Pass v. Principal Life Ins. Co.
| Decision Date | 15 September 2021 |
| Docket Number | CASE NO. 20-81606-CIV-ALTMAN/Reinhart |
| Citation | 561 F.Supp.3d 1318 |
| Parties | Jeffrey PASS, Plaintiff, v. PRINCIPAL LIFE INSURANCE CO., Defendant. |
| Court | U.S. District Court — Southern District of Florida |
Gregory Lance Denes, Juno Beach, FL, for Plaintiff.
Jeffrey Mark Landau, John Edward Meagher, Shutts & Bowen, LLP, Miami, FL, for Defendant.
Our Plaintiff, Dr. Jeffrey Pass (a dentist), was listed as the insured on his partner's disability policies—issued by the Defendant, Principal Life Insurance Company. The policies provided that, if Pass were to become disabled such that he could no longer practice dentistry, Principal would fund his partner's buy-out of his stake in the firm. When Pass suffered a total disability, his partner (Dr. Frydman) bought him out. The purchase agreement stipulated that Frydman would pay only for Pass's share of the dental practice—as determined by their joint accountant. The agreement also provided that, if Frydman could max out his insurance policies—through litigation or otherwise—he would add any additional insurance proceeds to Pass's pay-out. If no such additional funds became available, however, Frydman wouldn't have to pay Pass any amount above the appraised value. Pass, as assignee of Frydman's rights under the policies, has now sued Principal for the difference between the appraisal price and the policies’ maximum coverage.1
Because the insurance policies—and the underlying shareholder agreement to which they refer—didn't permit Pass and Frydman to max out their policies arbitrarily (as they've attempted to do here), we GRANT Principal's Renewed Motion for Judgment on the Pleadings [ECF No. 27].
Drs. Pass and Frydman owned a dental practice in Broward County, Florida. See Amended Complaint ¶ 6. Frydman was originally an associate, but he became a co-owner in 2001 under a "Buy-Sell Agreement,"3 which governed the dentists’ ownership and management of their firm. Id. As relevant here, the Buy-Sell Agreement required each of Pass and Frydman to take out a "disability buy-out insurance" policy on the other—the purpose of which was to fund the buy-out of the counterpart's share of the firm if that counterpart became permanently disabled and could no longer work. Id. ¶ 8; see also Buy-Sell Agreement ¶¶ 9A, C.
The Buy-Sell Agreement set out the method for computing the purchase price of the co-owner's share of the firm as follows: "The purchase price for the SHARES of a DISABLED SHAREHOLDER shall be the price which would have been paid had he died on the first day of the onset of the disability." Buy-Sell Agreement ¶ 9D. To calculate that price, the Buy-Sell Agreement required Pass and Frydman, first, to add up the firm's cash receipts from the previous two years and, second, to multiply and divide the total sum by four variables. Id. ¶ 9B(1)–(4). The Buy-Sell Agreement mandated that the firm's accountant complete this valuation. Id. ¶ 9B(5). This computational method was identical to the process that would be used to determine the purchase price of a co-owner's shares upon his retirement. Id. ¶ 10B ().
The Buy-Sell Agreement also included a provision that addressed situations in which the disability proceeds were either less than or greater than the purchase price of the disabled co-owner's share of the firm (as computed above). Here's that provision:
Id. ¶ 9D. In other words, the Buy-Sell Agreement ensured that the purchase price would be the higher of (1) the accountant's valuation of the disabled co-owner's stake in the firm based on the calculation outlined above, and (2) the disability insurance "proceeds."
Pursuant to the Buy-Sell Agreement, Frydman purchased two policies from Principal—both of which listed Pass as the insured. See Amended Complaint ¶ 8.4 The Policies obliged Principal to reimburse Frydman's "Buy-Out Expense" if four conditions occurred: (1) the insured (Pass) suffered a total disability; (2) Pass had an ownership interest in the firm when the owner (Frydman) incurred the Buy-Out Expense; (3) "[Frydman] incur[red] a Buy-Out Expense in performance of the terms of the Buy-Sell Agreement that [was] in force at the time the Total Disability beg[an]"; and (4) Frydman sent Principal whatever information the Policies required him to provide. See Policy 1 at 5; Policy 2 at 6.
