2002 Lawrence R. Buchalter Alaska Trust v. Phila. Fin. Life Assurance Co.

• Decision Date: 31 March 2015
• Docket Number: Case No. 12–CV–6808 KMK.
• Citation: 96 F.Supp.3d 182
• Parties: The 2002 LAWRENCE R. BUCHALTER ALASKA TRUST, Alaska Trust Company, and Stephen C. Harris, trustees, Plaintiffs, v. PHILADELPHIA FINANCIAL LIFE ASSURANCE COMPANY f/k/a AGL Life Assurance Company, Defendant.
• Court: U.S. District Court — Southern District of New York

96 F.Supp.3d 182

The 2002 LAWRENCE R. BUCHALTER ALASKA TRUST, Alaska Trust Company, and Stephen C. Harris, trustees, Plaintiffs

v.PHILADELPHIA FINANCIAL LIFE ASSURANCE COMPANY f/k/a AGL Life Assurance Company, Defendant.

Case No. 12–CV–6808 KMK.

United States District Court, S.D. New York.

Signed March 31, 2015.

Eric Donovan Dowell, Esq., Jonathan Thomas Shepard, Esq., Pryor Cashman LLP, New York, NY, for Plaintiffs.

William Robert Connelly, Esq., Law Offices of William R. Connelly, LLC, Mendham, NJ, for Plaintiffs.

Kendall Johan Burr, Esq., Thomas F.A. Hetherington, Esq., Aaron Christopher Storm, Esq., Hutson Brit Smelley, Esq. Edison, McDowell & Hetherington, LLP, Houston, TX, for Defendant.

OPINION & ORDER

KENNETH M. KARAS, District Judge.

Plaintiffs The 2002 Lawrence R. Buchalter Alaska Trust (“the Trust”), Alaska Trust Company, and Stephen C. Harris (“Harris”) assert seven causes of action against Defendant Philadelphia Financial Life Assurance Company (“PFLAC”), formerly known as AGL Life Assurance Company, from which the Trust purchased a variable universal life insurance policy. Defendant moves to dismiss all seven causes of action. For the following reasons, Defendant's Motion To Dismiss is granted in part and denied in part.

I. Background

A. Factual Background

The following facts are taken from the allegations contained in Plaintiffs' Second Amended Complaint (“SAC”), as well as the exhibits attached thereto. Lawrence Buchalter (“Buchalter”) “created and funded the Trust for his and his family's benefit” in November 2002. (SAC ¶ 30 (Dkt. No. 42).) The Trust is an asset protection trust, created under Alaska law. (See SAC Ex. A (“Trust Instrument”), at I–3, II–11.) Under the terms of the Trust Instrument, payments of the Trust's principal and income to the Trust's beneficiaries were to be made at the discretion of the Trustee. (Id. at I–11–12, II–12–13.) On or about November 1, 2002, Buchalter appointed the Alaska Trust Company as an Independent Trustee, meaning that, pursuant to the terms of the Trust Instrument, Buchalter “transferred all of his ‘right, title and interest in and to the property’ ... to the Trustee.” (SAC ¶ 31 (quoting Trust Instrument I–1).) The Alaska Trust Company has a “place of business in Anchorage, Alaska.” (Id. ¶ 23.) “On or about June 25, 2012, Buchalter appointed Harris as an additional Independent Trustee.” (Id. ¶ 31 n. 2.) Harris has a place of residence in New Rochelle, New York. (Id. ¶ 24.) Plaintiffs assert that Jeffrey Brown (“Brown”) was the Trust's appointed investment advisor, and that “the parties understood” that Buchalter was also an investment advisor, (id. ¶ 2 n. 1), despite the fact that the Trust Instrument provided that the investment advisor was Brown, or anyone else later appointed pursuant to the appointer article, (Trust Instrument I–8).

“The Trust is the Owner and Beneficiary under a variable universal life insurance policy known as the Flexible Premium Survivorship Variable Life Insurance Contract, policy number VL300397, issued in or about December 2002” by Defendant (the “Policy”). (SAC ¶ 32.) The Policy issued to the Trust is not a widely available, off-the-shelf product. Rather, the “Policy is offered only to qualified investors, including individuals, trusts[,] and other entities that satisfy certain suitability standards.” (SAC Ex. C (Private Placement not registered with the SEC under the 1940 Act as an investment company, and therefore the “SEC does not supervise the management or the investment practices or policies of the Variable Account or of the Company.” (Id. at 16.)

In exchange for Defendant maintaining the tax integrity of the insurance coverage and maintaining and administering the Policy's optional investment accounts, the Trust paid Defendant upfront and annual fees for the life of the Policy. (See SAC ¶ 36.) In total, Plaintiffs allege that the Trust paid more than $345,000 in fees to Defendant in connection with the Policy. (Id. ¶ 145; see also id. ¶ 20.) Policies such as the one at issue in this case “are designed to allow policy holders, such as the Trust, to invest a portion of their premiums in optional investment accounts that are offered under the policy.” (Id. ¶ 29.) Such policies have certain tax benefits, including that investment gains and the payout upon death are non-taxable and that policy holders “are able to access account balances during their lifetime by borrowing funds, tax free, from the policies.” (Id. ) As such, the policies are “essentially a combination of life insurance and a tax-advantaged investment vehicle.” (Id. ) Plaintiffs allege that the Trust has made a total of $4.5 million in premium payments for the Policy. (Id. ¶ 35.)

