In re Jones

• Decision Date: 02 November 1917
• Citation: 249 F. 487
• Parties: In re JONES.
• Court: U.S. Court of Appeals — Fourth Circuit

249 F. 487

In re JONES.

United States District Court, D. Maryland.

November 2, 1917

Supplemental Opinion, November 14, 1917.

John F Oyeman, of Baltimore, Md., for bankrupt and wife.

Joseph T. England, of Baltimore, Md., for trustee.

ROSE District Judge.

The bankrupt's life was insured. The insurance was payable to his wife, but he had the right at any time, and without her consent, to substitute any other beneficiary in her place. At the time of the filing of the petition in bankruptcy the policy had a cash surrender value of $1,725.85. The bankrupt had possession of it. The trustee says he is entitled to it or to its surrender value. The bankrupt and his wife say that he is not. Some states do not suffer creditors to take any life insurance. In them the trustee has no claim upon any life policy. Holden v. Stratton, 198 U.S. 202, 25 Sup.Ct. 656, 49 L.Ed. 1018. When this is not so, or when it is not clearly so, there has been much difference of opinion as to whether such policies, as that now in dispute, pass or do not pass to the trustee. The answer has in most cases turned upon the construction given to the varying phraseology of the applicable state statutes exempting some, but not all, life insurance policies from the demands of creditors.

It has been held that under the laws of New Hampshire (In re Whelpley [D.C.] 169 F. 1019), Ohio (Matter of Fetterman, 243 F. 975), Kentucky (Matter of Pfaffinger [D.C.] 164 F. 526), Wisconsin (Allen v Central Wisconsin Trust Co., 143 Wis. 381, 127 N.W. 1003, 139 Am.St.Rep. 1107, 25 Am.Bankr.Rep. 126), Minnesota (In re Johnson [D.C.] 176 F. 591), and Missouri (In re Orear, 189 F. 888, 111 C.C.A. 150), such policies do not pass to the trustee; but, on the other hand, the state exemption laws do not prevent their passing in New York (In re Wolff [D.C.] 165 F. 984; In re White, 174 F. 333, 98 C.C.A. 205, 26 L.R.A. [N.S.] 451; In re Hettling, 175 F. 65, 99 C.C.A. 87; In re Draper [D.C.] 211 F. 230), Pennsylvania (In re Herr [D.C.] 182 F. 716; In re Dolan [D.C.] 182 F. 949; In re Jamison [D.C.] 222 F. 92; In re Shoemaker [D.C.] 225 F. 329; In re Flanigan [D.C.] 228 F. 339), Georgia (Malone v. Cohn, 236 F. 882, 150 C.C.A. 144), Louisiana (In re Bonvillain [D.C.] 232 F. 370), and Tennessee (In re Moore [D.C.] 173 F. 679).

It would scarcely be accurate to say that the varying conclusions to which courts and judges have come have been always due to the difference of the wording of the state enactments. It is not unlikely that some of the judges, who held that particular statutes protected the policy altogether, would have reached the same conclusion, had they been dealing with some of the laws which other judges decided did not prevent the policy from passing to the trustee. To attempt a detailed analysis of these decisions would therefore be little worth while.

The bankrupt and his wife say that the petition of the trustee should be denied, and that for two reasons: (1) Under the proviso of paragraph 5 of section 70, a policy of this sort does not pass to the trustee. (2) By the law of Maryland such policies are exempt from the demands of creditors, and under section 6 of the Bankruptcy Act are not affected by bankruptcy. If not exempt by the state law, is this such a policy as will pass to the trustee? In other words, is it a policy which, on the day of the filing of the petition in bankruptcy, had a cash surrender value payable to the bankrupt, his estate, or his personal representatives? If it is not, the trustee has no claim upon it. Burlingham v. Crouse, 228 U.S. 459, 33 Sup.Ct. 564, 57 L.Ed. 920, 46 L.R.A. (N.S.) 148; Everett v. Judson, 228 U.S. 474, 33 Sup.Ct. 568, 57 L.Ed. 927, 46 L.R.A. (N.S.) 154; Andrews v. Partridge, 228 U.S. 479, 33 Sup.Ct. 570, 57 L.Ed. 929.

The trustee says that on that day, or any other day, the bankrupt could have named himself as the beneficiary and thereby have made the cash surrender value payable to himself. The trustee argues that to make determinative the circumstance that such designation would have to be made is to give greater weight to form or to ritual than to substance. He contends that to compel the bankrupt to change the beneficiary would not take from the wife any right which, in the eye of the law, is of any value. He cites to that effect the opinion of the Circuit Court of Appeals for the Sixth Circuit in Mutual Benefit Life Insurance Co. v. Swett, 222 F. 200, 137 C.C.A. 640, Ann.Cas. 1917B, 298, and the text-writers and adjudged cases therein referred to, all of which concur in holding that the original beneficiary has no vested interest in such a policy as that now before the court, or in its proceeds, and that until after the death of the insured she has nothing more than a mere expectancy in it. He asserts that the question has been before three Circuit Courts of Appeal, and that in two of them, the Fifth and Sixth, by a unanimous bench, it has been answered as he says it should be (Malone v. Cohn, 236 F. 882, 150 C.C.A. 144; Mutual Benefit Life Ins. Co. v. Swett, supra), and that only in the Second (In re Samuels, 237 F. 796, 151 C.C.A. 38) and there over the strong dissent of Judge Hough, has the contrary reply been given.

He accurately quotes the authorities. His argument is a strong one. No reply can be made to it, if it be assumed that, because the bankrupt can change the beneficiary, he usually will. To say that what the bankrupt for his pleasure would probably do to-morrow he could not be compelled for his creditors to do to-day would be in truth sticking in the bark; but, if we are to go to the very heart of the problem, is the case quite so clear? In point of fact, are not almost all of such policies taken out for the benefit of the wife, and does she not receive their proceeds in the overwhelming majority of cases in which she survives her husband? Must not the courts take judicial notice that under the present practice of many, probably of most, insurance companies, their ordinary form of policy reserves to the insured the right to change its beneficiary? This form they tender to an applicant for insurance, unless he asks for something else. He in most cases accepts it without a thought that he is not thereby making provision for his wife or his children. Is it quite worth while to shut one's eyes to facts like these, because it is legally possible on any day for the insured husband to take from his wife any chance of ever getting anything under his policy? The Circuit Court of Appeals for the Second Circuit (In re Hammel, 221 F. 56, 137 C.C.A. 80) thought not.

There has been no moment, since the issuance of the policy which the trustee now seeks, at which it had a surrender value payable to the bankrupt. It is true that, since it had a surrender value at all, there never has been a day upon which the bankrupt could not have had it made payable to himself but it is equally sure that there is no evidence that there ever was an hour when he wished to do so, nor is there any reason to believe he ever did. The trustee asks that weight be given to substance rather than to form; but if it be given to the substance of things as in real life they are, and not to what in legal theory they may be, will he gain aught? The doctrine approved in the Second Circuit will sometimes enable the bankrupt to apply to his own use the cash surrender value of policies for which his creditors' money has in fact paid. Such instances will be comparatively rare. The rule prevailing in the Fifth and Sixth Circuits will work hardship in...