decided.: April 6, 1951.
PHOENIX MUT. LIFE INS. CO.
CONNELLY ET AL.
Before McLAUGHLIN, KALODNER and HASTIE, Circuit Judges.
HASTIE, Circuit Judge.
This is a controversy between the beneficiary of a life insurance policy and a person to whom the insured had assigned the policy as collateral for a loan. The insured died, leaving the loan unpaid.The assignee claims an amount sufficient for repayment. The contending beneficiary is the widow of the insured who after the assignment became a substituted beneficiary, through exercise of the power to change the beneficiary reserved in the policy to the insured. She claims the entire amount of the proceeds on the theory that she acquired a "vested interest" which had not been affected by the assignment. The insurance company interpleaded the two claimants.
The district court concluded, 92 F.Supp. 994, as a matter of law, that the written assignment upon which the claim of the assignee was based did not affect the vested right of the beneficiary; that by the assignment the assignee acquired nothing more than the interest of the insured in the policy of insurance, and that inasmuch as the insured's right was contingent upon his survival of the beneficiary, the assignee took nothing.
The pertinent provisions of the insurance policy read as follows:
"Assignments. The Company assumes no responsibility for the validity of any assignment hereof and shall not be held to have notice of any assignment of this policy until the original assignment, or a copy thereof is received at its Home Office."
"Beneficiary Provisions. Unless otherwise provided herein, upon the death of any beneficiary hereunder during the lifetime of the insured, any interest of such beneficiary shall revert in equal shares to any surviving beneficiaries then designated hereunder, but if there be none to the insured or assigns. If the insured has reserved the right to change the beneficiary hereunder and such fact is recorded on this policy, the insured, if of legal age, may, whenever and as often as he likes, change any beneficiary designated herein by filing at the Home Office of the Company a written notice thereof, duly executed and accompanied by the policy for record of the change thereon by the Company."
"Rights of Insured. If the right to change the beneficiary has been reserved to the insured, an assignment, release or surrender of this policy or any interest therein by the insured, if of legal age, shall operate to the extent thereof to assign, release or surrender the interest of any and all beneficiaries hereunder."
The contract of insurance was entered into in New Jersey and the assignment took place there. We, therefore, look to the law of that state for the solution of this problem.*fn1
Sullivan et al. v. Maroney et al., 1909, 76 N.J.Eq. 104, 73 A. 842, 844, affirmed, 1910, 77 N.J.Eq. 565, 78 A. 150 is the fountainhead of a long line of cases which hold that under New Jersey law a beneficiary takes a vested interest*fn2 in a life insurance policy notwithstanding the reservation of the right in the insured to change the beneficiary, and that where a policy stipulates the way in which the beneficiary may be changed, that procedure must be followed in order that the interest of the original beneficiary may be divested. The Sullivan case spells out the doctrine that "There [are] * * * two sets of interests in [a] policy - the beneficiaries * * * and the representatives of the insured * * *. Each of these interests [may be] subject to assignment. Neither one [can] * * * assign anything excepting that which [will] come to that one, and the assignment of neither [can] possibly impinge upon the rights of the other".
However, it is equally important and as clearly recognized by the courts of New Jersey that primary definition and delimitation of the interest of the beneficiary must be found in and measured by the terms of the contract of insurance out of which solely his rights arise.*fn3 Therefore, in this case in order to determine whether the insured exercised rights and affected interests which were his or whether he ineffectually attempted to exercise rights and affect interests belonging to the beneficiary, we must look to the terms of the policy. Under the heading "Rights of Insured", we find the agreement that "an assignment * * * of [the] policy or any interest therein by the insured * * * shall operate to the extent thereof to assign * * * the interest of any and all beneficiaries" if the "right to change the beneficiary has been reserved by the insured."*fn4
This language clearly indicates an intention to reserve to the insured the power to alter both his interests and those of the beneficiary, whatever they might be, by assignment of the policy.*fn5 The instrument which creates the beneficiary's interest creates it subject to this power.
