DC Mex Holdings LLC v Affordable Land LLC and Dale
Fuller, ___ Mich. App. ___ (July 25, 2017), Case no.
332439
Michigan's Court of Appeals recently issued an opinion
interpreting a statutory provision exempting insurance proceeds
from the reach of creditors in certain situations. This case may
provide guidance related to estate planning and asset protection as
well as dealing with collection efforts and creditor's
claims.
DC Mex Holdings LLC obtained a $2.5 million dollar judgment jointly
and severally against the defendants. In an attempt to collect part
of that judgment, DC Mex initiated garnishment proceedings against
the universal life insurance policy issued to the individual
defendant, Dale Fuller, which had a cash value of just over
$73,000.
Fuller objected to the garnishment on the basis that the proceeds
were exempt from creditors pursuant to M.C.L. 500.2207(1) because
his daughter was the designated beneficiary, and because the
proceeds were not yet owed.
The statute at issue reads in pertinent part as follows:
It shall be lawful for . . . any father to insure his life for the
benefit of his children . . . and in case that any money shall
become payable under the insurance, the same shall be payable to
the person or persons for whose benefit the insurance was procured
. . . for his, her or their own use and benefit, free from all
claims of the representatives of such husband or father, or of any
of his creditors . . . and the proceeds of any policy of life or
endowment insurance, which is payable to the . . . children of the
insured or to a trustee for the benefit of the . . . children of
the insured, including the cash value thereof, shall be exempt from
execution or liability to any creditor of the insured . . . and
shall apply to insurance payable to the above enumerated persons or
classes of persons, whether they shall have become entitled thereto
as originally designated beneficiaries, by beneficiary designation
subsequent to the issuance of the policy, or by assignment (except
in case of transfer with intent to defraud creditors).
Pursuant to the policy terms, Fuller had the option of surrendering
the policy to obtain the net cash value. However, doing so would
reduce the value of the death benefit, an important factor in the
Court's ultimate conclusion.
DC Mex argued the statute did not protect the cash value of the
policy during the insured's lifetime because the statute
designated the cash value as a subset of "proceeds", and
proceeds only became relevant or payable upon death. Fuller argued
that the life insurance was payable to his daughter, so the cash
value of the policy was exempt from his creditors.
The Court of Appeals disagreed with both and held that the phrase
"proceeds of any policy . . . including the cash value
thereof" referred to the entire amount of the proceeds that
was payable to the beneficiary. Accordingly, the Court held the
cash value was exempt from garnishment efforts.
The Court explained that its rationale was consistent with the
public policy of protecting insurance intended to provide for an
insured's spouse and children from creditor's claims after
the insured's death. In this case, the Court's
interpretation prevented the devaluation or default of the policy,
which was also consistent with the legislature's intent
evidenced by the language exempting the cash value of the
proceeds.
The Court also rejected DC Mex's argument that Fuller engaged
in a fraudulent transfer precluding application of the exemption
when he changed the policy beneficiary, while the lawsuit was
pending, from a trust for his children's benefit to
Fuller's only child, his daughter. The Court found that the
statute expressly provided for proceeds payable to a trustee for
the benefit of the insured's children. Since the original
beneficiary was exempt and the changed beneficiary was exempt, the
Court held there was no fraudulent transfer.
Life insurance is a popular estate planning option to provide
support for surviving children, and the Court's ruling provides
further asset protection for an owner of a policy during the
owner's lifetime. If you have any questions about the
application of this decision, please contact one of our insurance,
appellate or estate planning attorneys.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
