Opinion
No. 16/14860.
09-08-2017
In the MATTER OF the Application of Linda PAGE f/k/a/ Linda Lynch, From the Imposition of a Constructive Trust on certain Insurance Proceeds pursuant to Insurance Law § 3212.
Steven M. Witkowicz, Esq., Handelman, Witkowicz & Levitsky, Rochester, Attorney for Linda Page. Michael A. Rosenbloom, Esq., Rochester, Attorney for Kathiann Lynch.
Steven M. Witkowicz, Esq., Handelman, Witkowicz & Levitsky, Rochester, Attorney for Linda Page.
Michael A. Rosenbloom, Esq., Rochester, Attorney for Kathiann Lynch.
RICHARD A. DOLLINGER, J.
But, Mousie, thou art no thy-lane,
In proving foresight may be vain;
The best-laid schemes o' mice an' men
Gang aft agley,
An' lea‘e us nought, but grief an’ pain,
The "best laid plans" reference from the Robert Burns poem "To a Mouse, on Turning her up in her Nest with a Plough,,"—with its time-tested metaphoric significance and its later adoption by novelist John Steinbeck—is sprinkled throughout judicial opinions in New York. Fernandez v. White Rose Food Co., 13 Misc.3d 1204(A) (Sup.Ct. Bronx Cty.2006) ; TKU–Queens Corp. v. Mabel Food Corp., 90 Misc.2d 48 (Civ.Ct. Wqueens Cty.1977). The federal courts have also joined the chorus. Barnes v. Brown Cty., 2017 U.S. Dist. LEXIS 35597 (E.D.Wisc., 2017).
In this matter, a husband and wife, in their divorce separation agreement, created a plan to provide insurance proceeds to cover the husband's support obligations if he died. After he succumbed, this "best-laid scheme" went slightly "agley," leaving his current spouse and his former spouse to duel over excess insurance proceeds, and the court to "plough" through the language of the separation agreement and claims under the Insurance Law.
The separation agreement required the husband to maintain a life insurance policy for no less than $120,000, until the youngest child was emancipated. The agreement required that the husband name as a beneficiary of the insurance "a trust for the benefit of the children." As dictated by the agreement, the purpose of the trust was to provide for the children's care, health, and education. The trustee was authorized to use the income or principal for care, maintenance, or education of the children as is "necessary or advisable" for the children to "take their place in the world." The trust terminated when the youngest child reached age 25. The agreement also provided that any "dividends" on the policies "shall belong exclusively to the parent who purchased the policy" and he or she "shall be entitled to receive such dividends or apply them to a reduction in premiums." The divorce judgment crimped the insurance mandate, stating simply that the insurance would be provided for the "benefit of the parties children."
The husband subsequently remarried and then died while the insurance mandate was in effect. At the time of his death, the husband was paying child support for his youngest child, and also had an obligation to contribute to the college costs for another of his sons. His former wife demanded the benefit under the insurance provision. The insurer declined to forward the proceeds until a trust—as required by the separation agreement—was created. In addition, the insurer suggested (in written materials provided to the widow and the former wife), that they would pay validly designated beneficiaries and then, "if none," the "insured's widow." After an exchange of correspondence, the widow and the former wife agreed to cooperate and have $120,000 of the insurance proceed paid into the anticipated trust. The former wife sought a court order, ex parte, to establish a constructive trust into which the $120,000 would be deposited, pending the further order of the court. This court granted that order, but added that the proceeds were subject to distribution by the court "in accordance with the terms of the property settlement and separation agreement."
When the insurance carrier released the proceeds, it issued a check for $128,000 plus change, a sum in excess of the mandated insurance amount under the agreement. When the husband's widow learned that the insurer had forwarded more than the $120,000, she and her attorney consulted with the former wife and her counsel and they agreed to permit $120,000 be transferred into a trust for the children. The parties could not reach an agreement on distribution of the amount in excess of $120,000, and the widow sought judicial intervention through an order to show cause, to prevent distribution of the excess amount. The widow claims that the excess proceeds were, under the agreement, the husband's property and that having fulfilled the trust obligation by funding the trust to the tune of the required $120,000, the remaining proceeds would pass, under the insurer's payment protocols, as a benefit to the wife. In a cross-motion, the former wife moved to have the excess funds distributed to cover the unpaid college expenses of two of the decedent's sons.
