Maryland Court of Appeals: Change in Beneficiary of Insurance Policy is “Transfer” Under Uniform Fraudulent Transfer Act | Rosenberg Martin Greenberg LLP
In a March 9, 2021 notice, the Maryland Court of Appeals signaled the end of what it called “a complex web of procedural history” by answering two questions certified by the United States District Court. for the District of Maryland. These questions have arisen “in the context of a ten-year dispute between the adult children of the Buckingham family and United Bank (” the Bank “)”. The Adult Children of Buckingham “Through the timely formation of various trusts, … have been successful in diverting hundreds of thousands of dollars of life insurance products from the declining family business and into their personal use.”
The policies concerned the life of John Buckingham. Some policies were owned by John and his company, Sun Control Systems, was the beneficiary. Others were owned by Sun, with Sun being the beneficiary. Sun was in default on his bank loan. Diversion was accomplished by: (a) forming several family trusts; (b) require one of the trusts to purchase the policies held by Sun from Sun for a fraction of their value and change the beneficiary; and c) ask David Buckingham, the son of John Buckingham, who had been appointed guardian of John after being diagnosed with terminal dementia, to change the beneficiary of the policies owned by John.
The Court of Appeal said that “ both federal and state courts have attempted to determine conclusively whether this diversion of life insurance proceeds was an appropriate use of family resources to help sick parents, or rather an act committed by the children of Buckingham to intentionally defraud the Bank. . However, as the emails between the children at the time of the establishment of the trusts and making the beneficiaries of the life insurance policies reflected their recognition that ”
The two questions certified to the Court of Appeal were whether: (a) the Maryland Uniform Fraudulent Conveyance Act,… achieved a change in beneficiary of life insurance; and (b) Md. Code Ann., Est. & Trusts § 15-102 grants a guardian of property the power to change the beneficiaries of life insurance policies? On the first question, the Bank argued that a change of beneficiary of a life insurance policy is an avoidable “transfer” under the Maryland Uniform Fraudulent Conveyance Act (“MUFCA”) if made with the actual intention to hinder, delay or defraud a creditor. The Buckingham Children argued that a beneficiary’s right to receive life insurance proceeds is “a mere expectation” during the lifetime of the insured and therefore does not constitute “property” that could be subject to a “transfer” under MUFCA.
On the second issue, the Bank argued that David Buckingham, as John’s guardian, did not have the authority to change the beneficiary of John’s life insurance policies to anyone other than John or his dependents. charge without court leave. Since David had not obtained court clearance before naming the trusts as beneficiaries, the bank argued the changes were ineffective. The Buckingham Children argued that David Buckingham, as John’s guardian, was entitled to exercise any rights under an insurance policy that John himself could have exercised without needing the approval of the court.
The Court of Appeal sided with the Bank and against the Buckinghams on both issues. On the first question, the Court rejected the Buckingham’s argument that a change of beneficiary is not a transfer, citing the broad definition of the term in the MUFCA. This definition includes “any payment of money, assignment, release, transfer, rental, mortgage or pledge of tangible or intangible property, as well as the creation of any lien or charge”. In addition, if a change of beneficiary was not a transfer, article 16-111 (d) of the article on insurance of the Maryland Annotated Code would be a meaningless surplus. This article provides that “A change of beneficiary, assignment or other transfer is valid, except for the transfer with the real intention of hindering, delaying or defrauding creditors.” Finally, the Court noted that the policies underlying the enactment of MUFCA were “to nullify and nullify transfers made for the purpose of hindering, delaying and defrauding creditors” and “to improve and not to hinder the recourse of the creditor ”. The Court said that if it adopted the Buckinghams ‘narrow interpretation of the term’ transfer ‘, “it would be difficult for policyholders’ creditors to have recourse in the event of a fraudulent change of beneficiary of life insurance.” Viewing a change of beneficiary as a transfer was “consistent with the intention of the General Assembly to improve, rather than hinder, creditors’ remedies.”
On the question of David Buckingham’s power to change the beneficiaries of his father’s life insurance policies, the Court began with the proposition that section 3 of the Bill of Rights in the Maryland Constitution provides that “the inhabitants of Maryland are entitled to the common law of England, and trial by jury, according to the course of that law, and for the benefit of the English statutes as they existed on the fourth day of July seventeen hundred and seventy-six; … Subject, however, to the revision, amendment or repeal of the legislature of that State. The long-established English common law principles underlying the concept of guardianship in 1776 were “that the purpose of guardianship is to ensure that the estate of the neighborhood is preserved and not diminished” and that “the lands and madmen’s buildings should be Waste and Destruction, and that they and their household should live and be competently maintained with the profits thereof. So, unless the Maryland Legislature revised, amended or repealed English law within the next two centuries, David Buckingham did not have the power to change the beneficiary of life insurance policies. of his father in any person other than the members of his household.
The Buckinghams argued that the Maryland Legislature did just that when it passed section 15-102
A trustee may exercise the options, rights and privileges contained in a life insurance policy, annuity or endowment contract constituting the property of the estate trustee, including the right to obtain the cash value, convert a policy in another type of policy, revoke any method of payment and pay some or all of the premiums of the policy or contract.
The Bank, on the other hand, noted that § 13-203 (c) (1) of this same article provides that “Except for the limitations contained in § 13-106 of this title, after designation of the guardian, the tribunal has all the powers over the property of the minor or the disabled person that the person could exercise if he or she is not disabled or a minor. Since the change of beneficiary does not appear in section 15-102
Ultimately, the loss of the Buckinghams was probably the fact that they expressed in writing their desire to put the proceeds of the life insurance policy out of the reach of the Bank and sought to achieve this by creating several trusts. If they wanted “an appropriate use of family resources to help sick relatives” they would simply have changed the beneficiaries into John’s family members so that they could “live and be competently nurtured with the benefits of the same. »In accordance with English supervision. law.