Redmond v. Erickson (In re Erickson)

• Decision Date: 26 August 2011
• Docket Number: BAP No. KS-11-005,Bankr. No. 10-20953
• Parties: IN RE LARRY J. ERICKSON and BETTY L. MOORE, Debtors. CHRISTOPHER J. REDMOND, Trustee, Appellant, v. LARRY J. ERICKSON and BETTY L. MOORE, Appellees.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Tenth Circuit

IN RE LARRY J. ERICKSON and BETTY L. MOORE, Debtors.CHRISTOPHER J. REDMOND, Trustee, Appellant,

v.LARRY J. ERICKSON and BETTY L. MOORE, Appellees.

BAP No. KS-11-005

Bankr. No. 10-20953

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE TENTH CIRCUIT

August 26, 2011

NOT FOR PUBLICATION

Chapter 7

OPINION^*

Appeal from the United States Bankruptcy Court

for the District of Kansas

Before CORNISH, Chief Judge, MICHAEL, and ROMERO, Bankruptcy Judges.

CORNISH, Chief Judge.

The Chapter 7 trustee appeals the bankruptcy court's order overruling his objection to a debtor's claimed exemption of life insurance proceeds and denying his motion for turnover. Having reviewed the record and applicable law, we affirm the bankruptcy court's order allowing debtor's exemption. However, ouraffirmance relies on grounds other than those stated by the trial court.¹

I. BACKGROUND FACTS

The facts of this case are undisputed.² Husband and wife Larry J. Erickson ("Erickson") and Betty L. Moore ("Moore") (collectively "Debtors") filed a petition for Chapter 7 relief on March 30, 2010. At the time the petition was filed, Erickson owned several insurance policies on his life with respect to which Moore was the designated beneficiary.³ Debtors neither scheduled the life insurance policies as assets, nor claimed them as exempt. Erickson died on May 24, 2010, within 180 days of filing the petition, thereby implicating 11 U.S.C. § 541(a)(5)(C),⁴ which operates to include the life insurance proceeds into Moore's bankruptcy estate.⁵

Moore did not notify the Chapter 7 trustee, Christopher J. Redmond ("Trustee"), of Erickson's death, or of her receipt of the life insurance proceeds as beneficiary. Trustee learned of these events from an interested third-party creditor. Trustee then sent Debtors' counsel a letter dated July 15, 2010,requesting information about the life insurance policies as well as an accounting of monies received by Moore. Debtors' counsel responded to Trustee by letter dated July 26, 2010, disclosing the existence of two life insurance policies, acknowledging Moore had received the proceeds of those policies, and stating Moore had used the proceeds to pay off the note and mortgage on her home.

On September 1, 2010, Moore amended her Schedules B and C, listing three life insurance policies as personal property, and claiming the proceeds thereof as exempt.⁶ Moore claimed two of the policies exempt under Kansas Statute § 60-2313(a)(7),⁷ which exempts any interest in any policy of insurance upon a person's life exempt from process pursuant to Kansas Statute § 40-414.⁸ Moore claimed the other policy exempt under Kansas Statute § 60-2308,⁹ which exempts pensions and benefits received from qualified retirement plans. Trustee then objected to Moore's claimed exemptions under Kansas Statute § 60-2313,¹⁰ and filed a motion for turnover with respect to the insurance proceeds.¹¹ Moorefiled various responses,¹² and the bankruptcy court set a hearing on the matter for December 15, 2010.

At the hearing, Trustee argued Moore did not have an exemptible interest in the life insurance policies as of the petition date, and that the insurance proceeds came into the bankruptcy estate pursuant to § 541(a)(5)(C) which supercedes any applicable state law.¹³ Further, Trustee argued Kansas Statute § 40-414 did not exempt the proceeds paid to Moore.¹⁴ Following the hearing, the bankruptcy court entered an order overruling Trustee's objection to Moore's claimed exemptions of the life insurance proceeds, and denying Trustee's motion for turnover.¹⁵ In its order, the bankruptcy court stated it need not determine the merits of Trustee's argument that § 541(a)(5)(C) supercedes Kansas Statute § 40-414

because the Court finds that Debtor Betty L. Moore had a separate and independent interest in the Insurance Policies and the proceeds thereof that could be exempted by the Debtor Betty L. Moore as of the Petition Date.¹⁶

Further, the bankruptcy court ordered Moore to reimburse Trustee's attorney fees and expenses in the amount of $2,000 because she failed to timely disclose the death of Erickson, the existence of the insurance policies, and payment of theproceeds.¹⁷ Trustee timely appealed the bankruptcy court's order to this Court.¹⁸

II. APPELLATE JURISDICTION

This Court has jurisdiction to hear timely-filed appeals from "final judgments, orders, and decrees" of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal.¹⁹ Neither party elected to have this appeal heard by the United States District Court for the District of Kansas. The parties have therefore consented to appellate review by this Court.

