PHL Variable Ins. Co. v. Sheldon Hathaway Family Ins. Trust

• Decision Date: 22 April 2016
• Docket Number: 15–4029.,Nos. 15–4028,s. 15–4028
• Citation: 819 F.3d 1283
• Parties: PHL VARIABLE INSURANCE COMPANY, Plaintiff–Appellee, v. The SHELDON HATHAWAY FAMILY INSURANCE TRUST, by and through its trustee, David HATHAWAY, Defendant–Appellant, and Windsor Securities, LLC, Intervenor Defendant–Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

819 F.3d 1283

PHL VARIABLE INSURANCE COMPANY, Plaintiff–Appellee,

v. The SHELDON HATHAWAY FAMILY INSURANCE TRUST, by and through its trustee, David HATHAWAY, Defendant–Appellant,andWindsor Securities, LLC, Intervenor Defendant–Appellant.

Nos. 15–4028

15–4029.

United States Court of Appeals, Tenth Circuit.

April 22, 2016.

Alexander Dushku, Kirton McConkie, Salt Lake City, UT (R. Willis Orton, R. Shawn Gunnarson, and Shawn T. Richards, Kirton McConkie, Salt Lake City, UT, and David W. Scofield, Peters Scofield, Sandy, UT, with him on the briefs), for Appellants.

David T. McDowell, Edison, McDowell & Hetherington, LLP, Houston, TX (Thomas F.A. Hetherington, Jessica L. Wilson, and Andrew R. Kasner, Edison, McDowell & Hetherington, LLP, Houston, TX, on the brief), for Appellee.

Before MATHESON, BALDOCK, and MORITZ, Circuit Judges.

MORITZ, Circuit Judge.

Sheldon Hathaway became embroiled in a stranger-originated-life-insurance (STOLI) scheme at the behest of his neighbor, Jay Sullivan. A STOLI scheme typically works something like this: An elderly individual authorizes a speculator to take out a policy on his or her life. The speculator pays the policy premiums and then profits from its investment—either by collecting the policy payout when the insured dies, or by selling the policy to another speculator before that happens. See Sciarretta v. Lincoln Nat'l Life Ins. Co., 778 F.3d 1205, 1208 (11th Cir.2015) (describing "purest form" of STOLI scheme).

Here, Intervenor Defendant–Appellant Windsor Securities, LLC (Windsor) took a more roundabout approach to "gambling on the lives of the elderly," see id. : it loaned Defendant–Appellant the Sheldon Hathaway Family Trust (the Trust) $200,000 to finance the initial premium on a life insurance policy (the policy) for Hathaway. Windsor, it turns out, "has made a handful" of these premium-financing loans to insurance trusts in the past. Aplt. Br. 11. In exchange, Windsor "receives a moderate return on [its] investment" if a trust repays the loan. Id. Alternatively, Windsor "foreclose[s] on the life insurance policy that was pledged as collateral" when a trust fails to do so. Id. at 11–12. That's what happened here.

But before Windsor could profit from its investment—either by selling the policy or by capitalizing on Hathaway's death—Plaintiff-Appellee PHL Variable Insurance Company (PHL) sought to rescind the policy based on alleged misrepresentations in Hathaway's insurance application (the application). The district court ultimately granted PHL's motion for summary judgment on its rescission claim. And it allowed PHL to retain the premiums Windsor already paid.

On appeal, Windsor and the Trust (collectively, the defendants) argue the district court erred in granting PHL's motion for summary judgment because there is at least a genuine dispute of material fact as to whether PHL waived its right to rescind the policy. Alternatively, they argue the district court erred in granting summary judgment because, at a minimum, a genuine dispute of material fact exists as to (1) whether the application contained a misrepresentation; and (2) whether PHL relied on that misrepresentation in issuing the policy. Finally, even assuming summary judgment was appropriate, they argue the district court lacked authority to allow PHL to retain the paid premiums.

We conclude no genuine dispute of material fact exists as to whether PHL waived its right to rescind the policy. Nor is there any genuine dispute of material fact as to whether the application contained a misrepresentation or whether PHL relied on that misrepresentation in issuing the policy. Finally, we hold the district court had authority to allow PHL to retain the paid premiums. Accordingly, we affirm.

BACKGROUND

Over the course of two or three years, Jay Sullivan approached his neighbor Sheldon Hathaway on several different occasions and spoke with him about purchasing life insurance from Sullivan. Sullivan assured Hathaway that an outside investor would finance the policy at no cost to Hathaway, and that Hathaway would receive $300,000 when the initial investor sold the policy after two years.

To assist Hathaway in completing the insurance application, Sullivan told Hathaway that he believed Hathaway's net worth was approximately $4,000,000. Hathaway knew that figure was inflated, but nevertheless acquiesced to his neighbor's calculations. The final signed version of the application listed Hathaway's net worth as $6,250,000.

