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,
No. 13-55773
United States Court of Appeals, Ninth Circuit
Filed Jan. 8, 2016
Argued and Submitted June 2, 2015.
810 F.3d 1133
What we are left with, then, is an order finding a stay violation but postponing until later a ruling on damages under
David M. Green, Debtor-In Re.
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
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
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
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, Defen-
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:
| Policy | Face Value | Settlement | Premium 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
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
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
III
As we have noted, 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
A
In determining the scope of an “interest of the debtor in property” under
The Bankruptcy Code does not define “an interest of the debtor in property.” However, we have guidance from the Supreme Court as to its meaning. The Court has explained that the phrase “is best understood as that property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings.” Begier v. I.R.S., 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990). Therefore, the interest must be analyzed under
Under the Bankruptcy Code, the filing of a bankruptcy petition creates a bankruptcy estate.
Indeed, the legislative history indicates that
The debtor held the ownership title to the life insurance policies prior to their transfer. “[P]roperty of the estate” includes all property in which the debtor has legal title except “to the extent of an equitable interest in such property that the debtor does not hold.” In re Advent Mgmt. Corp., 104 F.3d at 295. As indicated by the life settlements in this case, the term life insurance policies owned by the debtor had market value to the debtor independent of the death benefit or equitable beneficial interest. Therefore, because all of the debtor‘s legal and equitable interests became part of the bankruptcy estate when the case was commenced, his interest in the term life insurance policies and the life settlements would have been part of the bankruptcy estate under
B
Two sections of the Bankruptcy Code allow a debtor to retain assets that would otherwise form part of the bankruptcy estate under
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. 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. Therefore, the property falls within the reach of
1
The district court properly concluded that the life settlements at issue were not excluded from the estate under
Defendants argue that life insurance policies and life settlements are excluded from the bankruptcy estate by a judicially created exclusion. Based on a line of authority tracing to Supreme Court decisions interpreting the Bankruptcy Act of 1898, Defendants contend that the Estate‘s interest is limited to the cash surrender value of the life insurance policies. The policies at issue have no cash surrender value, so if Defendants are correct, the Trustee‘s avoidance action fails as a matter of law.
However, Defendants’ argument is premised on a provision of the Bankruptcy Act of 1898, which was abrogated by the adoption of the Bankruptcy Code in 1978. Section 70(a) of the Bankruptcy Act of 1898 specified, in relevant part:
That when any bankrupt shall have any insurance policy, which has a cash surrender value payable to himself, his estate, or personal representatives, he may, within thirty days after the cash surrender value has been ascertained and stated to the trustee by the company issuing the same, pay or secure to the trustee the sum so ascertained and stated, and continue to hold, own, and carry such policy free from the claims of the creditors participating in the distribution of his estate under the bankruptcy proceedings; otherwise the policy shall pass to the trustee as assets[.]
This section‘s purpose was “construed ... to vest the surrender value in the trustee for the benefit of the creditors, and not otherwise to limit the bankrupt in dealing with his policy.” Burlingham v. Crouse, 228 U.S. 459, 473, 33 S.Ct. 564, 57 L.Ed. 920 (1913); see also In re Holden, 114 F. 650, 652 (9th Cir.1902). Defendants argue that this authority implies that life settlements are excluded from a bankruptcy estate.
Burlingham, Holden, and their progeny, including Lekas v. Mann (In re Lekas), 299 B.R. 597, 602 (Bankr.D.Ariz.2003), do not state the rule defining the scope of a bankruptcy estate under the Bankruptcy Code, which supplanted the Bankruptcy Act of 1898. Rather, Burlingham interprets a section of the Bankruptcy Act of 1898, which is no longer in force. Because Green‘s bankruptcy was filed after October 1, 1979, the Bankruptcy Code applies, not the prior Bankruptcy Act of 1898. See Washburn & Roberts, Inc. v. Park East (In re Washburn & Roberts, Inc.), 795 F.2d 870, 873 (9th Cir.1986) (“Congress provided that in any bankruptcy case commenced after October 1, 1979, the old Bankruptcy Act of 1898 would not apply.“). The Court‘s construction of § 70(a) in Burlingham was accordingly abrogated by statute when the Bankruptcy Reform Act of 1978 was enacted.
Indeed, Congress specifically eliminated the prior section 70(a) in adopting the
The structure of the Bankruptcy Code buttresses our conclusion. In dealing with the issue of life insurance, Congress chose not to exclude it from the estate under
Even if it were not inapposite due to statutory abrogation, Burlingham and its progeny are not on point with the facts of David Green‘s bankruptcy. The district court correctly observed that Burlingham is not controlling because the Court did not “specifically address the possibility of the policies being sold on the secondary market[.]” This century-old decision cannot be fairly read to state binding precedent as to the treatment of life settlements by a bankruptcy trustee, as the secondary market for life insurance policies and the life settlement industry developed only in the last 30 years. In fact, shortly after it decided Burlingham, the Court in Cohen presciently recognized that a rule categorically excluding a life insurance policy from a bankruptcy estate would make the policies a vehicle for subterfuge. Cohen v. Samuels, 245 U.S. 50, 53, 38 S.Ct. 36, 62 L.Ed. 143 (1917) (“[T]o hold that there was nothing of property to vest in a trustee would be to make an insurance policy a shelter for valuable assets and, it might be, a refuge for fraud.“).
