Mercer National Bank v. White's Executor

• Citation: 236 Ky. 128
• Parties: Mercer National Bank of Harrodsburg et al. v. White's Executor et al.
• Decision Date: 18 November 1930
• Court: United States State Supreme Court (Kentucky)

236 Ky. 128

Mercer National Bank of Harrodsburg et al. v. White's Executor et al.

Court of Appeals of Kentucky.

Decided November 18, 1930.

1. Pledges. — Personal property of every kind may be subject of valid pledge.

2. Insurance. — Life policies constitute proper subject of pledge as security for debt.

3. Insurance. — Pledge of life policy to secure debt puts in lien all of pledgor's interest in insurance contract.

4. Pledges. — So long as debt remains unpaid, collateral security continues charged with lien, unless changed by subsequent contract or conduct of parties.

5. Insurance. — Pledgee of insurance policies has no right to excess proceeds after debt is deducted.

6. Insurance. — Assignment or pledge executed to creditors, accompanied by delivery of assigned insurance policy, held to have created valid lien to extent of debts.

7. Insurance. — It was pledgor's duty to pay premiums to keep insurance policies in force, and, if he failed to do so, pledgees could pay premiums and augument liens on policies to that extent.

8. Bankruptcy. — Bankruptcy Act preserves unimpaired all valid liens existing at time of adjudication (Bankruptcy Act, sec. 67 [11 USCA sec. 107]).

9. Pledges. — Pledgee has special property in pledge entitling him to possession, to protect which he may maintain detinue, replevin, or trover.

10. Execution. — Pledgor's interest is not subject to execution.

11. Bankruptcy. — Bankruptcy court will not interfere with sale by pledgee of thing pledged, under power of sale given by terms of contract, in absence of claim that power is exercised fraudulently or oppressively.

12. Bankruptcy. — Insurance policies having no cash surrender value are exempted from operation of Bankruptcy Act (Bankruptcy Act, sec. 70a(5), 11 USCA sec. 110(a) (5).

Bankruptcy Act, sec. 70a(5), 11 USCA sec. 110(a) (5), in its express terms, deals only with policies having a cash surrender value, and, therefore, other policies are impliedly exempted from its operation.

13. Bankruptcy. — Valid liens on policies of insurance without cash surrender value are unaffected by bankruptcy proceedings (Bankruptcy Act, sec. 70(a) (5), 11 USCA sec. 110(a) (5).

14. Bankruptcy. — Insurance policies having cash surrender value, although subject to lien for amount less than asset value, must be administered in bankruptcy proceedings (Bankruptcy Act, sec. 70a (5), 11 USCA sec. 110(a) (5).

15. Bankruptcy. — When insurance policy has no cash surrender value or when such value is less than lien against policy, bankruptcy court does not take jurisdiction (Bankruptcy Act, sec. 70a(5), 11 USCA sec. 110(a) (5).

16. Bankruptcy. — Trustee in bankruptcy has no interest in life policy payable to insured's personal representative, when insured has previously pledged policy for sum equal to or greater than stipulated surrender value (Bankruptcy Act, sec. 70a(5), 11 USCA sec. 110(a) (5).

17. Bankruptcy. — Discharge in bankruptcy does not affect liens on insurance policy created by valid pledge (Bankruptcy Act, sec. 67 [11 USCA sec. 107]).

18. Bankruptcy. — Discharge in bankruptcy leaves intact all liens except those especially stricken down by Bankruptcy Act, effect of discharge being to release personal liability only (Bankruptcy Act, sec. 67 [11 USCA sec. 107]).

19. Bankruptcy. — Discharge in bankruptcy does not affect vested liens acquired more than four months prior to proceeding, and liens are enforceable after discharge (Bankruptcy Act, sec. 67 [11 USCA sec. 107]).

20. Bankruptcy. — Liens exceeding cash surrender value on life policy, created by assignment to creditors as collateral security, held not discharged by insured's discharge in bankruptcy, though personal liability was extinguished; pledge of policy not being invalidated by discharge in bankruptcy and liens being enforceable.

Appeal from Mercer Circuit Court.

C.E. RANKIN for appellants.

E.H. GAITHER for appellee Charles B. White's executor.

BRUCE & BULLITT for appellee Mutual Life Insurance Company.

OPINION OF THE COURT BY JUDGE WILLIS

Reversing.

