Court Strikes Down Attempted Sale Of Military Pension Pay

Court Strikes Down Attempted Sale Of Military Pension Pay

Factoring companies that are active in the secondary markets for insurance products sometimes seek to effectuate transactions that courts later deem to be legally impermissible.

One example of this is with a military pension factoring transaction that became the subject of litigation in bankruptcy court over the last few years.

The case is In re Dunlap, Bankruptcy No. 09-75282-SCS and Adversary No. 10-07041-SCS (Bankr. E.D. Va. Sept. 13, 2011), and the court in that case said that the retired Air Force Major was legally precluded from transferring any rights to his military pension payments, and therefore the factoring company could not enforce the transaction where it purported to purchase those payment rights.

The reason, the court said, was that the agreement purporting to transfer the pension payment rights was in contravention of 37 U.S.C. § 701(a) because, at the time the agreement was entered into, the officer had no property right in the future pension payments which he could convey.  Further, the factoring company’s claims that the officer would not incur additional debt was not supported by the record, and its other claims also failed.

The court’s opinion describes some of the background, including how Dunlap, a retired Air Force Major and the person entitled to receive military pension payments, entered into an agreement with Structured Investments Company, LLC.

The Agreement provided that SICO would pay an immediate, $100,000 lump sum to Dunlap, in exchange for the right to receive certain pension payments that were due to be paid to Dunlap.

Pursuant to the agreement, Dunlap executed a direct deposit authorization, instructing that the paymnents be sent to an account that was designated by Structured Investments, and further providing that Dunlap would forward payments from that account to Structured Investments.

After receiving a number of payments, Dunlap stopped forwarding then to Structured Investments, and Dunlap and his wife then filed a Chapter 7 bankruptcy petition.

Dunlap moved for summary judgment.  In his summary judgment papers, Dunlap, while admitting that he was in breach of the agreement to direct the deposit of his payments into the bank account specified by Structured Investments, contended that he could not have assigned his payments rights, and Structured Investments could not have a property interest in the payments, because federal law prohibits such transactions.

In particular, Dunlap said that the decision of the United States Court of Appeals for the Fourth Circuit in Dorfman v. Moorhous (In re Moorhous), 108 F.3d 51 (4th Cir.1997), and its interpretation of 37 U.S.C. § 701 showed that an attempted assignment of military retirement pay does not vest a creditor with ownership in the pension payments because of the anti-assignment provision contained in 37 U.S.C. § 701(a).

That statute, Section 701(a), provides that “[u]nder regulations prescribed by the Secretary of the military department concerned, a commissioned officer of the Army, Navy, Air Force, or Marine Corps may transfer or assign his pay account, when due and payable.”

Dunlap argued that, under this statute, any assignment of military retirement pay prior to that pay being due and payable to the retiree is impermissible – and, therefore, Structured Investments could not have a property interest in his pension payments.

In response, Structured Investments made a number of arguments, including that Dunlap did not have standing to raise the statutory provision, that Dunlap was estopped from raising it, that Structured Investments had an equitable assignment.

In a very detailed opinion, the bankruptcy court granted summary judgment for Dunlap, rejecting the arguments made by Structured Investments.  The court concluded that “the reasoning of the United States Court of Appeals for the Fourth Circuit in Moorhous controls, that 37 U.S.C. § 701(a) is an “absolute prohibition on assignments” and transfers of pay (In re Moorhous, 180 B.R. at 150), and that Dunlap’s attempt to transfer rights in the pension payments when those payments were not yet due and payable was in contravention of 37 U.S.C. § 701(a) because, at the time the agreement was entered into, Dunlap had no rights in his future payments to convey.  Accordingly, Structured Investments had no property interest to enforce, and its other arguments also failed.

The full opinion is available beginning here.

Comments are closed.