Headen v. Miller

• Decision Date: 24 March 1983
• Citation: 141 Cal.App.3d 169,190 Cal.Rptr. 198
• Parties: Vera A. HEADEN, William B. Headen, Gordon A. Wong, Merrily Wong and Shu Wun Wong, Plaintiffs and Appellants, v. Ethel I. MILLER, Defendant and Respondent. Civ. 20979.
• Court: California Court of Appeals Court of Appeals

Page 198

190 Cal.Rptr. 198

141 Cal.App.3d 169

Vera A. HEADEN, William B. Headen, Gordon A. Wong, Merrily Wong and Shu Wun Wong, Plaintiffs and Appellants, v. Ethel I. MILLER, Defendant and Respondent.

Civ. 20979.

Court of Appeal, Third District, California.

March 24, 1983.

Hearing Denied May 18, 1983.

Thomas W. Martin, Leroy F. Fong and James Martin, Sacramento, for plaintiffs and appellants.

Hefner, Stark & Marois and Judy R. Campos, Sacramento, for defendant and respondent.

CARR, Associate Justice.

In this appeal from a judgment of dismissal entered after the trial court sustained without leave to amend demurrers by defendant Ethel I. Miller to all seventeen causes of action alleged in the complaint, the parties, by admission and briefing have limited the appeal to the 10th, 11th, 12th and 13th causes of action. ¹ Stripped to the essentials, these causes of action allege that a fraudulent conveyance, void as to plaintiff creditors, occurred when defendant Miller's now deceased husband changed the beneficiary on certain insurance policies on his life from his partner in their real estate business to his wife, defendant herein, a few months prior to his death. Plaintiffs, creditors of the partnership, seek to satisfy their claims from such insurance proceeds.

A demurrer admits all material and issuable facts properly pleaded. (Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695, 713, 63 Cal.Rptr. 724, 433 P.2d 732.) The facts, as alleged in the complaint, are that Ben Miller and Tom Oden were partners in a real estate venture known as Pioneer Realty Company (Pioneer). The plaintiff Wongs loaned Miller as an agent of Pioneer $180,700 and the Headens assigned him as an agent of Pioneer a promissory note to be used for land development and investment purposes. Miller and Oden maintained life insurance policies ² on each other's lives with the premiums paid by Pioneer. Such policies are alleged to be assets of the partnership. The policy on Miller's life named Oden as beneficiary. Approximately three months prior to his death Miller changed the beneficiary on his policy from Oden to his wife, defendant Ethel Miller. At the time of this change of beneficiary, both Miller and Pioneer were in debt to the point of insolvency. The monies obtained from plaintiffs were not used for real estate investment but to pay the business and personal obligations of Pioneer, Miller and Oden.

In the fall of 1979, Miller and Pioneer defaulted on the obligations to all plaintiffs and on November 28, 1979, Miller died in an automobile accident. Prior to his death, Miller had sold the Headens' note without their consent. Plaintiffs submitted claims to decedent Miller's estate. These were denied except for $44,489.24 allowed the Headens.

The causes of action against defendant Miller were premised upon her receipt of the life insurance proceeds as fraudulent transfers. ³ The trial court in sustaining the demurrers without leave to amend for failure to state a cause of action cited, without comment, Bryson v. Manhart (1936) 11 Cal.App.2d 691, 54 P.2d 778, and Union Central Life Ins. Co. v. Flicker (9th Cir.1939) 101 F.2d 857. By such citation, inferentially the court held the transfer was not in fraud of creditors as the beneficiary before the transfer was not the estate of deceased policy holder (Bryson v. Manhart, supra) and, in any event, the transfer was fraudulent only as to the cash surrender value of the insurance policy at the time of transfer. (Union Central Life Ins. Co. v. Flicker, supra.)

We do not perceive the problem to be so simple of solution. There is a paucity of case law, both in California and other jurisdictions on the issue of whether a change of beneficiary on a life insurance policy is properly the basis of a fraudulent conveyance action, and, if so, the measure of damages.

For reasons set forth we conclude the trial court erred in determining plaintiffs failed to state a cause of action.

I

The general rule in California and other jurisdictions which have adopted the Uniform Fraudulent Conveyance Act is that a conveyance by an insolvent person or partnership of an asset to another without a fair consideration is in fraud of creditors, without regard to the debtor's actual intent. (Civ.Code, §§ 3439.04 and 3439.08.) A conveyance made with actual intent to defraud is, of course, also in fraud of creditors. (Civ.Code, § 3439.07.) The creditor's remedies depend upon whether the claim has matured and include: setting the conveyance aside to the extent necessary to satisfy the claim or disregarding the conveyance and attaching or levying upon the property conveyed (where claim has matured); restraining defendant from disposing of the property; appointing a receiver to take charge of the property; setting the conveyance aside; or making any order which the circumstances of the case may require. (Civ.Code, §§ 3439.09, 3439.10.)

