Kaler v. Bala (In re Racing Services, Inc.)

Citation:
Kaler v. Bala (In re Racing Services, Inc.), Case No. 13-1086 (8th Cir. February 27, 2014)
Tag(s):
Ruling:
Bankruptcy court award of the cash value proceeds of a former employee's life insurance policy to her employer (the debtor) was reversed by the Eighth Circuit on the grounds that the debtor held only a limited right to the funds and the bankruptcy estate did not have control of the policy or its proceeds.
Procedural context:
After interpleader of the cash value of the insurance proceeds into the bankruptcy court by the insurer, the bankruptcy trustee filed an adversary proceeding to determine the estate's interest in the funds. Both the trustee and the defendant, the former employee, filed motions for summary judgment. The bankruptcy court ruled in favor of the trustee, and the defendant appealed. The bankruptcy appellate panel affirmed, and the defendant appealed again. The Eighth Circuit reversed and remanded.
Facts:
The defendant was a former employee and the founder of the debtor, Racing Services, Inc., a simulcast racing and parimutuel gambling operation in North Dakota. The company had purchased a whole-life insurance policy on her behalf, although she was designated the owner of the policy. A separate agreement provided that the company could recoup the premiums it paid for the policy under certain specific conditions, although the parties disagreed whether the company's interest was limited to recovery if the employee voluntarily surrendered the policy, or if the company could recover in the event of of any termination of the policy. In 2004, the defendant and the debtor were charged with various federal gaming and money laundering violations. They were subsequently convicted, although the convictions were later overturned by the Eighth Circuit. The company also filed bankruptcy in 2004. During the post-conviction phase in the criminal proceedings, the Department of Justice sought forfeiture of the cash value of the insurance policy, and the insurer paid $64,000.00 to the government, which was then returned to the insurer after reversal of the convictions. The company's bankruptcy trustee also claimed an interest in the funds, and the insurer ultimately deposited the money with the bankruptcy court. After summary judgment in favor of the trustee and an affirmance by the BAP, the defendant appealed to the Eighth Circuit. The Eighth Circuit found that the principles of contract interpretation controlled to establish the rights of the company (and thus the trustee). The Circuit found that the terms of the agreement between the employee and the debtor were unambiguous and limited the company's right to recover its premium payments in the event of the employee's voluntary surrender of the policy. As there was no voluntary surrender, or any evidence that the employee should be deemed to have surrendered the policy by failing to reinstate it after the forfeiture, the court reversed and remanded the case for further proceedings.
Judge(s):
Riley, Melloy, and Kelly

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