* The Honorable David G. Trager of the United States District

Court for the Eastern District of New York, sitting by

designation.

07-1657-bk

In Re: James & Karen Wornick

1 UNITED STATES COURT OF APPEALS

2 FOR THE SECOND CIRCUIT

3

4 August Term, 2007

5

6

7

8 (Argued July 9, 2008) Decided September 24, 2008)

9

10 Docket No. 07-1657-bk

11

12 --------------------------------------------x

13 James Wornick, Karen Wornick,

14

15 Appellants,

16

17 v.

18

19 Thomas Gaffney,

20

21 Trustee-Appellee.

22 --------------------------------------------x

23

24 B e f o r e: POOLER and HALL, Circuit Judges,

25 and TRAGER, District Judge.*

26

27

28 Appeal from an order of the United States District Court for

29 the Western District of New York (Curtin, J.) with judgment

30 entered on November 27, 2006, affirming the bankruptcy court's

31 order sustaining an objection by the trustee to the Wornicks'

32 claim of exemption for the cash surrender value of certain life

33 insurance policies.

34 The judgment of the district court is reversed.

35

36 _______________________
1234 DENIS A. KITCHEN, Esq., 5 Williamsville, New York 6 for Appellants 78 LAWRENCE C. BROWN, Esq., 9 Buffalo, New York

10 for Trustee-Appellee
 The "cash surrender value" of a life insurance policy is 1

"[t]he amount of money payable when an insurance policy having

cash value, such as a whole-life policy, is redeemed before

maturity or death." Black's Law Dictionary 1586 (8th ed. 2004).

1 TRAGER, District Judge:

2 In this bankruptcy appeal, the debtors, James and Karen

3 Wornick, ask us to reverse a district court order holding that

4 certain assets in connection with life insurance policies they

5 each held for the benefit of the other were not exempt from the

6 joint administration of their bankruptcy estates. Because the

7 inchoate interest that a spouse beneficiary holds in a reciprocal

8 life insurance policy does not constitute an asset of the

9 beneficiary's estate, the judgment of the district court is

10 reversed.

11

12 Background

13 The facts of this case are simple. On October 15, 2005, the

14 Wornicks filed a joint petition for bankruptcy protection under

15 Chapter 7 of the Bankruptcy Code. At the time, James and Karen

16 Wornick each owned whole life insurance policies on their own

17 lives for the benefit of the other, and each of these policies

18 had a cash surrender value. James owned three policies payable 1

19 on his death to Karen, with a total cash surrender value of

20 $8,627.45, and Karen owned one policy payable on her death to
2

1 James, with a cash surrender value of $8,994.71. The Wornicks

2 claimed that the cash surrender values of these policies should

3 be exempt from bankruptcy administration. The trustee objected

4 to these exemptions. The bankruptcy court sustained the

5 objections, ordering the Wornicks to turn over to the trustee the

6 cash surrender values of the policies. The Wornicks appealed to

7 the district court, which affirmed. This appeal followed.

8

9 Discussion

10 The only question this appeal presents is whether in a joint

11 bankruptcy case of spouses who own reciprocal life insurance

12 policies the bankruptcy estate of the beneficiary spouse is

13 entitled to the cash surrender value of an insurance policy taken

14 out by and insuring the other spouse. In other words, if A buys

15 an insurance policy on A's life and designates B as the

16 beneficiary, and if A and B file jointly for bankruptcy

17 protection, are B's creditors entitled to the cash surrender

18 value of the policy? The district court decided this question in

19 the affirmative, and we review the district court's decision de

20 novo. See KLC, Inc. v. Trayner, 426 F.3d 172, 174 (2d Cir.

21 2005).

22 The Wornicks claim that the cash surrender value of their

23 life insurance policies should be exempt under Section 3212 of
3

1 New York Insurance Law, which provides in pertinent part, 

2 [(a)](1) The term 'proceeds and avails', in

3 reference to policies of life insurance,

4 includes death benefits, accelerated payments

5 of the death benefit or accelerated payment

6 of a special surrender value, cash surrender

7 and loan values . . . .

8

9 . . .

10

11 (b)(1) If a policy of insurance has been or

12 shall be effected by any person on his own

13 life in favor of a third person beneficiary,

14 or made payable otherwise to a third person,

15 such third person shall be entitled to the

16 proceeds and avails of such policy as against

17 the creditors, personal representatives,

18 trustees in bankruptcy and receivers in state

19 and federal courts of the person effecting

20 the insurance.

