Are the proceeds of a term life policy community property or separate property of the spouse who pays the final premium? Our answer is an all too familiar one: it depends. We hold that the characterization "will depend on the ... premium for the final term of the policy." (Minnesota Mutual Life Ins. Co. v. Ensley (9th Cir. 1999) 174 F.3d 977, 983 (Minnesota Mutual Life Ins. Co.).) The effect of the rules governing characterization of term life insurance proceeds depends on multiple factors, including whether the policy contains certain contractual provisions, and the insurability of the insured spouse. The result is an unfortunately intricate methodology for allocating proceeds of term life insurance policies. Were we free to abandon community property jurisprudence and craft a simpler holding we might do so. We are not.
Here, the trial court failed to make findings sufficient to determine proper characterization of the proceeds. Therefore, we vacate the court's order, and remand for further factual findings and application of the rules we set forth herein.
In 1996, during the marriage of Becky J. Burwell
In September 2004, Becky petitioned for dissolution of her marriage with Gary.
Gary was served with a summons along with Becky's petition. The summons contained a number of automatic temporary restraining orders (ATROs). (See Fam. Code, § 2040; Cal. Rules of Court, rule 5.50(b).) The ATROs included the following text:
"2. cashing, borrowing against, cancelling, transferring, disposing of, or changing the beneficiaries of any insurance or other coverage including life, health, automobile, and disability held for the benefit of the parties and their minor child or children;
"3. transferring, encumbering, hypothecating, concealing, or in any way disposing of any property, real or personal, whether community, quasi-community, or separate, without the written consent of the other party or an order of the court, except in the usual course of business or for the necessities of life; and
"4. creating a nonprobate transfer or modifying a nonprobate transfer in a manner that affects the disposition of property subject to the transfer, without the written consent of the other party or order of the court. Before revocation of a nonprobate transfer can take effect, or a right of survivorship to property can be eliminated, notice of the change must be filed and served on the other party."
A status-only judgment of dissolution was entered in August 2005, and the court retained jurisdiction over all other issues. In November 2006,
In August 2008, Gary and Becky stipulated to a "further" judgment resolving some property issues. Though the stipulated judgment indicates that "the parties have reached an agreement with regard to the division of their marital property," five issues were explicitly reserved for a trial. One of the issues reserved for trial was "claims for breach of spousal fiduciary duty."
The stipulated judgment, signed by both parties, also states:
"16.
The judgment also fixed the separation date at September 21, 2004.
On October 7, 2008, Gary changed the beneficiary on the term life policy from Becky to Cynthia. Gary had not listed the policy in his preliminary or final disclosure declarations in the dissolution action. (See Fam. Code, §§ 2104, 2105.)
The trial on reserved issues contemplated by the prior stipulated judgment commenced in June 2009 before Judge John Somers and continued over several months. Several issues were adjudicated at the trial. The most contentious issue involved a community-asset business called Burwell Concrete, Inc. (BCI). The court was tasked with deciding whether approximately $2.5 million in postseparation income from BCI was community income or Gary's separate income. The trial also dealt with claims of breach of fiduciary duty.
The court eventually issued its ruling on May 16, 2011. First, the court ruled that (1) BCI had been awarded to Gary on August 21, 2008, and (2) postseparation income from BCI prior to August 21, 2008, was community income.
The court then ruled on the breach of fiduciary duty claims as follows: "[T]he court does not find a breach of fiduciary obligation in this case. There is no evidence that petitioner failed to meet her obligations of disclosure, or of good faith and fair dealing, in any way. Respondent's [(i.e., Gary's)] conduct is more problematic. Despite counsel's best efforts, there were often significant delays or problems in the disclosure of relevant financial information.... The disclosure issues, while problematic, are not sufficient in the court's view to establish breach of a fiduciary obligation in this case."
The court also ruled that Gary owed Becky (1) $105,195.49 in "back [spousal] support payments and interest"; (2) $125,000 in attorney fees; (3)
On April 17, 2010, after trial had commenced, but before the court had issued its aforementioned ruling, Gary committed suicide. Shortly after Gary's death, Becky filed a civil action to prevent the term life policy's proceeds from going to Cynthia. Becky also filed a probate action seeking letters of administration for Gary's estate.
