The opinion of the court was delivered by: POLLACK
This is a petition to review a Referee's ruling sustaining summary jurisdiction of the Bankruptcy Court to determine the ownership of the proceeds of a policy of life insurance on the life of Henry H. Herz. The insured was the president of the bankrupt, a close corporation. The insurance was made payable to the corporation as "primary beneficiary, creditor, as its interest may appear, balance of proceeds, if any, to Peggy Herz . . . daughter of the insured" who is the petitioner herein.
The trustee in bankruptcy claims the entire proceeds of the policy, which he views as the major asset of the estate. The petitioner claims that she is entitled to the death benefits payable under the policy and, further, that, in any event, the ownership interests in the death benefits may only be resolved in a plenary suit. Bankruptcy Act § 23, 11 U.S.C. § 46. On order of the Referee, the money has been paid by the insurance company into a separate segregated interest bearing time deposit account pending and subject to the resolution of the controversy.
The primary question to be decided here is whether the petitioner has shown sufficiently that she has a substantial and not merely a colorable adverse claim to the insurance proceeds. If she has, the trustee's claim must be adjudicated in a plenary suit, not a summary proceeding. Brouner v. Seligson, 416 F.2d 705, 706 (2d Cir. 1969) (per curiam); In Re Ira Haupt & Co., 289 F. Supp. 966, 972 (S.D.N.Y.1968) (Pollack, J.).
For the reasons shown hereafter, the petitioner has demonstrated a sufficiently substantial and not a merely colorable adverse claim to the ownership of the major portion of the proceeds of the insurance on her father's life so as to require a resolution of the trustee's conflicting claim thereto by a plenary suit in a court of competent jurisdiction.
In ruling that summary jurisdiction was appropriate, the Referee acted upon the assumption that the trustee had either actual or constructive possession of the res, stating:
More to the point it is the existence of the physical property consisting of the insurance policy which makes specific reference to the bankrupt as beneficiary which is at the touchstone of this court's actual possession of a res. Moreover, even if it were not a question of actual physical possession of a res, the fact that the bankrupt is named as a beneficiary is sufficient so long as the funds have not already been paid over to another party for the court would then have constructive possession of an asset within the duty of the trustee to administer and within the power of this court to determine rights to it.
At the date the petition in bankruptcy was filed by the creditors of this corporation, the insurance policy in question is shown by the present record to have been neither owned by, nor in possession of, the bankrupt. According to petitioner, the policy was effectively in her possession and control when the trustee first learned of it sometime after the filing in bankruptcy. In fact, a petition filed with the bankruptcy court by the trustee in April, 1971 stated that the trustee "has been informed that the original of the policy has been transmitted by the attorneys of the Estate of Henry H. Herz to the insurance company for payment, acting presumably on behalf of Peggy Herz, the secondary beneficiary." The policy was not owned by the corporation or even purchased by the corporation; rather as described infra, it was individually obtained and owned by the petitioner's father, who was the insured.
Moreover, the proceeds of the policy were never subject to the control of the bankrupt; the insurance company was not willing to turn over the funds to any party, absent a release from any and all adverse claims. An order of the referee, in effect without prejudice, was required to have the fund paid by the insurer into a special deposit account. That order, issued after a turnover order had been granted and vacated, left the funds under the direction of the Court and not of the trustee:
ORDERED that the Trustee be and he hereby is authorized to deposit the monies received in a separate segregated interest bearing time deposit account in the Irving Trust Company at 233 Broadway, New York, New York, subject to the further order of this court, and it is further
ORDERED, that the said time deposit certificate shall remain in the custody of the aforesaid bank subject to the further order of this court.
And, at the hearing on the turn-over application held on January 11, 1972, the insurer was described by the Referee as a "stakeholder" and the Referee characterized this case as one "where the insurance company holds the funds and is not quite certain who is entitled to any of the proceeds". Transcript of the Adjourned Motion on Turnover Proceeding, pp. 9, 2.
The sum of these facts equals neither the actual nor constructive possession of the disputed fund by the bankrupt at the date of the petition in bankruptcy necessary to create the basis for summary jurisdiction. See Schmitt v. Blackwelder, 379 F.2d 278, 281 (2d Cir. 1967); Buss v. Long Island Storage Warehouse Co., 64 F.2d 338, 339 (2d Cir. 1933). In Buss, the Court looked for ...