Metropolitan News-Enterprise


Monday, January 11, 2016


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Ninth Circuit Panel Rules for Creditors Over Investors in Viatical Settlement Dispute


From Staff and Wire Service Reports


A bankruptcy trustee can try to recover the market value of a debtor’s life settlements from banks that bought the man’s unmatured term life insurance policies, the Ninth U.S. Circuit Court of Appeals ruled Friday.

The case raises issues over the handling of what have come to be known as viatical settlements, in which an insured in need of money sells his or her policy for a lump sum greater than the cash surrender value but less than the value upon death. The buyer then pays the remaining premiums and receives the proceeds when the seller days, and buyers typically sell interests in those proceeds to banks and other investors.

The legality of such settlements was established in a U.S. Supreme Court over 100 years ago. But they did not become popular until the onset of the AIDS epidemic, and their increasing use has led to regulatory legislation in all but a handful of states.

In the case ruled on Friday, debtor David Green filed for Chapter 7 bankruptcy in 2007, about five months before he died.

But Green failed to disclose a number of assets when he filed the petition and the appointed trustee of the bankruptcy estate, Leslie Gladstone, filed to recover three undisclosed life settlements as fraudulent transfers.

The banks involved in the bankruptcy transactions - U.S. Bank and Coventry First - paid $507,000 for the life settlements at issue and received $9 million in death benefits when Green died.

When Gladstone learned about Green’s undisclosed assets, which the court described as a coincidence resulting from her attendance at a creditors’ meeting held in another case, she pursued an adversary proceeding against the banks, but the bankruptcy court granted the banks’ motions for summary judgment.

Gladstone appealed the decision, and a federal judge reversed the bankruptcy court’s judgment and an order denying Gladstone leave to amend her complaint. The banks appealed, but the circuit panel affirmed the district court’s ruling.

Writing for the three-judge panel, Chief Judge Sidney Thomas said that “the question presented in this case is whether the debtor’s interests in the term life insurance policies, including the secondary market value of the policies and resulting life settlements, constitute a recoverable ‘interest of the debtor in property’” under the relevant statute.

The district court correctly held that they are, Thomas said.

“In short, all equitable and legal interests that the debtor has when the bankruptcy petition is filed become property of the estate, unless excluded by statute or properly exempted by the debtor,” he said.

“If no exclusion or exemption applies, or if the debtor has failed to claim qualifying property as exempt, then the debtor’s interest in the property remains property of the bankruptcy estate.”

Thomas rejected the banks’ argument that the life insurance settlements at issue are exempt because California has opted out of the federal exemption schedule.

“This proposition is dubious, at best,” he said. “First the debtor did not claim the settlements or insurance policies as exempt within the required period.

“Second, the defendants lack standing to raise this issue. Third, the defendants did not present this argument either to the bankruptcy or district courts.”

Furthermore, Thomas said, “the record shows that the defendants necessarily knew that the debtor had transferred the beneficial interests in the life insurance policy to his wife.

“It further shows that the trustee went to great lengths to discover the multiple undisclosed life insurance policies held by the debtor, and that many of the delays documented in the record were due to the defendants’ requests or the actions of defendants’ counsel,” he said.

The panel remanded for further proceedings consistent with its opinion.

Neither side’s arguing counsel immediately responded to emails requesting comment on Friday morning.

The case is Gladstone v. U.S. Bancorp, 13-55773.


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