Bonnie J. Kudela

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AUTHENTICATED /\

U.S. GOVERNMENT
INFORMATION Va

UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF OHIO

In Re: )
) JUDGE RICHARD L. SPEER
Bonnie J. Kudela )
) Case No. 09-38113
Debtor(s) )
)
DECISION AND ORDER

This cause comes before the Court on two opposing Motions for Summary Judgment: the
Trustee’s Motions and the Debtor’s Motion. In support of their respective Motions, each of the Parties
submitted supporting memoranda setting forth their legal positions. The Court has now had the
opportunity to review the arguments submitted by the Parties, as well as the entire record in this case.
Based upon this review, the Court, for the reasons set forth herein, finds that the Trustee’s Motion for
Summary Judgment should be Granted; and that the Debtor’s Motion for Summary J udgment should
be Denied.

FACTS

On November 23, 2009, the Debtor, Bonnie J. Kudela (hereinafter the “Debtor”), filed a
petition in this Court for relief under Chapter 7 of the United States Bankruptcy Code. (Doc. No. 1).
The Debtor is 80 years of age. Prior to filing for bankruptcy relief, the Debtor, as a beneficiary,
received proceeds from a life insurance policy owned by her husband. The Debtor’s husband passed

away in March of 2008.

The remaining proceeds of the life insurance policy total $46,817.15, and are now held in three
bank accounts. In filing for bankruptcy relief, the Debtor claimed these funds as exempt pursuant to
O.R.C. § 2329.66(A)(6)(b) and § 3911.10. The bankruptcy trustee, Louis Yoppolo (hereinafter the

“Trustee”), has objected to the Debtor’s claim of exemption in the life insurance proceeds, filing a -

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motion with the Court for the turnover of the funds. It is on this matter that each of the Parties filed

their respective Motions for Summary Judgment.
DISCUSSION

The issue before the Court is whether the Debtor, as the beneficiary under a life insurance
policy maintained by her deceased husband, is entitled to claim the proceeds received under the policy,
as exempt. Determinations concerning the allowance of exemptions from property of the estate are
deemed to be acore proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). Accordingly, in this matter, this
Court has the jurisdictional authority to enter final orders and judgments. 28 U.S.C. § 157(b)(1).

On the matter before the Court, both the Trustee and the Debtor filed a Motion for Summary
Judgment. The standard for summary judgment is set forth in Federal Rule of Procedure 56(c), which
is made applicable to this proceeding by Bankruptcy Rules 7056. It provides for in part: A party will
prevail on a motion for summary judgment when “[t]he pleadings, depositions, answers to
interrogatories, and admission on file, together with affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.”
Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2252, 91 L.Ed.2d 265 ( 1986). With
respect to this standard, the moving party must demonstrate all the elements of the cause of action. RE.
Cruise Inc. v. Bruggeman, 508 F.2d 415, 416 (6" Cir.1975). In making this determination, the Court
is directed to view all the facts ina light most favorable to the party opposing the motion. Matsushita
v. Zenith Radio Corp., 475 U.S. 574, 586-588, 106 S.Ct. 1348, 1348, 1356, 89 L.Ed.2d 538 (1986).

When a debtor files for bankruptcy relief, all their interests in property become, by operation
of law, property of an estate. 1] U.S.C. § 541(a). In a case proceeding under Chapter 7 of the
Bankruptcy Code, property of the bankruptcy estate is subject to administration by a trustee, who is

statutorily charged with expeditiously collecting, and then reducing to money, property of the estate

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for distribution to the debtor’s creditors. | 1U.S.C. § 704(a)(1). A debtor’s claim of exemption serves
as an exception to this general rule, with the Bankruptcy Code providing that a debtor’s interest ih
certain types of property may, notwithstanding its status as estate property, be exempted from the
claims of creditors. 11 U.S.C. § 522(b)/(c).