For all these reasons, the district court correctly concluded that the debtor‘s interests in life insurance policies and life settlements were not excluded from the property of the bankruptcy estate pursuant to
The second method by which property may be removed from the bankruptcy estate is by exemption under
Section 522(d) enumerates federal exemptions available to the debtor. However, under
The Defendants claim, in the alternative to their
This proposition is dubious, at best.3 However, it is unnecessary for us to reach the merits of it for three independent reasons: the debtor did not claim the property as exempt; the Defendants lack standing to raise the argument; and the Defendants failed to present the argument to the district court.
First, the debtor did not claim the settlements or insurance policies as exempt within the required period. Section 522(l) requires the debtor to file a list of property to be claimed as exempt.
Second, the Defendants lack standing to raise this issue. “[A]n exemption is provided only for the benefit of the debtor,” Fox v. Smoker (In re Noblit), 72 F.3d 757, 758 (9th Cir.1995). “If the exempt property is transferred, the debtor has in essence waived the exemption, and the transferee cannot avail herself of the exemption in a subsequent avoidance action.” Id. Here, David Green waived his exemption when he shifted the beneficial interest of his insurance policies to Defendants, via his wife. Defendants, removed third parties, lack standing to now claim his exemption as a defense to the Trustee‘s avoidance action. Id. at 758-59.
Third, the Defendants did not present this argument either to the bankruptcy or district courts. We decline to exercise our discretion to consider arguments raised for the first time on appeal. See Robinson v. Jewell, 790 F.3d 910, 915 (9th Cir.2015).
C
Because the debtor had a legal and equitable interest in the property at issue within the meaning of
IV
The district court also properly held that the Trustee‘s avoidance action was not time-barred because the debtor‘s fraudulent concealment equitably tolled the statute of limitations from commencing. The trustee‘s avoidance action was subject to the two-year limitations period in
There is no serious dispute that David Green or his agents took steps to conceal the life settlement transactions with Defendants by transferring the beneficial interest in the policies to his wife before the sale to Defendants was completed. Nor is there any serious dispute that other assets of the estate were concealed. The record shows that the trustee diligently pursued collection of assets, but was prevented from discovering the existence of the life settlement transactions because of the debtor‘s actions to conceal them. The district court properly concluded, based on the undisputed facts, that application of equitable tolling was appropriate.
Defendants argue that equitable tolling is inapplicable because they are innocent third parties who did not intentionally conceal facts from the Trustee. This argument is foreclosed by In re Olsen, in which we applied equitable tolling to cut off a third party‘s limitations claim where the debtors—not the third party—concealed a conveyance from the Trustee. Olsen v. Zerbetz (In re Olsen), 36 F.3d 71, 72-73 (9th Cir.1994); see also Holmberg v. Armbrecht, 327 U.S. 392, 396, 66 S.Ct. 582, 90 L.Ed. 743 (1946) (“Equity will not lend itself to ... fraud [that prevents the plaintiff from being diligent] and historically has relieved from it.“).
Furthermore, 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.
Under the principles established in Lampf, 501 U.S. at 363, 111 S.Ct. 2773, the statute of limitations was tolled until the fraudulent transfers were revealed to the Trustee‘s attorney by David Green‘s stepson on August 10, 2010. The first amend-
V
Finally, the district court correctly concluded that the bankruptcy court should have granted the Trustee leave to amend her avoidance action. The Trustee sought to add allegations regarding the post-petition transfer of the Protective policy and to allege that the policies were transferred directly by David Green to Defendants in April 2007. The bankruptcy court denied leave to amend but provided no reasons for the denial. We “strictly review[]” the bankruptcy court‘s denial of leave to amend “in light of the strong policy permitting amendment.” Plumeau v. Sch. Dist. No. 40 Cnty. of Yamhill, 130 F.3d 432, 439 (9th Cir.1997) (internal quotation omitted).
The Trustee sought leave to amend because she discovered new evidence: an executed copy of the Protective beneficiary transfer form. Defendants did not initially produce that form in response to the Trustee‘s subpoena. Any delay associated with the Trustee‘s motion therefore stems in part from Defendants.
Amendment under these circumstances would not have been futile. The Protective form supports the Trustee‘s
VI
The district court properly concluded that summary judgment was not appropriate, and that the Trustee should have been granted leave to amend. We affirm the district court and remand for further proceedings consistent with this opinion. We need not, and do not, reach any other issues urged by the parties.
AFFIRMED.