Malkin v. Wells Fargo Bank, NA

• Decision Date: 27 May 2021
• Docket Number: No. 19-14689,19-14689
• Parties: ESTATE OF Phyllis M. MALKIN, By its Personal Representative, Toni Ellen Guarnero, Plaintiff - Appellee - Cross Appellant, v. WELLS FARGO BANK, NA, as Securities Intermediary, Defendant - Appellant - Cross Appellee, Berkshire Hathaway Life Insurance Company of Nebraska, Defendant - Appellant - Cross Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

998 F.3d 1186

ESTATE OF Phyllis M. MALKIN, By its Personal Representative, Toni Ellen Guarnero, Plaintiff - Appellee - Cross Appellant,

v.WELLS FARGO BANK, NA, as Securities Intermediary, Defendant - Appellant - Cross Appellee,Berkshire Hathaway Life Insurance Company of Nebraska, Defendant - Appellant - Cross Appellee.

No. 19-14689

United States Court of Appeals, Eleventh Circuit.

May 27, 2021

Joseph M. Kelleher, Gregory James Star, Michael J. Miller, Cozen O'Connor, Philadelphia, PA, Daniel O. Mena, Martha Rosa Mora, Avila Rodriguez Hernandez Mena & Garro, LLP, Coral Gables, FL, for Plaintiff-Appellee-Cross Appellant.

Ginger D. Anders, Donald Beaton Verrilli, Jr., Brendan B. Gants, Munger Tolles & Olson, LLP, Washington, DC, Rebecca Jo Canamero, Monica V. Castro, Raul Cosio, Scott Daniel Ponce, Holland & Knight, LLP, Miami, FL, Philip E. Rothschild, Holland & Knight, LLP, Fort Lauderdale, FL, for Defendant-Appellant-Cross Appellee.

Abigail Grieco Corbett, Samuel Olds Patmore, Jay B. Shapiro, Attorney, Albert D. Lichy, Stearns Weaver Miller Weissler Alhadeff & Sitterson, PA, Miami, FL, for Defendant-Appellant-Cross Appellee.

Before MARTIN, GRANT, and BRASHER, Circuit Judges.

MARTIN, Circuit Judge:

This appeal involves a dispute over what Phyllis Malkin's Estate calls an illegal stranger-originated life insurance ("STOLI") policy. The Delaware Supreme Court—the controlling authority on the state law issues in this case—has described STOLI policies as wagering contracts in which "a life insurance policy [is] procured or effected without an insurable interest." PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Tr., ex rel. Christiana Bank & Tr. Co. ("Price Dawe"), 28 A.3d 1059, 1071 (Del. 2011). These policies are prohibited by the Delaware constitution. Id. This appeal requires us to decide whether Ms. Malkin's life insurance policy was this type of STOLI policy.

In 2006, Ms. Malkin obtained a $4 million insurance policy on her life through American General Life Insurance Company. She worked with several entities to get a loan to finance the AIG Policy. Eventually, Ms. Malkin defaulted on the loan and opted to relinquish her rights to the AIG Policy to satisfy the balance of the loan. The AIG Policy was ultimately purchased by Berkshire Hathaway Life Insurance Company of Nebraska, with Wells Fargo Bank, N.A. serving as the securities intermediary. After Ms. Malkin passed away, her Estate filed suit seeking to recover the proceeds of the AIG Policy from Berkshire and Wells Fargo, claiming it was an illegal STOLI policy. The District Court ruled in favor of the Estate. It found that because the AIG Policy lacked an insurable interest at its inception, it was void under Delaware Code Annotated Title 18, § 2704(a), which, in relevant part, governs the purchase of a life insurance policy on the life of another person. The District Court thus ruled to allow the Estate to recover the Policy's proceeds under § 2704(b).¹

After careful consideration, we affirm the District Court's finding that the AIG Policy is void under § 2704(a). We must, however, reverse the District Court's decision to strike Berkshire's counterclaims for fraudulent and negligent misrepresentations. We defer our decision on the remaining issues in this case pending certification of two questions to the Supreme Court of Delaware.

I. BACKGROUND

In 2005, Ms. Malkin and her husband Paul were retired and living in Florida when an acquaintance referred them to Larry Bryan and his company, Simba.² Simba was in the business of "premium financing of life insurance," offering its clients what it referred to as "life insurance capacity transactions," where life insurance policies were acquired "by way of non-recourse premium financing." Sun Life Assurance Co. of Can. v. U.S. Bank Nat'l Ass'n ("Sun Life"), No. 14-CIV-62610-BLOOM/VALLE, 2016 WL 161598, at *1 (S.D. Fla. Jan. 14, 2016) (quotation marks omitted), aff'd in part, rev'd in part, and remanded, 693 F. App'x 838.³ Simba targeted a particular clientele: healthy seniors with excess wealth who did not wish to purchase life insurance for their own personal use, but who wanted to make money off of their life insurance capacity. Id. at *2. Simba told potential clients that there were no obligations or out of pocket expenses to them. See id.

Ms. Malkin "did not need" and "did not want" life insurance before meeting with Simba. Neither did she express any interest in paying for life insurance. The Malkins were simply interested in Simba's "risk free opportunity to make money."

