Source: https://caselaw.findlaw.com/us-supreme-court/296/489.html
Timestamp: 2019-04-21 03:16:03+00:00

Document:
As Amended Feb. 3, 1936. [296 U.S. 489, 490] Messrs. Wm. Marshall Bullitt, of Louisville, Ky., and Henry Roberts, of Bristol, Va. (Mr. J. K. Brown, of Bristol, Tenn., on the brief), for petitioner.
Mr. robert Burrow, of Bristol, Tenn., for respondent.
Mr. Clayton Scyphers, of Bristol, Va., for respondent, pro hac vice, by Special leave of Court.
The question for decision is whether the bankrupt of his trustee is the person entitled to future monthly disability benefits payable under a contract entered into before the adjudication.
The bankrupt contends that the 'Supplementary Contract' covering disability is not a separate and distinct contract, but an integral part of the life insurance policy; that the obligation to pay disability benefits is insurance within the meaning of section 70a of the Bankruptcy Act (11 U.S.C.A. 110(a); that it did not pass to the trustee, since that feature has no cash surrender value; and that if it be held that the contract for disability benefits has a cash surrender value, its amount should be ascertained and the bankrupt be given the opportunity, by paying such value to the trustee, to hold the obligation free from the claims of creditors. The bankrupt contends further that any future disability payments are in the nature of future earnings or after-acquired property, and, hence do not pass to the trustee. Finally, he insists that the obligation of the company to pay disability benefits is property exempt under the law of Tennessee. All of these contentions are, in our opinion, unsound.
'8456. Insurance on husband's life, effected by himself, goes to wife and children.-Any life insurance effected by a husband on his own life shall, in case of his death, inure to the benefit of his widow and children; and the money thence arising shall be divided between them according to the statutes of distribution, without being in any manner subject to the debts of the husband.
Second. The fact that the disability benefits are provided for in a 'Supplementary Contract' issued on the same day as the policy and physically attached thereto does not make them life insurance. The life policy and the contract were executed as distinct instruments. The 'Supplementary Contract' was to operate for some purposes as if a part of the life policy. 3 But for all other pur- [296 U.S. 489, 495] poses it is a separate obligation. The hazards covered by the two instruments are obviously different. The beneficiaries differ also. The payment under the life policy was to be made to the wife;4 the disability benefits are to be paid to Legg himself. A separate and different premium was exacted for the obligations assumed in each instrument. It was provided that forfeiture of the life policy would terminate all right arising from disability; but the supplementary contract could be terminated by Legg without affecting otherwise his life policy.
Third. The obligation of the company to pay disability benefits in the future is not after-acquired property. It is property which was acquired by Legg long before the adjudication, and fully paid for by the premiums paid before the adjudication. Nor are the benefits payable after the adjudication in any sense future earnings. They are not the fruit of anything to be done by Legg after the adjudication. The right to receive disability benefits in the future does not differ from any other right acquired before adjudication to receive money thereafter. It is in essence an annuity purchased and paid for prior to the adjudication. Like other property, it passed to the trustee, unless exempted by the law of the bankrupt's [296 U.S. 489, 496] domicile. 5 The principle declared in Local Loan Co. v. Hunt, 292 U.S. 234 , 54 S.Ct. 695, 93 A.L.R. 195, is not applicable here.
Fourth. No statute of Tennessee exempts disability benefits. Its law is, in some respects, more liberal to the debtor than section 70a of the Bankruptcy Act (11 U.S.C.A. 110(a). Section 8456 provides that 'any life insurance effected by a husband on his own life shall, in case of his death, inure to the benefit of his widow and children,' free from claims of the husband's creditors. This has been held to mean that the cash surrender value, as well as the policy, is exempt. 6 But there obviously was no intention to exempt this contract right which is not life insurance, or 'the money thence arising,' since section 8456 is, in substance, a re- enactment of the statute passed in 1846. Section 8458, enacted in 1925, and slightly modified since, is not applicable here. It deals only with life insurance and annuity contracts 'made for the benefit of, or assigned to, the wife and/or children, or dependent relatives.' Even if a contract for future disability benefits be deemed an annuity within the meaning of that section, it does not apply, because this contract to pay disability benefits was not made for, and has not been assigned to, Legg's wife, his children, or any dependent. The highest court of Tennessee has not had occasion to decide whether future disability benefits are exempt from claims of creditors; but the intermediate appellate court has held that the statute exempting life insurance does not apply to disability benefits payable [296 U.S. 489, 497] under a so-called health-insurance policy. Cravens v. Robbins, 8 Tenn.App. 435, 437.
[ Footnote 1 ] The Legg policy contained a table of cash surrender values. This related to the separate obligation to pay the face of the policy on death. It had no relation to the company's obligation under the 'Supplementary Contract' for disability benefits.
[ Footnote 2 ] Compare In re Kern (D.C.) 8 F.Supp. 246. As early as 1910, some companies had inserted in their policies a provision that if the insured became 'totally and permanently' disabled, payment of premiums would be waived so long as such disability continued. See New York Life Insurance Co. v. Edwards, 271 U.S. 109, 117 , 118 S., 46 S.Ct. 436. A little later, some companies introduced the provision that in case of total and permanent disability the face of the policy would be paid in annual installments beginning after the accrual of disability; the amounts so paid to correspondingly reduce the final amount of the policy payable at death, so that the entire liability under the policy could be extinguished even without death. Policies issued under the War Rick Insurance Act, October 6, 1917, c. 105, 40 Stat. 398, provide, in addition to payments of (say) $10,000 on death, monthly benefit payments up to $57. 50; the aggregate to be deducted from the face of the policy. It was not until about 1920 that provision was made for the payment, in consideration of an additional premium, of monthly disability benefits in addition to the full face of the pelicy at death. See Hunter and Phillips, 'Disability Benefits in Life Insurance Policies,' Actuarial Study No. 5 (2d Ed.) part 1, c. I (1932); Arthur Hunter, Papers on Disability Benefits, Eighth International Congress of Actuaries (1927), p. 83.
[ Footnote 4 ] Later, Legg changed the beneficiary to his children, reserving the right to change the beneficiary thereafter.
[ Footnote 5 ] See In re Wright (C.C.A.) 157 F. 544, 18 L.R.A.(N.S.) 193; In re Burtis (D.C.) 188 F. 527; In re Matschke (D.C.) 193 F. 284; In re Evans (D. C.) 253 F. 276. Compare In re Baudouine (D.C.) 96 F. 536; Mutual Life Ins. Co. of New York v. Smith (C.C.A.) 184 F. 1, 5, 33 L.R.A.(N.S.) 439; In re Balsier (D.C.) 215 F. 134.
[ Footnote 6 ] See Dawson v. National Life Ins. Co., 156 Tenn. 306, 300 S.W. 567; In re Stansell (D.C.) 8 F.(2d) 363; Grade, Exemption of Life Insurance Policies Under Tennessee Statutes, etc., 11 Tenn.Law Rev. 34. Compare Lunsford v. Nashville S. & L. Corporati n, 162 Tenn. 179, 35 S.W.(2d) 395.

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