Banks on Hook for Debtor’s Hidden Assets

PASADENA, Calif. (CN) - 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 Circuit ruled Friday.

The 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, seeks to recover three undisclosed life settlements as fraudulent transfers, according to the Circuit's opinion.

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, 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 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 to 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 Circuit remanded for further proceedings consistent with its opinion.

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

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