Becky moved to consolidate the civil action with the dissolution proceeding. Cynthia opposed consolidation. In her opposition papers, Cynthia argued that there were "no remaining issues left to be determined in the family law matter." Her opposition papers further stated that she "is not a party to the action nor does she have any real interest in the outcome." The court denied the motion to consolidate, but ordered the civil action stayed.
Concurrent with her motion to consolidate, Becky filed a motion seeking adjudication of the insurance policy as an omitted asset. (See Fam. Code, § 2556.) Becky contended that she was entitled to 100 percent of the proceeds. She acknowledged that she was aware of the policy when it was purchased, but assumed Gary had let it lapse.
Becky argued she was entitled to the proceeds under three legal theories. First, Gary's purported change of beneficiary from Becky to Cynthia was void because it was made in violation of the ATROs. As a result, Becky was still the operative beneficiary under the policy. Second, Gary's failure to disclose the insurance policy in his disclosures violated Family Code section 1101, and therefore the proceeds should be awarded entirely to Becky under subdivision (h) of that section. Third, the court retained jurisdiction over omitted community property assets under the August 2008 stipulated judgment. She argued she was entitled to half the proceeds as her share of the community asset. She also claimed the other half of the proceeds because they exceeded the amount of debt Gary owed her. These included amounts Gary allegedly owed her under the August 2008 stipulated judgment and "anticipated amounts [Gary] will owe [Becky] once Judge Somers makes his ruling [after the trial on reserved issues]." Becky subsequently filed a "Supplemental Memorandum of Points and Authorities" raising a fourth theory of recovery. In that filing, Becky argued that Gary's purported change of beneficiary must be set aside as a fraudulent transfer under section 3439.04 of the Civil Code.
Judge Susan M. Gill ruled on the motion in an order dated November 9, 2011.
The court found that Gary failed to disclose the policy and thereby violated his fiduciary duty to Becky. As a result, the policy was deemed an omitted asset and was "neither distributed in the Judgment on Reserved Issues, nor included in Judge Somers' ruling of April 1, 2010." Therefore, the ATROs continued to apply to the asset, and Gary's change of beneficiary to Cynthia "is void."
The court ruled that the policy was a community asset. The ruling contained no analysis of the characterization issue, but did cite to Estate of Logan (1987) 191 Cal.App.3d 319, 326 [236 Cal.Rptr. 368] (Logan) and In re Marriage of Gonzalez (1985) 168 Cal.App.3d 1021, 1024-1026 [214 Cal.Rptr. 634].
The court ordered one-half of the $1 million proceeds distributed to Becky "as her share of this community property asset." The court ordered that the remaining half of the proceeds "shall become part of [Gary's] estate." The order notes that Becky is a creditor of the estate "and the Probate Court must resolve the issue of what priority to give [Becky's] creditor claims against [Gary's] estate."
Cynthia filed a notice of intent to move for a new trial, seeking an order "(1) setting aside the ruling signed on November 7, 2011, that awards one-half of the term life insurance proceeds to Becky ... and (2) granting [a] new trial." (See fn. 6, post.)
Cynthia also filed a notice of appeal from the November 9, 2011, order. Becky filed a notice of cross-appeal from the same order.
Cynthia filed a motion to augment the appellate record with an October 22, 2009, transcript of testimony from the trial on reserved issues. Becky opposed the motion to augment and requested that we strike certain portions of Cynthia's opening brief referencing the transcript and certain portions of appellant's appendix, volume II. Becky contends these documents pertained to the trial on reserved issues before Judge Somers and were not before Judge Gill when she issued the appealed order. We granted the motion to augment the record, but did not "resolve the transcript's relevance to any issue on appeal or whether the court will consider the reporter's transcript on review." We previously deferred ruling on Becky's motion to strike pending further order of this court. We now deny it.
