In re Orear

GARLAND, District Judge. This is an original proceeding to review in matter of law an order of the United Stales District Court for the Eastern District of Missouri, made January 25, 1909, reversing an order of the referee in bankruptcy made May 27, 1908. The facts upon which the questions of law arise are as follows: On January 28, 1908, Derr Bros., a partnership composed of Jacob W. Derr and Charles C. Derr, were adjudged bankrupts, individually and as a firm. The petitioner, Celsus Orear, was duly appointed trustee of the estate. At the time of the filing of the petition in bankruptcy and the adjudication thereon, Jacob W. Derr had eight policies of life insurance upon his life for $2,500 each, issued by the Northwestern Mutual Life Insurance Company of Milwaukee, Wis. Eour of said policies were issued January 27, 1906. Prior to the filing of the petition in bankruptcy Derr had paid the annual premiums on each of the last-mentioned policies for ,⅞½ years. The next annual premium on each of said policies became due July 27, 1908. The remaining four policies were executed and delivered by the insurance company to Derr May 5, 1906. Prior to the filing of the petition in bankruptcy Derr had paid on these last-mentioned policies the annual premium for two- years, and the third annual premium became due on June 5, 1908. All the policies were limited payment life policies. They each provided that after payment of premium thereon for three years or more, and upon a full and valid surrender of the policy, the insurance company would pay cash surrender values of specified amounts. On June 5, 1908,,the third annual premium on four policies amounting to $198.50 on each policy became due, and these policies provided for a cash surrender value of $385 on each policy. By the terms of the four other policies the third annua’ premium amounting to $193.85 on each policy became due July 27, 1908, and these last-mentioned policies provided for a cash surrender value of $377 on each policy. These surrender values were payable to Derr, the insured, irrespective of the beneficiary named in the policy. The aggregate amount required to pay the third annual premium on the eight policies was $1,569.10. The aggregate amount of cash surrender values after the third premiums were paid was $3,018. The foregoing facts appearing to the referee by the petition of the trustee, the following order was made by the referee: “That- said bankrupt, Jacob W. Derr, forthwith execute and deliver to the trustee of this estate a good and sufficient written assignment conveying, as: signing and transferring to said trustee ail his right, title and interest in and to, and all rights, benefits, privileges and advantages accruing to him under, eight certain policies of life insurance issued by the Northwestern .Mutual Ufo Insurance Company upon the life of said bankrupt, for the sum of $2,501) each, being policies numbered 656496, 650197. 056498, 656199, and 660,‘>28, 660829, 660830, 660331; and it: is -further ordered tliat said trustee pay or tender to the said the Northwestern Mutual Life Insurance Company, the annual premiums next accruing on said policies respectively, at and upon the dates when said premiums shall become due and payable upon said policies [634] respectively; and it is further ordered that if, within 30 days after the date of the payment of said premiums upon said policies respectively, said bankrupt, Jacob W. Derr, or any beneficiary named in any of said policies, shall pay or cause to be paid to the trustee of this estate the sum of money which under the terms of such policy can be'realized by said trustee upon a surrender of such policy, then said trustee shall reassign and release such policy, or any policies in respect of which payments are so made, to said bankrupt, and deliver the same to him fully discharged from any and all claims of said trustee; and it is further ordered that in the event said bankrupt or said beneficiaries shall fail or neglect to avail themselves of the right to secure a reassignment of said policies, or any of them, in the manner here-inbefore specified, then said trustee shall thereupon surrender such policy, or policies, to the Northwestern Mutual Life Insurance Company, and collect from said company the cash surrender value thereof, as provided in said policies respectively.” The above order on petition of the bankrupt, _ Jacob W. Derr, was certified by the referee to the District Court for review. The District Court set aside said order, and its action in so doing is now before, us for review. It is conceded that at the time of the filing of the petition in bankruptcy, January 7, 1908, the insurance policies, neither by their terms nor by any concession or practice of the insurance company, had any cash surrender value. The question of law arising upon the record is this: Did the insurance policies pass to the trustee by the adjudication in bankruptcy ? If they did, then the trustee held the contracts in the same manner as a receiver, and if the referee, representing the United States District Court, should be of the opinion that it would be for the best interests of the bankrupt estate that the contracts be performed in whole or in part, he could very properly authorize the trustee to do so. It is to be presumed that if any question should arise in regard to the payment of individual and firm creditors the assets of the bankrupt estate would be marshaled as provided by law. Section 70 of the bankruptcy act provides that: “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 date he was adjudged a bankrupt except insofar as it is to property which is exempt, to all (3) 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; * * * (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 