Exempting life insurance after Wornick decision: MacDonald

In re MacDonald 08-11741 (Decision March 10, 2009; Judge Bucki, Buffalo) Motion by debtors to compel trustee to return life insurance proceeds turned over pursuant to the 2002 decision in Teufel etc. Prior to 2008, Western District of New York courts held that when a husband and a wife both file bankruptcy and one spouse has a life insurance policy with cash value and the other spouse as the beneficiary, the bankruptcy trustee, as trustee for both the owner and beneficiary of the policy, could claim in the cash value. The Second Circuit overruled this line of cases Wornick v. Gaffney 554 F3d 486, decision 9/24/08, and ruled that the cash value of reciprocal life insurance policies in joint cases are exempt. The MacDonald debtors then amended their exemptions to add the life insurance and then moved to have the trustee return funds previously turned over. Judge Bucki granted that motion, noting that the exemption issue had not previously been litigated in this particular case, so no “law of the case” had been established to preclude the debtors from exempting the asset now.