Opposition Brief — Hiscock v. Mertens

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Sipreme Court of the Cited States.

No. 209.—OcroBER TERM, 1906.

Albert K. Hiscock, Trustee in Bankruptcy )

of Jacob M. Mertens, Charles R. Mertens,

Ernest T. Mertens, and Edmund A. Mer- | On writ of certiorari to the

tens, individually and as composing the {| United States Circuit Court

copartnership firm of “J. M. Mertens & { of Appeals for the Second

Co.,” Bankrupts, Petitioner, Circuit.

V8.

Jacob. M. Mertens.

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[March 25, 1907.]

Mr. Justice McKenna delivered the opinion of the Court.

The question in this case is whether the cash surrender value of a policy

of insurance under sections 70-2-5 of the bankruptcy act must be provided

for in the policy, or whether it be sufficient, if the policy have such value by

the concession or practice of the company. Section 70 provides that “ the

trustee of the estate of a bankrupt upon his appointment and qualification

shall be vested by operation of law with the title of the bankrupt

as of the date he was adjudged a bankrupt, except in so far as it is to prop-

erty which is exempt, to all (1) documents relating to his property

(3) powers which he might have exercised for his own benefit, but not

those which he might have exercised for some other person . . . (5)

property which prior to the filing of the petition he could by any means

have transferred or which might have been levied upon and sold under

judicial process against him: Provided, that when any bankrupt shall have

any insurance policy which has a cash surrender value payable to himself,

his estate or persona] representatives, he may, within thirty days after the

cash surrender value has been ascertained and stated to the trustee by the

company issuing the same, pay or secure to the trustee the sum so ascer-

tained and stated, and continue to hold, own and carry such policy free

from the claims of the creditors participating in the distribution of the

estate under the bankruptcy proceedings, otherwise the policy shall pass to

| the trustee as assets.”

The respondent and his sons, individually and as composing the co-

| partnership of J. M. Mertens & Co., were declared bankrupts, and _peti-

tioner was elected the trustee of their estate October 14, 1903.

LPP RIT YR IEE AG OE, SPARSE GREASE OS PY RE Ie SPRANG T SIGF tt hb <-

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2 Hiscock vs. Mertens.

At the time the petition in bankruptcy was filed Mertens held four life

insurance policies issued by the Equitable Life Assurance Society of the

United States. One of the policies, payable to his wife if she should

survive him, has been dropped from this controversy. The other three

policies were payable to Mertens at his death, his executors, administra-

tors or assignees. They were subject to certain claims arising from their

having been assigned as security for certain loans. With these we are

not concerned.

A dispute arose as to the ownership of the policies, and the trustee filed

a petition in the District Court for the determination of the ownership of

them and that Mertens be required to make an assignment of them to the

trustee. Mertens answered, alleging that the policies had, by law and the

regular practice of the Equitable Life Assurance Society, a cash surrender

value which he had sought to pay to the trustee, and was ready and will-

ing to pay; that it was the uniform practice of the society to pay, upon

the surrender of such policies and on policies issued on any of the blank

forms shown by the policies, the cash value thereof “ determined in ac.

cordance with a fixed and definite method of computation, and stated on

demand, by any policy holder or person in interest ;” that the society, pur-

suant to law and in accordance with its practice, had stated to him and

declared the cash surrender value of each of the policies and its readiness

and willingness to pay such value upon the surrender of the policies. The

values were stated.

The matter was referred to a special master to take the proofs and report

the same, with findings of fact and conclusions of law. Proofs were taken

and a report made in accordance with the order of the court. The master,

in his report, describing the policies, said :

“None of these express any agreement or provision whereby upon de-

fault the company shall pay a ‘cash surrender value’ to any person. By

their terms the assured is excluded from any participation in dividends

until the completion of the tontine period, at which time all surplus and

profits derived from such policies are to be divided among the persistent

policies of that class then in force. At the expiration of the tontine period

the persistent policy holder is given certain options, among them to with-

draw in cash the policy’s entire share of the assets, that is, the accumulated

reserve, the amount of which is stated in each policy, and, in addition, the

accumulated surplus apportioned to the policy. Each of these policies also

provides that upon default in payment of a premium and the surrender of

the policy within six months thereafter the assured shall be entitled to a

new paid-up policy, based upon the reserve accumulated under the old

policy, but ‘ without participation in profits.” Both funds secured by the

agreement, namely, the insurance proper and the endowment fund repre-

senting the accumulated profits, are payable to the assured or to his ex-

ecutors, administrators or assigns. No other person is mentioned in either

of the policies as having any beneficial interest therein.”

