Branch Banking & Trust Co. v. Pac. Life Ins. Co.

• Decision Date: 04 December 2013
• Docket Number: Civil Action No. 3:09–CV–284–H.
• Citation: 985 F.Supp.2d 844
• Court: U.S. District Court — Western District of Kentucky
• Parties: BRANCH BANKING & TRUST COMPANY, as Trustee of the Charles A. Brown & Elise A. Brown Irrevocable Life Insurance Trust, Plaintiff v. PACIFIC LIFE INSURANCE COMPANY, Defendant.

985 F.Supp.2d 844

BRANCH BANKING & TRUST COMPANY, as Trustee of the Charles A. Brown & Elise A. Brown Irrevocable Life Insurance Trust, Plaintiff

v.PACIFIC LIFE INSURANCE COMPANY, Defendant.

Civil Action No. 3:09–CV–284–H.

United States District Court,

W.D. Kentucky,

at Louisville.

Dec. 4, 2013.

David A. Calhoun, John Brooken Smith, Rania M. Basha, Wyatt, Tarrant & Combs, LLP, Louisville, KY, for Plaintiff.

Patrick A. Shoulders, Jean M. Blanton, Ziemer, Stayman, Weitzel & Shoulders, LLP, Evansville, IN, Ridley M. Sandidge, Jr., Reed Weitkamp Schell & Vice, PLLC, Louisville, KY, for Defendant.

MEMORANDUM OPINION AND ORDER

JOHN G. HEYBURN II, District Judge.

Branch Banking & Trust Company (“BB & T”), as Trustee for the Brown family, brought an action for breach of contract against Pacific Life Insurance Company (“Pacific Life”) in connection with an exchange of life insurance policies pursuant to Section 1035 of the Internal Revenue Code. The parties wish to receive guidance on the Court's likely instructions to the jury, particularly on the issue of damages, and have filed motions for partial summary judgment addressing those issues. The Court has carefully considered them.

I.

The Court reiterates and incorporates by reference the facts set forth in the Sixth Circuit opinion and will repeat them here as necessary.

BB & T is Trustee of the Brown family's trust, which was funded by a Pacific Life variable life insurance policy (the “Policy”), which BB & T owned. In early 2008, Walter Koczot became the BB & T representative handling the trust. In August 2008, BB & T sought to substitute a John Hancock policy for the Pacific Life Policy. To do so, it decided upon a tax-free exchange of the policies under Section 1035 of the Internal Revenue Code. Such an exchange would require three steps: (1) BB & T transfers ownership of the Policy to John Hancock, (2) John Hancock surrenders the Policy and uses the proceeds to purchase a John Hancock policy, and (3) John Hancock assigns the new policy to BB & T.

BB & T initiated the Section 1035 process on August 18, 2008, executing a valid assignment of the Policy to John Hancock. Next, John Hancock submitted an assignment and surrender request to Pacific Life, executed by BB & T Vice President Walter Koczot and John Hancock representative Jonathan Squire. Pacific Life received it on September 9, 2008. The same day, Pacific Life sent a letter to John Hancock acknowledging receipt of the Section 1035 request but stating that the documents were incomplete; that is, not to its satisfaction. To be complete, Pacific Life required BB & T's corporate officer Walter Koczot's signature to include title and corporate seal or notary.

On September 19, 2008, a BB & T employee at a different branch who was not otherwise involved in this Section 1035 exchange received an email notification of the additional requirement from John Hancock. On October 1, 2008, the correct BB & T branch called Pacific Life to inquire about the exchange. Not until December 11 did BB & T comply with Pacific Life's requirement.

Thereafter, BB & T filed this lawsuit to recover the Brown family's loss. This Court reasoned that the Policy's surrender provision constituted an outstanding, irrevocable offer that John Hancock accepted on September 9. It further reasoned that Pacific Life had every right to assure the request was in a form “satisfactory to PL,” but that did not affect the effective date of September 9 or the unconditional nature of the original surrender request.

The Court also determined that BB & T was entitled to the full difference in the value of the investment on September 9, the effective date of the surrender, and the value of the investment on December 11, or $259,926.33 plus interest. The Court reasoned that mitigation was not appropriate in this context, when liquidated damages were certain and based on contract surrender requirements.

On appeal, the Sixth Circuit found genuine issues of material fact as to when the Policy was properly surrendered. The Sixth Circuit explained that the inclusion of the language “satisfactory to PL” was legally significant and factually unclear. Therefore, a jury must decide “whether Pacific Life's decision [to require title and corporate seal or notary along with Koczot's signature] was reasonable, that is, whether Pacific Life did, in fact, received a ‘satisfactory’ surrender request on September 9, 2008.” The Sixth Circuit did not consider the issue of damages.