In applying this general rule to an alleged fraudulent conveyance of a life insurance policy the initial problem is determining the nature of the "asset" conveyed. When an insolvent debtor transfers a piece of nonexempt real or personal property to a third person without consideration there is a tangible asset of fixed value from which the creditor's claim can be satisfied. (Civ.Code, § 3439.09; see e.g., Ahmanson Bank & Trust Co. v. Tepper (1969) 269 Cal.App.2d 333, 74 Cal.Rptr. 774.) An insurance policy, however, is not a thing of fixed value but is an agreement whereby one party for a consideration promises to pay money or perform some act of value to another on the destruction, death, loss, or injury of someone or something by specified perils. (California Physicians' Service v. Garrison (1946) 28 Cal.2d 790, 803-804, 172 P.2d 4, see also Ins.Code § 22.) Since the policy is a promise to pay (on the happening of a specified event, such as death), what is the value of the asset transferred in fraud of creditors? Courts have variously determined this to be the cash surrender value of the policy at time of transfer, the premiums paid post transfer or the entire proceeds of the policy.

At common law the creditors of the insured were allowed to recover the entire proceeds of the policy. (See e.g. Taylor v. Cohen (1876) 1 Ch.D. 636, 641; Cohen, The Fraudulent Transfer of Life Insurance Policies (1940) 88 U.Pa.L.Rev. 771, 775.) ⁴ The rationale for this rule was that by the payment of premiums the debtor had reduced his assets and the creditors were entitled to the property resulting from such payment, the insurance proceeds. (Cohen, at pp. 775-776.) The harsh treatment this rule accorded the debtor's widow apparently underlay subsequent decisions of some American courts that the creditors were entitled to reach only the cash surrender value of the policy or the amount of premiums paid subsequent to the transfer. ⁵ The cash surrender value approach is premised on the concept that the insurance policy is a contingent asset and when the policy is transferred, the creditors are injured only to the extent of the policy's cash surrender value or the value of the premiums paid. Had the debtor lived, they would of course be unable to levy on the proceeds of the policy. (See e.g., Union Central Life Ins. Co. v. Flicker, supra, 101 F.2d at p. 862.)

In states which retained the common law rule ⁶ the ameliorative effect of the cash value approach was attained by the enactment of insurance protective statutes patterned on the original New York Verplanck Act. ⁷ (Cohen, supra, at [141 Cal.App.3d 174] p. 779.) The effect of these statutes was to declare at least some portion of the life insurance proceeds exempt from attachment by the insured's creditors. With this background, we review the relevant California authorities.

II

In Bryson v. Manhart, supra, 11 Cal.App.2d 691, 54 P.2d 778, the insolvent insured changed the beneficiary of his insurance policy from his estate to his sister; approximately four months later he committed suicide. The sole creditor of his estate was an aunt from whom he had embezzled substantial sums of money entrusted to him for investment purposes. Inferentially the embezzled funds were used to pay premiums on the insurance policies as the decedent had only $4,000 in insurance prior to receipt of his aunt's money but acquired some additional $200,000 thereafter. The court ordered the transfers set aside as fraudulent. Citing to Navassa Guano Co. v. Cockfield (4th Cir.1918) 253 F. 883, the court reasoned the insured changed the beneficiary with knowledge that death was near and for the purpose of removing the insurance proceeds from his estate and the reach of creditors. The knowledge of impending death removed the element of contingency and gave the policy at the time of its transfer "an actual pecuniary value closely approximating its face amount." (Bryson v. Manhart, supra, 11 Cal.App.2d at p. 698, 54 P.2d 778.) It was this amount that was transferred in fraud of creditors, who were therefore entitled to reach the full proceeds to satisfy their claims. ⁸

In Union Central Life Ins. Co. v. Flicker, supra, 101 F.2d 857, the Circuit Court of Appeals for the Ninth Circuit undertook to determine if California Law allowed creditors to reach the entire proceeds of a fraudulently transferred policy or merely the cash surrender value. In deciding the creditors were not entitled to reach the entire proceeds of the policy the court distinguished Bryson v. Manhart as a transfer made in contemplation of death and assumed California courts would hold only the cash surrender value of the policy subject to execution. (At pp. 861-862.) The policy in that case had no cash surrender value and nothing of value was transferred, so the policy was a mere expectancy. The creditors were without a remedy as they were not injured by the transfer. (Ibid.)

In The Prudential Ins. Co. v. Beck (1940) 39 Cal.App.2d 355, 103 P.2d 241, the court applied the insurance exemption statute to a situation...