In analyzing this dispute, the agreement governs the obligations of the husband. The agreement expressly limits the husband's insurance obligation to $120,000. There is no requirement that he provide any greater amount to cover his children's educational and/or other expenses, or any unpaid child support. Based on this unambiguous language, neither the trustee, nor any of the sons have no claim against the husband's estate for any amount in excess of $120,000. The former wife, as trustee, has no claim against her former husband's estate for any sums due and owing under the insurance clause of their agreement or the judgment of divorce. The former wife may have a claim against the husband's estate for unfulfilled obligations to pay college costs for the children, but those claims are her claims alone—presumably for payments that she advanced over and above her required contribution under the agreement—and not claims on behalf of her sons. The former wife has no claim to intercept any insurance proceeds or make claim to any proceeds in advance of a judgment against the husband's estate. The former wife's claims would need to be brought against the husband's estate or as part of an estate administration.
The former wife argues that Section 3212(e)(1) of the Insurance Law applies to rescue her claim. She argues that the "transfer" of the excess proceeds—away from the trust and into the hands of the current wife-has the effect of defrauding her as a creditor. Putting aside the issue of the wife's standing to bring such a claim in this contract interpretation proceeding, her claims under the statute are missing essential requirements. The statute provides that any transfer is valid, except in cases of transfer with "actual intent to hinder, delay or defraud creditors." Ins. Law § 3212(e)(1). The Insurance Law borrows the definition of "actual intent to defraud" and its consequences from Article 10 of the Debtor/Creditor Law, which mandates that "conveyances" made "with actual intent to defraud" are fraudulent as to both present and future creditors. Debtor/Creditor Law § 276. Here, the husband, by apparently retaining the excess cash accumulation under the policy umbrella, never engaged in any fraudulent conduct. There is no evidence of any intent associated with his permitting the cash proceeds to accumulate under the policy. The husband never "transferred" the excess cash proceeds to his wife. The insurer provided that once the trust is fully funded under the separation agreement, the excess proceeds are paid to the widow, even without a specific beneficiary designation by the former husband. There is no evidence of fraud to support a claim under the Insurance Law in this matter.
In contrast, the widow's claims that the excess proceeds are an asset of the decedent to be paid to his then spouse finds some credence in the separation agreement, which specifically provided that any "dividends" paid on the policy were owned by the husband and could be used as he deemed fit. In this court's review of the insurance documents, it is unclear whether the excess proceeds were "dividends" in the strict sense of the agreement. Regardless of their exact description in the insurance policy, the excess cash accumulated during the course of the policy coverage and exceeded the face value of the insurance. The agreement, by allowing either party to retain control over the excess accumulated benefits under the policy strongly implies that the excess proceeds were the husband's separate property which he could direct or control as he deemed fit. There is no evidence that he sought to assign or direct those additional benefits to the trust established for his children. In the absence of any evidence indicating that the husband assigned those benefits to the trust, the insurer's declaration that the excess proceeds over the amount paid to the trust would be paid to the widow is controlling for this court. The spouse's request for an order directing the excess proceeds be paid to her is granted and they shall be turned over within 10 days of the filing and service of this order.
The excess cash proceeds may be taxable under the Internal Revenue Code as income to the recipient spouse. See Saunders v. United States IRS, 167 B.R. 832 (West.Dist.Va.1994) (income taxes due on excess insurance proceeds)
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On the question of legal fees, this court notes that there is no contractual relationship between the former spouse and the widow that would authorize an award of legal fees and no citation to any statutory authority that would enable this court to make such an award. The request for an award of legal fees is denied.
The "grief an' pain" of this "best-laid scheme" "gang aft agley" is ended.