In re Bateman, Bankruptcy No. 91 B 21843.
| Decision Date | 20 August 1993 |
| Docket Number | Bankruptcy No. 91 B 21843. |
| Citation | 157 BR 635 |
| Parties | In re Mary Eileen O'Keefe BATEMAN, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Joel A. Stein, Laser Schostok Kolman & Frank, Chicago, IL, for debtor.
William J. Barrett, Gardner Carton & Douglas, Chicago, IL, for Estate of Hilary Reddy.
Richard M. Friedman, Asst. U.S. Trustee. Chicago, IL.
Debtor Mary Eileen O'Keefe Bateman ("Debtor") has filed a voluntary Petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101, et seq. On Amended Schedule C to her petition, Debtor claimed as exempt, pursuant to 11 U.S.C. § 522(b)(2) and 735 ILCS 5/12-1001(f),1 her right to proceeds of an insurance policy payable to her by reason of death of the insured, her husband. The Estate of Hilary Reddy ("Reddy"), a judgment creditor of Debtor, sought collection of its judgment prior to Debtor's bankruptcy filing through garnishment of Debtor's interest in the insurance proceeds. The parties agree, under applicable non-bankruptcy law, that the garnishment process resulted in a judicial lien. Debtor therefore seeks a determination here that the proceeds are exempt from that judicial lien which may therefore be avoided.
The relevant facts are undisputed. They present an issue regarding the extent to which a personal property exemption may be claimed as to insurance proceeds under Illinois law. The parties dispute whether the proceeds involved here are entirely exempt under 735 ILCS 5/12-1001(f) ("§ 1001(f)") or only conditionally exempt pursuant to 735 ILCS 5/12-1001(h)(3) ("§ 1001(h)(3)"). For reasons below, § 1001(f) is found to control. Thus, Debtor's interest in the insurance proceeds is entirely exempt, and the judicial lien on Debtor's property may be avoided under 11 U.S.C. § 522(f) to the extent it includes these proceeds. An order to that effect has been entered, and this Opinion gives the supporting reasoning.
On November 22, 1987, the insured, Debtor's husband, died after a fall from the balcony of his apartment in New York City. Debtor is a named beneficiary of an accidental death insurance policy on her husband's life in the amount of $500,000. Debtor's claim for payment was twice considered and rejected by the insurance company due to its contention that the death resulted from suicide. Debtor contested these rejections in 1990 by filing a declaratory action against the insurance company in the District Court for the Southern District of New York. Debtor's declaratory action is currently pending, and no proceeds of the policy have been paid.
On January 18, 1991, during pendency of the declaratory action, in an unrelated case Reddy obtained judgment against Debtor in the amount of $170,454.31. In April of 1991, Reddy attempted to enforce that judgment by serving the insurance company a Garnishment Notice of Restraining Lien upon the insurance proceeds under New York law.
Debtor subsequently filed her Chapter 11 petition in this District on October 15, 1991. Reddy filed a proof of claim on December 3, 1991 which alleges a $181,320.75 secured debt.2 The instant motion was filed on May 3, 1993. The parties rest on the foregoing undisputed facts and their respective briefs.
This matter is before the Court pursuant to 28 U.S.C. § 157, and is referred under Local District Court Rule 2.33. The Court has subject matter jurisdiction under 28 U.S.C. § 1334, and this is a core proceeding under 28 U.S.C. § 157(b)(2)(K) and (O).
Although Reddy claims a judicial lien in any insurance proceeds that may be payable to the Debtor, 11 U.S.C. § 522(f) allows Debtor to avoid any judicial lien on her interest in property to the extent the lien impairs an exemption to which she is otherwise entitled. Both parties agree that Illinois law applies to determine exemptions and that the insurance proceeds are subject to an exemption under 735 ILCS 5/12-1001. However, they disagree about the extent to which Debtor's possible insurance proceeds may be exempt. Debtor claims those proceeds are entirely exempt under § 1001(f), and therefore Reddy's lien is entirely avoidable. Reddy argues that § 1001(h)(3) applies here. The latter section also recognizes a Debtor's exemption in insurance proceeds, but, if applicable, it is limited by its terms to an amount reasonably necessary for support of the Debtor. Thus, Reddy claims the judicial lien is avoidable only to the extent it impairs rights to insurance proceeds reasonably necessary for Debtor's support.
