New York Life Ins. Co. v. Baum, 78-2688

Decision Date30 May 1980
Docket NumberNo. 78-2688,78-2688
Citation617 F.2d 1201
PartiesNEW YORK LIFE INSURANCE CO., Plaintiff-Appellee, v. Noel B. BAUM, Defendant-Appellant, v. MEDIA SALES & MARKETING, INC., Defendant-Counterclaimant Cross-Plaintiff- Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

Philip A. Staskus, John A. Bailey, Tara Wall, Debora D. Ratliff, Robin C. Gibbs, Houston, Tex., for Baum and Media Sales & Marketing.

Baker & Botts, Richard L. Josephson, Houston, Tex., for plaintiff-appellee.

Appeals from the United States District Court for the Southern District of Texas.

Before COLEMAN, Chief Judge, PECK * and KRAVITCH, Circuit Judges.

COLEMAN, Chief Judge.

The issue in this case is whether the District Court erred when, by summary judgment, it held that a $50,000 life insurance policy issued by the New York Life Insurance Company was null and void. The District Court found the policy to be void ab initio. We vacate and remand for further proceedings.

In early 1973, appellant Noel Baum and Bill Cook began discussing a joint business venture. Baum was then a Baton Rouge field underwriter for the New York Life Insurance Company. Cook was an advertising sales manager at a Baton Rouge television station, with experience in the field of media advertising. Baum and Cook agreed upon a media advertising venture to be named Media Sales & Marketing, Inc. The original intention, as expressed by Baum in his deposition, was that the headquarters of the business was to be in Houston, Texas, but it was to be incorporated in Louisiana. 1 Cook was to furnish the experience for setting up and running the corporation and Baum was to furnish the starting capital. While in the process of setting up Media Sales, Carroll Cutler, a businessman in Houston, Texas, was added to the proposed corporate business venture. According to Baum, it was at this stage of planning that key man life insurance on the three came to be discussed and contemplated.

Baum's personal attorney drew up several drafts of a proposed pre-incorporation agreement, with plans for the business. The parties planned that Baum would contribute up to $45,000.00 for starting capital and helping the business arrange a line of credit. Under this plan, Baum intended to own and control the business during the early stages, with Cook and Cutler to buy back an interest when the business began generating income.

In late 1973, Cook moved to Houston, Texas, where he and Cutler opened an office and began doing business as Media Sales & Marketing, Inc. Baum helped to arrange a line of credit for the business at Bank of the Southwest in Houston. He personally extended considerable sums of money to Cook to use for developing the business. 2 By early November, 1973, however, Media Sales had not been formally incorporated and no operating income was being realized.

At this time, to protect his investment, Baum decided to go ahead with key man life insurance plans. His reciprocal insurance plan called for a policy on Cook with himself as beneficiary. On November 2, 1973, Baum executed an application for insurance on Cook's life, with a face amount of $50,000.00 plus accidental death benefits of $50,000.00. The application designated Media Sales & Marketing, Inc. as the policy owner and Noel Baum, Partner, as the beneficiary. Baum never filled out an application on his own life, with Cook as a beneficiary.

When it received Baum's application for insurance on Cook's life, New York Life (home office) notified Baum that company policy did not allow agents to be named as the beneficiaries in policies issued on the lives of persons other than family members. Baum agreed to change the beneficiary to Media Sales & Marketing, Inc., since he owned the controlling interest in the business. New York Life issued the policy, with an amendment which changed the beneficiary from Baum to Media Sales. The main application form listed the business address as Houston, Texas. The supplementary information policy application form stated that Media Sales had been incorporated in Louisiana in 1973, although actual incorporation had not been accomplished. This form was dated and signed in Baton Rouge, Louisiana. On the date of policy issue, December 8, 1973, no business by the name Media Sales & Marketing, Inc. had been formally incorporated in either Louisiana or Texas.

Twelve days later, December 20, 1973, Cutler, Cook, and another Houston resident formally incorporated in Texas a business named Media Sales & Marketing, Inc. (Media Texas). This business appears to have been distinct from the Media Sales originally planned by Baum. There is conflicting evidence as to whether this incorporation was with Baum's knowledge.

Baum stated in his deposition that the Media Texas business was incorporated without his knowledge and "cut me out completely." (Baum deposition at 67). There is other evidence, however, that indicates Baum's awareness to incorporate at some time in Texas. One such piece of evidence was a letter sent to Baum, Cook, and Cutler by Baum's attorney discussing incorporation of the business under Texas law. (Baum deposition, exhibit 11). Baum testified that his first awareness of the formal incorporation of Media Texas was after Bill Cook's death. (Baum deposition at 59.) Cutler testified, however, that he personally informed Baum of the incorporation and that Baum agreed to it. (Cutler deposition at 37).

According to Carroll Cutler, the business was incorporated in Texas to protect the participants from personal liability on business debts caused in part by Baum's failure to provide necessary funds. No stock was ever issued in Media Texas and the corporation never did produce any income.

On December 8, 1974, in Corpus Christi, Texas, Cook was gunned down just twenty minutes after the one year incontestability clause in the insurance policy had run. All the premiums on Cook's policy had been paid by Baum from the time of issuance until Cook's death.

In February, 1978, Baum filed a claim to $100,000.00 in proceeds from Cook's policy. He asserted entitlement to the proceeds because he was the principal financier of the proposed Media Sales Corporation in Louisiana, listed in the policy as the corporate beneficiary, and would have been its principal shareholder following formal incorporation.

In May, 1975, Media Texas filed a claim to the $100,000.00 in policy proceeds. Media Texas asserted that it was the corporate beneficiary designated in Cook's policy.

Faced with these claims, New York Life filed, in the Southern District of Texas, an interpleader action and an action for declaratory judgment (against Baum and Media Texas) to determine whether the Cook insurance policy was void for lack of an insurable interest. Only the sum of premiums paid by Baum was interpled. Baum and Media Texas filed counterclaims against New York Life.

Following discovery, Media Texas moved for summary judgment. Upon the recommendation of the United States Magistrate, the District Court denied this motion. The Magistrate's recommendation had stated in part:

There are material issues of fact in this case that should preclude a summary judgment. There is the obvious conflict between the two claimants to the insurance proceeds. As to the policy, NYLIC claims that the policy never went into effect for various reasons, that the named beneficiary was not in existence when the policy was issued, and has not admitted an "accidental" death. These are factual issues, among others, to be determined at trial.

New York Life then filed its own motion for summary judgment, alleging the Cook policy was null and void from its inception. Baum responded by filing a cross-motion for summary judgment.

On May 25, 1978, the District Court issued a memorandum opinion which held that Louisiana law was controlling because insurance...

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