CGU Life Ins. Co. v. METRO. MORTG. & SECURITIES

Citations: 131 F. Supp. 2d 670; 43 U.C.C. Rep. Serv. 2d (West) 1241; 2001 U.S. Dist. LEXIS 1138; 2001 WL 115407Docket: 2:00-cv-00271

Court: District Court, E.D. Pennsylvania; February 2, 2001; Federal District Court

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In the case CGU Life Insurance Company of America and CGU Annuity Service Corporation v. Metropolitan Mortgage Securities Co. Inc., the plaintiffs seek a declaratory judgment regarding the validity of certain assignments related to a Settlement Agreement executed by defendant Lester E. Lytle, Jr. and his wife in 1997. Under this agreement, they were to receive a lump sum of $225,000 and ongoing monthly payments of $1,200.82 until 2023, alongside additional lump sums in 2001 and 2009. The agreement included a clause that prohibited the acceleration, deferral, or sale of these periodic payments.

Following the agreement, the Home Insurance Company assigned its payment liability to CGU Annuity Service Corporation, which in turn purchased an annuity from CGU Life Insurance Company to fulfill these payment obligations. In 1998, Lytle sold part of his right to these payments to Woodbridge Sterling Capital LLC for $20,000, which later assigned its rights to Metropolitan Mortgage Securities Company. Lytle subsequently failed to forward the payments to Metropolitan, leading to a judgment against him in Washington State, which recognized the validity of the assignments.

The plaintiffs filed this action on January 13, 2000, arguing that the assignments made by Lytle are void and unenforceable, as is the judgment from the Washington court. The court granted the plaintiffs' motion for summary judgment while denying that of the defendants, affirming the plaintiffs' position on the assignments and the judgment.

Following the filing of their Answer to the Complaint, both plaintiffs and defendants Metropolitan and Woodbridge have filed motions for summary judgment. The standards for summary judgment are governed by Fed. R. Civ. P. 56, which allows a judgment to be granted if there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. A court must examine the pleadings, depositions, and affidavits to assess whether there is sufficient factual support for the claims. The moving party has the burden of demonstrating the absence of a genuine issue of material fact, while the court must view facts in the light most favorable to the non-moving party, drawing all reasonable inferences in their favor.

Material facts are defined as those that could influence the outcome of the case under relevant substantive law, and a genuine issue exists if a reasonable jury could return a verdict for the non-moving party. Plaintiffs argue they are entitled to judgment because the defendants violated a contract by improperly assigning rights related to a structured settlement agreement. Conversely, defendants contend the assignment should be upheld, asserting that the plaintiffs lack standing regarding an anti-assignment clause not applicable to them, that the clause is unenforceable under the Uniform Commercial Code, and that plaintiffs' claims of potential harm due to tax consequences are inconsistent with Third Circuit law. This case arises under the Court's diversity jurisdiction, seeking declaratory relief as described in 28 U.S.C. 2201, which allows courts to declare rights and legal relations of interested parties in cases of actual controversy.

A federal court has discretion to grant a declaratory judgment if it clarifies legal relations and alleviates uncertainty or controversy. While federal law governs the court's ability to issue such judgments, state law applies to substantive issues. Declaratory relief is warranted under the Declaratory Judgment Act when significant and immediate controversy exists between parties with opposing legal interests. In contract interpretation within Pennsylvania, multiple writings executed simultaneously related to a single transaction should be construed collectively, regardless of differing parties. The court first assesses any ambiguities in a contract, determining if it allows for reasonable alternative interpretations, a legal question. The intent of the parties is presumed to be reflected in the contract language, which should be analyzed in context, allowing consideration of surrounding circumstances and potential meanings. In this case, the Settlement Agreement, Qualified Assignment, and Annuity were executed in close temporal proximity and as parts of one transaction, with no ambiguities found. It is evident that the Settlement Agreement intended for Mr. Lytle to receive a structured settlement and that he acknowledged the assignment of rights to CGU Annuity Service Corporation for monthly and lump sum payments.

Mr. and Mrs. Lytle agreed not to assign their rights to periodic payments or accelerate these payments as part of the Settlement Agreement. They have no ownership rights in the annuity itself, only the right to receive agreed payments. The only party able to make assignments under the annuity is CGU Annuity Service Corporation, the owner. The Settlement Agreement, Uniform Qualified Assignment, and the Annuity are deemed valid and enforceable contracts.

Defendants challenge the plaintiffs' standing to enforce an anti-assignment provision included in the Settlement Agreement, arguing it only applies to parties involved in that contract. Generally, contract law protects the contractual expectations of named parties, and the enforcement of rights depends on the manifestation of intent within the contract. However, if an assignment is valid, the assignee inherits all rights of the assignor, making them the real party in interest.

