United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT August 8, 2007
Charles R. Fulbruge III
Clerk
No. 06-50363
In the matter of: CHARLES FREDERICK TRAUTMAN; CAROL JEAN
TRAUTMAN, Debtors.
-------------------------------------------------------
MARSHA G. MILLIGAN,
Appellee,
versus
CHARLES FREDERICK TRAUTMAN; CAROL JEAN TRAUTMAN,
Appellants.
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Appeal from the United States District Court
for the Western District of Texas
--------------------
Before HIGGINBOTHAM, WIENER, and PRADO, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
Charles Trautman surrendered his whole-life insurance policy,
receiving a check for the final cash value. He then filed for
bankruptcy, seeking to exempt the check from the estate. Holding
that the cash from a surrendered whole-life policy is not exempt
under Texas law, we affirm.
I
Husband and wife Charles and Carol Trautman got into financial
trouble. In 2004, Charles surrendered a whole-life insurance
policy that he owned, a policy which insured his life with the
death-benefit payable to Carol. The policy had a gross cash
surrender value of about $95,000 and an outstanding loan balance of
about $67,000, yielding a $27,913 difference. Charles received a
check for that amount but did not cash it. Soon after the couple
filed for bankruptcy. After electing to exempt property from the
estate under Texas law rather than federal law,1 the Trautmans
listed as an exemption the uncashed check. Trustee Marsha Milligan
objected. After a hearing, the Bankruptcy Judge denied the
objection, upholding the exemption. Milligan appealed, and the
district court reversed. The Trautmans appeal, and we review this
purely legal question de novo.
II
This case centers on Texas Insurance Code § 1108.051, which
provides:
(a) ...[T]his section applies to any benefits, including
the cash value and proceeds of an insurance policy, to be
provided to an insured or beneficiary under:
(1) an insurance policy...issued by a life, health,
or accident insurance company, including a mutual
company or fraternal benefit society...
(b) Notwithstanding any other provision of this code,
insurance...benefits described by Subsection (a):
(1) inure exclusively to the benefit of the person
for whose use and benefit the insurance...is
designated in the policy...; and
(2) are fully exempt from:
1
See generally Walden v. McGinness (In re Walden), 12 F.3d 445, 448
(5th Cir. 1994) (discussing exemptions).
2
(A) garnishment, attachment, execution, or other
seizure;
(B) seizure, appropriation, or application by any
legal or equitable process or by operation of law
to pay a debt or other liability of an insured or
of a beneficiary, either before or after the
benefits are provided; and
(C) a demand in a bankruptcy proceeding of the
insured or beneficiary.
This court must interpret the statute as a Texas court would. In
Texas, giving effect to the legislature’s intent is the cardinal
rule.2 There are no Texas or federal cases directly on point.
This case is created by the peculiarities of whole-life
policies. Term-life policies are simple - the owner pays a regular
premium to the insurer, who pays a death-benefit to the beneficiary
on the death of the insured if the premiums were current. With
whole-life policies, the owner pays the insurer more than the cost
of premiums. The excess money goes into a sort of interest-bearing
savings account, against which the owner can borrow money or pay
the premiums if he ever chooses to pay less than the regular
premium. As long as the policy exists, if the insured dies the
beneficiary receives a death-benefit.3 Critical here, the owner
can also withdraw the entire cash value, surrendering the policy.
Under Texas law, it’s clear that money paid to the debtor-
2
See LaSalle Bank Nat’l Ass’n v. Sleutel, 289 F.3d 837, 839 (5th Cir.
2002).
3
As Milligan noted at oral argument, usually there is a flat death-
benefit paid upon the insured’s death - there is no separate payment of the
cash value. The cash value is subsumed into that benefit as an actuarial
matter.
3
beneficiary of a term-life policy - as long as it can be traced to
that source - is exempt. The question here is whether money paid
to the owner of a surrendered whole-life policy - if it can be
traced to that source, as it can here - is exempt. We conclude
that it is not.
First, we look to the text. Parsing the text, we see that
“benefits,” while not explicitly defined, are either “cash
value...of an insurance policy” or “proceeds of an insurance
policy” that are “to be provided to an insured or beneficiary....”
Such “benefits” “inure exclusively to the benefit of the person for
whose use and benefit the insurance...is designated in the policy
or contract” and cannot be garnished, seized, or demanded in
bankruptcy. Thus, § 1108.051 protects “benefits,” and we must
determine whether the check here represents “benefits.” It does
not - even though on first glance it looks like “cash value...of an
insurance policy” - because “benefits” are things “to be provided
to an insured or beneficiary,” and the cash from a surrendered
whole-life policy goes not to the (former) insured or (former)
beneficiary, but the (former) owner of the policy. Charles argues
implicitly that the money went to him as a final “benefit” payable
to him as the insured, but the check went to him as the owner of
the policy, not the insured.4 That “benefits” “inure exclusively
4
Charles also points to the “before or after the benefits are provided
language,” but that language doesn’t define “benefits” in the first place. It
states only that, once “benefits” are created, they are protected as long as
they’re traceable.
