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Ruling keeps church ensnared in life insurance nightmare

May 11, 2013

A federal bankruptcy judge has slapped down an Anderson church that attempted to blame its bank for a failed scheme to finance church upgrades by buying life insurance policies on its elderly members.

Judge Frank Otte late last month refused to confirm a reorganization plan for the Lindberg Road Church of Christ that would have punished the bank by slashing its secured claim from $2 million to $507,000.

Otte shot down the unusual plan on a variety of grounds, including that it failed to comply with bankruptcy code and failed to treat the claims of Fort Wayne-based Star Financial Bank in a fair and equitable fashion.

“It is clear that the debtor’s position throughout this case has been supported or justified by the assumption that the bank acted improperly in its dealings with the debtor and therefore it should be punished and made to bear the costs of the loss of this deal,” Otte said.

“The court finds no evidence of such malice or wrongdoing,” he added. “The court suggests, as difficult as it might be, that this debtor accept the consequences of its financial decisions and not look for blame as an escape from dealing with negative fallout of those decisions.”

The church’s troubles began in 2006, when the congregation tapped a $2.5 million Star loan to fund church upgrades and buy life insurance policies on 11 elderly members. The idea was to buy annuities that would pay the life insurance premiums, then to pay off the bank loan as insured members died.

The underpinnings of the plan quickly unraveled. A shift in market conditions made purchasing annuities no longer viable, and efforts to sell the policies outright yielded no buyers.

At least two insured members died, yielding $550,000 for the bank. But premium payments stopped on remaining policies, decimating their value.

At a hearing last November, David Kleiman, a partner with Benesch Friedlander Coplan & Aronoff LLP representing the church, put the blame for the fiasco squarely on the bank and a financial advisory firm it worked with.

He argued that the church intended to borrow only $700,000, but the bank insisted on selling a “dangerous product” to a “small, unsophisticated church.” He called the bank’s actions “deceitful” and urged Otte to “rectify a terrible wrong.”

The bank, meanwhile, cast itself as the scapegoat and called the reorganization plan patently unfair. Under the proposal Otte rejected, the church would have repaid the $507,000 with 4 percent interest over 25 years.

The bank also would have been entitled to collect on proceeds from remaining life insurance policies, but those have “little or no present value,” Star argued in court filings.

The bank said it should be entitled to collect the entire $2 million because the church property provided as collateral is valued at $2.4 million.

Kleiman, the attorney for the church, could not be reached for comment.

Otte implored the church and bank to set aside hard feelings and work together to come up with a plan to restructure the debt. But a solution could be elusive. Court filings show the church has a meager revenue stream—the bulk of which is the $15,000 to $20,000 per month it collects in free-will offerings.

Teachers’ union suffers setback

Indiana Securities Commissioner Chris Naylor racked up a victory last month when a federal judge refused to dismiss the National Education Association as a defendant in Naylor’s high-profile lawsuit over the collapse of the ISTA Insurance Trust.

Judge Sarah Evans Barker ruled that “any determination of the NEA’s liability in this lawsuit must be reserved for the jury at trial.”

The NEA, parent of the Indiana State Teachers Association, is by far the most deep-pocketed defendant in the suit, which also names the ISTA and various ISTA benefit trusts.

The national organization argued that it was not liable for losses stemming from the 2009 collapse of the ISTA Insurance Trust, which provided health insurance to about 7,000 school employees and family members and provided long-term disability coverage to nearly 30,000 others.

The value of the trust’s assets plummeted 55 percent in 20 months, leaving it $57 million short of its liabilities, according to a 2009 Indiana Department of Insurance report.

The NEA argued it is not liable in the suit, in part because it did not directly manage ISTA employees involved with the trust. Naylor, however, said it should be on the hook “because of its operational control of the ISTA entities.”

Naylor’s suit, which seeks more than $23 million, alleges the trust sold unregistered securities, comingled funds, and failed to disclose its financial problems to school districts. It is scheduled for trial in October.•

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