Huskey v. Tolman (In re Tolman), Bankruptcy No. 12–00476–TLM.

• Decision Date: 29 March 2013
• Docket Number: Adversary No. 12–06022–TLM.,Bankruptcy No. 12–00476–TLM.
• Citation: 491 B.R. 138
• Parties: In re Rulon Lee TOLMAN, Debtor. Mary Leona Huskey, Plaintiff, v. Rulon Lee Tolman, Defendant.
• Court: U.S. Bankruptcy Court — District of Idaho

491 B.R. 138

In re Rulon Lee TOLMAN, Debtor.
Mary Leona Huskey, Plaintiff,
v.
Rulon Lee Tolman, Defendant.

Bankruptcy No. 12–00476–TLM.
Adversary No. 12–06022–TLM.

United States Bankruptcy Court,
D. Idaho.

March 29, 2013.

[491 B.R. 141]

Briane Nelson Mitchell, Mauk and Burgoyne, Vaughn Fisher, Fisher & Hudson, PLLC, Boise, ID, for Plaintiff.

Jeffrey Philip Kaufman, Law Office of D. Blair Clark, PLLC, Boise, ID, for Defendant.

MEMORANDUM OF DECISION
TERRY L. MYERS, Chief Judge.

On March 7, 2012, Rulon Lee Tolman (“Debtor”) filed a chapter 13 ¹ voluntary petition.² On April 12, 2012, Mary Leona Huskey (“Plaintiff”) filed a complaint initiating this adversary proceeding. Plaintiff seeks a determination that Debtor owes her a debt that is nondischargeable under §§ 523(a)(2)(A), (a)(4) and (a)(19).³

[491 B.R. 142]

She also asserted claims under the Idaho Consumer Protection Act but, during the course of the litigation, abandoned those claims. In addition, she dismissed the § 523(a)(19) cause without prejudice.⁴ The remaining causes under § 523(a)(2)(A) and (a)(4) were tried, and written closing arguments filed. The Court has carefully evaluated all the evidence, and the arguments of the parties. This Decision constitutes the Court's findings and conclusions under Rule 7052.

BACKGROUND AND FACTSA. The Plaintiff

Mary Huskey was born in 1921 and, at the time of trial, she was 91 years old. Notwithstanding her age, Plaintiff appeared cogent, aware and percipient. She had a sharp recall of many events. Understandably, her recall of some matters was on occasion a little vague, however those occasions were few. She was a competent and credible witness.

Plaintiff had a year of business school education, and worked for some 18 years as a claims examiner, and then another 10 years as an office worker and receptionist in a medical practice. She had similar sorts of occupations over the balance of her working career. She finished that career with almost 13 years as an administrative secretary for the Idaho Board of Engineers, retiring in 1988.

Given the matters at issue in this litigation, she was questioned about her investment experience. She had little, relying primarily on very traditional and conservative financial products such as certificates of deposit. After her retirement and up to the time her sister passed away in 2006 when she inherited the sizeable sums underlying the present litigation, Plaintiff relied on Social Security payments of $1,279.00 per month and a State of Idaho pension of $559.00 per month for her retirement needs. She also had some CD's and a little stock.

Plaintiff did not have any appreciable investing experience or acumen. She therefore had to rely on the advice and recommendations of others. Plaintiff did not evidence any meaningful understanding of the details of the documents at issue in this litigation, or the complexities of the financial products and investments those documents represented.

She signed and initialed documents, but she admitted she did not read them in detail and, at times, not at all. She relied instead on the explanations and information Debtor provided her about these documents and the investments she made thereunder.

B. The Debtor

Rulon Tolman is an independent life insurance agent, with 34 years of experience in that industry. He attended two colleges over the course of three years but did not obtain a degree. He has taken life insurance training and similar continuing education courses throughout his career.

Debtor initially was a captive agent for Mutual of New York (“MONY”), but then

[491 B.R. 143]

he became an independent agent. While at MONY, he held a Series 6 license.⁵ He no longer holds that license, testifying that he “made the decision [he] didn't want to deal with products that had any risk.”

Debtor characterized himself as a “financial professional” for Plaintiff from 2006 through 2010. He conceded that all Plaintiff's investments during that time were made on his advice and information. To his knowledge, Plaintiff had no other financial or investment advisor during that time. On certain of the documents involving Plaintiff's investments, Debtor signed as “investment advisor” or as “financial consultant.” ⁶

Factual aspects about how Debtor came to know of certain investments and products, and the extent or degree of his investigation or evaluation of the same, will be addressed later in this Decision.

