In Re Kishorchandra Jekisandas Patel

• Decision Date: 11 June 2010
• Docket Number: C/A No. 09-09601-JW.
• Citation: 431 B.R. 682
• Court: U.S. Bankruptcy Court — District of South Carolina
• Parties: In re Kishorchandra Jekisandas PATEL, Debtor(s).

431 B.R. 682

In re Kishorchandra Jekisandas PATEL, Debtor(s).

C/A No. 09-09601-JW.

United States Bankruptcy Court,

D. South Carolina.

June 11, 2010.

COPYRIGHT MATERIAL OMITTED

Russell A. DeMott, Wyckoff and DeMott, PC, Summerville, SC, for Debtor.

Michelle L. Vieira, Myrtle Beach, SC, for Trustee.

JUDGMENT

JOHN E. WAITES, Chief Judge.

Based on the findings of fact and conclusions of law set forth in the attached order of the Court, the Trustee's Objection to Exemption is overruled and Debtor's claim for an exemption under § 36-63-40(A) for the entire cash surrender value of the John Hancock life insurance policy is allowed.

ORDER OVERRULING CHAPTER 7 TRUSTEE'S OBJECTIONS TO EXEMPTION

This matter comes before the Court on the Chapter 7 Trustee's Objections to Exemption (collectively, “Objection”). Kishorchandra Jekisandas Patel (“Debtor”) filed a response to the Objection. This Court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). Pursuant to Federal Rule of Civil Procedure 52, which is made applicable to this contested matter by Federal Rules of Bankruptcy Procedure 7052 and 9014(c), the Court makes the following findings of fact and conclusions of law.¹

FINDINGS OF FACT

1. On December 23, 2009 (the “Petition Date”), Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. Michelle L. Vieira (“Trustee”) was subsequently appointed as the Chapter 7 trustee in this case.

2. As of the Petition Date, Debtor was the owner and insured of a John Hancock life insurance policy (the “Policy”). The Policy was issued on November 1, 1992. Debtor's wife, Urmibeu K. Patel, is the primary beneficiary under the Policy, and Debtor's children, Kevin K. Patel and Kelly K. Patel are secondary beneficiaries. Debtor has been married to Urmibeu K. Patel since 1985.

3. The Policy provides that that Debtor, as the owner of the Policy, retains the right to change the beneficiary during his lifetime. Neither Debtor nor Debtor's estate has ever been a named beneficiary under the Policy.

4. The Policy further provides that the Debtor may receive the surrender value of the Policy on receipt of written notice before his death and upon surrender of the policy. The cash surrender value of the Policy as of the Petition Date totaled $24,168.59.

5. It is stipulated by the parties that Debtor did not purchase the Policy, pay policy premiums, or take any other action under the Policy with the intent to defraud his creditors.

6. In Schedule C-Property Claimed as Exempt, filed December 23, 2009, Debtor initially claimed an exemption for the entire cash surrender value of the Policy under S.C.Code Ann. § 38-63-40(C).² Debtor specified that he claimed such exemption as an “INSURED/OWNER.”

7. The Trustee timely filed her Objection to Exemption on March 2, 2010 on the grounds that the claimed statute does not exempt cash surrender value.

8. After receiving the Trustee's Objection, Debtor amended his Schedule C on March 15, 2010 to claim an exemption as the “INSURED/OWNER” of the Policy for the entire cash surrender value under S.C.Code Ann. § 38-63-40(A), or alternatively, under S.C.Code Ann. § 15-41-30(A)(7) in the amount of $3,213.30 and under S.C.Code Ann. § 15-41-30(A)(9) in the amount of $4,125.00.

9. The Trustee filed a second Objection to Exemption on March 19, 2010 as to Debtor's claim for an exemption under S.C.Code Ann. § 38-63-40(A).

CONCLUSIONS OF LAW

The Trustee contends that Debtor is not entitled to claim an exemption under S.C.Code Ann. § 38-63-40(A) as an owner, insured, or beneficiary. The Trustee, as the party objecting to the allowance of the exemption, bears the burden of demonstrating that the exemptions were improperly claimed. Fed. R. Bankr.P. 4003(c). Before addressing the merits of the Trustee's arguments, the Court will examine the terms of the Policy and the state exemption laws upon which Debtor relies.

I. The Policy

The Policy at issue in this case is a whole life policy, which provides Debtor, as the owner of the Policy, with several financial options, including a cash surrender value benefit.³ Under the terms of the Policy, the cash surrender value increases as the Policy premiums are paid. During his lifetime, Debtor may surrender the Policy and receive its cash surrender value. The surrender of the Policy and receipt of the cash surrender value would presumably terminate the coverage and therefore any benefit for the beneficiary under the Policy. If the Policy is not surrendered during the Debtor's lifetime, the beneficiary of the Policy would be entitled to receive the sum insured, $100,000, plus any other benefits, rights and privileges of the Policy (“Death Benefit”) upon the death of Debtor. The Policy permits Debtor to change the beneficiary by providing written notice to the insurance company during his lifetime. Debtor's spouse is the current named beneficiary of the Policy. Debtor's two children are contingent beneficiaries of the Policy, and as such, would only receive the Death Benefit in the event that their mother predeceased Debtor.

