One of my very first blogs, titled “The Game of Life,” analyzed a case in Arizona involving the possibility of exempting, or protecting, life insurance policies in Chapter 7 bankruptcy. I am sure many of you may have forgotten this case, but debtor’s attorneys have not. We have been biting our nails and holding our breath as we have waited for the case to move its way through the bankruptcy appeal process. Just in case you thought bankruptcy court was extremely boring and no “big” cases come out of it, this tiny little case, In re Hummel, has made its way from the ground floor bankruptcy court to the Ninth Circuit Court of Appeals.

The initial events sending this case on its way through appeal process happened in Tucson. Ms. Hummel filed Chapter 7 bankruptcy, and, at that time, she owned three life insurance policies that each named her adult daughter as the beneficiary. Arizona allows an exemption, or protection, for life insurance policies. The exemption reads that “the cash surrender value of life insurance policies where for a continuous unexpired period of two years the policies have been owned by a debtor and have named as beneficiary the debtor’s surviving spouse, child, parent, brother, or sister, or any other dependent family member” is protected. Ariz. Rev. Stat. Sec. 33-1126(A)(6). The issue with life insurance policies revolves around whole or universal life policies, or some other policy with current cash value. Term policies are somewhat inconsequential because they do not carry cash value. They only have value when the owner passes away. If a Debtor has unprotected cash value, the Chapter 7 trustee can cash out the policies and use the funds to pay the Debtor’s creditors. Here, the Chapter 7 trustee asserted that Ms. Hummel’s policies were not protected because her daughter was no longer a dependent, and the Arizona law states that the beneficiary must be a dependent. The Debtor’s attorney argued that word “other” in the law, as in any other dependent family member, differentiated those family members from the ones specifically mentioned. The bankruptcy judge agreed with the Debtor’s attorney. The Chapter 7 trustee, unhappy, appealed the decision to the intermediate appeal level, the Bankruptcy Appellate Panel for the Ninth Circuit. The trustee won on at level. So, the Debtor, unhappy, moved to the next level, the Ninth Circuit Court of Appeals.

And it was here that Debtors everywhere got sweet victory. The Ninth Circuit Court of Appeals determined that construction of the Arizona statute did not limit the exemption only to policies where a dependent spouse, child, etc.. was listed as the beneficiary. Once again, the determination boiled down to an analysis of grammar and sentence structure. The Ninth Circuit held that it only made sense that the word “other” would work as a word of differentiation. If not, the word would become meaningless and superfluous. Additionally, the Court concluded that if it was not used to differentiate, the word would be illogical since the class of beneficiaries is stated as “the debtor, spouse, child or other dependent family member.” A debtor could not logically be a dependent of himself/herself. Another nice point made by the Ninth Circuit was that if there is ambiguity in the language of a statue, the exemption statute should be “construed liberally in favor of the debtor.”

This ruling is particularly important for older clients who are filing bankruptcy. Typically, an older debtor is not going to have a dependent child, but will very likely have a child as a beneficiary of his/her life insurance. In its ruling, the Ninth Circuit has provided some valuable protection to Debtors and their assets.

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