Sanders v. Ætna Life Insurance

May 30, 1913. The opinion of the Court was delivered by This is an action on two policies of insurance, by the beneficiaries therein named.

His Honor, the Circuit Judge, rendered judgment in their favor, and the defendant appealed.

It appears from the agreed statement of facts, upon which the case was heard in the Circuit Court, that M.F. Sanders and Bessie W. Sanders, his wife, were copartners in trade, as M.F. Sanders Company, and both as partners and as individuals, were adjudged bankrupts on the 30th of June, 1911, in pursuance of a petition filed on the 26th of June, 1911. That M.F. Sanders informed the trustee that he had certain policies of insurance on his life, which were in the Bank of Greenwood, where they could be seen by him. That the trustee said he would take the matter up, some other time. That the said policies were never scheduled by the bankrupts. That M.F. Sanders carried the policies to his attorney, who advised him that they had no cash surrender value, and that he should communicate this fact to the referee and trustee, which he did. On the 1st of November, 1911, Bessie W. Sanders was discharged as a bankrupt, but M.F. Sanders was never discharged. On the 12th of January, 1912, M.F. Sanders committed suicide, and left surviving him his wife and three children, who are plaintiffs in this action. On the 22d of November, 1911, upon the application of M.F. Sanders, the beneficiaries in the two policies were changed in favor of his three children. The policies provided that the insured should have the right to change the beneficiary without his or her consent. In the application for the change of beneficiary, M.F. Sanders made this statement: "I am not now adjudged insolvent, nor have I made a general assignment, for the benefit of creditors, that remain unsatisfied." The two policies were originally payable to Bessie W. Sanders, if she survived the insured, otherwise, to his executors, administrators or assigns. "Neither of the policies had any cash surrender value, prior to the death of the insured, and no loan value, until the end of the third premium year, to wit: 29th of July, 1912, nor until the payment of the third premium of 29th of July, 1912; and the company would have paid no money, prior to or at the date of the adjudication in bankruptcy, or prior to Sanders' death. The cash surrender value of neither of said policies has been ascertained, and stated to the trustee, by the company issuing the same, and the trustee made no effort to ascertain the same from the company, or to communicate the same to M.F. Sanders or Bessie W. Sanders." The bankrupt estate has never been settled.

The question to be determined, is, whether the policies were vested in the trustee by operation of law, when, it is admitted, that at the time M.F. Sanders Bessie W. Sanders were adjudged to be bankrupts, the said policies had no cash surrender value, and the company would have paid no money therefor, prior to the date of the adjudication in bankruptcy, or prior to Sanders' death.

Section 70a of the bankrupt act is as follows:

"The trustee of the estate of a bankrupt, upon his appointment and qualification * * * shall be vested by operation of law, with the title of the bankrupt, as of the day he was adjudged a bankrupt, except in so far as it is to property, which is exempt to all (1) documents relating to his property, * * * (3) powers which he might have exercised for his own benefit, but not those which he might have exercised for some other person, (4) property transferred by him in fraud of his creditors, (5) property 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 levied against him: Provided, That when any bankrupt shall have any insurance policy, which has a cash surrender value, payable to himself, his estate or personal representative, 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."

The proviso in section 70a when analyzed, shows, 1st, that the said section had in contemplation policies that had some cash surrender value, at the time the insured was adjudged a bankrupt; 2d, that when such value has been ascertained and stated to the trustee, by the company issuing the policy, the bankrupt may pay or secure to the trustee the sum so ascertained; 3d, that the payment must be made or security given to the trustee, within thirty days after said value has been ascertained; 4th, that upon complying with these requirements, the bankrupt shall continue to hold and own such policy, free from the claims of creditors; and 5th, that if the bankrupt complies with said requirements, the policy shall not pass to the trustee, as assets.

In order to place a proper construction on said section, we naturally endeavor to ascertain the object, which it was the intention of Congress to accomplish.

It will be observed that policies of insurance are placed upon a different footing, from all other property vested in the trustee; and that it was not intended that the policies, but only their cash surrender value should become assets, unless the insured failed or refused to comply with certain prescribed conditions.

It is true, the proviso contemplates a benefit to the bankrupt estate, and, when the policies have a cash surrender value, they are vested in the trustee by operation of law, in order that said value may be added to the assets. But the main object was to enable the bankrupt, to hold and own the policy free from the claims of his existing creditors; and the only effect of holding that the title to the policies was vested in the trustee, even when they were without cash surrender value, would be to defeat the principal aim of the statute, without increasing the assets. The law never intends that an act should be done, when its effect would be wholly nugatory.

