Penn Mut. Life Ins. Co. v. Greatbanc Trust Co., 09 C 06129.

Citation887 F.Supp.2d 822
Decision Date15 August 2012
Docket NumberNo. 09 C 06129.,09 C 06129.
PartiesThe PENN MUTUAL LIFE INSURANCE COMPANY, Plaintiff, v. GREATBANC TRUST COMPANY, Defendants.
CourtU.S. District Court — Northern District of Illinois

OPINION TEXT STARTS HERE

Gregory J. Star, John Michael Bloor, Justin O'Neill Kay, Katherine L. Villanueva, Stephen C. Baker, Drinker Biddle & Reath LLP, Philadelphia, PA, Terri L. Ahrens, Drinker Biddle & Reath LLP, Chicago, IL, for Plaintiff.

John King Burnett, III, Stahl Cowen Crowley Addis LLC, Marc Eric Rosenthal, Sheri D. Davis, Proskauer Rose LLP, Chicago, IL, for Defendants.

MEMORANDUM OPINION AND ORDER

JOHN J. THARP, JR., District Judge.

Stranger-owned life insurance, or STOLI, entails the maintenance of a life insurance policy by an investor who has no insurable interest in the life of the insured. Although the arrangement is unremarkable some cases, such as when an insured sells a policy on the open market as a means of liquefying the asset, other times it violates state common or—increasingly—statutory law. The term “STOLI” (or “SOLI” or “IOLI”) is more often applied in the latter case, for instance when a policy is originally taken out by a third party without an insurable interest, or when the insured procures the policy on his or her own life and immediately transfers it to an investor. These scenarios do not always run afoul of state laws, e.g., Kramer v. Phoenix Life Ins. Co., 15 N.Y.3d 539, 914 N.Y.S.2d 709, 940 N.E.2d 535 (2010), but they often do, and here the parties agree that the policy at issue was procured unlawfully. The principle underlying the law's aversion to STOLI is the longstanding public policy against wagering contracts. See, e.g., Grigsby v. Russell, 222 U.S. 149, 154, 32 S.Ct. 58, 56 L.Ed. 133 (1911) (“A contract of insurance upon a life in which the insured has no interest is a pure wager that gives the insured a sinister counter interest in having the life come to an end.”); Guardian Mut. Life Ins. Co. v. Hogan, 80 Ill. 35 (1875).

In this case, Plaintiff Penn Mutual Life Insurance Company alleges that it was defrauded by an unlawful STOLI scheme that resulted in the issuance of policy to an insurance trust, the beneficiary of which had no insurable interest in the life of Natalie Rosenblatt–Spitzer, the insured. Defendant Greatbanc Trust Company (the Trustee) is trustee of the Natalie Rosenblatt–Spitzer Insurance Trust (“NRSI Trust”). Although it is still the nominal owner and beneficiary of the policy, the Trustee transferred the beneficial interest to the GIII Accumulation Trust, an institutional investor, almost concurrently with the issuance of the policy and establishment of multiple trusts that facilitated the transfer. The Trustee now concedes that the Rosenblatt–Spitzer policy was procured unlawfully, but it disclaims knowledge of or participation in the scheme. Instead, the Trustee 1 points the finger at Ms. Spitzer (who is no longer a defendant) and the insurance agents who sold the policy and did the underwriting.

Before the Court are a number of motions addressed to the consequences of the Trustee's relatively recent admission that the policy was indeed an illegal STOLI arrangement. The Trustee amended its answer and now concedes that Penn Mutualis entitled to a judicial declaration that policy is void. Specifically, the Trustee admits:

• The Spitzer Policy “is ‘void or voidable,’ and Penn Mutual is entitled to “a judicial declaration that the Rosenblatt–Spitzer Policy is void ab initio. Amended Answer ¶ 1 (Dec. 5, 2011).

• The application for insurance contained at least one misrepresentation. Id. ¶ 39.

• The Underwriting Report contained misrepresentations. Id.¶ 40

• Material misrepresentations were made to Penn Mutual “concerning the source of funds for the premium payments on the Rosenblatt–Spitzer Policy.” Id. ¶ 50

“Penn Mutual is ... entitled to a judicial declaration that, pursuant to applicable law, the Rosenblatt–Spitzer Policy is void ab initio, as it was issued by Penn Mutual in reliance upon material misrepresentations.” Id.¶ 55

[T]he Rosenblatt–Spitzer Policy lacked a valid insurable interest at inception.” Id. ¶ 57, 58.

“Under applicable law, Penn Mutual is entitled to a judicial declaration that the Rosenblatt–Spitzer Policy lacked an insurable interest at inception and is therefore void ab initio.” Id.¶ 60.

