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Church's fate in judge's hands after insurance scheme sours

November 28, 2012

A federal judge will determine whether an Anderson church can exit bankruptcy with a lighter debt load, over objections from its bank lender, after a church scheme to profit by selling life insurance on its elderly members failed.

U.S. Bankruptcy Judge Frank J. Otte took the case under advisement late Tuesday after a one-day bench trial in Indianapolis. A ruling is expected in a matter of weeks.

The case pits Fort Wayne-based lender Star Financial Bank against the Lindberg Road Church of Christ, which in 2006 took out life insurance on 11 members, hoping the proceeds would help finance church upgrades.

The church filed for bankruptcy reorganization earlier this year after it failed to hammer out a settlement with the bank, which is owed about $2 million. The church's attorneys want the court to relieve most of the debt, based on the failure of the life-insurance strategy it claims Star endorsed.

Star's attorneys say the bank's underwriting did not rely on life-insurance proceeds, and a bank employee warned the church it shouldn't rely on them, either. The bank believes the church can afford to pay because the loans also were backed by the church's real estate, which was recently appraised at $2.4 million.

David Kleiman, an attorney for the church, in his opening statement asked the court to "rectify a terrible wrong" and called the bank's actions "deceitful."

He said the church only intended to borrow $700,000, but the bank insisted on selling a "dangerous product" to a "small, unsophisticated church." He argued a series of internal bank documents that make up the backbone of the church's case show the bank ignored internal warnings and those from other banks, and left the church in the dark about the risks it was facing.

"This is the perfect case to really carry out what we've always said, that the bankruptcy court is a court of equity," argued Kleiman, of Benesch Friedlander Coplan & Aranoff LLP, adding later about Star's employees: "They're not bad people. They simply ignored their customer. They didn't do the things any bank should do."

Star tried to block the church from presenting internal bank documents as part of its case, but Judge Otte ruled for the church, saying "the story needs to be told" because of the "extremely unusual circumstances" of the case.

Attorneys for the bank have suggested the church is trying to use the failed investment, known as Life Legacy, as a scapegoat to erase its obligation to repay loans whose proceeds paid for tangible church improvements.

The bank extended about $1.8 million for improvements, including for a child care center, before agreeing to boost the credit extended to $2.5 million so the church could pay life insurance premiums on $4.35 million in coverage of elderly members.

"Life Legacy was an option the church wanted but not the only option discussed," said attorney Thomas C. Scherer, of Bingham Greenebaum Doll, who represents Star Financial.

Scherer noted the life insurance strategy was not a bank program, but rather a product pushed by Total Financial Group of Carmel, which approached the church separately.

The bank called as a witness Jack Harter, a former loan officer for Star who is now with Mainsource Bank. Harter said Star's underwriting did not lean on life-insurance proceeds for collateral. After all, the bank viewed the church's real estate as worth $2.4 million.

The church's proposed exit plan calls for Lindberg Road to pay Star $507,000, plus 4-percent interest, over 25 years. The remainder of the debt, $1.5 million, would be secured by the life insurance policies. Star’s objection argues the policies can’t serve as collateral.

The lone witness for the church—board member, elder and office manager Sherrill Allred—said he's confident the church can afford to make the payments. The total figure is based on what the church would still owe on the $700,000 it originally intended to borrow.

Allred said his confidence is based in large part on a lease with the affiliated school, which has agreed to pay $5,500 per month, though Allred acknowledged on the stand that the school is three months behind on rent.

The judge is expected to either accept the church's exit plan or send the parties back to the drawing board.

The church is not alone in facing financial troubles stemming from a reliance on life-insurance proceeds. The pattern is typical of life-insurance-finance programs that were promoted and sold to charities and churches across the country in recent years, usually with bad results for buyers, insurance experts told IBJ for a story in October.

The key to the plan was the insurance, which was supposed to pay off either in death benefits or through a sale of the policies on the secondary market. Neither avenue materialized, as too few church members died, and the secondary market dried up during the recession.

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