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In re Garcia

United States District Court, D. Arizona

February 7, 2017

IN THE MATTER OF Juan D. Garcia (deceased) and Teresa A. Garcia, Debtors.
v.
Lawrence J. Warfield, Appellee. Teresa A. Garcia, Appellant, BK No. 0:15-bk-06493-BMW

          ORDER

          David G. Campbell United States District Judge.

         Debtor Teresa Garcia appeals an order of the bankruptcy court sustaining Trustee Lawrence J. Warfield's objection to her claimed exemption for group life insurance proceeds paid to her as a surviving spouse. Doc. 8. Trustee asks the Court to affirm the bankruptcy court's decision. Doc. 9. The appeal is briefed, and no party has requested oral argument. Docs. 8, 9. For reasons set forth below, the Court will reverse the bankruptcy court's decision.

         I. Background.

         The following facts are undisputed. Doc. 8 at 6; Doc. 9 at 4.[1] On May 26, 2015, Juan Garcia and Debtor Teresa Garcia jointly filed a Chapter 7 bankruptcy petition. Doc. 8 at 6. On July 18, 2015, Mr. Garcia passed away. Id. Mr. Garcia had a group life insurance policy through his employer, PepsiCo, and Debtor became entitled to group life insurance proceeds of $158, 000.00. Id. On August 11, 2015, Debtor filed an amendment to the schedules and statements, claiming that the insurance proceeds were exempt from the claims of her creditors under A.R.S. § 20-1132. Id. On February 2, 2016, Trustee filed an objection, asserting that § 20-1132 did not apply and that Debtor was entitled to an exemption of only $20, 000.00 under A.R.S. § 33-1126. Bankr. Doc. 39.[2] The bankruptcy court sustained Trustee's objection, and Debtor filed this appeal.

         II. Standard of Review.

         Under 28 U.S.C. § 158(a)(1), the Court has jurisdiction over appeals from final judgments, orders, and decrees of bankruptcy judges. The Court reviews the bankruptcy court's conclusions of law de novo and its findings of fact for clear error. In re JTS Corp., 617 F.3d 1102, 1109 (9th Cir. 2010). This appeal presents a purely legal question.

         III. Discussion.

         In 1954, the Arizona legislature enacted a comprehensive insurance code. See Arizona Insurance Code Act, ch. 64 (Senate Bill No. 1), 21 Ariz. Sess. Laws 80, App'x A (1954). The Act included a provision aimed at protecting proceeds of group life insurance policies from the claims of creditors. Id. at Art. 11, Sec. 32 (page 111 of App'x A). The provision's language is substantially similar to the National Convention of Insurance Commissioners' (“NCIC's”) standard language proposed in 1918, which has been adopted (either with the same or similar language) by approximately 25 states. See In re Fahey, 352 B.R. 288, 291 (Bankr. D. Colo. 2006).

         The provision relevant to this case was codified as A.R.S. § 20-1132, which reads:

A policy of group life insurance or the proceeds thereof, payable to the individual insured or to the beneficiary thereunder shall not be liable, either before or after payment, to be applied by any legal or equitable process to pay any liability of any person having a right under the policy.

A.R.S. § 20-1332(A). This appeal presents an issue of first impression for this Court regarding the statutory interpretation of this section.

         Debtor argues that the bankruptcy court erred by holding that § 20-1332 does not apply to her situation, and by denying her request to exempt all proceeds of her late husband's group life insurance policy from her creditors. Doc. 8 at 6. Trustee asserts that the bankruptcy court did not err and that its decision should be affirmed because § 20-1332 protects the proceeds of a group life insurance policy only from creditors of the purchaser and the insured, not from creditors of the beneficiary. Doc. 9 at 5-11.

         A. Liberal interpretation of exemption statutes.

         Under both federal and Arizona law, exemption statutes are to be liberally construed in favor of a debtor who claims an exemption. In re Thiem, 443 B.R. 832, 837-38 (Bankr. D. Ariz. 2011) (citing In re Arrol, 170 F.3d 934, 937 (9th Cir. 1999); Gardenhire v. Glasser, 226 P. 911, 912 (Ariz. 1924); In re Herrscher, 121 B.R. 29, 31 (Bankr. D. Ariz. 1989)). The exemption laws in Arizona “were not created merely for the purpose of conferring a privilege on a debtor, but to shelter the family and thereby ...


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