United States Court of Appeals

Fifth Circuit

FILED

August 8, 2007

Charles R. Fulbruge III

Clerk

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

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.

--------------------

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
1 See generally Walden v. McGinness (In re Walden), 12 F.3d 445, 448

(5th Cir. 1994) (discussing exemptions).

2

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:
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 deathbenefit 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

(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-
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

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
5 One could argue that the owner is a person for whose “use” a wholelife 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

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
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

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.
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

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 post1991 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 proceedsproducing 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 wholelife policy no longer “existed” after the Trautmans surrendered it,

in Young there was still a beneficiary who was paid under the terms
8

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.