Marshall Rief

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
In re: Marshall Rief 	* 	Case No. 05-36515-JS
* 	(Chapter 7)
* 	* 	* 	* 	* 	* 	* 	* 	* 	* 	* 	* 	*
*
Marshall Rief 	*
*
v. 	* 	Civil Action No. WMN-07-2284
*
Zvi Guttman, Trustee 	*
*
*
MEMORANDUM
The instant appeal challenges an order entered by the United
States Bankruptcy Court for the District of Maryland sustaining
the objection of Zvi Guttman, Chapter 7 Trustee (Trustee), to the
Debtor’s exemption of the cash surrender value of certain life
insurance policies. 	The appeal has been fully briefed and is now
ripe for decision. 	Upon review of the appellate briefs and the
applicable case law, the Court finds that no hearing is necessary
and that the decision of the bankruptcy court shall be affirmed.
I. FACTS AND PROCEEDINGS
On October 12, 2005, the Debtor, Marshall R. Rief, filed a
voluntary petition for relief under Chapter 7 of the Bankruptcy
Code. 	The Debtor is married and has two children, now aged 12
and 16. 	He is employed as a bail bondsman.
Prior to filing for bankruptcy, in January of 2005, the
Debtor had executed a Last Will and Testament (Will), in which he
bequeathed his tangible personal property to his wife or, in the
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event that she predeceased him, his children, and his residuary
estate to his wife, or in the event she predeceased him, to a
revocable trust in his wife’s name.
Simultaneously with the execution of his Will, the Debtor
executed papers to create the “Marshall R. Rief 2005 Trust”
(Trust), an irrevocable trust. 	The Debtor named his attorney,
Louis F. Friedman, as the trustee. 	The Trust provided, in
pertinent part:
SECTION 1. 	TRANSFER TO TRUST. 	Concurrently with the
execution of this Agreement, the Grantor has
transferred to the Trustee Ten Dollars ($10.00) in
cash, receipt of which hereby acknowledged by the
Trustee. 	Other property, real or personal (including
life insurance policies) may be transferred, endorsed,
or otherwise made payable to the Trustee.
Trust at § 1 (emphasis added). 	Proceeds of any life insurance
policies so transferred would be paid into a “Marital Insurance
Trust” for the benefit of his wife upon the Debtor’s death. 	Id.
at § 2.2. 	Upon the death of the Debtor’s wife, any remaining
funds in the “Marital Insurance Trust” would be paid into the
“Family Insurance Trust” for the benefit of the Debtor’s children
and any eventual grandchildren. 	Id. at § 3.3.
In Schedule C of the Debtor’s bankruptcy schedules, he
claimed as exempt ten life insurance policies pursuant to Md.
Code Ann., Ins. § 16-111 (2006 Repl. Vol.). 	Five of those
policies are at issue in the instant appeal - three that insure
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1These policies are: 1) Berkshire Life Policy No. L0983019, dated January 15, 1993,
App. at 137-141; 2) Berkshire Life Policy No. L0955434, dated September 12, 1990, App. at
132-136, 181; and 3) John Hancock Policy No. ML 7121871, dated September 10, 2003, App. at
161-163.
2These policies are: 1) Berkshire Life Policy No. L0977392, dated August 21, 1992, App.
at 142-145; and 2) Berkshire Life Policy No. L1004080, dated February 2, 1995, App. at 146-
150.
3
the life of the Debtor (Insurance Policies) 1 and two that are
owned by the Debtor, but insure the lives of the Debtor’s
children (Children’s Policies) 2 . 	The Insurance Policies all name
as the beneficiary either “trustees named in the last will &
testament of the Insured” or “Last will & testament of the
Insured.” 	See app. at 163 & 181. 	The Children’s Policies name
the Debtor or the Debtor and his wife jointly as the primary
beneficiaries. 	See id. at 143 & 148. 	The total cash surrender
value of the Insurance Policies is $123,792.07. 	July 19, 2007,
Mem. Op. of the bankruptcy court at 3. 	The total cash surrender
value of the Children’s Policies is $24,289.52. 	Id.