21

22 [(b)](2) If a policy of insurance has been or

23 shall be effected upon the life of another

24 person in favor of the person effecting the

25 same or made payable otherwise to such

26 person, the latter shall be entitled to the

27 proceeds and avails of such policy as against

28 the creditors, personal representatives,

29 trustees in bankruptcy and receivers in state

30 and federal courts of the person insured. If

31 the person effecting such insurance shall be

32 the spouse of the insured, he or she shall be

33 entitled to the proceeds and avails of such

34 policy as against his or her own creditors,

35 trustees in bankruptcy and receivers in state

36 and federal courts.

37

38 N.Y. Ins. Law § 3212 (emphasis added); see also 11 U.S.C.

39 § 522(b)(2) (providing that states may exempt certain property

40 from bankruptcy administration); N.Y. Dr. & Cr. Law § 282

41 (providing that insurance policies are exempt from bankruptcy
 The district court's holding was consistent with a prior 2

decision of the Western District of New York, Teufel v. Schlant,

No. 02 Civ. 81S, 2002 U.S. Dist. LEXIS 27930 (W.D.N.Y. Sept. 24,

2002), which itself resolved what had been a conflict among the

bankruptcy judges in the district on this issue – compare In re

Mata, 244 B.R. 580 (Bankr. W.D.N.Y. 1999) (Kaplan, J.) (holding

that Section 3212(b) did not exempt the cash surrender value of

4

1 administration as provided in Section 3212 of the Insurance Law). 

2 In essence, subsection (b)(1) says that if A buys insurance on

3 A's life and designates B as the beneficiary, then any interest B

4 has in the proceeds and avails of the policy is protected against

5 A's creditors. And subsection (b)(2) says that if A buys

6 insurance on B's life and designates A as the beneficiary, then

7 any interest A has in the proceeds and avails of the policy is

8 protected against B's creditors, and moreover, if A and B are

9 married, then A's interest is protected against A's creditors as

10 well.

11 The Wornicks' claim presents the slightly different question

12 of whether the cash surrender value of an insurance policy

13 purchased by A on A's life for the benefit of B is protected

14 against B's creditors, and thus does not fit precisely into

15 either of the exemptions provided by Section 3212(b)(1) & (2). 

16 In rejecting their claim to an exemption, the district court

17 concluded that the cash surrender values of these insurance

18 policies were insulated only against the creditors of the insured

19 and not against the creditors of the beneficiary. We disagree. 2
an insurance policy from the beneficiary's creditors), with In re

Polanowski, 258 B.R. 86 (Bankr. W.D.N.Y. 2001) (Bucki, J.)

(holding that the exemption did apply in cases like this because

the beneficiary holds no administrable interest in a spouse's

life insurance policy), overruled by Teufel, 2002 U.S. Dist.

LEXIS 27930. As discussed below, we agree with Judge Bucki's

opinion in Polanowski.

5

1 It has long been the law that "[t]he beneficiary of a life

2 insurance policy, who may at any time be removed from the

3 benefited position by the insured and against the beneficiary's

4 will, cannot have a vested interest." In re Greenberg, 271 F.

5 258, 259 (2d Cir. 1921); see also In re Solomons, 2 F. Supp. 572,

6 574 (S.D.N.Y. 1932) (noting that when the insured reserves the

7 right to change the beneficiary, the cash surrender value is an

8 asset of the insured). The filing of a bankruptcy petition

9 creates a bankruptcy estate, which includes "all legal or

10 equitable interests of the debtor in property as of the

11 commencement of the case." 11 U.S.C. § 541(a)(1). "Whether the

12 debtor has a legal or equitable interest in property such that it

13 becomes 'property of the estate' under section 541 is determined

14 by applicable state law." Musso v. Ostashko, 468 F.3d 99, 105

15 (2d Cir. 2006). Under New York law, the revocable beneficiary of

16 a life insurance policy has "a mere expectancy or . . . an

17 inchoate right [in the policy] depending entirely upon the will

18 of the insured." Davis v. Modern Indus. Bank, 279 N.Y. 405, 410,

19 18 N.E.2d 639, 641 (1939). As such, the beneficiary has no legal
6

1 or equitable interest in the policy that could be made part of

2 the property of the beneficiary's bankruptcy estate. Section

3 541(a)(5) of the Bankruptcy Code, entitled "Property of the

4 Estate," accords with this well-established principle by

5 providing that a debtor's interest in a life insurance policy is

6 only property of the bankruptcy estate when the debtor acquires

7 or becomes entitled to acquire the proceeds either before or

8 within 180 days of filing the bankruptcy petition. 11 U.S.C.

9 § 541(a)(5). 

