Protective Life Ins. Co. v. Hansen

• Decision Date: 19 January 2011
• Docket Number: No. 10–2085.,10–2085.
• Citation: 632 F.3d 388
• Parties: PROTECTIVE LIFE INSURANCE COMPANY, Plaintiff–Appellee,v.Megan HANSEN, Defendant–Appellant,v.B & K Enterprizes, Defendant–Appellee,andRobert K. Steuer, as Assignee of B & K Enterprizes, Intervenor–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

632 F.3d 388

PROTECTIVE LIFE INSURANCE COMPANY, Plaintiff–Appellee,

v.Megan HANSEN, Defendant–Appellant,

v.B & K Enterprizes, Defendant–Appellee,andRobert K. Steuer, as Assignee of B & K Enterprizes, Intervenor–Appellee.

No. 10–2085.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 29, 2010.Decided Jan. 19, 2011.

Sean D. Lanphier, Mallery & Zimmerman, Milwaukee, WI, for Plaintiff–Appellee.Ross A. Anderson (argued), Whyte Hirschboeck Dudek S.C., Milwaukee, WI, for Defendant–Appellee.Rachel L. Bachhuber (argued), Brian M. Maloney, Hanaway Ross, S.C., Green Bay, WI, for Defendant–Appellant.Robert K. Steuer (argued), Robert K. Steuer Law Office, Milwaukee, WI, pro se.Before BAUER, WOOD and WILLIAMS, Circuit Judges.BAUER, Circuit Judge.

Upon the death of Richard McDonald, Protective Life Insurance Company (“Protective”) filed this interpleader action, naming both Megan Hansen and B & K Enterprizes (“B & K”) as defendants. Hansen and B & K filed cross motions for summary judgment, each claiming to be the beneficiary of McDonald's one-million-dollar life insurance policy. The district court granted summary judgment in favor of B & K, and Hansen appealed. We have reviewed the district court's decision de novo, construing all facts and reasonable inferences in Hansen's favor. Finding no error, we affirm.

I. BACKGROUND

B & K is a Wisconsin limited liability company (“LLC”) that developed, built, owned, and operated a gas station and convenience store in Manitowoc, Wisconsin. McDonald was a founding member of the LLC, and he was also the manager and day-to-day operator of the station. Because lenders considered McDonald to be a “key man,” B & K was able to finance its operations by purchasing a one-million-dollar life insurance policy on McDonald's life and then assigning its interest in the insurance proceeds as security for various loans.

In 2007, McDonald's personal life was in disarray. He was in the midst of a divorce while living in a motel and dating Hansen, a friend of his ex-wife's daughter. His professional life was not faring much better. B & K was operating at a loss and members of the LLC suspected that McDonald was mismanaging the company. Confirming the members' suspicions, an audit of B & K's books revealed that McDonald appropriated $48,351.85 of B & K's funds, some of which was used to purchase items for Hansen and Hansen's brother.

Although B & K quickly removed McDonald as the manager of the station, his actions financially ruined the company. The members therefore hired Michael Culligan to wind up B & K and liquidate its assets, including the life insurance policy. At the time of liquidation, the policy had been paid through March 1, 2008, and although it had a cash surrender value of $217.50, B & K decided to dispose of the policy by simply letting it lapse. However, unbeknownst to B & K, Culligan signed and submitted a change of ownership form to Protective in January 2008, essentially asking it to immediately transfer ownership of the policy from B & K to McDonald. Subsequently, while believing himself to be the new owner of the policy, McDonald signed and submitted a change of beneficiary form in order to change the beneficiary of the policy from B & K to Hansen. McDonald then committed suicide.

According to Protective's terms and requirements, the owner of a life insurance policy may transfer ownership of the policy by signing and submitting a change of ownership form. However, while an LLC may submit this form with only one officer's signature, a corporation must submit this form with at least two corporate officers' signatures. Although B & K was unquestionably an LLC, the owner named on the policy was incorrectly recorded as “B & K Inc.” Thus, following its own policies, when Protective received the change of ownership form signed only by Culligan, it sent the form back to Culligan and explained that he would need to obtain the signature of another corporate officer and resubmit the form in order to transfer ownership of the policy. For unknown reasons, Culligan never did so. As a result, Protective never changed the owner of the policy.