On May 16, 2006, the Trustee filed an objection to the
Debtor’s exemptions in the bankruptcy court. 	The Trustee argued
that only such life insurance policies taken out for the benefit
of the Debtor’s spouse, children, or other dependant relatives
could be exempted and that none of the polices at issue met that
criteria. 	The Debtor responded that, because his wife was the
beneficiary under his Will, the Insurance Policies were for her
benefit. 	Alternatively, the Debtor argued that because he had
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taken steps to change the named beneficiary under the Insurance
Policies to the Trust, and because the Trust was for the benefit
of his wife and children, the Insurance Policies were exempt.
Lastly, the Debtor contended that Md. Code Ann., Cts. & Jud.
Proc. § 11-504(b)(2)(2006 Repl. Vol.) exempted the Children’s
Policies.
On July 31, 2006, a hearing was held on the objection and
testimony was taken from the Debtor and the attorney who drafted
both his Will and the Trust. 	The Debtor testified about each
insurance policy at issue and the beneficiary named under each
policy at the time the bankruptcy petition was filed. 	With
regard to the Trust, the Debtor testified that he set it up in
January of 2005, upon the advice of his attorney, but expressed
little understanding of its purpose or effect. 	Tr. of July 31,
2006, hearing at 14-15. 	Lastly, the Debtor testified that he
purchased the Children’s Policies as an education asset for their
benefit and that he believed that he held those policies in trust
for them. 	Id. at 35.
Mr. Friedman, the attorney who drafted the Will and the
Trust on the Debtor’s behalf, testified that the Debtor “signed
forms to transfer” the Insurance Policies to the Trust, but that
Mr. Friedman did not send them because “he knew [the Debtor] was
going into bankruptcy” and he didn’t want to make a transfer that
might appear improper. 	Id. at 25. 	He stated that he had
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discussed this with the Debtor and a conscious decision was made
not to send in the forms at that time. 	Id. at 31. 	Mr. Friedman
further testified that, if the Debtor were to die, Mr. Friedman
would be under a duty to “send the [beneficiary change] forms off
to the insurance company, and the insurance company would pay the
proceeds to the insurance trust.” 	Id. at 26. 	If he did not do
this, he testified that the proceeds of the Insurance Policies
would go to the Debtor’s estate which would then pay the proceeds
to the Debtor’s wife. 	On cross-examination, Mr. Friedman
acknowledged, however, that it was his understanding that, if the
Insurance Policies were paid to the Debtor’s estate after his
death, creditors would have priority over the Debtor’s wife as to
the proceeds. 	Id. at 29.
At the conclusion of the hearing, the bankruptcy court held
the matter sub curia. 	On July 19, 2007, the bankruptcy court
issued its memorandum opinion and order sustaining the Trustee’s
objections as to all of the policies. 	This timely appeal
followed.
II. STANDARD OF LAW
Findings of fact made by the bankruptcy court "shall not be
set aside unless clearly erroneous, and due regard shall be given
to the opportunity of the bankruptcy court to judge the
credibility of the witnesses." 	Fed. R. Bankr. P. 8013. 	"A
finding of fact is clearly erroneous only when the reviewing
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court is left with the definite and firm conviction that a
mistake has been committed." 	In re Broyles, 55 F.3d 980, 983
(4th Cir. 1995) (citations omitted). 	Conclusions of law are
reviewed de novo. 	In re Bulldog Trucking, Inc., 147 F.3d 347,
351 (4th Cir. 1998). 	Finally, a decision committed to the
discretion of the bankruptcy court is reviewed for an abuse of
discretion. 	See In re Modanlo, 342 B.R. 238, 241-42 (D. Md.
2006).
