United of Omaha Life Ins. Co. v. Claire Kay ( 2018 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 18a0478n.06
Case No. 18-1153
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FILED
Sep 21, 2018
UNITED OF OMAHA LIFE INSURANCE ) DEBORAH S. HUNT, Clerk
COMPANY, )
)
Plaintiff, ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR
v. ) THE EASTERN DISTRICT OF
) MICHIGAN
CLAIRE J. KAY; CLAYMORE )
CONSTRUCTION CO., )
)
Defendants-Appellants, )
)
BANK OF AMERICA, )
)
Defendant-Appellee. )
BEFORE: SUTTON, McKEAGUE and THAPAR, Circuit Judges.
THAPAR, Circuit Judge. Although Dr. Kay died, his life insurance policy lives on. But
his insurer does not know who to pay. Bank of America claims it is entitled to the life insurance
proceeds. But Dr. Kay’s widow, Claire (“Mrs. Kay”),1 says two statutes of limitations bar the
Bank’s claim. Since the district court considered only one of these statutes, we affirm in part and
remand in part for proceedings consistent with this opinion.
1
Consistent with a prior panel of this court, we refer to Claire Kay as Mrs. Kay. See generally Kay v. United of
Omaha Life Ins. Co., 709 F. App’x 320 (6th Cir. 2017).
Case No. 18-1153
United of Omaha v. Kay
I.
When the Kays needed money for their business, they borrowed it from Bank of America.
As collateral, the Kays put up Dr. Kay’s life insurance policy. To this end, the Kays drafted a
separate contract with the Bank called the “Collateral Assignment”—saying that if the Kays did
not pay back the loan, then the Bank could use the life insurance policy to recoup its money. And
when the Kays defaulted on their loan, the Bank sued and obtained a judgment against the Kays
in state court. But even with a state court judgment, the Kays did not pay—leading the Bank back
to state court.
While the Bank and the Kays fought in court, Dr. Kay passed away. But his insurer, United
of Omaha, refused to pay Mrs. Kay the life insurance proceeds because of an alleged policy lapse.
So Mrs. Kay sued Omaha in federal court. While her federal lawsuit against Omaha was pending,
the Bank and Mrs. Kay settled their separate dispute. Mrs. Kay agreed to pay the Bank some of
what the Kays owed, and the Bank agreed to “forbear on further collection activity” until Mrs.
Kay’s lawsuit against Omaha was “resolved.” R. 23-5, Pg. ID 453–54.
Almost a decade later, Mrs. Kay won her lawsuit against Omaha. Kay, 709 F. App’x at
321. Naturally, she expected Omaha to pay her. But the Bank thought it should be paid instead.
Not knowing whether to pay Mrs. Kay or the Bank, Omaha initiated this interpleader suit—a suit
used to “resolve conflicting claims to money or property.” First Trust Corp. v. Bryant, 410 F.3d
842, 852 n.6 (6th Cir. 2005) (internal quotation marks omitted). The district court granted
summary judgment to the Bank and awarded the Bank the life insurance proceeds. Mrs. Kay
appeals.
-2-
Case No. 18-1153
United of Omaha v. Kay
II.
Mrs. Kay argues that two Michigan statutes of limitations bar the Bank from collecting the
life insurance proceeds. We review both arguments de novo. Auburn Sales, Inc. v. Cypros Trading
& Shipping, Inc., 898 F.3d 710, 715 (6th Cir. 2018).
Debt statute of limitations (Mich. Comp. Laws § 600.5809). Mrs. Kay contends the Bank
cannot collect the life insurance proceeds because its claim is outside the relevant ten-year statute
of limitations for debt judgments. Mich. Comp. Laws § 600.5809(1), (3). When a party like the
Bank obtains a judgment on a debt, the statute-of-limitations clock starts running the day the state
court judgment is entered. Id. Since the Bank received a state court judgment on the Kays’ debt
(i.e., the business loan) more than ten years ago, Mrs. Kay says the Bank cannot collect the life
insurance as payment for the debt.
The problem for Mrs. Kay, however, is that the Bank is not trying to enforce the state court
judgment, so the debt statute of limitations does not apply. Instead, the Bank is attempting to
enforce its rights through the separate Collateral Assignment agreement. And by its terms, the
debt statute of limitations only applies to “noncontractual money obligation[s].” Mich. Comp.
Laws § 600.5809(1).
