Western United Life Assur. Co. v. Hayden

• Decision Date: 22 September 1995
• Docket Number: No. 94-3548,94-3548
• Citation: 64 F.3d 833
• Parties: WESTERN UNITED LIFE ASSURANCE COMPANY v. Debra Ann HAYDEN; David Gerard Hayden; Reliance Insurance Company; United Pacific Life Insurance Company; Western United Life Assurance Company Appellant. Third Circuit
• Court: U.S. Court of Appeals — Third Circuit

Page 833

64 F.3d 833

64 USLW 2192

WESTERN UNITED LIFE ASSURANCE COMPANY v. Debra Ann HAYDEN; David Gerard Hayden; Reliance Insurance Company; United Pacific Life Insurance Company Western United Life Assurance Company Appellant.

No. 94-3548.

United States Court of Appeals,Third Circuit.

Argued March 9, 1995.

Decided Aug. 30, 1995.

Sur Petition for Rehearing Sept. 22, 1995.

George M. Cheever (argued), Catherine L. Welsh, Kirkpatrick & Lockhart, Pittsburgh, PA, for Western United Life Assur. Co., appellant.

Mary Reitmeyer, Joseph R. Lawrence (argued), Pittsburgh, PA, for Debra A. Hayden and David G. Hayden, appellees.

Before HUTCHINSON, ALITO, and SAROKIN, Circuit Judges.

OPINION OF THE COURT.

ALITO, Circuit Judge:

This appeal concerns an adversary proceeding filed by Debra and David Hayden, who are the debtors in a Chapter 13 bankruptcy proceeding. The subject of the adversary proceeding is a prior transaction in which Debra Hayden, in return for a cash payment, purported to assign to Western United Life Assurance Company her right to receive certain future periodic payments. In the adversary proceeding, the Haydens maintained that these periodic payments belonged to the bankruptcy estate because Debra Hayden's transaction did not constitute an effective assignment. The bankruptcy court agreed and entered summary judgment in favor of the Haydens. The district court affirmed the bankruptcy court's order. We now reverse and remand for further proceedings consistent with this opinion.

I.

In 1984, Debra Hayden sustained injuries as a result of allegedly negligent medical treatment. App. 52. She subsequently filed a malpractice suit against the treating physicians, the hospital and their respective liability insurance company (collectively the "medical defendants"). ¹ Id.

In February 1988, Ms. Hayden settled her suit with the medical defendants. Id. She executed a settlement agreement that stated:

For and In Consideration of the sum of three hundred ten thousand dollars ($310,000) to me paid in hand by [the medical defendants] ... the receipt of which is hereby acknowledged,* * I, being of lawful age, hereby fully and forever release, acquit and discharge the said [medical defendants] ... from any and all actions ... on account of any and all known and unknown injuries ... sustained by me ... as a result of medical treatment received by [me] from [the medical defendants].

* * (and the payment of $290,000 to United Pacific Life Ins. Co. for the purchase of an annuity contract)

Western's Br. at Exhibit 1. The medical defendants then entered into a qualified assignment and assumption agreement with Reliance Insurance Company ("Reliance"). In pertinent part, this agreement stated:

Whereas, the Settlement Agreement provides for the [defendants] to make certain periodic payments to or for the benefit of [Ms. Hayden].

Whereas, the [defendants] desires to assign to [Reliance] its liability to make such periodic payments pursuant to the conditions of Internal Revenue Code [Sec.] 130(c)....

NOW, THEREFORE, ... the parties hereto agree as follows:

1. Liabilities Assigned. The [defendants] hereby assigns and [Reliance] hereby assumes all of the [defendants'] liability to make the periodic payments to [Ms. Hayden]....

2. Funding of Periodic Payments. [Reliance] may fund the periodic payments ... by purchasing a "qualified funding asset" within the meaning of I.R.C. [Sec.] 130(d), in the form of an annuity contract from United.... All rights of ownership and control of such annuity shall be vested in [Reliance]. However, for [Reliance's] convenience, [Reliance] directs United ... to make the payments to ... [Ms. Hayden]....

Id. at Exhibit 2. With funds provided by the medical defendants, Reliance then purchased a $290,000 annuity from United Pacific Life Assurance Company ("United"). Western Life Assurance Co. v. Hayden, No. 93-1850, 94-517, 94-518, at 2 (W.D.Pa. Sept. 20, 1994); App. 53. The annuity provided for monthly payments of $2,159.37 for the longer of 30 years or the remainder of Ms. Hayden's life. App. 63. The annuity designated Reliance as the owner and Ms. Hayden as the payee. Id. at 60.

