In re Walsh

• Decision Date: 16 June 1937
• Docket Number: No. 6876.,6876.
• Citation: 19 F. Supp. 567
• Parties: In re WALSH.
• Court: U.S. District Court — District of Minnesota

19 F. Supp. 567

In re WALSH.

No. 6876.

District Court, D. Minnesota, Third Division.

June 16, 1937.

John H. Horeish, of St. Paul, Minn., for bankrupt.

Lewis E. Solomon, of St. Paul, Minn., for trustee.

Oscar Hallam, of St. Paul, Minn., for a creditor.

NORDBYE, District Judge.

This matter came before the court on two petitions for review of an order made by the referee in bankruptcy filed February 24, 1937. On March 5, 1937, a creditor filed with the referee his petition for review of said order, and on March 6, 1937, the bankrupt filed her petition for review thereof.

The bankrupt appeared by her attorney, Mr. John H. Horeish; the trustee appeared by his attorney, Mr. Lewis E. Solomon; and a creditor appeared by his attorney, Mr. Oscar Hallam.

The matter came before the referee upon the written stipulation of the bankrupt and the trustee by their respective attorneys for the determination of the bankrupt's claim of exemption with respect to certain so-called retirement annuity contracts and the claim of the trustee to the cash surrender value of such contracts, and for amendment of the schedules heretofore filed herein by the bankrupt to include such contracts as assets claimed exempt by the bankrupt. The referee made the following findings of fact and conclusions of law:

"1. That the said Josephine T. Walsh was adjudicated bankrupt herein on the 31st day of October, 1935.

"2. That at the time of the bankrupt's voluntary petition herein and on the said 31st day of October, 1935, the bankrupt was the owner of three annuity contracts issued to her by the Equitable Life Assurance Society of the United States under the dates and being numbered as follows: Number 4,172,926, dated September 28, 1926; Number NM 4,857,291, dated September 25, 1928; and Number 7,583,810, dated January 8, 1929; and that each of said contracts, in consideration of an annual premium to be paid by the said bankrupt, provides for a life annuity to be paid the bankrupt after she shall attain the age of sixty, and that if she shall die before that time a death benefit in accordance with a table in the contract shall be paid to Ellie Walsh, a sister of the bankrupt, with a right reserved to the bankrupt to change the beneficiary.

"3. That each of said contracts had on October 31, 1935, a cash surrender value, which value, less loans theretofore made by the bankrupt on the security of the contracts, has been stated by the said Equitable Life Assurance Society of the United States to the trustee to be as follows:

On Contract Number 4,172,926 $245.08

On Contract Number 4,857,291 $439.45

On Contract Number 7,583,810 $136.08

"As conclusions of law, the Referee finds that the provisions in said contracts providing death benefits in favor of said Ellie Walsh constitute insurance, and as such the proceeds of such death benefits are exempt under Minnesota law from the claims of creditors of the bankrupt; that the provisions of said contracts for the benefit of the said bankrupt are in the nature of an investment and are not insurance and are not exempt from the claims of creditors under Minnesota law; and that if the bankrupt shall exercise for her own advantage or for the advantage of her estate the right reserved in said contracts or either of them to change the beneficiary therein named, or shall elect to realize the cash value thereof, or if the bankrupt shall survive until she attains the age of sixty, the amount of the cash surrender value of each contract as of October 31, 1935, shall become and be unadministered assets of this bankruptcy estate; and it is so ordered.

"It is further ordered that possession of the contracts be given the bankrupt; and that the schedules of the bankrupt be and they are hereby amended to include such contracts as assets claimed exempt by the bankrupt."

These policies are designated as retirement annuities. The bankrupt is referred to therein as the annuitant. In brief, they provide for a stipulated amount to be paid to the society from the date of the contract until the annuitant shall become sixty years of age. The society agrees to pay to the annuitant beginning at the age of sixty a life annuity in a stipulated monthly amount. If the annuitant should die before reaching the age of sixty, the society agrees to pay to the sister of the annuitant, or such other person as annuitant may designate, a specified sum in accordance with the schedules contained therein. The annuitant has the option, to be exercised before the annuity payments begin, of electing in lieu of the annuity payments to commence at the age of sixty (1) a life annuity beginning approximately ten years after the policy is issued, according to the schedule of payments attached to the contract, or (2) a refund annuity beginning at the same age. Under the refund annuity, if annuitant dies before she has received in annuity payments a stipulated sum, the annuity payments are to be continued to the named beneficiary until such stipulated sum is paid in full.

