Caron v. Farmington National

• Court: Court of Appeals for the First Circuit
• Decided: April 25, 1996
• Docket: 95-2320
• Status: Published

Opinion

USCA1 Opinion

United States Court of Appeals
                            United States Court of Appeals

                                For the First Circuit
                                For the First Circuit

                                 ____________________

        No. 95-2320



                  IN RE: ODA JOSEPH CARON AND LORRAINE NORMA CARON,



                                       Debtor.



                                 ____________________



                     ODA JOSEPH CARON, D/B/A CARON & SONS MOBIL,

              F/D/B/A WAKEFIELD COUNTRY STORE AND LORRAINE NORMA CARON,



                                     Appellants,



                                          v.



                               FARMINGTON NATIONAL BANK

                     AND LAWRENCE P. SUMSKI, CHAPTER 13 TRUSTEE,



                                      Appellees.



                                 ____________________



                     APPEAL FROM THE UNITED STATES DISTRICT COURT



                          FOR THE DISTRICT OF NEW HAMPSHIRE



                    [Hon. Paul J. Barbadoro, U.S. District Judge]
                                             ___________________



                                 ____________________



                                        Before



                                 Selya, Circuit Judge,
                                        _____________

                            Aldrich, Senior Circuit Judge,
                                     ____________________

                              and Stahl, Circuit Judge.
                                         _____________

                                 ____________________



            Grenville Clark, III  with whom Gray Wendell  & Clark, P.C. was on
            ____________________            ___________________________

        brief for appellants.

            David P. Azarian with whom Michael, Jones  & Wensley was on  brief
            ________________           _________________________

        for appellees.

                                 ____________________

                                    April 25, 1996

                                 ____________________



STAHL, Circuit Judge.  Oda J. Caron and Lorraine N.
                      STAHL, Circuit Judge.
                             _____________



            Caron   appeal  the  district   court's  affirmance   of  the



            bankruptcy  court's  denial  of  an exemption  for  the  cash



            surrender value  of an insurance policy on  Mr. Caron's life.



            Because we  find that the courts  below correctly interpreted



            the applicable New Hampshire statute, we affirm.



                                      Background
                                      Background
                                      __________



                      Appellants, husband and wife, filed a joint Chapter



            13 bankruptcy petition in  the United States Bankruptcy Court



            for the District  of New  Hampshire.  In  their statement  of



            financial  affairs, they  listed as  an asset  a Metropolitan



            Life Insurance Company policy  on the life of Mr.  Caron, and



            they  claimed  the  policy's  $19,260 cash  value  as  exempt



            property pursuant  to   522(b)(2)(A) of the  Bankruptcy Code.



            Because New Hampshire enacted legislation "opting out" of the



            federal exemptions, New Hampshire debtors are  only permitted



            to exempt property pursuant to state-enacted exemptions,  not



            those specified in  11 U.S.C.   522(d).   See N.H. Rev. Stat.
                                                      ___



            Ann.       511:2-a (opting out of  federal exemption scheme).



            Farmington National  Bank, a  creditor of the  Carons, timely



            filed  an objection  to  the exemption  claim,  in which  the



            chapter 13 trustee joined.



                      After a  hearing  before the  bankruptcy court,  at



            which  a  copy of  the life  insurance  policy was  placed in



            evidence, the court ruled that the policy was property of the


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estate  under  11  U.S.C.     541(a)(1)  and  that  the  cash



            surrender value of  the life insurance policy was  not exempt



            under  New Hampshire law.  The Carons appealed that ruling to



            the United  States District  Court  for the  District of  New



            Hampshire, which affirmed the  order of the bankruptcy court.



            This appeal followed.



                      The  sole issue  for determination  is whether  the



            courts below erred in holding that the  life insurance policy



            was not exempt property.  The parties agree with the relevant



            factual findings made  by the bankruptcy  court: that at  the



            time  of the  filing of  the  bankruptcy petition,  Mr. Caron



            owned the  life insurance  policy and  retained the  right to



            change  the  beneficiary  (his wife  and  co-debtor  Lorraine



            Caron) and the contingent  beneficiaries (their children), as



            well as the right to surrender the policy for its cash value.



