deceased) and Teresa A. Garcia, Debtors.Teresa A. Garcia, Appellant,

v.Lawrence J. Warfield, Appellee.

No. CV16–02835–PHX DGC

BK NO. 0:15–bk–06493–BMW

United States District Court, D. Arizona.

Signed February 7, 2017

Phil Hineman, Jr., Law Office of Phil Hineman PC, Phoenix, AZ, for Appellant.

Terry A. Dake, Terry A. Dake Ltd., Phoenix, AZ, for Appellee.

ORDER

David G. Campbell, United States District Judge

Debtor Teresa Garcia appeals an order of the bankruptcy court sustaining Trustee Lawrence J. Warfield's objection to her claimed exemption for group life insurance proceeds paid to her as a surviving spouse. Doc. 8. Trustee asks the Court to affirm the bankruptcy court's decision. Doc. 9. The appeal is briefed, and no party has requested oral argument. Docs. 8, 9. For reasons set forth below, the Court will reverse the bankruptcy court's decision.

I. Background.

The following facts are undisputed. Doc. 8 at 6; Doc. 9 at 4.¹ On May 26, 2015, Juan Garcia and Debtor Teresa Garcia jointly filed a Chapter 7 bankruptcy petition. Doc. 8 at 6. On July 18, 2015, Mr. Garcia passed away. Id. Mr. Garcia had a group life insurance policy through his employer, PepsiCo, and Debtor became entitled to group life insurance proceeds of $158,000.00. Id. On August 11, 2015, Debtor filed an amendment to the schedules and statements, claiming that the insurance proceeds were exempt from the claims of her creditors under A.R.S. § 20–1132. Id. On February 2, 2016, Trustee filed an objection, asserting that § 20–1132 did not apply and that Debtor was entitled to an exemption of only $20,000.00 under A.R.S. § 33–1126. Bankr. Doc. 39.² The bankruptcy court sustained Trustee's objection, and Debtor filed this appeal.

II. Standard of Review.

Under 28 U.S.C. § 158(a)(1), the Court has jurisdiction over appeals from final judgments, orders, and decrees of bankruptcy judges. The Court reviews the bankruptcy court's conclusions of law de novo and its findings of fact for clear error. In re JTS Corp. , 617 F.3d 1102, 1109 (9th Cir. 2010). This appeal presents a purely legal question.

III. Discussion.

In 1954, the Arizona legislature enacted a comprehensive insurance code. See Arizona Insurance Code Act, ch. 64 (Senate Bill No. 1), 21 Ariz. Sess. Laws 80, App'x A (1954). The Act included a provision aimed at protecting proceeds of group life insurance policies from the claims of creditors. Id. at Art. 11, Sec. 32 (page 111 of App'x A). The provision's language is substantially similar to the National Convention of Insurance Commissioners' ("NCIC's") standard language proposed in 1918, which has been adopted (either with the same or similar language) by approximately 25 states. See In re Fahey , 352 B.R. 288, 291 (Bankr. D. Colo. 2006).

The provision relevant to this case was codified as A.R.S. § 20–1132, which reads:

A policy of group life insurance or the proceeds thereof, payable to the individual insured or to the beneficiary thereunder shall not be liable, either before or after payment, to be applied by any legal or equitable process to pay any liability of any person having a right under the policy.

A.R.S. § 20–1332(A). This appeal presents an issue of first impression for this Court regarding the statutory interpretation of this section.

Debtor argues that the bankruptcy court erred by holding that § 20–1332 does not apply to her situation, and by denying her request to exempt all proceeds of her late husband's group life insurance policy from her creditors. Doc. 8 at 6. Trustee asserts that the bankruptcy court did not err and that its decision should be affirmed because § 20–1332 protects the proceeds of a group life insurance policy only from creditors of the purchaser and the insured, not from creditors of the beneficiary. Doc. 9 at 5–11.

A. Liberal interpretation of exemption statutes.

Under both federal and Arizona law, exemption statutes are to be liberally construed in favor of a debtor who claims an exemption. In re Thiem , 443 B.R. 832, 837–38 (Bankr. D. Ariz. 2011) (citing In re Arrol , 170 F.3d 934, 937 (9th Cir. 1999) ; Gardenhire v. Glasser , 26 Ariz. 503, 226 P. 911, 912 (1924) ; In re Herrscher , 121 B.R. 29, 31 (Bankr. D. Ariz. 1989) ). The exemption laws in Arizona "were not created merely for the purpose of conferring a privilege on a debtor, but to shelter the family and thereby benefit the state." In re Hummel , 440 B.R. 814, 820 (9th Cir. BAP 2010) (quoting In re Foreacre , 358 B.R. 384, 390 (Bankr. D. Ariz. 2006) ).

