Columbus Life Ins. Co. v. Wells Fargo Bank, N.A.

• Decision Date: 08 December 2020
• Docket Number: Case No. 4:20-cv-00041-M
• Court: U.S. District Court — Eastern District of North Carolina
• Parties: COLUMBUS LIFE INSURANCE COMPANY, Plaintiff, v. WELLS FARGO BANK, N.A., as Securities Intermediary, Defendant.

505 F.Supp.3d 609

COLUMBUS LIFE INSURANCE COMPANY, Plaintiff,

v.WELLS FARGO BANK, N.A., as Securities Intermediary, Defendant.

Case No. 4:20-cv-00041-M

United States District Court, E.D. North Carolina, Eastern Division.

Signed December 8, 2020

Charles Vinicombe, Michael J. Broadbent, Philip J. Farinella, Cozen O'Connor, Philadelphia, PA, Tracy L. Eggleston, Cozen O'Connor, Charlotte, NC, for Plaintiff.

A. Lee Hogewood, III, Matthew Thomas Houston, K&L Gates LLP, Raleigh, NC, Thorn Rosenthal, Cahill Gordon & Reindel LLP, New York, NY, for Defendant.

OPINION AND ORDER

RICHARD E. MYERS II, UNITED STATES DISTRICT JUDGE

This action was brought under the Declaratory Judgment Act seeking to contest a life-insurance policy. For the reasons that follow, the court: (1) declines to adjudicate the declaratory claims; and (2) abstains from adjudicating the legal and equitable counterclaims pending state-court resolution of an unsettled question regarding a significant North Carolina state policy.

I. Background

On May 15, 2020, Plaintiff Columbus Life Insurance Company filed an amended complaint seeking a judgment declaring that an insurance policy it issued, and to which Defendant Wells Fargo Bank, N.A. holds title, is void. [DE-6] Plaintiff alleges that: (1) the policy at issue is a so-called stranger-originated life-insurance ("STOLI") policy; and (2) STOLI policies are void as a matter of public policy and unenforceable under North Carolina law. [DE-6]

On June 25, 2020, Defendant filed an amended answer to Plaintiff's amended complaint in which Defendant: (1) raised affirmative defenses to Plaintiff's declaratory claims, including that the policy at issue "is incontestable" [DE-15 at 14]; and (2) brought counterclaims against Plaintiff for breach of contract and unjust enrichment in connection with the policy [DE-15 at 17-18].

On July 17, 2020, Plaintiff: (1) moved to strike certain of Defendant's affirmative defenses, including the incontestability defense, under Federal Rule of Civil Procedure 12(f) [DE-18]; and (2) moved to dismiss Defendant's counterclaims for failure to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6) [DE-20]. This matter comes before the court on Plaintiff's motions.

II. Analysis

a. Plaintiff's declaratory claims

By seeking declaratory relief in this court, Plaintiff has implicitly invoked the federal Declaratory Judgment Act (the "DJA"), 28 U.S.C. § 2201. The DJA provides as follows:

In a case of actual controversy within its jurisdiction .. any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.

28 U.S.C. § 2201(a). The court is satisfied that Plaintiff's amended complaint appropriately pleads an actual controversy that is within the court's diversity jurisdiction under 28 U.S.C. § 1332. [see DE-32]

A threshold question is whether the court, having jurisdiction to do so, should decide to hear the case. It is well-established that the DJA does not oblige federal courts to make any declarations of rights, but rather gives federal courts the power to make such declarations should they elect to do so in the exercise of their sound discretion. See Wilton v. Seven Falls Co. , 515 U.S. 277, 282, 287, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995) ("district courts possess discretion in determining whether and when to entertain an action under the [DJA], even when the suit otherwise satisfies subject matter jurisdictional prerequisites We have repeatedly characterized the [DJA] as ‘an enabling Act, which confers a discretion on the courts rather than an absolute right upon the litigant.’ ") (quoting Public Serv. Comm'n of Utah v. Wycoff Co. , 344 U.S. 237, 241, 73 S.Ct. 236, 97 L.Ed. 291 (1952) ); United Capitol Ins. Co. v. Kapiloff , 155 F.3d 488, 493 (4th Cir. 1998) ("The [DJA] provides that district courts ‘may declare’ the rights of interested parties. This permissive language has long been interpreted to provide discretionary authority to district courts to hear declaratory judgment cases.").