            Thus, for purposes of this appeal,  all that is before us  is



            the  legal conclusion that the policy was not exempt, and our



            standard of review is de novo.   See T I Federal Credit Union
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            v. DelBonis, 72 F.3d 921, 928 (1st Cir. 1995).
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                                      Discussion
                                      Discussion
                                      __________



                      In order to determine whether the cash value of the



            policy is exempt,  we begin with  the New Hampshire  statute,



            N.H. Rev. Stat. Ann.   408:2, which provides: 



                           If  a policy  of  life or  endowment

                      insurance  is effected  by any  person on

                      his own life or on another life, in favor

                      of a person other than  himself having an


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insurable  interest  therein, the  lawful

                      beneficiary thereof other than himself or

                      his   legal  representatives,   shall  be

                      entitled  to its  proceeds and  all other

                      benefits     against    creditors     and

                      representatives  of the  person effecting

                      the  same; provided, that, subject to the

                      statute of limitations, the amount of any

                      premiums for said insurance paid in fraud

                      of  creditors,   with  interest  thereon,

                      shall  enure to  their  benefit from  the

                      proceeds of the policy. 



                      The bankruptcy court ruled  that the policy was not



            exempt,  incorporating  by  reference its  discussion  of the



            issue in In re  Monahan, 171 B.R. 710, 715-21  (Bankr. D.N.H.
                     ______________



            1994)  where  it  decided   three  separate  cases  involving



            exemption  claims  under   New  Hampshire's  life   insurance



            exemption statute,   408:2.  



                      Because  the New  Hampshire  Supreme Court  has not



            rendered any  decisions construing   408:2,  we interpret the



            statute  as  we think  that court  would  interpret it.   The



            district  court agreed  with  the bankruptcy  court that  the



            plain meaning of the statute restricts the exemption right to



            the   beneficiary   and  provides   no  protection   for  the



            insured/owner of the policy.  Because the policy in this case



            provided the  beneficiary with  no right  to the proceeds  or



            other benefits of  the policy  except upon the  death of  the



            insured, the  district court ruled that Mrs. Caron, the named



            beneficiary, had no right  during the life of her  husband to



            maintain the  policy  for her  benefit  or to  surrender  the


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policy for its cash value, and that her sole  interest was as



            the beneficiary in the event of Mr. Caron's demise.



                      The  appellees, Farmington  National  Bank and  the



            Chapter  13 Trustee,  argue  that the  New Hampshire  statute



            distinguishes between  the owner/insured of the  policy and a



            third  person  beneficiary  and clearly  specifies  that  the



            person entitled  to the exemption is  "the lawful beneficiary



            thereof," not  the insured/owner.   The appellees  argue that



            only  when the insured has "parted with all of his beneficial



            interest  therein" would  a life  insurance policy  be exempt



            from the  insured's creditors, quoting from  and relying upon



            In re Bray,  8 F. Supp. 761, 763 (D.N.H.  1934).  They reason
            __________



            that since Mr. Caron,  at the time of the  bankruptcy filing,



            had  not "parted  with all  his beneficial  interest" in  the



            policy,  but  rather retained  ownership and  the concomitant



            rights to reach its cash value and to change the beneficiary,



            he still  effectively retained all  the beneficial  interest.



            Mrs. Caron's  interest, they  assert, was both  defeasible by



            Mr. Caron and contingent upon his death.



                      While the  statute is  not a model  of clarity,  we



            find the reasoning  of the bankruptcy court  and the district



            court to be compelling.  We  agree that the statute cannot be



            read to exempt the  policy in favor of an  owner/insured, but



            only in favor of a beneficiary.   And here, the rights of the



            beneficiary,  Mrs.  Caron, do  not  arise  until Mr.  Caron's


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death,  and  her  prospective  rights can  be  diminished  or



            terminated  by him during his lifetime.  As such, because Mr.



            Caron  was alive at the  time the petition  in bankruptcy was



            filed,  Mrs. Caron had no rights in the proceeds, cash value,



            or other benefits of the policy.   Thus, she had no  interest



            in the policy  that could be  exempted by  the statute.   The



            rights  and   powers  under   the  policy  retained   by  the



            owner/insured, Mr.  Caron, became the property  of the estate



            as of the filing of the petition.   See 11 U.S.C.   541(a)(1)
                                                ___



            (all legal or equitable  interests of the debtor  in property



            become property of the estate upon commencement of the case).



