In re Sims

• Citation: 421 B.R. 745
• Decision Date: 08 January 2010
• Docket Number: No. 09-3450-dd.,09-3450-dd.
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — District of South Carolina
• Parties: In re Robert M. SIMS, Jr. and Robin B. Sims Debtors.

421 B.R. 745

In re Robert M. SIMS, Jr. and Robin B. Sims Debtors.

No. 09-3450-dd.

United States Bankruptcy Court, D. South Carolina.

January 8, 2010.

Robert Frank Anderson, Columbia, SC, for Debtor.

ORDER ON OBJECTION TO EXEMPTION

DAVID R. DUNCAN, Bankruptcy Judge.

THIS MATTER is before the court on the debtors' claim of exemption in life insurance policies pursuant to S.C.Code Ann. § 38-63-40(A) (Law. Co-op. 2002 as amended) and the objection of the chapter 7 trustee pursuant to 11 U.S.C. § 502(a)¹ and Fed. R. Bankr.P. 3007(a). This order contains the findings of fact and conclusions of law by the court.

Findings of Fact

1. Robert M. Sims, Jr. and Robin B. Sims are husband and wife. They filed a joint voluntary petition for relief under chapter 7 of the Bankruptcy Code on May 5, 2009.

2. W. Ryan Hovis is the chapter 7 trustee.

3. Robert M. Sims, Jr. is the owner and named insured of a Merrill Lynch Life Insurance Company $250,000 Flexible Premium Variable Universal Life Insurance Policy, policy CM* * * * *91. Robin B. Sims is the beneficiary of the policy. This policy is listed in the bankruptcy schedules with a cash surrender value of $10,068.

4. Robin B. Sims is the owner and named insured of a Merrill Lynch Life Insurance Company $250,000 Flexible Premium Variable Universal Life Insurance Policy, policy CM* * * * *92. Robert M. Sims, Jr. is the beneficiary of the policy. This policy is listed in the bankruptcy schedules with a cash surrender value of $ 8,767.00

5. The policies were issued November 1, 2000.

6. The owner of each policy retains the right to change the beneficiary unless an irrevocable beneficiary designation has been made. No evidence of an irrevocable designation of beneficiary was introduced at the hearing on the trustee's objection to exemption.

7. Each policy provides: "Prior to the insured's attained age 100 we will pay the death benefit proceeds to the beneficiary upon the insured's death."

8. Each policy owner elected death benefit proceeds option 1 in the life insurance application and no evidence of a change in election was offered.

9. The applicable death benefit proceeds are determined by the insurance company as "the larger of the face amount or the variable insurance amount" together with certain adjustments.

10. The variable insurance amount is calculated using a factor that depends on the insured's attained age multiplied by the sum of cash value plus excess sales loads and varies "daily based on investment results. . . ."

11. The cash value of the policy may be taken by the owner of the policy at any time by surrender of the policy or the owner may take a partial withdrawal or borrow against the cash value of the policy.

12. The policy provides that: "The proceeds of this policy will be free from creditors' claims to the extent allowed by law."

13. Exemption of the cash surrender value in each policy was initially claimed pursuant to S.C.Code Ann. § 15-41-30(A)(8). The trustee filed a timely objection. Thereafter debtors amended Schedule C to claim exemption pursuant to S.C.Code Ann. § 38-63-40(A).

The trustee again filed a timely objection.

Contentions of the Parties

The debtors contend that the beneficiary may exempt the cash surrender value of the policies under the plain meaning of S.C.Code Ann. § 38-63-40(A). The trustee contends that the state exemption protects only proceeds and cash surrender value payable or paid to a beneficiary and thus does not spring into existence until the insured dies.

Conclusions of Law

Property of the estate

The filing of a bankruptcy case creates an estate composed of all legal or equitable interests of debtors in property, with exceptions not relevant here. See § 541(a)(1). Courts and commentators have uniformly described the sweep of property into the estate as "broad". See 5 Collier on Bankruptcy ¶ 541.01 (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev. 2007)[hereinafter Collier] ("Congress' intent to define property of the estate in the broadest possible sense is evident from the language of the statute. . . ."). See also In Re Baltimore Marine Industries, Incorporated, 476 F.3d 238, 240 (4th Cir. 2007) ("Section 541 of the Bankruptcy Code governs the composition of the bankruptcy estate and provides a broad definition of `[p]roperty of the estate.'"). Property of the estate includes property which a debtor seeks to exempt. Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992).

