Milligan v. TrautmanMilligan v. Trautman
Chаrles Trautman surrendered his whole-life insurance policy, receiving a check for the final cash value. He then filed for bankruptcy, seeking to exempt the check from the estate. Holding that the cash from a surrendered whole-life policy is not exempt under Texas law, we affirm.
I
Husband and wife Charles and Carol Trautman got into financial trouble. In 2004, Charles surrendered a whole-life insurance policy that he owned, а policy which insured his life with the death-benefit payable to Carol. The policy had a gross cash surrender value of about $95,000 and an outstanding loan balance of about $67,000, yielding a $27,913 difference. Charles reсeived a check for that amount but did not cash it. Soon after the couple filed for bankruptcy. After electing to exempt property from the estate under Texas law rather than federal law, 1 the Trаutmans listed as an exemption the un-cashed check. Trustee Marsha Milligan objected. After a hearing, the Bankruptcy Judge denied the objection, upholding the exemption. Milligan appealed, and the district court reversed. The Trautmans appeal, and we review this purely legal question de novo.
II
This case centers on Texas Insurance Code § 1108.051, which provides:
(a) ... [T]his 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 ... issued by a life, health, or accident insurance company, including a mutual company or fraternal benefit society ...
(b) Notwithstanding any other provision of this code, insurance ... benefits described by Subsection (a):
(1) inure exclusively to the benefit of the person for whose use and benefit the insurance ... is designated in the policy ...; 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 оf 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.
This court must interpret the statute as a Tеxas court would. In Texas, giving effect to the legislature’s intent is the cardinal rule. 2 There are no Texas or federal cases directly on point.
This case is created by the peculiarities of whole-life policies. Term-life policies are simple — the owner pays a regular premium to the insurer, who pays a death-benefit to the beneficiary on the death of the insured if the premiums were current. With whole-life policies, the owner pays the insurer more than the cost of рremiums. The excess money goes into a
First, we look to the text. Parsing the text, we see that “benefits,” while not explicitly defined, are either “cash value ... of an insurance policy” or “proceeds of an insurance policy” that are “to be provided to an insured or beneficiary....” Such “benefits” “inure exclusively to the benefit of the pеrson for whose use and benefit the insurance ... is designated in the policy or contract” and cannot be garnished, seized, or demanded in bankruptcy. Thus, § 1108.051 protects “benefits,” and we must determine whether the cheсk here represents “benefits.” It does not — even though on first glance it looks like “cash value ... of an insurance policy” — because “benefits” are things “to be provided to an insured or beneficiary,” and the сash from a surrendered whole-life policy goes not to the (former) insured or (former) beneficiary, but the (former) owner of the policy. Charles argues implicitly that the money went to him as a final “benefit” payаble to him as the insured, but the check went to him as the owner of the policy, not the insured. 4 That “benefits” “inure exclusively to the benefit of the person for whose use and benefit the insurance ... is designated in the policy” buttresses our conclusion because the surrendered check goes not to the person “whose use and benefit the insurance ... is designated in the policy” — that is, the beneficiary and maybe the insured — but the owner. 5 In sum, when the owner of a whole-life policy surrenders the policy, the funds are not protected by § 1108.051. 6
Second, the statutory history confirms our analysis and explains what “cash value ... of an insurance policy” аctually means. Before a 1991 amendment to the predecessor of § 1108.051 which added the term “cash values,”
7
courts did not exempt
Third, we notе the perils of the contrary conclusion. Exempting all money traceable to a surrendered whole-life policy would allow people to use such policies merely to avoid creditors. People could place their money in a whole-life policy with the cheapest possible premium, naming as a beneficiary someone to whom they’d want money in a normal savings account to go should they die. Sometime later — presumably even after only a few days — they could withdraw some of the money, or even all of it, forever shielding the money from creditors. That can’t be the law. Less insidiously, someone desiring to have a whole-life policy actually for insurance reasons nonetheless could put her extra money into the policy simply to shield it from creditors. That also can’t be the law.
The Trautmans cite
In re Young,
10
a bankruptcy case from Texas that the district court realized was one of the only useful cases. In
Young,
the bankruptcy court exempted two assets under the posi>-1991 predecessor to § 1108.051: 1) the cash value of an existing whole-life policy owned by the debtor; and 2) “life insurance proceeds access accounts,”
11
created before the petition date by the insurance company to hold the death-benefit proceeds paid to the debtor on the death of the debtor’s husband. But these two assets are the type paradigmatically protected by § 1108.051 — existing whole-life policies and proceeds from a term-life policy. The Trautmans urge that the money from their surrenderеd policy is, like the latter, “proceeds” from a previously-existing policy. But the value of a surrendered whole-life policy isn’t “proceeds” like that in
Young
— or in general — because there was never a proceeds-producing event, like death, sending money to the beneficiary, only the surrender of a policy, sending money to the (former) owner.
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Although one might say that the term-life policy no longer “existed” at thе time of bankruptcy in
Young,
just like the whole-life policy no longer “existed” after the Trautmans surrendered it, in
Young
there was still a
Because money from a surrendered whole-life policy is not exempt under § 1108.051, we AFFIRM.
Notes
.
See generally Walden v. McGinnes (In re Walden),
.
See LaSalle Bank Nat’l Ass'n
v.
Sleutel,
. As Milligan noted at oral argument, usually there is a flat death-benefit paid upon the insured’s death — there is no separate payment of the cash value. The cash value is subsumed into that benefit as an actuarial matter.
. Charles also points to the "before or after the benefits are provided language," but that languagе doesn’t define "benefits” in the first place. It states only that, once "benefits” are created, they are protected as long as they're traceable.
. One could argue that the owner is a persоn for whose "use” a whole-life policy is designated, hence certain things that "inure exclusively” to the owner — the cash value of a surrendered policy and, while the policy exists, the privileges of borrowing аgainst the cash value and applying the cash value to payment of future premiums — are exempt. This argument, however, fails because "benefits” are things "to be provided to an insured or beneficiary,” not an owner. Although the definition of "use” may not be clear, we decline to read it a way that creates conflict with this latter phrase.
. Timing is not critical here. Had Charles surrendered the policy after bankruptсy, the money he received would then not be exempt from garnishment, seizure, or future bankruptcy. Protection ceases when the policy is surrendered.
.
See
Act of May 22, 1991, 72d R.S. Ch. 609 § 1, 1991 Tex. Gen. Law 2217. The phrase containing "cash values” has since been re
.
See In re Brothers,
. Of course, a contingent beneficiary will receive nothing if the, policy owner later surrendеrs the policy, but the amendment to § 1108.051 protects the many, other beneficiaries who eventually receive benefits.
.
. These accounts are essentially interest-bearing checking accounts held with the insurer.
. The Trautmans also point to