III. DISCUSSION
As a general rule, the cash surrender value of life
insurance policies owned by a debtor at the time that a
bankruptcy petition is filed are an asset of the bankruptcy
estate. 	Hickman v. Hanover, 33 F.2d 873 (4 th Cir. 1929) (citing
Cohen v. Samuels, 245 U.S. 50 (1917)). 	The U.S. Bankruptcy Code
allows the debtor to exempt certain property from the estate. 	11
U.S.C. § 522(d). 	The Bankruptcy Code also permits states to opt
out of the federal scheme for exemptions. 	See id. at §
522(b)(2). 	Maryland, like many states, has chosen to opt out of
the federal scheme. 	See Md. Code, Cts. & Jud. Proc. § 11-504(g)
(2006 Repl. Vol.). 	Accordingly, Maryland law governs permissible
exemptions in the instant case.
A. The Insurance Policies
Section 16-111 of the Insurance Article, entitled “Proceeds
exempt from creditors,” provides:
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(a) The proceeds of a policy of life insurance or under
an annuity contract on the life of an individual made
for the benefit of or assigned to the spouse, child, or
dependent relative of the individual are exempt from
all claims of the creditors of the individual arising
out of or based on an obligation created after June 1,
1945, whether or not the right to change the named
beneficiary is reserved or allowed to the individual.
(b) For purposes of this section, proceeds include
death benefits, cash surrender and loan values,
premiums waived, and dividends, whether used to reduce
the premiums or used or applied in any other manner,
except if the debtor has, after issuance of the policy,
elected to receive the dividends in cash.
(c) This section does not prohibit a creditor from
collecting a debt out of the proceeds of a life
insurance policy pledged by the insured as security for
the debt.
(d) A change of beneficiary, assignment, or other
transfer is valid except for transfer with actual
intent to hinder, delay, or defraud creditors.
Md. Code Ann., Ins. § 16-111 (emphasis added).
The Court begins with the Debtor’s argument that Section 16-
111 exempts the Insurance Policies because he named his wife and
children as the beneficiaries under his Will, the Insurance
Policies were made “for the benefit of” his wife and children.
This argument present a question of law that this Court reviews
de novo.
Exemption statutes under Maryland law are designed to
“protect debtors to the extent of ensuring they are not
completely deprived of their means of support[.]” 	Schumacher &
Seiler, Inc. v. Fallston Plumbing, Inc., 605 A.2d 956, 958 (Md.
Ct. Spec. App. 1992). 	With this purpose in mind, exemption
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3 A caveat to this liberal construction principle was enunciated by the Bankruptcy Court
for the District of Maryland in In re Howland, 27 B.R. 896, 898 (Bankr. D. Md. 1983). That
Court noted that “[w]hile it is true that there is language in Hickman v. Hanover . . . that
exemption statutes are to be liberally construed, such an interpretation does not and cannot apply
to an open-ended exemption without monetary limit. Such exemptions must be governed by the
words of the legislature.” (Internal citation and parenthetical omitted.); See also In re Chapman,
68 B.R. 745, 747 n.2 (Bankr. D. Md. 1986), recognized as abrogated on other grounds by In re
Butcher, 189 B.R. 357, 367 n.8 (Bankr. D. Md. 1995).
The bankruptcy court subscribed to this view in interpreting the exemption statutes in the
case at bar. See Mem. Op. at 13 (noting that “where, as here, the statute providing the
exemption is unlimited as to amount, the terms of the statute governing the exemption must be
construed strictly”). This caveat has not been approved or rejected by any Maryland court or the
Fourth Circuit and will not be adopted by this Court at this time.
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statutes are construed liberally. 	See Hickman, 33 F.2d at 874
(“the better and almost universal rule is that such statutes
should receive a liberal construction in favor of the debtor in
order to advance the humane purpose of preserving to the
unfortunate or improvident debtor or his family the means of
obtaining a livelihood and prevent them from becoming a charge
upon the public”); In re Gibson, 300 B.R. 866 (D. Md.
2003)(same). 3 	The Maryland Court of Special Appeals has
emphasized, however, that
[w]hile it is legitimate to construe exemption
provisions liberally and broadly in favor of the
debtor, the legislation cannot be construed so broadly
as, in effect, to create provisions more robust or more
potent than those which the legislature intended, or to
read into the law an exemption not found there. A court
is limited in its application of an exemption statute
by what the terms of that statute can fairly be said to
embrace.
