AEI Life, LLC v. Lincoln Benefit Life Co.

• Decision Date: 22 December 2016
• Docket Number: 14–CV–6449
• Citation: 225 F.Supp.3d 136
• Parties: AEI LIFE, LLC, Plaintiff, v. LINCOLN BENEFIT LIFE COMPANY, Defendant.
• Court: U.S. District Court — Eastern District of New York

225 F.Supp.3d 136

AEI LIFE, LLC, Plaintiff,

v.LINCOLN BENEFIT LIFE COMPANY, Defendant.

14–CV–6449

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

Signed December 22, 2016

Eric A. Biderman, Julius A Rousseau, James M. Westerlind, Arent Fox LLP, 1675 Broadway, New York, NY 10019, (212) 484–3900, for AEI Life, LLC

Michael Paneth, Treff & Lowy PLLC, 342 Bedford Avenue, Brooklyn, NY 11211, 718–274–8888, William J. O'Mahony, Paneth & O'Mahony PLLC, 2329 Nostrand Avenue, Suite M–300, Brooklyn, NY 11210, 718–274–8888, for ALS Capital Ventures, LLC

Avi Rosengarten, 1704 Avenue M, Brooklyn, NY 11230, 718–627–4460, Thomas Charles Landrigan, Joshua Adam Scerbo, Cohen, LaBarbera & Landrigan, LLP, 40 Mathews Street, Suite 203, Goshen, NY 10924, 845–291–1900, for Joel Jacob

David BenHaim, Ira S. Lipsius, Lipsius–BenHaim Law, LLP, 80–02 Kew Gardens Road, Kew Gardens, NY 11415, 212–563–1710, for Innovative Brokers

Avi Rosengarten, 1704 Avenue M, Brooklyn, NY 11230, 718–627–4460, Thomas Charles Landrigan, Joshua Adam Scerbo, Cohen, LaBarbera & Landrigan, LLP, 40 Mathews Street, Suite 203, Goshen, NY 10924, 845–291–1900, for JRJ Services, Inc.

Jason Gosselin, Katherine Leigh Villanueva, Leslie J. Coletti, Drinker Biddle & Reath LLP, One Logan Square, 18th and Cherry Streets, Philadelphia, PA 19103, (215) 988–2535, for Lincoln Benefit Life Company

JUDGMENT, MEMORANDUM & ORDER

Jack B. Weinstein, Senior United States District Judge:

Table of Contents

I. Introduction...140

II. Facts...141

III. Arguments...141

A. AEI...141

B. LBL...142

C. September 23 and September 26, 2016 Evidentiary Hearing...142

D. November 22, 2016 Hearing...143

IV. Law...143

A. Summary Judgment...143

B. Choice of Law...143

C. Findings of Fact Based on Evidentiary Hearing...144

D. Incontestability Clauses...145

V. Application of Law to Facts...146

A. Choice of Law...146

B. Incontestability Clause...149

VI. Equity and Laches...151

VII. Conclusion...151

I. Introduction

This case challenges the validity of a "stranger-owned life insurance" ("STOLI") policy issued by defendant Lincoln Benefit Life Company ("LBL"). LBL commenced a declaratory judgment action in the federal district court in New Jersey seeking to have two of its life insurance policies (Policy No. 01N1404844 and Policy No. 01N1404934) declared invalid. That action was dismissed for lack of personal jurisdiction. The Court of Appeals for the Third Circuit reversed. The case was then transferred to this court. See 16–CV–2049 ("New Jersey Action"); Lincoln Benefit Life Co. v. AEI Life, LLC , No. 13–CV–4117 (D.N.J. Apr. 26, 2016).

While the New Jersey Action was on appeal to the Court of Appeals for the Third Circuit, AEI Life, LLC ("AEI"), as beneficiary of one of the policies (Policy No. 01N1404934) sued on in the New Jersey Action by LBL, filed an action in the Federal District Court for the Eastern District of New York. See 14–CV–6449 ("New York Action"). References to fact finding and law by the court in the instant memorandum and order refer only to the New York Action, 14–CV–6449.

The policy was issued in 2008. LBL has been receiving premiums ever since then. If New York law applies—as this court now holds—its two-year incontestability clause controls, and the policy is enforceable even if it had been obtained by fraud.

The New York and New Jersey Actions were not consolidated. The New Jersey Action was stayed pending a resolution of the New York Action. Order, 14–CV–6449, Aug. 4, 2016, ECF No. 68; Hr'g Tr., Aug. 3, 2016, at 68:12–68:23.

AEI moves for summary judgment in the New York Action on two grounds: (1) LBL is barred from contesting the validity of the insurance policy under the policy's incontestability clause; and (2) LBL has waived its rights to challenge validity—or should be estopped from challenging validity by laches and general equitable principles.

The case turns on whether New York or New Jersey substantive law applies. New York life insurance incontestability law rejects an insurer's defense that after two years a policy was invalid at its inception. Under New Jersey law, a policy may be challenged at any time after issuance if fraud was committed in the policy application process.

Since this court sits in New York, in deciding what state substantive law applies the court looks to New York's conflicts law. New York applies the choice of law clause in the insurance contract, unless the contract was fraudulently obtained (as it was here). If there was fraud at the inception, New York then applies its center of gravity rule in choosing which state law governs.

