Is the cash value of my personal whole life insurance policies protected from creditors?

15 March 2016

Answer:  It depends.

Massachusetts has many different statutes that provide protection of the cash value of whole life insurance policies, this post is to address three of them namely, Mass. Gen. Laws. c. 175 §§ 119A, 125 and 126.

To understand Massachusetts exemption statutes on life insurance it is necessary to understand the players with respect to a life insurance policy.  There is a person that initially purchased the policy, sometimes referred to as the effectuator, who is usually the owner of the policy.  Then there is the insured, which is the person whose life the policy is based on.  Lastly there is the beneficiary, who is the person that will receive the payout upon death.

Section 119A is fairly easy to understand, basically it comes down to the language of the policy itself.  The section permits a policy that has language prohibiting the beneficiary from “commut[ing], anticipat[ing], encumber[ing] alienat[ing], or assign[ing]” the policy to be protected.  It essentially allows the terms of the policy, if they shield the asset from creditors, to be honored.  It the policy does not have such language, then the section is not applicable.  In re Sloss, 279 B.R. 6, 9-10 (Bankr. D. Mass. 2002).  Simply based on antidotal evidence, the author believes that most life insurance policies freely allow beneficiaries to be changed, and thus, this section will rarely apply.  See e.g. In re Levesque, Case No. 07-17943, (Bankr. D. Mass. Aug. 21, 2008) (policy language permitting change of owner or beneficiary); In re Sloss, 279 B.R. 6, 9-10 (same). 

   

Initially, with respect to section 125 and 126, we must note that the exemptions are focused on the rights of the beneficiaries, instead of the owner(s) or effectuator(s) of the policy.  Massachusetts courts have ruled that since section 125 and 126 are based on the beneficiary, that to give the benefit intended, the cash value of a policy is protected in addition to any payout.  Rosenberg v. Robbins, 289 Mass. 402 (1935); In re CRS Stream, Inc., 217 B.R. 365, 369 (Bankr. D. Mass. 1998); In re Beach, 8 F. Supp. 910.

 

Section 125 is the broader of the two, it essentially has three limitations to the full protection provided for in the statute.  The first is that premium payments paid in fraud of creditors are not protected.  In re Sloss, 279 B.R. 6, 14.  This is rarely alleged and hard to prove, thus the author believes this provision would rarely apply.  The second limitation is that the protection only goes to the initial beneficiary of the policy.  Id.  So, if the beneficiary has been changed from its inception, the subsequent beneficiary has no protection.  The third and last limitation is that the beneficiary must have an insurable interest in the insured.  In re Chevalier, 330 B.R. 21, 25-26 (Bankr. D. Mass. 2005).  This has been described as “some reasonable expectation of pecuniary benefit or advantage from the continued life of the insured.”  Id. at 26 quoting In re Caron, 305 B.R. 614, 616 (Bankr. D. Mass. 2004).  Typically, if the insurance policy exists, (at least with respect to the original beneficiary), there is an insurable interest because life insurance companies do not issue policies unless an insurable interest exists.  One final note, the insurable interest need only exist at the time the policy was issued.  Id. 

 

Section 126 is the most unique and complicated of the statutes on life insurance.  In contrast to section 125, it does not matter if the beneficiary has been changed from when the policy effected, the policy is exempt if the beneficiary is a married woman.  Although the statute is silent with respect to who the insured must be, at least one court has ruled that the insured must be the married husband.  In re Chung-I Liang and Yu-Chi Chao, Case No. 11-43709, 2012 Bankr. LEXIS 2903 (Bankr. D. Mass. June 26, 2012).  One interesting expansion to the statute has been to determine that divorce does not change or alter the initial protection.  In re Chevalier, 330 B.R. 21, 27 fn.7 (Bankr. D. Mass. 2002); In re Sloss, 279 B.R. 6, 16.  Thus, if a woman gets divorced and is no longer a “married woman” for that reason, the protection endures.

Keep in mind that this blog only explores the applicability of the described statutes in a general sense and is not a replacement for a valid legal opinion by a qualified attorney.      

 
In the event that you have financial and legal matters that you need legal advice for, feel free to contact the author to consider an engagement.

What are the requirements for being found in civil contempt of court?

9 September 2015

The requirement is there “must be a clear and unequivocal command and an equally clear and undoubted disobedience.”  M.M. v. D.A., 79 Mass. App. Ct. 197, 198 (2011).

This means that the court order cannot be ambiguous (unclear) and that it is clear that you did not comply.  That is the general idea.  But who has the burden of proof and what if you cannot comply?

Well, for there to be a finding of contempt, the putative contemnor must be able to fulfil the court’s order.  Diver v. Diver, 402 Mass. 599, 603 (1988); O’Connell v. Greenwood, 59 Mass. App. Ct. 147, 154 (2003) (“A putative contemnor may no doubt avoid a finding of contempt if she meets her burden of proving her inability to comply with the relevant court order.”). 

When it comes to the debtor context, when the question is usually whether the debtor has paid the amount he was ordered to, the burden is on the party complaining that there was a violation.  Mass. Gen. Laws c. 224 § 16; In re Birchall, 454 Mass. 837, 852 (2009).  And it must be met with clear and convincing evidence.  Id. at 853.  It is not adequate to claim that the payment order did not specify what assets the debtor was to liquidate to support the argument that the payment order was unclear. 