Owing to the depreciation in high-priced lands which he had purchased, Charles B. White, a merchant in Burgin, became financially involved. In addition to his other indebtedness he owed large sums to the Mercer National Bank of Harrodsburg, the Citizens' Bank & Trust Company of Burgin, P.D. Catlin, and K.A. Perkins, and applied to them for additional money to tide him over his difficulties. There was a meeting of his friends and the representatives of the banks at Perryville, in the month of February, 1921. At that meeting they agreed to furnish the money and Mr. White agreed to secure them by a mortgage on all of his property and an assignment of certain insurance policies he was then carrying. The amount of money required being larger than was expected, the transaction was about to fall through when Mr. White proposed that he would take out an additional policy of insurance for $5,000 and assign it along with the other policies. Thereupon the bank and his friends agreed to make the loan. Shortly thereafter Mr. White and his wife executed a mortgage on all of his property to secure the entire indebtedness, both old and new, amounting to $19,240. A few days later he assigned his old policies of insurance and also a new $5,000 policy issued by the Mutual Life Insurance Company of New York. In the spring of 1922 Mr. White filed his petition and was adjudged a bankrupt. He listed as assets all his policies, including the Mutual Life policy. He listed the lenders as creditors holding a mortgage on his property and a lien on the insurance policies. They each filed claims asserting their lien under the mortgage and by virtue of the assignment of the policies. The surrender or redeemable value of the insurance policies was fixed at $1,600, and they asked that their claims be treated as lien claims and enforced by a sale of property. A general order of sale was entered. The trustees, the Citizens' Bank & Trust Company of Burgin, and the Farmers' Trust Company of Harrodsburg, an adjunct of the Mercer National Bank, made a sale of all the property real and personal and disposed of the insurance policies at their redeemable value. The Equitable policies were surrendered to the company and redeemed for their cash values while Mr. White himself paid the surrender value of the Prudential policy. These amounts were paid to the creditors and applied on their debts. At that time the Mutual Life policy had no surrender value, and appears to have been retained by the assignees. All the premiums thereon were paid by Mr. White. In addition to insuring his life that policy provided for sick benefits. Several years later Mr. White became ill and entitled to sick benefits. As the assignment of the policy appeared on the records of the company the sick benefits were sent to the assignees.

White sued the assignees to recover the sick benefits which they had collected, and to cancel the pledge of the policy. On final hearing plaintiff was granted the relief prayed, and defendants have appealed.

Personal property of every kind may be the subject of a valid pledge. 21 R.C.L., sec. 5, p. 634, 49 C.J., p. 902. And policies of life insurance constitute personal property of a character that may be pledged as security for debt. 37 C.J., sec. 134, p. 428; Hodge v. Ellis, 76 Ga. 272; Coleman v. Anderson, 98 Tex. 570, 86 S.W. 730; Dungan v. Mutual Benefit Life Ins. Co., 46 Md. 469; Jones v. N.Y. Life Ins. Co., 15 Utah 522, 50 P. 620; Widaman v. Hubbard (C.C.) 88 F. 806; Mandeville v. Kent, 88 Hun. 132, 34 N.Y.S. 622; Binkley v. Jarvis, 102 Ill. App. 59; Farmers' & T. Bank v. Johnson, 118 Iowa, 282, 91 N.W. 1074; Pollock v. Smith, 107 Ky. 509, 54 S.W. 740, 21 Ky. Law Rep. 1227; Embry's Adm'r v. Harris, 107 Ky. 61, 52 S.W. 958, 21 Ky. Law Rep. 714.

The pledge of a life insurance policy to secure a debt puts in lien all interest the pledgor has in the insurance contract.

So long as the debt remains unpaid the collateral security given for its payment continues charged with the lien, unless changed by the subsequent contract or conduct of the parties concerned. But the pledgee of insurance policies has no right to the excess proceeds after his debt is deducted. Mutual Benefit Life Ins. Co. v. First National Bank, 160 Ky. 538, 169 S.W. 1028; Wirgman v. Miller, 98 Ky. 620, 33 S.W. 937, 17 Ky. Law Rep. 1174; N.Y. Life Ins. Co. v. Miller, 56 S.W. 975, 22 Ky. Law Rep. 233; Irons v. U.S. Life Ins. Co., 128 Ky. 640, 108 S.W. 904, 33 Ky. Law Rep. 46, 129 Am. St. Rep. 318; Barbour v. Larue, 106 Ky. 546, 51 S.W. 5, 21 Ky. Law Rep. 94; Embry's Adm'r v. Harris, 107 Ky. 61, 52 S.W. 958, 21 Ky. Law Rep. 714; Wrather v. Stacy, 82 S.W. 420, 26 Ky. Law Rep. 683; Lee v. Mutual Life Ins. Co., 82 S.W. 258, 26 Ky. Law Rep. 577; N.Y. Life Ins. Co. v. Brown, 139 Ky. 711, 66 S.W. 613, 23 Ky. Law Rep. 2070; Murnam v. White, 22 S.W. 555, 16 Ky. Law Rep. 241; Radford Grocery Co. v. Powell, 228 Fed. 1.

The assignment or pledge executed by White to his creditors, accompanied by a delivery of the policy of insurance, created a valid lien thereon to the extent of the debts. The lien covered all the rights which the contract gave to White, and under the circumstances, when there was no statute or contract to the contrary, it was the duty of White to pay the premiums necessary to keep the insurance in force, but if he had failed to do so, the pledgees could have paid the premiums and augmented to that extent their liens on the pledged property. 37 C.J. 48, p. 436; Whittaker v. Howard, 7 Ky. Op. 542.

The Bankruptcy Act preserves unimpaired all valid liens existing at the time of the adjudication. Section 67 (11 USCA, sec. 107); 7 Corpus Juris, p. 185, sec. 287; Dale v. Pattison, 234 U.S. 399, 34 S. Ct. 785, 58 L. Ed. 1370, 52 L.R.A. (N.S.) 754; Hiscock v. Varick Bank, 206 U.S. 28, 27 S. Ct. 681, 51 L. Ed. 945; Hanson v. Blake & Co. (D.C.) 155 F. 342; In re Loveland (C.C.A.) 155 F....