Some Creditors Miffed By Shurwest's 'Sham Bankruptcy' Plan – InsuranceNewsNet - Insurance News Net

No one is disputing that Shurwest owes dozens of creditors many millions of dollars as the independent marketing organization tries to dig out from its ties to a pension scam.

How much the beleaguered company ends up paying is the topic of a fierce dispute playing out in an Arizona bankruptcy court.

Shurwest filed for Chapter 11 bankruptcy Aug. 31, 2021, in a bid to settle scores of lawsuits, all while steadfastly maintaining that company executives knew nothing about a pension fraud scheme adapted to hundreds of IUL sales.

According to bankruptcy documents, Shurwest faces 140 claims totaling more than $197.5 million. The current dispute before the court is whether to permit Shurwest to complete its bankruptcy under Chapter 11, Subchapter V, under which it can negotiate more favorable terms.

“Debtor has improperly attempted to shoehorn itself into a Subchapter V on the technicality that most of its debts are unliquidated because they have not yet been reduced to judgment,” reads a motion filed last week by Timothy W. Horn, owner of Horn Financial Services in Austin, Texas.

Horn claimed a loss of more than $1.6 million via working with Shurwest. In court documents, Horn claimed that Subchapter V was designated for small-business debtors, which he claimed Shurwest isn’t.

“Debtor has been able to take unfair advantage of the streamlined and debtor-friendly provisions of Subchapter V to evade numerous procedural protections intended to safeguard the interests of a large and diverse body of creditors like those holding claims against this estate,” the Horn filing said.

Neither Horn or his attorney returned phone and email messages seeking comment. In his motion, Horn asks the court to convert the Shurwest case to a “traditional” Chapter 11 bankruptcy. The case would first need to be converted to Chapter 7, Horn’s motion reads, then to Chapter 11.

Likewise, Minnesota Life filed a motion asking the court to convert the Shurwest bankruptcy to Chapter 7. The court will hear arguments May 17 on both motions to convert the Shurwest bankruptcy.

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‘Sham Bankruptcy’

According to court documents, Shurwest is proposing to pay claims through an arbitration process using the proceeds from three years of revenue, which it projects at about $6.14 million. Shurwest reported current gross income of about $125,000-$150,000 per month, and future operating expenses to be $35,000-$40,000 per month.

That means unsecured creditors would receive about 3.1% of their total claims, according to a motion filed by Horn.

Beginning in 2019, Shurwest began branding itself as The Quantum Group. The two companies appear to share the same address, phone number and employees, Minnesota Life noted in a lawsuit it filed against Shurwest in July 2021 in the U.S. District Court for the District of Minnesota.

The top executive for The Quantum Group, Jim Maschek, partner and president of distribution, also signed Shurwest bankruptcy documents as its representative. Maschek listed himself as the president of Shurwest.

In their bankruptcy court filings, Horn and Minnesota Life claim Shurwest is trying to shield The Quantum Group from paying any restitution.

“Debtor filed for bankruptcy solely in order to use the automatic stay and other provisions of Chapter 11 to summarily destroy the legitimate rights and interests of its victims, many of whom are elderly,” Minnesota Life said in a court filing. “Cause exists under Bankruptcy Code … to dismiss or convert this sham bankruptcy, which is a ploy for Debtor, its alter ego Quantum, and insiders to walk away unrepentant and unscathed.”

Shurwest sold Minnesota Life products for several years until problems arose with alleged fraudulent sales. Minnesota Life claims the policy applications were altered on more than 1,000 policies sold through Shurwest between 2014 to 2018. Minnesota Life would be sued itself by several disgruntled clients.

An attorney for Minnesota Life did not return a message seeking comment. A spokesman for Minnesota Life has said the insurer does not comment on active litigation.

Shurwest filed a lengthy bankruptcy settlement plan in November. The entire plan is the best way for Shurwest to repay the aggrieved parties, said Isaac Rothschild of Mesch Clark Rothschild, a Tuscon, Ariz., law firm handling the bankruptcy filing for Shurwest.