10 With regard to the insurance policies at issue here, the

11 insured could have changed the beneficiary at any time prior to

12 filing for bankruptcy, and the beneficiary would have had no

13 claim to the cash surrender value. It must be remembered that

14 the trustee stands in the shoes of the debtor and can only assert

15 claims that the debtor could have asserted prior to filing for

16 bankruptcy. See, e.g., In re CBI Holding Co., 529 F.3d 432, 447

17 (2d Cir. 2008) (noting that "a bankruptcy trustee stands in the

18 shoes of the bankrupt corporation and can maintain only those

19 actions that the debtors could have brought prior to the

20 bankruptcy proceedings") (internal citations and quotations

21 omitted). Thus, it seems obvious that because the beneficiary

22 here holds nothing more than an inchoate interest and has no

23 claim to the cash surrender value of the spouse's insurance
7

1 policy, the cash surrender value is not subject to administration

2 by the beneficiary's trustee in bankruptcy.

3 It has been suggested, however, that the Bankruptcy Reform

4 Act of 1978, by allowing for the first time spouses to file

5 jointly, worked a fundamental change in the powers of a

6 bankruptcy trustee to administer the estates of spouses in cases

7 like this. See Teufel, 2002 U.S. Dist. LEXIS 27930, at *13-14

8 (suggesting that the identical issue on appeal before the Western

9 District of New York presented a question of first impression

10 because spouses could not file joint bankruptcy petitions prior

11 to 1978); In re Jacobs, 264 B.R. 274, 277-78, 292-93 (Bankr.

12 W.D.N.Y. 2001) ("[T]he Bankruptcy Reform Act of 1978 dramatically

13 changed such things, and there should be no doubt that in the

14 absence of an exemption statue, the beneficiary's interest

15 (whatever that is) in a life insurance policy is not exempt in

16 the bankruptcy case of the beneficiary."). Indeed, the district

17 court in this case followed a line of cases that generally

18 concluded that in a joint bankruptcy case, the trustee can reach

19 those assets that the couple, acting together, could have reached

20 prior to bankruptcy. For instance, In re Jacobs compared the

21 issue in this case regarding the cash surrender values of

22 reciprocal insurance policies to

23 a million-dollar Stradivari-crafted violin

24 sitting in a safe-deposit box with its
8

1 owners, husband and wife, each holding one of

2 two necessary keys to the box; and then the

3 couple filing joint bankruptcy to get rid of

4 their debts and arguing to their creditors

5 and the bankruptcy court that neither one

6 alone has a "choate" or attachable right to

7 the Stradivarius, but only a "mere

8 expectancy" that the other will co-operate

9 when needed.

10

11 Id. at 292. In such a case, according to In re Jacobs, "the

12 trustee may agree with himself or herself as trustee in two

13 different estates to retrieve the million-dollar Stradivarius

14 from the safe-deposit box." Id. at 294. Following this general

15 line of reasoning, the lower courts in this case concluded that

16 the trustee of the Wornicks' estates, standing in the shoes of

17 both spouses, could agree with himself to cash out the insurance

18 policies for the benefit of the beneficiaries' creditors. In

19 other words, because the Wornicks as a couple could have agreed

20 to cash out these insurance policies, the lower courts concluded

21 that the trustee was also empowered to do so by virtue of the

22 joint filing. We do not think this analysis is correct.

23 While Section 302 of the Bankruptcy Code allows spouses to

24 file jointly, it does not automatically consolidate their

25 estates. 11 U.S.C. § 302(b) ("After the commencement of a joint

26 case, the court shall determine the extent, if any, to which the

27 debtors' estates shall be consolidated."); see also In re

28 Jorczak, 314 B.R. 474, 480 n.8 (Bankr. D. Conn. 2004) ("A joint
9

1 petition does nothing more than simultaneously commence two

2 individual cases. . . . [When a joint petition is filed] two

3 separate bankruptcy estates-the husband's and the wife's – are

4 created. A joint petition . . . , unless substantively

5 consolidated, does not affect the legal rights or obligations of

6 the debtors, the creditors or the trustee.") (internal citations

7 and quotations omitted); In re Arnold, 33 B.R. 765, 767 (Bankr.

