Legg v. St. John

Background

On March 8, 1934, a Tennessee resident who had become totally and permanently disabled before that date was adjudged a bankrupt. He held a life insurance policy and a supplementary contract that, in return for a separate premium, paid $174.52 per month if he was totally and permanently disabled before age 60. The company had waived premiums and paid benefits before the bankruptcy. The bankrupt asked that the policy and future disability payments be exempt from the trustee’s claim. The referee, district court, and Court of Appeals held that the disability payments were estate property, allowed the bankrupt a $40 monthly exemption under Tennessee law, and gave the trustee the remaining $134.52. The Supreme Court granted review and affirmed.

Reasoning

The Court addressed whether future disability payments were the bankrupt’s exempt insurance or property that passed to the trustee. It held the supplementary disability contract was not the kind of "insurance" covered by § 70(a) of the Bankruptcy Act, which refers to legal reserve life insurance with a cash surrender value. The supplementary contract was a separate obligation, had no cash surrender value, and covered a different hazard with a different beneficiary and premium. The Court also found the right to these payments was acquired before adjudication, not future earnings, so it passed to the trustee unless a state law exemption applied. Tennessee’s statutes exempt certain life insurance benefits for wife and children but do not exempt disability payments to the insured in this case.

Real world impact

As a result, prepaid disability payments like these are estate assets available to trustees, with only whatever narrow state exemptions apply. In this case the bankrupt kept a $40 monthly exemption and the trustee received $134.52. The decision clarifies that supplemental disability benefits bought and paid for before bankruptcy generally transfer to the estate rather than remain exempt personal income.