Thomas Carl Eshelman

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
THOMAS CARL ESHELMAN
DEBTOR
CASE NO.
11-08925-8-SWH
ORDER ALLOWING TRUSTEE’S OBJECTION TO EXEMPTION
The matter before the court is the trustee’s objection to the debtor’s claim of exemption in
a life insurance policy. On May 16, 2012, a hearing took place in Raleigh, North Carolina. For the
reasons set forth below, the trustee’s objection to the debtor’s claim of exemption is sustained.
BACKGROUND
On November 22, 2011, Thomas Carl Eshelman (the “debtor”) filed a petition under
chapter 7 of the Bankruptcy Code. 	On his Schedule C, the debtor listed a whole life insurance
policy with State Farm Insurance (the “Policy”), having a cash value of $19,160.47, as exempt
pursuant to N.C. Gen. Stat. § 1C-1601(a)(6). The chapter 7 trustee filed a timely objection based
on two grounds: 1) the debtor’s petition mistakenly listed Mary Stewart Eshelman, the debtor’s wife,
as the beneficiary of the Policy, when the correct beneficiary was Steven B. Lindsey as Trustee of
SO ORDERED.
SIGNED this 30 day of May, 2012.
________________________________________
Stephani W. Humrickhouse
United States Bankruptcy Judge
____________________________________________________________
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the Thomas Carl Eshelman Revocable Trust (the “Trust”); and 2) the Trust did not constitute a
beneficiary entitled to the protections afforded by § 1C-1601(a)(6). The debtor acknowledged and
corrected the beneficiary designation error and filed a response to the objection, reasserting the
Policy as exempt pursuant to § 1C-1601(a)(6).
DISCUSSION
The issue before the court centers upon the language of two statutes and the provisions of
the Trust. We start first with the applicable statutes. Section 1C-1601(a)(6) of the North Carolina
General Statutes provides:
(a) 	Exempt Property. – Each individual, resident of this State, who
is a debtor is entitled to retain free of the enforcement of the claims
of creditors:
* * *
(6) Life insurance as provided in Article X, Section 5 of the
Constitution of North Carolina.
Turning to the Constitution of North Carolina, Article X, Section 5 provides:
A person may insure his or her own life for the sole use and benefit
of his or her spouse or children or both, and upon his or her death the
proceeds from the insurance shall be paid to or for the benefit of the
spouse or children or both, or to a guardian, free from all claims of
the representatives or creditors of the insured or his or her estate. Any
insurance policy which insures the life of a person for the sole use
and benefit of that person’s spouse or children or both shall not be
subject to the claims of creditors of the insured during his or her
lifetime, whether or not the policy reserves to the insured during his
or her lifetime any or all rights provided for by the policy and
whether or not the policy proceeds are payable to the estate of the
insured in the event the beneficiary or beneficiaries predecease the
insured. (Emphasis added).
The court looks to the North Carolina Supreme Court’s interpretation of the state
constitution. 	“[I]n this court’s interpretation of Article X, Section 5, of the North Carolina
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Constitution, it is appropriate to be guided by interpretations by this State’s highest court,” because
only that court can resolve “issues concerning the proper construction and application” of the
constitution with the necessary finality. 	In re Foster, 2011WL 5903393 at *2 (Bankr. E.D.N.C.
Nov. 1, 2011) (quoting State ex. rel. Martin v. Preston, 385 S.E.2d 473, 479 (N.C. 1989)). The
North Carolina Supreme Court gives to the constitution “‘a liberal interpretation in favor of its
citizens with respect to those provisions which were designed to safeguard the liberty and security
of the citizens in regard to both person and property.’” Id. (quoting Corum v. University of North
Carolina, 413 S.E.2d 276, 290 (N.C. 1992)). 	That said, the actual language used in a statute,
including the state constitution, still must control; ie, “sole use and benefit” means “sole use and
benefit.” See State ex. rel. Martin, 385 S.E.2d at 479 (noting that “where the meaning is clear from
the words used, [the court] will not search for a meaning elsewhere”).
Turning to the language of the Trust itself, whether the exemption can apply depends upon
the disposition of assets that it allows. Article II of the Trust supplies the relevant language:
If the assets available to my Executor . . . are insufficient to pay my
funeral expenses, claims against my estate, expenses of administering
my estate (including without limitation attorneys’ fees and Executor’s
commissions), death taxes chargeable to my estate and to satisfy all
pre-residuary devises under my Will, my Trustee shall make
available to my Executor, upon its request . . . such sum or sums as
my Executor in its sole discretion shall determine to be necessary to
satisfy 	such 	deficiency. 	The 	foregoing 	notwithstanding, 	my
Trustee: . . . (2) may in its sole discretion decline to pay to or
otherwise make available for the benefit of my estate or my Executor
life insurance proceeds, or any other assets, which would otherwise
be exempt from the claims of creditors.
Exhibit B at pp. 4-5 (emphasis added).
Under the express terms of the Trust, then, the Trustee is given discretion to pay, or not to
pay, the claims of creditors. The debtor argues that the discretion element serves to insulate the
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exemption, but the court disagrees. It is that very discretion which, the court finds, precludes the
debtor from claiming the exemption. 	In Foster, the language in the trust at issue provided that
“[u]pon the Grantor’s death, the Trustee may pay or make arrangements . . . for the payment of . . .
the Grantor’s unsecured debts.” Foster, 2011 WL 5903393 at *2. The bankruptcy court sustained
the trustee’s objection to the debtor’s claimed exemption in the policy because the payment of
“unsecured debts” owed to creditors “exceeds the boundaries of ‘sole use and benefit’ contemplated
by [the Constitution].” 	Id. 	Because “creditors are precisely the type of entities sought to be
excluded under the provisions of Article X, Section 5,” the Foster court reasoned, “[t]o allow a
debtor to provide for the payment of his or her unsecured creditors from life insurance proceeds
upon death simply turns this constitutional protection on its head.” Id.
In the instant case, the Trust does not distinguish between types of creditors and instead
references only “claims against the estate,” but this is more than enough to illustrate that the
proceeds are not “for the sole use and benefit of [the policy owner’s] spouse or children or both,”
such that the exemption is not applicable.
Accordingly, the chapter 7 trustee’s objection to the debtor’s claim of exemption is
SUSTAINED.
SO ORDERED.
END OF DOCUMENT
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