Court Opinion

ID: 2975886
Source: CourtListenerOpinion
Date Created: 2015-09-22 17:41:56.125318+00
Date Added: 2024-06-11T11:43:58.830288
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                                     File Name: 07a0449p.06

                   UNITED STATES COURT OF APPEALS
                                 FOR THE SIXTH CIRCUIT
                                   _________________

                                                       X
                                                        -
 LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
                                                        -
 and SUN LIFE ASSURANCE COMPANY OF CANADA
                                                        -
 (U.S.),
                                                        -
                                                            Nos. 06-6068/6078/6079
     Plaintiffs-Appellees/Cross-Appellants (06-6079),
                                                        ,
                                                         >
           v.                                           -
                                                        -
                                                        -
                                         Defendant, -
 LLOYD F. GILBERT, JR.,

                                                        -
 IRENE K. WOLFE (06-6068); SINGER ASSET FINANCE -
                                                        -
 COMPANY, LLC (06-6078),                                -
            Defendants-Appellants/Cross-Appellees, -
                                                        -
                                                        -
                               Defendant-Appellee. -
 STEPHANIE MUSCHLITZ,
                                                        -
                                                       N
                        Appeal from the United States District Court
                    for the Eastern District of Tennessee at Greeneville.
                       No. 02-00341—J. Ronnie Greer, District Judge.
                                 Argued: September 13, 2007
                           Decided and Filed: November 13, 2007
                     Before: MARTIN, GUY, and CLAY, Circuit Judges.
                                     _________________
                                         COUNSEL
ARGUED: Carrollyn C. Cox, COX & COX, Virginia Beach, Virginia, Christopher H. Howard,
SCHWABE, WILLIAMSON & WYATT, Seattle, Washington, Todd A. Shelton, ROGERS,
LAUGHLIN, NUNNALLY, HOOD & CRUM, Greeneville, Tennessee, for Defendants. H. Mark
Stichel, GOHN, HANKEY & STICHEL, Baltimore, Maryland, for Plaintiffs. ON BRIEF:
Carrollyn C. Cox, COX & COX, Virginia Beach, Virginia, Jerry W. Laughlin, ROGERS,
LAUGHLIN, NUNNALLY, HOOD & CRUM, Greeneville, Tennessee, Howard E. Jarvis, WOOLF,
McCLANE, BRIGHT, ALLEN & CARPENTER, Knoxville, Tennessee, H. Scott Reams, TAYLOR,
REAMS, TILSON & HARRISON, Morristown, Tennessee, for Defendants. H. Mark Stichel,
GOHN, HANKEY & STICHEL, Baltimore, Maryland, for Plaintiffs.

                                               1
Nos. 06-6068/6078/6079        Liberty Life Assurance Co., et al. v. Gilbert, et al.             Page 2

                                       _________________
                                           OPINION
                                       _________________
        BOYCE F. MARTIN, JR., Circuit Judge. This Court is faced with the unenviable task of
deciphering what would surely be an excellent law school exam question in first-year civil
procedure. Liberty Life Assurance of Boston and Sun Life Assurance Company of Canada filed the
present interpleader and declaratory relief action in order to determine who was due annuity
payments originally received by the decedent, Lloyd Gilbert. Gilbert’s ex-wife, Irene Wolff, claims
she is due the annuity payments based on her separation agreement with Gilbert. A loan company,
Singer Asset Finance Company, claims it loaned Gilbert a substantial sum of money in exchange
for a security interest in Gilbert’s annuity payments. Finally, Gilbert’s daughter, Stephanie
Muschlitz, is the named beneficiary on the annuity. We believe the district court correctly decided
the numerous legal issues and did not abuse its discretion in weighing the equities, and accordingly
affirm its decision.
                                                 I.
       The district court adequately set out the facts in its order granting summary judgment to
Stephanie Muschlitz:
              The decedent, Lloyd Gilbert (“Gilbert”), was injured in an accident
       November 24, 1992, and subsequently filed a lawsuit in the Circuit Court for the City
       of Virginia Beach, Virginia, in an effort to recover damages for his personal injuries
       suffered as a result of the accident. The defendants in the Virginia action were
       insured by Liberty Mutual Insurance Company (“Liberty Mutual”) and, in 1995,
       [Gilbert] entered into a negotiated settlement of his claims. The Settlement
       Agreement and Release (“the [Settlement] Agreement”) entered into between Gilbert
       and Liberty Mutual provided for an immediate cash payment to Gilbert of $107,000
       plus periodic payments of $666 per month for thirty six years commencing
       November 25, 1995.
               The [Settlement] Agreement provided that Liberty Mutual could make a
       qualified assignment of its liability to make the agreed upon periodic payments,
       within the meaning of Section 130(c) of the Internal Revenue Code. Liberty Mutual
       then made such an assignment to Keyport Life Insurance Company (“Keyport”).
       The [Settlement] Agreement further provided that Liberty Mutual or its assignee
       could satisfy its obligations under the settlement agreement through the purchase of
       an annuity. Keyport did, in fact, purchase an annuity from Liberty Life. Keyport is
       the owner of the annuity and the annuity payments were directed to Gilbert to meet
       Liberty Mutual’s liability to Gilbert for the agreed upon periodic payments. The
       [Settlement] Agreement further provided that Gilbert does not have the power to
       “sell, mortgage, encumber, or anticipate the Periodic Payments, or any part thereof,
       by assignment or otherwise.” The original [Settlement Agreement] provided that
       upon the annuitant’s (i.e. Gilbert’s) death, payments would be made to the
       annuitant’s estate, but the annuitant was permitted by the terms of the [Settlement
       Agreement] to change the beneficiary by written request during the annuitant’s
       lifetime.
              At the time of Gilbert’s injuries in 1992, he was married to Wolff. During
       the course of Gilbert’s personal injury lawsuit, Gilbert and Wolff determined to be
       divorced and entered into a handwritten [separation] agreement dated June 29, 1995,
       which purports to obligate Gilbert to pay certain amounts to Wolff “if and when I
Nos. 06-6068/6078/6079         Liberty Life Assurance Co., et al. v. Gilbert, et al.                 Page 3

