United States v. Metropolitan Life Insurance Company

• Decision Date: 14 January 1958
• Docket Number: No. 7465.,7465.
• Citation: 256 F.2d 17
• Parties: UNITED STATES of America, Appellant, v. METROPOLITAN LIFE INSURANCE COMPANY, a corporation, and The Guardian Life Insurance Company of America, a corporation, Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

256 F.2d 17 (1958)

UNITED STATES of America, Appellant, v. METROPOLITAN LIFE INSURANCE COMPANY, a corporation, and The Guardian Life Insurance Company of America, a corporation, Appellees.

No. 7465.

United States Court of Appeals Fourth Circuit.

Argued November 8, 1957.

Decided January 14, 1958.

On Rehearing June 10, 1958.

Louise Foster, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, Washington, D. C., and Albert M. Morgan, U. S. Atty., Morgantown, W. Va., on the brief), for appellant.

Howard Caplan, Clarksburg, W. Va. (Stewart McReynolds, Stotler, McReynolds & Caplan, Clarksburg, W. Va., George E. Walton, New York City, Charles M. Preston, Daniel J. Reidy, Agnes S. Hunt, New York City, on the brief), for appellees.

Before PARKER, Chief Judge, and SOPER and HAYNSWORTH, Circuit Judges.

PARKER, Chief Judge.

This is an appeal by the United States from a judgment dismissing, as against two insurance companies, an action to foreclose a tax lien on the cash surrender value of two insurance policies issued to a taxpayer, who had been convicted of tax frauds and had fled from the country. The District Court held that, in the absence of an election by the insured to take the cash surrender value of the policies, he had no property therein to which a lien for taxes could attach, and that, as he had not made such election and had not been personally served with summons in the action so that he could be subjected to an order of court requiring him to make the election, the court was without power to grant relief. The facts are stated in detail in the opinion of the District Judge and need not be repeated here. Those necessary to an understanding of the case are as follows:

Insured, Dr. Milton Alfred Gilmore, is a citizen of West Virginia. On January 16, 1953, he was convicted by a jury of wilfully and knowingly attempting to evade federal income taxes; but, before sentence could be pronounced in the case, he fled into Canada, where he still is. Insured owed income taxes for the years 1942 through 1948, in addition to payroll withholding taxes, which were properly assessed but remained unpaid notwithstanding proper notices and demands made by the Collector of Internal Revenue upon insured and his wife, to whom he had transferred large amounts of cash. Insured held life insurance policies in the Metropolitan Life Insurance Company and the Guardian Life Insurance Company, which had substantial cash surrender values at the time of the institution of this action. Both policies were payable at insured's death to his wife as beneficiary and to his daughter as contingent beneficiary, but each policy reserved to him the right to change the beneficiary at any time.

This action was instituted to enforce the liens of the unpaid federal taxes against insured's interest in the two policies as well as against other property which he owned; and his wife and daughter were named as parties to the action along with insured and the two insurance companies. It was conceded that notice of the tax liens had been served upon the insurance companies in New York as well as in West Virginia. Personal service of process could not be had upon insured or his wife or daughter, but process was served upon them by publication, and was regularly served upon the insurance companies. Judgment was entered enforcing the liens against certain real estate in West Virginia but dismissing the action in so far as it sought to enforce liens against insured's interest in the policies. Only the right of the United States to enforce tax liens against the policies is involved in this appeal.

Three questions are presented by the appeal: (1) Did the insured have a property interest in the insurance policies? (2) If so, was a tax lien in favor of the United States perfected on such interest? (3) Can the tax lien be foreclosed in this action and the interest of insured in the policies be subjected to the satisfaction of the lien? We think that all of these questions should be answered in the affirmative.

1. The Property Interest of Insured in the Policies.

We think there can be no question but that insured had a property interest in the policies. Both policies had a cash surrender value which was withdrawable at any time and, while the policies were payable at the death of insured to his wife and daughter as beneficiaries, he had reserved the right to change the beneficiaries at any time. He had complete power over the policies, therefore, and could have availed himself of the cash surrender value by surrendering the policies as easily as he could have cashed in a certificate of deposit in a bank by surrendering the certificate. To say that he had no property in the policies because he had not elected to take the cash surrender value and surrender them is as lacking in reality as to say that the holder of a certificate of deposit in a bank has no property therein because he has not elected to cash and surrender it and can receive nothing thereon until he elects to do so. It has been held that the insured has a property interest in a policy which has no cash surrender value but only a borrowing privilege. United States v. Trout, D.C., 46 F.Supp. 484, 485. A fortiori, such property interest exists where there is a cash surrender value and the insured has reserved complete control, not only over this, but also over who may take the proceeds of the policies as beneficiary upon his death.

