ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA. (D.C. Civil No. 93-01850).
Before: Hutchinson, Alito, and Sarokin, Circuit Judges.
This appeal concerns an adversary proceeding filed by Debra and David Hayden, who are the debtors in a Chapter 13 bankruptcy proceeding. The subject of the adversary proceeding is a prior transaction in which Debra Hayden, in return for a cash payment, purported to assign to Western United Life Assurance Company her right to receive certain future periodic payments. In the adversary proceeding, the Haydens maintained that these periodic payments belonged to the bankruptcy estate because Debra Hayden's transaction did not constitute an effective assignment. The bankruptcy court agreed and entered summary judgment in favor of the Haydens. The district court affirmed the bankruptcy court's order. We now reverse and remand for further proceedings consistent with this opinion.
In 1984, Debra Hayden sustained injuries as a result of allegedly negligent medical treatment. App. 52. She subsequently filed a malpractice suit against the treating physicians, the hospital and their respective liability insurance company (collectively the "medical defendants").*fn1 Id.
In February 1988, Ms. Hayden settled her suit with the medical defendants. Id. She executed a settlement agreement that stated:
For and In Consideration of the sum of three hundred ten thousand dollars ($310,000) to me paid in hand by [the medical defendants] . . . the receipt of which is hereby acknowledged, ** I, being of lawful age, hereby fully and forever release, acquit and discharge the said [medical defendants] . . . from any and all actions . . . on account of any and all known and unknown injuries . . . sustained by me . . . as a result of medical treatment received by [me] from [the medical defendants].
** (and the payment of $290,000 to United Pacific Life Ins. Co. for the purchase of an annuity contract)
Western's Br. at Exhibit 1. The medical defendants then entered into a qualified assignment and assumption agreement with Reliance Insurance Company ("Reliance"). In pertinent part, this agreement stated:
Whereas, the Settlement Agreement provides for the [defendants] to make certain periodic payments to or for the benefit of [Ms. Hayden].
Whereas, the [defendants] desires to assign to [Reliance] its liability to make such periodic payments pursuant to the conditions of Internal Revenue Code [ § ] 130(c) . . . .
NOW, THEREFORE, . . . the parties hereto agree as follows:
1. Liabilities Assigned. The [defendants] hereby assigns and [Reliance] hereby assumes all of the [defendants'] liability to make the periodic payments to [Ms. Hayden]. . . .
2. Funding of Periodic Payments. [Reliance] may fund the periodic payments . . . by purchasing a "qualified funding asset" within the meaning of I.R.C. [ § ] 130(d), in the form of an annuity contract from United . . . . All rights of ownership and control of such annuity shall be vested in [Reliance]. However, for [Reliance's] convenience, [Reliance] directs United . . . to make the payments to . . . [Ms. Hayden] . . . .
Id. at Exhibit 2. With funds provided by the medical defendants, Reliance then purchased a $290,000 annuity from United Pacific Life Assurance Company ("United"). Western Life Assurance Co. v. Hayden, No. 93-1850, 94-517, 94-518, at 2 (W.D.Pa. Sept. 20, 1994); App. 53. The annuity provided for monthly payments of $2,159.37 for the longer of 30 years or the remainder of Ms. Hayden's life. App. 63. The annuity designated Reliance as the owner and Ms. Hayden as the payee. Id. at 60.
In January 1989, the Haydens were experiencing financial difficulties. In re Hayden, No. 92-2261, Adv. No. 92-0301, at 3 (Bankr. W.D.Pa. Oct. 13, 1993). To alleviate these difficulties, the Haydens contacted Donald Bach, who arranged for at least five loans in various amounts totalling more than $50,000. App. 53-54. In consideration for these loans, the Haydens agreed to pay back double the amount of the principal in 60 equal monthly payments. Western at 3.
Despite these loans, the Haydens continued to experience financial difficulties. In re Hayden at 4. In early 1990, Ms. Hayden asked Bach to consolidate the loans so as to reduce the monthly payments. App. 54. Bach advised Ms. Hayden that although consolidation was not possible, he might be able to arrange for the purchase of the annuity contract. Id.
In July 1990, Bach contacted Western United Life Assurance Company ("Western") to inquire whether Western had an interest in purchasing Ms. Hayden's annuity. Id. Western indicated an interest. On July 24, 1990, Western prepared a letter from Ms. Hayden addressed to Reliance. Id. This letter stated that Ms. Hayden had entered into an arrangement with Western and that pursuant to this arrangement she had conveyed her rights under the settlement agreement, including her right to receive the monthly annuity payments. Id. at 77. The letter asked Reliance to request that United change the annuity beneficiary to Western and to send future payments directly to Western. Id.
On August 10, representatives of Reliance and Western spoke. Id. at 55. Reliance informed Western that it would not honor Ms. Hayden's request. Id. at 79. Reliance explained that it was the owner of the annuity and that Ms. Hayden had no assignable rights in the policy. Id. After subsequent Discussions between Reliance and Western, the two settled on the following mutually acceptable method of executing the assignment. Although Reliance insisted that the checks remain payable to Ms. Hayden, it agreed ...