      receive any compensation for the accident dated 11/24/92.” Wolff and Gilbert were
      apparently divorced on June 10, 1999, and the Court’s decree incorporated and
      ratified the June 29, 1995 agreement between Gilbert and Wolff.
               On March 22, 1999, Gilbert entered into a “Loan Application and Loan
      Agreement,” with Merrick Bank pursuant to which Gilbert received $51,105.00. In
      the loan agreement, the defendant/counter plaintiff, Singer Asset Finance Company,
      is listed as the “processing agent.” Singer is also Merrick Bank’s assignee of the
      loan agreement. In the agreement, Gilbert agrees to repay the “loan,” in 240 monthly
      payments of $666.00 each, commencing on May 25, 1999 and concluding on April
      25, 2019.
              As required by the loan agreement, Gilbert pledged and granted a security
      interest to Merrick Bank [– subsequently assigned to Singer –] in the periodic
      payments to which he was entitled under the settlement agreement and annuity
      contract. UCC-1 financing statements were filed in North Carolina and Tennessee
      in an effort by Singer to perfect its security interest in the collateral (i.e. the periodic
      payments). Gilbert also executed an irrevocable durable power of attorney
      appointing Singer as his attorney-in-fact, granting Singer sole and absolute rights to
      deal with the periodic payments, including the right to change the beneficiary
      designation. Gilbert, also pursuant to the loan agreement, opened a bank account
      with Wachovia Bank, directed his annuity payments to said account, and gave Singer
      power of attorney to access deposits made to said bank. Gilbert further notified
      Liberty of a change of address to a post office box which, though being in the name
      of Gilbert, was controlled by Singer. When Gilbert entered into the loan transaction,
      Singer sent to the attorney for Gilbert’s ex-wife, Irene Wolff, a check in the amount
      of $3,015.84. The cover letter sent with the check indicates that it “represents
      payment of garnishment per agreement dated 6/29/95 on the above referenced
      account.” The account referenced is the case number for the divorce of Gilbert and
      Wolff.
              Other than the handwritten agreement between Gilbert and Wolff dated
      6/29/95, Gilbert never executed any documents to assign the receipt of any proceeds
      to Wolff. When Wolff did not receive any further payment from Gilbert, she filed
      a motion to show cause against him in the Circuit Court of the City of Virginia
      Beach on December 8, 2000. Gilbert failed to appear for the show cause hearing,
      and on August 10, 2001, an Amended Judgment Order was entered in the divorce
      case, granting Wolff judgment against Gilbert in the amount of $34,947.61, plus
      $1,260.00 in attorneys fees and costs of $83.48. A garnishment summons was issued
      on December 18, 2001 and served on Liberty Life, and Liberty Life, in its February
      20, 2002, answer to the garnishment summons, notified the Circuit Court of its
      intention to “withhold from Mr. Gilbert any monthly periodic payments which
      become due under the Policy following receipt of the Garnishment Summons until
      further notice from the court.”
             On December 29, 2000, despite his agreement with Merrick (and Singer),
      Gilbert requested that Liberty Life change the beneficiary on his annuity to his
      daughter, Stephanie Muschlitz. By letter dated November 12, 2001, Liberty Life
      acknowledged the change of beneficiary designation to the annuity. Gilbert died on
      September 23, 2003. No probate estate has been opened for Gilbert.
             Gilbert made all required payments to Singer under the loan agreement until
      February 2002, except for the payments for September and October, 2001. He made
Nos. 06-6068/6078/6079         Liberty Life Assurance Co., et al. v. Gilbert, et al.            Page 4

