Columbus Life Ins. Co. v. Wells Fargo Bank
| Decision Date | 02 September 2021 |
| Docket Number | 21 CVS 0052 |
| Citation | 2021 NCBC 52 |
| Parties | COLUMBUS LIFE INSURANCE COMPANY, Plaintiff, v. WELLS FARGO BANK, N.A., as securities intermediary, and LSH, CO. Defendants. |
| Court | Superior Court of North Carolina |
THIS MATTER is before the Court on Defendant Wells Fargo Bank N.A.'s Motion to Dismiss (ECF No. 8) pursuant to Rule 12(b)(6) of the North Carolina Rules of Civil Procedure and Defendant LSH, Co.'s Motion to Dismiss (ECF No. 32) pursuant to Rules 12(b)(2) and 12(b)(6).
THE COURT, having considered the Motions to Dismiss, the parties' briefs, the arguments of counsel, and other appropriate matters of record, CONCLUDES that the Motions to Dismiss should be GRANTED, in part, and DENIED, in part, for the reasons set forth below.
Cozen O'Connor by Tracy L. Eggleston and by Michael J Broadbent for Plaintiff Columbus Life Insurance Company.
K&L Gates LLP by Zachary S. Buckheit, Matthew T. Houston and A. Lee Hogewood III and Schulte Roth & Zabel, LLP by Harry S. Davis and Robert E. Griffin for Defendants Wells Fargo Bank, N.A. and LSH, Co.
MARK A. DAVIS SPECIAL SUPERIOR COURT JUDGE FOR COMPLEX BUSINESS CASES
1. Under longstanding North Carolina law, a life insurance policy that is taken out by one who lacks an insurable interest in the life of the insured is void as against public policy in that it constitutes an illegal wager on a human life. In 1995, the North Carolina General Assembly enacted a statute that requires life insurance policies delivered in this State to contain a provision stating that the insurer cannot contest the validity of the policy more than two years after it has been "in force"- other than on the basis of nonpayment of premiums. See N.C. G.S. § 58-58-22(2). The key question currently before the Court-an issue of first impression in North Carolina-is whether this statute serves to preclude an insurance company from seeking to terminate a policy issued more than two years earlier on the ground that it is void as an illegal wagering contract.
2. The Court does not make findings of fact on motions to dismiss under Rule 12(b)(6) and instead recites those facts contained in the Complaint and in documents attached to the Complaint, or referred to therein, that are relevant to the Court's determination of the motions. See, e.g., Concrete Serv. Corp. v. Inv'rs Grp., Inc., 79 N.C.App. 678, 681 (1986); Window World of Baton Rouge, LLC v. Window World, Inc., 2017 NCBC LEXIS 60, at *11 (N.C. Super. Ct. July 12, 2017).
3. In February 2005, insurance broker Wesley Chesson submitted an application to Plaintiff Columbus Life Insurance Company ("Columbus Life") for a life insurance policy on behalf of Dr. Earl Trevathan, Jr. The application, which was purportedly executed by Dr. Trevathan in Greenville, North Carolina, sought a $1 million policy with a $1 million rider, naming Dr. Trevathan as the initial owner and Dr. Trevathan's estate as the initial beneficiary. (Id. at ¶¶ 20-21.) The application also contained a representation that the proposed policy's benefits would be used for "Personal and Family Protection." (Id. at ¶ 22.) On March 9, 2005, Columbus Life issued the life insurance policy to Dr. Trevathan. ("Policy," ECF No. 3.1.) He was 81 years old at the time.[1] (Id. at p. 4.)
4. The Policy contains the following language that is pertinent to the present motions: "[Columbus Life] will not contest this policy to the extent of the initial Specified Amount after it has been in effect during the Insured's lifetime for two years from the Policy Date." (ECF No. 3.1, at p. 21.) This language was required by statute to be included in the Policy. See N.C. G.S. § 58-58-22(2).
5. On March 31, 2005, Chesson transmitted a check in the amount of the Policy's first premium payment ($94, 190.16) to Columbus Life, drawn on the account of an entity named E&W, LLC ("E&W"). (ECF No. 3, at ¶ 24.)
6. Unbeknownst to Columbus Life at the time the Policy was issued in 2005: (a) Dr. Trevathan was not in the market for life insurance and was not in a financial position to afford premiums on a $2 million life insurance policy (Id. at ¶ 18); (b) Chesson had explained to Dr. Trevathan that a large policy could be procured on his life at no cost to him and that the policy would be sold to an investor (Id.); (c) Dr. Trevathan only allowed the Policy to be procured because he would not be paying premiums and because the Policy was to be sold to an investor (Id.); (d) the entity that paid the premiums on the Policy, E&W, did so through a non-recourse premium finance loan to Dr. Trevathan (Id. at ¶ 27); (e) under the terms of the loan from E&W, Dr. Trevathan was under no obligation to pay premiums on the Policy (Id.); and (f) pursuant to the terms of the loan, Dr. Trevathan gave an immediate collateral assignment of the Policy to E&W (Id.).
