By Stephan Leimberg and Howard Zaritsky
"Investors who are interested in STOLI arrangements should consider that the insurers are litigating all of these cases that they discover, and that they are investigating policy claims carefully to discover STOLI arrangements. Furthermore, the insurers, while losing some of their suits, are having significant success in these actions, which is demonstrated in Lincoln National Life Ins. Co. v. Snyder."
Howard Zaritsky provides members with his analysis of yet another STOLI case, Lincoln Nat'l Life Ins. Co. v. Snyder, 2010 U.S. Dist. LEXIS 71127 (D. Del. July 15, 2010). As Howard indicates, the U.S. District Court for Delaware found a sufficient basis in the insurer's contention that the policy was void for breach, negligent and fraudulent misrepresentations, and lack of insurable interest, to send the case to trial.
Now, here is Howard's commentary:
In Lincoln National Life Ins. Co. v. Snyder the U.S. District Court for Delaware found sufficient basis in the insurer's contention that the policy was void for breach, negligent and fraudulent misrepresentations, and lack of insurable interest, to send the case to trial. The facts of this case are virtually prototypical for a STOLI arrangement.
Around or before November 25, 2005, Landon Strauss and Robert Fink (together the "defendants") persuaded Harry Wisner ("Wisner"), who was then 76 years old, to apply for an $18.5 million life insurance policy to be issued by Lincoln National. Strauss was an insurance agent for Lincoln National and Fink was an intermediary, acting together with Strauss to procure the policy. The defendants allegedly sought the policy to sell it to stranger investors on the secondary life insurance market.
Wisner created an irrevocable life insurance trust, naming Bayard J. Snyder as the trustee. Wisner named his wife, Joan, as the beneficiary of the trust. Wisner then submitted a formal application for $18.5 million in life insurance coverage, naming the trust as the proposed owner and beneficiary. The application stated that Wisner had a net worth of $76,900,000 and an unearned annual income of $4,000,000. The application was signed by the trustee on behalf of the trust as the proposed owner. Strauss was designated the producing agent and Wisner as the proposed insured.
Both the trustee and Wisner answered "no" in response to a question on the application asking whether they had "been involved in any discussion about the possible sale or assignment of this policy to a life settlement, viatical or other secondary market provider." Strauss also stated on the application that he had "not been involved in any discussion of the possible sale or assignment of the policy to a life settlement, viatical or other secondary market provider" and that he "[knew] of nothing affecting the insurability of the Proposed Insured[ ] which [was] not fully recorded in [the] application."
At the end of the application was an agreement and acknowledgement clause that read:
Each of the Undersigned declares that:
* * * *
6. I HAVE READ, or have had read to me, the completed Application for Life Insurance before signing below. All statements and answers in this application are correctly recorded, and are full, complete and true. I UNDERSTAND that any material false statements or material misrepresentations may result in the loss of coverage under the policy.
Lincoln National issued the $18.5 million policy, based on the application.
On October 12, 2006, Strauss submitted an Amendment to the Application signed by the trustee and Wisner, stating:
Neither I nor any person or entity on my behalf are [sic] receiving any compensation, whether via the form of cash, an agreement to pay money in the future, or a percentage of the death benefit.
I am purchasing insurance for my benefit and the benefit of my personal beneficiaries.
The premiums are not being advanced, loaned or financed by a third party.
Following the receipt of the Amendment, Lincoln National issued an Endorsement changing the policy date, issue date, and effective date of the policy. The trust paid the first premium of $1,044,140 by wire transfer, then paid additional premiums of $250,000 and $310,000 before Wisner's death at the age of 79, approximately two years after taking out the policy.
The trust filed a claim for Wisner's death benefit, after which Lincoln National initiated a contestable death claim investigation, which revealed, among other things, that the beneficiary interest in the trust had been sold to an unknown party, that Wisner had received compensation in connection with the transfer of beneficiary interest, and that Wisner's earned and unearned income did not support the representations made in the application.
Lincoln National brought suit to declare the policy void for:
1) lack of insurable interest at inception;
2) illegal procurement under applicable law; and
3) material misrepresentations in the application.
To the extent that the defendants were involved in fraud, fraudulent inducement, aiding and abetting fraud, negligent misrepresentation and/or breach of contract, Lincoln National also sought compensatory and punitive damages, as well as the right to retain some or all of the premiums paid.