Based primarily upon the Trust's amended answer,2 Penn Mutual moved for summary judgment on Counts I and II of its Complaint, which seek a declaratory judgment that the policy is void ab initio because it was procured through material misrepresentations and in the absence of a valid insurable interest. In addition to these declarations, Penn Mutual asks the Court to order that it may retain the policy premiums it has collected to date. Toward that end, Penn Mutual also moves for summary judgment on the Trustee's counterclaims: Count I, in which the Trustee requests rescission of policy premiums paid to Penn Mutual, and Count II, in which the Trustee seeks to recoup the premiums on a theory of unjust enrichment.. Penn Mutual filed its motion on December 19, 2011.

The Trustee responded to the summary-judgment motion on January 30, 2012. Consistent with its amended answer, the Trustee concedes that Penn Mutual is entitled to a judicial declaration that the policy is void ab initio. However, the Trustee argues that summary judgment on the issue of the premiums cannot be granted because the remedy available when a contact is declared void ab initio turns on the parties' relative culpability, as to which there are many disputed facts.

For that reason, on January 30, the Trustee moved pursuant to Federal Rule of Civil Procedure 56(d) to deny or stay the summary-judgment motion pending further discovery.3 In that motion, the Trustee contends that, to determine the fate of the premiums, additional discovery is needed about its alleged involvement in or knowledge of the pre-issuance scheme to defraud Penn Mutual, as well as Penn Mutual's own culpability in issuing the policy or allowing it to stand. Penn Mutual opposes the Trustee's Rule 56(d) motion, questioning the Trustee's good faith in filing it at all in light of the Trustee's third pleading of January 30—a Rule 12(c) motion insisting that the whole case should be resolved on the pleadings alone.

In its motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c), the Trustee—in stark contradiction of its summary-judgment response and Rule 56(d) motion—argues that the entire case, including the appropriate disposition of the premiums, can be decided on the face of the Complaint and Amended Answer alone. According to the Trustee, Illinois law is clear that only appropriate remedy for a voided life insurance policy is to rescind it and return the parties to the status quo ante. Thus, the motion requests (or at least acquiesces to) a declaration that the policy is void, but also seeks the return of all premiums to the Trust.4

DISCUSSION

The Court takes up all three pending motions together. For the reasons that follow, the Trust's motions are denied; Penn Mutual's motion is granted in part and denied in part; and the Court makes no provision for allocating the policy premiums.

A. The Trustee's Rule 12(c) and 56(d) Motions

The Court denies the Trustee's Rule 12(c) motion for judgment on the pleadings because it is moot in light of the Court's rulings on the summary-judgment motion, which seeks the same judgment and was filed before the Rule 12(c) motion. Moreover, the motion is improper on its face. First, the Trustee is not seeking judgment on its own behalf; instead, it moved for a declaratory judgment in favor of Penn Mutual, the plaintiff. Although the Trustee has every right to concede the invalidity of the policy, the Court can find no precedent for granting one party's motion for judgment in favor of its opponent, particularly where, as here, the opponent had already moved for the same relief on its own behalf. Second, Rule 12(c) motions are to be used only when they will not delay the proceedings—something that is all but impossible when filed in the midst of briefing an earlier-filed summary judgment motion. SeeFed.R.Civ.P. 12(c) (motion must be filed “early enough not to delay trial”); Riggins v. Walter, 279 F.3d 422, 427–28 (7th Cir.1995) (Rule 12(c) motions should be denied as untimely if they create unjustifiable delay). It appears that the Trustee filed a separate Rule 12(c) motion only so it could take a position—that there are no factual disputes and no need for discovery—that entirely contradicts its two responses to Penn Mutual's summary-judgment motion. But for this discrepancy, there is nothing the Trustee presents in its Rule 12(c) motion that it could not, and did not, present in its summary-judgment response.5 This gamesmanship is too clever by half.

Moreover, the Court declines to construe the Rule 12(c) motion as a cross-motion for summary judgment, seeFed.R.Civ.P. 12(d), because there already is a fully briefed summary-judgment motion seeking the same relief (excepting the fate of the premiums). Had the Trustee requested judgment for itself (e.g., on its counterclaim), then construing it as a summary-judgment motion might have been appropriate. But the Rule 12(c) motion does not seek judgment in the Trustee's favor and is largely redundant with the summary-judgment response.

The Court also denies as moot the Trustee's Rule 56(d) motion to stay the summary-judgment motion pending further discovery. Given the Trust's admissions, the Court can resolve the bulk of the summary-judgment motion as a matter of law. The primary factual disputes, which might require further discovery to flesh out, pertain to the fate of the premiums; that issue remains open. But where the Trust admits that Penn Mutual is entitled to judgment, the Court will not postpone the inevitable because the parties dispute the appropriate remedy.

B. Penn Mutual's Motion for Summary...

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