7. On or about February 12, 2007, Columbus Life received written notification from Chesson's office that E&W's collateral assignment had been released effective February 8, 2007. (Id. at ¶ 29.) In June 2007, Columbus Life received a written request to change the Policy's owner and beneficiary to Church Street Nominees Limited. (Id. at ¶ 30.) In June 2012, ownership of the Policy was once again changed-this time to Defendant Wells Fargo Bank, N.A. ("Wells Fargo"), as securities intermediary for the owner of the Policy, Defendant LSH, Co. ("LSH"). (Id. at ¶¶ 31-32.)
8. Having subsequently discovered the above-described circumstances under which the Policy was originally procured, Columbus Life now seeks a declaratory ruling from this Court that the policy was void ab initio[2] as the product of a "stranger-originated life insurance" ("STOLI") scheme.[3] (Id. at ¶¶ 30, 33.) Columbus Life contends the Policy lacked an insurable interest from its inception as it was merely an impermissible wager on Dr. Trevathan's life and therefore void ab initio. (Id. at ¶ 33.) Wells Fargo and LSH, not surprisingly, disagree. (Id. at ¶ 35.)
9. Columbus Life originally initiated a lawsuit against Wells Fargo asserting the invalidity of the Policy in the United States District Court for the Eastern District of North Carolina on May 4, 2020 (the "Federal Action"), seeking a declaration as to whether the Policy is valid under North Carolina law. On December 8, 2020, United States District Judge Richard E. Myers II entered an order declining to rule on Wells Fargo's motion to dismiss the action, stating that because the parties' arguments raised unsettled issues of North Carolina state law, the dispute should be adjudicated in the courts of North Carolina rather than by a federal court. See Columbus Life Ins. Co. v. Wells Fargo Bank, N.A., 2020 U.S. Dist. LEXIS 231313, at *17 (E.D. N.C. Dec. 8, 2020).
10. Specifically, Judge Myers stated his belief that North Carolina's courts should have the opportunity to determine the interplay between (1) the North Carolina General Assembly's 1995 enactment of N.C. G.S. § 58-58-22(2), which requires life insurance policies to include a provision precluding insurers from contesting the validity of the policy more than two years after the policy has been in force, except in the case of non-payment of premiums; and (2) the decision of the North Carolina Supreme Court in Wharton v. Home Sec. Life Ins. Co., 206 N.C. 254 (1934), which held that the presence of an incontestability clause in a life insurance policy did not bar a challenge to the policy by the insurer beyond the stated incontestability period based on the lack of an insurable interest. Accordingly, Judge Myers dismissed the Federal Action without prejudice to Columbus Life's right to refile the case in state court. Columbus Life, 2020 U.S. Dist. LEXIS 231313, at *18.
11. On January 7, 2021, Columbus Life initiated the present action by filing a complaint in Pitt County Superior Court. The Complaint contains two related causes of action: (1) a claim seeking a declaratory judgment from this Court that the Policy is an illegal wagering contract on a human life; and (2) a claim seeking a declaratory judgment from this Court that the policy is void ab initio for lack of an insurable interest. On March 5, 2021, this case was designated as a mandatory complex business case and assigned to the Honorable Gregory P. McGuire.
12. Wells Fargo filed a Motion seeking dismissal of this action pursuant to Rule 12(b)(6) on March 15, 2021. (ECF No. 8.)
13. On April 26, 2021, LSH filed a Motion seeking dismissal of all claims against it under Rules 12(b)(2) and (6). (ECF No. 32.) LSH also submitted the affidavit of Irina Danaila Gladek in support of its motion based on Rule 12(b)(2).
14. This matter was reassigned to the undersigned on July 1, 2021. (Reassign. Ord., ECF No. 43.) A hearing on the pending motions was held on July 21, 2021. The Motions to Dismiss are now ripe for resolution.
15. A motion to dismiss pursuant to Rule 12(b)(6) "tests the legal sufficiency of the complaint." Concrete Serv Corp. v. Investors Group, Inc., 79 N.C.App. 678, 681 (1986). The Court's inquiry is "whether, as a matter of law, the allegations of the complaint, treated as true are sufficient to state a claim upon which relief may be granted under some legal theory, whether properly labeled or not." Harris v. NCNB Nat'l Bank, 85 N.C.App. 669, 670 (1987). In deciding a Rule 12(b)(6) motion to dismiss, the court construes the complaint liberally and accepts all well-pleaded factual allegations as true. Laster v. Francis, 199 N.C.App. 572, 577 (2009); Krawiec v. Manly, 370 N.C. 602, 606 (2018). The Court, however, is not required "to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or...
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