In re Clemmer

• Decision Date: 02 August 1995
• Docket Number: Bankruptcy No. 94-33182.
• Parties: In re Dennis R. CLEMMER, Sr., Debtor.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Eastern District of Tennessee

184 B.R. 935 (1995)

In re Dennis R. CLEMMER, Sr., Debtor.

Bankruptcy No. 94-33182.

United States Bankruptcy Court, E.D. Tennessee.

August 2, 1995.

Frantz, McConnell & Seymour, Michael W. Ewell, Knoxville, TN, for William T. Hendon, Trustee.

John P. Newton, Jr., Knoxville, TN, for debtor.

MEMORANDUM ON TRUSTEE'S OBJECTION TO EXEMPTIONS

RICHARD S. STAIR, Jr., Chief Judge.

The debtor commenced this Chapter 7 case on December 28, 1994. The Trustee, William T. Hendon, timely filed an Objection to Exemptions (Objection) on February 2, 1995, which was amended April 19, 1995, asserting that two annuity contracts and three life insurance policies claimed as exempt by the debtor are not "qualified" properties under Tennessee law.¹ Alternatively, the Trustee argues that the debtor's exemptions in the annuity contracts and life insurance policies should be deemed forfeited or waived because he "failed to adequately, accurately and fully disclose the existence of these assets."

A hearing on the Trustee's Objection was held on July 7, 1995, to determine the following issues set forth in the Pretrial Order entered June 21, 1995: (1) whether the funds in the two annuity contracts and the cash surrender values of the three life insurance policies claimed as exempt by the debtor are, in fact, exemptible under Tennessee law; (2) whether the debtor failed to adequately, accurately, and fully disclose all assets now claimed as exempt; and (3) whether the debtor's alleged failure to disclose the assets results in a forfeiture or waiver of the right to claim them as exempt.

The record before the court consists of undisputed facts and documents stipulated by the parties through written Joint Stipulations filed June 29, 1995, and evidence introduced at the July 7, 1995 hearing on the Trustee's Objection.

This is a core proceeding. 28 U.S.C.A. § 157(b)(2)(B) (West 1993).

I

Prior to the commencement of this bankruptcy case, Alside Supply Center of Knoxville (Alside) obtained a judgment against the debtor in state court. Thereafter, Alside took two postjudgment discovery depositions of the debtor, one on January 21, 1992, and the other on April 29, 1993, during which the debtor failed to disclose the existence of his two annuity contracts and three life insurance policies with Metropolitan Life Insurance Company (MetLife). Alside ultimately learned of the existence of at least the two annuity contracts, and, as stipulated by the parties, caused a "garnishment or execution" to be issued against MetLife.²

The debtor filed his bankruptcy petition on December 28, 1994, and the next day, December 29, 1994, MetLife forwarded $83,455.24 to the Clerk and Master of the Knox County Chancery Court.³ The parties have stipulated, solely for the purpose of determining the exemption issues presently before the court, that the $83,455.24 came from the debtor's two annuity contracts, specifically $58,568.89 came from Annuity Contract No. XXXXXXXXXMA and $24,886.35 from Annuity Contract No. XXXXXXXXXMA. The parties have further stipulated that on or about January 25, 1995, the money held by the chancery court was turned over to the Trustee, and MetLife, pursuant to the terms of the annuity contracts and insurance policies, is presently holding the funds remaining in the two contracts and the cash surrender values of the three policies.

The debtor filed his schedules and Statement of Financial Affairs on January 12, 1995. On Schedule B, entitled "Personal Property," the debtor reported an $84,000 interest in MetLife "IRA, ERISA, Keogh, or other pension or profit sharing plans." On Schedule C, entitled "Property Claimed as Exempt," the debtor claimed an $84,000 exemption in his "Interest in Metropolitan Life" pursuant to Tenn.Code Ann. § 26-2-104(b) (Supp.1994). The parties have stipulated that the debtor did not list his three life insurance policies on his January 12, 1995 schedules.

On April 17, 1995, the debtor filed an Amendment to Schedules B & C to adjust his exemption of his MetLife policies to claim the two annuity contracts as exempt pursuant to Tenn.Code Ann. § 26-2-104(b), § 26-2-111(1)(D) (Supp.1994), and § 56-7-203 (1994), and to include as personal property his three life insurance policies and claim them as exempt pursuant to Tenn.Code Ann. § 26-2-102 (1980), § 26-2-111(1)(D), and § 56-7-203.⁴ The debtor's Amendment assigns the following values to the contracts and policies:

1. Annuity Contract No. XXXXXXXXXMA — $41,185.27⁵

2. Annuity Contract No. XXXXXXXXXMA — $97,456.73

3. Insurance Policy No. XXXXXXXXXA — $4,168.20

4. Insurance Policy No. XXXXXXXXXA — $4,376.18

5. Insurance Policy No. XXXXXXXXXUL — $5,771.69

The Trustee's Objection concerns the debtor's exemption of these five properties, which are more fully described as follows:

1. Annuity Contract No. XXXXXXXXXMA was purchased by the debtor on December 29, 1982, and Annuity Contract No. XXXXXXXXXMA was purchased by the debtor on February 4, 1984. Under both contracts, the debtor is the owner and annuitant, and Dennis Clemmer, Jr., the debtor's son, is named as the beneficiary in the event the debtor dies prior to distribution under the contracts.

