In construing a general reference to property in the Bankruptcy
Act, weight must be given to a proviso dealing with a special class
of property.
A proviso may sometimes mean additional legislation, and not be
intended to have the usual and primary office of a proviso, which
is to limit generalities and exclude from the scope of the statute
that which otherwise would be within its terms.
Life insurance is property, but it is peculiar property, and
Congress,
Page 228 U. S. 460
by the proviso in 70a of the Bankruptcy Act, intended that the
bankrupt should have the benefit of all policies except to the
extent of the actual cash value which could be realized by the
trustee for the creditors.
Under the proviso in § 70a of the Bankruptcy Act, the assignee
of a policy of insurance on the life of the bankrupt has the right
to retain the policy on the same terms that the bankrupt might have
retained it.
Under § 70a, life insurance policies which have no cash
surrender value, or on which the company has loaned the full
surrender value, so that the policy has no cash surrender value
remaining, do not pass to the trustee as general property, but
remain the property of the bankrupt, who is not limited in dealing
with them.
181 F. 479 affirmed.
The facts, which involve the construction of § 70a of the
Bankruptcy Act and the ownership of policies of insurance on the
life of a bankrupt, are stated in the opinion.
Page 228 U. S. 465
MR. JUSTICE DAY delivered the opinion of the Court.
The action was brought in the United States District Court for
the Southern District of New York by the trustees of the firm of T.
A. McIntyre & Company, and of the individual members of that
firm, bankrupts, against Charles M. Crouse and the Equitable Life
Assurance Society of the United States, to recover the sum of
$90,698.32, the net proceeds of certain policies of insurance
issued by the Equitable Life Assurance Society upon the life of
Thomas A. McIntyre, one of the bankrupts, deceased. The proceeds of
the policies were paid into court by the Society. The judgment of
the district court in favor of Crouse was affirmed by the circuit
court of appeals (181 F. 479), and the case has been appealed to
this Court.
It appears that, on the 10th of April, 1902, Thomas A. McIntyre
obtained two policies of life insurance in the Equitable Society.
They were known as "guaranteed cash value, limited payment, life
policies," each providing that, upon the death of the insured, the
company would pay to his executors, administrators, or assigns the
sum of
Page 228 U. S. 466
$100,000 in fifty annual installments, or the sum of $53,000 in
cash, a total of $106,000 for the two policies. On April 14, 1906,
the policies were assigned absolutely to the firm of T. A. McIntyre
& Company, and on April 24, 1907, they were by that firm
assigned to the Equitable Society as collateral security for a loan
of $15,370. On February 25, 1908, two months prior to the filing of
the petition in bankruptcy, the policies were assigned by McIntyre
& Company to the defendant, Charles M. Crouse, subject,
however, to the prior assignment to the Equitable Society. A
petition in involuntary bankruptcy was filed against McIntyre &
Company and its individual members on April 25, 1908, and on May 9,
1908, the defendant Crouse paid the premiums on the policies, in
the sum of $6,078.38. McIntyre & Company and the individual
members thereof were adjudged involuntary bankrupts on May 21,
1908, and the trustees were elected on the 24th of July, 1908. On
the 29th of July, 1908, Thomas A. McIntyre died, and the policies
became payable.
It appears that the policies had a cash surrender value, which
at the time when the trustees qualified, was $15,370, or the amount
of the loan of the Equitable Society upon the policies. It is
therefore apparent that, on the day when the petition was filed, as
well as the day of the adjudication in bankruptcy, the cash
surrender value would not have exceeded the loan and lien of the
Society upon the policies. The Circuit Court of Appeals for the
Second Circuit held that, under the circumstances, the policies did
not pass to the trustees as assets, and therefore the action which
had been begun to set aside the transfer to Crouse, as a preference
within the bankruptcy act, could not be maintained.
The correctness of this decision depends primarily upon the
construction of § 70a of the Bankruptcy Act, which reads:
Page 228 U. S. 467
"The trustee of the estate of a bankrupt, upon his appointment
and qualification, and his successor or successors if he shall have
one or more, upon his or their appointment and qualification, shall
in turn 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 (1) documents relating
to his property; (2) interests in patents, patent rights,
copyrights, and trademarks; (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 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, and (6) rights of action arising upon contracts
or from the unlawful taking or detention of, or injury to, his
property."
The part of the section particularly to be considered is
subdivision 5 and its proviso. Subdivision 5 undertakes to vest in
the trustee property which, prior to the filing of the petition,
the bankrupt could by any means have transferred, or which might
have been levied upon or sold under judicial process against him.
Then follows the proviso with reference to insurance policies which
have a cash surrender value, permitting a bankrupt, when the
cash
Page 228 U. S. 468
surrender value has been ascertained and stated, to pay or
secure such sum to the trustee, and to continue to hold, own, and
carry the policies free from the claims of creditors; otherwise the
policies to pass to the trustee as assets.
