Mutual Trust Life Insurance Company v. Wemyss

• Decision Date: 27 February 1970
• Docket Number: Civ. No. 10-165.
• Citation: 309 F. Supp. 1221
• Parties: MUTUAL TRUST LIFE INSURANCE COMPANY, Plaintiff, v. George S. WEMYSS et al., Defendants.
• Court: U.S. District Court — District of Maine

309 F. Supp. 1221

MUTUAL TRUST LIFE INSURANCE COMPANY, Plaintiff, v. George S. WEMYSS et al., Defendants.

Civ. No. 10-165.

United States District Court, D. Maine, S. D.

February 27, 1970.

COPYRIGHT MATERIAL OMITTED

John A. Mitchell, Portland, Me., for plaintiff.

Robert M. York, Old Orchard, Me., James R. Desmond, Robert C. Robinson, James R. Flaker, David N. Fisher, Jr., Harrison Richardson, Portland, Me., for defendants.

OPINION AND ORDER OF THE COURT

GIGNOUX, District Judge.

This is an action brought by Mutual Trust Life Insurance Company arising out of the defalcations and subsequent bankruptcy of a former general agent, George S. Wemyss. Jurisdiction is grounded in diversity of citizenship. The amended complaint is in three counts. The first count is an action in the nature of interpleader pursuant to the Federal Interpleader Act, 28 U.S.C. § 1335 (1964), to determine the rights of the parties with respect to the proceeds of a $10,000 life insurance policy of which Wemyss was the owner and named beneficiary at the date of his bankruptcy. The second count seeks a declaratory judgment under the Federal Declaratory Judgment Act, 28 U.S.C. § 2201 et seq. (1964), as to the rights of the parties with respect to the renewal commissions due, and to become due,¹ to Wemyss under his employment contract with Mutual. In the third count Mutual demands judgment against Globe Indemnity Company in the amount of $16,459.33 claimed to be owed under a fidelity bond issued by Globe insuring Mutual against the defalcations of Wemyss.

The relevant facts have been stipulated by the parties to be as follows:

Wemyss had been employed by Mutual as its general agent in Portland since 1946. Periodically his employment contracts were renewed, the most recent renewal being dated July 1, 1965. In late November 1967 Wemyss disclosed to Mutual that he had defrauded the company out of a substantial sum in advance premium payments. His employment was immediately terminated. On December 5, 1967 Wemyss filed a petition in bankruptcy and was adjudicated bankrupt in this Court. As of December 5, 1967 Wemyss' total defalcations were $18,306.93, but additionally Wemyss was indebted to Mutual for advances to his general agency and personal accounts in the total sum of $11,238.52. Wemyss also was obligated to Mutual for advances to an employee, Wynn Crawford, in the amount of $830.76. All of the monies advanced by Mutual to Wemyss were represented by notes which were executed within six years prior to the date of bankruptcy.

On the date of bankruptcy, Wemyss was the owner and beneficiary and had all the incidents of ownership of a $10,000 life insurance policy written by Mutual on the life of Lloyd F. MacDonald, a former employee of Wemyss. At that time the policy, which had been issued on June 8, 1967, had no cash surrender value. On February 3, 1968, within two months after Wemyss' bankruptcy, MacDonald died. As of May 1, 1969, the date of filing of the amended complaint in this Court, the amount due on this policy was $10,552.50, which amount has been paid into Court by Mutual.

Under the terms of Wemyss' employment contract, he, or his estate, was to be paid renewal commissions on all insurance policies written by him or his general agency as long as they remained in force. Mutual is presently withholding $9,382.86 renewal commissions earned to the date of trial, of which $176.09 was earned prior to the bankruptcy. The amount of any future renewal commissions to which Wemyss might be entitled is not presently ascertainable because his right to receive them is contingent upon the policies remaining in force and the premiums thereon being collected and paid as they become due. Nor have the parties been able to agree upon their present commuted value.²

On November 25, 1961, six years prior to his bankruptcy, Wemyss had executed an assignment of his right to all future renewal commissions under his employment contract in favor of First National Bank of Brunswick as collateral for loans by the Bank to Wemyss.³ Mutual expressly consented to this assignment. As of the date of bankruptcy, Wemyss was indebted to the Bank in the total amount of $8,093.38.

Globe insured Mutual against losses by embezzlement, defalcation, or other dishonest or illegal actions of Wemyss during the period from November 1, 1964 through November 1, 1967. Globe's liability to Mutual under this policy is $16,459.33, for which Mutual has filed the proof of claim required by the policy. Lumbermen's Mutual Casualty Company similarly insured Mutual from November 1 through December 1, 1967. Wemyss' defalcations during this period totaled $1,945.60. Lumbermen's has wholly compensated Mutual for $945.60 of these losses, and Mutual has absorbed $1,000 of the losses under the deductible clause of the policy.

