In re Davis, 01-01391.

• Decision Date: 28 February 2002
• Docket Number: No. 01-01391.,01-01391.
• Citation: 275 B.R. 134
• Parties: In re John William DAVIS, Debtor.
• Court: United States Bankruptcy Courts – District of Columbia Circuit

275 B.R. 134

In re John William DAVIS, Debtor.

No. 01-01391.

United States Bankruptcy Court, District of Columbia.

February 28, 2002.

COPYRIGHT MATERIAL OMITTED

ShaRon M. Kelsey, Kelsey & DeBerry, LLP, Largo, MD, for Debtor.

William D. White, Lepon, McCarthy, White & Holzworth, PLLC, Washington, DC, trustee.

DECISION RE TRUSTEE'S OBJECTION TO EXEMPTION

S. MARTIN TEEL, Jr., Bankruptcy Judge.

Under consideration is the Chapter 7 trustee's Objection to Exemption of Life Insurance Policy.¹ For the following reasons, the trustee's objection will be denied to the extent that the debtor seeks to exempt from the estate the proceeds of the life insurance policy (including its cash surrender value) so long as the beneficiary of the policy on the petition date was, and remains, a person other than the debtor, having an insurable interest in the life of the debtor.

I

The debtor has claimed as exempt the $14,500.00 cash surrender value of a life insurance policy on the debtor's own life and payable to his wife. The exemption apparently relied upon by the debtor is currently codified as D.C.Code Ann. § 31-4716(a) (2001),² which states, in relevant part:

"When a policy of insurance ... is effected by any person on his own life ... in favor of some person other than himself having an insurable interest therein ... the lawful beneficiary ..., other than the insured ..., shall be entitled to its proceeds and avails against the creditors ... of the insured ... whether or not the right to change the beneficiary is reserved or permitted and whether or not the policy is made payable to the ... insured, if the beneficiary ... shall predecease such person whose life is insured ...."

In interpreting D.C.Code Ann. § 31-4716(a) as exempting the cash surrender value of the life insurance policy at issue, the debtor contends that:

(i) the debtor effected the life insurance policy upon his own life;

(ii) the life insurance policy was effected in favor of some person other than the debtor — his wife;

(iii) the debtor's wife had an insurable interest in the life insurance policy upon being named as beneficiary thereof, citing Kindleberger v. Lincoln Nat'l Bank, 155 F.2d 281, 285 (D.C.Cir.1946), cert. denied, 329 U.S. 803, 67 S.Ct. 495, 91 L.Ed. 686 (1947); and

(iv) the proceeds and avails of the life insurance policy in which the wife received a vested interest upon being named as beneficiary include the cash surrender value to which she would be presently entitled.

II

It is established that where a debtor has taken out a life insurance policy on his own life that reserves to the debtor the ability to alter the beneficiary under the policy, the policy is property of the estate pursuant to 11 U.S.C. § 541(a)(1) to the extent of the cash surrender value of the policy on the date of filing of the petition. In re Herrell, 210 B.R. 386, 390 (Bankr.N.D.Fla.1997) (citing Cohen v. Samuels, 245 U.S. 50, 38 S.Ct. 36, 62 L.Ed. 143 (1917)).³ However, the estate's interest in a policy is subject to a debtor's right to claim the cash surrender value as exempt. Id. at 390. The debtor in this case has chosen to rely upon D.C.Code Ann. § 31-4716(a) to do so.

A.

While D.C.Code Ann. § 15-501 (2001) provides the state law exemptions most often relied upon by District of Columbia resident-debtors, D.C.Code Ann. § 31-4716(a) (or, as previously codified, D.C.Code Ann. § 35-716) provides an additional state law exemption which may be claimed pursuant to 11 U.S.C. § 522(b)(2). See Kindleberger, 155 F.2d at 287 (Prettyman, J. dissenting) ("`The courts have interpreted [D.C.Code Ann. § 35-716] to exempt from bankruptcy proceedings the cash surrender value of the policy.' ... Every reference we have is to the statute as an exemption statute for the protection of a living beneficiary against the creditors of the insured.") (quoting H.R.Rep. No. 1526, 73d Cong., 2d Sess. (1934) and S.Rep. No. 1420, 73d Cong., 2d Sess. (1934)).<sup>4</sup> This observation applies, however, only so long as the debtor has not designated himself as the beneficiary. See In re Messinger, 29 F.2d 158, 160 (2d Cir.1928), cert. denied, 279 U.S. 855, 49 S.Ct. 351, 73 L.Ed. 996 (1929) ("[Insurance Law of New York (Consol.Laws, c. 28) section 55a (a statute nearly identical to D.C.Code Ann. § 31-4716(a))] does not exempt the bankrupt if he exercises his reserved power to change the beneficiary for his personal advantage, and indeed precludes an exemption in such case by saying that the `beneficiary ... other than the insured' shall be entitled to the proceeds and avails.").