The Fourth Circuit long ago said that a district court should hear a declaratory-judgment action when the judgment sought would (1) "serve a useful purpose in clarifying and settling the legal relations in issue" and (2) "terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding." Aetna Cas. & Sur. Co. v. Quarles , 92 F.2d 321, 325 (4th Cir. 1937) (quotation marks and citation omitted). But the Quarles court also said that the DJA should not be used "to try a controversy by piecemeal, or to try particular issues without settling the entire controversy, or to interfere with an action which has already been instituted." Id.

Declaratory-judgment actions seeking adjudication of state-law issues that are brought in federal court pursuant to diversity jurisdiction require additional considerations:

[W]hen a federal court is confronted with an insurer's request for a declaratory judgment on coverage issues during the pendency of related litigation in the state courts, its discretion must be guided not only by the criteria outlined in Quarles , which focus on the general utility of the declaratory relief sought, but also by the same considerations of federalism, efficiency, and comity that traditionally inform a federal court's discretionary decision whether to abstain from exercising jurisdiction over state-law claims in the face of parallel litigation in the state courts.

Nautilus Ins. Co. v. Winchester Homes , 15 F.3d 371, 376 (4th Cir. 1994). The "considerations of federalism, efficiency, and comity" that district courts must consider in deciding whether to hear a declaratory-judgment action involving state-law causes of action—the so-called Nautilus factors—have been articulated by the Fourth Circuit as follows:

(i) the strength of the state's interest in having the issues raised in the federal declaratory action decided in the state courts;

(ii) whether the issues raised in the federal action can more efficiently be resolved in the court in which the state action is pending;

(iii) whether permitting the federal action to go forward would result in unnecessary entanglement between the federal and state court systems, because of the presence of overlapping issues of fact or law; and

(iv) whether the declaratory judgment action is being used merely as a device for procedural fencing--that is, to provide another forum in a race for res judicata or to achieve a federal hearing in a case otherwise not removable.

Centennial Life Ins. Co. v. Poston , 88 F.3d 255, 257 (4th Cir. 1996) (quoting Nautilus , 15 F.3d at 377 (internal quotation marks and brackets omitted)). Although the Nautilus factors speak to pending state action, the Fourth Circuit has made clear that the same factors are to be considered where there is no state action pending. Aetna Cas. & Sur. Co. v. Ind-Com Elec. Co. , 139 F.3d 419, 424 (4th Cir. 1998) ("a district court does not per se overstep the bounds of its discretion when it dismisses a declaratory judgment action in the absence of a pending parallel state court proceeding. Rather, such a dismissal is within the district court's discretion, and that discretion is not abused so long as the factors which we have enumerated to guide district courts in this determination weigh in favor of denying declaratory relief.").

In the amended complaint, Plaintiff seeks to prospectively establish a defense to an action to enforce the life-insurance policy. Defendant's incontestability defense is in essence a defense to Plaintiff's defense, with which Defendant could keep Plaintiff from being able to contest the policy's validity on the grounds raised in the amended complaint. The viability of Defendant's incontestability defense is therefore potentially dispositive of this dispute.¹

Plaintiff argues that the court should strike Defendant's incontestability defense as invalid because: (1) if Plaintiff is able to establish that the policy at issue is a STOLI policy, the policy would be void ab initio as a matter of North Carolina² public policy as an insurance contract issued without "insurable interest," see Vance v. Wiley T. Booth, Inc. , 112 N.C. App. 600, 602–03, 436 S.E.2d 256, 258 (1993) (discussing "insurable interest"); and (2) a party cannot use an incontestability clause in a life-insurance policy to overcome a defense that such a contract is invalid and unenforceable for lack of insurable interest. [DE-19 at 18–20] Both of Plaintiff's arguments find support in certain opinions from the North Carolina Supreme Court, most notably Wharton v. Home Sec. Life Ins. Co. , 206 N.C. 254, 173 S.E. 338 (1934).

In Wharton , the beneficiary of a life-insurance policy sued the insurer seeking the proceeds of the policy. Id. at 256, 173 S.E. at 339. The jury rendered a verdict in the beneficiary's favor, and the insurer appealed the resulting judgment, which ultimately reached the North Carolina Supreme Court. Id. The Wharton court first said:

It is well settled as the law in this and other jurisdictions that a person cannot take out a valid and enforceable policy of insurance for his own benefit on the life of a person in which he has no insurable interest; such a policy or contract of insurance is void and unenforceable on grounds of public policy, it being merely a wagering contract.

Id. The court noted that the beneficiary conceded that the policy was issued without insurable interest, but that she argued "that the principle is not applicable because of the presence in the policy of the incontestable clause" which stated that "[a]fter this policy has been in force for two full years, it shall be incontestable except for nonpayment of premiums, fraud,...