By Agenique Smiley
BridgeTower Media Newswires
It’s an old adage, “a man has a right to provide for his family.” And the Michigan Court of Appeals, apparently, agrees.
In DC MEX Holdings LLC v. Affordable Land LLC, the Court of Appeals reversed the Oakland Circuit Court’s denial of Defendant-Appellant Dale Fuller’s objection to Plaintiff-Appellee DC Mex LLC’s writ of nonperiodic garnishment.
The Court of Appeals, holding that the phrase “including the cash value thereof” means that the cash value of a life insurance policy is considered part of its proceeds and is, therefore exempt from garnishment under MCL 500.2207(1), remanded the matter for further proceedings.
On Oct. 7, 2013, DC Mex Holdings was awarded a $2.5 million judgment against defendant, Affordable Land, LLC, and Fuller, jointly and severally. The judgement was affirmed by the Court of Appeals.
DC Mex filed a request for a writ of nonperiodic garnishment naming the Prudential Insurance Company of America as the garnishee regarding any property or money that it held belonging to Fuller which was entered by the deputy clerk. Prudential filed a garnishment disclosure indicating that Fuller owned an individual life insurance policy with an approximate cash value of $73,078.91.
On Jan. 27, 2016, Fuller filed an objection to the garnishment on the grounds that the cash value of the policy was exempt. In his brief in support, he argued that the cash value of the policy was exempt under MCL 500.2207(1) and, therefore, requested that the trial court grant his objection and quash the writ of garnishment. He further requested fees and costs.
On Feb. 5, 2016, DC Mex filed a response to the objection, arguing that the cash value of a life insurance policy was not protected under MCL 500.2207(1) during an insured’s lifetime because the insured can “park” available cash in the “cash value” portion of a life insurance policy and prevent a judgment
creditor from collecting it.
After ordering the parties to file supplemental briefings supporting their arguments at a hearing on Feb. 10, 2016, the court issued an opinion and order denying Fuller’s objection to the writ of garnishment. Fuller appealed the trial court’s decision.
MCL 500.2207(1) has a long legislative history, dating back to the 1800s. Originally, its purpose was to provide for the well-being of the wife and children of a deceased husband. Under the statute, it was lawful to provide — or secure a benefit — for those persons via a life insurance policy and the proceeds of that policy were payable to those beneficiaries free of any claims by the husband’s creditors.
Despite being amended many times to reflect modern thinking and serve changing societal needs, the overall purpose of MCL 500.2207(1) has remained the same, to provide for the well-being and financial security of the beneficiaries designated under the policy by its owner, free of garnishment by the owner’s creditors.
The following specific portion of MCL 500.2207(1) was at issue:
“... and the proceeds of any policy of life or endowment insurance, which is payable to the ... children of the insured ..., including the cash value thereof, shall be exempt from execution or liability to any creditor of the insured.”
Relevant to the dispute, Fuller had a universal life insurance policy with Prudential that could be surrendered for its “net cash value.” “Net cash value” was defined under the policy as the cash value less any contract debt or zero if the contract was in default. The policy also provided that the cash value at any time is the contract fund less any surrender charge. Fuller could surrender the policy for its net cash value — the cash value less any contract debt — or zero if the contract is in default.
‘Including the cash value thereof’
The primary issue in DC MEX Holdings was not whether the proceeds of the policy were exempt from execution.
The proceeds — the total payable value of the policy owed to the beneficiary at the insured’s death — are exempt from garnishment by the insured’s creditors. MCL 500.2207(1) is very clear and the parties do not disagree on that point.
However, the statute is not as clear on whether the cash value of an insurance policy, which is available for use by an insured during his or her lifetime, is exempt from garnishment. “Just look at the legislative history,” urges Fuller’s attorney Robert Levi. “The early version of the statute does not mention proceeds or cash value, it just talks about proceeds,” he added.
Levi has over 32 years of practice at his firm, Robert L. Levi, PC in West Bloomfield, where he specializes in employee benefits, employment litigation and both criminal and civil appeals.
“Before the statute was amended, there were only three ways to receive funds under a life insurance policy: death of the owner, surrender of the policy or if the owner took out a loan against the policy,” Levi continued. According to Levi, the Legislature amended MCL 500.2207(1) to add the phrase “including the cash value thereof” so that it could be protected from garnishment.
In the opinion, DC Mex argued that MCL 500.2207(1) does not protect the cash value during the insured’s lifetime because the statute designates the cash value as a subset of proceeds, which only become relevant upon death, by using the phrase “including the cash value thereof.”
“The cash value exists only while the owner of the policy is alive because the owner is the only person who can take out a loan against the policy, plus, once the owner dies, the cash value converts to a death benefit,” Levi stated.
In the opinion, DC Mex argued that under Fuller’s interpretation of MCL 500.2207(1), a judgment debtor could simply “park” all available cash in the “cash value” portion of a life insurance policy and prevent a judgment creditor from collecting it, even though the judgment debtor could at any time retrieve some or all of the “parked” cash. However, to Levi, this argument is resolved by the law against fraudulent conveyances. DC Mex obtained a restraining order that prevented Fuller from transferring assets in or out of the insurance policy.
“The purpose of MCL 500.2207(1) is to preserve the proceeds of the insurance policy for the beneficiary, a spouse or child, therefore, allowing a creditor to garnish it negates its purpose,” added Levi. “Because the cash value exists only during the life of the insured, it must be protected in order to ultimately
protect the death benefit.”
DC MEX Holdings LLC’s counsel Jonathan Frank did not respond to requests for commentary.
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