March 18, 2014
(Editor’s Note: This post is an excerpt from an article appearing in Practitioner Insights on WestlawNext)
A debtor must turn over to her Chapter 7 trustee $7,200 in life insurance proceeds she spent on her father’s funeral, a Michigan bankruptcy judge has ruled, saying that while the result may seem harsh, the Bankruptcy Code necessitated it.
Whether the debtor was the owner of the policy, as she had argued, or just the beneficiary, the proceeds fall within the scope of statutory provisions defining “property of the estate,” U.S. Bankruptcy Judge Scott W. Dales of the Western District of Michigan said, ordering her to remit the proceeds within 28 days.
Ownership of the proceeds
According to the opinion, Chapter 7 trustee Thomas C. Richardson moved to compel turnover of $9,700 in nonexempt assets from debtor Della Hodge. She agreed to remit only $2,300.
She challenged the trustee’s demand for $7,200 in life insurance proceeds she received when her father died days after her filing, which she used to pay for the burial, the opinion said.
The trustee relied on Section 541(a)(5) of the Bankruptcy Code, 11 U.S.C.A. § 541(a)(5), which includes among property of a debtor’s estate any interest in property the debtor acquires or becomes entitled to acquire within 180 days after the filing of the petition as a beneficiary of a life insurance policy.
In her response, Hodge argued that she was the owner of the policy, not the beneficiary, putting the proceeds outside the scope of Section 541(a)(5) because she would have acquired them on account of her pre-petition ownership of the policy, the opinion said.
Hodge, however, had not listed the policy under personal property in her bankruptcy filings, the opinion said. By the time of oral argument on the trustee’s motion her counsel had conceded that Hodge’s father was actually the owner of the policy, the opinion said.
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