In re Trautman

• Decision Date: 08 August 2007
• Docket Number: No. 06-50363.,06-50363.
• Citation: 496 F.3d 366
• Parties: In the Matter of: Charles Frederick TRAUTMAN; Carol Jean Trautman, Debtors. Marsha G. Milligan, Appellee, v. Charles Frederick Trautman; Carol Jean Trautman, Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

496 F.3d 366

In the Matter of: Charles Frederick TRAUTMAN; Carol Jean Trautman, Debtors Marsha G. Milligan, Appellee, v. Charles Frederick Trautman; Carol Jean Trautman, Appellants.

No. 06-50363.

United States Court of Appeals, Fifth Circuit.

August 8, 2007.

Charles Randall Carr (argued), Austin, TX, for Appellee.

Eric Jay Taube (argued), Hohmann, Taube & Summers, Austin, TX, for Appellants.

Appeal from the United States District Court for the Western District of Texas.

Before HIGGINBOTHAM, WIENER, and PRADO, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Charles Trautman surrendered his whole-life insurance policy, receiving a check for the final cash value. He then filed for bankruptcy, seeking to exempt the check from the estate. Holding that the cash from a surrendered whole-life policy is not exempt under Texas law, we affirm.

I

Husband and wife Charles and Carol Trautman got into financial trouble. In 2004, Charles surrendered a whole-life insurance policy that he owned, a policy which insured his life with the death-benefit payable to Carol. The policy had a gross cash surrender value of about $95,000 and an outstanding loan balance of about $67,000, yielding a $27,913 difference. Charles received a check for that amount but did not cash it. Soon after the couple filed for bankruptcy. After electing to exempt property from the estate under Texas law rather than federal law,¹ the Trautmans listed as an exemption the uncashed check. Trustee Marsha Milligan objected. After a hearing, the Bankruptcy Judge denied the objection, upholding the exemption. Milligan appealed, and the district court reversed. The Trautmans appeal, and we review this purely legal question de novo.

II

This case centers on Texas Insurance Code § 1108.051, which provides:

(a) . . . [T]his section applies to any benefits, including the cash value and proceeds of an insurance policy, to be provided to an insured or beneficiary under:

(1) an insurance policy . . . issued by a life, health, or accident insurance company, including a mutual company or fraternal benefit society . . .

(b) Notwithstanding any other provision of this code, insurance . . . benefits described by Subsection (a):

(1) inure exclusively to the benefit of the person for whose use and benefit the insurance . . . is designated in the policy . . .; and

(2) are fully exempt from:

(A) garnishment, attachment, execution, or other seizure;

(B) seizure, appropriation, or application by any legal or equitable process or by operation of law to pay a debt or other liability of an insured or of a beneficiary, either before or after the benefits are provided; and

(C) a demand in a bankruptcy proceeding of the insured or beneficiary.

This court must interpret the statute as a Texas court would. In Texas, giving effect to the legislature's intent is the cardinal rule.² There are no Texas or federal cases directly on point.

This case is created by the peculiarities of whole-life policies. Term-life policies are simple—the owner pays a regular premium to the insurer, who pays a death-benefit to the beneficiary on the death of the insured if the premiums were current. With whole-life policies, the owner pays the insurer more than the cost of premiums. The excess money goes into a sort of interest-bearing savings account, against which the owner can borrow money or pay the premiums if he ever chooses to pay less than the regular premium. As long as the policy exists, if the insured dies the beneficiary receives a death-benefit.³ Critical here, the owner can also withdraw the entire cash value, surrendering the policy. Under Texas law, it's clear that money paid to the debtor-beneficiary of a term-life policy—as long as it can be traced to that source—is exempt. The question here is whether money paid to the owner of a surrendered whole-life policy —if it can be traced to that source, as it can here—is exempt. We conclude that it is not.

First, we look to the text. Parsing the text, we see that "benefits," while not explicitly defined, are either "cash value . . . of an insurance policy" or "proceeds of an insurance policy" that are "to be provided to an insured or beneficiary. . . ." Such "benefits" "inure exclusively to the benefit of the person for whose use and benefit the insurance . . . is designated in the policy or contract" and cannot be garnished, seized, or demanded in bankruptcy. Thus, § 1108.051 protects "benefits," and we must determine whether the check here represents "benefits." It does not—even though on first glance it looks like "cash value . . . of an insurance policy"—because "benefits" are things "to be provided to an insured or beneficiary," and the cash from a surrendered whole-life policy goes not to the (former) insured or (former) beneficiary, but the (former) owner of the policy. Charles argues implicitly that the money went to him as a final "benefit" payable to him as the insured, but the check went to him as the owner of the policy, not the insured.⁴ That "benefits" "inure exclusively to the benefit of the person for whose use and benefit the insurance . . . is designated in the policy" buttresses our conclusion because the surrendered check goes not to the person "whose use and benefit the insurance . . . is designated in the policy" —that is, the beneficiary and maybe the insured—but the owner.⁵ In sum, when the owner of a whole-life policy surrenders the policy, the funds are not protected by § 1108.051.⁶

Second, the statutory history confirms our analysis and explains what "cash value . . . of an insurance policy" actually means. Before a 1991 amendment to the predecessor of § 1108.051 which added the term "cash values,"⁷ courts did not exempt even the cash value of existing whole-life policies because such policies were essentially savings accounts to which debtors had constant access.⁸ Hence creditors could seize whole-life policies, destroying them. Texas, presumably desiring to protect the named, contingent beneficiaries of existing whole-life policies, amended the statute to include "cash values." As a result, debtors cannot now garnish, seize, or claim in bankruptcy the cash value of an existing policy—a blessing to contingent beneficiaries, who now may later receive a death-benefit.⁹ But presumably Texas did not mean to exempt money from a surrendered whole-life policy, money a beneficiary will certainly never see. So "cash value" means something, just not what the Trautmans think.

Third, we note the perils of the contrary conclusion. Exempting all money traceable to a surrendered whole-life policy would allow people to use such policies merely to avoid creditors. People could place their money in a whole-life policy with the cheapest possible premium, naming as a beneficiary someone to whom they'd want money in a normal savings account to go should they die. Sometime later—presumably even after only a few days—they could withdraw some of the money, or...