In re Fahey

• Decision Date: 21 September 2006
• Docket Number: No. 05-38723 EEB.,05-38723 EEB.
• Citation: 352 B.R. 288
• Parties: In re Weldon Thomas FAHEY and Loretta Ann Fahey (Deceased), Debtors.
• Court: U.S. Bankruptcy Court — District of Colorado

352 B.R. 288

In re Weldon Thomas FAHEY and Loretta Ann Fahey (Deceased), Debtors.

No. 05-38723 EEB.

United States Bankruptcy Court, D. Colorado.

September 21, 2006.

Ellen R. Welner, Englewood, CO, for Debtor.

Harvey Sender, Denver, CO, for trustee.

ORDER ON OBJECTION TO CLAM OF EXEMPTION

ELIZABETH E. BROWN, Bankruptcy Judge.

THIS MATTER comes before the Court on the Objection to Debtor's Claim of Exemption ("Objection"), filed by Harvey Sender, Chapter 7 trustee (the "Trustee"), and the Debtor's Response. The parties have elected to submit this matter to the Court based on briefs, rather than requesting an evidentiary hearing. The Objection presents a question of first impression for this Court: is a named beneficiary of a group life insurance policy entitled to exempt the policy proceeds under Colo. Rev.Stat. § 10-7-205? The Trustee argues that the literal language of the statute only exempts proceeds "paid to an employee," as opposed to a beneficiary. His interpretation would mean that group life insurance proceeds paid on the death of an employee would never be exempt because the insurer would not be able to pay the proceeds directly to the deceased employee. The Debtor argues that the statute is ambiguous and must be interpreted to apply to him as a beneficiary. Having reviewed the filings and being otherwise advised in the premises, the Court hereby FINDS and CONCLUDES:

BACKGROUND

The relevant facts are neither complex nor disputed. Weldon Thomas Fahey ("Debtor") and Loretta Ann Fahey ("Mrs.Fahey") filed their joint Chapter 7 petition on October 4, 2005. Mrs. Fahey died the next day. At the time of her death, Mrs. Fahey was covered by a group life insurance policy. She had named the Debtor as the beneficiary of that policy. On November 21, 2005, in an amendment to Schedules B and C, the Debtor claimed an exemption in the policy proceeds he received — which totaled $25,000 — pursuant to Colo.Rev.Stat. § 10-7-205.

DISCUSSION

The Debtor has claimed the insurance policy proceeds as exempt under Colo.Rev. Stat. Ann. § 10-7-205, which provides:

No policy of group insurance, nor the proceeds thereof, when paid to any employee thereunder, shall be liable to attachment, garnishment, or other process, or be seized, taken, appropriated, or applied by any legal or equitable process or operation of law, to pay any debt or liability of such employee, or his beneficiary, or any other person who may have a right thereunder, either before or after payment, nor shall the proceeds thereof, where not made payable to a named beneficiary, constitute a part of the estate of the employee for the payment of his debts.

Colo.Rev.Stat. Ann. § 10-7-205. Although the statute has been on the books since 1919, it appears that no court has ever interpreted it in a published opinion.

State statutes are interpreted according to state rules of statutory construction. See Citizens for Responsible Gov't State Political Action Comim. v. Davidson, 236 F.3d 1174, 1190 (10th Cir. 2000). Colorado rules of statutory construction provide as follows:

"Our primary task in construing a statute is to give effect to the intent of the General Assembly.... To discern that intent, a court should look first to the plain language of the statute." Farmers Group, Inc. v. Williams, 805 P.2d 419, 422 (Colo.1991). When we determine that statutory language is ambiguous, we may look to rules of statutory construction and to the legislative history as indications of the legislature's intent. Rodriguez v. Schutt, 914 P.2d 921, 925 (Colo.1996). We give effect both to the spirit and to the intent of the legislators in enacting the statute. Hall v. Walter, 969 P.2d 224, 229 (Colo.1998). "Although we must give effect to the statute's plain and ordinary meaning, the General Assembly's intent and purpose must prevail over a literalist interpretation that leads to an absurd result." Lagae v. Lackner, 996 P.2d 1281, 1284 (Colo.2000).

Grant v. People, 48 P.3d 543, 546-47 (Colo. 2002).

The Trustee argues that the phrase "when paid to any employee thereunder" requires no interpretation, as its plain language limits the availability of the exemption to group insurance policies that are paid to an insured employee. But, the statute applies to group life insurance policies. Construing the phrase as applying to a deceased employee would require the employee to receive policy proceeds upon or after his death, which would be impossible. Construing the phrase as applying to a deceased employee's personal representative or estate would create an internal inconsistency within the statute, as the statute later provides that the policy proceeds are not to constitute part of the employee's estate. The statutory language is therefore ambiguous. See In re Heins, 83 B.R. 534 (Bankr.S.D.Ohio 1988) (construing almost identical statutory provision, finding it ambiguous); In re Fick, 249 B.R. 108 (Bankr.W.D.N.C.2000) (same). In order to ascertain the General Assembly's intent, the Court considers the following: (a) the statute's legislative history; (b) interpretation of other states' identical or similar exemption statutes; and (c) the consequences of different possible constructions of the statutory language.