8 E.D.N.Y. 1983) ("Although a joint petition is filed, estates are

9 in legal effect separate or several. Section 302 has procedural

10 effect only. Although a husband and wife file a joint petition,

11 there are in fact two separate debtors. The right of exemption is

12 a personal privilege.") (emphasis added). And the trustee in

13 this case does not claim that the bankruptcy court ever entered

14 an order consolidating the Wornicks' estates. Nor does joint

15 administration allow the property of one spouse to be used to

16 satisfy the debts of the other spouse. See generally 2 Collier

17 on Bankruptcy P 302.02 (15th ed. 2005) (citing In re Hicks, 300

18 B.R. 372 (Bankr. D. Idaho 2003)). Thus, in our view, the trustee

19 may not reach assets in a joint filing that he could not have

20 reached had the spouses filed separately. Here, had the Wornicks

21 filed separate bankruptcy petitions, the trustee would have been

22 powerless to administer the cash surrender value as part of the

23 estate of the owner/insured because Section 3212(b)(1) provides
10

1 an express exemption in favor of the beneficiary. Likewise,

2 because the beneficiary's interest in the proceeds and avails of

3 the policy is inchoate, the trustee, standing in the shoes of the

4 beneficiary, would have been powerless to administer property to

5 which the beneficiary had no legal claim, notwithstanding the

6 lack of an exemption insulating the cash surrender value from

7 administration as part of the estate of the beneficiary. A joint

8 filing does not vest the trustee with the power to reach a

9 spouse's assets that would have otherwise been insulated, and in

10 the Wornicks' joint bankruptcy case, the cash surrender values of

11 their insurance policies are not administrable.

12 Indeed, to hold otherwise, and to allow the trustee to

13 administer the cash surrender values of these insurance policies,

14 would leave this area of the law in an awkward stance. As noted

15 above, Section 3212(b)(2) provides that if A and B are married,

16 and A buys insurance on B's life and designates A as the

17 beneficiary, then the proceeds are not reachable by the creditors

18 of either A or B. This exemption would also apply if B purchased

19 the insurance and then assigned it to A. See, e.g., In re

20 Rundlett, 142 B.R. 649, 654 (Bankr. S.D.N.Y. 1992) (holding that

21 "when a husband assigns a life insurance policy on his life to

22 his wife, he is deemed to have acted as her agent so that she

23 should be regarded as having caused or effected the policy, with
 Whether either of these transfers could be deemed 3

fraudulent need not be parsed here. Nonetheless, it bears noting

that "even the conversion of nonexempt property into exempt

property by an insolvent contemplating bankruptcy has been held a

transaction not intended to defraud creditors in the absence of

evidence of extrinsic fraud." In re Adlman, 541 F.2d 999, 1005

(2d Cir. 1976). New York's Fraudulent Conveyance law defines

"assets of a debtor" as "property not exempt from liability for

his debts. To the extent that any property is liable for any

debts of the debtor, such property shall be included in his

assets." N.Y. Dr. & Cr. Law § 270 (emphasis added). In cases

like this, the debtor who would be doing the transferring is the

insured, not the beneficiary, and in the estate of the insured

the cash surrender value is exempt under Section 3212(b)(1). In

other words, A is transferring property that cannot be used to

satisfy A's debts, which is by definition not a fraudulent

conveyance. Moreover, "Conveyance" is defined as including

"every payment of money, assignment, release, transfer, lease,

mortgage or pledge of tangible or intangible property, and also

the creation of any lien or incumbrance." Id. Because, as

discussed above, a beneficiary holds only an inchoate interest in

an insurance policy, merely changing a beneficiary cannot be

considered a conveyance of property capable of being fraudulent. 

See, e.g., First Wisconsin Nat'l Bank of Milwaukee v. Roehling,

269 N.W. 677, 679 (Wis. 1936) (holding that changing the

11

1 the result that the proceeds, including the cash surrender value,

2 are exempt from the wife's creditors"). Debtors who are

3 similarly situated to the Wornicks, therefore, could easily

4 insulate their collective insurance policies from creditors by

5 simply transferring ownership of each policy from one spouse to

6 the other prior to filing for joint bankruptcy; the insured and

7 beneficiary could remain the same. Another option available to

8 similarly situated debtors would be to change the beneficiaries

9 of their policies prior to filing, after which the insured could

10 claim an exemption under Section 3212(b)(1). That the Wornicks 3
beneficiary of an insurance policy is not a conveyance and cannot

be considered a fraudulent transfer). We are aware of no cases

in which similar transactions were found to be fraudulent

conveyances.

12

1 failed to foresee the utility of such trivial maneuvers prior to

2 filing for bankruptcy should not disqualify them for the

3 protection of New York's life insurance exemption. 

4

5 Conclusion

6 In sum, the trustee wants to administer the cash surrender

7 values of insurance policies as non-exempt assets of the

8 beneficiary. Any leviable interest in this property, however,

9 belongs to the owner/insured, not to the beneficiary. Section

10 3212(b)(1) protects the cash surrender value from the creditors

11 of the owner/insured, and because the beneficiary owns no

12 administrable interest, the property is not subject to

13 administration. Therefore, the order of the district court is

14 reversed.