Holden v. Stratton

Background

A married couple who had taken out life and accident insurance claimed the cash proceeds were protected from creditors under a Washington law first passed in 1895 and amended in 1897 to include accident policies. A bankruptcy trustee argued the policies were not exempt under the federal Bankruptcy Act because of a proviso in section 70a, and also challenged the state law’s validity and its coverage of the particular policies, some of which named the wife as beneficiary or allowed a cash surrender value.

Reasoning

The Court addressed whether the federal law (section 6) that adopts state exemptions was limited by the proviso in section 70a. The Court read section 6 broadly and held that section 70a simply lists the kinds of property that pass to a trustee, while expressly excluding property that is exempt. The proviso, the Court explained, was meant to protect the functioning of non‑exempt policies by allowing payment of a surrender value, not to override state exemptions. The Court also found the Washington exemption law broad enough to include the challenged policies and saw no constitutional defect in the state statute as applied prospectively.

Real world impact

As a result, the specific life and accident policies at issue were treated as exempt under Washington law and not assets for the trustee to distribute. The Court reversed the Court of Appeals and affirmed the District Court’s judgment, vindicating the debtors’ claim of exemption and limiting trustees’ ability to take such policy proceeds in similar circumstances.