Sun Life Assurance Co. of Canada v. Individually

• Decision Date: 16 March 2011
• Docket Number: Civ. No. 09–498–SLR.
• Parties: SUN LIFE ASSURANCE COMPANY OF CANADA, Plaintiff,v.Jonathan S. BERCK Individually and as Trustee of the Daniel Berman Insurance Trust, Dated April 25, 2007, and Steven Lockwood, Defendants.
• Court: U.S. District Court — District of Delaware

770 F.Supp.2d 728

SUN LIFE ASSURANCE COMPANY OF CANADA, Plaintiff,

v.Jonathan S. BERCK Individually and as Trustee of the Daniel Berman Insurance Trust, Dated April 25, 2007, and Steven Lockwood, Defendants.

Civ. No. 09–498–SLR.

United States District Court, D. Delaware.

March 16, 2011.

David P. Primack, Esquire of Drinker Biddle & Reath LLP, Wilmington, DE. Of Counsel; Jason P. Gosselin, Esquire and Jonathan D. Pavlovcak, Esquire of Drinker Biddle & Reath LLP, Philadelphia, PA, for Plaintiff.John T. Dorsey, Esquire and Michele Sherretta Budicak, Esquire of Young Conaway Stargatt & Taylor, LLP, Wilmington, DE. Of Counsel: Julius A. Rousseau, III, Esquire, James M. Westerlind, Esquire, and Eric A. Biderman, Esquire of Herrick, Feinstein LLP, New York, NY, for Defendants.

MEMORANDUM OPINION

SUE L. ROBINSON, District Judge.I. INTRODUCTION

On July 8, 2009, plaintiff Sun Life Assurance Company (“Sun Life” or “plaintiff”) filed the present action against defendant Jonathan S. Berck (“Berck”), trustee of the Daniel Berman Insurance Trust (the “Berman Trust”). (D.I. 1) Plaintiff alleges in its second amended complaint, filed on June 12, 2010, that defendants Steven Lockwood (“Lockwood”), and Daniel Berman (“Berman”) fraudulently procured a $4 million insurance policy (the “Berman Policy”) on the life of Berman, which policy lacked any insurable interest. (D.I. 28 at ¶¶ 34–35) ¹ Plaintiff seeks declaratory judgment that the policy is void ab initio, a retainment of some or all of the premiums paid under the Berman Policy, and damages. ( Id. at 14–16) The court has jurisdiction over this matter pursuant to 28 U.S.C. § 1332(a)(1). The court granted defendants' motion to dismiss plaintiffs amended complaint for failure to state a claim on June 30, 2010, with leave to amend. (D.I. 26) Plaintiff filed a second amended complaint on July 12, 2010. (D.I. 28) Presently before this court are defendants' motions (D.I. 35; D.I. 45; D.I. 47) to dismiss plaintiff's second amended complaint for failure to state a claim. For the reasons that follow, the court denies defendants' motions.

II. BACKGROUND

Plaintiff is a Canadian corporation with its principal place of business in Wellesley Hills, Massachusetts. (D.I. 28 at ¶ 6) Berck is a resident of New York who serves as trustee of the Berman Trust. ( Id. at ¶ 7) Lockwood is a resident of New York who serves as an insurance broker and was the insurance broker for the Berman Policy. ( Id. at ¶ 8)

Beginning in April 2007, Lockwood, Berck, and others helped Berman, who was 77 years old at the time, apply for a life insurance policy. ( Id. at ¶ 23–27) They allegedly sought the policy not for any legitimate insurance need but as a wagering contract to sell to stranger investors on the secondary life insurance market. ( Id.) The amended complaint describes this stranger-originated life insurance (“STOLI”) market as a phenomenon that has emerged over the last decade, comparable to unlawful wagering policies that have been around and disfavored by courts for centuries. ( Id. at ¶¶ 11, 13) In a STOLI arrangement, speculators collaborate with an individual to obtain a life insurance policy in the name of that individual and then sell some or all of the death benefit payable upon the death of the insured to stranger investors. ( Id. at ¶ 12) To maximize the expected rate of return, STOLI speculators often choose individuals who are over the age of 70 who have a net worth of at least $1 million to apply for the life insurance policies in which they will invest. ( Id. at ¶ 15) The speculators will usually pay for the insured's related costs, such as application fees and premiums, and may even pay the insured some compensation upon issuance of the policy. ( Id. at ¶ 17)

