The Herald Bulletin

Morning Update

Local News

October 30, 2012

Church’s failed financial plan in legal battle with bank

Life insurance policies intended to cover loan

ANDERSON, Ind. — An Anderson church, which has filed for bankruptcy, is in a legal battle with a bank over resolving a failed financing plan where church leaders took out life insurance policies on 11 of their older members to cover construction and renovation projects.

The insurance policies were intended to cover a loan used by the Lindberg Road Church of Christ, 2625 Lindberg Road, to expand its child care center and remodel its affiliated Anderson Christian School.

But the plan fell through when there was no market to sell the life insurance policies and “the insureds continued to live,” according to court documents filed in U.S. Bankruptcy Court for the Southern District of Indiana.

The church filed for bankruptcy in January and the ensuing legal actions have become a “nightmare” for the church, said David Kleiman, an attorney with an Indianapolis firm representing the church.

Initially, the church sought Chapter 11 bankruptcy, which would protect it from foreclosure while it paid back a $2.5 million line of credit for the expansion and remodeling. The closing on the loan was in early 2007.

This month, the Fort Wayne-based Star Financial Bank objected to that Chapter 11 plan, saying the bank would receive more from a Chapter 7 declaration, which would liquidate the church’s real property assets, according to the filing.

A debtor can only file for Chapter 11 if the creditor would make less from a Chapter 7 filing, said Kleiman.

The expansion and remodeling was funded through life insurance policies involving some of the church’s senior members. The church bought $4.35 million in life insurance policies on 11 members. The death benefits on those policies — or their sale on a secondary market — would back the line of credit. The bank promoted the plan as its “Life Legacy” program.

In an August court filing, Kleiman noted, “It was a great plan except for one thing — it didn’t work! There was no market for the life insurance policies and the insureds continued to live. Nevertheless, even after the bank was aware of the problems with the Life Legacy program, it continued to loan the church money it could never repay.”

Members volunteered for plan

According to church elder Sherrill Allred, the church initially envisioned a smaller, member-funded project, but expanded that when the bank and Carmel-based Total Financial Group proposed the insurance plan.

“All the members (who took out policies) volunteered for this,” said Allred, 62 of Anderson.

Former church member Johnny Lollar, 81, of Anderson, is listed in the filings as having one of the largest death benefits — $700,000 through Penn Mutual Life Insurance. He said he volunteered for the policy, but hadn’t heard anything about it in years.

“I’m surprised,” Lollar said. “I didn’t know any of this (bankruptcy) was going on.”

The church tried to sell the policies through Total Financial Group in 2009, but was told there was no market for them. That left the church with nearly $2 million in debt to the bank, which was due in February 2010.

Kleiman said Lindberg Road tried unsuccessfully to settle the matter before filing for Chapter 11 bankruptcy earlier this year.

“We do feel there’s a degree of responsibility that the church has,” Allred said. “This has been not only a financially difficult process, but a morally difficult one for the church.”

Kleiman proposed a plan where the church would pay $507,000 plus interest to the bank over the next 25 years. The $1.5 million remainder would come through the life insurance policies’ proceeds.

Allred said the church hasn’t decided how it would fund the cash repayment because there are “still too many factors” at play.

Those uncertainties have affected church attendance and school enrollment, said Tom Snell, administrator of Anderson Christian School and former elder. He estimated church attendance has dropped to the mid-200s, about a 100-worshiper decrease from last year. School enrollment is down about 10 percent from last year, he said.

Both the church and school are operating during bankruptcy proceedings.

“People just aren’t sure what’s coming,” Snell said.

The bank filed an objection to the church’s reorganization plan Oct. 26, asserting Star Financial could receive more under a Chapter 7 bankruptcy, which would involve a “liquidation of the (church’s) real property,” according to the filing. The church responded saying its proposed repayment plan was fair.

The bank’s attorneys could not be reached for comment Tuesday.

Kleiman said a hearing is set for Nov. 27 to decide a course of action.

“Hopefully then the nightmare will come to an end,” he said.

Find Baylee Pulliam on Facebook and @BayleeNPulliam on Twitter, or call 648-4250.

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