FELL LRG LENDER SARTRE LIL IEP TEE IY MEE IT TNT AE LOIN NEE ARMS —

Hiscock vs. Mertens. 3

It appeared from the testimony that as a matter of fact policies of the

character of those in controversy had, under the practice of the company,

cash surrender values, if offered for surrender within six months from the

date of the non-payment of any premium. Explaining this, a witness said:

“To make clear the replies of previous questions I will state that the

Equitable Life Assurance Society would decline to purchase for cash a

policy during the period for which premiums had been paid, entitling

the policy holder to protection for the face value, for the reason that in

the event of the death of the holder of that policy before the expiration

of the period for which premiums had been paid, the question would be

raised as to the liability of the company, so that the payment of an

amount of cash for the surrender of a policy is only made by the com-

pany after that policy has lapsed by reason of the non-payment upon its

due date.” And it was testified that the cash surrender values of policies

was determined by a fixed and definite method of computation, uniform

in all cases, and had, without exception, been paid to persons insured by

the company. It further appeared that the surrender values of the poli-

cies in controversy were as follows: Policy No. 274445, $5,905.65 ; policy

No. 417678, $2,272.56; policy No. 417171, $6,574.00.

It was further testified that the surrender value of each policy was

equivalent to the amount of a paid up-policy, which the company was

willing to give. Or, as expressed by a witness, “it is equivalent to the

percentage reserved under that policy (referring to policy No. 274445,)

which the company is willing to pay in consideration of the surrender.”

The District Court held that the policies had no cash surrender value

within the meaning of section 70 of the bankrupt act. The court said:

“In the policies in question not only is there a failure to provide for a

cash surrender a ae the provisions are inconsistent with the existence

of such a value. This, however, is not at war with the fact that the As-

surance Association may be willing to pay money for the surrender of

such policies. There is no pretence that this custom of the insurer formed

a part of the contract between the parties, or that the insured could enforce

the payment of a surrender value, or the payment of anything, on sur-

rendering the policy. In short, the insurer might be willing to pay a

surrender value and might not. Such payment would be optional with it.”

And again:

“The association might be willing to pay one day, entirely unwilling

the next. Is this the ‘cash surrender value’ spoken of in the bankruptey

law? This court thinks not. It would seem that had Congress intended

that every bankrupt holding a policy of insurance of the nature of these

should retain the same as his own on paying to the trustee in bankruptey

the value thereof that the insurer might fix by its custom or otherwise, it

would have used language appropriate to that end, and not an expression

implying a value the insured has a legal right to demand, and the insurer

may be compelled to pay, a value generally understood to be provided for

in the policy itself.”

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4 Hiscock vs. Mertens.

The court cited, to sustain its views, In re Welling, 113 Fed. Rep. 189,

and In re Stingluff, 106 Fed. Rep. 154.

An order was entered requiring Mertens to assign the policies to the

trustees. It was reversed by the Circuit Court of Appeals. The latter

court, however, said, that “it should be inclined to concur with the views

expressed in Jn re Welling, and to sustain the conclusion of the District

Judge in the cause at bar, that ‘no policy is understood to have a cash

surrender vaiue unless provided for in the policy so as to be enforceable

by the insured,’ were it not for a subsequent expression of opinion by the

Supreme Court. This is found in Holden v. Stratton (198 U.S. 214)

as follows:

“There has been some contrariety of opinion expressed by the lower

Federal courts as to the exact meaning of the words ‘cash surrender value’

as employed in the proviso, some courts holding that it means a surrender

value expressly stipulated by the contract of insurance to be paid, and

other courts holding that the words embrace policies, even though a stipu-

lation in respect to surrender value is not contained therein, where the

policy possesses a cash value which would be recognized and paid by the

insurer on the surrender of the policy. It is to be observed that this latter

construction harmonizes with the practice under the bankrupt act of 1867,

(In re Newlands, 6 Ben. 342; In re McKinney, 15 Fed. Rep. 535,) and

tends to elucidate and carry out the purpose contemplated by the proviso

as we have construed it. However, whatever influence that construction

may have, as the question is not necessarily here involved we do not ex-

pressly decide it.’”