Section 541(a)(1) of the Bankruptcy Code provides that “property of the estate” includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” Since Debtor is the owner and insured of the Policy, his interest in the cash surrender value of the Policy is included as property of the bankruptcy estate. See In re Sims, 421 B.R. 745, 748 (Bankr.D.S.C.2010) (“The interest of the owner of the insurance policy and the interest of the insured in [a whole life insurance] policy are property of the bankruptcy estate.”) The Bankruptcy Code permits a debtor to exempt from property of the estate certain property for which an exemption is available under either state or federal law. See 11 U.S.C. § 522(b). Exemptions under the federal exemption statute, 11 U.S.C. § 522(d), may be claimed unless applicable state law restricts the debtor to the exemptions that are available under state law. In re Sanford, C/A No. 09-01116 -jw, slip op. (Bankr.D.S.C. Oct. 1, 2009). South Carolina has opted out of the federal exemption scheme, therefore Debtor is limited to the exemptions provided under South Carolina law. See S.C.Code Ann. § 15-41-35 (providing that “[n]o individual may exempt from the property of the estate in any bankruptcy proceeding the property specified in 11 U.S.C. § 522(d) except as may be expressly permitted by this chapter or by other provisions of law of this State.”) Debtor has claimed an exemption for the entire amount of the cash surrender value of the Policy under S.C.Code Ann. § 38-63-40(A), as the owner and insured of the Policy. In the alternative, Debtor has claimed an exemption for the Policy in the amount of $3,213.30 under S.C.Code Ann. § 15-41-30(A)(7) and in the amount of $4,125.00 under S.C.Code Ann. § 15-41-30(A)(9).

The Trustee cites In re Sims, 421 B.R. 745 (Bankr.D.S.C.2010) in support of her assertion that § 38-63-40(A) does not allow the debtor to claim an exemption as the “owner, insured, or beneficiary.” In that case, the debtor husband was the owner and insured of a whole life insurance policy, which named the debtor wife as the beneficiary, and the debtor wife was the owner and insured of a separate whole life insurance policy, which named the debtor husband as the beneficiary. These policies both provided for a cash surrender value benefit. Each debtor as the beneficiary of the other's policy, claimed the cash surrender value of the other's policy as exempt pursuant to § 38-63-40(A). Thus, the issue addressed by Judge Duncan in Sims was whether the beneficiary of a whole life insurance policy may exempt the cash surrender value of the policy under the plain meaning of § 38-63-40(A). In his analysis of this issue, Judge Duncan recognized that, despite the joint petition filed by these debtors, each debtor's estate was separate and “each property interest and each exemption stands on its own.” He distinguished the property interest in a life insurance policy of an owner and insured from a beneficiary, noting that the interest of an owner and insured in a life insurance policy is property of the debtor's bankruptcy estate, while the interest of a beneficiary is inchoate and thus “there is nothing to exempt in or from this defeasible interest.” Emphasizing that the statute specifically serves to protect proceeds of a policy from the claims of creditors of the insured, Judge Duncan concluded that a beneficiary cannot claim an exemption for the cash surrender value of a policy under § 38-63-40(A) to protect those proceeds from the creditors of the beneficiary. This Court agrees with the holding in Sims, but finds that this case presents an issue that was not raised or addressed by Sims: whether a debtor, as the owner and insured of the policy, may claim an exemption for the cash surrender value of a whole life insurance policy under § 38-63-40(A).

II. General Rules of Statutory Construction

When interpreting a state law, a federal court applies the statutory construction rules applied by the state's highest court. In re DNA Ex Post Facto Issues, 561 F.3d 294 (4th Cir.2009) (citing Carolina Trucks & Equip., Inc. v. Volvo Trucks of N. Am., Inc., 492 F.3d 484, 489 (4th Cir.2007)). Under South Carolina law, “[a]ll rules of statutory construction are subservient to the one that the legislative intent must prevail if it can be reasonably discovered in the language used, and that language must be construed in light of the intended purpose of the statute.” State v. Sweat, 386 S.C. 339, 350, 688 S.E.2d 569, 575 (2010) (quoting Broadhurst v. City of Myrtle Beach Election Comm'n, 342 S.C. 373, 380, 537 S.E.2d 543, 546 (2000)). The words of a statute should be given “their plain and ordinary meaning without resorting to subtle or forced construction to limit or expand that statute's operation.” Sweat, 688...