"The meaning of a state exemption is controlled by the applicable state law, and a bankruptcy court is bound by the state's construction of its statute." In re Thiem , 443 B.R. at 838. The Arizona Supreme Court has instructed that "[w]hen resolving questions of statutory interpretation, we first consider the language of the statute, which provides ‘the best and most reliable index of a statute's meaning.’ " State v. Thomas , 219 Ariz. 127, 194 P.3d 394, 396 (2008) (quoting Janson v. Christensen , 167 Ariz. 470, 808 P.2d 1222, 1223 (1991) ).

B. Does Debtor have a "right under the policy?"

The plain language of § 20–1332 protects proceeds of a group life insurance policy from "any liability" of "any person having a right under the policy." § 20–1332. Thus, whether § 20–1332 exempts proceeds from the creditors of a beneficiary turns on whether the beneficiary has "a right under the policy." The parties do not cite, nor has the Court found, any Arizona case addressing whether a beneficiary of a life insurance policy has "a right under the policy." See § 20–1332.

Debtor cites A.R.S. § 20–1128(A) to support her position that a beneficiary has "a right under the policy" from the moment the insured dies. Doc. 8 at 11. Section 20–1128(A) states that "[t]he benefits payable upon the death of the insured and provided in any life ... insurance policy made payable to ... the spouse of the insured shall ... inure upon their becoming payable, to the separate use and benefit of such spouse." Id. Thus, Debtor reasons, "as soon as the policy became payable, [she] had a right to the funds[,]" and this right brings her within the exemption provided in § 20–1132. Id.

The broad language of § 20–1332 seems to support Debtor's interpretation. It states that "proceeds ... payable to ... the beneficiary thereunder shall not be liable ... to be applied by any legal or equitable process to pay any liability of any person having a right under the policy." § 20–1332(A) (emphasis added). Section 20–1128(A) gives the spouse of the insured rights to the proceeds of a life insurance policy at the time of the insured's passing. And § 20–1332 plainly states that it applies to "any person having a right under the policy." Id. (emphasis added).

Trustee argues that Debtor "confuses a right to the proceeds with rights under the policy." Id. at 8. Trustee asserts that Debtor has no "right under the policy" because "[i]n life insurance, there are only two parties who have rights under the policy—the insurer and the insured. Beneficiaries, until the insured dies, have no vested interest of any kind, and have no ‘right under the policy.’ " Id. at 7. "Life insurance beneficiaries have nothing more than an expectancy, terminable at will." Id. (citing Thomas v. Thomas , 54 So.3d 346 (Ala. Civ. App. 2009) ).

True, a named beneficiary has only an expectancy before a policy becomes payable. See, e.g. , Matter ofEstate of Dobert , 192 Ariz. 248, 963 P.2d 327, 330 (1998) (finding that the named beneficiary of a life insurance policy had no vested interest in the policy proceeds prior to the insured's death); Doss v. Kalas , 94 Ariz. 247, 383 P.2d 169, 172 (1963) ("The beneficiary, during the life of the insured, has no vested right which the law protects[.]"). But Courts consistently recognize that a named beneficiary's expectancy becomes vested when the insured dies. See, e.g. , McClain v. Beder , 25 Ariz.App. 231, 542 P.2d 424, 425 (1975), overruled by statute on other grounds ("[I]f the insured does not change the beneficiary [of a life insurance policy] prior to his death, the proceeds of the policy vest in the beneficiary at the time of his death."); see also In re Holmes , No. A11-00225-DMD, 2012 WL 365755, at *2 (Bankr. D. Alaska Feb. 2, 2012) ("Generally, ‘a spouse named as the beneficiary in a life policy issued to the other spouse has a mere expectancy in the policy that becomes a vested right only upon the death of the insured.’ " (quoting 4 Couch on Ins. § 64:2 (3d ed. 2011) ).

Under this law, Debtor's expectancy matured into a vested right when her spouse died. Thereafter, Debtor had a vested right to payment—a "right under the policy" within the meaning of § 20–1132. Debtor's interest in the policy may not have vested before her husband died, but § 20–1132 is not limited to that point in time. It applies to "proceeds" of group life insurance "payable to the ... beneficiary ... either before or after payment." A.R.S. § 20–1332(A). Given this broad language, and Arizona's instruction that exemption statutes are to be construed liberally, the Court concludes that Debtor's right to the policy's proceeds constitutes "a right under the policy." Id.

C. Does § 20–1132 apply to creditors of beneficiaries?

Trustee next argues that § 20–1132 does not apply to creditors of a beneficiary. Specifically, Trustee argues that "it is evident that A.R.S. § 20–1132 does for group life insurance what its companion statute, A.R.S. § 20–1131, does for individual life insurance—it prevents creditors of the purchaser and the insured from making claims to the proceeds." Doc. 9 at 6 (emphasis in original).

Section 20–1131 provides in relevant part:

If a policy of life insurance is effected by any person on the person's own life or the life in favor of another person having an insurance interest in the policy, or made payable by assignment, change of beneficiary or other means to a third person, a lawful beneficiary of such third person,

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