Schumacher, 605 A.2d at 958 (quoting 9A Am. Jur. 2d Bankruptcy §
1098 (1991)).
Thus, this Court must first look to the plain language of
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4The Trustee contends that the Debtor is not permitted to make this argument for the first
time on appeal. A review of the record reveals that the Debtor did not argue before the
bankruptcy court that the proceeds of the Insurance Policies would not be subject to claims of
creditors and did not cite the statute he now cites on appeal. Rather, he argued that whether his
creditors could reach the proceeds was irrelevant to the issue of whether the policies were made
for the benefit of the Debtor’s wife and children. See Tr. at 53. The Court concludes, however,
that the debtor’s argument that the proceeds were exempt, whether paid to the estate or the Trust,
was broad enough to encompass the argument now before this Court, albeit based on newly
asserted legal authority.
9
Section 16-111 and afford it a liberal construction in favor of
the Debtor. 	The statute requires, in relevant part, that an
insurance policy be made “for the benefit of” a spouse, child, or
dependant. 	The bankruptcy court concluded that “the fact that
the debtor’s spouse and dependant children as legatees under his
[Will] are the same beneficiaries protected under [Section 16-
111] does not extend the terms of the statute to it.” 	Mem. Op.
at 16. 	This was so because a “‘legatee is not to be deemed a
beneficiary of the policy’” given that the proceeds of the policy
would be paid into the Debtor’s estate and be subject to the
claims of creditors. 	Id. (quoting 5 Couch on Insurance § 67:5
(3d ed. 2006)).
The Debtor contends, however, that Md. Code Ann., Est. &
Trusts § 8-115 (2001 Repl. Vol.), would prevent creditors from
reaching the proceeds of Insurance Policies if the proceeds were
paid into the estate. 4 	Section 8-115, entitled “Certain proceeds
exempt from claims,” states, in relevant part: “The proceeds of a
life insurance policy . . . are exempt from claims in accordance
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5While the Court did not explain this “greater benefit,” it is assumed that the tax
treatment of the proceeds might be more beneficial to the debtor’s family under a trust than if
they were the direct beneficiaries of the policies.
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with the provisions of §§ 8-431 and 16-111 of the Insurance
Article.” 	According to the Debtor, this statute would prohibit
his creditors from reaching the insurance proceeds and,
accordingly, the proceeds would be paid directly to his wife and
children through the estate. 	As the Trustee points out, however,
this statute merely implements Section 16-111. 	Thus, the
statute’s effect is determined by this Court’s conclusion with
respect to Section 16-111.
The Court begins with whether Section 16-111 requires that a
spouse, child, or other dependant relative be the named
beneficiary under the policy. 	There are no Maryland cases
answering this question. 	The Debtor cites to two cases decided
under a similar Pennsylvania statute allowing the exemption of
policies that named as the beneficiary a trust benefitting the
debtor’s spouse and children. 	See In re Phillips, 7 F.Supp. 807,
808 (D. Pa. 1934)(“In order that a policy may be made for the
benefit of the wife or children of an insured, it is not
necessary that such be stated in the policy alone.”); In re
Bosak, 12 F.Supp. 278 (D. Pa. 1935)(same). 	That court focused on
the purpose of the designation and concluded that, by designating
a trust as the beneficiary, as opposed to naming a spouse or
child, a “greater benefit” might result to the debtor’s family. 5
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In a more recent case under slightly different facts, the
District Court for the District of Ohio reached a different
result. 	In In re Bunnell, 322 B.R. 331 (Bankr. N.D. Ohio 2005),
the debtor had named a non-dependant relative, her sister, as the
beneficiary of her life insurance policy. 	She claimed that the
policy was exempt based on the fact that in her will, she had
named her sister as the trustee of a trust for the benefit of her
children. 	She asserted that in naming her sister as the
beneficiary of the policy, she also had intended the proceeds of
the policy to be for the benefit of her children. 	The bankruptcy
court rejected this argument, opining:
Under any rational interpretation, the phrase taken out
for the benefit of as used in [the Ohio statute]
necessarily denotes, with respect to life insurance,
the policy beneficiary. In that way, the Trustee argues
that since the Debtor's life insurance policy only
named her sister, individually, as a beneficiary, with
no mention of her children or a trust in the children's
favor, the policy does not qualify under [the statute]
as having been taken out for the benefit of her
children. On the other side, the Debtor, while not
contesting the fact that she named her sister
individually as the policy beneficiary, argues that to
implement her true intent, the designation must be read
consistent with her will wherein her sister was
appointed as a trustee, not beneficiary, of a
testamentary trust to provide for her children. In
support of this position, the Debtor points to those
cases issued by this Court which hold that a liberal
construction must be given when interpreting
exemptions. In re Brown, 133 B.R. 860 (Bankr.N.D.Ohio
1991); In re Shaffer, 228 B.R. 892 (Bankr.N.D.Ohio
1998).