Exemptions promote a variety of public-policy aims: (1) providing the debtor with that
property which is necessary for their survival; (2) enabling the debtor to rehabilitate themselves; and
(3) protecting the debtor’s family from the adverse effects of impoverishment. Jn re Malsch, 400 B.R.
584, 587 (Bankr. N.D.Ohio 2008). For debtors who seeks relief under the Bankruptcy Code,
exemptions also further one of the Code’s primary aims: providing the debtor with a fresh-start. Jd.
at 587-88. Based upon their remedial function, exemptions are to be liberally construed in favor of a

debtor. Jn re Bunnell, 322 BR. 331, 334 (Bankr. N.D.Ohio 2005).

Nevertheless, exemptions are entirely creatures of statute, being in derogation of the
common-law rule that all of a debtor’s property is subject to execution for the payment of the debtor’s
legal obligations. Jn re Wycuff, 332 B.R. 297, 300 (Bankr. N.D.Ohio 2005). A debtor’s intent to claim
Property as exempt will thus not be assumed. Instead, a debtor is required to take some affirmative
action — usually by noting the claim of exemption and its statutory authority in bankruptcy schedule
C — to claim property as exempt. /n re Brooks, 227 B.R. 891, 893-94 (Bankr. W.D.Mo.1998),

For individuals domiciled in Ohio, such as the Debtor in this case, the right to exempt property
in bankruptcy is determined by Ohio law as well as nonbankruptcy federal law. 11 U.S.C. § 522(b);
O.R.C. § 2329.662. As authority for the position that her interest in the life insurance proceeds she
received on the policy owned by her deceased husband is exempt, the Debtor cites to two provisions
of the Ohio Revised Code: § 2329.66(A)(6)(b) and § 3911.10. Together, these provisions, generally,

serve to exempt a debtor’s interest in life insurance and other similar contracts.

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The first provision, § 2329.66(A)(6)(b), provides:

(A) Every person who is domiciled in this state may hold property exempt
from execution, garnishment, attachment, or sale to satisfy a judgment or order,
as follows:

(b) The person’s interest in contracts of life or endowment insurance
or annuities, as exempted by section 3911.10 of the Revised Codef.]

Section 3911.10, as referenced in this provision, then provides, in relevant part:

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.

As with other claims of exemption, the party obj ecting to the exemption, the Trustee in this case, has

the burden of proving that the claim of exemption is improper. FED.R.BANKR.P. 4003(c).

For his burden, that the Debtor is not entitled to use O.R.C. § 2329.66(A)(6)(b) and § 3911.10
to exempt her interest in the proceeds she received from her deceased husband’s life insurance policy,
the Trustee focused on the following language contained at the end of § 3911.10: “free from all claims
of the creditors of such insured person or annuitant.” According to the Trustee, “[bJased upon this
language, R.C. § 3911.10 only provides an exemption of life insurance proceeds from the creditors of
the insured, in this case Debtor’s late husband, Charles R. Kudela, and vot the creditors of Debtor, who

is the beneficiary of such proceeds.” (Doc. No. 23, at pg. 3) (emphasis in original). As support for his

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position, the Trustee cited to the case of In re Huth, 1998 WL 404153 (Bankr. N.D.Ohio 1998),
rendered by another court in this judicial district, the Northern District of Ohio.

In Inre Huth, the trustee sought the turnover of life insurance proceeds received by the debtor
as a result of the postpetition death of her husband, whom was a co-debtor in the case. As is the
situation in this case, the debtor claimed the life insurance proceeds exempt pursuant to O.R.C.
§ 2329.66(A)(6)(b) and § 3911.10. As is also the situation in this case, the debtor in Jn re Huth relied
upon the liberal construction that is afforded to exemption statutes to support her claim that she was
entitled to claim the life insurance proceeds she received from her husband’s policy as exempt. The
court in Jn re Huth, however, rejected the debtor’s position, adopting instead the exact position

advocated by the Trustee in the instant case,

In In re Huth, the Court first stated:

The language of § 3911.10 specifically states that life insurance policy
proceeds “shall be held .. . free from all claims of the creditors of such insured
person.” The “insured person” in this case is the deceased Mr. Huth. The
statute clearly does not exempt life insurance proceeds from the creditors of
Mrs. Huth as the beneficiary of Mr. Huth’s life insurance policy. Even if it
were the intent of the Ohio General Assembly to provide an exemption for life
insurance proceeds received by a beneficiary, it is not a court's function to
rewrite a statute to express that intent.