            Accordingly, neither Mr.  Caron nor his wife  are entitled to



            the statutory exemption.1 



                      While  we recognize  that generally  courts are  to



            construe  exemption  statutes   liberally  to  reflect  their



            remedial  purposes, we  find reasons  here to  afford  a more



            narrow  reading.  While the result that the Carons seek would



            apparently obtain under  the analogous federal  exemption, 11



            U.S.C.   522(d)(7), see In re Monahan, 171 B.R. at 716 & n.8,
                                ___ _____________



            legislative history indicates that New Hampshire opted out of


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            1.  We note, but  do not rely upon, the  fact that Mrs. Caron

            is  a  co-debtor in  this  joint bankruptcy,  and  it appears

            therefore that  her interest in  the insurance policy  was an

            asset of  the estate in any  event, subject to the  claims of

            her creditors if  not Mr.  Caron's.  At  most, the  exemption
            ___

            statute shelters a policy from the creditors of  the insured;

            it  makes no reference  to the creditors  of the beneficiary.

            See N.H. Rev. Stat. Ann.   408:2.  
            ___



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the federal  exemption scheme  because it was  too "liberal,"



            overly  indulgent of  debtors at  the expense  of creditors.2



            Even more  persuasive is legislative  history indicating that



            the  New Hampshire  legislature specifically chose  to delete



            language that would have made the Carons' arguments much more



            plausible.   The  statute at  issue, as  originally proposed,



            provided that the exemption was available "whether or not the



            right to change the beneficiary  is reserved or permitted  to



            such  person  [the  owner/insured],"  but  that language  was



            struck.    New  Hampshire House  Report  on  House Bill  224,



            Journal of  the House, April 29, 1931, at 698.  We infer from



            the  deletion that  the  legislature declined  to extend  the



            exemption to  policies where  the owner/insured  retained the



            power  to alter  the  beneficiary.   Of  like import  is  the



            legislature's deletion of the provision that "No court and no



            trustee or assignee for the benefit of creditors, shall elect



            for  the person  effecting  such insurance  to exercise  such



            right to change  the named beneficiary."  Id.   We infer from
                                                      ___



            this deletion  a legislative  intent that the  statute should



            not  prevent  a bankruptcy  trustee  from  stepping into  the


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            2.  See New  Hampshire House Judiciary Comm.  Report, Journal
                ___

            of  the House, 1981 January  Session, April 23,  1981, at 533

            (stating  that  the proposed  opt-out  statute  "prevents New

            Hampshire residents from filing with the more liberal federal

            bankruptcy  law.");  Minutes  of  House  Judiciary  Committee

            executive session April 20, 1981, statement of Representative

            Eaton  (federal bankruptcy  act  is "very  liberal" and  that

            state exemptions ought to control instead).



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policy  owner's  shoes to  exercise  policy  rights, such  as



            reaching the cash  value or changing the beneficiary.   Thus,



            the legislative history strongly  suggests a narrow scope for



            New Hampshire's  life insurance  exemption,  and the  Carons'



            exemption claim falls outside that scope.



                      Contrary to the Carons' arguments, we are not bound



            to  follow,  and  need   not  overrule,  the  district  court



            decisions in In re  Whelpley, 169 F. 1019 (D.N.H.  1909), and
                         _______________



            In re  Bray,  8 F.  Supp. 761  (D.N.H. 1934).   The  Whelpley
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            decision predates  the enactment  of the present  statute and



            the aforementioned legislative choices  to set a narrow scope



            for  the  exemption.   Moreover,  the  two-paragraph Whelpley
                                                                 ________



            opinion is devoid of  analysis.  In Bray, the  district court
                                                ____



            held  that the life insurance policy was not exempt under the
                                                     ___



            statute at issue here.  Bray, 8  F. Supp. at 763.  While Bray
                                    ____                             ____



            provides more  analytical discussion,  it is not  clear which



            aspects of the insurance policy  rendered it non-exempt.   It



            is just as plausible,  in our view,  to read Bray as  support
                                                         ____



            for the appellees' arguments as it is for the Carons'.  Thus,



            having  considered  both  Whelpley  and Bray,  we  find  them
                                      ________      ____



            unpersuasive.



                      Because the language of the  exemption statute does



            not encompass the insurance policy in this case, the decision



            of the district court is affirmed.
                                     ________


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