by The chapter 7 debtor’s change of beneficiary in his life insurance policy from his employer to his wife was not an avoidable property transfer where the debtor retained his interest in the policy and the transfer did not diminish the bankruptcy estate. Harden v. Harrison (In re Harrison), 2021 WL 739533, No. 19-5730, Adv. Proc. No. 20-113 (Bankr. E.D. N.C. Feb. 22, 2021).
In his schedules, the debtor listed an interest in Guardian Whole life insurance policy, valued at $814,917, with his wife as beneficiary. The chapter 7 trustee filed an adversary proceeding under sections 548 and 550, or section 544, seeking to avoid the pre-petition transfer of beneficial interest in the policy from the debtor’s employer, Ebenconcepts, to the debtor’s wife. The debtor moved to dismiss the complaint.
The court began with the key question of whether the debtor transferred an interest in property that resulted in diminution of the bankruptcy estate. Because property interests are determined by state law, both parties cited Russell v. Owen, 165 S.E. 687 (N.C. 1932), where the Supreme Court of North Carolina held that “the beneficiary of a life insurance policy acquires a vested interest from the time the insurance takes effect, if the contract contains no reservation of the right to change the beneficiary, assign the policy, or divert the proceeds.”
The court found Russell unhelpful as it concerned the property interest held by the beneficiaries rather than the interest held by the debtor. As owner of the life insurance policy, the debtor’s interest was determined by the terms of the contract. One of those terms was that the insured retained the right to change beneficiaries. When the debtor changed the beneficiary within 90 days of his bankruptcy petition, he did not transfer his ownership of the policy or his contractual right to change beneficiaries.
The court rejected the trustee’s argument that, until the death of the insured, the beneficial interest in the policy belonged to the debtor, finding that the beneficial interest of a life insurance policy can never belong to the owner of the policy. Likewise, the court rejected the argument that Ebenconcepts “owned” an interest in the policy prior to transfer as being both contrary to North Carolina law and irrelevant with respect to the debtor’s estate.
The court further found that the possibility that the change in beneficiary from Ebenconcepts to the debtor’s wife might allow the debtor to exempt the value of the life insurance policy where he could not have done so before was not relevant. The change in status from non-exempt to exempt did not alter the fact that the debtor did not transfer his interest in the property.
Stating that “[t]he propriety of changing the qualities and characteristics of property just prior to filing a bankruptcy petition is the subject of an objection to exemption and many reported decisions exist for guidance,” the court noted that the question of whether the policy could be exempted over objection was not before it.
The trustee also argued that the change in beneficiary was avoidable under section 544 which allows the trustee to avoid any transfer of the debtor’s interest in property that would be avoidable under state law. The trustee argued that North Carolina law creates a broader definition of a debtor’s “interest in property” than the Bankruptcy Code. The court disagreed, finding that avoidability under North Carolina law was equivalent to that of the Bankruptcy Code.
The court granted the debtor’s motion to dismiss.