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Bankruptcy – Term Life Insurance – Estate Property – Attempted Beneficiary Change

Wallace v. Crawford (In re Meyers) (Lawyers Weekly No. 12-05-1118, 26 pp.) (J. Craig Whitley, J.) 11-05040; W.B.N.C.

Holding: James Meyers owned a term policy insuring his life when he filed his bankruptcy petition; on that date, the policy became the property of the bankruptcy estate. Mr. Meyers’ later attempt to change the policy’s beneficiary from his grandmother to the plaintiff-creditor was a nullity.

The defendant-trustee’s motion for summary judgment is granted.


James Meyers owned a $2,000,000 policy insuring his own life. He named his grandmother, Maudie Meyers, as beneficiary.

Mr. Meyers allowed the policy to lapse but then applied for reinstatement on June 16, 2009. While his application was pending, Mr. Meyers filed a chapter 7 bankruptcy case on July 14, 2009. He did not disclose the policy in his bankruptcy schedules, nor did he claim an exemption in it.

On Aug. 7, 2009, the policy was reinstated.

On Aug. 24, 2009, Mr. Meyers executed and submitted a change of beneficiary form, ostensibly changing the beneficiary under the policy from Ms. Meyers to the plaintiff-creditor. The form stated that the relationship of Mr. Meyers to the creditor was “debt coverage.”

On Jan. 28, 2010, Ms. Meyers filed her own bankruptcy case.

On June 22, 2010 (145 days after Ms. Meyers filed bankruptcy), Mr. Meyers committed suicide. Both Mr. Meyers’ creditor and Ms. Meyers’ bankruptcy trustee claim the proceeds of Mr. Meyers’ life insurance policy.


Only the owner of an unmatured life insurance policy has the power to change the beneficiaries. Pursuant to 11 U.S.C. § 541(a)(1), unmatured life insurance contracts constitute property of the bankruptcy estate; this property is potentially subject to exemption.

There are two federal exemptions for unmatured life insurance contracts owned by the debtor. However, North Carolina has opted out of federal exemptions. N.C. debtors are limited to the exemptions found in G.S. § 1C-1601(a) and other state law. Of these, only G.S. § 1C-1601(a)(2) and (a)(6) are even remotely applicable to debtor-owned life insurance contracts. The former permits a debtor to claim up to $5,000 in value in any property. The latter subsection permits exemptions in insurance policies, but only if the beneficiary is a spouse or child of the owner/debtor.

No one has argued that either state exemption applies in this case. The original beneficiary was Mr. Meyers’ grandmother, not his spouse or child (Mr. Meyers was unmarried and had no children). As to the $5,000 exemption, Mr. Meyers failed to list the policy in his bankruptcy petition and failed to assert any exemption in the policy.

Because the policy was not listed or exempted, it remained property of the bankruptcy estate at the time the policy matured on June 22, 2010.

This court declines to follow In re Herrell, 201 B.R. 386 (Bankr. N.D. Fl. 1997), for several reasons, including the fact that Herrell is based on the view that the right to change a beneficiary under an unmatured life insurance contract is excluded from the bankruptcy estate by § 541(b)(1). The unqualified, unlimited right to change the beneficiary under the policy was a right purchased by Mr. Meyers when he purchased the policy. The right was not required to be solely exercised for the benefit of another. Mr. Meyers could exercise the right for his own benefit to name his estate as the beneficiary, to name his creditor as beneficiary to secure financing, or to allow him the ability to sell the policy if he chose. He also had the right to designate no beneficiary at all.

That § 541(b)(1) is inapplicable to the current situation is demonstrated by Mr. Meyers’ own actions. His post-petition attempt to change the beneficiary was an effort to name his own creditor as the beneficiary for “debt coverage.” It does not appear that Congress intended for § 541(b)(1) to exclude a debtor’s unqualified and unlimited right, as owner, to change a beneficiary designation on an unmatured life insurance contract.

Because Mr. Meyers was not the owner of the policy on Aug. 24, 2009 or anytime thereafter, his attempt to change the beneficiary to the plaintiff-creditor was a legal nullity and of no force or effect. Ms. Meyers remained the lawful beneficiary and was such when she herself filed chapter 7. When Mr. Meyers died and Ms. Meyers became entitled to the payments of the proceeds 145 days after filing her bankruptcy petition, those proceeds constituted property of her bankruptcy estate pursuant to 11 U.S.C. § 541(a)(5)(C).

Under the contract and under N.C. law, the insurer had no discretion in whether or not to reinstate the policy. A reinstated policy is not a new policy of insurance; instead, the reinstatement merely revives the original contract to the same extent as if there had been no lapse.

Consequently, the creditor’s unsupported assertion that Mr. Meyers had no interest in the policy at the time of his bankruptcy petition is contrary both to the contract and applicable law. The fact that the policy lapsed and was reinstated does not alter the legal analysis.

Summary judgment for Ms. Meyers’ bankruptcy trustee.

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