4
to the benefit of the person for whose use and benefit the
insurance...is designated in the policy” buttresses our conclusion
because the surrendered check goes not to the person “whose use and
benefit the insurance...is designated in the policy” - that is, the
beneficiary and maybe the insured - but the owner.5 In sum, when
the owner of a whole-life policy surrenders the policy, the funds
are not protected by § 1108.051.6
Second, the statutory history confirms our analysis and
explains what “cash value...of an insurance policy” actually means.
Before a 1991 amendment to the predecessor of § 1108.051 which
added the term “cash values,”7 courts did not exempt even the cash
value of existing whole-life policies because such policies were
essentially savings accounts to which debtors had constant access.8
Hence creditors could seize whole-life policies, destroying them.
Texas, presumably desiring to protect the named, contingent
5
One could argue that the owner is a person for whose “use” a whole-
life policy is designated, hence certain things that “inure exclusively” to
the owner - the cash value of a surrendered policy and, while the policy
exists, the privileges of borrowing against the cash value and applying the
cash value to payment of future premiums - are exempt. This argument,
however, fails because “benefits” are things “to be provided to an insured or
beneficiary,” not an owner. Although the definition of “use” may not be
clear, we decline to read it a way that creates conflict with this latter
phrase.
6
Timing is not critical here. Had Charles surrendered the policy after
bankruptcy, the money he received would then not be exempt from garnishment,
seizure, or future bankruptcy. Protection ceases when the policy is
surrendered.
7
See Act of May 22, 1991, 72d R.S. Ch. 609 § 1, 1991 Tex. Gen. Law
2217. The phrase containing “cash values” has since been reworked, without a
change in meaning, to be the current phrase containing “cash value.”
8
See In re Brothers, 94 B.R. 82 (Bankr. N.D. Tex. 1988).
5
beneficiaries of existing whole-life policies, amended the statute
to include “cash values.” As a result, debtors cannot now garnish,
seize, or claim in bankruptcy the cash value of an existing policy
- a blessing to contingent beneficiaries, who now may later receive
a death-benefit.9 But presumably Texas did not mean to exempt
money from a surrendered whole-life policy, money a beneficiary
will certainly never see. So “cash value” means something, just
not what the Trautmans think.
Third, we note the perils of the contrary conclusion.
Exempting all money traceable to a surrendered whole-life policy
would allow people to use such policies merely to avoid creditors.
People could place their money in a whole-life policy with the
cheapest possible premium, naming as a beneficiary someone to whom
they’d want money in a normal savings account to go should they
die. Sometime later - presumably even after only a few days - they
could withdraw some of the money, or even all of it, forever
shielding the money from creditors. That can’t be the law. Less
insidiously, someone desiring to have a whole-life policy actually
for insurance reasons nonetheless could put her extra money into
the policy simply to shield it from creditors. That also can’t be
the law.
9
Of course, a contingent beneficiary will receive nothing if the policy
owner later surrenders the policy, but the amendment to § 1108.051 protects
the many, other beneficiaries who eventually receive benefits.
6
The Trautmans cite In re Young,10 a bankruptcy case from Texas
that the district court realized was one of the only useful cases.
In Young, the bankruptcy court exempted two assets under the post-
1991 predecessor to § 1108.051: 1) the cash value of an existing
whole-life policy owned by the debtor; and 2) “life insurance
proceeds access accounts,”11 created before the petition date by the
insurance company to hold the death-benefit proceeds paid to the
debtor on the death of the debtor’s husband. But these two assets
are the type paradigmatically protected by § 1108.051 - existing
whole-life policies and proceeds from a term-life policy. The
Trautmans urge that the money from their surrendered policy is,
like the latter, “proceeds” from a previously-existing policy. But
the value of a surrendered whole-life policy isn’t “proceeds” like
that in Young - or in general - because there was never a proceeds-
producing event, like death, sending money to the beneficiary, only
the surrender of a policy, sending money to the (former) owner.12
Although one might say that the term-life policy no longer
“existed” at the time of bankruptcy in Young, just like the whole-
life policy no longer “existed” after the Trautmans surrendered it,
in Young there was still a beneficiary who was paid under the terms
10
166 B.R. 854 (Bankr. E.D. Tex. 1994).
11
These accounts are essentially interest-bearing checking accounts
held with the insurer.
12
The Trautmans also point to TEX. PROP. CODE § 41.001(c), which exempts
for six-months the “proceeds” of a sale of a homestead, for the proposition
that the “sale” of their policy yielded “proceeds” defined as “money from the
sale of an asset.” That just isn’t what “proceeds” means here.
7
of the policy, whereas here nothing was given “to an insured or
beneficiary.” In other words, there is a difference between a
policy dissipating because the insured died and a policy
dissipating because its owner surrendered it - the statute
countenances the former, not the latter.
Because money from a surrendered whole-life policy is not
exempt under § 1108.051, we AFFIRM.
8