Becky moved this court to dismiss Cynthia's appeal for lack of standing. We previously deferred ruling on the dismissal motion. For the reasons explained below, we now deny that motion as well.
Appellate standing is conferred by section 902 of the Code of Civil Procedure. (Rao v. Campo (1991) 233 Cal.App.3d 1557 [285 Cal.Rptr. 691]; see Code Civ. Proc., § 902.) That statute provides, in relevant part, that "[a]ny
In her motion to dismiss, Becky argues Cynthia was not a "party" to the action below and therefore lacks standing. She does not contend Cynthia was not "aggrieved" by the order from which she ostensibly appeals.
The California Supreme Court held in Carleson that "one who is legally `aggrieved' by a judgment may become a party of record and obtain a right to appeal by moving to vacate the judgment pursuant to Code of Civil Procedure section 663." (Carleson, supra, 5 Cal.3d at p. 736.) As Becky argues in her motion, "Cynthia did not move to vacate the judgment under Code of Civil Procedure section 663." But, Cynthia did file a motion seeking to "set aside" the subject order under Code of Civil Procedure section 657.
For the reasons explained below, we view the Supreme Court's reference to Code of Civil Procedure section 663 in Carleson (Carleson, supra, 5 Cal.3d 730) as merely identifying one type of motion to vacate that will confer "party" status on the movant for purposes of appellate standing. In this context, we see no relevant distinction between a motion seeking to set aside a decree (Code Civ. Proc., § 663) and a motion seeking to "vacate[]" a "decision" (Code Civ. Proc., § 657). Thus, we believe the most faithful application of Carleson would permit an appeal here, where the appellant moved to set aside the judgment in the lower court.
In support of its holding in Carleson, the Supreme Court cited to five cases: Eggert v. Pac. States S. & L. Co. (1942) 20 Cal.2d 199, 201 [124 P.2d 815] (Eggert); In re Elliott (1904) 144 Cal. 501 [77 P. 1109] (Elliott); Estate of Partridge (1968) 261 Cal.App.2d 58 [67 Cal.Rptr. 433]; Estate of Sloan (1963) 222 Cal.App.2d 283 [35 Cal.Rptr. 167]; and Butterfield v. Tietz (1966) 247 Cal.App.2d 483 [55 Cal.Rptr. 577] (Butterfield). (Carleson, supra, 5 Cal.3d at pp. 736-737.)
In all of these cases, there was no indication that a person must file a motion seeking to vacate the judgment under a particular statute. To the contrary, in Estate of Sloan, the court described Eggert and other cases as holding that a party must "move to vacate or otherwise formally oppose the judgment appealed from below." (Estate of Sloan, supra, 222 Cal.App.2d at p. 292, italics added.) Likewise, the remainder of the cases do not require the motion to vacate be made pursuant to any particular statute.
Thus, we view Carleson's reference to Code of Civil Procedure section 663 as merely identifying the statute under which that case's particular motion was brought. We do not view the statutory citation as limiting the scope of Carleson's holding. (Carleson, supra, 5 Cal.3d 730.)
Here, Cynthia's motion sought to "set[] aside the ruling signed November 7, 2011 ...," and was therefore a motion seeking to vacate the order for purposes of the Carleson rule. Contrary to Becky's contention in her motion to dismiss, Cynthia is a "party" for purposes of appellate standing. (See Carleson, supra, 5 Cal.3d at pp. 736-737.)
Next, we address the characterization of term life insurance proceeds.
Here, we must apply these principles to term life insurance proceeds.
In Logan, the First District held that term life insurance policies only remain community property after separation for as long as community funds are used to pay the premium. (Logan, supra, 191 Cal.App.3d at p. 325.) Otherwise, if the insured remains insurable, the term policy is not a divisible community asset because "the policy is of no value and the community has fully received what it bargained for." (Id. at pp. 325-326.) In dictum, Logan indicated that "[i]f the insured becomes uninsurable during the term paid with community funds, then the right to future insurance coverage which cannot otherwise be purchased is a community asset to be divided upon dissolution." (Id. at p. 326.) In Marriage of Spengler, supra, 5 Cal.App.4th 288, the Third District agreed with the holding of Logan but disagreed with its dictum. (Marriage of Spengler, supra, at p. 293.)