The requirements which must be satisfied for the debtor's claim of exemption under D.C.Code Ann. § 31-4716(a) to be effective to exempt the cash surrender value of the debtor's life insurance policy are:

• the insured must have effected a life insurance policy on his own life in favor of another;

• the beneficiary must have an insurable interest in the life of the debtor; and

• the property being claimed as exempt is a proceed or avail of the life insurance policy.

1. The debtor effected a life insurance policy on his own life in favor of his

wife.

The first requirement of D.C. Code Ann. § 31-4716(a) shall be deemed satisfied, unless the trustee elects to contest the debtor's factual representations.

2. The debtor's wife has an insurable interest in the life of the debtor.

The debtor cites Kindleberger to support his contention that his wife acquired a vested interest in the policy upon being named beneficiary. The difficulty with the debtor's proposition and his reliance upon Kindleberger is two-fold. First, the debtor misinterprets the "insurable interest" requirement of D.C.Code Ann. § 31-4716(a): the statute does not require that the beneficiary have an insurable interest in the policy itself; it requires that the beneficiary have an insurable interest in the life of the person insured by the policy. Second, The debtor in this case cannot rely upon Kindleberger as to this requirement of the statute because the Court of Appeals in Kindleberger relied upon D.C.Code Ann. § 30-213 to find that the beneficiary had a vested interest in the policy at issue, but D.C.Code Ann. § 30-213 was repealed in 1976.⁵

The debtor's misreading of D.C.Code Ann. § 31-4716(a) is understandable given the Court of Appeals' statement that:

[I]f the test of the statute's applicability be based on whether the deceased beneficiary had acquired a vested interest in the policy, it is immediately seen [by reason of D.C.Code Ann. § 30-213] that in the District of Columbia there can be no question as to whether a wife acquires a vested interest when she is named beneficiary.

Kindleberger, 155 F.2d at 285 (emphasis added). In so stating, the Court of Appeals was merely positing what the outcome would be if, but did not hold that, D.C.Code Ann. § 31-4716(a) applies only when the wife has acquired a vested interest.⁶ A holding that a vested interest was required would have ignored the distinction between a beneficiary having an insurable interest in the life of a person insured (what the statute requires) and having a "vested interest in the policy." What the statute actually requires is clear upon a close reading of D.C.Code Ann. § 31-4716(a), which states in relevant part:

When a policy of insurance, whether heretofore or hereafter issued, is effected by any person on his own life or on another life in favor of some person other than himself having an insurable interest therein ....

Clearly, the phrase "having an insurable interest therein" refers to the beneficiary having such an interest in the life of the person insured. The Court of Appeals' resort to D.C.Code Ann. § 30-213 mooted the necessity of deciding whether D.C.Code Ann. § 31-4716(a) applied only if the policy had vested in the beneficiary.

Even in the absence of D.C.Code Ann. § 30-213, the "insurable interest" requirement of D.C.Code Ann. § 31-4716(a) is satisfied here. The term "insurable interest" has a well established meaning under the common law that is different from the concept of a vested ownership of the policy itself, and of which Congress was presumably aware when it enacted the statutory predecessor of D.C.Code Ann. § 31-4716(a). Under the common law, spouses have an insurable interest in one another. See Hopkins v. Hopkins, 328 Md. 263, 614 A.2d 96, 98 (1992) ("At common law, an insurable interest connoted a relationship between the insured and the beneficiary such that, for the beneficiary, `there is an actual expectancy which will be curtailed by the insured's death.' Such relationships may be pecuniary or based on blood or affinity.") (quoting Robert E. Keeton & Alan I. Widiss, Insurance Law § 3.5(a), at 179 (1988)); Green v. Southwestern Voluntary Ass'n., 179 Va. 779, 20 S.E.2d 694, 696 (1942) ("[W]hen, from the personal relationship between them, the [insurer] has a reasonable right to expect some pecuniary advantage from the continuance of the life of the [insured], or to fear loss from his death, an insurable interest exists.") (citation omitted). The court in Hopkins continued, "[t]he direct and intimate ties existing between husband and wife are such that each reasonably has an expectancy of a familial benefit, if not an economic one, from the continued life of the other." Hopkins, 614 A.2d at 99 (citing Edwin W. Patterson, Essentials of Insurance Law § 38, at 172-74 (1957)). Accordingly, the second requirement of D.C.Code Ann. § 31-4716(a) is satisfied.

3. The cash surrender value of the debtor's life insurance policy is a proceed or avail of the policy.

The debtor also cites Kindleberger for the proposition that the cash surrender value of a life insurance policy is a proceed of the policy. The debtor quotes the dissent's observation, with which the majority did not disagree, that "[t]he courts have interpreted [D.C.Code Ann. § 35-716] to exempt from bankruptcy proceedings the cash-surrender value of a policy." Kindleberger, 155 F.2d at 287 ...