The policy owned by AEI was fraudulently procured so that the clause in the policy favoring New Jersey law is not in force. The center of gravity here is as clearly fixed in New York as is the Empire State Building. New York substantive law therefore applies—and with it, as a matter of law—its two-year applicable incontestability rule.

The court conducted a full bench trial on the preliminary issues of fraud and contacts with New York and the state of New Jersey. It concluded: (1) that there was fraud in the inducement, and (2) that every contact of significance was in New York. The policy is thus incontestable and enforceable under New York law.

II. Facts

The factual background is detailed in the court's February 24, 2015 and December 21, 2015 memoranda and orders, both of which addressed and denied motions to transfer venue. See AEI Life, LLC v. Lincoln Ben. Life Co. , 305 F.R.D. 37, 40–42 (E.D.N.Y. 2015) ; AEI Life, LLC v. Lincoln Ben. Life Co. , No. 14–CV–6449, 2015 WL 9286283, at *1–2 (E.D.N.Y. Dec. 21, 2015). Those memoranda and orders are incorporated as if fully set forth in the present memorandum.

In 2008, LBL issued a life insurance policy (Policy No. 01N1404934) for over six million dollars on the life of Gabriela Fischer. The initial owner and beneficiary of the policy was "The Gabriela Fischer Trust." The Trust's initial beneficiary was Ms. Fischer's son, Irving Fischer. Shortly before the Trust purchased the policy, one Shlomo Reichnitz wired one million dollars to be deposited in the Trust's bank account. AEI Life , 305 F.R.D. at 40. On August 29, 2011, the insurance policy was sold by the Trust to Progressive Capital Solutions, LLC. Several days later, AEI, the present owner, purchased the policy, and it has been paying premiums ever since. Id.

LBL contends that the policy was executed in fraud and is unenforceable. AEI, the current bona fide purchaser-owner of the policy, responds that the policy is enforceable under New York's two-year incontestability rule. AEI Life , 305 F.R.D. at 41 ; Pl.'s Mem. of Law in Supp. of its Renewed Mot. for Summ. J., 14–CV–6449, June 9, 2016, ECF No. 55–1 ("Pl.'s Summ. J. Mot.").

In April 2016, AEI's first motion for summary judgment was denied with leave to renew. Order, 14–CV–6449, Apr. 13, 2016, ECF No. 51. Discovery was extended so the parties could obtain any evidence with respect to the circumstances of issuance. Id. ; Hr'g Tr., 14–CV–6449, Apr. 13, 2016, at 20:20–22:1.

AEI renewed its motion for summary judgment in June 2016. Additional evidence was submitted, particularly in the form of the deposition of Joel Jacob, the insurance agent who brokered the policy. See Decl. of Eric A. Biderman in Supp. of Pl.'s Renewed Mot. for Summ. J. at Ex. 25, 14–CV–6449, June 9, 2016, ECF No. 55–28 (May 10, 2016 Dep. Tr. of Joel Jacob).

III. Arguments

A. AEI

AEI's substantive argument is that the incontestability clause in the insurance policy prevents LBL from challenging the policy's validity on the ground that the policy lacks an insurable interest. Pl.'s Summ. J. Mot. at 16–18. The policy's incontestability clause reads:

We [LBL] will not contest this certificate after it has been inforce during the lifetime of the insured for two years from the issue date unless one of the following exceptions occurs:

1) Any increase in face amount: This contestable period with respect to the increase amount will be measured during the lifetime of the insured for two years form the effective date of the increase.

2) Reinstatement of this certificate or any riders: This contestable period will be measured during the life-time of the insured for two years following the reinstatement date.

3) An attached rider has a separate incontestability provision. This contestable period will be measured in accordance with the incontestability provision provided in the rider.

We may contest this certificate at any time for the failure to make sufficient payments to cover the monthly deductions required to keep this certificate and its riders in force.

Decl. of Eric A. Biderman in Supp. of Pl.'s Renewed Mot. for Summ. J. at Ex. 3, 14–CV–6449, June 9, 2016, ECF No. 55–6, at p. 15 (emphasis added). None of the above exceptions apply.

AEI contends that the court should disregard the choice of law provision in the insurance contract (which points to New Jersey law) and apply New York law to the dispute. Under New York law, so long as there was an insurable interest when the policy was created—and even though fraud permeated its creation—the New York two-year incontestability rule governs. The fact that it was assigned to a party without an insurable interest does not invalidate it. Pl.'s Summ. J. Mot. at 16–18.

B. LBL

LBL argues that the New Jersey choice of law clause in the insurance contract should be enforced because a reasonable relationship between the parties and the transaction to New Jersey existed. Def. Lincoln Benefit Life Co.'s Response in Opp'n to Pl.'s Renewed Mot. for Summ. J., 14–CV–6449, June 27, 2016, ECF No. 60 ("Def.'s Opp'n Mem."), at 11–13.

Should the court disregard the choice of law clause in the insurance contract on the ground of fraud (as it does), LBL asserts that under the "center of gravity" test used in New York, New Jersey has the most significant contacts with the policy and its law should apply. Id. at 13–17. Its main arguments rest on the facts that the signature block of the policy application indicates that it was signed in Lakewood, New...