Very much in point are the cases of Rowen v. Com'r, 2 Cir., 215 F.2d 641; United States v. Behrens, 2 Cir., 230 F.2d 504; United States v. Hoper, 7 Cir., 242 F.2d 468; and United States v. Bess, 3 Cir., 243 F.2d 675. In these cases it was held that a tax lien could be enforced against the proceeds of a policy to the extent of its cash surrender value, even though insured had died and the proceeds of the policy were payable to named beneficiaries. Dealing with this subjection of the cash surrender value to the liens in United States v. Behrens, supra, Judge Learned Hand said:

"The obligation of an insurer in a policy of life insurance is made up of a number of promises, of which one is to pay to the beneficiary the amount of the insurance — the `proceeds\' — and another is to pay the `surrender value\' to the insured upon his demand. The performances of these promises are not only separate, but inconsistent with each other: the payment of the `surrender value\' cancels the promise to pay the `proceeds\' and the promise to pay the `proceeds\' assumes that the insured has not demanded and received the `surrender value.\' * * *

"However, in Rowen v. Commissioner of Internal Revenue, supra, 215 F.2d at page 647, we held that `it is not realistic to view his\' the insured\'s `death as wiping out these values. Under the policies, his death was merely a condition upon which the surrender values no longer payable to the decedent became merged in the greater values which the insurers were obligated to pay the beneficiaries.\' There can be no doubt that the courts have spoken of the `surrender value\' as though it were in fact a fund which the insurer held as a custodian for the insured. This way of looking at the situation was long ago stated by Judge Addison Brown with his customary clarity, and the Supreme Court has twice quoted what he said with approval. We shall not requote it in full; it is enough to excerpt the following passages. `Though this excess of premiums paid is legally the sole property of the company, still in practical effect, though not in law, it is the moneys of the assured deposited with the company in advance to make up the deficiency in later premiums * * *. So long as the policy remains in force, the company has not practically any beneficial interest in it, except as its custodian, with the obligation to maintain it unimpaired and suitably invested for the benefit of the insured. This is the practical, though not the legal, relation of the company to this fund.\' This language obviously treats the surplus of the paid premiums that makes up the `surrender value,\' as a `fund\' held for the insured, and, if it were such, the lien would follow it into the `proceeds.\'"

This is in accord with the holding of the Supreme Court in Burnet v. Wells, 289 U.S. 670, 679, 53 S.Ct. 761, 764, 77 L.Ed. 1439, where Mr. Justice Cardozo, speaking for the court, said:

"A policy of life insurance is a contract susceptible of ownership like any other chose in action. It `is not an assurance for a single year, with a privilege of renewal from year to year by paying the annual premium.\' It is `an entire contract of assurance for life, subject to discontinuance and forfeiture for non-payment of any of the stipulated premiums.\' N. Y. Life Insurance Co. v. Statham, 93 U.S. 24, 30, 23 L. Ed. 789; Vance on Insurance, pp. 260, 262 and cases there cited. One who takes out a policy on his own life, after application in his own name accepted by the company, becomes in so doing a party to a contract, though the benefits of the insurance are to accrue to some one else. Mutual Life Ins. Co. of New York v. Hurni Packing Co., 263 U.S. 167, 177, 44 S.Ct. 90, 68 L.Ed. 235; Vance on Insurance, pp. 90, 91, and 108. The rights and interests thereby generated do not inhere solely in those who are to receive the proceeds. They inhere also in the insured who in co-operation with the insurer has brought the contract into being. * * * The contracts remain his, or his at least in part, though the fruits when they are gathered are to go to some one else."

As said by Mr. Justice Holmes in Grigsby v. Russell, 222 U.S. 149, 156, 32 S.Ct. 58, 59, 56 L.Ed. 133, "Life insurance has become in our days one of the best recognized forms of investment and self-compelled saving. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property."

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