Lavastone Capital LLC v. Berland

• Decision Date: 16 November 2021
• Docket Number: No. 75, 2021,75, 2021
• Parties: LAVASTONE CAPITAL LLC, Defendant - Appellant, v. ESTATE OF Beverly E. BERLAND, Plaintiff - Appellee.
• Court: United States State Supreme Court of Delaware

266 A.3d 964

LAVASTONE CAPITAL LLC, Defendant - Appellant,

v.ESTATE OF Beverly E. BERLAND, Plaintiff - Appellee.

No. 75, 2021

Supreme Court of Delaware.

Submitted: September 15, 2021

Decided: November 16, 2021

Kenneth J. Nachbar, Esquire (argued), Megan Ward Cascio, Esquire, and Sabrina M. Hendershot, Esquire, Morris, Nichols, Arsht, & Tunnell, LLP, Wilmington, Delaware, for Appellant.

Daniel R. Miller, Esquire, Walden, Macht & Haran, LLP, Philadelphia, Pennsylvania, for Appellee.

David E. Ross, Esquire, Ross Aronstam & Moritz, LLP, Wilmington, Delaware, Amici Curiae for the Life Insurance Settlement Association and European Life Settlement Association.

Stephen B. Brauerman, Esquire, Bayard, P.A., Wilmington, Delaware, Amici Curiae for Institutional Longevity Markets Association.

Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and MONTGOMERY-REEVES, Justices, constituting the Court en Banc.

VAUGHN, Justice.

The United States District Court for the District of Delaware certified the following three questions of law to this Court in accordance with the Delaware Constitution, Article IV, § 11 (8) and Delaware Supreme Court Rule 41 :

Question One : If an insurance contract is void ab initio under 18 Del. C. § 2704(a) and PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust , 28 A.3d 1059 (Del. 2011), is any resulting death-benefit payment made "under any contract" within the meaning of 18 Del. C. § 2704(b) ?

Question Two: Does 18 Del. C. § 2704(a) and (c)(5) forbid an insured or his or her trust to procure or effect a policy on his or her own life using a nonrecourse loan and, after the contestability period has passed, transfer the policy, or a beneficial interest in the trust that owns the policy, to a person without an insurable interest in the insured's life, if the insured did not ever intend to provide insurance protection beyond the contestability period?

Question Three : May an estate profit under 18 Del. C. § 2704(b) if an insurance policy in violation of 18 Del. C. § 2704(a) was procured in part by fraud on the part of the decedent and the decedent profited from the previous sale of the policy?

By order dated March 12, 2021, this Court accepted the certified questions. For the reasons discussed in this opinion, we answer the certified questions as follows.

Question One : Yes, a death-benefit payment that is made on a policy that is void ab initio under 18 Del. C. § 2704(a) and PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust is made "under [a] contract" within the meaning of 18 Del. C. § 2704(b).

Question Two : No, so long as the use of nonrecourse funding did not allow the insured or his or her trust to obtain the policy "without actually paying the premiums"¹ and the insured or his or her trust procured or effected the policy in good faith, for a lawful insurance purpose, and not as a cover for a wagering contract.

Question Three : Yes, an estate may profit under 18 Del. C. § 2704(b) where the policy was procured in part by fraud on the part of the decedent and the decedent profited from the previous sale of the policy, if the recipient of the policy benefits cannot establish that it was a victim of the fraud.

I. Factual and Procedural Background

The following undisputed facts have been submitted with the certification.

Beginning in 2001, Lavastone Capital LLC (Lavastone) entered into an agreement with Coventry First LLC (Coventry) to purchase "life settlements" – life-insurance policies sold on the secondary market. Lavastone bought many life-insurance policies from Coventry through this arrangement. One was that of Beverly E. Berland. Lincoln Financial (Lincoln), not a party here, issued the policy to Berland in 2006. But Berland did not act alone in acquiring it. A few months before, she approached a business called "Simba," hoping to engage in a "life insurance capacity transaction." As Simba pitched it, the transaction allowed clients to "create dollars today by using a paper asset, (a life insurance policy not yet issued from a major insurance carrier insuring your life)" by selling it on the secondary market. Clients did not need to put up any money upfront. Instead, they got nonrecourse loans to finance the transactions, which allowed them to make all necessary payments without tapping into personal funds. The only collateral for the loan was the life-insurance policy itself. Simba played the role of a broker in these transactions, reaching out to both the insurers and banks on behalf of its client.

Berland agreed to participate in several transactions with Simba, profiting greatly. But only one transaction is at issue here.