THE MOTION TO DISMISS
The trustee filed a motion to dismiss the complaint for failure to state a cause of action, asserting that:
1) Lincoln National is deemed to have full knowledge of the alleged misrepresentations;
2) Lincoln National cannot rescind the policy;
3) the policy was not void/voidable due to lack of insurable interest;
4) Lincoln National's did not adequately plead loss causation for the fraud and misrepresentation;
5) fraud was not alleged with sufficient particularity;
6) the fraud and misrepresentation claims are time barred;
7) Lincoln National cannot simultaneously seek to rescind the contract and seek damages on the same contract; and
8) the court should strike several of Lincoln National=s allegations as immaterial to the litigation.
The U.S. District Court for Delaware (Judge Robinson), denied all of the motion to dismiss, except for the claim that the insurer could not simultaneously seek to rescind the contract and seek damages for breach or rescission.
Existence of an Insurable Interest
The court held that Lincoln National had pled facts sufficient to sustain a claim that the policy was void ab initio because there was no insurable interest. Applicable state law (Delaware) prohibits procurement of life insurance if the insured does not have an insurable interest. State law defines an insurable interest as benefits that are payable to individuals related closely by blood or by law who have a substantial interest out of love and affection; or to any other individual with a lawful and substantial interest in having the life, health or bodily safety of the injured continue.
The trustee argued that:
1) the trustee of a trust established by an individual also has an insurable interest in the life of that individual; and
2) the insured was entitled to name the trust as the owner and beneficiary because he had an insurable interest in his own life.
The court stated that, while an insured can name his own trust as the owner and beneficiary, that right must be considered in the context of the public policy concerns for which the insurable interest doctrine was developed. This doctrine, the court stated, developed in common law and out of public policy concerns that deem insurance policies without an insurable interest at inception to be illegal wagering contracts. "Wagering contracts] have a tendency to create a desire for the [death of the insured]. They are, therefore, independently of any statute on the subject, condemned, as being against public policy." See Warnock v. Davis, 104 U.S. 775, 779 (1881) (emphasis added).
The object of the insurable interest requirement is "to curtail use of insurance contracts as wagering contracts by distinguishing between contracts that sought to dampen the risk of actual future loss and those that instead sought to speculate on whether some future contingency would occur" and because wagering contracts give "the [policyholder] a sinister counter interest in having the life come to an end.
In Delaware, insurable interest need only be present when the policy is procured, but there is no governing judicial precedent in Delaware regarding what constitutes a lack of insurable interest at the time of policy procurement, and no clear consensus has emerged across jurisdictions regarding this issue.
Lincoln National alleged specifically that:
1) Strauss and Fink approached Wisner to participate in a STOLI scheme for the benefit of stranger investors;
2) Strauss solicited strangers, with the help of Fink as an intermediary, to invest in the Wisner Policy before submitting the application to Lincoln National;
3) material misrepresentations were made on the application regarding Wisner's income, net worth and purpose for the policy in order to conceal the STOLI nature of the policy;
4) Lincoln National found evidence of the misrepresentations during the contestable death claim investigation after Wisner's death;
5) Lincoln National also found evidence that the beneficial interest in the trust was sold;
6) stranger investors paid the premiums on the policy and compensated Wisner for his participation in the alleged STOLI scheme;
7) Strauss and Fink helped obtain another policy, which was found by a California court to be have been fraudulently procured and void ab initio for lack of insurable interest;
8) Strauss and Fink solicited investors to invest in the Wisner Policy and the other policy as a single package.
The court held that the complaint sufficiently alleged, beyond a speculative level, that there was an arrangement in place, at the time of procurement, to transfer the Wisner policy, and that these facts are sufficiently plausible to state a cause of action.
Imputation of Agent's Knowledge to Insurer
The court also refused to impute Strauss's knowledge to Lincoln National. The court noted that Delaware law imputes an agent's knowledge to the principal, if that knowledge is acquired "while acting within the scope of his or her authority." The court stated that Strauss' fraud and knowledge were not imputable, because an agent's knowledge is not imputed to the principal if "the agent's own interests become adverse" with those of the principal. In concealing the alleged fraud or misrepresentations related to the policy, the court stated, Strauss was acting out of his own self interest, the financial misrepresentations on the application were allegedly made to obtain a higher face value policy, generating higher commissions and a higher investment vehicle for the defendants.
The court also stated that public policy concerns are consistent with applying the adverse interest exception to prevent imputation of Strauss' fraud and knowledge to plaintiff. The rationale behind imputation of an agent's knowledge to a principal is "the presumption that an agent has discharged his duty to disclose to his principal all material facts coming to his knowledge as to the subject of his agency." This rationale does not apply when the agent has an adverse interest which, by its very nature, the agent wants to conceal. Lincoln National sufficiently alleged active concealment by Strauss, raising the defense of adverse interest.
