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Secondary life insurance loans topic of CUs' lawsuit
DETROIT, Mich. (1/14/13)--Two Michigan credit unions have sued three companies that recruited them  to finance life insurance premiums for policies sold or brokered in a secondary "life settlement" market.

Lansing-based Alliance Catholic CU (formerly Michigan Catholic CU) and Troy-based Astera CU (Auto Body CU) allege they each lost more than $1 million because the companies "systematically misstated the underwriting data to procure premium finance loans for policies…that could not have been financed elsewhere through established lenders."

The complaint,  filed Wednesday in the U.S. District Court in Detroit, is against Texas-based Capital Lending Strategies LLC;  its manager, Dan Phillips; Allied Solutions Inc., based in Carmel, Ind.; Allied's principal officer, Peter Hilger; and O'Malley & Associates LLC, Crystal Lake, Ill.

In 2007 and 2008, Hilger and Phillips allegedly proposed to the credit unions an investment scenario calling for "high net worth" individuals to form irrevocable life insurance trusts that would each hold one or more high-dollar life insurance policies.  The credit unions agreed to finance the first 27 months of premiums for each policy through a short-term, non-recourse loan to the irrevocable life insurance trust borrower. The loans were secured with an interest in the underlying policies and a certificate of deposit. O'Malley sold or brokered the loans.

According to the court document, the credit unions were told they would always have a repayment source when each premium finance loan matured--even if the borrower defaulted--because their collateral could be sold in the life settlement secondary market.

However, an "overwhelming majority of the premium  finance loans" defaulted or weren't repaid. The companies, called to service or sell the loans in the secondary market, failed to generate enough repay the loans. The credit unions advanced more funds to preserve their interest.

The complaint alleges the transactions had "fundamental flaws" and the companies "systematically misstated the value of the life insurance policy collateral in the underwriting and other data supplied … in order to induce and trick plaintiffs to enter into the joint venture…"

When they tried to possess the collateral, the credit unions encountered resistance and learned they did not have documentation needed to liquidate the collateral.


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