A decision is considered final "if it 'ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.'"²⁰ A bankruptcy court's order allowing a debtor's claimed exemption and denying a trustee's motion for turnover is final for purposes of appellate review.²¹

III. STANDARD OF REVIEW

The facts of this case are undisputed. Trustee appeals the bankruptcy court's conclusion that Moore had an exemptible interest in the life insurance policies as of the petition date under Kansas law. Thus, this appeal presents onlylegal issues for determination. Legal questions are reviewed de novo.²² De novo review requires an independent determination of the issues, giving no special weight to the bankruptcy court's decision.²³

IV. ANALYSIS

On appeal, Trustee first argues the bankruptcy court incorrectly concluded Moore "had a separate and independent interest in the Insurance Policies and the proceeds thereof that could be exempted by the Debtor Betty L. Moore as of the Petition Date."²⁴ We agree. Such a conclusion is not supported by Kansas law.

As of the petition date, Erickson, the insured, was still living. Therefore, Moore's interest in the life insurance policies was limited to that of a designated beneficiary subject to divestment. The Kansas Supreme Court has ruled that "'[a] beneficiary has only an inchoate right to the proceeds of a policy, subject to being divested at any time during the lifetime of the insured, by transfer, assignment, or change of beneficiary.'"²⁵ As a result, Moore had only an expectancy and not a legal or equitable interest in the life insurance policies that she could exempt asof the petition date. Notwithstanding the bankruptcy court's incorrect conclusion in this regard, as discussed below, Moore can nevertheless exempt the proceeds under Kansas statutory law.

Kansas is an opt-out state, meaning a debtor's exemptions are determined by state law, subject to applicable Bankruptcy Code limitations.²⁶ Many of Kansas' exemptions, including the exemption regarding life insurance policies, are set forth in § 60-2313 of the Kansas Statutes, which provides in pertinent part:

(a) Except to the extent otherwise provided by law, every person residing in this state shall have exempt from seizure and sale upon any attachment, execution or other process issued from any court in this state:

. . .

(7) Any interest in any policy of insurance or beneficiary certificates upon a person's life exempt from process pursuant to K.S.A. 40-414 and amendments thereto.²⁷

Section 40-414 of the Kansas Statutes provides in pertinent part:

(a) If a life insurance company or fraternal benefit society issues any policy of insurance or beneficiary certificates upon the life of an individual and payable at the death of the insured, or in any given number of years, to any person or persons having an insurable interest in the life of the insured, the policy and its reserves, or their present value, shall inure to the sole and separate use and benefit of the beneficiaries named in the policy and shall be free from:

(1) The claims of the insured or the insured's creditors and representatives;

(2) the claims of any policyholder or the policyholder's creditors and representatives, subject to the provisions of subsection (b);

(3) all taxes, subject to the provisions of subsection (d); and

(4) the claims and judgments of the creditors and representatives of any person named as beneficiary in thepolicy of insurance.²⁸

This statutory language has been interpreted by the Kansas Supreme Court and Kansas bankruptcy courts to protect life insurance proceeds paid to a beneficiary.

As most recently stated by a Kansas bankruptcy court:

Kansas law exempts the proceeds of a life insurance policy, whether they be cash or surrender value in the hands of the insured or proceeds in the hands of the beneficiary. Kan. Stat. Ann. § 40—414(a)(4) expressly exempts the "beneficiary's interest" from any claims of his creditors. Kansas courts have long held that proceeds of an insurance policy in the hands of a beneficiary or deposited in the beneficiary's bank account retain their exempt character. Although the insurance exemption statute has been amended from time to time since 1902, courts sitting in Kansas have continually held that proceeds held by beneficiaries remain exempt.²⁹

Trustee argues § 541(a)(5)(C) somehow "supercedes" this Kansas exemption statute.³⁰ This argument is completely contrary to § 522(b) which provides that debtors are entitled to certain exemptions notwithstanding § 541. Accordingly,Trustee's argument that § 541 supercedes the Kansas statutory exemption for life insurance proceeds has no merit, and as pointed out by Moore, has been previously rejected by another Kansas bankruptcy court.³¹ Although § 541(a)(5)(C) operates to bring the life insurance proceeds into Moore's bankruptcy estate because she became entitled to them within 180 days of filing her petition, she may still claim them as exempt pursuant to Kansas Statutes § 40-414 and § 60-2313.

On appeal, Trustee also argues that even if Kansas Statute § 40-414 is potentially applicable, Moore still may not exempt the life insurance proceeds because at the time she amended her schedules to claim exemption, she no longer had any interest in...