Protective's terms and requirements also provided that only the owner of a policy can change the beneficiary of the policy. Thus, McDonald's attempt to change the beneficiary from B & K to Hansen is only effective if McDonald was the owner of the life insurance policy when he submitted the change of beneficiary form.

B & K is currently in receivership. The liquidation of B & K's assets did not generate enough proceeds to pay its secured debt, and all members of the LLC were therefore compelled to make substantial cash contributions to help pay off the debt. Although McDonald was still a member of the LLC and owned the largest portion of the LLC at the time of liquidation, he refused to make any cash contributions, thereby forcing other members to cover his share. The record reveals that non-member creditors currently have claims totaling approximately $83,000, while members have claims totaling approximately $400,000.

Upon Hansen's and B & K's cross motions for summary judgment, the district court entered judgment in favor of B & K. Hansen appealed, claiming that McDonald owned the policy and that Hansen is the rightful beneficiary of the policy.

II. DISCUSSION

We review the district court's grant of summary judgment de novo, construing all facts and reasonable inferences in Hansen's favor. Winsley v. Cook County, 563 F.3d 598, 602 (7th Cir.2009); Milwaukee Metro. Sewerage Dist. v. Am. Intern. Specialty Lines Ins. Co., 598 F.3d 311, 316–17 (7th Cir.2010). Summary judgment in favor of B & K is proper only if the pleadings, discovery materials, disclosures, and affidavits demonstrate no genuine issue of material fact such that B & K is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). Both parties agree that we should apply Wisconsin state law because a federal court sitting in diversity applies the substantive law of the state in which it is sitting. See, e.g., Allstate Ins. Co. v. Keca, 368 F.3d 793, 796 (7th Cir.2004).

A. B & K Is the Owner and Beneficiary of the Life Insurance Policy

Although Protective's records indicate that B & K is the owner and beneficiary of the policy, Hansen contends that in January 2008 McDonald became the owner of the policy and Hansen became the beneficiary of the policy. She reaches this conclusion by setting forth a series of interlocking arguments, which proceed as follows: (1) B & K and Protective made a mutual mistake when they named “B & K Inc” the owner of the policy, and we should reform the policy to read “B & K LLC” in order to reflect the contracting parties' true intentions; (2) after reforming the policy to read “B & K LLC,” we should find that Culligan transferred ownership of the policy from B & K to McDonald because an LLC may transfer ownership of its policy by submitting a change of ownership form that bears only one officer's signature; and (3) after finding that McDonald owned the policy, we must find that Hansen is the beneficiary of the policy because McDonald, as the owner of the policy, had the authority to name Hansen as the new beneficiary. Alternatively, should we reject this series of arguments, Hansen contends that McDonald owned the policy because B & K and McDonald formed a binding contract to transfer ownership of the policy, and Hansen can enforce this contract because she is an intended third-party beneficiary. We address each of these arguments in turn.

Hansen begins her series of interlocking arguments by asserting that B & K and Protective made a mutual mistake when they named “B & K Inc” the owner of the policy and that we should reform the contract to read “B & K LLC” in order to reflect the true intention of B & K and Protective. Under Wisconsin law, a contract may be reformed “when the writing that evidences or embodies an agreement in whole or in part fails to express the agreement because of a mistake as to the contents or effect of the writing.” Addison Ins. Co. v. Korsmo, 280 Wis.2d 558, 694 N.W.2d 510, ¶ 11 (Wis.Ct.App.2005) (citing Vandenberg v. Cont'l Ins. Co., 244 Wis.2d 802, 628 N.W.2d 876, 889 (2001)). Establishing the existence of a mutual mistake in an insurance contract, however, requires less proof than is needed for any other contract. Jewell v. United Fire & Cas. Co., 25 Wis.2d 509, 131 N.W.2d 276, 280 (1964). Putting our concerns with standing aside, we will assume without deciding that reforming the contract to read “B & K LLC” is proper.

Hansen next contends that once we reform the contract to read “B & K LLC,” we must find that Culligan transferred...