Carton v. B&B Equities Grp., LLC

• Decision Date: 07 December 2011
• Docket Number: No. 2:11–cv–746–RCJ–PAL.,2:11–cv–746–RCJ–PAL.
• Citation: 827 F.Supp.2d 1235
• Parties: Edwin B. CARTON, et al., Plaintiffs v. B & B EQUITIES GROUP, LLC et al., Defendants.
• Court: U.S. District Court — District of Nevada

827 F.Supp.2d 1235

Edwin B. CARTON, et al., Plaintiffs

v.B & B EQUITIES GROUP, LLC et al., Defendants.

No. 2:11–cv–746–RCJ–PAL.

United States District Court, D. Nevada.

Dec. 7, 2011.

Kevin B. Christensen, Wesley J. Smith, Christensen James & Martin, Las Vegas, NV, for Plaintiffs.

Robert L. Eberle, Oxford, GA, pro se.

Estate Planning Solution Network, Farmingham, MA, pro se.Bruce S. Plotnick, Farmingham, MA, pro se.Angelo Diaz Gonzalez, Guaynabo, PR, Howard J. Russell, Weinberg, Wheeler, Hudgins, Gunn & Dial, LLC, Jacquelyn S. Leleu, McDonald Carano Wilson LLP, James R. Olson, Olson, Cannon, Gormley & Desruisseaux, Marek P. Bute, Snell & Wilmer, Charles H. McCrea, Jr., Lionel Sawyer & Collins, Mindy Fisher, William R. Urga, Jolley Urga Wirth Woodbury & Standish, Las Vegas, NV, Carrie L. Parker, Downey Brand LLP, Reno, NV, David B. Betts, Law Offices of David B. Betts, Columbia, SC, C. Andrew Kitchen, Pro Hac Vice, James Ethan McDaniel, Jeffrey M. Grantham, Maynard Cooper & Gale P.C., Birmingham, AL, David T. McDowell, Pro Hac Vice, Jessica L. Wilson, Pro Hac Vice, Edison, McDowell & Hetherington LLP, Houston, TX, Roger B. Cowie, Pro Hac Vice, Locke Lord Bissell & Liddell LLP, Dallas, TX, for Defendants.Gloria Diaz Rivera, San Juan, PR, pro se.Roger B. Cowie, Pro Hac Vice, Locke Lord Bissell & Liddell LLP, Dallas, TX, Mindy Fisher, William R. Urga, Jolley Urga Wirth Woodbury & Standish, Las Vegas, NV, for ThirdParty Plaintiff.Howard J. Russell, Weinberg, Wheeler, Hudgins, Gunn & Dial, LLC, Las Vegas, NV, for ThirdParty Defendant.

ORDER

ROBERT C. JONES, District Judge.

This case involves a stranger-originated life insurance scheme, in which the plaintiffs “loaned” money to pay the premiums on seven life insurance policies of six wealthy individuals. In their first amended complaint (“FAC”), the plaintiffs claim they were not aware this arrangement was against public policy and now seek to have the policies declared void ab initio and the premiums returned. Defendant American General Life Insurance Company (“American General”) has filed a motion to dismiss (# 55) as has Defendant Aviva Life and Annuity Company (“Aviva”) (# 90). The plaintiffs have also filed a motion to dismiss certain counterclaims, a motion to strike unsigned pleadings, and a motion for entry of default (# 62). Finally, Defendants Samuel Diggle and the Samuel L. Diggle Irrevocable Life Insurance Trust—respectively an insured party and a beneficiary under the arrangement—have filed a motion to dismiss the FAC (# 102). For the reasons stated below, the Court grants American General's motion to dismiss (# 55) and Aviva's motion to dismiss (# 90); Diggle's motion to dismiss is denied (# 102); and the plaintiffs' motion to dismiss, strike, and for entry of default (# 62) is granted in part and denied in part.

BACKGROUND

Stranger-originated life insurance (“STOLI”) arrangements have become increasingly common over the past decade. See Sun Life Assurance Co. of Canada v. Berck, 770 F.Supp.2d 728, 729–30 (D.Del.2011). In a typical STOLI scheme, a speculator collaborates with an elderly individual who has a high net worth in obtaining a life insurance policy on the life of the wealthy individual. See generally 3 Leo Martinez et al., New Appleman Insurance Law Practice Guide § 34.09[3] (2011). The wealthy individual is often promised cash upon the future sale of the policy or enticed to enter the arrangement through the promise of two years of free life insurance. The speculator provides non-recourse financing to purchase the policy—secured by the policy—which comes due after the two-year contestability period in which the insurer has to challenge the policy has run. If the insured dies within the two-year contestability period, the speculator is repaid plus interest out of the proceeds of the policy. If the insured survives the two-year contestability period, then there are two ways he or she may repay the speculator. First, the insured may pay the outstanding debt and accrued interest and retain the policy. This option is generally less attractive because the interest rates are often high or because the insured was promised a portion of the proceeds upon the sale of the policy. The second option is the insured may transfer the policy to the speculator to satisfy the debt, and the speculator may then sell the policy on the secondary market. These arrangements ultimately amount to unlawful wagering and have generally been disfavored by courts. See Berck, 770 F.Supp.2d at 730.