On or before May 7, 2007, plaintiff received a life insurance application from M & M Brokerage Services, Inc. (“M & M”), a company affiliated with Lockwood, requesting a $10 million policy on Berman's life. ( Id. at ¶ 23) Both the application and a financial questionnaire, signed by Berman, indicated that the purpose of the insurance coverage was for “[an] Estate Plan” and for “Estate Protection;” an attached Broker's Report, signed by Lockwood, indicated the “information [in the application] [was] complete and true to the best of his knowledge.” ( Id. at ¶¶ 29–32) In a letter dated May 23, 2007 and sent to Sun Life in support of the Berman Application, Lockwood advised Sun Life that he had been working with Berman and his accountants over the last six months and that Berman needed an additional $10 million in life insurance for estate tax planning purposes. ( Id. at ¶ 33)

The Berman Policy issued on June 6, 2007 with a face value of $4 million and included an incontestability clause that read in part: “In the absence of fraud, after this Policy has been in force during the lifetime of the Insured for a period of two years from its Issue Date, [plaintiff] cannot contest it except for non-payment of Premiums.” (D.I. 11, ex. A at 3, 14) The sole named owner and beneficiary was the Berman Trust, which was ostensibly created on April 25, 2007 under Delaware state law. (D.I. 28 at ¶ 24) The contract was signed in Wilmington, Delaware, and the policy was issued on a Delaware policy form and delivered to the Berman Trust.² ( Id. at ¶ 25)

Defendant and others allegedly concealed from plaintiff their true intent to transfer interest in the policy to stranger investors. ( Id. at ¶ 36) Plaintiff now believes that premium payments on the policy, including the initial premium of $187,960, were funded directly or indirectly by complete strangers as part of a secondary market transaction and that some or all of the beneficiary interest in the policy was sold or reassigned upon or after issuance of the policy. ( Id. at ¶ 37, 40) Therefore, plaintiff asserts that the Berman Policy, as a STOLI arrangement, was void at the time of procurement because its true nature as a wagering policy was concealed; Berman did not initiate its procurement on his own and neither he nor others ever intended for any policy benefits to be paid to his spouse, relatives, or any person having a substantial interest in his life. ( Id. at ¶ 34)

III. STANDARD

In a diversity action, the court must first address the threshold issue of which law governs the rights and liabilities of the parties before it. For substantive issues, the court looks to the substantive law of the forum state in which it sits. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The forum state's choice of law doctrine is included within its substantive law. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496–97, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Kruzits v. Okuma Machine Tool, Inc., 40 F.3d 52, 55 (3d Cir.1994). Under the law of Delaware, the law of the place where an insurance contract was made governs the obligations imposed by such contract.³ Wilmington Trust Co. v. Mut. Life Ins. Co. of New York, 177 F.2d 404, 406 (3d Cir.1949).

In reviewing a motion filed under Federal Rule of Civil Procedure 12(b)(6), the court must accept the factual allegations of the non-moving party as true and draw all reasonable inferences in its favor. See Erickson v. Pardus, 551 U.S. 89, 94, 127 S.Ct. 2197, 167 L.Ed.2d 1081 (2007); Christopher v. Harbury, 536 U.S. 403, 406, 122 S.Ct. 2179, 153 L.Ed.2d 413 (2002). A court may consider the pleadings, public record, orders, and attached exhibits. Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384–85 n. 2 (3d Cir.1994).

A complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief, in order to give the defendant fair notice of what the ... claim is and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 545, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (interpreting Fed.R.Civ.P. 8(a)) (internal quotations omitted). A complaint does not need detailed factual allegations; however, “a plaintiff's obligation to provide the ‘grounds' of his entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id. at 545, 127 S.Ct. 1955 (alteration in original) (citation omitted). The “[f]actual allegations must be enough to raise a right to relief above the speculative level on the assumption that all of the complaint's allegations are true.” Id. Furthermore, “[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.” Ashcroft v. Iqbal, ––– U.S. ––––, 129 S.Ct. 1937, 1950, 173 L.Ed.2d 868 (2009). Such a determination is a context-specific task requiring the court “to draw on its judicial experience and common sense.” Id.

IV. DISCUSSION

Plaintiff's amended complaint seeks a declaration that the Berman Policy is void ab initio for lack of any insurable interest, and the remainder of plaintiff's claims are contingent upon the ability to obtain that declaratory relief. (D.I. 28 at ¶¶ 49–53) In their motion to dismiss, defendants argue that: (1) plaintiff is barred from asserting invalidity of the Berman Policy because the two-year contestability period has already expired; (2) even if plaintiff's claim is not barred by the incontestability clause, plaintiff has failed to sufficiently allege a lack of insurable interest; and (3) plaintiff's fraud claim against Berck in his capacity as a trustee must be dismissed. (D.I. 36 at 5, 11, 19)

A. Incontestability Clause

Two-year incontestability clauses are required in life insurance contracts by Delaware law, which provides:

There shall be a provision that the policy shall be incontestable after it has been in force during the lifetime of the insured for a period of not more than 2 years after its date of issue, except for (1) nonpayment of premiums, and (2) at the insurer's option, provisions relating to benefits in the...