Two constructions have been given this section, and the
question, as presented in this case, has not been the subject of
direct determination in this Court. The one favors the view that
only policies having a cash surrender value are intended to pass to
the trustee for the benefit of creditors. [
Footnote 1] The other, conceding that the proviso deals
with this class of policies, maintains that policies of life
insurance which have no surrender value pass to the trustee under
the language of § 70a immediately preceding the proviso, which
reads:
"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. [
Footnote 2]"
To determine the congressional intent in this respect requires a
brief consideration of the nature of the rights dealt with. Life
insurance may be given in a contract providing simply for payment
of premiums on a calculated basis which accumulates no surplus for
the holder. Such insurance has no surrender value. Policies,
whether payable at the end of a term of years or at death, may be
issued upon a basis of calculation which accumulates a net reserve
in favor of the policy holder, and which forms a consequent basis
for the surrender of the policy by the insured, with advantage to
the company upon the payment of a part of this accumulated reserve.
This feature of surrender value was discussed by Judge Brown of
the
Page 228 U. S. 469
Southern District of New York, in
In re McKinney, 15 F.
535, 537:
"The first of these elements, the surrender value of the policy,
arises from the fact that the fixed annual premium is much in
excess of the annual risk during the earlier years of the policy --
an excess made necessary in order to balance the deficiency of the
same premium to meet the annual risk during the latter years of the
policy. This excess in the premium paid over the annual cost of
insurance, with accumulations of interest, constitutes the
surrender value. Though this excess of premiums paid is legally the
sole property of the company, still in practical effect, though not
in law, it is moneys of the assured, deposited with the company in
advance, to make up the deficiency in later premiums to cover the
annual cost of insurance, instead of being retained by the assured,
and paid by him to the company in the shape of greatly increased
premiums when the risk is greatest. It is the 'net reserve'
required by law to be kept by the company for the benefit of the
assured, and to be maintained to the credit of the policy. 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."
"Upon the surrender of the policy before the death of the
assured, the company, to be relieved from all responsibility for
the increased risk, which is represented by this accumulating
reserve, could well afford to surrender a considerable part of it
to the assured, or his representative. A return of a part in some
form or other is now usually made."
This case has been cited with approval in this Court.
Holden
v. Stratton, 198 U. S. 202;
Hiscock v. Mertens, 205 U. S. 202.
Page 228 U. S. 470
Under the bankruptcy Act of 1867, no special provision was made
for insurance policies. The section providing for the passing of
the assets of the bankrupt to the trustee contained the broad
language of "all the estate, real and personal." Under this
statute, it was held in
In re McKinney, supra, that the
insurance upon the life of the bankrupt vested in the bankrupt
estate only to the extent of its cash surrender value at the time
of the filing of the petition.
In
Holden v. Stratton, supra, this Court held that the
law of the State of Washington, exempting the proceeds of life
insurance policies, was applicable, and under the Bankruptcy Act of
1898, § 6, the bankrupt might retain such policies. The Circuit
Court of Appeals for the Ninth Circuit, from which
Holden v.
Stratton came by certiorari to this Court, had held that § 70a
was not controlled by the exemptions provided in § 6 of the
Bankruptcy Act, and had adhered to its former decision in
In re
Scheld, 104 F. 870, in which § 70a had been construed to pass
insurance policies having a cash surrender value to the trustee
unless the bankrupt paid or secured the surrender value, as pointed
out in the section. While this Court held that the exemption under
the state law applied under the Bankruptcy Act to the policy in
question, coming to deal with the construction of § 70a, this Court
said (p.
198 U. S.
213):
"As § 70a deals only with property which, not being exempt,
passes to the trustee, the mission of the proviso was, in the
interest of the perpetuation of policies of life insurance, to
provide a rule by which, where such policies passed to the trustee
because they were not exempt, if they had a surrender value, their
future operation could be preserved by vesting the bankrupt with
the privilege of paying such surrender value, whereby the policy
would be withdrawn out of the category of an asset of the estate.
That is to say, the purpose of the proviso was to confer a benefit
upon the insured bankrupt by limiting
Page 228 U. S. 471
the character of the interest in a nonexempt life insurance
policy which should pass to the trustee, and not to cause such a
policy when exempt to become an asset of the estate. When the
purpose of the proviso is thus ascertained, it becomes apparent
that to maintain the construction which the argument seeks to affix
to the proviso would cause it to produce a result diametrically
opposed to its spirit and to the purpose it was intended to
subserve."
The section came again before this Court in
Hiscock v.