Id. at *2. The court in Jn re Huth then went on to observe:

Additional support for the Court's holding may be found in the absence of any
mention of O.R.C. § 3911.14 in Ohio’s general exemption statute, O.R.C.
§ 2329.66. Section 3911.14 specifically provides that life insurance policy
proceeds “shall not be subject to the claims of creditors of any beneficiary.” No
such language is found in O.R.C. § 3911.10. Furthermore, O.R.C.
§ 2329.66(A)(6)(b) only provides for an exemption ‘in contracts of life or
endowment insurance or annuities, as exempted by section 3911.10 of the
Revised Code.’ Section 3911.14 specifically is not incorporated into Ohio’s
general exemption statute. Accordingly, it follows that it was not the intent of

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the Ohio General Assembly to provide an exemption for life insurance
proceeds received by a beneficiary who has filed for bankruptcy. Although this
conclusion is unfortunate, it is not the function of the Court to create an
exemption not provided for by the Ohio General Assembly.

This holding is not sui generis.

Although the reasoning was not addressed in detail, this same conclusion was also reached by
an Ohio state court. In Shapiro, Zamore & Associates, Inc. v. Westfield Life Ins. Co., 1994 WL 97619
(Ohio App. 8" Dist. 1994), the court held that where two spouses were judgment-debtors, and a life
insurance policy had been issued in the name of the deceased husband, § 3911.10 did not operate to
protect the wife as a beneficiary because she, “in addition to being the spouse of a debtor, is herself]
a debtor.” Based upon the reasoning set forth in In re Huth, the Court finds this conclusion to be

sound.

There are three necessary parties to a life insurance contact: (1) the insurer; (2) the insured; and
(3) the beneficiary. 43 AM. JuR. 2d Insurance § 533. In this matter, the Debtor’s deceased husband was
the insured; the Debtor was the beneficiary. This distinction is critical. As recognized in Jn re Huth,
the protection afforded by O.R.C. § 3911.10 only extends to and is limited to the insured, not a

beneficiary.

Courts, when interpreting a statute, must “presume that the legislature says in a statute what
it means and means in a statute what it says there.” State ex rel. Lee y. Karnes, 103 Ohio St.3d 559,
564, 817 N.E.2d 76, 81-82 (2004) (internal citation omitted), citing BedRoc Ltd, LLC v. United States,
541 U.S. 176, 124 S.Ct. 1587, 1593, 158 L.Ed.2d 338 (2004). For this purpose, when construing an
Ohio statute, Ohio law mandates that “[w]ords and phrases shall be read in context and construed
according to the rules of grammar and common usage.” O.R.C. § 1.42. Also, “[w]ords and phrases that
have acquired a. . . or particular meaning, whether by legislative definition or otherwise, shall be

construed accordingly.” Jd.

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It is, therefore, clear that the Ohio State Legislature, by designating only the ‘insured’ as th

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class of persons protected by O.R.C. § 3911.10, meant to exclude beneficiaries, and the proceeds the)
hold from a life insurance policy, from the scope of the statute’s protections. The recent action by the

Ohio state legislature reinforces this conclusion.

Effective September 30, 2008, the Ohio state legislature caused significant changes to be made
to Ohio’s exemption law, notably increasing the dollar amount afforded by many of Ohio’s
exemptions. 2008 Ohio Laws File 122 (Sub. S.B. 281). The legislature, however, at this juncture did
not change or alter O.R.C. § 3911.10, which remained the same both before and after September 30,
2008. In light of the decisions rendered in Jn re Huth and Westfield Life Ins. Co., supra, this inaction

is telling.