1. Financing the premium payments . To get a nonrecourse loan for Berland, Simba got her medical records under a HIPAA release and sent them to Coventry Capital I LLC (Coventry Capital). Coventry Capital was the lending-program administrator for LaSalle Bank (LaSalle) (which was to be the lender for the premium payments) and facilitated creating a life-expectancy report through another entity, Coventry Servicing LLC (Coventry Servicing). Coventry Servicing then sent the report to Lexington Bank (Lexington), which provided insurance for nonrecourse loans issued by LaSalle. After Lexington agreed to insure the Berland loan, LaSalle agreed to issue it.

The loan package created a trust, called the Berland Insurance Trust (the Trust). It had two trustees: the Wilmington Trust Company (Wilmington Trust) and Murray Roffeld, Berland's longtime partner. The loan's "borrower" was a sub-trust of the Trust, on whose behalf Wilmington Trust executed a Note and Security Agreement. The note could be satisfied by relinquishing the life-insurance policy before the loan-maturity date. Otherwise, Berland assigned her interest in the Trust, sub-trust, and policy as collateral. The quarter-million-dollar loan was due twenty-six months from the issue date and had an effective interest rate of 20.52 percent.

2. Acquiring the policy . At that time, Berland also executed a "special irrevocable durable power of attorney." This allowed Coventry Capital to originate and service any life-insurance policy on behalf of Berland. Berland then applied for a $5 million Lincoln life-insurance policy. Included with her application was a form that falsely stated that she had $10 million in assets and $180,000 in annual income. After she signed the application, Simba submitted it to Coventry Capital. Coventry Capital then sent the application to Wilmington Trust, which signed the application as the Trust's trustee and policy owner. Lincoln then issued the policy, delivering it to the Trust at Wilmington Trust's address in Delaware. The parties dispute whether Simba or Berland paid the $5,000 application fee.

3. Selling the policy . The Trust maintained the policy for more than two years, past the contestability period. At no point did anybody other than Berland control whether or to whom Berland or the Trust could sell the policy. Indeed, when looking to sell the policy, Berland signed engagement letters with three separate life-settlement brokers. She ultimately accepted an offer brought by one of these brokers, Four Seasons Financial Group, in July 2008.

Coventry First, acting as a life-settlement provider for Lavastone, was the buyer, paying $453,822.88. Berland directed the trust to use this money to pay off the Note and Security Agreement. She personally retained the remaining $73,594.05 surplus. Coventry First then sold the agreement to Lavastone, per the two companies’ prior contract. Lavastone kept the policy in force, paying all relevant premiums to Lincoln Financial. Upon Berland's death more than seven years later, Lincoln paid Lavastone $5,041,032.06 in death benefits under the policy.

In December 2018, Berland's estate filed a complaint against Lavastone in the District Court, seeking to recover the death benefits that Lavastone received under 18 Del C. § 2704(b). On July 17, 2020, the parties filed cross-motions for summary judgment. On March 2, 2021, the District Court certified the three questions of law to this Court.

II. Standard of Review

The certified questions are issues of law, which this Court decides de novo .²

III. DISCUSSION

A. Legal Background and Price Dawe

For hundreds of years, the law has prohibited wagering on human life through the use of life insurance that was not linked to a demonstrated economic risk.³ Delaware has codified the requirement that a person procuring a life insurance policy must have an "insurable interest" in the life of the insured in 18 Del. C. § 2704. Section 2704(a) provides:

Any individual of competent legal capacity may procure or effect an insurance contract upon his or her own life or body for the benefit of any person, but no person shall procure or cause to be procured any insurance contract upon the life or body of another individual unless the benefits under such contract are payable to the individual insured or his or her personal representatives or to a person having, at the time when such contract was made, an insurable interest in the individual insured.

Section 2704(c) defines the categories of persons that have an insurable interest in an individual's life. The categories include the individual insured and others, such as close family members or business associates and the "trustee of a trust created and initially funded by" the insured.⁴

In Price Dawe , this Court answered questions of law certified by the United States District Court for the District of Delaware relating to the insurable interest requirement. In that case, Price Dawe formed an insurance trust with a family trust as the beneficiary. Dawe was the beneficiary of the family trust. On March 8, 2007, an insurer issued a $9 million life insurance policy on Dawe's life. The insurance trust was the owner and beneficiary of the policy. Dawe died on March 3, 2010. After the insurance trust made a claim for the death benefit, the insurer contested the policy, claiming that Dawe did...