LANSING, Mich. – Two area credit unions say they each lost more than $1 million after they were misled into investing in a scheme to provide loans to the “life settlement” market, the secondary market for loans collateralized by life insurance policies.

The credit unions, Alliance Catholic CU (formerly Michigan Catholic CU) and Astera CU (formerly Auto Body CU), say they were recruited as lenders to the life settlements scheme in which high-net worth individuals would form irrevocable life insurance trusts that would each hold one or more high dollar life insurance policies against an individual grantor’s life. According to a new suit filed in federal court, the scheme was created by Allied Solutions, which recruited the credit union participants, Capital Lending Strategies LLC of Texas, and O’Malley & Associates of Chicago, which acted as the broker. All three entities are named as defendants in the suit brought by the two credit unions.

The credit unions claim the overwhelming majority of the premium finance loans they made under the scheme either defaulted at maturity or were never repaid, costing each of them more than $1 million in losses.

O’Malley did not respond to requests for comment yesterday and Allied Solutions said it does not discuss pending litigation. Capital Lending’s telephone has been disconnected with no forwarding information.

The dispute is the latest in what has become a thriving secondary market for life insurance policies, with participants buying and selling policies, financing loans to buy and sell policies, and often betting when or whether an individual policy is going to pay off with the death of the policy holder. In one such dispute, Indiana’s FORUM CU sued DFCU Financial for some $6 million of life insurance premium loan participations it had acquired from failed Cap Com CU, which had been acquired by DFCU. Allied also served as broker in that deal. The dispute was settled out of court under confidential terms.

Under the Alliance Catholic/Astera scheme, Allied, Capital Lending and O’Malley proposed irrevocable life insurance trust borrowers to the credit unions. The three entities would provide loan underwriting documentation and the credit unions would fund the life insurance policies by advancing the premiums for two years. Allied, Capital Lending and O’Malley would be responsible for servicing the loans and monitoring the insured individuals. And the three defendants acted as agents when the policies were sold on the secondary market.

But the suit claims none of the defendants generated enough sales to repay the loans and in some cases the credit unions had to advance more funding to pay additional life insurance premiums to preserve their interest in the collateral. When they attempted to take possession of their life insurance policy collateral, the credit unions encountered resistance from most borrowers in the premium finance loans, they claim.

“Defendants O’Malley, Allied and Capital Lending systemically misstated the value of the life insurance policy collateral in the underwriting and other data supplied to the (credit unions) in order to induce and trick (the credit unions) to enter into the joint venture or series of ventures,” alleges the suit.

The two credit unions claim the defendants breached various duties and promises to them by: not exercising proper care in underwriting; by failing to refer what they promised would be “safe, high yield, low risk loans”; and by failing to disclose or warn the credit unions that the loan agreements did not “satisfy industry standards for protecting the secured creditor’s interest.”

The suit claims at one point Allied, O’Malley and Capital Lending formed a separate company to function as a “straw man” in acquiring life insurance policy collateral from the credit unions for resale at a substantial markup.

 

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