In Carrel v. Allied Products Corp., the Ohio Supreme Court opined,

According to principles of statutory construction, the General Assembly will
not be presumed to have intended to abrogate a common-law rule unless the
language used in the statute clearly shows that intent. Thus, in the absence of
language clearly showing the intention to supersede the common law, the
‘existing common law is not affected by the statute, but continues in full force.
There is no repeal of the common law by mere implication.

78 Ohio St.3d 284, 287, 677 N.E.2d 795, 798-99 (1997). Thus, had it intended to expand the class of

person’s protected by O.R.C. § 3911.10, it follows that the Ohio state legislature would have acted

accordingly when in 2008 it effectuated a comprehensive change to Ohio’s law on exemptions.

It is the Debtor’s position, however, that denying her an exemption in proceeds received from
a life insurance policy does not comport with accepted jurisprudence. For this position, the Debtor
relied heavily upon this Court’s prior decision in In re Bunnell, 322 B.R. 331, 334 (Bankr. N.D.Ohio
2005), and this statement made therein: “Section 3911.10 sets forth three classes of protected

beneficiaries: (1) a spouse; (2) children; or (3) a dependent of the insured.” According to the Debtor,

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from this class of protected beneficiaries a “legislative intent is demonstrated that protects the policy

proceeds for debtor beneficiary spouse.” (Doc. No. 27, at pg. 4).

In In re Bunnell, the issue before the Court was whether a debtor’s interest in a life insuranc¢
policy, that named her sister as the sole beneficiary, qualified as exempt under O.R.C. § 3911.10
Based upon a plain meaning approach, the Court held that the debtor’s life insurance policy was not
exempt because, within the meaning of the statute’s protected class of beneficiaries, the debtor’s
sibling was neither a spouse or a child; nor had it been shown that the sibling was a dependent of the

debtor.

However, whether a person falls within the protected class of beneficiaries provided in
§ 3911.10 is not dispositive of the policy’s exempt status. As already explained, § 3911.10 specifically
requires that to exempt a life insurance policy, the owner of the policy ~ that is, the insured — must be
the debtor. Simply put, for a life insurance policy to be exempt under § 3911.10, not only must the
debtor be the person insured under the policy, but the beneficiary designated in the policy must also

fall within one of those classes of protected beneficiaries.

The Debtor’s reliance on In re Bunnell is, thus, misplaced because it only addressed the issue
of whether a beneficiary fell within one of the protected classes specified in § 3911.10. The decision
did not address the issue, as presented in this particular case, of whether a beneficiary under a life
insurance policy could claims the proceeds from the policy as exempt under § 3911.10. The Court’s

decision in Jn re Bunnell, therefore, has no precedential effect on the facts as they exist in this case.

As additional support for her position that accepted jurisprudence serves to exempt her interest
in the proceeds she received under her husband’s life insurance policy, the Debtor made two related
points. First, according to the Debtor, at the time of her husband’s death, she held a vested interest in

his life insurance policy. Second, based upon this vesting occurring prepetition, the Debtor called

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attention to the fact that this is different from the circumstances presented in Jn re Huth, supra, where

the death of the spouse occurred postpetition.

Under Ohio law, the Debtor is correct that upon the death of an insured, the beneficiary’
interest in a life insurance policy ripens into a vested interest with the right to maintain suit on the
policy as the real party in interest. 59 OHIO JUR. 3d Insurance § 1205. The Debtor also properly
observes that in Jn re Huth, supra, the death of the spouse, unlike the situation in this case, occurred
postpetition. However, insofar as it concerns the Debtor’s qualification to claim an exemption under

§ 3911.10, these are distinctions without a difference.

Simply because the Debtor may have had an prepetition ownership interest in her husband’s
life insurance policy, does not mean that, as applied to O.R.C. § 391 1.10, she gained the status of an
insured under the policy. Ownership is distinct from the concepts of an insured and beneficiary under
an insurance policy. An insured may be defined generally as the “person who obtains or is otherwise
covered by insurance on his health, life, or property.” BLACK’s LAW DICTIONARY 809 (6" ed. 1990).
By comparison, a beneficiary is defined generally as the “person entitled to take proceeds on death of
insured.” Jd. at 157. Consequently, the fact that the Debtor may have held a vested interest in her
husband’s insurance policy prior to seeking bankruptcy relief does not afford her the status of an

insured under the policy so as to entitle her to make a claim of exemption under § 3911.10.

