In re Ashley, 04-80979.

• Decision Date: 06 October 2004
• Docket Number: No. 04-80979.,04-80979.
• Citation: 317 B.R. 352
• Court: U.S. Bankruptcy Court — Central District of Illinois
• Parties: In re Mary B. ASHLEY, Debtor.

317 B.R. 352

In re Mary B. ASHLEY, Debtor.

No. 04-80979.

United States Bankruptcy Court, C.D. Illinois.

October 6, 2004.

Charles E. Covey, Peoria, IL, for Debtor.

OPINION

THOMAS L. PERKINS, Bankruptcy Judge.

A debtor's ability to exempt certain property from the claims of creditors is one of the most important features of the fresh start that bankruptcy relief provides. Illinois debtors must use the exemptions provided by Illinois law, which, as a rule, are clear and provide fixed, limited value amounts for the various categories of exemptible property. The exemption for life insurance proceeds is an exception. Not only is the exemption unlimited in value, so that large amounts are often at issue, the applicable statutory provisions are so convoluted as to render the legislative intent indiscernible. The issue before the Court requires it to choose between two alternative provisions that exempt life insurance proceeds. Specifically, the Court must decide whether the exemption claimed by a debtor in the proceeds of policies insuring the life of her deceased husband, naming her as the beneficiary, are fully exempt without regard to need, or exempt only to the extent reasonably necessary for her support.

After her husband died, the Debtor, Mary B. Ashley (DEBTOR), filed her voluntary Chapter 7 petition on March 3, 2004. She has no dependents. On her schedule of personal property, she listed $43,000 in a Metropolitan Life money market account and $5,000 as an account receivable due from Hartford Life Insurance, labeling both as life insurance proceeds. On her schedule of exemptions, she claimed the entire $48,000 as exempt pursuant to 215 ILCS 5/238. Gary T. Rafool, the Chapter 7 Trustee (TRUSTEE), objected to the exemption to the extent that the life insurance proceeds are not reasonably necessary for her support.

Although the exemption is claimed only under the life insurance exemption found in the Illinois Insurance Code, 215 ILCS 5/1, et seq., both parties have argued the issue as if the exemption was also sought under the provisions of the general, personal property exemption law, 735 ILCS 5/12-1001. For the reasons set out hereinafter, this Court determines that the Insurance Code Exemption is inapplicable. Exemption claims may be liberally amended, In re Bauer, 298 B.R. 353, 356 (8th Cir. BAP 2003), and the Court will allow the DEBTOR to amend Schedule C to assert the proper basis for the exemption in conformance with this Opinion.

HISTORICAL BACKGROUND

Under the Bankruptcy Act, the matter of exemptions was left to state law. Section Six of the Act (11 U.S.C. § 24) provided, in pertinent part:

This Act shall not affect the allowance to bankrupts of the exemptions which are prescribed by the laws of the United States or by the State laws in force at the time of the filing of the petition in the State wherein they have had their domicile for the six months immediately preceding the filing of the petition, or for a longer portion of such six months than in any other State....

The Bankruptcy Code, which became effective on October 1, 1979, departed from that rule, providing debtors a choice between federal exemptions or state exemptions, unless their state had opted out of the federal exemptions. As the legislative history behind this provision suggests, the states' exercise of that option would necessarily require a review of the existing law and likely trigger a revamping of many exemption statutes:

[S]ome State exemption laws have not been revised in this century. Most are outmoded, designed for more rural times, and hopelessly inadequate to serve the needs of and provide a fresh start for modern urban debtors. The historical purpose of these exemption laws has been to protect a debtor from his creditors, to provide him with the basic necessities of life so that even if his creditors levy on all of his nonexempt property, the debtor will not be left destitute and a public charge. The purpose has not changed, but neither have the level of exemptions in many states. Thus, the purpose has largely been defeated.

Though exemption laws have been considered within the province of State law under the current Bankruptcy Act, [footnote omitted] H.R. 8200 adopts the position that there is a Federal interest in seeing that a debtor that goes through bankruptcy comes out with adequate possessions to begin his fresh start. Recognizing, however, the circumstances do vary in different parts of the country, the bill permits the states to set exemption levels appropriate to the locale and allows debtors to choose between the State exemptions and the Federal exemptions provided in the bill. [footnote omitted] Thus, the bill continues to recognize the States' interest in regulating credit within the States, but enunciates a bankruptcy policy favoring a fresh start.

H.R.Rep. No. 595, 95th Cong., 1st Sess. 126 (1977), reprinted in 1978 U.S.C.C.A.N. 6087.

In re Butcher, 189 B.R. 357 (Bankr.D.Md.1995).

