Leslie Gladstone v. US Bancorp
811 F.3d 1133
9th Cir.2016Background
- Debtor David Green filed Chapter 7 on Sept. 12, 2007, and died about five months later. He failed to disclose three pre-petition life-settlement transactions (three term policies sold in the secondary market) that produced roughly $9,000,000 in death benefits after his death; purchasers paid about $507,000.
- The Trustee sued to avoid and recover the life-settlement proceeds as fraudulent/preferential transfers under the Bankruptcy Code (11 U.S.C. § 548 and related provisions).
- Bankruptcy court granted summary judgment for defendants and denied Trustee leave to amend; the district court reversed both rulings and allowed amendment. This appeal followed to the Ninth Circuit.
- Core factual disputes included timing and effective dates of transfers (one policy transfer completed post-petition), concealment of assets, and whether the policies/settlements were property of the estate or exempt.
- Trustee discovered the transfers late (stepson produced documents in Aug. 2010); Trustee argued equitable tolling of the § 546 limitations period due to debtor concealment.
Issues
| Issue | Plaintiff's Argument (Gladstone) | Defendant's Argument (U.S. Bancorp/Coventry) | Held |
|---|---|---|---|
| Whether debtor’s interests in unmatured life policies and life-settlement value are "interest[s] of the debtor in property" under § 548 (via § 541) | Policies and their secondary-market value were legal/equitable interests of debtor at petition and therefore property of the estate | Under pre-Code precedent and the Bankruptcy Act, estate interest is limited to cash-surrender value; unmatured policies/viaticals not part of estate | Affirmed: policies and life-settlement value are property of the estate under § 541(a); § 541(b) contains no exclusion for such settlements |
| Whether § 541(b) or other Code provisions exclude life settlements from the estate | No statutory exclusion; Congress removed old § 70(a) approach and chose to address life insurance via exemptions, not exclusion | Argues judicially-created exclusion (Burlingham line) limits trustee to surrender value only | Rejected: Burlingham and similar pre-Code holdings are abrogated by the Bankruptcy Code; Congress could have excluded life policies but did not |
| Whether the assets were exempt such that Trustee cannot avoid transfers (California exemption) | Debtor did not timely claim exemptions; exemptions benefit only debtor and were waived/transferred; defendants lacked standing | Policies exempt under CA law (Cal. Code Civ. Proc. § 704.100) and thus not avoidable | Rejected: Trustee did not claim exemptions; defendants lack standing to raise debtor's exemptions for avoidance defense; argument not preserved on appeal |
| Whether Trustee’s avoidance action was time-barred under § 546(a)(1) | Equitable tolling applies because debtor concealed transfers and prevented discovery; action filed within tolled period | Defendants argue they are innocent third parties and statute shouldn’t be tolled for their benefit | Held: Equitable tolling applies; limitations tolled until Trustee discovered transfers (Aug. 10, 2010); complaint timely |
| Whether Trustee should have been granted leave to amend complaint to add post-petition transfer allegations | Trustee discovered new documentary evidence (Protective beneficiary transfer form) late and sought to add § 549 claim; amendment not futile | Defendants opposed as delay/futility | Held: Abuse of discretion to deny leave; leave to amend should have been granted |
Key Cases Cited
- Begier v. I.R.S., 496 U.S. 53 (Sup. Ct.) (property of the estate defined by § 541 governs what constitutes "interest of the debtor in property")
- United States v. Whiting Pools, Inc., 462 U.S. 198 (Sup. Ct.) (Congress intended broad inclusion of property in the estate)
- Burlingham v. Crouse, 228 U.S. 459 (Sup. Ct.) (interpreting Bankruptcy Act §70(a) on surrender value — treated as abrogated here)
- Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (Sup. Ct.) (rule on discovery and equitable tolling principles)
- Barnhart v. Peabody Coal Co., 537 U.S. 149 (Sup. Ct.) (expressio unius canon and statutory-structure interpretation)
- Taylor v. Freeland & Kronz, 503 U.S. 638 (Sup. Ct.) (exempt property remains part of estate absent timely claim; debtor must properly claim exemptions)
- Olsen v. Zerbetz (In re Olsen), 36 F.3d 71 (9th Cir.) (equitable tolling can apply where debtor concealed transfers even if third parties innocent)
- Ernst & Young v. Matsumoto (In re United Ins. Mgmt., Inc.), 14 F.3d 1380 (9th Cir.) (equitable tolling applied to fraudulent concealment in bankruptcy avoidance context)