In re McWhorter

• Decision Date: 05 August 2004
• Docket Number: No. 04-81399-JAC-7.,04-81399-JAC-7.
• Citation: 312 B.R. 695
• Parties: In re Randy McWHORTER, Drewcellia McWhorter, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Alabama

312 B.R. 695

In re Randy McWHORTER, Drewcellia McWhorter, Debtors.

No. 04-81399-JAC-7.

United States Bankruptcy Court, N.D. Alabama, Northern Division.

August 5, 2004.

S. Mitchell Howie, Huntsville, AL, for Debtor.

Kevin M. Morris, Sparkman, Shepard & Morris P.C., Huntsville, AL, for Trustee.

Tazewell T. Shepard, Huntsville, AL, Trustee.

MEMORANDUM OPINION

JACK CADDELL, Bankruptcy Judge.

This matter came before the Court upon the Trustee's Objection to Amended Claim of Exemptions filed by Tazewell T. Shepard, Trustee of the Chapter 7 Estate of Randy and Drewcellia McWhorter ("Trustee"). A hearing was held on August 2, 2004 with Kevin M. Morris appearing on behalf of the Trustee and S. Mitchell Howie appearing on behalf of the debtors. Upon due consideration of the pleadings and respective submissions of the parties the Court finds that the Trustee's objection to Debtor's amended claim of exemptions is due to be sustained.¹

FACTS

Prior to filing a petition for bankruptcy relief, co-debtor Randy McWhorter effected a life insurance policy on his own life through Principal Life Insurance Company ("Principal Life"), and named his spouse and co-debtor, Drewcellia McWhorter, as the beneficiary of said policy. Thus, Mr. McWhorter was the insured/policy owner, and Mrs. McWhorter was the beneficiary under said policy.

On March 25, 2004, Mr. and Mrs. McWhorter filed a joint voluntary petition under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Alabama, Northern Division. On May 18, 2004, Mr. McWhorter died, leaving Mrs. McWhorter as the surviving spouse and debtor in their bankruptcy case. Accordingly, Principal Life distributed the proceeds from said policy to Mrs. McWhorter.

On June 30, 2004, Mrs. McWhorter filed an amendment to her schedules, claiming the life insurance proceeds as exempt under Code of Alabama §§ 6-10-8 and 27-14-29. The Trustee filed an objection to the claimed exemption to the extent Mrs. McWhorter sought to exempt the proceeds as to her own creditors.

DISCUSSION

There is no dispute that under Alabama law, the proceeds of an insurance policy effected by a husband on his own life for the benefit of his spouse, are exempt as to the creditors of the insured and/or policy owner in bankruptcy. See Code of Alabama §§ 6-10-8 and 27-14-29 (1975). The issue before this Court is whether Alabama law also provides an exemption in such situations as to the creditors of a beneficiary-spouse in bankruptcy.

This Court must look to Alabama law in determining whether a debtor can properly exempt life insurance proceeds from the reach of creditors and trustees in bankruptcy and, if so, to what extent. Code of Alabama § 6-10-8 (1975) states in relevant part as follows:

If a policy of insurance, whether heretofore or hereafter issued, is effected by any person on his or her own life or on another life in favor of a person other than himself or herself ... the lawful beneficiary ... shall be entitled to its proceeds and avails against the creditors and representatives of the insured and of the person effecting the same...; A husband or a wife, in his or her own name or in the name of a trustee, may insure the life of his or her spouse for the benefit of himself or herself ...; or a husband or a wife may insure his or her own life for the benefit of his or her spouse ...; and such insurance and the proceeds and avails thereof, whether or not the right to change the beneficiary is reserved or permitted, is exempt from liability for the debts or engagements of the insured, or for the torts of the insured, or for any penalty or damages recoverable of the insured.

(Emphasis added).

It is undisputed that Mr. McWhorter is both the insured and owner of the policy with Principal Life, and Mrs. McWhorter is the mere beneficiary under said policy. Section 6-10-8 provides an exemption as to the creditors of the insured and/or policy owner, but does not extend that exemption as to the creditors of a mere beneficiary.

Much the same, Code of Alabama § 27-14-29 (1975) provides in relevant part as follows:

(a) If 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 a person other than himself, ... the lawful beneficiary, or assignee thereof, ... shall be entitled to its proceeds and avails against the creditors, personal representatives, trustees in bankruptcy and receivers in state and federal courts of the person insured and of the person effecting the insurance, ...

(b) If a policy of insurance, whether heretofore or hereafter issued, is effected by any person on the life of another in favor of the person effecting the same ... the latter shall be entitled to the proceeds and avails of the policy as against the creditors, personal representatives, trustees in bankruptcy and receivers in state and federal courts of the person insured. If the person effecting such insurance, or the assignee of such insurance, is the wife of the insured, she shall also be entitled to the proceeds and avails of the policy as against her own creditors, personal representatives, trustees in bankruptcy and receivers in state and federal courts.

(Emphasis added).

The exemption provided under paragraph (a) of this section is limited as to the creditors of the insured and/or policy owner. While paragraph (b) appears to extend an exemption to the beneficiary-spouse, that exemption only applies if the beneficiary-spouse was the person who effected the insurance. Again, the parties do not dispute that it was Mr. McWhorter who effected the insurance. Thus, it appears clear that these statutes do not provide Mrs. McWhorter with a right to exempt the insurance proceeds from the reach of her own creditors.

Notwithstanding the above, Debtor relies on In re Hyde, 200 B.R. 694 (Bankr.N.D.Ala.1996) in support of her position. Hyde involved a debtor who, prior to bankruptcy, effected a life insurance policy on his own life and named his spouse as the beneficiary. The debtor, who was the insured/owner under the policy, listed the cash surrender value as exempt under §§ 6-10-8 and 27-14-29, and a creditor objected to the claim of exemptions. The court held that the cash surrender value of the policy was exempt as to the creditors of the debtor.

However, the Debtor overlooks one crucial difference between Hyde and the case at hand. In the current matter the beneficiary-spouse, Mrs. McWhorter, is also a joint debtor in the bankruptcy case. In Hyde the Court only held that the cash surrender value was exempt as to the creditors of the debtor, who was the insured/policy owner. The Court never ruled whether the proceeds were exempt as to the creditors of the mere beneficiary, because the beneficiary was not in bankruptcy. Thus, the Hyde decision did not address the issue before this Court in the present matter.

Debtor also contends that the policy underlying these statutes supports a ruling in her favor. The courts have previously noted that these statutes are founded on a policy of providing protection for the spouse and children of the insured, and should be liberally construed to achieve that result. See Kimball v. Cunningham Hardware Co., 192 Ala. 223, 68 So. 309 (1915); Young v. Thomason, 179 Ala. 454, 60 So. 272 (1912); In re Beckman, 50 F.Supp. 339 (N.D.Ala.1943). However, the "protection" that the courts refer to, and...