Similarly, the fact that hes interest may, unlike in Jn re Huth, have arisen prepetition does
entitle the Debtor to use § 3911.10 to claim an exemption. To the contrary, it simplifies matters. In In
re Huth, the relevancy of the debtor’s Spouse passing away postpetition was that it necessitated that

the trustee take an extra step and rely on § 541(a)(5)(A)! to bring the life insurance proceeds received

1

(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate.
Such estate is comprised of all the following property, wherever located and by whomever held:

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by the debtor within the scope of estate property. Here, no such step is required, with the Debtor’$
interest in the proceeds of her husband’s life insurance policy passing to the estate under the statute’

general provision, § 541(a)(1).?

Finally, in support of her position that her interest in the proceeds she received under her
husband’s life insurance policy are exempt, the Debtor cited to the case of In re Bess, 47 B.R. 414
(S.D. Ohio 1985). In In re Bess, the Court found that a debtor could use § 3911.10 to claim an
exemption in the surrender value of a life insurance policy where the debtor was both the insured and
the beneficiary. The trustee in In re Bess had argued that this dual status, arising because the debtor
and her spouse on a single life insurance policy named the other as a beneficiary, precluded the
allowability of the exemption. But this is not the situation here, with the Debtor never being an insured
under her husband’s life insurance policy. Consequently, as with the Debtor’s reliance on this Court’s
decision Jn re Bunnell, the holding of In re Bess does not extend to the factual situation presented in

this particular case.

In conclusion, O.R.C. § 2329.66(A)(6)(b) and § 3911.10 do not confer upon the Debtor the
tight to claim as exempt the proceeds she received as a beneficiary on the policy insured on the life of

her husband. This is not to say that the Debtor, being a widow 80 years of age, does not present a

(5) Any interest in property that would have been property of the estate if such interest had
been an interest of the debtor on the date of the filing of the petition, and that the debtor
acquires or becomes entitled to acquire within 180 days after such date—

(A) by bequest, devise, or inheritance;
2

The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such
estate is comprised of all the following property, wherever located and by whomever held:

(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable
interests of the debtor in property as of the commencement of the case.

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sympathetic situation. However, this Court is not free to create an exemption where none exists. In re

Wycuff, 332 B.R. 297, 300 (Bankr. N.D.Ohio 2005). As such, the insurance proceeds held by th

CD

Debtor are subject, as estate assets, to administration by the Trustee.

In reaching the conclusions found herein, the Court has considered all of the evidence, exhibits

and arguments of counsel, regardless of whether or not they are specifically referred to in this Decision
Accordingly, it is

ORDERED that the Motion for Summary Judgment filed by the Trustee, Louis Yoppolo, be,
and is hereby, GRANTED; and that the Motion for Summary Judgment filed by the Debtor, Bonnie
J. Kudela, be, and is hereby, DENIED.

IT IS FURTHER ORDERED that the Trustee’s Motion for Turnover be, and is hereby
GRANTED.

IT IS FURTHER ORDERED that the Debtor forthwith turnover to the Trustee those life

insurance proceeds she holds in her accounts.

Dated: March 8, 2010

Uda

ra

Richard L. Speer
United States
Bankruptcy Judge

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CERTIFICATE OF SERVICE

Copies were mailed this 8th day of March 2010 to:

Bonnie J. Kudela
1201 Portside Drive
Vermilion, OH 44089

Louis J Yoppolo
1200 Edison Plaza
300 Madison Avenue
Toledo, OH 43604

Robert J Gargasz
1670 Cooper Foster Park Rd, #C
Lorain, OH 44053

/s/Jennifer S Huff
Deputy Clerk, U.S. Bankruptcy Court

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