In addition to plaintiff Mutual, the parties presently before the Court, all named as defendants, are: Wemyss, Globe, Lumbermen's, Wemyss' Trustee in Bankruptcy, and Maine National Bank, the corporate successor to First National Bank of Brunswick.

At issue in this case are: (1) the rights of the various parties to the proceeds of the life insurance policy on the life of Lloyd MacDonald; (2) the rights of the parties to the renewal commissions earned by Wemyss under his employment contract with Mutual; and (3) the amount of Globe's liability to Mutual under its fidelity bond. For the reasons which follow, the Court has concluded: (1) that Wemyss' Trustee in Bankruptcy is entitled to the life insurance proceeds as an asset of the bankrupt estate; (2) that Mutual is entitled to apply the renewal commissions presently held by it⁴ in satisfaction of Wemyss' indebtedness to Mutual; and (3) that Globe is liable to Mutual under its fidelity bond in the stipulated amount of $16,459.33, without any credit for the amount of the renewal commissions presently to be applied by Mutual in satisfaction of Wemyss' indebtedness to it.

I The Life Insurance Proceeds

It is stipulated that on December 5, 1967, the date of his bankruptcy, Wemyss was the owner, beneficiary, and had all the incidents of ownership of the $10,000 life insurance policy issued by Mutual on the life of Lloyd MacDonald, Wemyss' former employee; that at that time the policy had no cash surrender value; and that MacDonald died on February 3, 1968 while the bankruptcy proceeding was still pending. The Trustee claims that the proceeds of this policy passed to him as an asset of the bankrupt estate. Wemyss and the three insurance companies contend that the proceeds passed to Wemyss as after-acquired property.⁵ All parties agree that their rights to the insurance proceeds must depend upon the proper interpretation and application of Section 70, sub. a(5) of the Bankruptcy Act, 11 U.S.C. § 110(a) (5) (1964), which provides in relevant part as follows:

The trustee of the estate of a bankrupt * * * upon his * * * appointment and qualification, shall in turn be vested by operation of law with the title of the bankrupt as of the date of the filing of the petition initiating a proceeding under this title, except insofar as it is to property which is held to be exempt, to all of the following kinds of property wherever located * * * (5) property, including rights of action, which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him, or otherwise seized, impounded, or sequestered: * * * And provided further, That when any bankrupt, who is a natural person, shall have any insurance policy which has a cash surrender value payable to himself, his estate, or personal representatives, he may, within thirty days after the cash surrender value has been ascertained and stated to the trustee by the company issuing the same, pay or secure to the trustee the sum so ascertained and stated, and continue to hold, own, and carry such policy free from the claims of the creditors participating in the distribution of his estate under the bankruptcy proceedings, otherwise the policy shall pass to the trustee as assets; * * *.

It is not disputed that prior to his bankruptcy Wemyss could have transferred the insurance policy here involved and that it might have been levied upon and sold under judicial process against him. Nor was the policy exempt under Maine law. 24 M.R.S.A. § 426 (1964) (as amended 1967, repealed ch. 132 § 11 (1969), now 24-A M.R.S.A. § 2428 (1970)). It is thus clear, as the parties agree, that by virtue of Section 70, sub. a(5) Wemyss' interest in the policy vested in the Trustee as of the date of the filing of the petition in bankruptcy, unless the priviso to that section is applicable.⁶

With respect to the applicability of the proviso, certain principles are well established. The proviso in terms operates only when "any bankrupt, who is a natural person,⁷ shall have any insurance policy which has a cash surrender value payable to himself, his estate, or personal representatives." The Supreme Court has held that where the bankrupt is the owner of a life insurance policy on his own life, which has a cash surrender value payable to himself, his estate, or personal representatives, he is entitled to keep the policy by paying or securing to the trustee its cash surrender value determined as of the date of bankruptcy. Burlingham v. Crouse, 228 U.S. 459, 33 S.Ct. 564, 57 L.Ed. 920 (1913); Everett v. Judson, 228 U.S. 474, 33 S.Ct. 568, 57 L.Ed. 927 (1913); Andrews v. Partridge, 228 U.S. 479, 33 S.Ct. 570, 57 L.Ed. 929 (1913). Similarly, if such a policy has no cash surrender value, it remains the property of the insured, and the trustee is not entitled thereto. Burlingham v. Crouse, supra. It is also settled that where the bankrupt is the beneficiary, but not the owner, of an insurance policy on the life of another, the trustee has no claim to the policy or to its cash surrender value, and if the insured dies subsequent to...