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Litton Loan Servicing, L.P. v. Dennis Schubert

Summarizing by Amir Shachmurove

Leslie Gladstone v. U.S. Bancorp

Gladstone v. U.S. Bancorp, No. 13-55773 (9th Cir. Jan. 8, 2016).
A trustee may seek to avoid as fraudulent the debtor’s prepetition sale of a term life-insurance policy.
Procedural context:
In this chapter 7 case, the trustee brought a section 548 action to avoid the debtor's prepetition transfers of term life-insurance policies. The bankruptcy court granted the defendants’ motion for summary judgment and denied the trustee’s motion for leave to file a second-amended complaint. The district court reversed. On appeal from the district court, the Ninth Circuit affirmed the district court and remanded to the bankruptcy court.
Before filing his petition on September 12, 2007, the debtor, David Green, conveyed three term life-insurance policies. He transferred the first two policies (of which he was the beneficial owner) to his wife, Eileen Green, and she later sold them to the defendants. The face value of the first two policies totaled $6 million, and in return she received $193,000. A third policy was issued on David’s life for the benefit of Eileen. A month before David’s bankruptcy, he and Eileen signed an agreement to convert the third policy to a universal policy with a face value of $3 million and sold it to defendants for $314,776.66. The issuer of the third policy did not transfer the policy to the defendants until after the petition was filed. The defendants paid Eileen the purchase price of the third policy after the petition date. David did not disclose the transfers in his schedules or statement of financial affairs. He died several months after filing his petition, after which the defendants received the policies’ face amounts. On August 9, 2010, David’s stepson informed the trustee of the three transactions. The policies that David owned had market value to him independent of the death benefit or equitable beneficial interest. Had he not transferred his interests in the policies before bankruptcy, his estate would have included those interests. The policies were thus “an interest of the debtor in property” under section 548. Neither life insurance policies nor viatical settlements are excluded from estate property under section 541(b). A judicially created exclusion under the former Bankruptcy Act of 1898 is unavailable under the 1978 Bankruptcy Code. The Ninth Circuit rejected the defendants’ argument that the policies and settlements should be treated as removed from the estate under section 522. Under California law, applicable to this case, federal exemptions are unavailable, and Cal. Code Civ. Proc. section 704.100 provides that unmatured life-insurance policies are exempt without making a claim. But that statute specifically excludes the policy loan value, which represents the policyholder’s equitable interest. Even if there were merit to the defendants’ section 522 argument, David did not claim the property as exempt; the defendants lacked standing to raise the exemption argument; and the defendants failed to present the argument to the bankruptcy or district courts. The trustee filed her amended complaint more than two years after the petition date, which ordinarily would be time-barred under the section 546(a)(1)(A) avoidance-action statute of limitations. But David’s fraudulent concealment of the life-insurance transactions equitably tolled the statute of limitations. The trustee timely filed the complaint within two years after David’s stepson informed the trustee of the transactions. Finally, the bankruptcy court should have permitted the trustee to further amend the complaint based on the trustee’s discovery of new evidence.
Sidney R. Thomas, Chief Judge, Consuelo M. Callahan, Circuit Judge, and James K. Singleton, Senior District Judge for the U.S. District Court for the District of Alaska, sitting by designation. Opinion by Chief Judge Thomas.

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