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Hughes v. Hughes

Court of Appeals of Tennessee, Knoxville

January 5, 2017


          Session September 14, 2016

         Appeal from the Chancery Court for Carter County No. 28680 John C. Rambo, Chancellor

         This appeal concerns a dispute over the proceeds of a decedent's federal group life insurance policy. The decedent presumably intended to designate his brother, the appellee in this matter, as the sole beneficiary. The appellants, children of the decedent, allege fraud on the part of the brother and seek to impose a constructive trust upon the funds he received. The trial court granted summary judgment for the brother based on the application of the federal preemption doctrine as well as the Tennessee and federal law of fraud and the Tennessee Rules of Evidence. The appellants appeal. We affirm.

         Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed; Case Remanded

          John B. McKinnon, III, and Penny J. White, Johnson City, Tennessee, for the appellants, Chazz Alden Hughes and Tessarai Lee-Hughes Powers.

          Steven C. Huret and Rebecca J. Ketchie, Kingsport, Chattanooga, Tennessee, for the appellee, Allen Hughes.

          John W. McClarty, J., delivered the opinion of the court, in which Charles D. Susano, Jr., J., and D. Michael Swiney, C.J., joined.



         I. BACKGROUND

         Prior to his death, Brady Lee Hughes ("Decedent") was employed by the United States Postal Service. As a federal employee, he was entitled to participate in the Federal Employee Group Life Insurance ("FEGLI") program. Metropolitan Life Insurance Company ("Metlife") provided the FEGLI policy purchased by Decedent. On January 28, 1991, Decedent designated his brother, R. Allen Hughes ("Brother"), as the sole beneficiary of his FEGLI policy. After he designated Brother as the beneficiary of the FEGLI policy, Decedent and his wife, Cathy Ann Young Hughes (now Cathy Ann Young-Hilton), divorced. The final decree of divorce, which was entered October 8, 1992, incorporated the Marital Dissolution Agreement ("MDA") with a provision that stated: "Life Insurance: The husband shall maintain his current policy of life insurance with the children, beneficiaries." There is no suggestion in the record that Decedent ever owned any policy other than the MetLife policy under FEGLI. The appellants, Chazz Alden Hughes and Tessarai Lee Hughes-Powers (collectively, "the Children"), are Decedent's children and Brother's nephew and niece respectively.

         Decedent died on December 16, 2011. MetLife paid all of the proceeds of his FEGLI insurance policy to Brother, in accordance with the beneficiary designation previously executed on January 28, 1991. According to the Children, the approximate sum of the death benefit was $340, 000.

         The Children subsequently filed suit to impose a constructive trust on the proceeds of Decedent's FEGLI insurance policy, citing the MDA provision as proof that the benefits belong to them. They contend "that at some point in the history of the said life insurance policy, that either they or [their mother] for the benefit of them, had been designated as the beneficiaries of the death benefits." The Children also allege that Brother received the insurance proceeds by fraud: they argue that Brother had promised Decedent that he would hold the proceeds in trust for the Children, and Decedent named him beneficiary of the policy in reliance on that promise. In support of their claims, the Children submitted, inter alia, an affidavit from Dr. Victor Young ("Dr. Young"), their maternal uncle, which recounts a conversation he had with Brother about the conversations Brother had with Decedent. They note that Brother used some of the proceeds (approximately $37, 000) to pay for the Children's student loans and other living expenses.

         Brother denies that there was any prior agreement with Decedent that he was to hold the FEGLI proceeds in trust for the benefit of the Children. In fact, he contends that he did not know until after Decedent's death that he had been named the sole beneficiary on the FEGLI policy. Brother further asserts that Decedent's policy is governed by federal law, which preempts Tennessee state law through the Supremacy Clause of the United States Constitution. He notes that in situations similar to this one, the United States Supreme Court has held that a constructive trust created by state law cannot override the federal insurance policyholder's valid beneficiary designation. Brother also argues that the Children cannot, as a matter of law, prove that Brother committed fraud to receive the insurance proceeds. He contends that he assisted the Children financially "only because I wanted to and not because I was under any explicit instructions from my late brother to do so." According to Brother, his "desire to honor his late brother's memory by looking after his children does not mean that they are legally entitled to the FEGLI proceeds."

         The trial court granted summary judgment to Brother on the bases that the creation of a constructive trust based on the MDA was preempted by federal law and that the Children did not satisfy the requisite elements to support their fraud claims. The court specifically held that FEGLI's provisions preempt all Tennessee law that would impose a constructive trust. The Children timely appealed the rulings of the trial court.

         II. ISSUES

The issues raised by the Children are restated as follows:
a. Whether the holding in Hillman v. Maretta controls the outcome of this case in which the beneficiary is alleged to have committed constructive fraud in acquiring life insurance proceeds and when a state domestic relations order, "based on specific judicial recognition of particular needs" has directed a different disposition.
b. Whether the grant of summary judgment can be upheld when the chancery court failed to consider the Children's constructive fraud claim and admissible evidence supporting that claim.
c. Whether the federal preemption doctrine shields fraud committed by the beneficiary of a federal life ...

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