Oct. 13, 2009 – Clarifying one of its earlier holdings, the Wisconsin Court of Appeals ruled on Oct. 8 that a court may impose a constructive trust in favor of beneficiaries named by the life insurance provision of a marital settlement agreement even if the provision is not “support related.”

In Pluemer v. Pluemer, 2009AP155, the court restricted its holding in Duhame v. Duhame, 154 Wis. 2d 258 (Ct. App. 1989), to the facts of that particular settlement agreement.

The court also determined that a bona fide purchaser’s interest in the insurance proceeds is superior to an interest protected by a constructive trust.

Marital settlement agreement

Under the terms of their marital settlement agreement, Gerald Pluemer and his first wife Lisa named their daughter Jessica as the beneficiary of their life insurance policies. But when Gerald’s business ran into financial trouble, he purportedly named his second wife Patricia as a beneficiary so that she would cover his debts with a second mortgage on her home. There was no written contract between Patricia and Gerald to memorialize the exchange.

Gerald and Patricia signed a contract with Gerald’s business partner, requiring the partner to obtain a loan to pay off Patricia’s second mortgage. The business partner, however, did not secure the loan and balked at repaying the second mortgage after making one $600 payment. 

Patricia claimed not to know of the insurance provision in Gerald and Lisa’s marital settlement agreement. When Gerald died, Patricia used the insurance proceeds to pay off the second mortgage and Gerald’s other remaining debts. Jessica then sued to recover the proceeds from Patricia.

The trial court granted summary judgment for Jessica, imposing a constructive trust over the proceeds in her favor.

No support requirement

In an opinion authored by Presiding Judge Charles Dykman, the court of appeals held that Duhame does not establish a legal requirement that all life insurance stipulations in marital settlements must be “support related” for a court to impose a constructive trust over the proceeds.

In Duhame, the divorcing spouses agreed to name their minor children as beneficiaries of the father’s life insurance which he held through his employer. But when he remarried, the children’s father changed the beneficiary designation in favor of his new wife. The trial court imposed a constructive trust on the proceeds in favor of the children and the Wisconsin Court of Appeals upheld it.

Based on the language of the settlement agreement stipulation in question and the uncontroverted affidavit of the ex-wife, the court of appeals had concluded the parties’ intention was to prevent the ex-husband from removing the children as beneficiaries. The court found that the life insurance provision was both “support-related” and “employment-related,” meeting this particular divorce stipulation’s “two threshold factors … before a change in beneficiary is prohibited.”

The court stated that this two-part test was not intended to extend beyond the facts of Duhame. Consequently, the court said, there was no need to decide whether the life insurance provision in Gerald and Lisa’s marital settlement agreement was “support-related.” Rather, the court of appeals said, the question is whether or not the trial court erroneously exercised its discretion by imposing a constructive trust when a party claims to be a bona fide purchaser.

Bona Fide Purchaser?

A “bona fide purchaser” is a grantee who purchases in good faith, without notice, and for a valuable consideration, the court of appeals explained.

“As strong as an equitable claim for a constructive trust may be, ‘it can in no case be stronger than that of a purchaser, who has put himself in peril by purchasing a title, and paying a valuable consideration, without notice of any defect in it, or adverse claim to it,’” the court of appeals explained, citing to Simpson v. Cornish, 196 Wis. 125 (1928).

In this case, the court of appeals held that the record does not resolve whether Patricia was a bona fide purchaser and so the trial court should not have granted summary judgment. The court of appeals observed that the lack of a written contract between Gerald and Patricia leads to competing inferences. The court also discounted Jessica’s argument that Gerald had no interest in the policy to sell, noting that “a claim to bona fide purchaser status arises only when one holding party transfers it to another despite having no right to do so.”

“If the trial court finds that Patricia did mortgage her house to repay Gerald’s business debts in consideration for the life insurance interest, then, coupled with her uncontroverted testimony that she had no knowledge of the life insurance provision in the marital settlement agreement, Patricia is a bona fide purchaser of that amount of the life insurance interest, and a constructive trust over that amount is not appropriate,” the court wrote.