Milligan v. Trautman, A-05-CA-425-LY.

• Decision Date: 10 March 2006
• Docket Number: No. A-05-CA-425-LY.,A-05-CA-425-LY.
• Citation: 340 B.R. 773
• Parties: Marsha G. MILLIGAN, as Chapter 7 Trustee, Appellant, v. Charles Frederick TRAUTMAN and Carol Jean Trautman, Appellees.
• Court: U.S. District Court — Western District of Texas

340 B.R. 773

Marsha G. MILLIGAN, as Chapter 7 Trustee, Appellant, v. Charles Frederick TRAUTMAN and Carol Jean Trautman, Appellees.

No. A-05-CA-425-LY.

United States District Court, W.D. Texas, Austin Division.

March 10, 2006.

Eric J. Taube, Hohmann, Taube & Summers, L.L.P., Austin, TX, for debtors.

Charles Randall Carr, Diamond McCarthy Taylor & Finley, LLP, Austin, TX, for Marsha G. Milligan, appellant.

MEMORANDUM OPINION AND ORDER

YEAKEL, District Judge.

Before the Court in the above styled cause of action is the appeal of Marsha Milligan, as Chapter 7 Trustee for Appellees Charles and Carol Trautman's bankruptcy estate, from the Bankruptcy Court's Order Denying Objection To Exemptions, signed April 11, 2005. At issue is whether a check received by the Trautmans before their bankruptcy petition was filed, from Northwestern Mutual Life upon cancellation and surrender of a life insurance policy and which they retained on their petition date, is exempt from their bankruptcy estate under the Texas exemption provision of the Texas Insurance Code. See Tex. Ins.Code Ann. § 1108.051 (West Pamphlet 2005) ("Section 1108.051"). The parties submitted briefs on the issue (Clerk's Document Nos. 4, 5, & 6) and on November 1, 2005, the Court board oral argument, at which both parties were represented by counsel. After considering the briefs, the arguments of counsel, the file, and the applicable law, the Court is of the opinion that Milligan's objection was proper and that the Bankruptcy Court should have denied the Trautmans' Section 1108.051 exemption. Consequently, this Court concludes that the Bankruptcy Court's order decrying Milligan's objection should be reversed.

Stipulated facts

Before filing for bankruptcy protection, the Trautmans held Northwestern Mutual life insurance policy number 13066339 (the "Policy") insuring the life of Charles Trautman. On November 24, 2004, the Trautmans, before filing for bankruptcy protection, canceled and surrendered the Policy. At cancellation, the Policy had a gross cash value of $95,239.96, and an outstanding loan balance of $67,327.08, resulting in a net cash value of $27,912.88. On November 24, upon receiving notice that the Trautmans were canceling the Policy, Northwestern Mutual tendered to Mr. Trautman a check in the amount of $27,912.99 ("the Check").¹ The Trautmans filed a voluntary joint petition in bankruptcy under Title 11 United States Code, chapter 7 on December 7, 2004 (the "Petition Date"). On that date, they still retained the Check, uncashed.

The Trautmans elected to exempt property of their bankruptcy estate under Texas state law, and on December 12, they filed schedules, statements, and a summary, which lists their assets, debts, creditors, and other information.² The Trautmans claimed as exempt property a check from Northwestern Mutual in the amount of $27,912.00 (presumably the Check) based upon Section 1108.051. Milligan timely objected to the claimed exemption and the Trautmans responded. Following a hearing, the Bankruptcy Court signed an order that denied Milligan's objection, which she has timely appealed. This Court, thus has jurisdiction over the appeal. See 28 U.S.C. § 158(a).

Analysis

Determining whether an exemption applies to property that otherwise would be part of a debtor's bankruptcy estate is a core proceeding. See 28 U.S.C. § 157(b)(2)(B). When reviewing a Bankruptcy Court's decision in a core proceeding, the district court functions as an appellate court and applies the standard of review generally applied in federal-court appeals. See Webb v. Reserve Life Ins Co., 954 F.2d 1102, 1103-04 (5th Cir.1992). This appeal presents a single legal issue, a question of statutory interpretation-whether the Check qualifies as exempt property under Section 1108.051; there are no disputed facts. District courts review questions of law from bankruptcy proceedings de novo; therefore, this Court will make a judgment independent of the Bankruptcy Court's and without deference to that court's analysis and conclusions. See Coston v. Bank of Malvern, 987 F.2d 1096, 1099 (5th Cir.1992).

