In re Wills

In re: DAVID PATRICK WILLS, Debtor

Case No. 19-33175

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF OHIO WESTERN DIVISION AT DAYTON

October 5, 2020

Judge Humphrey

Chapter 7

Decision and Order Sustaining the Chapter 7 Trustee's Objection to the Debtor's Exemption in a Life Insurance Policy and Granting the Trustee's Motion for Turnover (Docs. 21 and 23)

This contested matter concerns the narrow question of whether, under an Ohio exemption statute, the cash value of a life insurance policy is exempt when the beneficiary is a stepchild who was not adopted by the insured, and is not a dependent.

The debtor, David Patrick Wills ("Wills") filed a Chapter 7 petition on October 12, 2019 (doc. 1). On Wills' amended Schedule A/B, he listed an interest in life insurance policy with Mutual Trust Life Insurance Company (the "Life Insurance"). The cash value of the Life Insurance was disclosed as $9,468.21. Stipulations ¶ 5 (doc. 36). See also Exhibit B (policy statement, dated September 18, 2018, showing the cash value at $9,468.21). Effective August 27, 2019, the primary beneficiary has been Wills' stepchild, Brian Douglas Plater. Stipulations ¶ 8, 9, Exhibit C. Plater is not a dependent of Willis and has not been adopted by Wills. Stipulations, ¶ 10, 11.

Wills, in his amended Schedule C, exempted the Life Insurance pursuant to Ohio Revised Code §§ 2329.66(A)(6)(b), 3911.10, 3911.12, and 3911.14. Stipulations, ¶ 6. The Chapter 7 Trustee, Erin C. Renneker (the "Trustee") objected to the exemption (doc. 23). The Trustee has moved for turnover of the cash value of the Life Insurance (doc. 21). Wills responded to the exemption objection and the turnover motion (docs. 24 & 26). The parties subsequently filed stipulations (doc. 36) and additional briefing (docs. 37 - 39).

With certain exceptions not relevant here, property of the estate is defined to include all legal and equitable interests of the debtor. 11 U.S.C. § 541(a)(1). The Bankruptcy Code allows a debtor to exempt certain property from the debtor's creditors. 11 U.S.C. § 522(d). A claimed exemption has a prima facie presumption of validity. In re Bellasari, 554 B.R. 440, 443 (Bankr. S.D. Ohio 2016). The Trustee, as the objecting party, "has the burden of proving that the exemptions are not properly claimed." Fed. R. Bankr. P. 4003(c). The burden is by a preponderance of the evidence. Hamo v. Wilson (In re Hamo), 233 B.R. 718, 723 (B.A.P. 6th Cir. 1999). If the Trustee provides evidence to rebut the presumptively valid exemption, the burden of production shifts to the debtor to demonstrate the exemption is properly claimed. Bellasari, 554 B.R. at 445. The ultimate burden of persuasion remains with the Trustee. In re Weatherspoon, 605 B.R. 472, 482 (Bankr. S.D. Ohio 2019).

Ohio uses its own state exemptions by opting out of the federal exemptions provided in 11 U.S.C. § 522(d). 11 U.S.C. § 522(b)(2); Ohio Rev. Code § 2329.662. Ohio exemptions are to be liberally construed in favor of the debtor. Daugherty Cent. Trust Co. of Ne. Ohio, N.A., 504 N.E.2d 110, 1004-05 (1986). However, a liberal construction does not allow a court "to rewrite [an exemption] on grounds we are thereby improving the law." Daugherty, 504 N.E.2d at 1105. See also Menninger v. Schramm (In re Schramm), 431 B.R. 397, 402-03 (B.A.P. 6th Cir. 2010) (citing Daugherty, and concluding that the language of OhioRevised Code § 3911.10 does not allow a debtor to exempt insurance proceeds, as the beneficiary, from his or her own creditors).

Ohio Revised Code § 2329.66(A)(6)(b) provides that any person domiciled in the state of Ohio may exempt from execution "[t]he person's interest in contracts of life or endowment insurance or annuities, as exempted by section 3911.10 of the Ohio Revised Code[.]" Section 3911.10 provides that:

All contracts of life or endowment insurance or annuities upon the life of any person, or any interest therein, which may hereafter mature and which have been taken out for the benefit of, or made payable by change of beneficiary, transfer, or assignment to, the spouse or children, or any persons dependent upon such person, or an institution or entity described in division (B)(1) of section 3911.09 of the Revised Code, or any creditor, or to a trustee for the benefit of such spouse, children, dependent persons, institution or entity, or creditor, shall be held, together with the proceeds or avails of such contracts, subject to a change of beneficiary if desired, free from all claims of the creditors of such insured person or annuitant. Subject to the statute of limitations, the amount of any premium upon such contracts, endowments, or annuities, paid in fraud of creditors, with interest thereon, shall inure to their benefit from the proceeds of the contracts, but the company issuing any such contract is discharged of all liability thereon by the payment of its proceeds in accordance with its terms, unless, before such payment, written notice is given to it by a creditor, specifying the amount of the claim and the premiums which the creditor alleges have been fraudulently paid.

Ohio Rev. Code § 3911.10. The parties agree that § 3911.10 is the relevant exemption statute.

Section 3911.10 provides that the beneficiary must be a spouse, a child, or a dependent of the insured. As Prater is not a spouse of the Debtor, or a dependent, the only question is whether he is a child for purposes of § 3911.10. Chapter 3911 of the Ohio Revised Code does not define the term "children." Therefore, we must look to § 1.59(A), which states that "[a]s used in any statute, unless another definition is provided by that statute or a related statute: (A) 'Child' includes child by adoption." Ohio Rev. Code § 1.59(A).

The plain meaning of § 3911.10, read with § 1.59(A), is a child, if not a natural born child or a dependent of the child of the insured, must be adopted. The definition of child provided by § 1.59(A), based on its plain meaning, appears to be to ensure that a legally adopted childreceives the same legal standing in Ohio as a natural born child. See also Ohio Rev. Code § 1.42 ("Words and phrases should be read in context and construed according to the rules of grammar and common usage.").

Both parties point to other Ohio statutes referencing stepchildren. See Ohio Rev. Code §§ 3923.24(A)(1)(a) (providing that group sickness and accident insurance policies must cover unmarried children, under certain circumstances, up to the age of twenty-six, including a "natural child, stepchild, or adopted child of the insured."); 1751.14 (similar requirement for a health insuring corporation); 1112.01(G) (for purposes of Chapter 11112, concerning Family Trust Companies, defining "Family member" to include stepchildren); 1322.01(Q) (for purposes of Chapter 1322, the Residential Mortgage Lending Act, defining the term "Immediate Family" to include "a stepchild."); 3965.01(G) (for purposes of Chapter 4965, concerning Cybersecurity, defining the term "Family" to include a stepchild). These statutes, for our purposes, all demonstrate when the Ohio legislature chose to separately include a stepchild in a statute, it knew how to do so. When the statute has no such provision, the term child as defined by § 1.59(A), is limited to a "natural child" or a child that is adopted.

The Debtor argues that the term children in § 3911.10 should include stepchildren because it supports maintaining the integrity of the family unit and cites In re Schaeffer, 228 B.R. 892 (Bankr. N.D. Ohio 1998). In Schaefer, the court concluded that when the beneficiary was an emancipated child that was not a dependent, the cash surrender value of a life insurance policy could be exempt under § 3911.10. First, the plain meaning of the statute provides a fair reading that a dependent is a separately defined, qualified beneficiary — separate from a child or spouse. The court agreed that the primary purpose of § 3911.10 was to preserve the family unit, but described other...