As argued, it is the rule in Ohio that exemptions
are to be liberally construed in favor of a debtor so
as to effectuate their remedial purpose. Morris Plan
Bank of Cleveland v. Viona, 122 Ohio St. 28, 170 N.E.
650 (1930). There are, however, limits-as exemptions
are entirely creatures of statute, and thus a court
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6For example, under the trust, if any of the debtor’s children did not reach the age of
thirty, non-family members would receive a portion of the proceeds. Id. at 465.
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cannot create an exemption where one does not exist;
nor can a court go contrary to the express language of
the statute. Id. Here, as now explained, these
principles squarely conflict with the Debtor's position
that her tacit intent must be accepted over the clear
and specific beneficiary designation she made with
respect to her life insurance policy.
Id. at 334 (emphasis in original).
While the reasoning of the Bunnell Court is persuasive, this
Court need not decide whether there could be some circumstances
where an alternative beneficiary designation made with the clear
intent to benefit a spouse, child, or dependant relative could
satisfy Section 16-111 because this case falls short of that
standard. 	Bartholow v. Garner, 43 B.R. 463 (N.D. Tex. 1984) is
instructive on this point. 	In Bartholow, the bankruptcy trustee
appealed an order of the bankruptcy court sustaining the debtor’s
exemption of a life insurance policy that named as its
beneficiary a trust for the benefit of the debtor’s children.
The Texas statute allowed “the exemption of the cash surrender
value of a life insurance policy ‘to the extent that a member or
members of the family of the insured person . . . is beneficiary
thereof.” 	Id. at 464 (quoting T EX . R EV . CIV . S TAT . A NN . art.
3836(a)(6)). 	The district court noted that exemption statutes
under Texas law were to be construed liberally, but concluded
that because the trust included certain ambiguities and
contingencies 6 that might allow creditors to reach the proceeds
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or prevent the funds from reaching the debtor’s children at all,
exempting the policy would not be in keeping with the purpose
behind the exemption to provide for the family of the debtor.
Id. at 465.
The Bartholow Court’s reasoning is equally persuasive as to
the instant case. 	The Insurance Policies named the Will or the
“trustee’s named in the [Will]” as the beneficiaries. 	Thus, on
the face of the policies, it appears that the Debtor intended to
make his estate the direct beneficiary of the Insurance Policies.
As the bankruptcy court recognized, the result of this
designation was that the proceeds of the policies would flow into
the estate, be subject to claims of creditors, and be used to pay
other expenses, such expenses related to the Debtor’s funeral.
See 31 Am. Jur. 2d Executors and Administrators § 482 (noting
that where a life insurance policy is a payable to a named
beneficiary, it is excluded from the decedent’s estate, but where
it is payable to the estate, “the proceeds constitute general
assets of the estate”). 	The Debtor must be presumed to know the
effect of his designation, especially given the fact that he
named his wife as the direct beneficiary of other policies not at
issue on appeal. 	While some residual benefit might flow to the
Debtor’s wife or children from their position as legatees under
the Will, the Court cannot conclude that the policies were made
“for the benefit of” the Debtor’s wife and children under these
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7See Daly v. Daly, 113 A. 643 (Md. 1921) (insured directed employer to change
beneficiary designation and employer advised he would provide him the proper form once it was
received from insurer, but employer did not follow through prior to insured’s death); Lingham v.