The Policies defined the "Buy-Out Expense" as "the expense incurred by the Owner in performance of the terms of the Buy-Sell Agreement in effect when the Insured's Total Disability began." Policy 1 at 4; Policy 2 at 4 (same). If the insured had buy-out coverage with another insurer (as was the case here), the Policies allowed Principal to deduct the amount of the additional coverage from the Buy-Out Expense it had to reimburse. As the Policies made clear: "The total benefits provided by this policy and any other Buy-Out Expense coverage in effect at the time of Total Disability will not exceed the total Buy-Out Expense incurred." Policy 1 at 5–6; Policy 2 at 6 (same).
As we noted above, one of the four conditions precedent to Principal's funding of the Buy-Out Expense was the requirement that Frydman provide certain information to Principal. See Policy 1 at 5; Policy 2 at 9. Policy 1 required Frydman to send Principal (1) the Buy-Sell Agreement that was in force at the time the total disability began, (2) the Buy-Out Expense Frydman "actually incur[red]," and (3) the method the accountant would use to value the firm. See Policy 1 at 6. Policy 2 mandated that Frydman give Principal a "satisfactory written proof of loss," which included "[c]opies of the Buy-Sell Agreement and business valuation documents and satisfactory evidence [that] Buy-Out Expense payments have been made," as well as other financial documents and any other proof Principal deemed necessary. Policy 2 at 6.
If the conditions precedent were met, the Policies directed Principal to pay Frydman in one of three ways: (1) monthly payments, (2) a lump sum, or (3) a combination of lump sum and monthly payments. See Policy 1 at 6; Policy 2 at 6–7. The lump sum would be "equal to the lesser of the actual lump sum Buy-Out Expense the Owner incurred or the Maximum Lump Sum Benefit shown on the current Data Page," and "[t]he total of the lump sum benefit will not exceed the lesser of the total Buy-Out Expense or the Maximum Aggregate Benefit." Policy 1 at 6 (emphases added); Policy 2 at 6 (same). The Maximum Lump Sum Benefit was defined as "the maximum lump sum amount payable for any Total Disability ... shown on the current Data Page." Policy 1 at 4; Policy 2 at 4 (same). The Maximum Aggregate Benefit was the "the maximum amount payable for any Total Disability." Policy 1 at 4; Policy 2 at 4 (same).5
Pass eventually became permanently disabled. See Amended Complaint ¶ 14. To complete Frydman's purchase of Pass's share of the practice—and pursuant to the terms of the Buy-Sell Agreement—the two partners entered into a Closing Agreement. Id. ¶ 17. The Closing Agreement provided that Frydman would pay a purchase price of $880,400, composed of: (1) $255,000, to be reimbursed by Northwestern Mutual under its policy, (2) $455,000, to be reimbursed by Principal under both Policies, and (3) $200,400, to be reimbursed by Principal under Policy 2. See Closing Agreement ¶ 1(a)–(c). If the insurers refused to pay any of those amounts, the Closing Agreement stipulated that Frydman would assign his rights to Pass, who could then seek indemnification. Id. ¶ 1(d)(1). Whether or not Frydman (or Pass) could obtain the entire $880,400 from the insurers, though, Frydman would still pay Pass $524,623—the "guaranteed payment" Pass would have been entitled to upon his retirement, as provided in Paragraph 9 of the Buy-Sell Agreement. Id. ¶ 1(d)(2); see also Amended Complaint ¶ 18 ().
If they couldn't collect disability insurance beyond $524,623, however, "then Dr. Frydman's tender under subparagraph (1) above shall be voided and Dr. Pass shall not collect any further payments from Dr. Frydman in excess of the Guaranteed Payments [of $524,623]." Closing Agreement ¶ 1(d)(2). And, "[t]o the extent that any benefits under the Policies in excess of the Guaranteed Payments are paid to Dr. Frydman and/or Dr. Pass, such payments, once made to Dr. Pass, shall be allocated towards the Purchase Price." Id. The Closing Agreement also required Frydman to "execute a note" for the purchase price, and that note "shall be subject to paragraph 1(d) above such that payments in excess of $524,623 shall be suspended if any of the Policies do not pay benefits." Id. ¶ 2(b)(2).
In short, as the Amended Complaint and the appended documents make clear, using the calculation in Paragraph 9 of the Buy-Sell Agreement, Pass and Frydman's accountant determined that Pass's share of the firm was worth $524,623. See Closing Agreement ¶ 1(d)(2); Amended Complaint ¶ 18. But, because Frydman had a total of $880,400 in maximum policy coverage from both Northwestern Mutual and Principal, he and Pass purported to rely on Paragraph 9D of the Buy-Sell Agreement to bump their price up from $524,623 to $880,400. See Amended Complaint ¶ 20 (...
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