Mrs. Kay admits as much in her brief by conceding that the Collateral Assignment creates
a separate contractual right. Appellant Br. 23; see also 17 Williston on Contracts § 49:119 (4th
ed.) (stating that generally “[a]n agreement assigning an insurance policy is . . . treated as an
ordinary contract”). But, she argues, the language of the Collateral Assignment implicitly
incorporates the debt statute of limitations. Her argument goes like this. The Collateral
Assignment contract states that the “[p]olicy is to be held as collateral security for any and all
liabilities . . . either now existing or that may hereafter arise . . . .” R. 1-1, Pg. ID 27. So, by Mrs.
-3-
Case No. 18-1153
United of Omaha v. Kay
Kay’s lights, the life insurance proceeds can only be used to pay off “liabilities.” And, according
to Mrs. Kay, “liabilities” are only those debts that are legally enforceable. Assuming the Bank
cannot legally enforce the Kays’ debt because of the debt statute of limitations, Mrs. Kay argues
that the Kays’ debt is no longer a “liabilit[y]” that the Bank can use the life insurance to pay off.
Therefore, she says the Bank has no rights to the proceeds under the Collateral Assignment
contract.
Mrs. Kay is wrong for two reasons. First, even if the statute of limitations makes her debt
legally unenforceable, it does not cancel the debt as a liability. A statute of limitations is a rule of
procedure. Rules of procedure change only the procedures or remedies that a party can seek, not
the party’s underlying substantive rights. Rushua v. Dep’t of Corr., 859 N.W.2d 735, 742 (Mich.
2014). So here, the debt statute of limitations changes whether the Bank can legally enforce the
Kays’ debt in court (procedure), but it does not extinguish the debt (substantive right). Indeed,
under Michigan Law, “[t]he running of the statute of limitations does not cancel [a] debt, it merely
prevents a creditor from enforcing [their] claim” in court. De Vries v. Alger, 44 N.W.2d 872, 876
(Mich. 1950); accord Midland Funding LLC v. Johnson, 137 S. Ct. 1407, 1411–12 (2017)
(collecting states, including Michigan, where the “creditor has the right to payment of a debt even
after the [statute of] limitations period has expired”); Buchanan v. Northland Grp., LLC, 776 F.3d
393, 396–97 (6th Cir. 2015). So the Kays’ debt to the Bank remains a liability.
Mrs. Kay claims that legal enforceability is all that matters. Since the debt is not legally
enforceable, she claims it is no longer a “liabilit[y]” under the Collateral Assignment contract.
Instead, she says the term “liabilities” in that agreement refers to only legally enforceable debts,
not any debts at all. Thus, she claims the Bank cannot use the Collateral Assignment to collect the
life insurance proceeds. Yet while Mrs. Kay points to Black’s Law Dictionary for support, her
-4-
Case No. 18-1153
United of Omaha v. Kay
selective definition of “liabilities” is unavailing. Mrs. Kay says liability means only “[t]he quality,
state, or condition of being legally obligated or accountable.” Black’s Law Dictionary 1053 (10th
ed. 2014) (emphasis added). Mrs. Kay fails to acknowledge the second definition in Black’s,
which makes no mention of legal obligation at all: a liability is “[a] financial or pecuniary
obligation in a specified amount.” Id. And Black’s Law Dictionary notes that when this financial
definition is intended, people use the plural—they write “liabilities.” Id. The Collateral
Assignment notably also uses the plural “liabilities,” leading to the inference that the parties here
intended the financial definition, not the legal-obligation definition. When paired with the fact
that the Collateral Assignment is a financial agreement, it becomes all the more likely that the
financial definition of “liabilities” is the more appropriate meaning to be gleaned from the
Assignment’s plain text. Using this financial definition, the Kays’ debt is clearly a liability because
(as we explained) the Bank still has a right to payment—the debt is still a debt. And Mrs. Kay still
has not paid the Bank. See Grand Trunk W. R. Co. v. Boyd, 33 N.W.2d 120, 123 (Mich. 1948)
(stating that the “common meaning of ‘liability’. . . is an obligation to pay a debt or amount owed”).
Thus, even if the debt statute of limitations has made the Kays’ debt legally unenforceable, the
statute has not extinguished the right to payment itself. The “liabilit[y]” remains.