Harmon, 502 F.Supp. 302, 307 (D. Md. 1980) (where insured’s mother signed beneficiary
change form on behalf of dying daughter based on daughter’s express instructions, change was
effective despite failure to comply with rule that only the insured could sign the form); Cotter v.
United States, 78 F.Supp. 495 (D. Md. 1948) (where soldier serving during WWII requested to
change the beneficiary of his policy from his father to his new wife, but was given the wrong
form preventing the change from becoming effective prior to his death, he had done everything
“reasonably necessary within his power” to make the change and equity would treat it as done).
14
circumstances.
The Court now turns to the Debtor’s alternative argument,
that the Court should treat the Trust as the beneficiary of the
Insurance Policies. 	This also is a question of law for this
Court to resolve de novo. 	Without deciding whether the
designation of the Trust as beneficiary would otherwise have
satisfied Section 16-111, the Court can find no legal authority
to support the Debtor’s contention that, because he intended to
change the beneficiary designation and took steps to do so, it
should be treated as if done. 	The cases cited by the Debtor are
easily distinguishable from the instant case because in each, the
insured had taken steps to change the beneficiary on his
insurance policy, but, after the insured’s death, it became
apparent that the change had never been effected through no fault
of the insured. 7
In the instant case, there was testimony that the Debtor
signed the necessary forms to change the beneficiary on the
Insurance Policies, but that he thereafter made a conscious
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8This testimony came in through the Debtor’s estates and trust attorney. There was no
testimony from the Debtor that he had intended to transfer the Insurance Policies to the Trust.
15
decision on the advice of counsel not to follow through with the
change at that time. 8 	See Mem. Op. at 4. 	Having made that
choice, this Court cannot conclude that the Debtor did “all that
he could to meet the conditions for change required by the
policy[.]" 	See Reid v. Duboraw, 272 F. 99, 101 (4 th Cir.
1921)(holding that where an insured requested change of
beneficiary forms from his insurer and thereafter executed the
forms, but failed to return the forms to the insurer prior to his
death, there was no valid change of beneficiary). 	At the time
that the Bankruptcy petition was filed, it is clear from the
policies themselves that the Trust was not the named beneficiary.
The Insurance Policies are not exempt under Section 16-111.
B. 	Children’s Policies
The Debtor agrees that Section 16-111 does not exempt the
Children’s Policies because the policies are not on his life, but
on the life of his children. 	He contends, however, that the
policies are exempt under Md. Code, Cts. & Jud. Proc. § 11-
504(b)(2), which provides that the “following items are exempt
from execution on a judgment . . . (2) Money payable in the event
of sickness, accident, injury, or death of any person, including
compensation for loss of future earnings. This exemption includes
but is not limited to money payable on account of . . . insurance
. . . ."
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According to the Debtor, because he was the beneficiary
under the Children’s Policies, the policies were monies payable
to him "in the event of the . . . death" of his children and are
thereby exempted. 	As authority for this proposition, the Debtor
cites several cases in which bankruptcy courts have held that the
proceeds of an insurance policy that had already been paid to a
debtor as a beneficiary upon the death of the insured were exempt
under Section 11-504(b)(2). 	See In re Kleinman, 272 B.R. 339
(Bankr. D. Md. 2001)(proceeds of debtor’s wife’s insurance
policies paid to debtor prior to filing of petition); In re
Howland, 27 B.R. 896 (proceeds of debtor’s husband’s life
insurance policies which were paid to her within 180 days after
she filed her petition were exempt under § 11-504(b)(2)). 	That
is not the situation here. 	The Children’s Policies have not been
paid and the cash surrender values of the policies are not “money
payable in the event of. . . death[.]” 	The Bankruptcy Court
correctly concluded that the Children’s Policies were not exempt.
IV. CONCLUSION
For the above stated reasons, the order of the Bankruptcy
Court sustaining the Trustee’s objection will be affirmed. 	A
separate order will issue.
/s/
William M. Nickerson
Senior United States District Judge
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Dated: January 15, 2008
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