Gladstone v. U.S. Bancorp

• Decision Date: 08 January 2016
• Docket Number: No. 13–55773.,13–55773.
• Citation: 811 F.3d 1133
• Parties: Leslie T. GLADSTONE, Chapter 7 Trustee, Plaintiff–Appellee, v. U.S. BANCORP, a Delaware corporation; U.S. Bank N.A., a banking subsidiary; and Coventry First LLC, a Delaware limited liability company; Defendants–Appellants, David M. Green, Debtor–In Re.
• Court: U.S. Court of Appeals — Ninth Circuit

811 F.3d 1133

Leslie T. GLADSTONE, Chapter 7 Trustee, Plaintiff–Appellee,

v.U.S. BANCORP, a Delaware corporation; U.S. Bank N.A., a banking subsidiary; and Coventry First LLC, a Delaware limited liability company; Defendants–Appellants,David M. Green, Debtor–In Re.

No. 13–55773.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 2, 2015.

Filed Jan. 8, 2016.

Susan C. Stevenson (argued) and Jennifer E. Duty, Pyle Sims Duncan & Stevenson, San Diego, CA, for Defendants–Appellants.

Sean C. Coughlin (argued), Financial Law Group, La Jolla, CA, for Plaintiff–Appellee.

Roland R. Peterson and Angela M. Allen, Jenner & Block, LLP, Chicago, IL; Carl N. Wedoff, Jenner & Block, LLP, New York, N.Y., for Amicus Curiae National Association of Bankruptcy Trustees.

Before: SIDNEY R. THOMAS, Chief Judge, CONSUELO M. CALLAHAN, Circuit Judge and JAMES K. SINGLETON,^* Senior District Judge.

OPINION

THOMAS, Chief Judge:

In recent years, a substantial market has developed for the purchase of unmatured term life insurance policies. In these "viatical settlement" or "life settlement" transactions, the policyholder receives a lump-sum settlement greater than the cash surrender value of the policy, but less than the policy's death benefit. The purchaser continues to pay the policy premiums, and collects the death benefit when the policyholder dies. The purchaser then typically offers the life insurance benefit of the policy to potential investors. See Huskey v. Tolman (In re Tolman), 491 B.R. 138, 144 (Bankr.D.Idaho 2013).

Viatical settlements often occur when the policyholder is terminally ill and needs funds to pay for end-of-life care or under other circumstances when the policyholder needs "present cash more than the security of a death benefit." Tolman, 491 B.R. at 144 ; see also Life Partners, Inc. v. Morrison, 484 F.3d 284, 287 (4th Cir.2007). In this case, the purchasers paid approximately $507,000 for life settlements with the debtor and received $9,000,000 in death benefits when he died shortly thereafter.

The bankruptcy trustee filed an adversary proceeding to recover the market value of the life settlements. 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" pursuant to 11 U.S.C. § 548(a)(1). We conclude that they do, and we affirm the judgment of the district court.

I

Facing financial difficulties, David Green filed a voluntary Chapter 7 bankruptcy petition on September 12, 2007. Leslie Gladstone (the "Trustee") was appointed Chapter 7 trustee of the bankruptcy estate (the "Estate"). David Green died on February 22, 2008, about five months after filing his Chapter 7 petition.

David Green failed to disclose a number of assets when he filed his Chapter 7 petition. This appeal concerns three undisclosed life settlements executed between David Green and Coventry First, LLC (collectively with U.S. Bancorp and U.S. Bank National Association, "Defendants"), which the Trustee seeks to avoid and recover as fraudulent transfers.

In the months preceding the filing of his Chapter 7 petition, David Green took steps to transfer ownership of the three policies to consummate the life settlements. David Green did not disclose any of the life settlements on the Statement of Financial Affairs he submitted with his Chapter 7 petition. Nor did he disclose the life settlements at his § 341 First Meeting of Creditors, when he was questioned under oath by the Trustee. The life settlements were negotiated in two sets of transactions, which were brokered by Robert Hamzey, a friend of the Greens.

The first set of transactions involved two Transamerica policies. Policy 3530 was issued to insure the life of David Green for his own benefit, with a face value of $2,000,000. Policy 4528 was issued to insure the life of David Green for his own benefit, with a face value of $4,000,000. David Green transferred the beneficial interest in the Transamerica policies to his wife, Eileen Green. Eileen Green subsequently signed a life settlement agreement to sell Policy 3530 for $5,000 and Policy 4528 for $188,000 to the Defendants. She received $193,000 from the Defendants about one month before David Green filed his bankruptcy petition. After his death five months later, Defendants received $6,000,000, the face value death benefits for the Transamerica policies.

