In re White, 3783-E.

• Decision Date: 01 August 1960
• Docket Number: No. 3783-E.,3783-E.
• Citation: 185 F. Supp. 609
• Parties: In the Matter of Clarence William WHITE, Bankrupt.
• Court: U.S. District Court — Northern District of West Virginia

185 F. Supp. 609

In the Matter of Clarence William WHITE, Bankrupt.

No. 3783-E.

United States District Court N. D. West Virginia.

August 1, 1960.

Mary Frances Brown and G. Norris Watson, of Stathers & Cantrall, Clarksburg, W. Va., for petitioner.

Jack R. Nuzum, Elkins, W. Va., trustee, pro se.

CHARLES F. PAUL, District Judge.

This matter is here upon the petition of the Penn Mutual Life Insurance Company to review and correct an order of the Referee in Bankruptcy entered April 16, 1959, upon a petition by the Trustee therefor, requiring the insurance company to turn over to the Trustee the sum of $1,295.88 as part of the assets of the bankruptcy estate, which sum the Referee found to be the cash surrender value as of the time of the filing of the bankruptcy petition, of a paid-up policy of life insurance upon the life of the bankrupt. The bankrupt's wife is the primary beneficiary of the policy, the face amount of which is $2,000. The bankrupt, as insured, had retained the right to change the beneficiary and all other rights pertaining to ownership of the policy. The bankrupt had refused to sign a "Cash Surrender Request" which the insurance company demanded before complying with the Trustee's original demand for the cash surrender value. The bankrupt had been allowed his $200 statutory exemption out of other scheduled property.

The insurance company contends: first, that the cash surrender value of the policy does not pass to the Trustee by virtue of the Bankruptcy Act because it is exempt to the bankrupt under the provisions of W.Va.Code, Ch. 33, Art. 6, Sec. 27(a) (Michie Code § 3397(a))¹; second, that the Referee has incorrectly determined the amount of the cash surrender value and has disregarded, and failed to give effect to the lien of, the amount of an unpaid policy loan effected by the bankrupt.

The Trustee's contentions with reference to the question of his entitlement to the remaining cash surrender value, whatever that may be, are two: first, that if the West Virginia statute is an exemption statute it cannot be constitutionally applied in this case because W. Va. Constitution Art. VI, Sec. 48² limits the legislative power to provide for exemptions of personal property to property "to the value of two hundred dollars"; second, that, even if the code section were constitutional as an exemption statute, the language of the Act entitling the beneficiary to the "proceeds and avails against the creditors * * * of the insured" refers to the death benefits payable upon the maturity of the policy upon the death of the insured and not to any of its values during the lifetime of the insured. In both of these contentions the Trustee was upheld by the Referee.

I find myself unable to affirm the Referee's rulings upon either of the questions presented.

It seems clear that, if the statute, properly construed, exempts values in a life insurance policy which have accrued during the lifetime of the insured from the claims of his creditors, then, unless the statute violates the Constitution of the State of West Virginia, this cash surrender value does not pass to the Trustee by virtue of the Bankruptcy Act. The leading case of Holden v. Stratton, 1905, 198 U.S. 202, 25 S.Ct. 656, 49 L.Ed. 1018, expressly holds that, under these circumstances, the bankruptcy court must give effect to the State statute.

In view of the fact that this statute was first enacted in 1929 with amendments in 1951 and 1957 which are not here material, it is somewhat surprising to find that the questions here presented appear to be matters of first impression in West Virginia.

Let us consider first the problem of whether the statute extends its protection to the values of insurance during the lifetime of the insured because, not until we have disposed of this question will we reach the constitutional question.

The Trustee contends that the words "proceeds and avails" in the statute refer only to the "death benefits" payable upon the maturity of the policy by death of the insured and after his death. The argument runs that to hold otherwise would be to provide a debtor with an avenue for depositing his funds, in unlimited amounts, in a species of property which would place it beyond the reach of his creditors, but not beyond his own reach after his discharge in bankruptcy. It is contended that no court should attribute to the legislature a purpose to achieve this unconscionable result unless the language of the statute specifically so provides. This argument overlooks the protection which the legislature has afforded to creditors in paragraph (b) of the section which provides in part "Subject to the statute of limitations, the amount of any premiums for such insurance paid in fraud of creditors, with interest thereon, shall inure to their benefit from the proceeds of the policy, * * *". There is no claim here that any of the premiums for the policy in question were paid in fraud of creditors.