In this case, plaintiffs are recognized as the assignees of Home Insurance Company’s obligations to make periodic payments, having stepped into Home’s role as per the Settlement Agreement. The assignment from Home to CGU Annuity was finalized on October 13, 1987, and CGU Annuity procured the relevant annuity contract shortly thereafter. Consequently, plaintiffs possess the standing to enforce the anti-assignment clause.

Defendants contend that even if plaintiffs have standing, the anti-assignment provision is unenforceable under Section 9-318(4) of the Uniform Commercial Code, which invalidates contract terms that prohibit assignment or require consent for such. Plaintiffs counter that Article 9 of the U.C.C. is not applicable to this sale transaction, citing a specific exemption related to insurance policy claims under 13 Pa. C.S.A. 9104(7), which excludes various transaction types from Article 9's scope.

Section 9104 outlines exclusions in three categories: transactions subject to overriding governmental interests, nonconsensual transactions, and those outside mainstream commercial financing. Section 9104(7) pertains to the third category, highlighting that rights under life insurance, other policies, and deposit accounts often serve as collateral but are adequately addressed by existing law. It specifies that "proceeds" include assets received from the disposition of collateral, with distinctions made between cash proceeds (e.g., money, checks) and noncash proceeds. In the case at hand, payments claimed by the defendants stemmed from a personal injury settlement linked to a liability insurance policy. The Home Insurance Company, with Lytle's consent, assigned its rights to an assignee who purchased an annuity for periodic payments. However, Lytle lacked any security interest in these payments or the annuity, leading to the conclusion that the payments do not qualify as "proceeds" under 9306(a). Furthermore, while annuities differ from life insurance policies, they fall under the jurisdiction of the Pennsylvania Insurance Department, indicating that Article 9 of the Uniform Commercial Code does not apply here.

The defendants argue that Lytle's conveyance of rights under the settlement agreement remains valid despite an anti-assignment clause, referencing Bel-Ray Co. v. Chemrite, where the Third Circuit ruled that such provisions limit assignment rights but do not void the assignment itself. This ruling was based on New Jersey law, which has adopted the Restatement (Second) of Contracts. In contrast, Pennsylvania law defines an assignment as a transfer of rights or interests, typically involving a complete interest unless otherwise specified.

In Pennsylvania, contractual rights to future payments are generally assignable, but nonassignment clauses are valid if carefully scrutinized by the courts. Key cases illustrate that such scrutiny occurs primarily in the insurance context. For example, in *National Memorial Services v. Metropolitan Life Insurance*, the courts found a nonassignment clause unenforceable after the insured event (the policyholder's death) had already occurred, making the insurer's risk non-existent. This reasoning was echoed in other cases, such as *Viola v. Fireman's Fund Insurance Company* and *Seasor v. Liberty Mutual Insurance Co.*, where courts noted that assignments made after the occurrence of an insured event do not affect the insurer's risk. The *Fran and John's Doylestown Auto Center* case and *High-Tech Enterprises, Inc. v. General Accident Insurance Co.* supported this principle by allowing assignments for payments related to prior damages. Additionally, in *Continental Casualty Co. v. Diversified Industries, Inc.*, it was determined that nonassignment clauses did not prevent assignment when the underlying injury occurred before the assignment. The excerpt also highlights that structured settlements, which offer tax advantages under I.R.C. 104(a)(2), are intended under specific agreements, ensuring compliance with tax regulations.

Returns from the plaintiff's lump-sum investment payment are subject to taxation as investment income, whereas periodic payments from a structured settlement are classified as damages for personal injuries and are thus exempt from income tax. Under Section 130 of the Internal Revenue Code, insurance companies making periodic payments for personal injuries can receive favorable tax treatment, provided certain conditions, including the non-assignability of payments, are met. Without such tax benefits, plaintiffs could be obligated to report as income the funds received to purchase an annuity, with no deductions available until periodic payments are made. The anti-assignment clause was implemented to mitigate the risk of increased tax liability. This clause is necessary for the assignment from Home Insurance to CGU Annuity Service Corp. to qualify as a 'Qualified Assignment' under the tax code. The anti-assignment clause is upheld under Pennsylvania law, leading to the decision to grant the plaintiffs' motion for summary judgment. Consequently, the portion of the Washington Superior Court Judgment allowing Defendant Metropolitan to collect specific payments directly from the plaintiffs is declared null and void. The court's order concludes that the anti-assignment clause is enforceable against the defendants, while the defendants' motion is denied. The plaintiff, Mr. Lytle, has not defended against the action, and the names of the insurance companies involved have been updated in accordance with regulatory approvals. The court distinguishes this case from a prior case that lacked an anti-assignment provision, reinforcing its decision.