The second set of transactions involved what became Protective Policy 3280. That policy was issued to insure the life of David Green for the benefit of Eileen Green, with a face value of $3,000,000. A month before filing bankruptcy, David and Eileen Green signed a life settlement agreement to convert the term life policy to a universal policy and sell it to Defendants for $280,000 plus $34,776.66 in premium reimbursements. Eileen Green transferred the beneficial interest of Protective 3280 to Defendants shortly before the bankruptcy. However, Protective did not transfer the policy to the Defendants until after the bankruptcy was filed, whereupon Eileen Green was paid $314,776.66 per the life settlement agreement. After David Green's death, Defendants received the $3,000,000 proceeds from the policy.

In sum, Defendants paid approximately $507,000 for the life settlements and received $9,000,000 in death benefits when Green died a few months after the viatical settlement transactions. The following chart summarizes the three policies and life settlements at issue:

	Face	Premium
Policy	Value	Settlement	Reimbursement

Transamerica 3530	$2,000,000	$ 5,000	none
Transamerica 4528	$4,000,000	$188,000	none
Protective 3280	$3,000,000	$280,000	$34,776.66

In addition to the life settlements at issue in this appeal, other assets connected to the Estate changed hands in the weeks and months leading up to David Green's bankruptcy filing. These assets include two other life insurance policies, a condominium, and a mortgage note owned by the Greens. None of the life settlements with Defendants and none of the foregoing other assets and transfers were disclosed when David Green filed his Chapter 7 petition on September 12, 2007, nor were they disclosed on his Section 341(a) questionnaire, or at the Section 341(a) meeting of creditors. These transactions frustrated the Trustee's task to assemble the bankruptcy estate.

The Trustee learned of David Green's death a few weeks after he died. Over a year later, by coincidence alone, she found out about David Green's undisclosed other assets and transfers at a Section 341 meeting in another bankruptcy proceeding to which she was appointed. Based on that information, and after Eileen Green and Hamzey declined to cooperate with her investigation that followed, the Trustee sought and received approval to conduct examinations of and document production by Eileen Green and Hamzey pursuant to Federal Rule of Bankruptcy Procedure 2004. At Hamzey's Rule 2004 examination, the Trustee gathered more information about other assets and transfers not at issue in this appeal. With this information in hand, the Trustee filed an initial adversary complaint seeking recovery and avoidance of the other assets and transfers and an emergency motion for extension of the statute of limitations. The bankruptcy court granted the motion, and the statute of limitations was extended to December 11, 2009.

On August 9, 2010, David Green's stepson Frank Ray called the Trustee's attorney and told him about the life settlements at issue in this appeal. The next day, Ray delivered copies of the relevant purchase agreements that documented the two life settlement transactions. Based on this information and documents subpoenaed from the Defendants, the Trustee filed the first amended complaint, which sought to avoid the transfer of the Transamerica and Protective life insurance policies to Defendants.

The Trustee pursued the adversary proceeding against Defendants in the months that followed, but was met with requests to postpone depositions and other discovery until after a hearing on Defendants' anticipated motion for summary judgment. The Trustee eventually received interrogatory answers and moved the bankruptcy court for leave to file a second amended complaint because discovery showed that the Protective 3280 life settlement did not become effective until after the bankruptcy was filed and to make further allegations about the pre-petition transfers.

The bankruptcy court granted Defendants' motion for summary judgment and denied the Trustee's motion for leave to file the second amended complaint in a minute order. The bankruptcy court did not issue findings of fact and conclusions of law or otherwise state grounds upon which the motions were adjudicated.

The Trustee appealed the judgment of dismissal to the district court. The district court reversed the judgment entered by the bankruptcy court and reversed the bankruptcy court's order denying the Trustee leave to file the second amended complaint. This timely appeal followed.

II

The district court heard the initial appeal pursuant to 28 U.S.C. § 158(a) (2012). We have jurisdiction to review the district court's order pursuant to 28 U.S.C. § 158(d)(1). "The role of the district court and this court are basically the same in the bankruptcy appellate process. Therefore, we review the bankruptcy court decision directly. We review the bankruptcy court's findings of fact for clear error, and its conclusions of law de novo." Microsoft Corp. v. DAK Indus., Inc. (In re DAK Indus., Inc.), 66 F.3d 1091, 1094 (9th Cir.1995) (citations omitted). In conducting de novo review of the bankruptcy court's grant of summary judgment, we "must view the evidence in the light most favorable to the non-moving party and ‘determine whether there are any genuine issues of material fact and whether the bankruptcy court correctly applied the substantive law.’ " Caneva v. Sun Cmts. Operating Ltd. P'ship (In re...