In re CRS Steam, Inc.

• Decision Date: 11 February 1998
• Docket Number: 97-44297-JFQ.,Bankruptcy No. 97-44296-JFQ
• Citation: 217 BR 365
• Parties: In re CRS STEAM, INC., Debtor. In re Thomas F. LeBLANC, Debtor.
• Court: U.S. Bankruptcy Court — District of Massachusetts

217 B.R. 365 (1998)

In re CRS STEAM, INC., Debtor.

In re Thomas F. LeBLANC, Debtor.

Bankruptcy Nos. 97-44296-JFQ, 97-44297-JFQ.

United States Bankruptcy Court, D. Massachusetts.

February 11, 1998.

COPYRIGHT MATERIAL OMITTED

Kevin C. McGee, Sider & Chandler, Worcester, MA, for Debtor.

OPINION

JAMES F. QUEENAN, Jr., Bankruptcy Judge.

A creditor, Engineering Resources, Inc. ("ERI"), objects to various property exemptions claimed by Thomas F. LeBlanc (the "Debtor"), who has elected to take exemptions available under Massachusetts law. At issue is the validity of exemptions claimed in a $38,000.00 whole life insurance policy and an individual retirement account having a balance of $92,059.00. Also in dispute is whether the bankruptcy estate includes the Debtor's simplified employee pension valued at $44,756.00 and, if it does, whether that too is exempt under Massachusetts law. The case presents significant questions of interpretation of Massachusetts exemption statutes. Set forth here are the court's findings and conclusions after a nonevidentiary hearing.

I. CLAIMED EXEMPTION IN INSURANCE POLICY

At the filing the Debtor owned a whole life insurance policy issued by Prudential Life Insurance Company of America, Policy No. 77-841-766. The schedules do not disclose the policy's cash surrender value or its death beneficiaries. Counsel inform the court that the policy is payable at death to an intervivos trust whose beneficiaries are the Debtor's children, if any survive him, otherwise his nieces and nephews. The Debtor is at present unmarried and without children, but with nieces and nephews.

The Debtor contends the policy is exempt pursuant to section 125 of chapter 175 of the Massachusetts General Laws, which provides as follows:

If a policy of life or endowment insurance is effected by any person on his own life or another life, in favor of a person other than himself having an insurable interest therein, the lawful beneficiary thereof, other than himself or his legal representatives, shall be entitled to its proceeds against the creditors and representatives of the person effecting the same, whether or not the right to change the named beneficiary is reserved by or permitted to such person; provided, that, subject to the statute of limitations, the amount of any premiums for said insurance paid in fraud of creditors, with interest thereon, shall enure to their benefit from the proceeds of the policy; but the company issuing the policy shall be discharged of all liability thereon by payment of its proceeds in accordance with its terms, unless before such payment the company shall have written notice, by or on behalf of a creditor, of a claim to recover for certain premiums paid in fraud of creditors, with specification of the amount claimed. No court, and no trustee or assignee for the benefit of creditors, shall elect for the person effecting such insurance to exercise such right to change the named beneficiary.

Any person to whom a policy of life or endowment insurance, issued subsequent to April eleventh, eighteen hundred and ninety-four, is made payable may maintain an action thereon in his own name.

Mass. Ann. Laws ch. 175, § 125 (Law. Co-op. 1987).

The statute protects the "lawful beneficiary" from claims of the insured's creditors to the policy's "proceeds". The "proceeds" of a life insurance policy consist of the sum payable at the insured's death. See Mass. Ann. Laws ch. 175, § 119B ("proceeds" at death of insured include unsecured premiums paid), § 119C ("proceeds" at death of insured include interest in certain cases), § 132 (separately regulating policy provisions concerning "loan values," "cash surrender values" and "proceeds"). The statute's penultimate sentence affords a measure of express protection to the insured during his lifetime by prohibiting the trustee in his bankruptcy proceeding from changing the beneficiary designation. But here again the statute focuses on the rights of the beneficiary in the proceeds payable at the insured's death.

Unlike, for example, the insurance exemption available under section 522(d)(8) of the Bankruptcy Code, section 125 makes no reference to the policy's "accrued dividend or interest" or "loan value." See 11 U.S.C. § 522(d)(8) (1994). Nor, as do some state statutes, does section 125 exempt the policy's "proceeds and avails." See Holden v. Stratton, 198 U.S. 202, 25 S.Ct. 656, 49 L.Ed. 1018 (1905) (exemption for "proceeds and avails" exempts cash surrender value). See also In re Weick, 2 F.2d 647 (6th Cir.1924) (exemption for "policies of life insurance" exempts cash surrender value); In re Griese, 172 B.R. 336 (Bankr.D.Colo.1994) (exemption for "avails of policies" exempts cash surrender value); In re Buffinton, 100 B.R. 448 (Bankr. N.D.Iowa 1987) (exemption for "unmatured life insurance policy" exempts cash surrender value). The exemption given by section 125 for "proceeds" appears to be equivalent to the exemption granted in the Bankruptcy Code for an "unmatured life insurance contract. . . ." See 11 U.S.C. § 522(d)(7) (1994).

