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Parties Involved:
American Society of Chartered Life Underwriters and Chartered Financial Consultants
Amicus Curiae
International Association of Machinists
Amicus Curiae
Arlin Joe Mueller
Appellant
Christopher J. Redmond
Appellee

Document Text:

PUBLISH 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

IN RE: ARLIN JOE MUELLER, ) 

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Debtor, 

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ARLIN JOE MUELLER, 

·Appellant, 

' 

FILED 

United States Court of Appeals Tenth Circuit 

FEB 0 6 l989 

ROBERT L. HOECKER 

Clerk 

v. 

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No. 87-1506 

CHRISTOPHER J. REDMOND, 

Trustee, 

Appellee. 

INTERNATIONAL ASSOCIATION OF 

MACHINISTS, District Lodge No. 

70; and AMERICAN SOCIETY OF 

CHARTERED LIFE UNDERWRITERS 

AND CHARTERED FINANCIAL CONSULTANTS, Wichita, Kansas 

Chapter, 

Amici Curiae. 

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Appeal from the United St'ates District Court 

For the District of Kansas 

D.C. No. 86-1795 

Donald B. Clark, Wichita, Kansas, for Appellant. 

Christopher J. Redmond (Martin R. Ufford with him on the brief) of 

Redmond, Redmond, O'Brien & Nazar, Wichita, Kansas, for Appellee. 

Ernest McRae of McRae & Early, Wichita, Kansas, for Amici Curiae. 

Appellate Case: 87-1506 Document: 01019739965 Date Filed: 02/06/1989 Page: 1 
( Before SEYMOUR, MOORE, and EBEL, Circuit Judges. 

MOORE, Circuit Judge. 

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Appellate Case: 87-1506 Document: 01019739965 Date Filed: 02/06/1989 Page: 2 
This is an appeal from an order of the United States District 

Court for the District of Kansas affirming a judgment' of the 

bankruptcy court denying the debtor a personal exemption for the 

value of a life insurance policy the debtor purchased immediately 

prior to filing his bankruptcy petition. After examining the 

circumstances, the bankruptcy court concluded the debtor purchased 

the policy to defraud his creditors; consequently, the court 

disallowed the claimed exemption. We agree with the analysis 

applied by both the bankruptcy and district courts and affirm. 

Debtor is a divorced father of one child who was eleven years 

old at the time of the transactions pertinent to 

late 1985 or early 1986, debtor consulted 

this case. In 

counsel about the 

possibility of filing a petition in bankruptcy. Then, in January 

1986, debtor decided to obtain life insurance to complement 

coverage in the amount of $100,000 he already owned. Although 

debtor claimed the new policy was to provide for his daughter's 

education, the existing policies were unencumbered, and they named 

his daughter as sole beneficiary. From assets not subject to 

exemption, the debtor fully paid the new policy's single premium 

·of $7,500. This payment left the debtor insolvent and without 

non-exempt assets. 

the debtor signed 

bankruptcy petition. 

Three days after purchasing the new policy, 

the papers necessary for the filing of his 

Prior to_ 1984, the Kansas personal exemption statute provided 

a blanket exemption for ~he nonforfeiture value of life insurance 

purchased before bankruptcy. The only exception to the exemption 

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Appellate Case: 87-1506 Document: 01019739965 Date Filed: 02/06/1989 Page: 3 
was judicially create9. Kansas courts refused to exempt p~operty 

from a cre~itor's claim if that creditor .could show he had a 

"peculiar equity" in the non-exempt assets used to acquire the 

property. This peculiar equity arose when the debtor obtained the 

non-exempt property by fraud or when that property was subject to· 

a lien~ Metz v. Williams, 88 P.2d 1093, 1096 (Kan. 1939). 

In 1984, the Kansas legislature a~ended the personal 

exemptions statute. Under the amended statute the nonforfeiture 

value of life insurance is not exempt from: 

Claims of the creditors of a policyholder who files a 

bankruptcy petition under 11 u.s.c. § 101 et seq. on or 

within one year after the date the policy is issued if 

the policy was obtained by the debtor for the purpose of 

defrauding one or more of the debtor's creditors. 

Kan. Stat. Ann. § 40-414(b)(l) (1984). Debtor claims this 

amendment did not alter the law on personal exemptions for life 

insurance in any way. He suggests the legislature merely intended 

to explicitly ratify the "peculiar equity'' doctrine as it had been 

applied by the Kansas courts. _Since both parties agree no 

creditor had a peculiar equity in the assets the debtor used to 

purchase the life insurance, the debtor argues the insurance is 

exempt. We disagree. 

It is axiomatic that when a legislature amends prior law it 

is presumed the legislature intended to make a change in the 

meaning and effect of the law. State v. Dubish, 675 P.2d 877, 883 

(Kan. 1984). Of equal significance is the presumption that a 

legislature does not intend to enact useless or meaningless 

statutes. City of Olathe·v. Board of Zoning Appeals, 696 P.2d 

409, 413. (Kan. App. 1985). 

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Appellate Case: 87-1506 Document: 01019739965 Date Filed: 02/06/1989 Page: 4 
These principles · make clear that the · Kansas legislature 

intended to change a debtor's rigpt to exempt .from the bankruptcy 

estate the nonforfeiture value of life ~nsurance policies. It did 

so in unequivocal language which both the bankrup~cy and district 

courts correctly a~plied to this case. 1 It is equally clear that. 

since the amendment of § 40-414 ( b) ( 1) ,. the "peculiar equity" 

doctrine does not apply to insurance policies purchased by 

bankruptcy debtors within one year of filing a 

petition. 

bankruptcy 

The debtor alternatively argues that the bankruptcy court 

erred in holding he purchased the policy with intent to defraud. 

Again, we disagree. 

In disposing of this issue, the district court correctly 

relied upon the test for determining the existence of fraud 

expressed in In re Mehrer, 2 Bankr. 309, 312 (Bankr. E.D. Wash. 

1980). Mehrer holds that whether a prebankruptcy transaction 

which converts non-exempt property into life insurance constitutes 

a fraud can be gauged by considering so-called "badges of fraud. 112 

In this case, the bankruptcy court found the badges of fraud 

were: (1) the debtor was insol~ent when he purchased the policy; 

(2) the policy was purchased one week prior to the filing of his 

petition in bankruptcy; (3) the debtor used his last non-exempt 

assets to make the acquisition; (4) the debtor had two other 

1 Indeed, if the Kansas legislature meant to ratify the ''peculiar 

equity••· doctrine, they could have easily done so by incorporating 

into the amendment the terminology repeatedly used by the courts. 

2Kansas co~rts have employed "badges of fraud" ·to determine fraud 

in other circumstances. See City of Arkansas City v. Anderson, 

762 P.2d 183, 187 (Kan. 1988). 

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Appellate Case: 87-1506 Document: 01019739965 Date Filed: 02/06/1989 Page: 5 
unencum,bered life · insurance policies; (SJ al though. the debtor 

contended he purchased the last policy to provide for his 

daughter's education, the named beneficiaries are the "then living 

children of the insured, and the then living children of any ~hild 

of the insured who is not then living~ per stirpes." Judging 

these findings by the clearly erroneous standard, as we must, 

Haskins v. United States, 846 F.2d 55, 56 (10th Cir. 1988), we 

find no error. 

AFFIRMED. 

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Appellate Case: 87-1506 Document: 01019739965 Date Filed: 02/06/1989 Page: 6