Mr. Will B. Crowley for petitioner.
Mr. Justice McKenna delivered the opinion of the court:
The question in this case is whether the cash surrender value of a policy of insurance under 70-2-5 of the bankruptcy act must be provided for in the policy, or whether it be sufficient if the policy have such value by the concession or practice of the company. Section 70 provides that 'the trustee of the estate of a bankrupt, upon his appointment and qualification, . . . shall in turn be vested by operation of law with the title of the bankrupt as of the date he was adjudged a bankrupt, except in so far as it is to property which is exempt, to all (1) documents relating to his property . . . (3) powers which he might have exercised for his own benefit, but not those which he might have exercised for some other person . . . (5) property which, prior to the filing of the petition, he could, by any means, have transferred, or which might have been levied upon and sold under judicial process against him: Provided, That when any bankrupt shall have any insurance policy which has a cash surrender value payable to himself, his estate or personal representatives, he may, within thirty days after the cash surrender value has been ascertained and stated to the trustee by the company issuing the same, pay or secure to the trustee the sum so ascertained and stated, and continue to hold, own, and carry such policy free from the claims of the creditors participating in the distribution of his estate under the bankruptcy proceedings; otherwise the policy shall pass to the trustee as assets.' [30 Stat. at L. 565, chap. 541, U. S. Comp. Stat. 1901, p. 3451.]
The respondent and his sons, individually and as composing the copartnership of J. M. Mertens & Company, were declared bankrupts, and petitioner was elected the trustee of their estate October 14, 1903
At the time the petition in bankruptcy was filed Mertens held four life insurance policies issued by the Equitable Life Assurance Society of the United States. One of the policies, payable to his wife if she should survive him, has been dropped from this controversy. The other three policies were payable [205 U.S. 202, 206] to Mertens at his death, his executors, administrators, or assignees. They were subject to certain claims arising from their having been assigned as security for certain loans. With these we are not concerned.
A dispute arose as to the ownership of the policies, and the trustee filed a petition in the district court for the determination of the ownership of them, and that Mertens be required to make an assignment of them to the trustee. Mertens answered, alleging that the policies had, by law and the regular practice of the Equitable Life Assurance Society, a cash surrender value which he had sought to pay to the trustee, and was ready and willing to pay; that it was the uniform practice of the society to pay, upon the surrender of such policies and on policies issued on any of the blank forms shown by the policies, the cash value thereof 'determined in accordance with a fixed and definite method of computation, and stated on demand by any policy holder or person in interest;' that the society, pursuant to law and in accordance with its practice, had stated to him and declared the cash surrender value of each of the policies and its readiness and willingness to pay such value upon the surrender of the policies. The values were stated.
The matter was referred to a special master to take the proofs and report the same, with findings of fact and conclusions of law. Proofs were taken and a report made in accordance with the order of the court. The master, in his report, describing the policies, said:
It appeared from the testimony that, as a matter of fact, policies of the character of those in controversy had, under the practice of the company, cash surrender values, if offered for surrender within six months from the date of the nonpayment of any premium. Explaining this, a witness said: 'To make clear the replies of previous questions I will state that the Equitable Life Assurance Society would decline to purchase for cash a policy during the period for which premiums had been paid, entitling the policy holder to protection for the face value, for the reason that, in the event of the death of the holder of that policy before the expiration of the period for which premiums had been paid, the question would be raised as to the liability of the company, so that the payment of an amount of cash for the surrender of a policy is only made by the company after that policy has lapsed by reason of the nonpayment upon its due date.' And it was testified that the cash surrender values of policies was determined by a fixed and definite method of computation, uniform in all cases, and had, without exception, been paid to persons insured by the company. It further appeared that the surrender values of the policies in controversy were as follows: Policy No. 274,445, $5,905.65; policy No. 417, 678, $2,272.56; policy No. 417,171, $6,574.00. [205 U.S. 202, 208] It was further testified that the surrender value of each policy was equivalent to the amount of a paid-up policy, which the company was willing to give. Or, as expressed by a witness, 'it is equivalent to the percentage reserved under that policy (referring to policy No. 274,445), which the company is willing to pay in consideration of the surrender.'
The district court held that the policies had no cash surrender value within the meaning of 70 of the bankrupt act. The court said:
The court cited, to sustain its siews, Re Welling, 51 C. C. A. 151, 113 Fed. 189, and Re Slingluff, 106 Fed. 154.
An order was entered requiring Mertens to assign the policies [205 U.S. 202, 209] to the trustees. It was reversed by the circuit court of appeals. The latter court, however, said that it 'should be inclined to concur with these views [expressed in Re Welling] and to sustain the conclusion of the district judge in the cause at bar, that 'no policy is understood to have a cash surrender value unless provided for in the policy so as to be enforceable by the insured,' were it not for a subsequent expression of opinion by the Supreme Court. This is found in Holden v. Stratton, 198 U.S. 214 , 49 L. ed. 1022, 25 Sup. Ct. Rep. 660, as follows:
The court observed that the extract from Holden v. Stratton was obiter to the questions decided in the case, but considered it such an explicit declaration of views that the court expressed hesitation to disregard it.
