In re Stilwell

• Decision Date: 10 March 2005
• Docket Number: No. 04-CV-2258.,04-CV-2258.
• Citation: 321 B.R. 471
• Parties: In re Margaret STILWELL, Debtor. Tuscola National Bank, Community Banks of Shelby County, Appellants, v. Margaret Stilwell, Debtor, Appellee.
• Court: U.S. District Court — Central District of Illinois

321 B.R. 471

In re Margaret STILWELL, Debtor Tuscola National Bank, Community Banks of Shelby County, Appellants, v. Margaret Stilwell, Debtor, Appellee.

No. 04-CV-2258.

United States District Court, CD. Illinois, Urbana Division.

March 10, 2005.

Timothy O. Smith, Danville, IL, for Appellant Tuscola National Bank.

Mariann Pogge, Springfield, IL, for Appellant Community Banks of Shelby County.

Rodney Louis Smith, Brankey & Smith, P.C., Charleston, IL, for Appellee.

ORDER

McCUSKEY, Chief Judge.

This is an appeal from an Order entered by the United States Bankruptcy Court for the Central District of Illinois (Bankruptcy Case No. 03-93877) brought pursuant to 28 U.S.C. § 158(a). Following this court's careful review, this court affirms the Order of the Bankruptcy Court.

FACTS

The Debtor, Margaret Stilwell, filed her voluntary petition under chapter 7 of the Bankruptcy Code on November 25, 2003. In Schedule C of her Bankruptcy Petition, the Debtor claimed an exemption in all proceeds from two life insurance policies on the life of her deceased husband. On February 26, 2004, Community Banks of Shelby County (Community Banks), a secured creditor of the Debtor, filed its Objection to Claims of Exemption and argued that the life insurance proceeds should be exempt only "to the extent reasonably necessary for the support of the debtor or a dependent of the debtor." On February 27, 2004, Tuscola National Bank, another secured creditor of the Debtor, filed its Objection to Claimed Exemption and also argued that the Debtor should not be allowed a 100% exemption for the $650,000 in life insurance proceeds. The Chapter 7 Trustee, Marsha L. Combs-Skinner, and another creditor also filed objections to the claimed exemption. On March 15, 2004, the Debtor filed her Response to Objection to Claim Exemptions and a Memorandum of Law in Support of her Claimed Exemptions. The Debtor cited In re Bateman, 157 B.R. 635 (Bankr.N.D.Ill.1993) and In re Bird, 288 B.R. 546 (Bankr.C.D.Ill.2002) in support of her position that she was entitled to an exemption in the insurance proceeds.

The parties entered into a Stipulation of Facts regarding the claimed exemption for the life insurance proceeds. The parties stipulated that the Debtor's husband, James Stilwell, died on May 2, 2003. Stilwell was survived by the Debtor and their four children, Jamie Stilwell, Heidi Stilwell, Megan Stilwell, and Haley Stilwell. The two youngest daughters still lived at home and were dependent upon the Debtor. At the time of Stilwell's death, the Debtor was the sole beneficiary of a $50,000 life insurance policy and was 60% beneficiary of a $1 million policy. The Debtor was entitled to $600,000 in proceeds from the $1 million policy and each of the daughters was entitled to $100,000 in proceeds from this policy. The stipulation stated that the life insurance proceeds to which the Debtor was entitled, totaling $650,000, were being held and were accruing interest pending resolution of the objections.

On October 19, 2004, Chief United States Bankruptcy Judge Gerald D. Fines issued an Opinion in this case. In re Stilwell, 2004 WL 2708512 (Bankr.C.D.IU. 2004). Judge Fines noted that two other Bankruptcy Judges in the Central District of Illinois, Judge Larry L. Lessen and Judge Thomas L. Perkins, had issued Opinions that dealt squarely with the issues raised in this proceeding. Both Judge Lessen and Judge Perkins held that all proceeds from a life insurance policy insuring the life of a debtor's spouse were entirely exempt pursuant to the provisions of 735 111. Comp. Stat. 5/12-1001(f) (West 2002). See In re Ashley, 317 B.R. 352 (Bankr.C.D.Ill.2004); In re McKinney, 317 B.R. 344 (Bankr.C.D.Ill.2004); In re Bird, 288 B.R. 546 (Bankr.C.D.111.2002). Judge Fines therefore entered an Order which denied the Objections to the Claimed Exemption. Subsequently, Community Banks and Tuscola National Bank each filed a timely Notice of Appeal from Judge Fines' Order.

ANALYSIS

On appeal, both Community Banks and Tuscola National Bank contend that Judge Fines applied the wrong Illinois statute in ruling on their Objections. The issue presented for review is whether Judge Fines properly allowed the Debtor's claim of a full exemption of the proceeds of her deceased husband's life insurance under 735 Ill. Comp. Stat. 5/12-1001(f) or whether Judge Fines should have allowed an exemption for only that portion of the life insurance proceeds necessary for the Debtor's support under 735 Ill. Comp. Stat. 5/12-1001(h)(3). A debtor's entitlement to a bankruptcy exemption is a question of law to be reviewed de novo. Matter of Yonikus, 996 F.2d 866, 868 (7th Cir.1993). Following this court's careful and thorough de novo review, this court agrees with all of the other courts which have decided this issue, including United States District Judge Jeanne E. Scott, and concludes that the Debtor was entitled to a full exemption under Illinois law.

