Lapsed Life Insurance Leads to Constructive Trust in Nashville, Tennessee Postdivorce Dispute: Burton v. Mooneyham

Facts: Husband and Wife divorced in 2011. The final decree required Husband to designate Wife as the beneficiary of his $500,000 life insurance policy and maintain that policy.

Husband owned other life insurance policies. As his financial circumstances deteriorated, he either allowed policies to lapse or he cashed them in. One policy that Husband allowed to lapse was the $500,000 policy he was ordered to maintain for the benefit of Wife.

Tennessee contempt of courtWhen Wife learned of the lapse, she asked the trial court to hold Husband in criminal contempt, and the trial court did so. The trial court also ordered Husband to reinstate the $500,000 policy. Husband appealed the trial court’s ruling. The following month, Husband died.

When Husband died, the only remaining life insurance policy was a $250,000 policy designating 70% of the benefits to Wife, i.e., $175,000, and the remainder to Husband’s mother.

Wife sought to recover the life insurance proceeds payable to Husband’s mother.

Husband’s mother argued that Wife was claiming an interest in a policy not subject to the divorce decree.

The trial court ruled that Wife has a vested right to any life insurance policy obtained by Husband that satisfies the mandate in the divorce decree and, therefore, Wife was entitled to the proceeds from the $250,000 policy.

Husband’s mother appealed.

On Appeal: The Court of Appeals affirmed the trial court.

Tennessee courts have long used equitable grounds to protect people legally mandated to be listed as beneficiaries of a life insurance policy. Tennessee courts have also held that a divorce decree creates in the listed beneficiary a vested right to any life insurance policy obtained by the decedent that satisfies the mandate in the divorce decree.

Importantly, the divorce decree’s mandate cannot be defeated by failing to name the obligee as the policy’s beneficiary, purchasing insufficient coverage, or allowing the policy to lapse.

When a divorce decree requires maintenance of a life insurance policy and the obligor allows the policy to lapse, the obligee is entitled to what he or she would have received absent the lapse. Tennessee courts may impose a constructive trust to protect the obligee’s vested equitable interest.

The Court held that Wife was entitled to all the proceeds from the $250,000 policy:

Here, it is undisputed that (1) the final decree required [Husband] to maintain a life insurance policy of $500,000 naming [Wife] as beneficiary; (2) Husband allowed the specified policy to lapse; and (3) at the time of his death, [Husband] was insured under a policy that partially satisfied the mandate in the final decree. When a divorce decree requires one party to maintain an existing, specific life insurance policy for the benefit of the other party, the decree in the divorce case gives the obligee a vested right in the policy, as between the obligee and the insured.

Conversely, although [Husband’s mother] was a named beneficiary of the surviving policy, a beneficiary named in a life insurance policy does not generally have any vested interest in the policy, but only an expectancy during the life of the insured. Moreover, [Husband’s mother’s] rights as a beneficiary derived from [Husband’s] rights; therefore, she can stand on no higher ground than he does.

The trial court’s judgment was affirmed.

K.O.’s Comment: Should Wife have pursued civil contempt against Husband instead of criminal contempt? Would Husband’s appeal of the criminal contempt finding have succeeded? I say yes to both.

Tennessee Code Annotated § 29-9-103 provides a limited remedy for criminal contempt, i.e., a $50 fine plus up to 10 days’ incarceration per count. Criminal contempt punishes; it does not coerce compliance with a court order. A person incarcerated for criminal contempt cannot win his or her freedom by complying with the order.

Had Wife pursued civil contempt instead of criminal contempt, Husband could have been incarcerated until he complied with the divorce decree. The remedies for civil contempt are specifically designed to compel compliance with an order.

The same situation occurred in Dukes v. Dukes. The husband in Dukes was in civil contempt after canceling the $50,000 life insurance policy he was ordered to maintain.

Had Wife properly pursued civil contempt instead of criminal contempt, one can only wonder whether the full $500,000 policy would’ve been restored by the time of Husband’s death. Her decision to pursue criminal contempt may have been an expensive mistake.

Burton v. Mooneyham (Tennessee Court of Appeals, Middle Section, March 19, 2018).

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K.O. Herston is a family-law attorney in Knoxville, Tennessee whose practice is devoted exclusively to family law, including divorce, child custody, child support, alimony, prenuptial agreements, and other aspects of family law.

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