Pape v. Braaten

• Decision Date: 25 March 2022
• Docket Number: 18 C 1481
• Parties: GREGORY PAPE, in his individual; STACEY PAPE, as trustee for the Gregory Pape Irrevocable Life Insurance Trust, Plaintiff, v. MARK BRAATEN, an individual; MARKBRAATEN, INC., a Wisconsin Corporation; VOYA FINANCIAL ADVISORS, INC., a Minnesota Corporation; PACIFIC LIFE INSURANCE COMPANY, a Nebraska Corporation; ROHE LEVY, an individual, Defendants.
• Court: U.S. District Court — Northern District of Illinois

GREGORY PAPE, in his individual; STACEY PAPE, as trustee for the Gregory Pape Irrevocable Life Insurance Trust, Plaintiff,
v.
MARK BRAATEN, an individual; MARKBRAATEN, INC., a Wisconsin Corporation; VOYA FINANCIAL ADVISORS, INC., a Minnesota Corporation; PACIFIC LIFE INSURANCE COMPANY, a Nebraska Corporation; ROHE LEVY, an individual, Defendants.

No. 18 C 1481

United States District Court, N.D. Illinois, Eastern Division

March 25, 2022

MEMORANDUM OPINION AND ORDER

REBECCA R. PALLMEYER UNITED STATES DISTRICT JUDGE

In January 2015, Plaintiff Gregory Pape purchased two premium-financed life insurance policies with a combined face value of $10 million, issued by Defendant Pacific Life Insurance Company. In this lawsuit, Pape alleges that Defendants Rohe Levy, Mark Braaten, and Braaten's company (MarkBraaten, Inc.), who played various roles in the transaction, misrepresented several aspects about the policies and the premium financing strategy. Specifically, Plaintiffs allege that Defendants represented that the premium financing arrangement would enable Pape to purchase a $10 million life insurance policy with an upfront payment of approximately $33, 000. After initiating the purchase, Pape would take out loans to pay the policy premiums (the “premium financing” component of the program). The loan balance would increase over time as interest on the borrowed amount accumulated. Defendants represented, however, that by Year 20, the policies would have generated enough revenue through investment returns of 7% that the policies' cash surrender value would be sufficient to pay off the loan and accrued interest. In the meantime, apart from the $33, 000 up-front payment, Pape would pay nothing out of pocket and would stand to recover $10 million in death benefits.

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At some point after renewing the policies in 2016 and 2017, Pape realized the program was untenable. He surrendered the policies in January 2018 and filed this lawsuit against the insurer and the persons and entities involved in promoting the purchase to him. Plaintiffs Pape and his trustee have alleged various state-law claims against Defendants Braaten, MarkBraaten, Inc., Levy, and Pacific Life, including fraudulent misrepresentation against Braaten; unjust enrichment against Levy; and negligence against Pacific Life (under both direct and respondeat superior theories), Braaten and MarkBraaten, Inc., and Levy. Defendants Pacific Life [200], Braaten and MarkBraaten, Inc. [203], and Levy [207] now move for summary judgment on all counts against them. For reasons discussed below, the court denies the Braaten Defendants' motion for summary judgment. Levy's motion and Pacific Life's motion are granted in part and denied in part.

FACTUAL BACKGROUND

The facts are set forth in the Defendants' separate Rule 56.1 statements submitted in support of the three defense motions for summary judgment, as well as Plaintiffs' Rule 56.1 responses and statements of additional facts.^[1] Before reviewing those facts, the court presents background information on premium-financed life insurance.

I. Premium Financed Life Insurance

Some life insurance policies, in addition to providing financial compensation upon the insured's death, accumulate cash value over time. 8 Jeffrey E. Thomas, New Appleman on Insurance Law Library Edition § 88.03, Lexis Nexis (2021). This cash value is based on the

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premiums paid and, for insurance products with an investment component, the investment performance of the premium dollars. Id. When a policy has an investment component, there is ordinarily a “separate account mechanism, ” meaning the cash value is placed in a separate account for investment purposes; the funds in that account belong solely to the policyowner. Id. at § 81.02. In this case, Plaintiff Gregory Pape bought two universal life insurance policies. Universal life insurance policies have adjustable death benefits and flexible premiums, meaning the policyholder may vary the death benefit and premium. See Id. at §§ 1.08, 81.02. Additionally, once the policy's cash value has generated enough income, it may fully fund the policy's premiums, and no further premium payments are needed. Id. at § 81.02. The policies Pape purchased were “indexed”-that is, the cash value in those policies would accumulate according to an external index, such as a stock market index. See https://www.investopedia.com/articles/ personal-finance/012416/pros-and-cons-indexed-universal-life-insurance.asp (last visited March 25, 2022).

