Judge Nugent

10-12211 Tessendorf (Doc. # 35)

In Re Tessendorf, 10-12211 (Bankr. D. Kan. Jun. 21) Doc. # 35

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SIGNED this 21 day of June, 2011.



IN RE: )
HUGH S. TESSENDORF, ) Case No. 10-12211
Debtors. )



Debtor Hugh Tessendorf filed his bankruptcy case on June 30, 2010. Among his claimed
exemptions was a certificate of deposit with Met Life Bank in the amount of $15,300 (CD).1
Tessendorf acquired this CD in late 2008 with part of the proceeds of an insurance policy on the life
of his father. At the father’s death, the insurance proceeds were paid into a New York Life

1 According to the parties’ stipulations the value of the CD at filing, with accrued
interest, was $15,751.73.


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Insurance Company investment account called the “Continued Interest Account.”2 These are the
only funds ever deposited into that account. Tessendorf wrote a $15,000 check on that account to
Met Life Bank to fund the CD. He claims the CD as exempt insurance benefits under KAN. STAT.
ANN. § 40-414(a)(4). The Trustee timely objects. The parties stipulated to the facts as summarized,
but did not supply the Court with a copy of the CD.3


Kansas has opted out of the federal exemption scheme set out in 11 U.S.C. § 522(d).4
Accordingly, the debtors may only avail themselves of Kansas state exemptions. The Trustee bears
the burden to prove that the property sought is not exempt.5 As noted above, the parties have
submitted this matter on stipulations.

Kansas law exempts the proceeds of a life insurance policy, whether they be cash or
surrender value in the hands of the insured or proceeds in the hands of the beneficiary. KAN. STAT.
ANN. § 40-414(a)(4) expressly exempts the “beneficiary’s interest” from any claims of his creditors.

 Kansas courts have long held that proceeds of an insurance policy in the hands of a beneficiary or
deposited in the beneficiary’s bank account retain their exempt character.6 Although the insurance

2 The stipulations describe this account as an interest bearing checking account. See Dkt.
30, ¶ 10.

3 Dkt. 30. The Trustee Carl Davis appears on his own behalf. Debtor appears by
William Zimmerman. This is a core proceeding over which the Court has subject matter
jurisdiction. See 28 U.S.C. §§ 157(b)(1), (b)(2)(B), and 1334(b).

4 KAN. STAT. ANN. § 60-2312(a) (2005).

5 Fed. R. Bankr. P. 4003(c).

6 Emmert v. Schmidt, 65 Kan. 31, 68 P. 1072 (1902) (proceeds of insurance deposited in

beneficiary’s bank exempt from garnishment by judgment creditor).

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exemption statute has been amended from time to time since 1902, courts sitting in Kansas have
continually held that proceeds held by beneficiaries remain exempt.7

Kansas courts have also concluded that otherwise non-exempt items of property that are
acquired with life insurance proceeds lose their exempt character. In Independence Savings & Loan
Ass’n v. Sellars, the debtor lost her insurance exemption when she invested the proceeds in stock
in a savings and loan association.8 The Kansas Supreme Court differentiated between a mere deposit
in the institution and actually investing it in equity, making the stock she purchased liable to her
creditors’ claims. Likewise, in the earlier case of Pefly v. Reynolds, the court held that a tract of land
purchased by the debtor with exempt insurance proceeds did not retain the exempt character of the
proceeds if the land itself was not otherwise exempt.9

This Court has previously held that a debtor who invested the proceeds of her husband’s life
insurance in an annuity contract could not claim the contract exempt because Kansas law does not
afford annuitants the same protection that it does beneficiaries.10 This holding was based on two
grounds: first, that annuities are not “insurance” because annuities are purchased rights to receive
fixed or periodic payments as opposed to the right to receive a sum certain at the death of the
insured; and second, that property purchased with the proceeds of an exempt insurance policy does
not retain that policy’s exempt character.11 The Trustee here relies on Houser to argue that

7 See In re Douglas, 59 B.R. 836 (Bankr. D. Kan. 1986).

8 149 Kan. 652, 88 P.2d 1059 (1939).

9 115 Kan. 105, 222 P. 121 (1924).

10 See In re Houser, 2004 WL 2192603 (Bankr. D. Kan. Feb. 25, 2004).

11 Id. at *2, citing Sellars and Pefly, supra.


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Tessendorf’s CD is an investment as was the annuity in Houser and, as such, is no longer exempt.