Despite the joint petition filed by these debtors, the estate of each debtor remains separate unless consolidated. See § 302(b). There has been no motion to consolidate these estates. Each debtor has, with respect to the two life insurance policies, very different and independent interests. The joint filing and even consolidation "does not alter the debtor's state law property rights or bankruptcy rights that are derivative of those rights." Collier ¶ 302.06 (16th ed. 2009). See also Bunker v. Peyton, 312 F.3d 145, 153 (4th Cir.2002)("Under joint administration the estate of each debtor remains separate and distinct. Joint administration does not affect the substantive rights of either the debtor or his or her creditors." (citations omitted)). It is important to recognize that each property interest and each exemption stands on its own.

The interest of the owner of the insurance policy and the interest of the insured in the policy are property of the bankruptcy estate. Milligan v. Trautman (In re Trautman), 496 F.3d 366 (5th Cir. 2007)(where an owner had surrendered a life insurance policy prior to bankruptcy and held the cash value paid him as owner, the interest was property of the estate and was not exempt under Texas law). What then is the interest of a beneficiary of a life insurance policy under state law? The beneficiary's interest is, if anything, a lesser interest—a terminable interest at that. The South Carolina Supreme Court describes the interest this way:

It is now well established under our decisions that where a right to change the beneficiary has been reserved to the insured in the policy, the named beneficiary, during the lifetime of the insured has not a vested right or interest but a mere expectancy, and the complete control of the policy remains in the insured. . . . [T]he beneficiary has only an inchoate right. . . .

Swygert v. Durham Life Ins. Co., 229 S.C. 199, 92 S.E.2d 478, 480 (1956). This is the property interest that comes to the beneficiary's bankruptcy estate. The interests of the owner/insured are property of that debtor's bankruptcy estate.

Exemption

The first duty of a chapter 7 trustee is to "collect and reduce to money the property of the estate for which such trustee serves. . . ." § 704(a)(1). This property is then distributed in payment of claims against the estate. See § 726. The Bankruptcy Code allows a debtor to prevent the distribution to creditors of certain property by claiming it as exempt. Section 522(b) allows debtors to choose exemptions afforded by state law or the federal exemptions listed in § 522(d). The Bankruptcy Code also permits states to "opt out" of the federal exemptions listed in the Bankruptcy Code and limits debtors in bankruptcy cases to the exemptions available under state law and other applicable federal law. § 522(b)(2). South Carolina has opted out of the federal bankruptcy exemptions. § 15-41-35 S.C.Code Ann. (2005).²

Certain life insurance exemptions are provided by the Bankruptcy Code. See § 522(d)(7), (8), (11). These exemptions, while not available to South Carolina debtors—who, as noted, are barred from the Bankruptcy Code exemptions by the state opt out, are mirrored in the South Carolina opt out exemptions. See § 15-41-30(8), (9), (12) S.C.Code Ann. State law often also provides other exemptions relating to life insurance policies. 4 Collier, ¶ 522.10[5] (2007); See also 14 and 14A Collier, Exemptions (for collected state statutes providing life insurance policy exemptions). The exemption statute at issue here is one such statute.

The Bankruptcy Code provides the procedure for claiming exemptions and objecting to claimed exemptions as follows: "The debtor shall file a list of property that the debtor claims as exempt under subsection (b) of this section. . . . Unless a party in interest objects, the property claimed as exempt on such list is exempt." § 522(1). The time for objecting to a claimed exemption is found in the Federal Rules of Bankruptcy Procedure, which provide in part: "The trustee or any creditor may file objections to the list of property claimed as exempt within 30 days after the conclusion of the meeting of creditors held pursuant to Rule 2003(a) . . . unless, within such period, further time is granted by the court." Fed. R. Bankr.P. 4003(b). Here Debtors have claimed and amended their exemptions and Trustee has, after an extension, timely objected to the claimed exemptions, as amended. Trustee has the burden of proof on the objection to exemption. Fed. R. Bankr.P. 4003(c).

At issue are two $250,000 life insurance policies written by Merrill Lynch. The issue is whether the cash surrender value of these policies is exempt under South Carolina law. Debtors claim exemption pursuant to state law which provides:

(A) Proceeds and cash surrender values of life insurance payable to a beneficiary other than the insured's estate in which such proceeds and cash surrender values are expressed to be for the primary benefit of the insured's spouse, children, or dependents are exempt from creditors of the insured whether or not the right to change the beneficiary is reserved and whether or not the policy is payable to the insured if the beneficiary dies first except:

(1) if the insured has filed a petition in bankruptcy within two years of purchasing the insurance, such proceeds or cash surrender are only exempt as permitted by Section 15-41-30; or

(2) the amount of premiums paid and interest thereon with intent to defraud...