C. Transactions

Plaintiff first met Debtor in 1997. Debtor was a financial consultant for, and had sold annuities to, Plaintiff's sister Erma Travis and Erma's husband. Erma's husband passed away in 1997, and Plaintiff met Debtor while he was assisting Erma with her affairs. Erma was later diagnosed with a terminal illness. Erma met with Debtor and asked him to help Plaintiff as he had Erma and her husband, because Plaintiff would be Erma's heir.

Erma passed away in June 2006. Plaintiff was the sole beneficiary of certain annuities Erma owned that were purchased through Debtor. Those annuities had a value in excess of $900,000.

At the time of her sister's passing, Plaintiff was almost 85 years old. She had been retired for eighteen years, and had lived off her Social Security income and state pension payment. She had accumulated some savings, but she was not prepared to deal with her sizeable inheritance without assistance.

In August 2006, shortly after Erma's death, Plaintiff met with Debtor. She liked and trusted him, and she knew she needed professional assistance to deal with her inheritance. She then and later, without exception, followed his recommendations and advice. At trial, Debtor confirmed that he understood at the time he assisted Plaintiff she had little prior experience with investments, and that her income was limited to Social Security and pension payments.⁷

1. 2006 annuities

Plaintiff had options for the $900,000+ in inherited annuities. She could have surrendered them for a lump sum payment, elected to take an income stream, or transferred them to another annuity. The decision had to be accomplished within five years or the annuity company would disburse a lump sum payment. Debtor advised her to purchase new annuities in her name, purportedly in order to improve the rate of return on her investments.⁸ She

[491 B.R. 144]

agreed. Three investments were made from late August to early October 2006.

First, Debtor recommended, and Plaintiff purchased, a $70,000 Sun Life Financial annuity. Exs. 114, 117, 203.

Second, Plaintiff also followed Debtor's advice, and purchased a $425,000 Allianz Annuity. Ex. 109. Plaintiff wrote two checks totaling $500,000 made payable to Allianz for this annuity, and the application indicates that $500,000 was submitted. Ex. 110. Yet Allianz issued the annuity with a stated initial premium of $425,000. Exs. 109. There is no explanation in the documentary evidence, nor in testimony, as to what happened to the other $75,000.⁹

Third, Debtor advised Plaintiff to purchase an annuity from Americom Life and Annuity Company, which advice she followed, purchasing such an annuity in the amount of $470,321. See Exs. 206, 115, 116. Again Debtor handled all the paperwork.¹⁰

Debtor received commissions for selling these annuities to Debtor. Plaintiff indicated she understood Debtor would get a commission, but she did not inquire about it because “it wasn't her business.” Debtor testified that the commissions were paid by the insurance company providing the annuity. There is no affirmative evidence as to the amount of commissions Debtor received on these three transactions.

2. 2008 life settlement contract

Almost two years later, Debtor was contacted by a field marketing organization, Alternative Investment Services (“AIS”).¹¹ Through AIS, Debtor learned of Consolidated Wealth Holdings (“CWH”). CWH sold “life settlement contracts” or what are sometimes characterized as “viatical” agreements or settlements.

a. Viatical agreements i. Generally

Viatical or life settlement agreements generally involve an insured who wishes to sell his life insurance policy, needing present cash more than the security of a death benefit. The insured contacts a viatical settlement brokerage firm, and provides relevant information about the policy and his or her medical situation. The insured will generally be paid an amount steeply discounted from the face value of the policy. The brokerage then offers the life insurance benefit of the policy, or a fractional interest therein, to potential investors. The decision of an investor to acquire the policy (or an interest in it) depends on the amount required for the purchase, and the amount of that investor's prospective recovery of policy benefits on the insured's death. Obviously, this return is highly dependent on the expected or projected time of the insured's death. While potential returns might be high, depending on the cost of acquisition and the ultimate payment of benefit, there is significant risk due to maturity uncertainty. The investments are also generally illiquid. Some may

[491 B.R. 145]

have high transactional costs. They are invariably complex and, as an investment tool, inherently imprecise.

ii. Securities regulation

Plaintiff called and examined Joel Server, a registered securities administrator and financial consultant with KMS Financial in Seattle, Washington, about the investment products involved in this litigation. ¹² Server explained many of the fundamental concepts involved with life settlement and viatical contracts.¹³ He testified that such investments are so complicated he has rarely if ever seen them fit an investor's needs. He also indicated it was highly unlikely they would be appropriate for elderly investors such as Plaintiff.

Server also testified that such contracts are “securities” in Idaho and an individual selling the same is required to hold a securities license as well as an insurance license. In fact, the Idaho statute expressly defines “securities” as including viatical...