The parties have now filed competing motions asking the Court to set forth the jury instructions and other rulings applicable to any trial of this case.

II.

The primary jury instructions are actually quite straightforward. Although the version set forth below could be subject to change upon discussion with the parties, the Court intends to instruct as follows:

“1. You must determine whether Pacific Life was reasonable in requiring title and corporate seal or notary with Walter Koczot's signature to complete the surrender request.

Pacific Life may impose requirements upon a surrender request which allow it to be objectively satisfied that the request is legitimate. In deciding whether Pacific Life's requirements were reasonable, you must decide whether the surrender request was objectively satisfactory from Pacific Life's perspective. You should not consider Pacific Life's subjective viewpoint.

You can, but are not required to, consider the following, as well as anything else you find relevant to your determination:

1. Whether Pacific Life had a reason to seek assurances of proper assignment from BB & T;

2. Whether Pacific Life's prior communications to BB & T representative Walter Koczot demonstrated its recognitionof Koczot as BB & T's authorized agent prior to August 2008;

3. Whether it is Pacific Life's practice or policy to request a notarized signature or corporate seal in similar circumstances; and

4. Whether it is the custom of the life insurance industry to request such additional information.

If you find that Pacific Life's requirement was reasonable, enter a verdict for Pacific Life under Question 1 of the Verdict Form. If you find that Pacific Life's requirement was unreasonable, enter a verdict for BB & T under Question 1 of the Verdict Form.”

III.

The question of damages, depending upon the two potential jury verdicts, presents quite a few more difficult issues. The parties have two very different conceptions of how damages should be determined. The Court will first discuss damages should a jury find that Pacific Life was reasonable in determining that the surrender request was unsatisfactory and requiring further action. Then the Court will discuss damages should a jury find that Pacific Life was unreasonable.

A.

The Court has never reached the question of damages in the event Pacific Life is found to have acted reasonably. Pacific Life argues that BB & T would not be entitled to any damages. BB & T, on the other hand, argues that the jury should have to decide a second breach of contract question: whether Pacific Life notified BB & T in accordance with the Policy's terms that the surrender request was unsatisfactory.

The Policy provided that Pacific Life would send any premium or “other notice” regarding the Policy to the policy owner. The Policy's integration clause provided that it, along with other enumerated documents, was the entire contract, which could only be modified in writing by an officer of Pacific Life. On September 9, 2008, John Hancock was the undisputed owner of the Pacific Life Policy by virtue of BB & T's assignment initiating the Section 1035 process. The parties agree that on September 9, Pacific Life sent proper notice of its demand for a notarized signature or corporate seal to John Hancock. Having done so, Pacific Life complied with its contractual notice obligations. Neither the parties nor the Court can identify any other legally mandated notice requirements.

BB & T advances several circumstantial or logical arguments in favor of a notice obligation.¹ It argues that Pacific Life understood that John Hancock's surrender request was made as part of a Section 1035 exchange. It points out that Pacific Life sent a letter to BB & T on September 9, 2008 stating that “Pacific Life has been advised by John Hancock that ‘your Pacific Life policy may be replaced.’ ” It notes that Pacific Life did not concede the validity of the assignment until May 2010, in rebuttal to BB & T's notice argument.

While these arguments might inform what Pacific Life should have done as a business, they do not dictate what Pacific Life was legally obligated to do. As a legal matter, arrangements between BB & T and John Hancock, if any, were of no consequence to Pacific Life. Pacific Life notified the policy owner, John Hancock, on the day it received the surrender request in the manner specified on the surrender request. John Hancock could have forwarded the communication to the former policy owner, BB & T, on September 9. Ultimately, although best business practices may be to notify the former policy owner directly, nowhere in the Policy is Pacific Life legally obligated to do so.

For this reason, the question of notice need not be submitted to the jury. If the jury finds that Pacific Life acted reasonably, BB & T will not be entitled to any damages.

B.

Finally, the Court addresses damages in the event Pacific Life is found to have acted unreasonably. The core issue here is mitigation. If Pacific Life's requirement was unreasonable, the effective date of the surrender request was September 9, 2008.² As a matter of law, BB & T had no duty to comply with an unreasonable request. The Court previously determined that it could find “no sound principle of mitigation which it could apply logically or ascertainably in these circumstances.” Pacific Life asks the Court to reconsider whether, at some point between September 9 and December 11, 2008, BB & T had a duty to mitigate its...