In re Messinger

• Decision Date: 19 November 1928
• Docket Number: No. 145.,145.
• Citation: 29 F.2d 158,68 ALR 1205
• Parties: In re MESSINGER. Ex parte RILEY.
• Court: U.S. Court of Appeals — Second Circuit

68 ALR 1205, 29 F.2d 158 (1928)

In re MESSINGER Ex parte RILEY.

No. 145.

Circuit Court of Appeals, Second Circuit.

November 19, 1928.

Samuel C. Duberstein, of Brooklyn, N. Y. (Max Schwartz, of New York City, of counsel), for appellant.

Sobel & Brand, of New York City (Samuel Sobel and Martin M. Alpert, both of New York City, of counsel), for appellee.

Before MANTON, L. HAND, and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

The bankrupt listed among his assets two insurance policies, payable to his wife as beneficiary, in each of which he had reserved the right to change the beneficiary. After the trustee in bankruptcy had qualified, he demanded that the policies be turned over to him by the bankrupt, who accordingly surrendered them. Thereafter the bankrupt applied to the referee for an order directing the trustee to return the policies on the ground that the trustee, because of the provisions of section 55a of the Insurance Law of the state of New York (Consol. Laws, c. 28), had no interest in them. The referee directed the return of the policies, his order was thereafter confirmed by the District Court, and from the order of confirmation the trustee has taken this appeal.

The question raised by this appeal is whether the life insurance policies made payable to the bankrupt's wife, but in which he had reserved the right to change the beneficiary, became exempt from the claims of his creditors under the provisions of section 55a of the state Insurance Law.

Section 6 of the Bankruptcy Act (11 US CA § 24) provides that:

"This act shall not affect the allowance to bankrupts of the exemptions which are prescribed by the state laws in force at the time of the filing of the petition in the state wherein they have had their domicile for the six months or the greater portion thereof immediately preceding the filing of the petition."

Section 55a of the Insurance Law provides:

"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, or, except in cases of transfer with intent to defraud creditors, if a policy of life insurance is assigned or in any way made payable to any such person, the lawful beneficiary or assignee thereof, other than the insured or the person so effecting such insurance, or his executors or administrators, shall be entitled to its proceeds and avails against the creditors and representatives of the insured and of the person effecting the same, whether or not the right to change the beneficiary is reserved or permitted, and whether or not the policy is made payable to the person whose life is insured if the beneficiary or assignee shall predecease such person: Provided, that, subject to the statute of limitations, the amount of any premiums for said insurance paid with intent to defraud creditors, with interest thereon, shall enure to their benefit from the proceeds of the policy; but the company issuing the policy shall be discharged of all liability thereon by payment of its proceeds in accordance with its terms, unless before such payment the company shall have written notice, by or in behalf of a creditor, of a claim to recover for transfer made or premiums paid with intent to defraud creditors, with specification of the amount claimed."

Section 70a of the Bankruptcy Act (11 USCA § 110a) determines the disposition of life insurance policies, so far as they may not come within the exemptions under state laws which are permitted by section 6, supra. The pertinent clauses of section 70a are as follows:

"The trustee of the estate of a bankrupt, upon his appointment and qualification * * * shall * * * be vested by operation of law with the title of the bankrupt, as of the date he was adjudged a bankrupt, except in so far as it is to property which is exempt, to all * * * (3) powers which he might have exercised for his own benefit, but not those which he might have exercised for some other person; * * * (5) property which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him: Provided, that when any bankrupt shall have any insurance policy which has a cash surrender value payable to himself, his estate, or personal representatives, he may, within thirty days after the cash surrender value has been ascertained and stated to the trustee by the company issuing the same, pay or secure to the trustee the sum so ascertained and stated, and continue to hold, own, and carry such policy free from the claims of the creditors participating in the distribution of his estate under the bankruptcy proceedings, otherwise the policy shall pass to the trustee as assets. * * *"

The Supreme Court construed section 70a in Cohen v. Samuels, 245 U. S. 50, 38 S. Ct. 36, 62 L. Ed. 143, before section 55a of the Insurance Law was adopted, and at a time when there was no state statute which could be thought to exempt the proceeds of insurance policies from the claims of creditors. In that case, as here, the policies were payable to certain beneficiaries, and the bankrupt reserved the right to change the beneficiaries. In spite of the fact that the policies were not payable to the bankrupt, the Supreme Court held that the cash surrender value was an asset which passed to the trustee under section 70a, supra, because the insured had power, by reason of the reservation in the policies, to make them payable to himself. To the same effect was Cohn v. Malone, 248 U. S. 450, 39 S. Ct. 141, 63 L. Ed. 352, and our own decision in Matter of Greenberg, 271 F. 258.

Does section 55a of the Insurance Law allow an exemption to the bankrupt within the provisions of section 6 of the Bankruptcy Act? Only in such event can the Insurance Law apply, for the Bankruptcy Act must govern as between it and a state law, and the cash surrender value would pass to the trustee under section 70a, unless it is "property which is exempt."

There can be no doubt that, within the terms of section 6, the state law could have exempted the reserved power of the bankrupt from the claims of his creditors even to the extent of allowing him to exercise it in his own interest, for, as the Supreme Court said in Holden v. Stratton, 198 U. S. at page 212, 25 S. Ct. 659, 49 L. Ed. 1018, it is "couched in unlimited terms and is accompanied with no qualification whatever."

In Holden v. Stratton a statute of the state of Washington provided "that the proceeds or avails of all life insurance shall be exempt from all liability for any debt." It was held that this statute exempted the cash surrender value of policies payable to the wife of the bankrupt, if she survived him, in which no power to change the beneficiary was reserved, and was valid under section 6 of the Bankruptcy Act. But in the present case the language of the Insurance Law does not in terms grant an exemption to the avails of the policy in the hands of the bankrupt, for it only provides that the "beneficiary * * * other than the insured * * * shall be entitled to the proceeds and avails against the creditors and representatives 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 person whose life is insured if the beneficiary * * * shall predecease such person."

The statute 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. But it plainly does attempt to exempt the "proceeds and avails," so far as beneficiaries, other than the bankrupt, may have an interest in the policy. It does not protect the insured against his creditors, and only seeks to prevent them from affecting the rights of the beneficiaries other than himself. While the insured may still change the...