In January 1989, the Haydens were experiencing financial difficulties. In re Hayden, No. 92-2261, Adv. No. 92-0301, at 3 (Bankr.W.D.Pa. Oct. 13, 1993). To alleviate these difficulties, the Haydens contacted Donald Bach, who arranged for at least five loans in various amounts totalling more than $50,000. App. 53-54. In consideration for these loans, the Haydens agreed to pay back double the amount of the principal in 60 equal monthly payments. Western at 3.

Despite these loans, the Haydens continued to experience financial difficulties. In re Hayden at 4. In early 1990, Ms. Hayden asked Bach to consolidate the loans so as to reduce the monthly payments. App. 54. Bach advised Ms. Hayden that although consolidation was not possible, he might be able to arrange for the purchase of the annuity contract. Id.

In July 1990, Bach contacted Western United Life Assurance Company ("Western") to inquire whether Western had an interest in purchasing Ms. Hayden's annuity. Id. Western indicated an interest. On July 24, 1990, Western prepared a letter from Ms. Hayden addressed to Reliance. Id. This letter stated that Ms. Hayden had entered into an arrangement with Western and that pursuant to this arrangement she had conveyed her rights under the settlement agreement, including her right to receive the monthly annuity payments. Id. at 77. The letter asked Reliance to request that United change the annuity beneficiary to Western and to send future payments directly to Western. Id.

On August 10, representatives of Reliance and Western spoke. Id. at 55. Reliance informed Western that it would not honor Ms. Hayden's request. Id. at 79. Reliance explained that it was the owner of the annuity and that Ms. Hayden had no assignable rights in the policy. Id. After subsequent discussions between Reliance and Western, the two settled on the following mutually acceptable method of executing the assignment. Although Reliance insisted that the checks remain payable to Ms. Hayden, it agreed to honor a request from Ms. Hayden to change irrevocably the address to which the checks were sent to that of Western. Id. at 81.

In September 1990, the parties executed a series of documents in an attempt to assign to Western Ms. Hayden's rights to the monthly payments. ² In pertinent part, Ms. Hayden executed a document entitled "Annuity (Payment) Assignment Agreement." The document stated:

FOR VALUE RECEIVED ... [Debra A. Hayden] does hereby assign, transfer, and set over to Western ... all Assignor's right, title and interest in and to the periodic payments described below together with Assignor's existing rights and interest ... in and to the following described annuity contract/policy and related release and/or settlement agreement....

Western's Br. at Exhibit 5. The document then identified with specificity the monthly payments, the annuity contract, and the settlement agreement. Ms. Hayden also directed Reliance to have United irrevocably change the address to which the checks were sent to that of Western. Id. at Exhibit 4. Finally, because the annuity checks remained payable to Ms. Hayden, she executed an irrevocable special power of attorney empowering Western to endorse and cash the checks. Id. at Exhibit 6. In return, Western paid Ms. Hayden $178,395.63, of which $92,420.63 was used to satisfy the loans. App. 58; Western at 4. Pursuant to these arrangements, the monthly payments were received and deposited by Western from the end of 1990 until August 1992. App. 58.

On May 14, 1992, Debra and David Hayden filed a voluntary bankruptcy petition under Chapter 13 of the bankruptcy code. Western at 5. Subsequently, the Haydens filed a six-count adversary complaint against Western, United, and Reliance. ³ In this complaint, the Haydens alleged that the September 1990 documents executed by Ms. Hayden did not create an effective assignment. Thus, the Haydens argued that the annuity checks were property of the estate and that the court should order Western to turn over these checks to the estate. Similarly, the Haydens maintained that Western was only an unsecured creditor of the estate for a sum equal to the value of its bargain with Ms. Hayden less any prepetition annuity checks it received and cashed.

The parties moved for summary judgment on the adversary complaint. In re Hayden at 1. The bankruptcy court entered partial summary judgment in favor of the Haydens. ⁴ Id. at 14. The court held that the documents executed by Ms. Hayden did not create an effective assignment and that the monthly annuity payments were the property of the bankruptcy estate. Thus, the court ruled that Western was an unsecured creditor and ordered Western to surrender the postpetition annuity payments to the Chapter 13 trustee. Id.

The bankruptcy court subsequently confirmed the Hayden's Chapter 13 plan. In pertinent part, the plan provided that all monthly annuity payments from the commencement of the case to the date of consummation would be surrendered to the trustee for distribution to the creditors. Western at 5. For the first six months after consummation, the Haydens were to receive the monthly annuity checks, from which $870 would be given to the trustee for distribution to the creditors. Id. The remaining portion of the annuity checks for this six-month period, as well as the full amount of all subsequent annuity checks, was excluded as a payment reasonably necessary for the support of the debtor under 11 U.S.C. Sec. 522(d)(10)(E). Thus, the effect of the bankruptcy court's ruling in the adversary proceeding and its approval of the plan was that the Haydens continued to receive the annuity payments while Western received only a small percentage of the sum it paid to Ms. Hayden for her purported assignment.

Western separately appealed to the district court the...