       no payments after February, 2002. On May 10, 2002, Singer filed suit against
       Gilbert in the Chancery Court for Hancock County, Tennessee seeking judgment
       against Gilbert “in an amount not to exceed $150,000” and for an injunctive relief
       prohibiting Gilbert from exercising dominion over the periodic payments. Singer’s
       state court complaint stated causes of action based on theories of breach of the loan
       agreement, conversion and unjust enrichment against Gilbert. An amended
       complaint added Keyport as a party defendant and sought injunctive relief and
       declaratory relief. Liberty Life filed this action in the Court on November 18, 2002,
       to determine to whom annuity benefits are payable, Wolff and Singer having both
       notified Liberty Life of claimed entitlement to a portion of the annuity payments, and
       Muschlitz laying claim to the entirety of the annuity payments as Gilbert’s
       beneficiary.
         The district court granted summary judgment in favor of Muschlitz, as discussed below. In
its July 6, 2006 Order, the district court ordered an accounting of the payments made by Liberty into
the district court’s escrow account to determine which payments were made before Gilbert’s death,
and which were made after. The payments made before his death were ordered payable to his estate,
and those made after were ordered payable to Muschlitz, as the named beneficiary upon Gilbert’s
death.
                                                    II.
                                     1.        Standard of Review
        We review a district court's grant of summary judgment de novo. Monette v. Electronic Data
Sys. Corp., 90 F.3d 1173, 1176 (6th Cir.1996). Summary judgment is appropriate if, pursuant to
Rule 56(c) of the Federal Rules of Civil Procedure, “the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter
of law.” FED. R. CIV. P. 56(c).
         Additionally, this Court must construe the facts and draw all inferences in favor of the non-
moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 478 U.S. 574, 587-88 (1986). At
the outset, Singer argues that the district court applied the wrong standard of review when it stated
in its order that the court must “construe the evidence in the record most favorably for the moving
parties.” This was obviously a typographical error, as both immediately before and after the above-
quoted language, the district court stated the proper standard that all facts and inferences would be
drawn in favor of the non-moving party. Our review of the district court’s order does not reveal that
any inferences were drawn or facts were construed in favor of a moving party; rather, the district
court analyzed all three parties’ summary judgment motions and statements of undisputed facts in
accordance with the proper summary judgment standard.
                                          2.     Wolff’s Claims
        Wolff argues that the handwritten 1995 separation agreement between herself and Gilbert
created an “equitable assignment of [the] anticipated proceeds from his personal injury action.” She
further argues that the subsequent incorporation of the agreement into the Virginia Beach Circuit
Court’s divorce decree “imposes [an] equitable lien upon the annuity.”
        The district court found that Wolff’s claim fails for the simple reason that in order for
Gilbert’s assignment to be effective, under Virginia law he must have had “a present ownership of
the subject matter of the assignment to the assignee,” and Gilbert did not have a present ownership
interest in any proceeds from his personal injury action at the time of the 1995 settlement agreement.
Nos. 06-6068/6078/6079         Liberty Life Assurance Co., et al. v. Gilbert, et al.           Page 5