A. Legislative History

By the early 1903's, labor unions had established mutual benefit societies in order to provide their members' families with death benefits. In response, large employers sought to obtain group life insurance policies that provided coverage for their employees. Insurance companies that attempted to meet this need were hampered by various state laws or regulations that prevented issuing insurance without a medical examination or prevented issuing insurance for a group at a lower premium rate than that charged for individual term insurance.¹

In 1917, the National Convention of Insurance Commissioners ("NCIC") formed a committee to study the matter and to establish uniform standards for group life insurance. At the 1918 NCIC Session, held in Denver, the committee presented its report, which was adopted without any remarks. The committee report set forth proposed standard statutory language defining group life insurance and requiring policies to contain certain provisions. The report also included proposed statutory language that was intended to exempt the proceeds of group life insurance policies. The proposed exemption included the phrase "when paid to any employee or employees thereunder." See Proceedings of the 49th Session (Nat'l Convention of Ins. Comm'rs), Sept. 10-13, 1918, at 29.

Seven months after the NCIC Session, the Colorado General Assembly enacted House Bill 438, which contained the standard statutory language recommended at the Session. Colorado's exemption provision contained the phrase "when paid to any employee thereunder," almost identical to the language recommended by the NCIC. See 1919 Colo. Sess. Laws, ch. 135, at 444. Many other states adopted the NCIC's recommended language, and employer-provided group life insurance became quite popular. See Sterling Pierson, The Legislatures Expand the Group Insurance Field, 15 A.B.A. J. 407, 409-10 (1929).

Interpretation of Other States' Exemption Statues

Colorado's group life insurance exemption statute was taken from the NCIC's model law. When a statute is patterned on a model law, a court may interpret the statute by looking to other states' interpretations of the model statute. Szaloczi v. John R. Behrmann Revocable Trust, 90 P.3d 835, 838-39 (Colo.2004); Pueblo Bancorporation v. Lindoe, Inc., 63 P.3d 353, 368 (Colo.2003). Before comparing interpretations of other state statutes, the Court first turns to the language used in other states.²

1. Language Used in Other States' Exemption Statutes

Some states, such as Colorado, adopted language in their exemption statutes identical to that proposed by the NCIC, including the phrase "when paid to any employee [or employees] thereunder" ("Same Language"). Currently, five states have group life insurance exemption statutes with the Same Language. See Colo.Rev.Stat. Ann. § 10-7-205; D.C.Code § 31-4717; Ind. Code § 27-1-12-29; N.C. Gen.Stat. § 58-58-165; Ohio Rev.Code Ann. § 3917.05.

Other states, such as Massachusetts, adopted exemption language based on, but different from, that proposed by the NCIC, containing phrases such as "when paid to any employee or employees thereunder, or to their beneficiaries" ("Similar Language"). See 1918 Mass. Acts ch. 112, § 4. Currently, twenty states have group life insurance exemption statutes with Similar Language. See Ariz.Rev.Stat. Ann. § 20-1132; Ark.Code Ann. § 23-79-132; Del.Code Ann. tit. 18, § 2727; Haw.Rev. Stat. § 431:10-233; Idaho Code Ann. § 41-1835; Ky.Rev.Stat. Ann. § 304.14-320; La.Rev.Stat. Ann. § 22:649; Mass. Gen. Laws ch. 175, § 135; Me.Rev.Stat. Ann. tit. 24-A, § 2430; Mont.Code Ann. § 33-15-512; Nev.Rev.Stat. § 687B.280; N.J. Stat. Ann. § 17B:24-9; Okla. Stat. Ann. tit. 36, § 3632; P.R. Laws Ann. tit. 26, § 1134; Vt. Stat. Ann. tit. 8, § 3708; V.I.Code Ann. tit. 22, § 839; Va.Code Ann. § 38.2-3339; Wash. Rev.Code § 48.18.420; W.Va.Code Ann. § 33-6-28; Wyo. Stat. Ann. § 26-15-131.

For completeness' sake, the Court notes that five states currently provide a beneficiary a broad exemption for proceeds of all life insurance. Md.Code Ann., Cts. & Jud. Proc. § 11-504(b)(2); N.M. Stat. § 42-10-3; 42 Pa. Cons.Stat. Ann. § 8124(c)(5); Tx. Ins.Code Ann. § 1108.051; Kan. Stat. Ann. § 40-414(a)(4). Thirteen states currently provide that proceeds of all life insurance are exempt from the claims of a beneficiary's creditors in certain situations, such as when the beneficiary was the spouse of the deceased insured. See Alaska Stat. § 09.38.030(e)(4); Cal Civ. Proc.Code § 704.100(c); Ga.Code Ann. § 44-13 — 100(a)(11)(C); 735 Ill. Comp. Stat. 5/12-1001(f); Iowa Code. Ann. § 627.6(6); Minn. Stat § 550.37(10); Neb.Rev.Stat. § 44-371; N.Y. Ins. Law § 3212(b)(2); N.D. Cent.Code § 28-22-03.1; S.C.Code...