At issue is whether Section 1108.051, which provides an exemption for insurance and annuity benefits, applies and exempts the Check from the Trautmans' bankruptcy estate. Section 1108.051 provides:

(a) Except as provided by Section 1108.053, this 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 or annuity contract issued by a life, health, or accident insurance company, including a mutual company or fraternal benefit society; or

(2) an annuity or benefit plan used by an employer or individual.

(b) Notwithstanding any other provision of this code, insurance or annuity benefits described by Subsection (a);

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

Section 1108.051.

Milligan contends that Section 1108.051 applies only to insurance benefits, which the Check is not, because the Trautmans received it upon cancellation and surrender of a life insurance policy before their Petition Date. She further contends that based on the language of the section, when cash is distributed upon surrender of an insurance policy, as the Check was here, it is not a benefit "to be provided to an insured" "under" a policy. Milligan also contends that the Check is not within the two specifically mentioned categories of insurance benefits in subsection (a) of Section 1108.051, cash value and proceeds. She contends the Check is not "cash value of a policy to be provided," "under" a policy, because, on the Petition Date, no policy existed to which cash value could attach. She also contends the Check is not policy proceeds "to be provided" "under" a policy, because the Check was not paid "under" the policy upon a triggering event such as death, injury, or medical necessity.

Milligan also argues that to consider the Check an insurance benefit contradicts a plain reading of the statute and is inconsistent with the public policy objective that underlies the exemption, which is to protect insurance benefits intended for policy beneficiaries from bankruptcy forfeiture. By canceling and surrendering the Policy, Milligan contends that any need or cause for a Section 1108.051 exemption is obviated, as no longer is there a policy under which benefits will be paid and no longer is there any beneficiary's interest to protect. Milligan argues that the Check is nothing more than a cash disbursement to the Trautmans, which is indistinguishable from their other cash assets, and should be included in their bankruptcy estate.

The Trautmans respond that a plain reading of the statute indicates that the Texas Legislature intended to provide for the result obtained in the Bankruptcy Court and allow a Section 1108.051 exemption because the Check, although disbursed to the Trautmans before the Petition Date, was, on the Petition Date, an identifiable fund held discreetly from other assets, and represents the cash value of the Policy, which was provided to the insured. The Trautmans contend that this result provides meaning to Section 1108.051(b)(2)(B) that states that benefits, including cash value, are fully exempt to pay a debt of an insured "either before or after the benefits are provided."

The parties have not directed this Court to, not has the Court found, any Supreme Court, Fifth Circuit, or federal district-court case interpreting Section 1108.051 in a context analogous to what is presented in this cause.³ Several bankruptcy courts have addressed the Section 1108.051 exemption, although again not as to the issue presented to this Court. In doing so, such courts have extensively reviewed the Texas Legislature's intent and the statutory progress of the predecessor to Section 1108.051, Article 21.22(1) of the Texas Insurance Code. See Act of May 30, 1993, 73d Leg., R.S., ch. 685, § 20.20, art. 21.22, 1993 Tex. Gen. Laws 2559, 2706 ("Article 21.22(l)").⁴ The issue presented regarding Article 21.22(1) is the statutory interpretation and interplay of the general personal-property exemption provisions of Texas Property Code Chapter 42⁵ and the more directed Article 21.22(1) exemption for cash values of annuities or life insurance policies in existence on the debtor's petition date. See, e.g., In re Scott, 193 B.R. 805 (Bankr.N.D.Tex.1996); In re Borchers, 192 B.R. 698 (Bankr.W.D.Tex.1996); In re Shurley, 163 B.R. 286 (Bankr.W.D.Tex. 1993); In re Bowes, 160 B.R. 290 (Bankr. N.D.Tex.1993); In re Brothers, 94 B.R. 82 (Bankr.N.D.Tex.1988). One bankruptcy court, in addition to addressing the cash value of life insurance policies existing on the debtor's petition date, also addressed proceeds paid to a debtor-beneficiary before her petition date. See In re Young, 166 B.R. 854 (Bankr.E.D.Tex.1994) (debtor's two "life insurance proceeds access accounts" in existence on petition date, which contained proceeds of death benefits paid as a result of insured's, the debtor's husband's, death and cash value of debtor's two life insurance policies). In all of these cases, the issues surrounded cash values of insurance policies in existence on the debtors' bankruptcy petition dates. This Court is unaware of any case applying the Section 1108.051 exemption to cash received by a debtor, upon surrendering an insurance policy before the debtor's bankruptcy petition date.

As the issue presented involves the interpretation and...