        The district court further held that once Wolff “sought to enforce the agreement through the
contempt proceedings in the Virginia court, any contractual remedy she may have had under the
original agreement . . . was reduced to a judgment, and her contractual rights cannot serve as a basis
for her claim to the annuity payments.” Accordingly, the district court found that Wolff has no
claim to the annuity payments vis-a-vis the alleged assignment in the 1995 separation agreement,
but rather stands in the shoes of an unsecured judgment creditor of Gilbert. The district court then
held that because Virginia law precludes proceeds derived from settlement of a personal injury suit
from the creditor process, Wolff has no legal claim to the annuity payments.
        Wolff argues that Virginia law states that an agreement to assign property not yet in
ownership constitutes an equitable lien. While this may be true in certain instances, her argument
misses the point. Rather, the district court found no language in the divorce settlement agreement
“that even suggests an attempted assignment.” The district court found that the divorce settlement
agreement created an obligation on the part of Gilbert to pay certain agreed upon sums to Wolff,
contingent on Gilbert’s receipt of compensation from his personal injury action, but did not
specifically assign any rights in the periodic payments to Wolff.
       We find the district court was correct in holding that no assignment occurred. Gilbert did
not manifest an intent to transfer ownership of the settlement proceeds, or his right to the settlement
proceeds, to Wolff in the separation agreement. Rather, he merely promised to pay a sum of money
to Wolff, contingent on his receiving compensation for his personal injury action. Such a promise
does not amount to an equitable assignment. See S.L. Nusbaum & Co. v. Atlantic Virginia Realty
Corp., 146 S.E.2d 205, 210 (Va. 1966) (“a mere promise or agreement to pay a debt out of a
designated fund, . . . does not give an equitable lien upon the fund, or operate as an equitable
assignment of it.” (internal citations omitted)).
        Additionally, under Virginia law, one may only assign a future anticipated benefit or
obligation that is presently owned, i.e., under contract. See Edmunds v. CVC Enterprises, Inc., 544
S.E.2d 324, 326-327 (Va. 2001). When the separation agreement was entered into, Gilbert had not
contracted with Liberty for the settlement of his personal injury case; he was still in the position
where he may not have received anything in compensation for his personal injury action.
Accordingly, no assignment, equitable or otherwise, occurred between Gilbert and Wolff regarding
the structured settlement of his personal injury lawsuit.
       As the district court properly held, when Wolff enforced the divorce decree through the
contempt power of the Virginia court, she became a judgment creditor of Gilbert. Unfortunately,
Wolff’s attempt at enforcing her judgment against Gilbert through garnishment of his annuity
payments under the structured settlement are disallowed under Virginia law. VA. CODE ANN. § 34-
28.1 (exempting proceeds from personal injury actions from creditor process).
       We therefore affirm the district court’s finding that Wolff does not have a valid legal claim
to Gilbert’s annuity payments.
                                       3.    Singer’s Claims
       The district court held the loan transaction between Gilbert and Singer to be invalid because
(1) Virginia law disfavors factoring transactions; (2) the Settlement Agreement prohibited
assignment of the periodic payments; and (3) Gilbert did not have any ownership interest in the
annuity policy. We agree with the district court’s determination and affirm.
         As the lower court correctly found, Gilbert had no ownership interest in the annuity. He is
a beneficiary of the annuity which was merely the vehicle for funding the periodic payments agreed
to in the settlement agreement between Gilbert and Liberty. Both In re Granati, 307 B.R. 827, 830-
31 (E.D. Va. 2002), and Allstate Ins. Co. v. Am. Bankers Ins. Co. of Fla., 882 F.2d 856, 859 (4th Cir.
Nos. 06-6068/6078/6079          Liberty Life Assurance Co., et al. v. Gilbert, et al.            Page 6