The New Jersey "vested interest" concept of the beneficiary's status is not incompatible with this contractual arrangement.*fn6 The New Jersey courts recognized that the reservation of the right to change beneficiaries is not sufficient to prevent the beneficiary's interest from being vested. Yet, the right to change beneficiaries itself is nothing more than a power of defeasance in the insured which he may exercise over the beneficiary's vested interest. The reservation in the policy of additional rights to the insured simply subjects the interest of the beneficiary in and from its inception to additional powers of defeasance. It does not change the "vested" character of the beneficiary's interest.*fn7
But whatever the nature and status of the beneficiary's interest may be conceptually, it is argued that the judge made law of New Jersey recognizes only one way of defeating a beneficiary's claim, namely, a formal change of beneficiary. We think the New Jersey cases are not so sweeping. In the cases, general language of which is relied upon for the stated proposition, the problem was whether an insured who attempted to change the beneficiary had complied with the requirements of the policy for so doing.*fn8 There was no question of the relation of the rights of an assignee to the rights of a beneficiary. We do not regard these cases as controlling here or even as indicative of what the courts of New Jersey would hold in this situation. To the contrary, we are confident that those courts would respect the terms of a specific contract of insurance, which affirmatively provide for diminution of the beneficiary's interest through assignment of the policy.*fn9
The district court was in error, therefore, when it concluded, as a matter of law, that the written assignment upon which the claim of the assignee was based did not affect the vested right of the beneficiary and that by the assignment the assignee acquired nothing more than the interest of the insured in the policy of insurance which was contingent upon his survival of the beneficiary. The assignment did more than pass the interest of the insured. The act of assignment was the exercise of a power reserved to the insured by the terms of the contract to affect both his rights and those of the beneficiary. Both were subordinated to the rights of the assignee.
In order that this case may be finally determined on this appeal, appellant has asked that we decide whether the proceeds of the policy are exempt from the claim of the assignee under the special statutory protection afforded beneficiaries who are married women by Title 17, Chapter 34, Section 29 of the New Jersey Revised Statutes.*fn10 Even though this type of exemption statute is a common enactment among the various states, there is a dearth of opinion on the applicability of the statute to an assignee-creditor of the insured. The only question much discussed in the New Jersey cases is whether the payment of premiums by an insolvent insured on a policy payable to, or for the benefit of, his wife and children is fraudulent as to creditors.*fn11
We recognize and respect the legislative purpose of this statute and others like it to assure that the provision which a man by his life insurance has made for the support of his wife and children after his death shall receive substantial protection against the claims of his creditors, G. P. Farmer Coal & Supply Co. et al. v. Albright, 1919, 90 N.J.Eq. 132, 106 A. 545. Yet, consistent with such respect, the Superior Court of Pennsylvania, in construing a similar Pennsylvania statute, has held that the essential scope of the act is the protection of the proceeds of a policy payable to the widow after the insured's death against the claims of general creditors of the estate. "It does not limit the powers of the insured during his lifetime, nor may it be invoked against an assignee-creditor who attempts to realize on his security". Lemley v. McClure, 1936, 122 Pa.Super. 225, 185 A. 878, 881. We believe this analysis is sound.
Moreover, the appellee had no interest in the policy at the time of the assignment. The original beneficiary was insured's daughter. Appellee was substituted as beneficiary after the assignment. In construing the Massachusetts statute (G.L.Mass., 1932) c. 175, § 126, which is almost identical in language with the one before us, the highest court of that state held that it was not the purpose of the statute to protect persons in the defendant's position - a substituted beneficiary and insured's widow - against persons who had acquired equitable rights in the policy itself before she acquired any rights in it. "[The statute] would not, we think, be fair and reasonable if it had the effect of depriving a party of an equitable right or title acquired in the policy before the married woman became a beneficiary without making any provision reimbursing such party in any way for the cost of acquiring that interest. A married woman is not in generl allowed to take property of her husband free of encumbrances, charges, and trust interests honestly acquired in his lifetime by third parties". Massachusetts Linotyping Corp. v. Fielding, 1942, 312 Mass. 147, 43 N.E.2d 521, 524. By parity of reasoning, the New Jersey statute does not help the widow here.
For the reasons set out above, the judgment below will be reversed with directions that judgment with costs be entered for appellant.