The schedule which sets forth the payments to the beneficiary in the event the annuitant dies before any annuity payments are due provides that where the annual premium payment is $100, the beneficiary would receive $91 in case of the annuitant's death during the contract's first year. At the tenth year, the payment is $1,062 to the beneficiary, the annuitant having paid in $1,000. The amount payable is increased each year, until the twentieth year when $2,000 would have been paid to the society, the death benefit is $2,561. This latter sum would represent the premiums paid by the annuitant plus something less than 3 per cent. interest per annum on the premiums paid from year to year to the society. There are options on surrender or lapse and provisions for participation in the distribution of the divisible surplus of the society. The cash surrender value of the three policies at the time of adjudication, less loans made to the annuitant, totals $820.61.

If the available proceeds of these contracts as of the date of adjudication are exempt under the Minnesota law, then it is clear that the cash surrender value did not become an asset of the bankrupt's estate. Holden v. Stratton, 198 U.S. 202, 25 S.Ct. 656, 49 L.Ed. 1018.

In order to determine whether or not the referee's disposition of the question is correct, resort must be had to the statutes of Minnesota and a construction of the annuity contracts in light thereof. The only pertinent statute in the state dealing with exemptions of insurance is section 3387 of Mason's Minnesota Statutes 1927, which is entitled, "Who Entitled to Proceeds of Life Policy." It provides: "Whenever any insurance is effected in favor of another, the beneficiary shall be entitled to its proceeds against the creditors and representatives of the person effecting the same. All premiums paid for insurance in fraud of creditors, with interest thereon, shall inure to their benefit from the proceeds of the policy, if the company be specifically notified thereof in writing before payment."

Section 3388 is entitled, "Exemption in Favor of Family — Change of Beneficiary." It reads: "Every policy made payable to, or for the benefit of, the wife of the insured, or after its issue assigned to or in trust for her, shall inure to her separate use and that of her children, subject to the provisions of § 3387. But the person applying for and procuring such policy may change the beneficiary or beneficiaries, if the consent of the beneficiary or beneficiaries named in the policy is obtained, or if a power so to do is reserved in the contract of insurance, or in case of the death or divorcement of a married woman named as beneficiary."

Section 3314 defines insurance as follows: "Insurance is any agreement whereby one party, for a consideration, undertakes to indemnify another to a specified amount against loss or damage from specified causes, or to do some act of value to the assured in case of such loss or damage. It shall be unlawful for any person, firm or corporation to solicit or make or aid in the soliciting or making of any contract of insurance not authorized by the laws of this state. All contracts of insurance on property, lives, or interests in this state, shall be deemed to be made in this state."

It is evident that the exemption contemplated by section 3387 refers to life insurance. This section was first enacted in 1895, being section 71 of chapter 175 of the Session Laws of that year which was entitled: "An act to revise and codify the insurance laws of the state." The pertinent portion of the original act reads as follows: "Sec. 71. When a policy of insurance is effected by any person on his own life, or on another life in favor of some person other than himself having an insurable interest therein, the lawful beneficiary thereof, other than himself or his legal representatives, shall be entitled to its proceeds, against the creditors and representatives of the person effecting the same; and a person to whom a policy of life insurance, hereafter issued, is made payable may maintain an action thereon in his own name."

The statute in its present form first appeared in the Revised Laws of Minnesota of 1905 (section 1691). It was first construed in Murphy v. Casey, 150 Minn. 107, 184 N.W. 783. Plaintiff therein was a judgment creditor of the insured and sought to levy upon the insured's alleged interest in three twenty-year payment plan life insurance policies with cash surrender options. The policies were payable to insured's mother with the right of the insured, however, to change the beneficiary at any time. All of the policies provided that, in the event the designated beneficiary should not be living at the death of the insured, the amounts due at his death should become payable to his heirs, executors, administrators, and assigns in the event no other beneficiary had been designated prior to insured's death. In determining the right of the...