Opinion
BANKRUPTCY NO.: 1-02-00081
August 22, 2003
Nature of Proceeding: Debtor's Motion to Determine Secured Status of Commerce Bank (Doc. 61)
OPINION
Drafted with the assistance of Wendy E. Morris, Law Clerk.
Background
Prior to Debtor's bankruptcy filing, he obtained loans from Commerce Bank in 1998 and 2001. He also executed two assignments of the same life insurance policy in favor of Commerce Bank.
After his bankruptcy case was filed, a difference of opinion arose concerning the nature of the assignments. Debtor filed the instant Motion seeking determination of Commerce Bank's secured status in the assigned life insurance policy. A hearing was held on November 25, 2002, which encompassed testimony from Commerce Bank's vice president for loan review and the admission of various exhibits. The parties also stipulated to two (2) documents — the 1998 and 2001 assignments. Counsel for both sides submitted post-hearing briefs replete with un-proffered "evidence" and personal attacks on each other only clouding the issue to be decided.
A review of a transcript of the proceeding reveals that the actual issue pending is whether Debtor's assignment was absolute or merely collateral security for the underlining loans.
Although Pennsylvania's Commercial Code does not allow Article 9 security interests in life insurance policies, such policies are assignable and governed by Pennsylvania contract law. Commerce Bank currently has possession of the policy. See 13 Pa. Cons. Stat. Ann. § 9109(d)(8) (West 2003); see generally In re Tyson Metal Products, Inc., 117 B.R. 181 (Bankr. W.D. Pa. 1990) (overview of Pennsylvania law concerning creation of security interests and assignments in life insurance policies).
Discussion
Pennsylvania law defines assignments as transfers of some right, title or interest in the thing assigned to another, unless qualified.See Horbal v. Moxham Nat'l Bank, 697 A.2d 577, 583 (Pa. 1997) (citing In re Purman's Estate, 56 A.2d 86, 88 ( Pa. 1948)); accord Waiwada v. Commercial Credit Plan Consumer Discount Co. (In re Waiwada), 248 B.R. 258, 261 (Bankr. M.D. Pa. 2000). The extent of an assignee's interest in the thing assigned depends on whether he holds the assignment absolutely or merely as collateral security.
An absolute assignment may be found where "there is an intent to assign a present right in the subject matter of the assignment, divesting the assignor of all control over that which is assigned." Tyson Metal Products, Inc., 117 B.R. at 185 (citations omitted).
However, a different result occurs if the assignment is for collateral security. Collateral assignments of life insurance policies are qualified by the terms of the pledge. See Synder v. Home Life Ins. Co., 195 A. 895, 896 (Pa. 1938). A collateral assignment does not vest absolute ownership in the creditor of the thing assigned.See Brown v. German-American Title Trust, 34 A. 335 (Pa. 1896). "An assignment of an insurance policy as collateral security vests in the assignee a title to enable him to collect the proceeds thereof, yet it does not divest the assignor of the general property in the policy, and, notwithstanding his assignment, the assignor has title to property subject to the assignee's lien." Clark v. Equitable Life Assur. Soc. of U.S., 133 F. 816, 818 (E.D. Pa. 1904);see also Premium Fin. Specialists v. Remcor, Inc. (In re Remcor, Inc.), 186 B.R. 629, 637 (Bankr. W.D. Pa. 1995); United States Nat'l Bank v. Campbell, 47 A.2d 697, 700 (Pa. 1946). Payment of the underlining debt extinguishes the lien on the policy and entitles the assignor to possession of the policy. Id.
The interpretation of assignment agreements is governed by the rules of construction governing contracts and the circumstances surrounding the execution of the agreement. See Hobal, 697 A.2d at 583. "The fundamental rule in construing a contract is to ascertain and give effect to the intention of the parties." Friia v. Friia, 780 A.2d 664, 668 (Pa.Super. 2001) (citation omitted). The parties' intent is to be discerned solely by the language contained in the document unless it is unclear or ambiguous. See id. (citation omitted). Any ambiguity in an assignment is resolved against the preparer. See Moore v. Moore, 25 A.2d 130, 131 (Pa. 1942).
This Court is convinced after reviewing the assignments that its language is clear and unambiguous. Both assignments contain identical language, with respect to the agreements' provisions. Paragraph "A" provides, in part:
the undersigned hereby pledges, collaterally assigns, transfers, delivers and sets over to and in favor of Commerce Bank/Harrisburg . . . Life Insurance Policy . . . upon the life of Carl Bronitsky, M.D. and all claims, options, privileges, rights, title and interest therein and thereunder (except as provided in Paragraph — hereof). . . .
Although, paragraph "A" helps foster the illusion that Commerce Bank holds an absolute assignment in the policy, other statements contained within the agreement lead the Court to a contrary conclusion.
Initially, it bears noting that each agreement is entitled "ASSIGNMENT OF LIFE INSURANCE POLICY AS COLLATERAL" in a bold typeface larger than what is used elsewhere in the documents. However, this is not the only instance where the word "collateral" is used in the document. As noted above, the phrase "collaterally assigns" is used in paragraph "A". Furthermore, paragraph "D" states that "the policy is to be held as collateral security for any and all present and future liabilities. . . ." (emphasis added). Neither the word "absolute" nor the phrase "absolute assignment" is used in any form or fashion within the agreement. As Pennsylvania's Supreme Court affirmed inBrown:
The use of the term `collateral security,' when a debtor transfers to his creditor an article of value . . . is intended to express that it is not received in payment of the principal debt, and that it is not an additional right to which the creditor is absolutely entitled. It is merely a concurrent security for another debt,. . . subsidiary to the principal debt,. . . and ,. . . if the principal debt be paid off, the debtor is entitled to the restoration of the collateral security.
34 A. 335 (citation omitted).
Moreover, paragraph "C" reserves and excludes certain rights from the assignment. Namely, Debtor's right to collect a disability benefit from the insurer and the right to designate and change the beneficiary. Paragraph "E" even imposes an obligation on Commerce Bank to pay the balance of sums received from the insurer to those entitled under the policy after the debt is paid.
These provisions support the interpretation that Debtor was not divested of all control in the policy and that the assignment was given as collateral security and not as an absolute transfer of Debtor's rights. See e.g. Tyson Metal Products, 177 B.R. at 185; cf. Lellock v. Prudential Ins. Co., 811 F.2d 186 (3d Cir. 1987) (debtor and beneficiary under the policy executed an absolute assignment of an insurance policy without qualifications or reservations). The assignment only gave Commerce Bank a qualified interest in the assigned life insurance policy, commensurate with the liabilities secured. Debtor still holds title to the policy, subject to Commerce Bank's lien. See Clark, 133 F. at 818. The insurance policy was assigned as collateral security and not absolutely.
The Court hereby schedules a telephone conference between the parties to discuss the current status of the case.
An Order will follow.
ORDER
For those reasons indicated in the Opinion filed this date, IT IS HEREBY ORDERED that a Telephone Conference to discuss the current status of the above bankruptcy case is scheduled for Friday , September 26, 2003 , at 10:30 o'clock A.M. The Court will initiate the telephone conference which will include Attorney Deborah A. Hughes at #717-651-1772 and Attorney Guy Beneventano at #717-232-5000.