November 3, 2012

Funding scheme bankrupts Indiana church

Using life insurance as collateral for a construction loan doesn't pay off.

The Associated Press

ANDERSON, Ind. — Lindberg Road Church of Christ in Anderson didn't have many financing options when its leaders decided in 2005 that it was time to expand a successful child care center.

The church could use $700,000 in pledges from its members to obtain a construction loan and work in phases. Or it could take out life insurance on some of its elderly members and use their death benefits to back a $2.5 million line of credit, which would pay for the child care center plus other upgrades at the affiliated Anderson Christian School.

Lindberg Road opted for the latter and in late 2006 bought $4.35 million in life insurance on 11 of its members.

Now, the church is trying to avoid foreclosure by Fort Wayne-based Star Financial Bank, which promoted the insurance scheme along with Total Financial Group of Carmel.

"This whole plan that was supposed to provide the funding has not worked out the way we were expecting," Tom Snell, administrator of Anderson Christian School and a former church elder, told the Indianapolis Business Journal.

Snell wasn't among the church trustees who signed off on the life insurance, but he's familiar with it because the school guaranteed the construction loan with its tuition revenue.

The key to the plan was the insurance, which was supposed to pay off either in death benefits or through a sale of the policies on the secondary market.

Things fell apart in 2009, when the church looked to sell the policies through Total Financial Group and was told there was no market for them, Snell said.

The pattern is typical of life-insurance-finance programs that were promoted and sold to charities and churches across the country in recent years, usually with bad results for buyers, insurance experts said.

Total Financial Group appears to have created an entire side business around marketing to charities, and it's sold products to at least one other local church, Castleton United Methodist Church.

Raymond T. Blunk, principal at Total Financial Group, didn't respond to messages.

Lindberg Road was left in a financial bind when the sale of its policies didn't pan out. The church still owed $1.9 million with its note coming due Feb. 1, 2010.

The church's attorneys want the bankruptcy court to relieve most of the debt, based on the failure of the life-insurance scheme. Star argues that the church can pay what it owes because the loan also was backed by real estate, which the bank values at $2.4 million.

The church's attorney, David Kleiman at Benesch Friedlander Coplan & Aronoff LLP, proposed an exit plan that calls for the church to pay Star $507,000, plus interest, over 25 years. The remainder of the debt, $1.5 million, would be secured by the life insurance policies.

Star's objection, filed Oct. 15, doesn't dispute that the bank promoted the life-insurance financing, but argues the policies can't serve as collateral.

 

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