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In Re Estate of Winstead





Appeal from the Circuit Court of McLean County; the Hon. Luther H. Dearborn, Judge, presiding.


Rehearing denied July 1, 1986.

The owner of a life insurance policy pledges the policy to a bank as collateral for farm operating loans. The bank is not, however, designated as a beneficiary of the policy. Upon the death of the owner of the policy, the bank elects to satisfy a part of the policy owner's indebtedness by appropriating to itself the entire proceeds of the policy. Under these circumstances, is the beneficiary named in the policy entitled to subrogation to the claim which the bank would have had against the decedent's estate absent the availability to the bank of the life insurance policy proceeds?


We reverse.

Prior to his death on December 7, 1983, Charles B. Winstead was a farmer who had a revolving line of credit at the Atlanta (Illinois) National Bank (ANB). The amounts which he borrowed from ANB were used for his operating, machinery, equipment, and living expenses.

In his will executed November 22, 1983, Winstead devised a life estate in his real estate to his wife, Marilyn, with the remaining interest to be divided equally among his issue and his wife's two god-children. He also devised to his wife all the furnishings of his residence, any cars and trucks titled in his name at the time of his death, and three horses. All other property, "whether real, personal, life insurance or any other form," was to be divided equally between Marilyn (provided that she survived him for 30 days) and his issue. Winstead's will further provided that "all debts and obligations not paid at my death" were to be paid from the above-mentioned estate residue.

Following the initiation of probate proceedings, Marilyn filed a claim against Winstead's estate. As the basis for her claim, Marilyn stated that she was the beneficiary of a $150,000 policy on Winstead's life issued by the Inter-Ocean Insurance Company, and that by virtue of a collateral assignment of the policy by Winstead, the proceeds thereof were paid to ANB to reduce a debt of Winstead's which would have been a legitimate claim against his estate and against estate assets in which ANB held a perfected security interest. Marilyn requested that the assets of Winstead's estate be marshalled in order to replace the proceeds of the life insurance policy, or alternatively that she be subrogated to the claim which but for the life insurance proceeds, ANB would have had against both Winstead's estate and the estate assets in which the bank held a security interest.

The evidence presented at the hearing on Marilyn's claim consisted entirely of factual stipulations and the deposition of Rodney L. Albers. The parties stipulated that on August 23, 1982, Winstead applied for a $150,000 life insurance policy with the Inter-Ocean Insurance Company. In his application, Winstead designated his estate as the policy beneficiary, and the policy was issued on October 19, 1982. Winstead wedded Marilyn on September 25, 1982, and on November 5, 1982, he requested that Marilyn be designated beneficiary of his life insurance policy, with his three children as contingent beneficiaries. Inter-Ocean complied with that request on November 18, 1982. Also on November 5, 1982, Winstead executed a collateral assignment of his life insurance policy to ANB. Inter-Ocean did not, however, accept that assignment for filing at its Cincinnati, Ohio, office until April 13, 1983.

Prior to his death, Winstead had executed three security agreements with respect to his debts to ANB (which totaled $177,446), and three Uniform Commercial Code financing statements with respect to the ANB debts on file at the time of his death. Inter-Ocean subsequently honored Winstead's assignment of his life insurance policy and ANB received its $150,000 face value on January 23, 1984. Neither before nor after receiving the policy proceeds did ANB assert a claim against Winstead's estate with respect to the collateral described in the security agreements and financing statements. The parties further stipulated that the value of Winstead's estate's assets which were pledged to secure Winstead's obligations to ANB was more than $100,000 but probably less than $200,000.

In a deposition, Rodney L. Albers, an assistant cashier and loan officer at ANB, testified that he had had a working relationship with Winstead since 1981. None of the security agreements which Winstead executed in favor of ANB had been released at the time of his death. According to Albers, ANB first requested that Winstead assign to it a life insurance policy in mid-1982. Albers became aware of the existence of Winstead's life insurance policy upon reviewing a statement of Winstead's financial condition, which listed "[h]undred fifty thousand [life insurance], with the spouse and children as beneficiaries." Although Albers first requested assignment of Winstead's life insurance policy in November 1982, the assignment (dated November 5, 1982) was not received by ANB until shortly before Inter-Ocean accepted it for filing on April 13, 1983. ANB requested assignment of Winstead's life insurance policy because it felt that there was insufficient collateral for Winstead's line of credit, and the bank was looking to Winstead's future earnings for repayment of a portion of his debts.

Winstead provided no instructions as to what assets ANB was to utilize to satisfy his debts in the event of his death, and before collecting the proceeds of Winstead's life insurance policy, ANB made no effort to realize payment of his debts from the other pledged collateral. Essentially, ANB decided to satisfy Winstead's indebtedness by appropriating the proceeds of his life insurance policy because that was a more convenient method of obtaining payment of his debts. The insurance proceeds did not, however, fully reduce Winstead's indebtedness; a remaining amount of $31,091.09 was realized from other assets of Winstead's estate. At the time of the deposition, ANB's claim against Winstead's estate was entitled to be released.

On cross-examination, Albers stated that ANB did not foreclose on Winstead's collateral (other than the life insurance policy) following his death because it was advised by its attorney that it could not do so and that Winstead's indebtedness instead "had to be settled by the estate."

The "Assignment of Life Insurance Contract as Collateral" form which Winstead executed with respect to the Inter-Ocean life insurance policy ...

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