The court observed that the extract from Holden v. Stratton was obiter

to the questions decided in the case, but considered it such an explicit

declaration of views that the court expressed hesitation to disregard it.

We are hence confronted with the problem whether the obiter of

Holden v. Stratton shall be pronounced to be the proper construction of

section 70 of the bankrupt act. We may remark at the commencement

that that obiter was not inconsiderately uttered, nor can it be said that it

was inconsequent to the considerations there involved. It was there nec-

essary to determine between conflicting decisions of two Circuit Courts of

Appeals upon the effect of State statutes of exemption from liability for

debts, and a careful consideration of section 6 of the bankrupt act, which

provided for exemptions, and section 70, which defined the property

which passed to the trustee, was necessary to be made and their proper

effect and relation determined. As elements in that consideration the

meaning and scope of section 70 were involved and the purpose of Con-

gress in its enactment. Section 6 provides for exemptions “ prescribed

by the State laws.” Section 70 vests the title of all the property of the

bankrupt in the trustee, “except in so far as it is to property which is

exempt.” Then, after a designation of the property the title to which is

ELC ST NO DENY TI ; Sls aca EMMNETASLAIA ERAS | AY ee |

Hiscock vs. Mertens. 5

transferred, follows the proviso in regard to insurance policies. It was

argued that the proviso would be meaningless unless considered as wholly

disconnected from the clause as to exempt property, and this court replied :

“As section 70a deals only with property which, not being exempt, passes

to the trustee, the mission of the proviso was, in the interest of the

perpetuation of policies of life insurance, to provide a rule by which,

where such policies passed to the trustee because they were not exempt, if

they had a surrender value their future operation could be preserved by

vesting the bankrupt with the privilege of paying such surrender value,

whereby the policy would be withdrawn out of the category of an asset of

the estate. That is to say, the purpose of the proviso was to confer a benefit

upon the insured bankrupt by limiting the character of the interest in a

non-exempt life insurance policy which should pass to the trustee, and not

to cause such a policy when exempt to become an asset of the estate,

When the purpose of the proviso is thus ascertained it becomes apparent

that to maintain the construction which the argument seeks to affix to the

proviso would cause it to produce a result diametrically opposed to its

spirit and to the purpose it was intended to subserve.” 198 U.S. 213.

And, contemplating the proviso as having such purpose, the court used

the language quoted by the Circuit Court of Appeals, and expressed the

view that, as between the two constructions that had been made of the

terms, “cash surrender value,” whether they meant a stipulation in the

contract or the recognition by the company, the latter harmonized with

the practice under the bankrupt act of 1867 and tended to elucidate and

carry out the purpose contemplated by the proviso as the decision con-

strued it. And the precedent practice is necessarily a strong factor and

would be so even if it had a less solid foundation in reason. It is nowhere

better expressed than in In re McKenney, 15 Fed. Rep. 535. It is there

pointed out that the foundation of the surrender value of a policy is

the excess of the fixed annual premiums in the earlier years of the policy

over the annual risk during the later years of the policy. “ This excess,” it

was said, “in the premium paid over the annual cost of insurance, with

accumulations of interest, constitutes the surrender value.”

And further :

“Though this excess of premiums paid is legally the sole property of

the company, still in practical effect, though not in law, it is moneys of

the assured, deposited with the company in adyance, to make up the de-

ficiency in later premiums to cover the annual cost of insurance instead of

being retained by the assured, and paid by him to the company in the

shape of greatly increased premiums when the risk is greatest. It is the

‘net reserve’ required by law to be kept by the company for the benefit

of the assured, and to be maintained to the credit of the policy. So long

as the policy remains in force the company has not practically any bene-

ficial interest in it, except as its custodian, with the obligation to maintain

it unimpaired and suitably invested for the benefit of the assured. This is

the practical, though not the legal, relation of the company to this fund

6 Hiscock vs. Mertens.

“ Upon the surrender of the policy before the death of the assured the

company, to be relieved from all responsibility for the increased risk,

which is represented by this accumulating reserve, could well afford to

surrender a considerable part of it to the assured, or his representative,

A return of a part in some form or other is now usually made.