2. Life Insurance Policy No. XXXXXXXXXA was issued on December 28, 1975, and Life Insurance Policy No. XXXXXXXXXA was issued on October 2, 1978. Both policies insure the life of Dennis Clemmer, Jr., and the debtor is the owner and beneficiary.

3. Life Insurance Policy No. XXXXXXXXXUL was issued on March 24, 1990. The policy is owned by the debtor and insures the debtor's life. The beneficiaries are Sarah Clemmer, the debtor's mother, and Dennis Clemmer, Jr.

Dennis Clemmer, Jr. is an adult, who was born on September 1, 1974. Sarah Clemmer and Dennis Clemmer, Jr. were not financially dependent on the debtor at the time he commenced his Chapter 7 case nor have they been financially dependent on the debtor since the filing of the debtor's bankruptcy petition.

II

In the Joint Stipulations, the debtor waived his right to rely on Tenn.Code Ann. §§ 26-2-104(b) and 26-2-111(1)(D); however, the debtor continues to rely on Tenn.Code Ann. § 56-7-203, which provides:

The net amount payable under any policy of life insurance or under any annuity contract upon the life of any person made for the benefit of, or assigned to, the spouse and/or children, or dependent relatives of such persons, shall be exempt from all claims of the creditors of such person arising out of or based upon any obligation created after January 1, 1932, whether or not the right to change the named beneficiary is reserved by or permitted to such person.

Tenn.Code Ann. § 56-7-203 (1994). This section allows for the exemption of funds in annuity contracts and the cash surrender values of policies rather than only the death proceeds payable under the contracts and policies. See Newport v. Thurman (In re Thurman), 127 B.R. 401, 403-06 (M.D.Tenn. 1991) (discussing the historical basis of the present-day interpretation of section 56-7-203 and concluding that "the language of § 203 demonstrates that it was designed to apply in cases only where the policy holder is still alive"); Lunsford v. Nashville Sav. & Loan Corp., 162 Tenn. 179, 35 S.W.2d 395 (1931).

The Trustee contends that the debtor's annuity contracts and life insurance policies are not exemptible under section 56-7-203 because they are not "upon the life of any person made for the benefit of, or assigned to, the spouse and/or children, or dependent relatives of the debtor." § 56-7-203. The debtor conceded at trial that Life Insurance Policy No. XXXXXXXXXA and No. XXXXXXXXXA are not exemptible under section 56-7-203 because the policies name the debtor as the beneficiary, but claims that $3,000 of Policy No. XXXXXXXXXA is exempt pursuant to Tenn. Code Ann. § 26-2-102. The Trustee's Objection will therefore be sustained with respect to the full cash surrender value of Policy No. XXXXXXXXXA, and the cash surrender value of Policy No. XXXXXXXXXA to the extent it exceeds $3,000.

The debtor contends that the two annuity contracts, which name his son as the death beneficiary, and the one insurance policy, No. XXXXXXXXXUL, which names his son and mother as "joint"⁶ beneficiaries, are properly exempted under section 56-7-203. In interpreting section 56-7-203, the use of the phrase "and/or" evidences "a clear option of selection of members of a class of beneficiaries"; therefore, insurance or annuity proceeds "payable to or bequeathed to any one or more of the beneficiaries named in the statute are exempt from the claims of creditors." In re Estate of Bruce, 58 Tenn.App. 435, 430 S.W.2d 884, 887-88 (interpreting Tenn.Code Ann. § 56-1110, which was recodified in materially identical form as section 56-7-203), cert. denied (Tenn.1968).

The Trustee argues, in support of his contention that the beneficiaries named in the three annuity contracts and one insurance policy are not included under section 56-7-203, that the court should limit the statute's application to dependent children. The statutory language of section 56-7-203 and the interpreting Tennessee case law do not support the Trustee's argument. The Tennessee Legislature could easily have prefaced the term "children" with the word "dependent," but it chose not to do so. Moreover, if this court imposed a dependency requirement on the term "children," as used in section 56-7-203, the same requirement would most certainly apply to spouses, which is contrary to Tennessee case law. See Overman v. Overman, 570 S.W.2d 857, 859 (Tenn.1978) (failing to discuss whether the wife was financially dependent on her husband before finding that the annuity contracts, to which she was the "primary beneficiary," were exempt). Therefore, the court finds that the statutory language only allows for one interpretation: the term "children" includes minor or adult, financially dependent or nondependent children of the debtor. See Stewart Title Guar. Co. v. McReynolds, 886 S.W.2d...