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January 26, 1959


The opinion of the court was delivered by: LA Buy, District Judge.

The parties have stipulated the facts in the above cause.

The sole question to be decided is whether the plaintiff, named beneficiary in certain life insurance policies of decedent and joint owner of certain stocks which had been pledged as collateral with consent of the plaintiff to secure a loan of decedent, is entitled to recover the amount thereof from the trustees of the testamentary trust. After cashing the said policies and stock certificates, the creditor released other collateral also deposited as security for the loan to the decedent's estate. The estate was closed and an order of distribution was entered distributing the estate assets to the testamentary trustees.

The plaintiff's suit is premised on the principle of subrogation — that is, that the beneficiary of a life insurance policy pledged as security for the debt has the right to be subrogated to the pledgee's claim against the insured's estate for the amount paid to the pledgee out of the proceeds of the policy. Such a right has been said to be dependent upon the particular facts and circumstances of the case and a determining factor is the intention of the insured. See Annotation, 83 A.L.R. 77; Barbin v. Moore, 1932, 85 N.H. 362, 159 A. 409, 83 A.L.R. 62; Annotation, 160 A.L.R. 1389; Smith v. Coleman, 1945, 184 Va. 259, 35 S.E.2d 107, 160 A.L.R. 1376. No Illinois cases have been cited by the parties on this application of the principle of subrogation.

The court finds the reasoning in Smith v. Coleman, supra, helpful and persuasive. The Virginia Supreme Court of Appeals held that if no change was made in the policy, upon the death of the insured the right of the beneficiary becomes fixed and vested. The creditor, after the death of the insured, retained part of the proceeds of the policy involved in payment of the loan and returned the other collateral to the estate of the insured. Although the beneficiary had consented to the assignment of the policy, the court concluded that while the creditor had the right to use the collateral to pay the debt due it, the exercise of this right did not deprive the beneficiary named in the policy of her right to subrogation, as it was her money that was used to discharge an obligation for which the estate was primarily obligated; and the rights of the beneficiary should not be foreclosed through the whim or arbitrary action of the creditor absent a showing that such selection of collateral was in accord with the intention of the insured.

To defeat the right of a beneficiary it must appear that the insured, by the wording of the instrument assigning the policy or evidencing the loan, or by testamentary disposition, accomplishes such a result.

Neither plaintiff nor defendant has called specific provisions of the assignments or note to the court's attention and both rest on the last will and testament of the deceased. Such document, after providing for the payment of debts, establishes a trust for the plaintiff's minor children and makes no reference to plaintiff. It is stated by defendants that if plaintiff should succeed in this suit, there will be no assets left to administer the trust and decedent's intention will thus be defeated. The failure of the last will and testament to refer in any way to the plaintiff cannot be interpreted to establish that she was to receive nothing under the policies of insurance.

If from the assignment of the policies and the promissory note it appears that decedent intended that the policies be used as the primary fund for the discharge of his debt rather than his estate or the other collateral, the rights of the plaintiff would be effectively negatived. Nothing appears in the promissory note to aid the court in this regard. It provides that the holder of the note had the right to sell, assign, and deliver all of the security in the event of nonperformance of the promise and

    "The holder may at its option, whether this
  note is due or not due, demand, sue, collect, or
  make any compromise or settlement it deems
  desirable with reference to the collateral held
  hereunder. The holder shall have no duty as to
  the collection or protection of the collateral
  held hereunder or any income therefrom, nor as to
  the preservation of any rights pertaining thereto
  beyond the safe custody thereof,"

The assignments of the life insurance policies were effected on standard forms and provided that the assignee-creditor had

    "The sole right to collect from the Insurer the
  net proceeds of the Policy when it becomes a
  claim by death * * *.
    "E. The Assignee covenants and agrees with the
  undersigned as follows:
    "1. That any balance of sums received hereunder
  from the Insurer remaining after payment of the
  then existing Liabilities, matured or unmatured,
  shall be paid by the Assignee to the persons
  entitled thereto under the terms of the Policy
  had this assignment not been executed."

In connection with the pledging of the stock which was in joint ownership, the power of attorney and agreement signed ...

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