Through a series of intermediaries, including Gabriel Giordano and Crump Life Insurance Services, Inc. (Crump), the application eventually reached PHL. PHL then sought confirmation of Hathaway's net worth from Infolink, a third-party service that verified the calculations in the application, ostensibly based on a conversation with Hathaway. Later, PHL would learn Infolink never contacted Hathaway.

In the meantime, Sullivan assisted the Trustee—Hathaway's son, David—in obtaining the initial $200,000 premium payment from a San Diego law firm that Windsor later reimbursed, and PHL issued the policy to Hathaway on January 31, 2008. But later that year, PHL became suspicious of Giordano and began an internal investigation into the policies he originated. As a result of that investigation, PHL sent Hathaway a letter on May 5, 2009, requesting additional information about certain representations in the application and warning that failure to provide that information might lead to rescission of the policy. When Hathaway didn't respond, PHL filed suit to rescind the policy on January 28, 2010. The district court granted summary judgment in favor of PHL, and authorized it to keep the premiums. Windsor appealed.

DISCUSSION

We review the district court's decision to grant summary judgment de novo, applying the same legal standard as the district court and viewing the evidence in the light most favorable to the non-moving party. Zisumbo v. Ogden Reg'l Med. Ctr., 801 F.3d 1185, 1196 (10th Cir.2015). "Summary judgment is appropriate when ‘there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.’ " Id. (quoting Fed. R. Civ. P. 56(a) ).

I. Waiver

The defendants first argue the district court erred in granting PHL summary judgment on its rescission claim because PHL waived its right to rescind the policy. In support of this assertion, the defendants offer four separate—albeit related—waiver theories.

A. Statutory Waiver

First, the defendants argue PHL waived its right to rescind by failing to timely notify Hathaway that PHL had acquired knowledge of facts that would allow it to rescind the policy. See Utah Code Ann. § 31A–21–105(5)¹ (noting that if an "insurer acquires knowledge of sufficient facts to constitute a general defense to all claims under [a] policy, the defense is only available if the insurer notifies the insured within 60 days after acquiring the knowledge of its intention to defend against a claim if one should arise"). According to the defendants, PHL acquired the requisite knowledge no later than December 31, 2008. By then, the defendants assert, "PHL knew that the [a]pplication contained inaccuracies that could support ‘a general defense to all claims under the policy.’ " Aplt. Br. 26 (quoting § 31A–21–105(5) ). Thus, they conclude, in order to satisfy § 31A–21–105(5)'s 60–day notice requirement, PHL had to notify Hathaway no later than March 1, 2009, of its "intention to defend against a claim if one should arise." Id. (quoting § 31A–21–105(5) ). And by failing to do so, the defendants argue, PHL waived its right to rescind the policy.

PHL disagrees. It maintains that failure to comply with § 31A–21–105(5)'s 60–day notice requirement only precludes an insurer from asserting a defense to an insured's claim, not from rescinding a policy under which a claim never actually arises. See § 31A–21–105(5) (stating defense is unavailable if insurer fails to comply with notice requirement, and explaining that insurer only "acquire[s] knowledge" for purposes of waiver provision if that knowledge "was disclosed ... in connection with communications or investigations associated with the insurance policy under which the subject claim arises " (emphasis added)). Here, PHL points out, (1) no claim ever arose under the policy, and (2) PHL never asserted a defense to that non-existent claim. Accordingly, PHL insists, § 31A–21–105(5)'s 60–day notice requirement doesn't apply to PHL's efforts to rescind the policy.

We need not resolve this dispute. Even assuming § 31A–21–105(5) applies to an insurer's attempts to rescind a policy, the defendants' argument that the statute required PHL to provide notice by March 1, 2009, is viable only if they presented evidence from which a reasonable jury could conclude that PHL "acquire[d] knowledge of sufficient facts to constitute a general defense to all claims" by December 31, 2008. Id. For the reasons discussed below, we conclude the defendants fail to demonstrate a genuine dispute on this point.

First, the defendants point out that PHL admitted it "learned of the misrepresentations [in the application] during an investigation."² Aplt. Sealed App. vol. 7, at 444. The defendants' opening brief then directs us to pages 207–08 of the sealed appendix.³ While those two pages of the record contain eight pages of deposition testimony, the defendants point us to only one other specific statement that appears there: PHL's "investigation culminated with regard to [its] law department in December of 2008." Aplt. Br. 26 (quoting Aplt. Sealed App. vol. 4, at 207). Although the defendants don't explicitly state as much, they seem to suggest these two statements, taken together, establish that PHL "learned of the misrepresentations" in the application sometime "in December of 2008." Aplt. Sealed App. vol. 4, at 207; Aplt. Sealed App. vol. 7, at 444. And although "no precise date appears in the record," they reason, that means PHL acquired the requisite facts no later...