Defendant provided Buchalter and the Trustee with the PPM “in order to allow them to select investment alternatives under the Policy.” (Id. ¶ 37.) “The pre-approved list that [Defendant] presented was a group of private hedge fund partnerships and fund-of-hedge-fund partnerships that created investment vehicles designed specifically for insurance company investment, and [were] designed to be in compliance with relevant tax and insurance regulations.” (Id. ) Furthermore, while the investments were held by the Policy, (see id. ¶ 40 (explaining that Defendant had exclusive control over and ownership of the invested assets)), the Trust had some degree of control over how the Policy invested the funds. In particular, “the Policy provides that the Trust is permitted to change the direction of the investments.”

(Id. ¶ 43; see also SAC Ex. B (“Second Dec. 20, 2002 Letter Agreement”),¹ at 3 (“Insurer will permit Policyowner (subject to such restrictions as may be imposed by Insurer in the PPM or in the Policy) to allocate Assets between or among the Accounts.”); PPM 13 (“As soon as practicable ..., Premium will be allocated between or among the Investment Accounts according to the Policy Owner's instructions as specified in the Application, or as subsequently changed.”).)

In September 2005, Defendant provided Plaintiffs with a list of insurance dedicated funds available on Defendant's platform. (SAC Ex. D (“AGL Life Assurance Company—Insurance Dedicated Funds”).)² One such fund was the Strategic Stable Return Fund ID (“SSR”), a “hedge fund-of-funds.” (SAC ¶ 4.) The document provided by Defendant regarding SSR states,

BEFORE MAKING ANY INVESTMENT IN THE FUND OR BEFORE ALLOCATING ASSETS TO AN SUB–ACCOUNT THAT INVESTS IN THE FUND, INVESTORS ARE ENCOURAGED TO CAREFULLY AND THOROUGHLY REVIEW THE FUND'S PRIVATE PLACEMENT MEMORANDUM AND RELATED GOVERNING DOCUMENTS WITH THEIR FINANCIAL, LEGAL[,] AND TAX ADVISORS TO DETERMINE WHETHER THE INVESTMENT IS APPROPRIATE AND SUITABLE FOR THEM. INVESTMENT IN THE FUND AND ALLOCATION OF ASSETS TO AN INSURANCE COMPANY SUB–ACCOUNT THAT INVESTS IN THE FUND IS NOT APPROPRIATE OR SUITABLE FOR ALL INVESTORS.

(SAC Ex. D (“August 2005 SSR Tear Sheet”), at 2.)³ In or about December 2005, “the Trust invested nearly $3.2 million of the investment account” in SSR, (SAC ¶ 4; see also id. ¶ 73), which investment reached a peak of $3.904 million in September 2008, (id. ¶ 96). Plaintiffs allege that in or about July 2008, they sought to redeem the Trust's entire investment in SSR and requested that Defendant's CEO prepare the necessary redemption documentation ASAP. (SAC ¶¶ 6, 80; see also SAC Ex. G (Email from William D. Lipkind, Esq. to John Hillman (July 30, 2008) (“July 30 Lipkind Email”) (“I need the applicable person at your shop to send me the applicable documents and describe the applicable procedures whereby the Buchalter policy can sell out all of its positions and reduce everything to cash ASAP.”).) Plaintiffs allege that the request was made with enough time for Defendant to effect the redemption request before the quarter ended, as SSR required 45 days' notice to redeem, and the quarter ended on September 30, 2008. (SAC ¶¶ 62, 81.) However, instead of requesting redemption in September, as Plaintiffs wished, Defendant included special instructions “to redeem all funds on December 30, 2008, rather than three months prior as clearly directed in the ‘ASAP’ email.” (Id. ¶ 7; see also id. ¶ 83; SAC Ex. H (“Investment Account Transfer Requests”), at unnumbered 2 (listing as special instructions, “Effective Date—December 31, 2008”).) Plaintiffs further allege that “[t]he Trustee and the Advisors, expecting that [Defendant] had followed [Buchalter's counsel's] explicit instruction to redeem ‘ASAP,’ reasonably expected that the Trust's SSR investment would be redeemed as of September 30, 2008 and that [the Trust] would recoup the entire stated balance.” (SAC ¶ 85.) However, Plaintiffs allege that this “inexplicably did not occur because of [Defendant's] ... gross negligence in connection with the most routine process of filling out the redemption forms.” (Id. ) And “[b]y October 2008, SSR had received so many redemption requests that it exercised its right to suspend all such requests until such time it felt it could accommodate the return of capital.” (Id. ¶ 86.) At that point, the “Trust's capital was frozen,” and the “Trust's SSR investment account steadily declined in stated value[.]” (Id. ¶ 8.) Although “SSR sent out letters to investors after the September 2008 suspension of redemptions suggesting that the return of investor capital was imminent in ... 2008, 2009, 2010[,] and 2011,” (id. ¶ 89; see also id. ¶¶ 90–93 (describing these letters)), which letters “offered Buchalter some comfort that the Trust's capital would be returned,” (id. ¶ 94), “no capital has been returned to the Trust,” (id. ¶ 95). Indeed, according to Plaintiffs, the “reported SSR investment account balance has dropped every single month” since its peak in September 2008, (id. ¶ 96), and as of November 30, 2012, the investment account had a stated balance of $356,900, “indicating a loss of over 90% of capital since the Trust's redemption request,” (id. ¶ 97). Further, Plaintiffs allege, “upon information and

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