In In re Newland, 6 Ben. 342, it was said that the present value of a

policy is its cash surrender value, and but for that “it could not be said

to have any appreciable value. Parker v. Marquis of Anglesey, 20 Weekly

Reporter, 162, and 25 Law Times Rep., new series, 482.”

There is no expression in either of the cases that the cash surrender

value depended upon contract as distinct from the usage of companies,

And section 70 expresses no distinction. At the time of its enactment

there were policies which stated a surrender value and a practice which

conceded such value if not stated. If a distinction had been intended to

be made it would have been expressed. Able courts, it is true, have de-

cided otherwise, but we are unable to adopt their view. It was an actual

benefit for which the statute provided, and not the manner in which it

should be evidenced. And we do not think it rested upon chance conces-

sion. It rested upon the interest of the companies and a practice to which

no exception has been shown, And that a provision enacted for the bene-

fit of debtors should recognize an interest so substantial and which had

such assurance was perfectly natural. What possible difference could it

make whether the surrender value was stipulated in a policy or universally

recognized by the companies. In either case the purpose of the statute

would be subserved, which was to secure to the trustee the sum of such

value and to enable the bankrupt to “continue to hold, own and carry

such policy free from the claims of the creditors participating in the dis-

tribution of the estate under the bankruptcy proceedings.”

Counsel for petitioner argues that the policies are mere investments, and

intimates the injustice of keeping them from the trustee, and illustrates the

comment by contrasting what the company would have paid as the surrender

value of policy No. 274445, if default had been made in payment of pre-

miums, and what the company would pay six months thereafter. The con-

trast is between $5,905.65 and $11,318.40. But this isthe result of the age

of the policy, and cannot be a test of other policies or of the construction

of the law. And a precisely like effect would result if the policy expressed

a surrender value, in which case, it is conceded, it would come under the

law. The same comment is applicable to other arguments of petitioner

which tend to confound the distinction between surrender value and other

value. Section 70 deals with the former, and makes it the conditions of

the relative rights of the bankrupt and the trustee of his estate. Pursu-

ing the argument farther, it is said that “the right to participate in the

profits was a part and parcel of the policy and of the privileges enjoyed

ESET ENN FLEE EME NIM LENE ES I FTES EM, GAN LIPO NE RTE I TEN

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Hiscock vs. Mertens. 7

thereunder ;” and it is further observed that the difference between the value

of the policy which was used for illustration, “ if lapsed on September 8, 1903,

given as $0,905.65, and its value on March 8, 1904, $11,318.40, is chiefly

made up of the value of this right to participate in profits.” And counsel

for petitioner is disposed to think the contention absurd that the bank-

ruptey law contemplated that such a valuable right “could be absolutely

wiped out and taken from the trustee in such a case as this by allowing the

bankrupt to take up the policy by paying what the bankrupt here claims to

be the surrender value.” Such result would not appear to be absurd if the

policy were only two years old instead of nineteen years. Manifestly a

policy cannot be declared in or out of the law according to its age, nor

can anything be deduced from the investment features of tontine policies.

Such policies were decided to be covered by the law in Holden v. Stratton.

Whether the law should have included them is not our concern. What-

ever may be said against it, it has seemed best to the legislature to encour-

age the extra endeavor and sacrifice which such policies may represent.

It is further contended that respondent has not made out that the poli-

cies have a cash surrender value, because it appears from the evidence that

the company would not accept their surrender until they had lapsed, and

that they had not lapsed either when the petition was filed or the bank-

ruptey adjudged. But this is tantamount to saying that no policy can

ever have a surrender value. According to the testimony, policies which

have a stipulation for such value are subject to the same condition. And

there is nothing in the record to show that the practice and policies of

other companies are not the same as those of the Equitable Life Assurance

Society. Section 70 is broad enough to accommodate such condition. It

permits the redemption of a policy by the bankrupt from the claims of

creditors by paying or securing to the trustee the cash surrender value of

the policy “ within thirty days” after such value “has been ascertained

and stated to the trustee by the company issuing the same.”

Judgment affirmed.

True copy.

Test :

Clerk Supreme Court, U. 8.

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