If the person complaining, usually a plaintiff in a supplementary process action, meets the burden and the court determines the debtor is in contempt for failure to pay, the court has the power to incarcerate the debtor for 30 days.  At the end of the 30 days, there should be another hearing to determine whether the debtor is still in contempt.  As long as the debtor remains able to pay and does not, this can continue.

However, the purpose of civil contempt, as opposed to criminal contempt, is to get the contemnor to comply.  Sodones v. Sodones, 366 Mass. 121, 129-130 (1974).  It has been said that the civil contemnor “carries the keys of his prison in his own pocket” because all he has to do is comply to get out of jail.  International Union, United Mine Workers v. Bagwell, 512 U.S. 821, 828 (1994). (Criminal contempt is different and beyond the scope of this blog.).  Also, if the court believes that the incarceration is no longer a motivation to stimulate the contemnor’s compliance, it is to release the contempt.  However, it is a fools folly to rely on this principal. 

When it comes to the domestic relations context, when the question is usually whether a party has complied with a probate/divorce court’s order to perform or refrain, the burden is on the possible contemnor.  Mass.  Gen. Laws c. 215 § 34; Diver v. Diver, 402 Mass. 599, 603 (1988).  This means if you are accused of contempt in the probate court, you should take is quite seriously and be prepare to prove either you complied or were unable to comply.

In the event that you find yourself facing a contempt complaint/accusation or believe another party has violated a court order, feel free to contact this office to discuss. 

If a third party pays for the legal representation of another person, are they entitled to keep tabs on the case and have input in decisions and actions taken?

3 October 2015

No.

It is common for some potential clients that need legal help to seek and need a third party to pay for the legal representation.  In that case, it is also common for that third party payer to expect to have access to the communications between the attorney and client and have input on decision making.  Some payers even make demands or place conditions on the payment, sometimes out of interest in helping the client, and sometimes to serve their own interests.

But from the lawyer’s perspective, to maintain ethical standards, he must resist when a third party payer has these expectations, and many times opt not to pursue the representation if the issue cannot be rectified.  There are common sense reasons that any objective layman could express, and one professional reason is the need to comply with the Massachusetts Rules of Professional Conduct.  Specifically the rules that apply are 1.3, 1.6, and 1.7 which are in pertinent part:

RULE 1.3: DILIGENCE

A lawyer shall act with reasonable diligence and promptness in representing a client. The lawyer should represent a client zealously within the bounds of the law.

RULE 1.6: CONFIDENTIALITY OF INFORMATION

(a)A lawyer shall not reveal confidential information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).

            . . . .

RULE 1.7: CONFLICT OF INTEREST: CURRENT

CLIENTS

(a)    Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:

(1) the representation of one client will be directly adverse to another client; or
 

(2) there is a significant risk that the representation 
of one or more clients will be materially limited

by the lawyer’s responsibilities to another client,

a former client or a third person or by a personal

interest of the lawyer.

(b)   Notwithstanding the existence of a concurrent conflict of interest under

paragraph (a), a lawyer may represent a client if:

(1) the lawyer reasonably believes that the lawyer will 
be able to provide competent and diligent 
representation to each affected client;

(2) the representation is not prohibited by law;

(3)   the representation does not involve the assertion of

a claim by one client against another client represented

by the lawyer in the same litigation or other proceeding

before a tribunal; and

(4)   each affected client gives informed consent,

confirmed in writing.

             . . . .

            Comment

             . . . .

Interest of Person Paying for a Lawyer’s Service

[13] A lawyer may be paid from a source other than the client, including a co-client, if the client is informed of that fact and consents and the arrangement does not compromise the lawyer’s duty of loyalty or independent judgment to the client. See Rule 1.8(f). If acceptance of the payment from any other source presents a significant risk that the lawyer’s representation of the client will be materially limited by the lawyer’s own interest in accommodating the person paying the lawyer’s fee or by the lawyer’s responsibilities to a payer who is also a co-client, then the lawyer must comply with the requirements of paragraph (b) before accepting the representation, including determining whether the conflict is consentable and, if so, that the client has adequate information about the material risks of the representation.

Another good reason is the attorney-client privilege.  The basics are that a client wants to have his communication with his attorney to be protected from disclosure, for many reasons, one being that they may be in litigation in the future and it will damage them to have the communication revealed.  The attorney-client privilege allows a client to keep his communications with his attorney from disclosure.  If a third party is present during the communication, or if that information is later revealed, the attorney-client privilege could be attacked. This means the client’s adversary (the other side) may be entitled to the confidential information because it was not treated properly.

If you are intending on paying for the legal representation of another party, it may be that you care for them or seek to make sure things are done right.  It is important to understand that purchasing legal services is different than anything else, and your seeking to be privy to the confidential information that otherwise would also be covered by the attorney-client privilege, can harm the very person that you are trying to help.  Instead of seeking to control the matter and placing demands on the payment of your money that only an unethical attorney would accept, the better course of action is to find an ethical attorney and trust that the attorney will have the client’s best interests at heart.  And if a lawyer resists the types of demands discussed in this post that would be the first indication that lawyer may be a good choice.

If you are seeking an attorney that has his client’s interests at heart, feel free to give this office a call.