Timeliness of Suit to Rescind Policy
The trustee argued that Lincoln National was estopped from rescinding the policy because it had not timely disclaimed coverage and coverage. The trustee argued that Delaware law provides that an insurance policy must provide that the benefits are payable by reason of the death of the insured, that settlement will be made on receipt of proof of death, and that, at the insurer's option, surrender of the policy and/or proof of the interest of the claimant. If an insurer shall specify a particular period prior to the expiration of which settlement shall be made, such period shall not exceed 2 months from the receipt of such proofs. (emphasis in the opinion)
The trustee argued that the two month period in the statute limits the reasonable time for settling claims, and that Lincoln National had to disclaim coverage within that time. The court disagreed that two months is the limitation on the time for claiming rescission of the insurance contract, and noted that the policy did not specify any particular settlement period.
Furthermore, the insurer's delay was partially the result of the time required for the claim investigation, and state law expressly states that investigation of a claim or loss does not constitute a waiver of the policy. Therefore, the court concluded, the alleged facts in the complaint support a claim that Lincoln National acted with reasonable promptness.
Retaining Premiums While Suing for Rescission
The trustee argued that Lincoln National cannot sue for rescission and retain the premiums after learning about the STOLI arrangement. Delaware law, however, provides that a party need not return property acquired under a fraudulent contract, in order that it may be rescinded, when the defrauded party has received nothing under the contract which it was not entitled. Lincoln National's situation, the court stated, falls under the first scenario because it may, depending on the outcome of this action, be entitled to retain the premiums collected on the policy. If the policy is rescinded, Lincoln National will be required to refund the premiums; otherwise, it may retain them.
Fraud and Misrepresentation Claims
The court also addressed issues pertaining to the fraud and misrepresentation claims. The trustee argued that these claims should be dismissed under one or more of four alternate theories. It asserted that:
1) Lincoln National failed to plead loss causation adequately;
2) Lincoln National failed to plead the "knowledge and belief" standard against the trustee;
3) Lincoln National failed to plead fraud with particularity; and
4) the fraud and negligent misrepresentation claims are time barred.
On the first argument, the trustee claimed that Lincoln National did not allege that its losses were actually caused by the trustee's alleged misrepresentations. The trustee contended that Lincoln National must show not only that it would not have issued the policy but for the misrepresentations, but that the alleged misrepresentations caused the alleged harm and the payment of death benefits.
The prima facie elements of common law fraud and misrepresentation in Delaware are:
1) a false representation, usually one of fact, made by the defendant;
2) the defendant's knowledge or belief that the representation was false, or was made with reckless indifference to the truth;
3) an intent to induce the plaintiff to act or to refrain from acting;
4) the plaintiffs action or inaction taken in justifiable reliance upon the representation; and
5) damage to the plaintiff as the result of such reliance.
The causation requirement under common law fraud and misrepresentation is measured by the relationship between plaintiff's reliance and plaintiff's loss. In its complaint, Lincoln National asserted that the defendants' financial misrepresentations in the application were "false and grossly overstated in order to procure a high face amount life insurance policy, which [Wisner] could not otherwise obtain" and that the defendants concealed the STOLI nature of the Wisner Policy and planned for the premiums to be advanced or financed by a third party, in contravention to the representations made on the application and the amendment.
Lincoln National claimed that it issued the policy in reliance upon those representations, and that doing so was to its detriment because, had the application been truthful, it would have issued no policy or only one with a smaller face amount. The court accepted as sufficient Lincoln National's claims on this issue.
Regarding knowledge and consent, the trustee asserted that Lincoln National had not alleged that the trustee knew or was in a position to know that the information on the application was false. This contention was based on an error in the complaint that quoted the application's agreement and acknowledgement clause as stating: "All statements and answers in this application are correctly recorded, and are full, complete and true to the best of my knowledge and belief." (emphasis in opinion) The clause actually stated that "All statements and answers in this application are correctly recorded, and are full, complete and true."
The court held that the trustee's contention was moot, because the trustee signed the application stating the representations were all true, rather than only believing them to be true. The court also allowed Lincoln National to amend its complaint to fix the mis-quote.
The court also rejected the trustee's contention that the claim of negligent misrepresentation must state "with particularity" the circumstances causing the damage. The court noted that particularity is required for fraud claims, but not for claims of negligent misrepresentation. Furthermore, the court found that the complaint plead fraud with sufficient particularity, because it showed the circumstances of the fraud sufficiently to place the defendants on notice of the misconduct with which they are charged.