(Emphasis supplied.) 735 ILCS 5/12-1001. Allowing the lien in this case to stand necessarily impairs to some extent the exemption under § 1001 which exempts "personal property" that may be owned by a "debtor". The "debtor" under the Illinois statute in this case is the Debtor Bateman because she is a judgment debtor in the New York suit brought by Reddy.
Reddy points out that § 1001(f) refers to the "proceeds payable because of the death of the insured", whereas § 1001(h)(3) refers to "debtor's right to receive . . . a payment under a life insurance contract". Therefore, Reddy argues that the exemption under § 1001(f) is limited to where debtors own insurance policies or where they are the insured parties. See Reddy's Memorandum, at p. 2 (). Since Debtor in this case merely has the right to receive death benefits, and she is not the policy owner or the insured, Reddy maintains that § 1001(h)(3) must be the relevant provision.
When interpreting Illinois statutes, Matter of Barker, 768 F.2d 191, 194-95 (7th Cir.1985). Reddy's arguments fail because of the plain and unambiguous language of § 1001. Section 1001(f) simply does not say what Reddy argues. It exempts property "owned by the debtor" in two cases: first, dealing with insurance "proceeds payable to a "debtor" because of death of the insured", and second, where cash value in a debtor's own policy of insurance, or endowment, or annuity contract is owned by the debtor, but is payable to a family member "or other person dependent upon the insured" and creditors seek to attach that cash value before or after death of the insured.
The first clause of § 1001(f) is critical here. It exempts "all proceeds payable because of the death of the insured". § 1001(f). The insured here was Debtor's deceased husband. The second clause, concerning cash surrender values, does apply to a living insured, or policy or contract owner. Both clauses refer to policies "payable to a wife or husband of the insured, or to a child, parent, or other person dependent upon the insured. . . ." Id. However, the first clause of § 1001(f) controls here. That clause applies on its face to Debtor and cannot possibly apply to the deceased. (How, indeed, could any deceased "debtor" own proceeds of insurance due by reason of his or her death?)
However, § 1001(h)(3) could also be read to apply to Debtor here if she was dependent on the deceased. Reddy points to the canon of statutory construction that courts must "give effect to each provision of the statute and avoid construction of a statute in a manner that would render any portion of it meaningless or void". People v. Tarlton, 91 Ill.2d 1, 4, 61 Ill.Dec. 513, 514, 434 N.E.2d 1110, 1111 (1982). Since the wording of § 1001(f) appears to overlap partially with § 1001(h)(3), how are they to be read together?
First, there are situations where § 1001(h)(3) applies exclusively. One such case is where life insurance payments have been converted to another form of property. For example, in In re Jackson, 95 B.R. 590 (Bankr.C.D.Ill.1989), the debtor used life insurance proceeds as downpayment for a house, and then claimed an exemption in those proceeds under both § 1001(f) and § 1001(h)(3). The court held that the exemption could only be claimed under subsection (h)(3) because the proceeds were converted to another form of property. Id. at 592-93. Therefore, the reading of § 1001(f) in this Opinion, that recognizes an exemption for life insurance proceeds even when the "debtor" referred to in the statute is not the policy owner or the insured, does not render § 1001(h)(3) meaningless or void.
It must be conceded that the Illinois Legislature has not drafted §§ 1001(f) and 1001(h)(3) in a way in which distinction between application of these provisions comes immediately to the eye. However, these sections clearly encompass at least three different scenarios:
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