Discussing Illinois' response to the enactment of the Bankruptcy Code and decision to opt out of the federal exemption scheme, the court in In re Marriage of Logston, 103 Ill.2d 266, 469 N.E.2d 167, 82 Ill.Dec. 633 (1984) stated:

[I]n response to developments in Federal bankruptcy law, the Illinois legislature in 1981 altered the basic format of the personal property exemption statute. The Bankruptcy Reform Act of 1978 (11 U.S.C. sec. 101 et seq. (198 2)) had increased the relief available to individual debtors by granting several Federal bankruptcy exemptions ( 11 U.S.C. sec. 522(d) (1982)). The States, however, could deny their residents the benefit of these exemptions by enacting "opt out" legislation. (11 U.S.C. sec. 522(b)(1) (1982).) In 1980, the Illinois legislature chose to opt out of the Federal exemption scheme and restrict our residents to exemptions granted by Illinois law. (See Ill.Rev.Stat.1983, ch. 110, par. 12-1201; see generally Comment, Bankruptcy Exemptions: Whether Illinois's Use of the Federal "Opt Out" Provision Is Constitutional, 1981 S.Ill.U.L.J. 65, 65-70.) Shortly thereafter, likely because the existing Illinois provisions "pale[d] in comparison to the federal bankruptcy exemptions" (Comment, Bankruptcy Exemptions: Whether Illinois's Use of the Federal "Opt Out" Provision Is Constitutional, 1981 S.Ill.U.L.J. 65, 69; see also Gov. James R. Thompson, Amendatory Veto Message to the Senate of August 20, 1981, 82d Ill.Gen.Assem., S.B. 300), our legislature endeavored to expand Illinois exemptions, including those for personal property (S.B. 300, 82d Ill.Gen.Assem., 1981 Sess., 1981 House Debates, June 27, 1981, at 307-09).

After amendment, section 12-1001 no longer exempted only a few personal possessions and finite amounts of other personalty. It now also exempted the debtor's right to receive certain types of income, such as the social security, pension, and disability insurance benefits that are at issue in the case at bar. (1981 Ill.Laws 3629, 3632-34.) Only the House of Representatives debated this amendment, and its discussion focused on changes to the homestead exemption provisions (Ill.Rev.Stat.1983, ch. 110, pars. 12-901 through 12-912). The legislators did not mention whether the expanded exemptions would affect maintenance and support obligations, and the changes to the personal property provision were not discussed at all. See S.B. 300, 82d Ill.Gen.Assem., 1981 Sess., 1981 Senate Debates, April 1, 1981, at 2, and May 12, 1981, at 20-21; 1981 House Debates, June 23, 1981, at 191-99, and June 27, 1981, at 307-09.

THE THREE LIFE INSURANCE EXEMPTION PROVISIONS

Resolution of the issue before the Court begins with an analysis of the three statutory provisions that deal with life insurance exemptions.¹ The earliest of those provisions, enacted as part of the Insurance Code in 1937, and unchanged for sixty-seven years, provides that:

All proceeds payable because of the death of the insured and the aggregate net cash value of any or all life and endowment policies and annuity contracts payable to a wife or husband of the insured, or to a child, parent or other person dependent upon the insured, whether the power to change the beneficiary is reserved to the insured or not, and whether the insured or his estate is a contingent beneficiary or not, shall be exempt from execution, attachment, garnishment or other process, for the debts or liabilities of the insured incurred subsequent to the effective date of this Code, except as to premiums paid in fraud of creditors within the period limited by law for the recovery thereof.

215 ILCS 5/238(a) (hereinafter referred to as the Insurance Code Exemption).

The Insurance Code Exemption has two features that are important to note. First, the exemption pertains to both the policy proceeds and the cash value of the policy. Historically, the proceeds of an insurance policy have not been considered an asset of the insured. Explaining the rule, the court in Vieth v. Chicago Title & Trust Co., 307 Ill.App. 99, 30 N.E.2d 126, 130 (Ill.App. 1 Dist.1940), stated:

[T]he proceeds of life insurance are not an asset even to the insured. In fact, they do not come into existence until after death. During life the insured could not by any suit recover the proceeds, and claim them as his own. The creditor can have no right where the insured possessed none. A man's life is not property; of it he can make no gift; neither can he assign; nor can a creditor take it in payment of a debt."

See, also, In re Estate of Grigg, 189 Ill.App.3d 5, 136 Ill.Dec. 636, 545 N.E.2d 160 (Ill.App. 1 Dist.1989) (proceeds of life insurance policy not asset of insured).²

The carve-out from the exemption for insurance premiums paid by an insolvent insured was taken from the forerunner of the Insurance Code Exemption, enacted in 1869, to authorize a married woman to obtain an insurance policy on the life of her husband, and to receive the proceeds free and clear of the claims of...