Thus, this case turns on the nature of the CD and whether it represents some sort of
investment, like an annuity, or whether it is simply a deposit. The Court first notes that the Emmert
court concluded that the act of depositing the insurance benefit does not operate to strip it of its
exempt character. Indeed, in dicta in Pefly, the court stated –

Where one deposits money in a bank the relation established is of course that of
debtor and creditor, the title to the specific currency passing. Technically the
transaction may be considered as an investment of the cash in a demand against the
bank, by which its form is changed; but in a practical sense the depositor is regarded
as retaining the control of the money, just as one who deposits in a bank the money
of others intrusted to his keeping is not treated as having converted it.12

Emmert dealt with an ordinary deposit account.

As noted above, the Court was not supplied with the actual certificate of deposit issued by
Met Life in this case so it cannot know what the terms of repayment are or whether other legal
conditions have been imposed on the deposit. The statement of account supplied with the
stipulations describes the CD as a renewable 12-month obligation of the bank.13 The debtors rely
on the FDIC’s definition of a CD as “a deposit type, not an account ownership category.”

Certificates of deposit are negotiable instruments.14 No Kansas appellate court has
addressed whether depositing exempt life insurance proceeds in a CD affects the exempt character
of the proceeds, but the Kansas Supreme Court has considered whether a deposit of otherwise
exempt funds in a CD divests the exemption in Decker & Mattison Co. v. Wilson. There, the Kansas

12 115 Kan. at 121 (citations omitted).
13 The stipulations state that the CD is renewable annually and that debtor has in fact
renewed the CD each year since it was acquired. See Dkt. 30, ¶ 13 and Ex. A attached thereto.
14 KAN. STAT. ANN. § 84-3-104(j) (2010 Supp.) .

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Supreme Court held that acquiring a certificate of deposit with the proceeds of a worker’s
compensation award did not change the exempt character of the award.15 In Decker & Mattison, the
court dealt with a judgment debtor who received a lump sum compensation award and deposited
it into a savings account that was thereafter converted to a CD. Concluding that the funds were
readily identifiable to the exempt award, the court opined that “...it is evident that money which has
been converted into a CD retains the quality of money such that an exemption which originally
protected the money will protect the certificate as well.”16 Certificates of deposit are “normal modes
adopted by the community” for safekeeping funds, not “permanent investments which have lost the
quality of money.”17 This Court sees no distinction between exempt life insurance proceeds and
exempt worker’s compensation benefits that would warrant different treatment of the former when
used to acquire a CD.

Accordingly, this Court predicts that the Kansas appellate courts would find that a certificate
of deposit that is identifiable to and consists solely of exempt insurance proceeds retains the
proceeds’ exempt character. The Court notes the above-quoted passage from Pefly which points out
that even though a deposit creates an obligation of the bank to repay funds that may not be the
identical specie deposited by the beneficiary, the depositor still retains some control over the funds.

15 273 Kan. 402, 44 P.3d 341 (2002). Worker compensation awards are exempt under
KAN. STAT. ANN. § 44-514(a) (2000) and KAN. STAT. ANN. § 60-2313(a)(3) (2005).

16 Id. at 409.

17 Id., citing E.W. v. Hall, 260 Kan. 99, 917 P.2d 854 (1996) (Federally-exempt social
security benefits deposited in a CD or savings account retain their exempt status) and Porter v.
Aetna Casualty Co., 370 U.S. 159, 82 S.Ct. 1231, 8 L.Ed.2d 407 (1962) (Attachment of VA
benefits deposited in a savings and loan account barred as such deposits “retained the quality of
monies”). See also In re Delgado, 967 F.2d 1466 (10th Cir. 1992) (creditor’s security interest in
debtor’s certificate of deposit representing proceeds from a lump sum worker’s compensation
settlement was unenforceable under K.S.A. 44-514).


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Likewise, a depositor who receives in exchange for her deposit a CD, retains the right to the return
of the deposited funds, plus accrued interest, on a date certain.

This Court’s opinion in Houser does not direct a different outcome. Acquiring a certificate
of deposit is very different from buying an annuity. The holder of a CD retains the right to recover
an amount of money equal to what was deposited plus accrued interest. An annuitant retains only
the right to the periodic payment and, usually, surrenders any right to the return of the underlying
investment. An annuity is not a negotiable instrument.18

The parties have stipulated that the proceeds of the life insurance benefit remain identifiable
in the CD. Nothing has occurred that would disturb their exempt character. The Trustee has not
demonstrated that the debtor should not receive the benefit of the exemption. The Trustee’s
objection to the debtor’s exemption of the life insurance benefits represented by the CD is

# # #

18 See NationsBank of North Carolina, N.A. v. Variable Annuity Life Ins. Co., 513 U.S.
251, 259, 115 S. Ct. 810, 130 L.Ed. 2d 740 (1995) (describing annuity contracts as investment
products, not insurance); In re Stutterheim, 109 B.R. 1006, 1008 (Bankr. D. Kan. 1988), aff’d
109 B.R. 1010 (D. Kan. 1989) (annuity contract is an investment vehicle).


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