To fund his policies, Pape used premium financing, a funding mechanism in which the proposed insured obtains a loan from a third-party lender (who, in this case, was not affiliated with the insurance carrier) in order to pay premiums. (Pls.' Statement of Additional Facts to the Braaten Defs. [220] (hereinafter “Pls.' Braaten Ad. SOF”), at ¶ 5; Pls.' Statement of Additional Facts to Levy [218] (hereinafter “Pls.' Levy Ad. SOF”), at ¶ 40; Pacific Life Statement of Facts [205] (hereinafter “Pacific Life SOF”), at ¶ 17.) Premium financing does not change the underlying insurance product. (Pls.' Braaten Ad. SOF ¶ 5; Pls.' Levy Ad. SOF ¶ 40; Pacific Life SOF ¶¶ 19- 20.) But if a policy is purchased using premium financing rather than liquid assets, the accumulated cash value of the policy (once it has generated sufficient income in later years) can pay off the premium finance loan. New Appleman § 1.06. The cash value of the policy may also be used as collateral for all or some portion of the premium finance loan; if the loan interest rate rises or the policy's investment component underperforms, the policyholder may be required to

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post additional collateral to secure the full loan balance. See https://www.investopedia.com/ insurance/life-insurance-premium-financing-worth-risk/ (last visited March 25, 2022).

Plaintiffs assert that throughout the relevant time period, the Defendants represented the plan for Pape's premium-financed polices (including aspects about the loan and investment component of the policies) through “life insurance illustrations.” An “illustration” is “a presentation or depiction that includes non-guaranteed elements of a policy of life insurance over a period of years.” National Association of Insurance Commissioners, Life Insurance Illustrations Model Regulation (hereinafter “NAIC Model Regulation”), at § 4.H, https://content.naic.org/ciprtopics/ topiclifeinsuranceillustrations.htm (last visited March 25, 2022); see also Ill. Admin. Code tit. 50, § 1406.30. There are three types of illustrations: a “basic” illustration is “a ledger or proposal used in the sale of a life insurance policy that shows both guaranteed and non-guaranteed elements”; a “supplemental” illustration is furnished in addition to a basic illustration, but may be presented in a different form; and an “in force” illustration depicts the policy while in effect. NAIC Model Regulation, § 4.H; see also Ill. Admin. Code tit. 50, § 1406.30. Pacific Life's Compliance Manual adopts these definitions. (Compliance Manual, Ex. 3 to Pls.' Resp. to Braaten SOF [221] (hereinafter “Compliance Manual”), at 3.) For these illustrations, “non-guaranteed” elements are “the premiums, benefits, values, credits, or charges . . . that are not guaranteed or not determined at [issuance of the policy], ” while “guaranteed” elements are anything “guaranteed and determined at issue.” NAIC Model Regulation, § 4.F.

According to Plaintiffs, the plan was for Pape to take out loans to pay for the premiums on his two policies; the interest on these loans would capitalize into the loan principal, meaning the interest would be added to the long-term, total loan balance, rather than immediately paid. See https://www.investopedia.com/ask/answers/040915/what-does-it-mean-capitalize-accrued-interest.asp (last visited March 25, 2022). Then, the investment component of Pape's policies would generate a return that would increase the policies' cash value; eventually, in Year 20, the cash surrender value would be sufficient to pay off the loan principal and accumulated interest.

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(Pls.' Braaten Ad. SOF ¶ 17; Pls.' Opp'n to Braaten [222] at 5.) In other words, the plan was for the policies to be entirely self-sustaining: the investment component would pay for the policies themselves.

II. The Parties

The Plaintiffs in this case are Gregory Pape (“Pape”) and, as trustee for the Gregory Pape Irrevocable Life Insurance Trust, his sister Stacey Pape.^[2] (Levy Statement of Facts [209] (hereinafter “Levy SOF”), at ¶ 2; Second Am. Compl. [104] ¶ 4.) Pape sold his medical imaging company for $25 million in 2005, and is currently a retiree. (Levy SOF ¶¶ 1, 8.) The Defendants are Mark Braaten (“Braaten”) and his company, MarkBraaten, Inc. (collectively, the “Braaten Defendants”), Rohe Levy (“Levy”), and Pacific Life Insurance Company (“Pacific Life”). Pacific Life is a life insurance company that issued the policies at issue in this lawsuit. (Pacific Life Resp. to Pls.' Statement of Additional Facts [228] (hereinafter “Pacific Life Resp. to Ad. SOF”), at ¶ 35.) Pacific Life was not party to Pape's third-party loan agreement to pay for the policies' premiums, and played no role in negotiating or securing the loan. (Pacific Life SOF ¶ 19.)

According to Pacific Life, Braaten and Levy “were appointed as insurance producers pursuant to Illinois law to sell insurance product on behalf of Pacific Life.” (Pacific Life's Answer to Pls.' First Interrogs., Ex. 10 to Pls.' Resp. to Braaten SOF [220-10], Ex. 19 to Pls.' Resp. to Levy SOF [218-12], Ex. 22 to Pls.' Resp. to Pacific Life SOF [223-2] (hereinafter “Interrogs.”), at ¶ 2.) In Illinois, an “insurance producer” is “a person required to be licensed under the laws of this State to sell, solicit, or negotiate insurance, ” which encompasses both insurance agents and insurance brokers. Skaperdas v. Country Cas. Ins. Co., 2015 IL 117021, ¶¶ 29, 43, 28...