Conversely, in Biltoft v. Wootten (1979) 96 Cal.App.3d 58 [157 Cal.Rptr. 581] (Biltoft), the Fourth District held that proceeds from term life insurance "must be apportioned between community and separate property in the same
We believe Biltoft and Woodmen err in analyzing the relevant property interests at the wrong level of abstraction. That is, those opinions generally identify the property interest as the entire insurance policy. We believe the proper unit of analysis is the individual contractual rights conferred by the policy. As was said in an analogous context, "[t]he Court of Appeal's ... analysis rests on the erroneous legal assumption that [the asset] was ... unitary and indivisible.... It is not." (In re Marriage of Sonne (2010) 48 Cal.4th 118, 127 [105 Cal.Rptr.3d 414, 225 P.3d 546].)
Each premium payment gives rise to an enforceable contractual right of coverage for an additional period of time. As premiums are paid over the life of the policy, distinct property interests in coverage for various periods of time arise. Of those distinct property interests, only one is worth anything in hindsight: coverage for the term during which the insured dies.
As we will explain, Biltoft and Woodmen's misidentification of the relevant property interests leads to their erroneous characterization of the proceeds and the needless deaths of countless straw men.
Biltoft and Woodmen first reject the argument that each premium payment does not create a new contract. They are correct to discredit this notion. The relevant "property" is not a unitary and indivisible interest in the entire policy contract, but in the individual enforceable contractual rights derived from it. (See Civ. Code, § 953; cf. Marriage of Brown, supra, 15 Cal.3d at p. 845 ["a
Biltoft and Woodmen next assert "it would be unreasonable to hold that the payment of the premiums ... would convert the entire proceeds...." (Biltoft, supra, 96 Cal.App.3d at p. 61; Woodmen, supra, 113 Cal.App. at p. 732.) This is true, as far as it goes. The separate estate's subsequent payment of the premium does not "convert" the community's "proceeds." But the point is they were never the community's proceeds to begin with. The proceeds belong to whomever the insurance company is contractually obligated to pay. In other words, the valuable property interest is the enforceable contractual right to compel payment of the proceeds. (See Civ. Code, § 953; cf. Marriage of Brown, supra, 15 Cal.3d at p. 845 ["a contractual right is ... a chose in action, a form of property (see Civ. Code, § 953; [citation]) ..."].) In this context, that contractual right is the coverage during which the insured dies. The community did not acquire this contractual right. Instead, the community paid for, and received in full, a different contractual right: the right to be paid upon a contingency that ultimately failed. The important aspect of this contractual right is not that it has been converted or appropriated by the separate estate (it has not). The pivotal attribute of the community's interest is its complete lack of value. It does not entitle its holder to the policy proceeds and never will. The right to be paid if the insured dies between January 1 and January 31 becomes forever worthless on February 1 if the insured is alive. That is how term insurance works.
Even Logan briefly falls prey to this erroneous "conversion theory." Logan states: "If, as is usually the case, the insured is insurable at the end of the term purchased with community funds, the renewed policy, that is, the term policy purchased by the payment of the premium with postseparation earnings which are separate property ... changes character from community to separate property." (Logan, supra, 191 Cal.App.3d at pp. 324-325, italics added.) We disagree. The reason the community is not entitled to the
"[I]t is ... well established that, upon separation of the parties or dissolution of marriage, one spouse is not entitled to appropriate a community asset for his or her own use without reimbursing the community for the value of the appropriated asset." (In re Marriage of Elfmont (1995) 9 Cal.4th 1026, 1039 [39 Cal.Rptr.2d 590, 891 P.2d 136] (conc. & dis. opn. of George, J.) (Marriage of Elfmont).) The community must be reimbursed to the extent it owns or has an interest in the contractual rights used by the separate estate to obtain the final coverage term. As explained, post, this concept is relevant where the insured spouse becomes medically uninsurable during a term paid for by the community.
