The opinion of the court was delivered by: William M. Skretny Chief Judge United States District Court
The Chapter 7 Trustee appeals the bankruptcy court's decision to grant the Debtors' Motion to Compel the Trustee to return insurance policy proceeds. The bankruptcy court held that certain insurance policy proceeds that were previously turned over to the Trustee were exempt and must therefore be returned to the Debtors. The Trustee contends that the bankruptcy court erred because its July 11, 2008 order granting turnover is a final order that the Debtors did not appeal, and which resolves the exempt nature of the proceeds. For the reasons stated below, the bankruptcy court's decision is affirmed.
The Debtors filed a joint Chapter 7 petition on April 24, 2008. At that time, they did not claim an exemption for the cash surrender value of their reciprocal whole life insurance policies. The Trustee filed an application pursuant to Bankruptcy Code section 542 and Fed. R. Bankr. P. 9014 for an order directing the Debtors to turn over to the Trustee the non-exempt cash surrender value of these policies. The Trustee's application was unopposed, and by order entered July 11, 2008, the bankruptcy court granted the application. The Debtors did not appeal the bankruptcy court's order, and thereafter turned over the non-exempt cash value of the policies to the Trustee.
While this matter was before the bankruptcy court, the case of Wornick v. Gaffney was pending in the Second Circuit Court of Appeals. 544 F.3d 486 (2d Cir. 2008). On September 2, 2008, the Wornick court held that the "inchoate interest that a spouse beneficiary holds in a reciprocal life insurance policy does not constitute an asset of the beneficiary's [bankruptcy] estate." Id. at 488. This decision reversed existing law in the Western District of New York.
When the Debtors learned of the decision in Wornick, they amended their Schedule C - Property Claimed as Exempt to include their reciprocal insurance policies' cash value. They also filed a motion to relieve party from an Order ("Debtors' Motion"), seeking relief from the bankruptcy court's July 11, 2008 order pursuant to Fed. R. Civ. P. 60(b). The Debtors also sought to have the bankruptcy court compel the Trustee to return the funds they had turned over.
The Trustee opposed the Debtors' Motion on the grounds that they failed to contest or object to the Trustee's turnover application and failed to appeal the July 8, 2008 order granting that application.
The bankruptcy court granted the Debtor's Motion on March 11, 2009. This timely appeal followed.
The bankruptcy court's order, which turns on a legal conclusion, is reviewed de novo. Porges v. Gruntal & Co., Inc. (In re Porges), 44 F.3d 159, 162 (2d Cir. 1995); In re Thompson, 217 B.R. 375, 378 (2d Cir. B.A.P. 1998). The bankruptcy court's determinations are examined independently, but reviewed under a deferential standard and reversed only if clearly erroneous. Brody v. Brody (In re Brody), 3 F.3d 35 (2d Cir. 1993).
At issue is whether the bankruptcy court correctly concluded that the Debtors are entitled to the return of funds previously turned over to the Trustee. The Trustee argued that the bankruptcy court's July 11, 2008 order finally resolved whether the life insurance policies were exempt, and that the Debtors, ...