Banking Law Alert – June 2016 Edition

KNOW THE FRAUDULENT CONVEYANCE LAWS TO PROTECT YOUR INTERESTS

In the case of State Bank of Reeseville v. Shea, the Tennessee Court of Appeals dealt with the issue of Tennessee Statutes dealing with exempt life insurance proceeds.  The State Bank of Reeseville, a Wisconsin bank (“Bank”), made a loan to Reeseville 16, LLC (the “LLC”) for construction of a facility.  The principals of the LLC, Mr. and Mrs. Shea, signed personal guaranties of the LLC’s loan.

Approximately two years after the closing of the construction loan, Mr. Shea committed suicide leaving two life insurance policies with his wife as the beneficiary. After the suicide, the LLC defaulted on the loan, the Bank filed foreclosure proceedings in Wisconsin and for judgment against Mrs. Shea for default under the terms of her personal guaranty.  A default judgment was entered in favor of the Bank against Mrs. Shea in the amount of $239,000.00.

Two months after the Bank obtained the judgment in Wisconsin, Mrs. Shea purchased real property in Chattanooga, Tennessee with proceeds from her husband’s life insurance policies. Shortly thereafter, she quitclaimed the property to her father without consideration.

Following the transfer of the property by Mrs. Shea, the Bank filed two actions in Tennessee: (1) an action to enforce a foreign judgment against Mrs. Shea; and (2) a complaint against Mrs. Shea alleging that she made a fraudulent conveyance of property in an attempt to hide assets from collection efforts.  The Trial Court ruled in favor of the Bank that the conveyance by Mrs. Shea was fraudulent and should be set aside.

Mrs. Shea appealed the Trial Court’s ruling, claiming that the life insurance proceeds were exempt under TCA §56-7-203. Specifically, TCA §56-7-203 provides in pertinent part that the net amount payable under any life insurance policy upon the life of any person made for the benefit of his or her spouse or children is exempt from all claims of creditors of the deceased person.

The Court of Appeals pointed out that Tennessee cases have long upheld the enforceability of that statute. However, the Court of Appeals pointed out that life insurance proceeds are not exempt from claims of creditors of the surviving beneficiaries.  In the Bank of Reeseville case, Mrs. Shea was a direct creditor to the Bank under her personal guaranty.  As such, being a direct creditor, the proceeds of the life insurance policy, once they came into Mrs. Shea’s hands, became subject to her creditors’ claims.  Accordingly, the Court of Appeals ruled that Mrs. Shea could not claim an exemption from the judgment of the Bank under TCA §56-7-203.

OUR RECOMMENDATION:  It is important that banks understand the exemptions from execution in Tennessee.  There are a number of statutes that are protective of the debtors.  However, in the State Bank of Reeseville case, the Bank prevailed because of the ability to understand when certain exemptions do not apply.

CAUTION TO THE UNWARY: Had the facts in the State Bank of Reeseville case been slightly different, the Bank would have lost.  For example, had only Mr. Shea signed a personal guaranty, and Mrs. Shea not been obligated herself, the life insurance proceeds from Mr. Shea’s death going to Mrs. Shea would have been exempt under TCA §56-7-203.  The cautious approach is to do one or both of two things:  (1) be sure both spouses sign a guaranty for the entity’s debt; and/or (2) get a collateral assignment of the life insurance proceeds from the obligor to secure the loan.  Then the life insurance proceeds would be paid first to the Bank to the extent of the outstanding loan balance.