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 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.” Act July 1, 1898, c. 541, 30 Stat. 505 (U. S. Comp. St. 1901, p. 3451). We think the District Court fell into error in holding that the policies of insurance did not pass to the trustee. Its judgment that they did not pass was based upon the erroneous proposition that the proviso in section 70, above quoted, defined and limited what insurance policies should pass. Whereas, the true construction to be given to said proviso requires us to hold that it simply excepts from the prop- [635] erty of tlie bankrupt, which would otherwise pass to the trustee under the other provisions oí section ?'0,Npolicies of insurance which have a cash surrender value, either by the terms of the policy or by the concession of tlie insurance company. This construction was placed upon the proviso in the following cases: In re Slingluff (D. C.) 106 Fed. 151 ; In re Welling, 113 Fed. 189, 51 C. C. A. 151; In re Coleman, 136 Fed. 318, 69 C. C. A. 196; In re Mertens (D. C.) 131 Fed. 972. Tlie Supreme Court of tlie United States in Hiscock v. Mertens, 205 U. S. 202, 27 Sup. Ct. 488, 51 L. Ed. 771, decided nothing contrary to the position here taken. The Supreme Court in the case mentioned decided that in order that the bankrupt should have the benefit of the proviso in section 70, it was not necessary that the insurance policy should in terms provide for a cash surrender value, but that it was sufficient to bring the policy within the proviso if, by the concession or practice of the company issuing the same, it had a cash surrender value, hieither is there anything in Holden v. Stratton, 198 U. S. 202, 25 Sup. Ct. 656, 19 L. Ed. 1018. which in any way conflicts with our views. In that case the Supreme Court held that the proviso in section 70 did not in any way modify or control section 6 of the same act relating to exemptions. Subdivision 5 of section 70 specifies as property the title to which will vest in the trustee: “Pr<>i>crt.v which prior to the filing of the petition lie (bankrupt) could by any means have transferred or which might have been levied upon and soH under judicial process against him.” Subdivision 25, § 1, of the Bankruptcy Act, provides that the word “transfer” “shall include the sale and every other and different mode of disposing of, or parting- with property, absolutely or conditionally as a payment, pledge, mortgage, gift or security.” All of the policies of insurance in controversy' contained the following provision: “The insured may nominate a beneficiary or beneficiaries hereunder,, and may also change any beneficiary or beneficiaries nominated by him or named in the policy.” 'Under this provision the insured was .unequivocally given the right and power to change the beneficiary in each policy without the concurrence of the beneficiary named in the policy and even against the will of such beneficiary. Not only so, but this power was oue which lie could exercise for his own benefit. To illustrate: He could have borrowed money and have changed the beneficiary so that tlie lender would have held the policy as security for the repayment of his money. He also could have exercised this power so as to have secured indulgence from an existing creditor. He further could have exercised this power so as to have made the policy payable to his own estate. He still further could have exercised this power by naming as tlie beneficiary some trustee for all his creditors. See Atlantic Mut. Life Ins. Co. v. Gannon, 179 Mass. 291, 60 N. E. 933. Of the case of Central Nat. Bank v. Hume. 128 U. S. 195, 9 Sup. Ct. 41, 32 L. Ed. 310, it is enough to say that the policies there in question did not empower tlie insured to change the beneficiary, but contained provisions to the contrary, as is shown by the statement pre [636] ceding the opinion. Neither did the policy in Gordon v. Ware National Bank, hereinafter cited, so empower the insured. In the case of Gordon v. Ware National Bank, 132 Fed. 444, 65 C. C. A. 580, 67 L. R. A. 550, this court in an opinion where all the cases are cited held that the owner of a policy of insurance may lawfully and in good faith assign the same to a creditor who has no insurable interest in the assignor to secure the payment of a debt, and that on default of payment the creditor may foreclose the pledge and sell the policy at judicial sale. It necessarily results from this state of the law that Jacob W. Derr, prior to the filing of the petition in bankruptcy,, could have transferred to one or more of his creditors the insurance policies in question to secure the payment of his debts. This being so, the policies were property which, under section 70, subd. 5, above mentioned, passed to the trustee upon the adjudication of Derr as a bankrupt. Whether or not policy No. 656496, which is expressed therein to be for the benefit of the wife of the insured, is to be regarded as exempt under section 7895, Rev. St. Mo. 1899 (Ann. St. 1906, p. 3749), and whether or not anything has occurred to avoid an exemption of the policy under that statute, are questions which were not in any manner presented before the referee or the District Court, and have not been presented in this court; so we leave them undecided. The- United States District Court for the Eastern Division of the Eastern District of Missouri is therefore directed to vacate its judgment of December 19, 1908, reversing the order'of the referee made May 27, 1908, and enter a judgment affirming the same, but without prejudice to the right, if any, of the wife of the bankrupt to claim the policy expressed to be for her benefit as an exemption under the state statute before mentioned.