1989), held that a beneficiary of an annuity which the beneficiary does not own, has no legal right
in the annuity to assign. Accordingly, Gilbert could not lawfully assign his right to payment under
the annuity and Singer had no enforceable security interest in Gilbert’s monthly payments. See also
RESTATEMENT (SECOND) OF CONTRACTS § 321 cmt. d, illus. 7 and 8 (1981).
        In addition to not having an ownership interest in the annuity, the settlement agreement
between Gilbert and Liberty expressly forbade Gilbert from selling, mortgaging, encumbering, or
anticipating the “Periodic Payments,” by assignment. The district court correctly found that in
signing this Settlement Agreement with Liberty, Gilbert negotiated away his ability to assign his
rights to the periodic payments.
         Recognizing that there had been no valid legal assignment by Gilbert to Singer, the district
court analyzed whether there had been an equitable assignment that could be specifically enforced.
The district court determined that Singer had no equitable right to Gilbert’s periodic payments. A
determination of whether an equitable assignment occurred is within the sound discretion of the
district court. Haythe v. May, 288 S.E.2d 487 (Va. 1982). We review the district court’s equitable
determination for abuse of discretion. Under Virginia law, equity will not enforce specific
performance of a contract that is “founded in fraud, imposition, mistake, undue advantage, or gross
misrepresentation, or where . . . it would be unconscientious to enforce it.” Allstate Ins. Co., 882
F.2d at 860 (quoting Clay v. Landreth, 45 S.E.2d 875,879 (Va. 1948)).
         In weighing the equities, the district court looked to all of the facts and circumstances of the
transaction. The district court recognized that Singer provided significant consideration to Gilbert
in exchange for his annuity payments. But it was also apparent to the district court that the elaborate
scheme devised by Singer — e.g., Gilbert’s signing a power of attorney in favor of Singer, Gilbert
changing his address to a Post Office box under Singer’s sole control, and Gilbert’s opening a bank
account and giving Singer sole control of it — evidenced the fact that Singer was aware the annuity
was non-assignable and used deceptive practices to obtain an assignment of the annuity contract
without Liberty’s knowledge. As the court in Granati stated, “it strains credulity to believe that
[Singer], which is fully engaged in the business of purchasing annuity contracts, believe[d] that it
was purchasing the annuity rights directly from [Gilbert]. . . . Rather, it is evident that [Singer] knew
that its purported assignment from [Gilbert] rested on dubious legal grounds, and so it implemented
the many measures detailed above as part of a concerted, and frankly less than forthright efforts to
assure success of the contract.” Granati, 307 B.R. at 831-32.
        The district court also noted that Virginia law presently forbids factoring transactions unless
approved by a court or other administrative body. See VA. CODE ANN. § 59.1-475 et seq. (Virginia
Structured Settlement Protection Act). This law was not enacted at the time of the Gilbert-Singer
transaction, but as the district court found, it is indicative of Virginia’s public policy disfavoring
factoring transactions. While we could find no cases discussing Virginia’s public policy towards
these types of transactions prior to the passage of the Virginia Structured Settlement Protection Act,
it was not unreasonable for the district court to look to the Act as evidence of a policy that does not
favor them. Accordingly, it was within the district court’s discretion to include Virginia’s stance
against factoring transactions when weighing the equities.
       We believe the district court did not abuse its discretion when it weighed the equities and
ruled against Singer. Not only was the transaction legally invalid, but Virginia public policy
disfavors such transactions, and Singer was aware of these facts when it entered into the transaction.
As the Granati court rhetorically asked: “why a party, who employs deceptive means to shore the
foundation of a contract it suspects may be of questionable validity, should have its duplicitous
bargain saved by the tools of equity?” Granati, 307 B.R. at 832; see also Allstate, 882 F.2d at 860.
Nos. 06-6068/6078/6079               Liberty Life Assurance Co., et al. v. Gilbert, et al.                      Page 7

                                            4.    Muschlitz’s Claims
       The district court determined that Gilbert’s daughter, Stephanie Muschlitz, was entitled to
the proceeds of the annuity as the named beneficiary on the policy.
        Singer argues that Muschlitz does not have standing to enforce the settlement agreement
because she was not an intended beneficiary, but rather an incidental beneficiary. This is completely
inaccurate. Paragraph four of the settlement agreement clearly contemplates Gilbert having an
identified beneficiary, and provides the process for naming such beneficiary. As such, the district
court was correct in holding that she had standing to enforce the settlement agreement. See Levine
v. Selective Ins. Co. of Am., 462 S.E.2d 81, 83 (Va. 1995) (“the essence of a third-party beneficiary’s
claim is that others have agreed between themselves to bestow a benefit upon the third party but one
of the parties to the agreement fails to uphold his portion of the bargain.” (internal quotations
omitted)).
        The only other issue presented is the fact that Gilbert named Muschlitz as his beneficiary
after he had entered into his agreement with Singer, including executing1 a power of attorney giving
Singer sole authority to make beneficiary designations under the policy. The district court held that
because it had already found the Singer transaction to be legally invalid — including the power of
attorney, which the district court found to be part of the underhanded practices Singer employed to
consummate the transaction — and that the equities did not favor specifically enforcing the
agreement, the fact that the Singer transaction occurred before Muschlitz was named Gilbert’s
beneficiary is of no consequence. That decision was not in error.
                                                          III.
        We hold that the district court properly found that the separation agreement between Gilbert
and Wolff was not an assignment of Gilbert’s right to receive periodic payments under the
settlement agreement and that the annuity payments are exempt from Wolff’s garnishment action
under Virginia law. We also hold that the district court properly found that the Gilbert-Singer
transaction was legally invalid and against the public policy of Virginia. Additionally, the district
court did not abuse its discretion in deciding the equities did not weigh in favor of specifically
enforcing the transaction. Finally, because Wolff has no right to the annuity payments and the
Singer transaction was legally invalid and not equitably enforced, Muschlitz is entitled to the annuity
payments as the named beneficiary under the settlement agreement in accordance with the district
court’s order of July 6, 2006.

         1
           Singer also raises in its brief the argument that Article 9 of the UCC voids the anti-assignment language of
the settlement agreement. Because it does not appear that this argument was presented to the district court, the argument
is waived.