Maryland Court of Appeals: Change of Beneficiary of Insurance Policy Is “Conveyance” Under Uniform Fraudulent Conveyance Act

In a March 9, 2021 opinion, the Maryland Court of Appeals signaled the end of what it termed “an elaborate web of procedural history” by answering two questions certified to it by the United States District Court for the District of Maryland.  Those questions arose “in the context of a decade-long dispute between the adult children of the Buckingham family and United Bank (“the Bank”).”  The Buckingham adult children “Through the opportune formation of various trusts, …successfully diverted hundreds of thousands of dollars in life insurance proceeds away from the declining family business and to their personal use.”

The policies were on the life of John Buckingham.  Some policies were owned by John with his company, Sun Control Systems, being the beneficiary.  Others were owned by Sun, with Sun being the beneficiary.  Sun was in default in its loan from the Bank.  The diversion was accomplished by: (a) forming multiple family trusts; (b) having one of the trusts purchase the policies owned by Sun from Sun for a fraction of their value and change the beneficiary; and (c) having David Buckingham, the son of John Buckingham, who had been appointed John’s guardian after he was diagnosed with terminal dementia, change the beneficiary on the policies owned by John.

The Court of Appeals said that “federal and state courts both have attempted to conclusively determine whether this diversion of life insurance proceeds was an appropriate use of familial resources to assist ailing parents, or instead an act undertaken by the Buckingham children to intentionally defraud the Bank.”  However, since e-mails between the children at the time that the trusts were formed and made the beneficiaries of the life insurance policies reflected their recognition that the “[t]he bank or other creditors w[ould] end up with those funds” otherwise, whether the children had acted intentionally to put money out of reach of Sun’s creditors was not really at issue.  More accurately, the issue was whether Maryland law afforded the Bank any remedy to undo what the children had done.

The two questions certified to the Court of Appeals were whether: (a) the Maryland Uniform Fraudulent Conveyance Act, … reaches a change in life insurance beneficiary; and (b) Md. Code Ann., Est. & Trusts § 15-102 grants a guardian of property the authority to change the beneficiaries of life insurance policies?  On the first question, the Bank contended that a change in the beneficiary of a life insurance policy is a “conveyance” avoidable under the Maryland Uniform Fraudulent Conveyance Act (“MUFCA”) if made with actual intent to hinder, delay, or defraud a creditor.  The Buckingham children argued that the right of a beneficiary to receive life insurance proceeds is “merely an expectancy” while the insured is alive and thus was not “property” that could be the subject of a “conveyance” under MUFCA.

On the second question, the Bank contended that David Buckingham, as John’s guardian, did not have authority to change the beneficiary of John’s life insurance policies for the benefit of anyone other than John or his dependents without court permission.  Since David had not obtained court permission before designating the trusts as beneficiaries, the Bank contended that changes were ineffective.  The Buckingham children argued that David Buckingham, as John’s guardian, had the right to exercise any right under an insurance policy that John himself could have exercised without the need for court approval.

The Court of Appeals sided with the Bank and against the Buckinghams on both questions.  On the first question, the Court rejected the Buckinghams’ argument that a change of beneficiary is not a conveyance by citing the expansive definition of the term in the MUFCA.  That definition includes “every payment of money, assignment, release, transfer, lease, mortgage, or pledge of tangible or intangible property, and also the creation of any lien or incumbrance.”  Moreover, if a change of beneficiary was not a conveyance, Section 16-111(d) of the Insurance Article of the Maryland Annotated Code would be meaningless surplusage.  That section provides that “A change of beneficiary, assignment, or other transfer is valid except for transfer with actual intent to hinder, delay, or defraud creditors.”  Finally, the Court noted that the policies underlying the enactment of the MUFCA were “to render null and void conveyances made for the purpose of hindering, delaying and defrauding creditors” and “enhance and not impair the remedies of the creditor.”  The Court said that if it adopted the Buckinghams’ narrow interpretation of “conveyance,” “it would be difficult for the creditors of policy holders to have any remedy for the fraudulent change of a life insurance beneficiary.”  Deeming a change in beneficiary to be a conveyance was “consistent with the General Assembly’s intent to enhance, rather than impair, the remedies of creditors.”

On the question of David Buckingham’s authority to change the beneficiaries of his father’s life insurance policies, the Court started with the proposition that Article 3 of the Declaration of Rights in the Maryland Constitution provides that “That the Inhabitants of Maryland are entitled to the Common Law of England, and the trial by Jury, according to the course of that Law, and to the benefit of the English statutes as existed on the Fourth day of July, seventeen hundred and seventy-six; … subject, nevertheless, to the revision of, and amendment or repeal by, the Legislature of this State.”  The long-established English common law principles underlying the concept of guardianship in 1776 were “that the purpose of guardianship is to ensure the estate of the ward is preserved and not diminished” and “the lands and tenements of lunatics should be ‘safely kept without Waste and Destruction, and that they and their Household shall live and be maintained competently with the Profits of the same.’” Thus, unless the Maryland Legislature had revised, amended, or repealed English law in the intervening two centuries, David Buckingham did not have to power to change the beneficiary of his father’s life insurance policies to anyone other than members of his household.

The Buckinghams argued that the Maryland Legislature had done just that when it enacted Section 15-102(t) of the Estates and Trusts Article of the Maryland Annotated Code.  That section provides that:

A fiduciary may exercise options, rights and privileges contained in a life insurance policy, annuity, or endowment contract constituting property of the fiduciary estate, including the right to obtain the cash surrender value, convert a policy to another type of policy, revoke any mode of settlement, and pay any part or all of the premiums on the policy or contract.

The Bank, on the other hand, noted that § 13-203(c)(1) of that same Article provides that “Except for the limitations contained in § 13-106 of this title, after appointment of the guardian, the court has all the powers over the property of the minor or disabled person that the person could exercise if not disabled or a minor.”  Since changing the beneficiary is not listed in Section 15-102(t), the Bank argued that only the court had authority to change the beneficiary.  The Court of Appeals agreed that Section 15-102(t) did not overturn “the role of a guardian to maintain and preserve the estate of the ward [that] originated with English common law and was incorporated into Maryland law under the Declaration of Rights.”

In the end, the Buckinghams’ undoing was probably that they put in writing their desire to put the life insurance policy proceeds out of the Bank’s reach and sought to accomplish that by setting up multiple trusts.  If they intended “an appropriate use of familial resources to assist ailing parents,” they would have simply changed the beneficiaries to members of John’s household so that they could “live and be maintained competently with the Profits of the same” in accordance with English guardianship law.