Ms. Malkin got the life insurance policies through Simba's typical process. This involved Simba introducing its clients to Coventry Capital I LLC ("Coventry"), and Simba and Coventry worked together to get approval from an insurer, in this case American General Life Insurance Company ("AIG"). Ultimately, three separate policies were taken out on Ms. Malkin's life: the $4-million AIG policy at issue here (the "AIG Policy"); a $5-million policy issued by Sun Life Assurance Company (the "Sun Life Policy");⁴ and another $4-million policy procured through a separate entity called Sail Funding Trust II. Ms. Malkin got a total of $13 million in life insurance coverage.

We briefly describe how Ms. Malkin obtained her life insurance policies because those details are relevant to whether there was an insurable interest in the AIG Policy. Coventry acted as the program administrator and servicing agent of a life insurance premium financing program in connection with LaSalle Bank. In that capacity, Coventry first approved a non-recourse premium finance loan for the Sun Life Policy.⁵ Coventry required Ms. Malkin to fill out various forms that were "not negotiable," including a document in which she appointed Coventry as her attorney-in-fact, with full authority to originate, service, or liquidate "any life insurance policies on [her] life[.]" Ms. Malkin also signed a loan application form with LaSalle Bank, for which Coventry acted as the program administrator for LaSalle Bank. And the Malkins agreed that a trust would be established to hold insurance policies on Ms. Malkin's life.

At this time, Coventry noted internally that it was "hoping to add" another Malkin policy on top of the Sun Life Policy—the $4-million AIG Policy at issue here. Mr. Bryan, Simba's founder, said Ms. Malkin was not the one who decided to apply for coverage from either Sun Life or AIG. See, e.g., R. Doc. 135-4 at 68 (confirming that prospective insureds entered into nonnegotiable "take it or leave it deals").

In March 2006, the Malkins entered into an agreement with Wilmington Trust Company to create a Delaware trust for the purpose of applying for and holding both the Sun Life and AIG Policies ("the Trust"). Coventry's initial plan was for the Sun Life Policy and the AIG Policy to be funded under a single loan, which would be obtained by a single sub-trust to the Trust. However, by April 2006, Coventry changed its plan and ultimately each policy was funded under a separate but identical loan entered into by two separate but identical sub-trusts of the Trust.

The AIG Sub-Trust, LaSalle Bank, and Coventry entered into a $264,895.87, 26-month, non-recourse agreement to fund the AIG Policy. The AIG Loan was to be funded April 7, 2006, while the Sun Life Policy would be issued the following week. Because the Sun Life Policy was funded under a separate loan from the AIG Policy, Coventry repeated the process for the Sun Life Policy. A few weeks later, the Sun Life Sub-Trust, LaSalle Bank, and Coventry entered into a $238,050, 26-month, non-recourse agreement to fund the Sun Life Policy. At the end of 26 months, Ms. Malkin would owe $360,265.34 on the AIG Loan and $340,496.41 on the Sun Life Loan. Coventry paid the initial premiums to AIG on the AIG Policy. Mr. Bryan confirmed that the Malkins paid no premiums on either the AIG Policy or the Sun Life Policy.⁶

On June 16, 2008, Coventry told the AIG Sub-Trust that the balance on the AIG Loan was due. The notice said Coventry was going to "foreclose upon and sell or otherwise liquidate" the AIG Policy unless Ms. Malkin paid the entire AIG Loan amount plus additional interest. Instead of paying the AIG Loan, Ms. Malkin agreed that the AIG Sub-Trust would satisfy the $360,265.34 balance on the AIG Loan by "relinquishing all right, title and interest in and to the [AIG] Policy" to Coventry. When the Sun Life Loan became due, Ms. Malkin and Coventry repeated the same process with the Sun Life Policy, which meant Malkin relinquished all rights to the Sun Life Policy to Coventry as well.

In 2012, Wells Fargo became the owner and beneficiary of the Policy as securities intermediary.⁷ In 2013, Berkshire agreed to buy 125 life insurance policies, including the AIG Policy, from Coventry with Wells Fargo serving as the securities intermediary.⁸ In this purchase agreement, Coventry represented to Berkshire that to its knowledge none of the policies "was originated in connection with a STOLI transaction." Berkshire paid Coventry $322,103 for the AIG Policy and then made $137,194.20 in premium payments to AIG.

Ms. Malkin passed away in September 2014. On October 27, 2014, AIG paid death benefits from the AIG Policy to Wells Fargo in the amount of $4,013,976.47. On October 29, Wells Fargo credited that full amount to the securities account that it maintained for Berkshire. Berkshire then transferred the proceeds to another of its Wells Fargo accounts.

In 2017, Ms. Malkin's Estate filed suit to recover the AIG Policy proceeds from Wells Fargo under Delaware's insurable interest statute, § 2704(b). After some third-party indemnification litigation by Wells Fargo and Berkshire against Coventry, the Estate filed an Amended Complaint, adding Berkshire as a defendant.

The parties filed motions for summary judgment, and the District Court issued its order granting summary judgment to the Estate. The court found that: (1) the Estate's claim is governed by Delaware law; (2)...