Mertens, supra, and it was held that the insured was entitled
to retain the policies upon the payment to the trustee of a sum
equivalent to the amount the company was willing to pay according
to its custom, although there was no stipulation in the policies as
to a cash surrender value, and upon this subject the Court said (p.
205 U. S.
212):
"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 statute 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."
And, in that case, it appeared that this sum was less than
$6,000, whereas, in a short time, some six months later, the
maturity of one of the policies would give it a value of over
$11,000. But this Court held that this circumstance made no
difference in the right of the insured to pay the surrender value
and hold the policy.
True it is that life insurance policies are a species of
property, and might be held to pass under the general terms of
subd. 5, § 70a, but a proviso dealing with a class of this property
was inserted, and must be given its due weight in construing the
statute. If is also true that a proviso may sometimes mean simply
additional legislation,
Page 228 U. S. 472
and not be intended to have the usual and primary office of a
proviso, which is to limit generalities and exclude from the scope
of the statute that which would otherwise be within its terms.
This proviso deals with explicitness with the subject of life
insurance held by the bankrupt which has a surrender value.
Originally, life insurance policies were contracts in consideration
of annual sums paid as premiums for the payment of a fixed sum on
the death of the insured. It is true that such contracts have been
much varied in form since, and policies payable in a period of
years, so as to become investments and means of money saving, are
in common use. But most of these policies will be found to have
either a stipulated surrender value or an established value, the
amount of which the companies are willing to pay, and which brings
the policy within the terms of the proviso (
Hiscock v. Mertens,
supra), and makes its present value available to the bankrupt
estate. While life insurance is property, it is peculiar property.
Legislatures of some of the states have provided that policies of
insurance shall be exempt from liability for debt, and in many
states, provision is made for the protection from such liability of
policies in favor of those dependent upon the insured.
See
Holden v. Stratton, supra.
Congress undoubtedly had the nature of insurance contracts in
mind in passing § 70a with its proviso. Ordinarily the keeping up
of insurance of either class would require the payment of premiums,
perhaps for a number of years. For this purpose, the estate might
or might not have funds, or the payments might be so deferred as to
unduly embarrass the settlement of the estate. Congress recognized
also that many policies at the time of bankruptcy might have a very
considerable present value which a bankrupt could realize by
surrendering his policy to the company. We think it was this latter
sum that the act intended to secure to creditors by requiring its
pay
Page 228 U. S. 473
ment to the trustee as a condition of keeping the policy alive.
In passing this statute, Congress intended, while exacting this
much, that, when that sum was realized to the estate, the bankrupt
should be permitted to retain the insurance which, because of
advancing years or declining health, it might be impossible for him
to replace. It is the two-fold purpose of the Bankruptcy Act to
convert the estate of the bankrupt into cash and distribute it
among creditors, and then to give the bankrupt a fresh start with
such exemptions and rights as the statute left untouched. In the
light of this policy, the act must be construed. We think it was
the purpose of Congress to pass to the trustee that sum which was
available to the bankrupt at the time of bankruptcy as a cash
asset, otherwise to leave to the insured the benefit of his life
insurance.
It should be observed in this connection that, in the present
case, the company had advanced upon the policies their full
surrender value, as stipulated in the policies, and that the only
interest that could have passed to the trustees would have been the
speculative right to the net proceeds of the policies, contingent
upon the death of the bankrupt, and possibly dependent upon the
payment of large annual premiums for thirteen years.
It is urged, however, that, under § 70a, the cash surrender
value was to be paid by the bankrupt when ascertained, and the
policies kept alive for his benefit, and as these policies had been
assigned by the beneficiary to McIntyre & Company, not as
collateral, but absolutely, they would not come within the terms of
the proviso, and therefore the proceeds of the policies vested in
the bankrupt estate; but we find nothing in the act by which the
right of the assignee of a policy to the benefits which would have
accrued to the bankrupt is limited. As we have construed the
statute, its purpose was to vest the surrender value in the trustee
for the benefit of the creditors, and not otherwise to limit the
bankrupt in dealing with his policy.
Page 228 U. S. 474
As to the reimbursement of Crouse for the premiums advanced by
him, and the application by him of the proceeds of the policies to
particular items of indebtedness of the bankrupt estate in his
favor, upon the facts found, we have no occasion to disturb the
decree of the circuit court of appeals.
It results that the judgment of the circuit court of appeals
must be
Affirmed.
[
Footnote 1]
In re Buelow, 98 F. 86;
In re Josephson, 121
F. 142;
Gould v. New York Life Ins. Co., 132 F. 927;
Morris v. Dodd, 110 Ga. 606.
[
Footnote 2]
In re Becker, 106 F. 54;
In re Slingluff, 106
F. 154;
In re Welling, 113 F. 189;
In re Coleman,
136 F. 818;
In re Hettling, 175 F. 65;
In re
Orear, 178 F. 632.