If it had been ascertained that the policies had a cash surrender value of one hundred dollars, and the insured had paid that sum, the trustee would no longer have any interest in them. Do the admitted facts show that the bankrupt forfeited his right to pay the cash surrender value, and to continue to hold the policies? Let us consider the bankrupt's rights, in view of the fact that the cash surrender of the policies has not been ascertained and stated to the trustee, by the company issuing the same. It is admitted that the trustee made no effort to ascertain the same from the company, or to communicate the same to M.F. Sanders or Bessie W. Sanders; that M.F. Sanders notified both the referee and the trustee of the existence of the policies, and that he and his attorney regarded them as having no cash surrender value; that the trustee said he would take them up at some other time; that the bankrupt died on the 12th of January, 1912, and that the bankrupt estate has not been settled. The only inference to be drawn from these facts is, that if the bankrupt were alive he would still have the right to pay the cash surrender value of the policies, and hold them free from his existing creditors, upon complying with the requirements of said section; but, that, as he is dead, this privilege could be exercised by the representative of his estate. In re Judson, 113 C.C. A. 158.

Under our interpretation of the said section, this, however, is an immaterial question, as the fact that the policies had no cash surrender value, shows that the title to them did not become vested in the trustee — there being no failure to perform a condition where the nonperformance thereof, would have caused the title to the policies to become assets of the bankrupt estate.

In the case of Hiscock v. Mertens, 205 U.S. 202, the Court had under consideration the question, whether the cash surrender value of a policy of insurance under section 70a of the bankruptcy act, must be provided for, in the policy, or whether it is sufficient if the policy have such value, by the concession or practice of the company. In discussing this question, the Court thus states the object of the foregoing provision: "It was an actual benefit, for which the statute provided, and not the manner in which it should be evidenced. * * * What possible difference could it make, whether the surrender value was stipulated in a policy, or universally recognized by the companies. In either case, the purpose of the act would be subserved, which was to secure to the trustee the sum of such value, and to enable the bankrupt to continue to hold, own and carry, such policy free from the claims of the creditors, participating in the distribution of the estate, under the bankruptcy proceedings."

The statute is thus explained in the case of Morris v.Dodd, 110 Ga. 606, 78 Am. St. Rep., 129, 50 L.R.A. 33:

"The purpose of the bankruptcy act, is to take the property owned by the bankrupt when the petition is filed, and apply it toward the payment of his then existing debts, discharging him in due course from any further liability, his after acquired property not being subject to such debts. This being true, it is apparent that the creditors represented by the trustee, whose debts cannot continue against the bankrupt, can have no insurable interest in his life for the purpose of indemnifying themselves against loss. In view, therefore, of the authorities cited and the language of the act itself, it seems that a policy of insurance on the life of a bankrupt, though payable to his legal representatives, does not vest in the trustee as assets of the bankrupt's estate, if the policy has no cash surrender value."

To the same effect is the case of In re Judson, 113 C.C. A. 158, in which the Court says: "We think that the statute in question clearly indicates an intention upon the part of Congress to permit bankrupts to retain the advantages of existing life insurance policies, provided they will pay to their trustees all that could be obtained by surrendering such policies at the commencement of the proceedings. In the case of policies having a cash surrender value the proviso covers the case. In the case of policies having no cash surrender value the proviso does not apply expressly, but reading it in connection with the other provisions, we think that such policies are not ``property,' within the meaning of the statute, but are in the nature of personal rights. True they are ``property' within technical definitions of the term. But they represent nothing more than the right to pay future premiums at a fixed rate. Their value is altogether speculative, and in our opinion, it was not the intention of Congress that bankrupts should be deprived of their policies, to enable trustees of bankrupt estates to use their funds to speculate with."

The first and second propositions upon which the appellant's rely are: 1. "That the bankrupt (the insured) had a ``power which he might have exercised for his own benefit,' viz.: the power to change the beneficiary, and that that power passed to the trustee. 2. That the power to change the beneficiary was property, within the meaning of the act, which he could have transferred or assigned, and that that right passed to the trustee."

These propositions are unsound, for the reason they presuppose, that the policies were vested in the trustee, which we have shown is not the fact.

The third proposition is as follows: "That Mrs. Sanders, the beneficiary, being also a bankrupt, and the insured having died before the estate was wound up, the fund belongs to the trustee."

In the first place, the value of Bessie W. Sanders' interest in the policies, as an asset in the hands of the trustee, must be determined, with reference to the filing of the petition, and not, as contended, at the time her husband died. And in the second place, whatever interest she may have had, at that time, was subject to be defeated by the action of the insured in changing the beneficiary, which was actually done. The appellant, however, contends, that the statements upon which the change was made, were false. If there was fraud in this respect, it did not affect the rights of the trustee, and he has no cause to complain. Morris v.Dodd, 110 Ga. 606, 78 Am. St. Rep. 129, 50 L.R.A. 33.

Judgment affirmed.

MR. JUSTICE HYDRICK concurs.

MR. JUSTICE WATTS disqualified.