A person is medically uninsurable if they are "unable to obtain individual life insurance." (Spengler, supra, 5 Cal.App.4th at p. 291.) A person may become uninsurable because of the condition of his or her health. (Cf. United States v. Ryerson (1941) 312 U.S. 260, 262 [85 L.Ed. 819, 61 S.Ct. 479].) Sometimes, a person who becomes medically uninsurable may nonetheless continue existing coverage by virtue of a contractual right to renew his or her policy. (Marriage of Elfmont, supra, 9 Cal.4th at p. 1034.) This is referred to as the "right of renewal." (Ibid.)
The right of renewal is an enforceable contractual right and a property interest. (See Civ. Code, § 953; see also Marriage of Brown, supra, 15 Cal.3d at p. 845 ["a contractual right is ... a chose in action, a form of property (see Civ. Code, § 953; [citation]) ..."].) The community initially purchased this
The cap itself is a contractual right to be charged premiums at or below a maximum amount. Both the separate and community estates have paid premiums to maintain this contractual right. Thus, if the insured spouse renews the policy postseparation, and the premiums would have been higher without the premium cap, the insured spouse has necessarily appropriated property which the community acquired and helped maintain.
For example, consider the following hypothetical. The community pays 50 percent of the premiums over the life of a policy. Without the premium cap, the insured spouse would have had to pay $1,000 for the premium for the final coverage term. However, because of the premium cap, the insured spouse only had to pay a $400 premium for the final coverage term.
50% × $600 $300 3 ___________ → ______ → __ $600 + $400 $1,000 10
In this scenario, the community would be entitled to three-tenths, or 30 percent, of the proceeds.
We cannot apply these principles to the proceeds at issue here because there is an insufficient factual record. To determine which characterization and/or apportionment method applies, there must be findings of fact on (1) whether Gary paid the postseparation premiums with (a) separate funds, (b) funds attributable to his community estate with Becky, or (c) funds attributable to his community estate with Cynthia (or some combination); (2) if Gary paid the premiums with separate funds, whether he was medically insurable when he began doing so; and, if so, (3) whether Gary could have purchased a comparable policy at a comparable price when he began paying premiums with separate funds (and if not, how much more expensive would the premiums have been without the premium cap).
We therefore vacate the order adjudicating the policy proceeds. We remand for the trial court to make these factual findings, and to apply the law as expressed in this opinion to the facts so found.
None of the parties' remaining contentions alter this disposition, as we will now explain in the unpublished portion of the opinion.
The trial court's order that the "term life insurance policy was a community asset of the parties" is vacated. The matter is remanded for further evidentiary proceedings to determine the proper characterization and distribution of the term life insurance policy proceeds in accordance with this opinion.
Franson, J., and Peña, J., concurred.
The exhibits are properly before us. We may augment the record to include "[a]ny document filed or lodged in the case in superior court...." (Cal. Rules of Court, rule 8.155(a)(1)(A), italics added.) "By the explicit terms of the rule it is not a prerequisite to augmentation that the requested documents be offered or used on the trial or hearing below." (People v. Preslie (1977) 70 Cal.App.3d 486, 490 [138 Cal.Rptr. 828].) Becky's motion to strike portions of appellant's appendix and opening brief is denied.
The notice of intention to move for a new trial is itself the motion for a new trial. (Code Civ. Proc., § 659, subd. (b).) Cynthia very well may have failed to file a memorandum of points and authorities or supporting affidavits or some other documents to support the motion. And, if true, that failure alone could have been grounds for denial. (See Cal. Rules of Court, rule 3.1600(b).) But for purposes of standing, we are concerned with whether Cynthia made the subject motion, not whether it was successful. That is, we are determining whether Cynthia took "`appropriate steps to become a party of record in the proceedings'" (In re Silvia R., supra, 159 Cal.App.4th at p. 345, fn. 3) not whether those efforts were meritorious.
Here, there is no provision for unilateral termination of the policy by the insurer. Nor do we find any analogous provision that would render the contractual right a mere expectancy.