Plaintiffs Edwin and Lonnie Carton were first introduced to STOLI transactions by Defendant Bruce Plotnick, whom they met at a financial planning seminar in the early to mid 2000's. (FAC (# 43) at 12). Plotnick was the featured lecturer at the seminar and is the principal employee and owner of Defendant Estate Planning Solution Network (“EPSN”). ( Id. at 7). Plotnick suggested the Cartons invest their retirement funds in a concept called “premium financing” through Defendant Robert Koppel (“R. Koppel”). ( Id.). Plotnick and R. Koppel told the Cartons that B & B Equities (“B & B”), a Nevada limited liability company whose managing members are Defendants R. Koppel and Robert Eberle, would organize limited liability companies which would be assigned the rights to the life insurance policies of the insured third-parties and would assume the liabilities in funding the policies. ( Id. at 13). The Cartons were then informed they would receive an ownership interest in these limited liability companies and were guaranteed a return of 20% on their investment. ( Id.). The Cartons were also told that the insurance premiums would be paid by the limited liability companies for a two year period, after which they would be repaid in one of two ways: (1) the insured keeps the policy and pays off the loan with interest, or (2) the insured sells the policy on the secondary market. ( Id. at 10). The Cartons allege they were under the impression that this type of transaction was legal and that the insurance company would have full knowledge of the arrangement. (Opp'n to Mot. to Dismiss (# 113) at 9).

On July 16, 2008, the Cartons invested $700,000 with B & B through Plotnick and R. Koppel. (FAC (# 43) at 14). The investment was spread over seven insurance policies (collectively “the Policies”) which insured six individuals (collectively “the Insured”). ( Id. at 17). Three of the Policies were through American General and insured Defendants Thomas E. Colbert, Wanda D. Dean, and Kenneth D. Huntley. ( Id.). Thomas Colbert is a resident of Nevada, Wanda Dean is a resident of California, and Kenneth Huntley is a resident of Iowa. ( Id. at 7–8). Three of the Policies were through Aviva, and insured Defendants Kenneth D. Huntley, Leon E. Dean, and Samuel L. Diggle. ( Id. at 17). Leon Dean is a resident of California and Samuel Diggle is a resident South Carolina. ( Id. at 7–8). The final policy was through Americo and insured Defendant Gloria Diaz Rivera, a resident of Puerto Rico. ( Id. at 8, 17). The face amount of these policies ranged from $600,000 to $3,000,000. ( Id. at 17). The beneficiaries of the Policies were irrevocable life insurance trusts which bore the name of the Insured (ex: the Kenneth D. Huntley Irrevocable Life Insurance Trust) (the “ILITs”). ( Id. at 8, 18). The Insured served as trustee for each of their respective ILITs. ( Id. at 19).

On the American General applications for life insurance, the Insured failed to answer the question which asked for information on the “Premium Payor” if it was different from the policy owner, even though a third party was providing financing for the policy. (FAC (# 43) at 26–28). On the Aviva applications for insurance, the Insured failed to inform Aviva of the premium financing arrangement. ( Id.).

Promissory notes were signed by the Insured in their capacity as trustee of their ILITs promising to repay the loans obtained from the Cartons and agreeing to an interest rate of 20% per annum on those loans. ( Id.). This amount became payable either: (a) the day following the two year anniversary of the note; (b) the date of the death of the insured; (c) the date of any breach; or (d) the date of any default. ( Id. at 20). Limited liabilities companies were created which bore the name of the Insured (Plaintiffs Kenneth Huntley II, LLC, Leon Dean II, LLC, Gloria Diaz II, LLC, Thomas Colbert V, LLC, Wanda Dean II, LLC, and Samuel Diggle II, LLC) (the “LLCs”) and the Insured executed a collateral assignment, which assigned and pledged the insurance policies to the LLCs as collateral to secure the loan. ( Id. at 21). The Cartons obtained an interest in the LLCs reflecting the percentage of the funding they provided, and in August 2008 received a package of documents which included the insurance application for each policy, the secured promissory note, the collateral assignment, and other relevant documents. ( Id. at 16, 25).

The loans were all set to expire between June and September of 2009. ( Id. at 27–29). However, in July of 2009, the Cartons received letters informing them that additional investors were brought in to pay a third year of premiums on four of the Policies, thus decreasing the Cartons' percentage interest in the Policies. ( Id. at 25–26). None of the Policies were sold and apparently all of the policies have since lapsed for non-payment. (Mot. to Dismiss (# 90) at 5). The Cartons never received their principal or the guaranteed interest on their investment. (FAC (# 43) at 26–30).

The Cartons filed suit on behalf of themselves and the LLCs on May 10, 2011 against B & B, Global Equity Preservation, Inc. (“Global Preservation”); Global Equity Resources, LLC (“Global Resources”); Eagle Investment Corporation of America; Pro Financial Group, Inc. (also registered under the name Pro Fi Group); R. Koppel; Robert Eberle; Steve Koppel (a shareholder and officer of B & B) (“S. Koppel”); EPSN; Bruce Plotnick; the Insured; the ILITs who...