In particular, the court noted, Lincoln National had alleged that:
1) the alleged STOLI scheme called for the establishment of the trust that would become the record owner and beneficiary of the policy;
2) the trust, from the outset, was intended for transfer on the secondary market, not for estate liquidity, financial planning, or other legitimate insurance related purposes;
3) the trust was used to conceal the true purpose of the policy;
4) the premiums, which are alleged to have been funded by stranger investors, were paid from ah account in the trust's name;
5) Wisner and the trustee falsely represented, in both the application and the related amendment, that they had not been involved in any discussion regarding possible sale or transfer of the policy;
6) the trustee, as the proposed owner of the policy, signed the application declaring everything in it was complete and true; and
7) the misrepresentations were made in order to intentionally conceal the alleged STOLI scheme and to secure a higher face value for the policy.
The court also refused to dismiss the fraud and misrepresentation claims as being time-barred. The Delaware statute of limitations for fraud and negligent misrepresentation is three years, and that period is "calculated from the time of the wrongful act even if plaintiff is ignorant of the cause of action." Therefore, the statute of limitations for the present case expired three years after the allegedly fraudulent application was submitted to plaintiff.
The present action was not filed until after that date, so the fraud and misrepresentation claims would be barred, unless the statute of limitations period was tolled because the defendant affirmatively acted to conceal the wrong. To toll the statute of limitations, Lincoln National must show that the defendants "knowingly acted to prevent plaintiff from learning facts or otherwise made misrepresentations intended to put [ ] plaintiff off the trail of inquiry."
Fraudulent inducement thus requires a showing that the trustee affirmatively acted to conceal the fraud in question. (emphasis in opinion). The court found that Lincoln National had alleged facts sufficient to toll the statute of limitation, because they had asserted that the trustees fraudulently and intentionally concealed their misrepresentations.
Finally, the trustee contended that Lincoln National's claim for negligent misrepresentation should be dismissed because the nature of the alleged misrepresentation requires proof of an intentional or knowing act. The court stated that a negligent misrepresentation does not require a knowing or intentional state of mind, but only:
1) a pecuniary duty to provide accurate information;
2) the supplying of false information;
3) failure to exercise reasonable care in obtaining or communicating the information; and
4) a pecuniary loss caused by justifiable reliance upon the false information.
Lincoln National, the court stated, adequately pled that the trustee:
1) signed the application and amendment as the proposed owner of the trust;
2) supplied false financial and other information on both the application and amendment;
3) failed to exercise reasonable care in communicating the relevant information; and
4) induced plaintiff to reasonably rely on the alleged misrepresentations and issue the policy at a high face value, which it otherwise might not have done.
Simultaneous Claim to Retain Premiums and Rescind the Policy
The court agreed with the trustee, however, that Delaware law requires an insurer to return premiums paid on a policy in order to have the policy declared void. The court stated that rescission of benefit increases on a life insurance policy requires the insurer to refund premiums.
The court explained that allowing an insurance company to retain premiums while rescinding the policy would incentivize insurers to bring rescission suits as late as possible, as they continue to collect premiums at no actual risk.
The courts have been inconsistent in their views regarding the validity of STOLI transactions. The investors had notable successes in Sun Life Assurance Co. of Canada v. Paulson (D. Minn.), First Penn Pacific Life Ins. Co. v. Evans (D. Md. and 4th Cir.), Wuliger v. Manufacturers Life Insurance Co. (6th Cir.).
The insurers, however, have had successes in Life Products Clearing, LLC v. Angel, American General Life Ins. Co. v. Schoenthal Family, LLC (11th Cir.), Lincoln National Life Ins. Co. v. Calhoun (D.N.J.), Phoenix Life Insurance Co. v. LaSalle Bank, N.A. (E.D. Mich.), Axa Equitable Life Ins. Co. v. Infinity Fin. Group, LLC (S.D. Fla.), Principal Life Insurance Co. v. Minder (E.D. Pa.), Lincoln National Life Ins. Co. v. The Gordon R.A. Fishman Irrevocable Life Trust (C.D. Cal), Sun Life Assurance Co. of Canada v. Moran (D. Ariz); and Ashkenazi v. AXA Equitable Life (E.D.N.Y.); and Penn Mutual Life Ins. Co. v. Wolk (S.D.N.Y.)
Investors who are interested in STOLI arrangements should consider that the insurers are litigating all of these cases that they discover, and that they are investigating policy claims carefully to discover STOLI arrangements. Furthermore, the insurers, while losing some of their suits, are having significant success in these actions, as demonstrated in Lincoln National Life Ins. Co. v. Snyder.
This is clearly a case of investor beware.
CITE AS: LISI Estate Planning Newsletter #1680 (July 27, 2010) at http://www.leimbergservices.com Copyright 2010 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited - Without Express Permission.