Now, the second issue with Mrs. Kay’s proposed reading of the Collateral Assignment:
even if she is right that “liabilities” means only legally enforceable debt, her argument fails because
she does not account for all the words in the Collateral Assignment. The agreement secures
“liabilities . . . either now existing or that may hereafter arise . . . .” R. 1-1, Pg. ID 27. So
“liabilities” must be read together with both the phrase “now existing” and “may hereafter arise.”
See Auto-Owners Ins. Co. v. Churchman, 489 N.W.2d 431, 434 (Mich. 1992) (stating that, under
Michigan law, a “court must look at the contract as a whole and give meaning to all terms”);
-5-
Case No. 18-1153
United of Omaha v. Kay
see also 17 Williston on Contracts § 49:119 (4th ed.) (“An agreement assigning an insurance
policy is . . . interpreted under general contract principles.”). And when we look at both of these
phrases with Mrs. Kay’s “legally enforceable” definition of “liabilit[y],” we can see that the
Collateral Assignment covers two types of liabilities: (1) those legally-enforceable liabilities that
existed when the parties signed the agreement (“now existing”) and (2) new legally-enforceable
liabilities created later (“hereafter arise”). Read in context, the Kays’ debt falls into the first
category. The Kays’ debt existed when the parties signed the Collateral Assignment, and the debt
was legally enforceable back then. If the Kays and the Bank wanted the Collateral Assignment to
cover only liabilities that remained legally enforceable, then they could have drafted the contract
that way. But they did not. Since the “liabilit[y] . . . now existing” (i.e., the Kays’ debt) has not
been paid in the years since, the Collateral Assignment explicitly allows the Bank to collect the
insurance to pay off that debt.
Accordingly, we affirm the district court insofar as it held that Mich. Comp. Laws
§ 600.5809 does not bar the Bank’s claim on the insurance proceeds.
Contract statute of limitations (Mich. Comp. Laws § 600.5807(9)).2 Mrs. Kay alleges that
a different Michigan statute of limitations applies to contracts like the Collateral Assignment.
Mich. Comp. Laws § 600.5807(9). Claims for breach of contract have to be brought within six
years. Id. Since the Collateral Assignment is based on Dr. Kay’s life insurance, Mrs. Kay says
the statute-of-limitations clock started running either when Dr. Kay died or when Omaha first
declined to pay out the life insurance proceeds. Both of those events occurred in 2009, so the
2
Michigan has amended its statutes of limitations, effective May 7, 2018. 2018 Mich. Pub. Acts 8. Mrs. Kay points
to a provision that used to be Mich. Comp. Laws § 600.5807(8), but now appears to be Mich. Comp. Laws
§ 600.5807(9). How the changes made to the amended Mich. Comp. Laws § 600.5807(9) may impact this case are
also questions best left to the district court in the first instance.
-6-
Case No. 18-1153
United of Omaha v. Kay
statute-of-limitations clock would have run out in 2015—two years before the Bank became
involved in this suit. Therefore, Mrs. Kay argues, the Bank’s claim is too late.
The district court did not consider the contract statute of limitations. Accordingly, the
district court also did not reach the Bank’s argument that the settlement agreement tolled the statute
of limitations. Since the Bank agreed with Mrs. Kay to “forbear on further collection activity” in
the earlier settlement agreement, the Bank says the contract statute of limitations has not run out
yet—it has been tolled. If true, the contract statute of limitations would not bar the Bank’s claim
to the insurance proceeds.
The record, however, is undeveloped with respect to the settlement agreement. With full
briefing and argument, the text of the settlement agreement may be found ambiguous, requiring
the court to inquire into the parties’ intentions. And under Michigan law, parties’ intentions in
contract interpretation are questions of fact. See Klapp v. United Ins. Grp. Agency, Inc.,
663 N.W.2d 447, 453–54 (Mich. 2003). Given the state of the record, and district courts’ “special
competence” for factfinding, the district court should consider the proper interpretation of the
settlement agreement and the contract statute of limitations in the first instance. Teva Pharm. USA,
Inc. v. Sandoz, Inc., 135 S. Ct. 831, 850 (2015) (Thomas, J., dissenting); cf. Solo v. United Parcel
Serv. Co., 819 F.3d 788, 797 (6th Cir. 2016) (“We are not inclined to decide this matter before it
has been fully briefed by both parties and considered by the district court in the first instance.”).
* * *
We AFFIRM the district court’s holding as to Mich. Comp. Laws § 600.5809 and
REMAND to the district court for additional consideration of Mich. Comp. Laws § 600.5807(9)
and further proceedings consistent with this opinion.
-7-