We are hence confronted with the problem whether the obiter of Holden v. Stratton shall be pronounced to be the proper construction of 70 of the bankrupt act. We may remark at the commencement that that obiter was not inconsiderately uttered, nor can it be said that it was inconsequent to the considerations there involved. It was there necessary to determine between conflicting decisions of two [205 U.S. 202, 210] circuit courts of appeals upon the effect of state statutes of exemption from liability for debts, and a careful consideration of 6 of the bankrupt act, which provided for exemptions, and 70, which defined the property which passed to the trustee, was necessary to be made and their proper effect and relation determined. As elements in that consideration the meaning and scope of 70 were involved and the purpose of Congress in its enactment. Section 6 provides for exemptions 'prescribed by the state laws.' Section 70 vests the title of all the property of the bankrupt in the trustee, 'except in so far as it is to property which is exempt.' Then, after a designation of the property the title to which is transferred, follows the proviso in regard to insurance policies. It was argued that the proviso would be meaningless unless considered as wholly disconnected from the clause as to exempt property, and this court replied:
And, contemplating the proviso as having such purpose, [205 U.S. 202, 211] the court used the language quoted by the circuit court of appeals, and expressed the view that, as between the two constructions that had been made of the terms, 'cash surrender value,' whether they meant a stipulation in the contract or the recognition by the company, the latter harmonized with the practice under the bankrupt act of 1867 [14 Stat. at L. 517, chap. 176], and tended to elucidate and carry out the purpose contemplated by the proviso as the decision construed it. And the precedent practice is necessarily a strong factor and would be so even if it had a less solid foundation in reason. It is nowhere better expressed than in Re McKinney, supra. It is there pointed out that the foundation of the surrender value of a policy is the excess of the fixed annual premiums in the earlier years of the policy over the annual risk during the later years of the policy. 'This excess,' it was said, 'in the premium paid over the annual cost of insurance, with accumulations of interest constitutes the surrender value.'
Though this excess of premiums paid is legally the sole property of the company, still in practical effect, though not in law, it is moneys of the assured, deposited with the company in advance, to make up the deficiency in later premiums to cover the annual cost of insurance instead of being retained by the assured, and paid by him to the company in the shape of greatly increased premiums when the risk is greatest. It is the 'net reserve' required by law to be kept by the company for the benefit of the assured and to be maintained to the credit of the policy. So long as the policy remains in force the company has not practically any beneficial interest in it, except as its custodian, with the obligation to maintain it unimpaired and suitably invested for the benefit of the assured. This is the practical, though not the legal, relation of the company to this fund.
In Re Newland, supra, it was said that the present value of a policy is its cash surrender value, and but for that 'it could not be said to have any appreciable value. Parker v. Anglesey, 20 Week. Rep. 162, 25 L. T. N. S. 482.'
There is no expression in either of the cases that the cash surrender value depended upon contract as distinct from the usage of companies. And 70 expresses no distinction. At the time of its enactment there were policies which stated a surrender value and a practice which conceded such value if not stated. If a distinction had been intended to be made it would have been expressed. Able courts, it is true, have decided otherwise, but we are unable to adopt their view. It was an actual benefit for which the statute provided, and not the manner in which it should be evidenced. And we do not think it rested upon chance concession. It rested upon the interest of the companies and a practice to which no exception has been shown. And that a provision enacted for the benefit of debtors should recognize an interest so substantial and which had such assurance was perfectly natural. What possible difference could it make whether the surrender value was stipulated in a policy or universally recognized by the companies? In either case the purpose of the state would be subserved, which was to secure to the trustee the sum of such value and to enable the bankrupt to 'continue to hold, own, and carry such policy free from the claims of the creditors participating in the distribution of the estate under the bankruptcy proceedings.'
Counsel for petitioner argues that the policies are mere investments, and intimates the injustice of keeping them from the trustee, and illustrates the comment by contrasting what the company would have paid as the surrender value of policy No. 274,445, if default had been made in payment [205 U.S. 202, 213] of premiums, and what the company would pay six months thereafter. The contrast is between $5,905.65 and $11,318.40. But this is the result of the age of the policy, and cannot be a test of other policies or of the construction of the law. And a precisely like effect would result if the policy expressed a surrender value, in which case it is conceded, it would come under the law. The same comment is applicable to other arguments of petitioner which tend to confound the distinction between surrender value and other value. Section 70 deals with the former, and makes it the conditions of the relative rights of the bankrupt and the trustee of his estate. Pursuing the argument farther, it is said that 'the right to participate in the profits was a part and parcel of the policy and of the privileges enjoyed thereunder;' and it is further observed that the difference between the value of the policy which was used for illustration, 'if lapsed on September 8, 1903, given as $5,905.65, and its value on March 8, 1904, $11,318.40, is chiefly made up of the value of this right to participate in profits.' And counsel for petitioner is disposed to think the contention absurd that the bankruptcy law contemplated that such a valuable right 'could be absolutely wiped out and taken from the trustee in such a case as this by allowing the bankrupt to take up the policy by paying what the bankrupt here claims to be the surrender value.' Such result would not appear to be absured if the policy were only two years old instead of nineteen years. Manifestly a policy cannot be declared in or out of the law according to its age, nor can anything be deduced from the investment features of tontine policies. Such policies were decided to be covered by the law in Holden v. Stratton. Whether the law should have included them is not our concern. Whatever may be said against it, it has seemed best to the legislature to encourage the extra endeavor and sacrifice which such policies may represent.
It is further contended that respondent has not made out that the policies have a cash surrender value, because it appears [205 U.S. 202, 214] from the evidence that the company would not accept their surrender until they had lapsed, and that they had not lapsed either when the petition was filed or the bankruptcy adjudged. But this is tantamount to saying that no policy can ever have a surrender value. According to the testimony, policies which have a stipulation for such value are subject to the same condition. And there is nothing in the record to show that the practice and policies of other companies are not the same as those of the Equitable Life Assurance Society. Section 70 is broad enough to accommodate such condition. It permits the redemption of a policy by the bankrupt from the claims of creditors by paying or securing to the trustee the cash surrender value of the policy 'within thirty days' after such value 'has been ascertained and stated to the trustee by the company issuing the same.'