# Opposition Brief — Hiscock v. Mertens

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386020_0204%3A5

## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1907
- **Citation:** 205 U.S. 202

## Text

DCRR DEL RG GE fe

=] n
3 4 < .

LLG LINAS OTT EL OG | IEEE LE LE APR © NOE

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.

4

[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 <-
: x

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.”

GERI SEE POLE LIL SLE LILLE LITE IIL IIE ILE III LIE LN ON SO
ERNE AID OS ee RAINY Qa a

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

a

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.

a sent REAM UTNE I +

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386020_0204%3A5. Public record. Not legal advice.