In Banco Popular, North America v. Kanning, 638 Fed.Appx. 328 (5th Cir. 2016), the court of appeals held that a debtor’s assignment of his life insurance policy to a lender was enforceable and that the lender’s lien was not extinguished by the declaration of bankruptcy by the named beneficiary of the policy. On December 3, 2007, Banco Popular, North America (“Banco”) made a loan to BEMK, Inc. d/b/a All About Diamonds, a Texas jewelry store (“BEMK”). Christopher Kanning, the president of BEMK, executed an assignment of his life insurance policy with USAA Life Insurance Company (“USAA”) as collateral for the loan from Banco. Neither Banco nor USAA countersigned the assignment, and USAA subsequently refused to acknowledge the enforceability of the assignment against USAA as a result. Furthermore, the USAA insurance policy included language specifically stating that, to be binding upon USAA, any assignment would need to be consented to by a representative of USAA.
In July of 2010, BEMK declared Chapter 7 bankruptcy, and after Banco’s recovery of certain inventory collateral of BEMK, there remained outstanding indebtedness of approximately $665,000 owing to Banco. After Christopher Kanning’s death in January of 2012, his wife, Cynthia Kanning (“Kanning”) presented a claim on the USAA life insurance policy, and USAA approved her claim and paid her the policy proceeds. Kanning used a portion of the proceeds to purchase a new home and used the remainder to pay off existing debt and for home improvements. In August of 2012, Kanning filed a Chapter 7 bankruptcy, and she was granted a discharge in December 2012. In March 2013, Banco filed suit against Kanning seeking a declaratory judgment that it had the right to possess the proceeds of the USAA life insurance policy as well as damages for conversion in the amount of such proceeds. Kanning alleged that, because the assignment of the USAA insurance policy did not comply with USAA’s internal policies and was not enforceable against USAA, it was not enforceable by Banco against Kanning. The trial court agreed, and Banco appealed.
In coming to its decision, the court of appeals evaluated several claims by Kanning: (i) that the USAA policy had not been validly assigned by Christopher Kanning to Banco, (ii) that if the assignment was not enforceable against USAA, it was not enforceable against Kanning as beneficiary and (iii) that Kanning’s bankruptcy would effectively prohibit any conversion claim against Kanning by Banco. With respect to the first claim, the court of appeals found that Christopher Kanning’s execution of the insurance assignment revealed his intent to pledge the insurance policy as collateral for the BEMK loan. The court of appeals found further that, although the USAA insurance policy contained language which would prevent the assignment from being binding upon USAA, the policy language was not broad enough to prohibit assignments of the policy altogether. Therefore the court of appeals rejected Kanning’s second claim. The court of appeals also found that the insurance assignment provided a sufficient basis for a conversion claim by Banco against Kanning, since Banco was entitled to the proceeds of the insurance policy which Kanning accepted from USAA. Lastly, because Banco sought to enforce a claim to recover the insurance policy proceeds, which were its property by virtue of the assignment, the appeals court ruled that such a claimwas in rem, and therefore not in contempt of Kanning’s bankruptcy discharge.