Admittedly, the West Virginia statute is a broad one. It places no limitation upon the face amount of the policies which may be held exempt from creditors; it places no limitation upon the annual premiums which may be devoted to the purpose of acquiring such a policy; nor does it limit such policies to ones taken out for the benefit of the insured's family or dependents. Its only limitation is that the policy must be in favor of a person other than the insured or assigned to such other person. Nevertheless, it would seem that the legislative policy is to provide citizens of West Virginia an avenue for protecting and providing for the welfare of those who are their special concern, without risk that their purpose may be frustrated by seizure at the instance of future creditors. It cannot successfully be contended that, absent constitutional prohibition, this is not a proper legislative purpose. It is not the province of the courts to criticise the propriety of the legislature's actions or to limit any clearly expressed purpose by strained construction. To limit the meaning of the words "proceeds and avails", to that contended for by the Trustee, would seriously hamper the accomplishment of the expressed legislative purpose. Seizure and appropriation of the values of life insurance built up during the lifetime of the insured by his creditors would frustrate the purpose just as much as would the seizure of the death benefits by creditors of his estate after his death.

The only authority cited in support of the Referee's ruling is the case of In re Moore, 1909, 173 F. 679, 680 decided by the District Court for the Eastern District of Tennessee. This case involved a right of the Trustee in Bankruptcy to the cash surrender value of two insurance policies on the life of the bankrupt, one of which was made payable to the bankrupt himself, and the other to his estate. It is to be noted that under the West Virginia statute neither of these policies would be exempt. The court, however, considered two sections of the Tennessee code which were enacted in 1846. The first, § 2294, provides, "A life insurance effected by a husband on his own life shall inure to the benefit of the widow and next of kin, to be distributed as personal property, free from the claims of his creditors." The second, § 2478, provides, "Any life insurance effected by a husband on his own life shall, in case of his death, inure to the benefit of his widow and children; and the money thence arising shall be divided between them according to the law of distributions, without being in any manner subject to the debts of the husband, whether by attachment, execution or otherwise." The court pointed out that the first of these code sections is in the chapter of the code entitled "Of the Administration of Estates", and that the second section referred specifically to the death of the insured. It concluded that both code sections were limited in their application to the death benefits collected after the death of the insured and had no application to the cash surrender values. The case of In re Stansell, 8 F.2d 363, 364, decided by the District Court for the Western District of Tennessee in 1925, involved the right of a Trustee in Bankruptcy for a Tennessee bankrupt to the cash surrender value of policies on the life of the bankrupt in which his wife was the named beneficiary. The court considered the two code sections cited in In re Moore and also another code section, § 2265, passed in 1875. This section provides: "When policies of insurance are effected by any person on his life, for the benefit of his wife * * the creditors of the person thus insuring shall have no claim on the proceeds of the policy, and the same shall inure to the persons for whose benefit the insurance was effected." Applying this section, the court found that the cash surrender values were exempt, saying, at page 364, "In the opinion of this court the cash surrender value of a life insurance contract is as much `the proceeds of a policy,' as the money due on the policy after the death of the insured. Thus, without going into the reported cases in Tennessee, the act of 1875, clearly exempts the surrender value of the policies in the instant case from the claim of the trustee of the bankrupt's estate." The court in its opinion severely criticises In re Moore, perhaps unjustifiably.

The case of In re Beckman, D.C.1943, 50 F.Supp. 339 considers a factual situation identical with ours and a statute of the State of Alabama, Code 1940, Tit. 7, § 624, which is nearly identical with the West Virginia statute. The court points out that the Alabama statute was taken from the New York statute, Insurance Law, § 55-a, and discusses leading cases from both New York and New Jersey, N.J.S.A. 17:34-28, 29. In a well-reasoned opinion it...