Under the Bankruptcy Act, the matter of exemptions was left to state law. See Ashley, 317 B.R. at 354. However, under the Bankruptcy Code, which became effective on October 1, 1979, debtors were provided a choice between federal exemptions or state exemptions, unless their state had opted out of the federal exemptions. Ashley, 317 B.R. at 354. Subsequently, the Illinois legislature enacted 735 Ill. Comp. Stat. 5/12-1201, effective July 1, 1982, which stated, in pertinent part, "residents of this State shall be prohibited from using the federal exemptions provided in Section 522(d) of the Bankruptcy Code of 1978 (11 U.S.C. 522(d)), except as may otherwise be permitted under the laws of Illinois." 735 111. Comp. Stat. 5/12-1201 (West 2002). Accordingly, Illinois has elected to opt out of the federal exemptions, and Illinois law applies to exemptions.

Section 12-1001 of the Illinois Code of Civil Procedure sets out a list of exempt personal property. The statute provides, in pertinent part:

The following personal property, owned by the debtor, is exempt from judgment, attachment, or distress for rent:

. . . . .

(f) All proceeds payable because of the death of the insured and the aggregate net cash value of any or all life insurance and endowment policies and annuity contracts payable to a wife or husband of the insured, or to a child, parent, or other person dependent upon the insured, whether the power to change the beneficiary is reserved to the insured or not and whether the insured or the insured's estate is a contingent beneficiary or not;

. . . . .

(h) The debtor's right to receive, or property that is traceable to:

(3) a payment under a life insurance contract that insured the life of an individual of whom the debtor was a dependent, to the extent reasonably necessary for the support of the debtor or a dependent of the debtor.

735 Ill. Comp. Stat. 5/12-1001(f),(h)(3) (West 2002).

As noted, it is the Debtor's position that section 12-1001(f) applies to this situation and, therefore, the entire proceeds she received as beneficiary of the life insurance policies insuring her husband's life, $650,000, is exempt. It is the position of Community Banks and Tuscola National Bank that section 12-1001(h)(3) applies and the proceeds of the life insurance policies are exempt only "to the extent reasonably necessary for the support of the debtor" and her dependents.

Unfortunately, no published Illinois decision has addressed this precise issue. Fortunately, however, this court is not the first to address the interplay between the two statutes. The first court to address this issue was United States Bankruptcy Judge Jack B. Schmetterer in In re Bateman, 157 B.R. 635 (Bankr.N.D.Ill.1993). In addressing this issue, Judge Schmetterer aptly stated that "it must be conceded that the Illinois Legislature has not drafted §§ 1001(f) and 1001(h)(3) in a way in which distinction between application of these provisions comes immediately to the eye." Bateman, 157 B.R. at 638. The court then concluded that § 1001(f) applied to this situation, noting that this reading of the statute was "squarely in line with the general requirement that exemptions be liberally construed in favor of debtors." Bateman, 157 B.R. at 639.

In In re Bird, 288 B.R. 546 (Bankr. C.D.IU.2002), Judge Lessen, in addressing precisely the same issue, accepted the rationale and holding in Bateman. Bird 288 B.R. at 548. Judge Lessen had the same issue before him again in In re McKinney, 317 B.R. 344 (Bankr.C.D.Ill.2004). Judge Lessen found that his holding in Bird was sound and should be up held in that case. McKinney, 317 B.R. at 345. Judge Lessen stated that he considered the argument for reconsidering the issue and re-read Judge Schmetterer's opinion in Bateman. Judge Lessen stated that "Judge Schmetterer's interpretation of § 1001(f) is, in this Court's opinion, the best interpretation of a poorly-written statute. It is logical, wellreasoned, and consistent with the general requirement that exemptions be liberally construed in favor of debtors." McKinney, 317 B.R. at 345.

The issue was next addressed by Judge Perkins in In re Ashley, 317 B.R. 352 (Bankr.C.D.Ill.2004). Judge Perkins first noted that the issue before the court required it to choose between two alternative provisions that exempt life insurance proceeds. Ashley, 317 B.R. at 353. Judge Perkins started his analysis of the issue by considering the earliest statutory provision dealing with life insurance exemptions, a provision enacted as part of the Insurance Code in 1937, and unchanged for sixtyseven years. Ashley, 317 B.R. at 355, citing 215 Ill. Comp. Stat. 5/238(a). Judge Perkins noted that, under the exemption provided in the Insurance Code, "Illinois courts carefully protected the widow's rights to the insurance proceeds against the claims of creditors of her deceased husband." Ashley, 317 B.R. at 356. Judge Perkins further noted that, in enforcing the plain language of the statute, "courts have uniformly held that the ...