“There is the possibility for the Shurwest annuity business to continue going, and if there is a light at the end of the tunnel through a reorganized plan, it discharges the debts so Shurwest can grow its business and maximize return to the creditors,” he explained.

The plan is going through a comment period and an effort to build a consensus among creditors, Rothschild said.

“A majority of our contract creditors are on board,” he added. “A majority of the individual investors have suggested that our plan could provide an appropriate mechanism. And we’ve been working with them over the last month-plus to try and determine what those factors, and what that mechanism, should look like.”

Retiree Pension Scam

Shurwest executives insist they had no knowledge of a pension scam used to goose sales of indexed universal life policies. Prosecutors say the scam originated with a company called Future Income Payments (FIP).

Using various marketing efforts, FIP solicited pensioners by offering them a lump sum in exchange for a portion of their future pension payments. FIP called the practice “structured cash flows” and the company used brokers and insurance producers to find investors – often retired veterans, teachers and firefighters.

Unknown to many investors, the future pension payment terms required them to pay what often equated to an annual interest rate exceeding 100% over a five-year term.

In time, another layer was added to the scam, prosecutors said. Investors were urged to fund IUL policies with their FIP payment, ostensibly to replace the pension as a retirement plan. However, prosecutors said the new layer just created another opportunity for rogue agents and FIP reps to further gouge investors through hidden and high fees.

“This vehicle allows me to yield an extra 5%-6% when I’m funding a life policy,” wrote Melanie Schulze-Miller, national sales director of life insurance for Shurwest, in a 2016 email to her boss. “Better for client, better for us, better for agent, and it actually creates a larger life policy because the premiums are even higher (so extra better for us).”

Emails between then-vice president of sales Jim Maschek and co-founder and president Ron Shurts show that Shurwest executives were wary of the FIP idea when first proposed. Shurts wrote that he was “uncomfortable” with the idea and wanted compliance officers to take another look at it.

Schulze-Miller would go on to form her own company called MJSM Financial, which handled many of the fraudulent sales, according to court documents. Schulze-Miller claimed she did so at Maschek’s suggestion, court documents say. Shurwest execs say Schulze-Miller went rogue with the FIP sales.

Pairing FIP with life insurance sales paid off handsomely for Shurwest. According to court documents, the company’s annual gross receipts were $15.7 million in 2016, and jumped to $21.1 million in 2018.

In a recent court brief, Minnesota Life said it uncovered 274 IUL policies sold through Shurwest and linked to FIP.

“Everyone at Shurwest, including Maschek and Shurts, were fully aware that we were promoting FIP to fund life insurance policies,” reads an April 2021 affidavit signed Schultze-Miller.

4 Degrees Of Liability

Shurwest has good reason to want to settle the bankruptcy claims as soon as possible. Due to the lawsuits, Shurwest spent more than $1.7 million for professional fees alone in the first two quarters of 2021, court documents state.

The Shurwest plan offers an “arbitration option” for claims or going through an expedited arbitration process. Creditors opting out of the arbitration will resolve their claims through the claim objection process contemplated by the Rules of Bankruptcy Procedure.

A claims arbitrator will place claims into one of four categories of Shurwest liability, the plan said. Category one claims will receive a distribution of “100% of the pro rata amount of its allowed claim,” the plan stated. Category two claims will receive 50% and category three, 25%.
Category four claims will receive a nominal payout, the plan stated. These claims would be considered to have “no material connection with Shurwest and who are unlikely to prevail in any litigation against Shurwest,” the plan said.

“The Debtor believes that the Plan will provide a greater return to creditors than they would receive in a liquidation under Chapter 7 or Chapter 11,” the plan said. “Accordingly, Shurwest can satisfy the ‘best interests of creditors’ test for confirmation of the Plan.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.