Obtain a Free Download of Lincoln National Life Ins. Co. v. Snyder.
Lincoln National Life Ins. Co. v. Snyder, ___ F.Supp.2d ___, (D. Del. July 15, 2010); Warnock v. Davis, 104 U.S. 775 (1881); Herman v. Provident Mut. Life Ins. Co. of Philadelphia, 886 F.2d 529 (2d Cir. 1989); North American Co. for Life and Health Ins. v. Lewis, 535 F.Supp.2d 755 (S.D. Miss. 2008); Sun Life Assurance Co. of Canada v. Paulson, (D. Minn. 2008); Grigsby v. Russell, 222 U.S. 149, 154 (1911); Lincoln Nat'l Life Ins. Co. v. Calhoun, 596 F.Supp.2d 882 (D.N.J. 2009); Product Clearing v. Angel, 530 F.Supp.2d 646 (S.D.N.Y .2008); Albert v. Alex. Brown Mgmt. Servs., Inc., (Del. Ch. 2005); Curtis, Collins & Holbrook Co. v. United States, 262 U.S. 215 (1923); MetCap Secs. LLC v. Pearl Senior Care, Inc., (Del. Ch. 2007); In re Health South Corp. S'holders Litig., 845 A.2d 1096 (Del. Ch. 2003); KE Property Mgmt, Inc. v. 275 Madison Mgmt. Corp., (Del. Ch. 1993); Ambrose v. Thomas, (Del. Super., 1992); Gaffin v. Teledyne, Inc., (Del. Ch., 1990), aff'd in relevant part, 611 A.2d 467 (Del.1992); Eastern States Petroleum Co. v. Universal Oil Prods. Co., 49 A .2d 612 (Del. Ch.1946); Stephenson v. Capano Development, Inc., 462 A.2d 1069 (Del. 1983); Simons v. Cogan, 549 A.2d 300 (Del. 1988); In re Fruehauf Trailer Corp., 250 B.R. 168 (D.Del. 2000); Vietnam Veterans of Am., Inc. v. Guerdon Indus., Inc., 644 F.Supp. 951 (D.Del.1986); In re Student Fin. Corp., (D.Del. 2004); Klein v. Gen. Nutrition Co., 186 F.3d 338 (3d Cir. 1999).EBS Litig. LLC v. Barclays Global Investors, N.A., 304 F.3d 302 (3d Cir. 2002); Krahmer v. Christie's Inc., 911 A.2d 399 (Del. Ch. 2006) (quoting State ex rel. Brady v. Pettinaro Enters., 870 A.2d 513 (Del. Ch. 2005)); Grunstein v. Silva, (Del. Ch. 2009); Outdoor Techs., Inc. v. Allfirst Fin., Inc., (Del. Super. 2001); Oglesby v. Perm Mut. Life Ins. Co., 877 F.Supp. 872 (D.Del. 1994). See also Strassburger v. Early, 752 A.2d 557 (Del. Ch.2000); Sannini v. Casscells, 401 A.2d 927 (Del. 1979); Life Products Clearing, LLC v. Angel, 530 F.Supp. 2d 646 (S.D.N.Y. 2008); Wuliger v. Manufacturers Life Insurance Co., 567 F.3d 787 (6th Cir. 2009), rev=g and rem=g, (N.D. Ohio 2008); First Penn Pacific Life Ins. Co. v. Evans, (D. Md. 2008); American General Life Ins. Co. v. Schoenthal Family, LLC, 555 F.3d 1331 (11th Cir. 2009); Phoenix Life Insurance Co. v. LaSalle Bank, N.A., (E.D. Mich. 2009); Axa Equitable Life Ins. Co. v. Infinity Fin. Group, LLC, (S.D. Fla. 2009); Axa Equitable Life Ins. Co. v. Infinity Fin. Group, LLC, (S.D. Fla. 2009); Principal Life Insurance Co. v. Minder, (E.D. Pa. 2009); Lincoln National Life Ins. Co. v. The Gordon R.A. Fishman Irrevocable Life Trust, (C.D. Cal. 2009); Sun Life Assurance Co. of Canada v. Moran, (D. Ariz. 2009); Ashkenazi v. AXA Equitable Life, 2009 NY Slip Op. 33 (E.D.N.Y. 2009); Penn Mutual Life Ins. Co. v. Wolk, (S.D.N.Y. June 28, 2010); 18 Del. Code ' 2704 (2010); 18 Del. C. ' 2724(3) (2010); 18 Del. C. ' 2914 (2010); 10 Del. Code ' 8106 (2010).