If a chapter 7 trustee succeeds with a clever argument in the Fifth Circuit, whole life policies will not be exempt in Texas. The trustee’s argument failed to convince Bankruptcy Judge Craig A. Gargotta of San Antonio, Bankruptcy Judge Tony M. Davis of Austin and District Judge Lee Yaekel of Austin.
A couple filed a chapter 7 petition and claimed a Texas exemption for two life insurance policies. The husband was the insured in both, and his wife was the beneficiary of both. They were whole-life policies. The couple claimed exemptions as both the insured and the beneficiary.
The chapter 7 trustee objected to the exemption claim, advancing the idea that the husband was the owner and that Texas law only provides an exemption for the insured or the beneficiary. The argument failed to persuade Bankruptcy Judge Davis, so the trustee tried out the argument on appeal to District Judge Yeakel.
The Amendment to the Texas Exemption
Before 1991, there was a loophole in the Texas exemption for life insurance. Because the former statute did not exempt cash values, courts held that policies were like bank accounts that the insured could access at any time and that creditors could seize. The Fifth Circuit observed that the ability of creditors to seize the policies effectively destroyed whole life policies in Texas. Milligan v. Trautman (In re Trautman), 496 F.3d 366, 369-370 (5th Cir. 2007).
The Texas legislature amended the exemption statute in 1991. The law now exempts “any benefits, including the cash value and proceeds of an insurance policy, to be provided to an insured or beneficiary” under a life insurance policy. [Emphasis added.]
In Trautman, the Fifth Circuit held that the surrender value of a whole-life policy was not exempt because the debtor had surrendered the policy before filing. Judge Yeakel read Trautman to “suggest[] that unsurrendered cash value — in other words, cash value remaining in an existing policy — is exempt.” [Emphasis in original.]
Judge Yeakel similarly read the amendment to mean that the “Legislature clearly intended to protect the ‘cash value’ of unsurrendered life-insurance policies from claims of creditors and from liquidation trustees.” [Emphasis in original.] In view of the “plain language of the statute,” Judge Yeakel held that “the statute explicitly allows Debtors to exempt the cash value of the existing life-insurance policies.”
Judge Yeakel affirmed Judge Davis, but the trustee is appealing to the Fifth Circuit.
Update
The trustee suffered a similar defeat when he brought the same theory to Bankruptcy Judge Gargotta, who upheld the exemption. See In re Meinscher, 22-50925, 2023 BL 50677 (Bankr. W.D. Tex. Feb. 14, 2023). To read ABI’s report on Meinscher, click here. After his defeat in Meinscher, the trustee appealed to the district court but withdrew the appeal after Judge Yeakel’s decision came down.
If a chapter 7 trustee succeeds with a clever argument in the Fifth Circuit, whole life policies will not be exempt in Texas. The trustee’s argument failed to convince Bankruptcy Judge Craig A. Gargotta of San Antonio, Bankruptcy Judge Tony M. Davis of Austin and District Judge Lee Yaekel of Austin.
A couple filed a chapter 7 petition and claimed a Texas exemption for two life insurance policies. The husband was the insured in both, and his wife was the beneficiary of both. They were whole-life policies. The couple claimed exemptions as both the insured and the beneficiary.
The chapter 7 trustee objected to the exemption claim, advancing the idea that the husband was the owner and that Texas law only provides an exemption for the insured or the beneficiary. The argument failed to persuade Bankruptcy Judge Davis, so the trustee tried out the argument on appeal to District Judge Yeakel.