Wednesday, August 20, 2014

No. 65: A Life Settlement in a Bankruptcy Case

On August 13, 2014, Melville Capital issued a press release entitled "Melville Capital, LLC Brokers Sale of Initially Undisclosed Life Insurance Policy, Delivers $460,000 to Chapter 7 Estate." Melville calls itself "the country's premier Life Settlement Broker practicing in the area of restructuring and insolvency." The press release discusses a lumber company bankruptcy case where the trustee found life insurance policies that were not listed among the company's assets. The press release identifies nine other cases in which Melville was involved.

The Lumber Company Case
In the lumber company case, the bankruptcy trustee asked Melville to review the policies. Melville determined that one policy had value. The trustee retained Melville on a "success fee basis" to sell the policy through a life settlement in the secondary market for life insurance. Afterward, the trustee said he "was able to liquidate what appeared to be a worthless asset for a very significant amount of money for the benefit of the estate."

The Policy
In the press release, Melville says the policy was sold for $460,000, but provides no further details. I contacted Melville. A representative graciously answered several questions but, as will be seen, declined to answer two questions. I verified most of the information by reviewing public documents in the bankruptcy court file.

The policy was universal life with a face amount of $1 million and no available surrender value. It was policy No. B00399008 issued by Protective Life Insurance Company (Birmingham, AL). The policy was sold to Magna Life Settlements, Inc. (Austin, TX) for $460,000. Melville received a commission of 18 percent ($82,800), out of which Melville undoubtedly covered some expenses, and the bankruptcy estate received the remaining $377,200. (In Re: Hubert Moore Lumber Co., U.S. Bankruptcy Court, Middle District of Georgia, Case No. 13-71347.)

General Observations
I had never heard about the use of life settlements in bankruptcy proceedings. I am posting this item to call attention to the subject.

Melville says the bankrupty estate received the gross purchase price of $460,000. I think it would be more accurate to say the estate received the net amount of $377,200.

I was surprised that the gross purchase price was 46 percent of the face amount. Such a high ratio is reminiscent of viatical settlements involving terminally ill insureds. I asked Melville about the insured's age and also about the insured's general health at the time of the life settlement. Melville declined to answer those questions because of concerns about privacy and the Health Insurance Portability and Accountability Act (HIPAA). I tried without success to contact Magna and Protective. I think the insured must be very old, very ill, or both.

I am offering a complimentary PDF of Melville's press release. Send an e-mail to and ask for Melville's release.