Thus section 125 is open to the interpretation that it applies only after the death of the insured and does not permit the insured to protect the policy's cash surrender value from his creditors during his lifetime. Indeed, a similarly worded New Hampshire statute has been so construed, even though the New Hampshire statute refers to "proceeds and all other benefits." See In re Monahan, 171 B.R. 710, 717-19 (Bankr. D.N.H.1994).

The difficulty with so interpreting section 125 is that the Supreme Judicial Court of Massachusetts has adopted a contrary construction. In Rosenberg v. Robbins, 289 Mass. 402, 194 N.E. 291 (1935), the holder of a promissory note sought to reach and apply, in payment of the note, the cash surrender value of insurance policies owned by the note's makers and payable at death to their wives or children. Section 125 had been amended in 1928 to add its present penultimate sentence. The plaintiff apparently conceded that this amendment would bar her from reaching the cash surrender value if her debt arose after the date of the amendment's adoption. She argued only that the obligation represented by her note, which was dated February 28, 1929, came into existence in 1927 and thus was constitutionally immune from the amendment's application. The court ruled against her on this question on the ground that the note replaced the prior obligation. It therefore held she could not reach the cash surrender value of the policies. The court was rather laconic in its comments on the statute, stating:

The plaintiff does not contend that she can reach and apply to the payment of her note the cash surrender value of the policies if the changes in G.L. c. 175, §§ 125, 126, effected by St.1928, c. 176, are applicable to her claim. See Dussoulas v. Lang, 24 Fed. Rep. (2d) 254; certiorari denied 277 U.S. 593, affirming In re Lang, 20 Fed. Rep. (2d) 236. In re Messinger, 29 Fed. Rep. (2d) 158; certiorari denied sub nomine Reilly v. Messinger, 279 U.S. 855; Hickman v. Hanover, 33 Fed. Rep. (2d) 873.

Rosenberg, 289 Mass. at 408, 194 N.E. at 293.

A reading of the decisions cited with approval in Rosenberg gives some explanation of the court's holding. In re Messinger, for example, was a bankruptcy case involving a New York exemption statute containing much of the language of section 125. It protected the rights of the "lawful beneficiary" in the policy's "proceeds and avails." The statute lacked section 125's penultimate sentence. The court, through Augustus N. Hand, recognized that the statute spoke only of the rights of the policy's beneficiary and did not "in terms grant an exemption to the . . . policy in the hands of the bankrupt. . . ." 29 F.2d at 160. But the court concluded, without reliance upon the statutory term "avails", that the debtor could nevertheless exempt the policy from creditors whose claims arose after the statute's effective date because giving such creditors rights in the policy "would deprive the beneficiaries of their interest." Id. The court did not explain how payment of the cash surrender value to the trustee in bankruptcy, without policy cancellation or change of ownership, would prejudice a beneficiary's right to receive the proceeds at the debtor's death if the debtor continued to pay the premiums.¹ In any event, the reasoning of Messinger and the Massachusetts court in reliance on it is immaterial. My job is to apply Massachusetts law. The holding of Rosenberg is conclusive on the present question. See also In re Beach, 8 F.Supp. 910 (D.Mass.1934) (approving debtor's bankruptcy exemption of cash surrender value of policy under section 125 and relying upon Messinger).

Because section 125 refers to a policy "effected" by an insured in favor of a member of a specified class of beneficiaries, the Supreme Judicial Court of Massachusetts construes the statute to apply only if the beneficiary remains unchanged since the policy was first issued. See McCarthy v. Griffin, 299 Mass. 309, 311, 12 N.E.2d 836, 837 (1938); Bailey v. Wood, 202 Mass. 562, 574, 89 N.E. 149, (1909). There is no indication that the beneficiary of the Debtor's policy has changed since its issuance.

There is nevertheless an obstacle which the Debtor fails to overcome. Section 125 grants exemption rights only for a policy taken out by a person "in favor of a person other than himself having an insurable interest therein. . . ." Mass. Ann. Laws ch. 175, § 125 (Law. Co-op. 1987). The present policy, through a trust, is "in favor" of the Debtor's children and, if no children survive him, in favor of the Debtor's nieces and nephews. The Debtor presently has no children. So his nieces and nephews would receive beneficial interests in the proceeds if he died now. The policy is therefore at present "in favor" of the nieces and nephews. By the weight of authority, a niece or nephew does not ordinarily have an insurable interest in...