Sun Life Assurance Co. of Can. v. Wells Fargo Bank, N.A.
| Decision Date | 17 August 2022 |
| Docket Number | 20-2339, No. 20-2472 |
| Citation | 44 F.4th 1024 |
| Parties | SUN LIFE ASSURANCE COMPANY OF CANADA, Plaintiff-Appellee, Cross-Appellant, v. WELLS FARGO BANK, N.A., as Securities Intermediary, Defendant-Appellant, Cross-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Brian D. Burack, Corey Thomas Hickman, Joseph Michael Kelleher, V, Michael J. Miller, Gregory J. Star, Daniel Paul Thiel, Charles J. Vinicombe, Cozen O'Connor, Philadelphia, PA, John Michael Moore, Drinker Biddle & Reath Llp, Philadelphia, PA, Daniel Arthur Cohen, Walden Macht & Haran LLP, New York, NY, for Plaintiff.
Daniel Arthur Cohen, Walden Macht & Haran LLP, New York, NY, Corey Thomas Hickman, Michael J. Miller, Cozen O'Connor, Chicago, IL, John Michael Moore, Drinker Biddle & Reath Llp, Philadelphia, PA, for Counter Defendant.
Timothy Robert Carwinski, Reed Smith LLP, Chicago, IL, Andrew James Dykens, Julius A Rousseau, Arent Fox LLP, New York, NY, for Defendant.
David Joel Chizewer, Roger Andrew Lewis, Goldberg Kohn Ltd., Chicago, IL, for Respondents.
Christopher John Drinkwine, Heyl Royster, Rockford, IL, Pro Se.
Before Easterbrook, Wood, and Hamilton, Circuit Judges.
This diversity action under Illinois law takes us to a corner of life insurance law dealing with insurable interests. For more than a century, courts in Illinois and across the country have tried to balance two general rules. First, the owner or buyer of a life insurance policy, at least at its inception, must have an insurable interest, typically some sort of family and/or financial interest in the continued life of the insured. If a stranger without an insurable interest buys insurance on another person's life, the purchase is treated as void ab initio as a perhaps dangerous wager on another's life. Second, though, a life insurance policy is a contract and can be a form of property. A person who buys a policy supported by an insurable interest may choose voluntarily to sell, give, or otherwise assign the policy to a third party who does not have an insurable interest in the insured's continued life. Compare Warnock v. Davis , 104 U.S. 775, 26 L.Ed. 924 (1881), and Cisna v. Sheibley , 88 Ill. App. 385 (1899) (), with Grigsby v. Russell , 222 U.S. 149, 32 S.Ct. 58, 56 L.Ed. 133 (1911), and Bloomington Mutual Life Benefit Ass'n v. Blue , 120 Ill. 121, 11 N.E. 331 (1887) ().
This case presents a twenty-first century iteration of the insurable interest problem, in an era with an active secondary market for life insurance policies and even securitization of pools of policies obtained in the secondary market. See generally PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust , 28 A.3d 1059, 1069–70 (Del. 2011) (). The district court found here that a $5 million life insurance policy was void because it had been purchased through an elaborate sequence of transactions designed to hide from the insurer the fact that there was no proper insurable interest. Sun Life Assurance Co. of Canada v. Wells Fargo Bank, N.A. , 2020 WL 1503641 (N.D. Ill. Mar. 30, 2020). The paper transactions took the form of a proper policy, but their substance amounted to a void wager on a stranger's life. The court also allowed the insurer to keep almost all of the premiums that had been paid while the policy was in force. In these cross-appeals, we affirm the district court's judgment, with the one exception of the small portion of the premiums that the district court ordered to be refunded.
At the age of 78, Robert Corwell seemed to buy a new $5 million life insurance policy on his life with an annual premium of nearly $300,000. His purchase was the visible part of a complex scheme of legal engineering by several companies to buy a life insurance policy so that its true nature as unlawful stranger-originated life insurance would not be detected. The key facts underlying the purchase and later sale of the policy here are not in dispute. That makes the case suitable for the parties' cross-motions for summary judgment, and our appellate review is de novo. E.g., Herzog v. Graphic Packaging International, Inc. , 742 F.3d 802, 805 (7th Cir. 2014). When considering cross-motions for summary judgment, at each stage of the analysis we must draw all reasonable inferences in favor of the party against whom the relevant motion was granted. Gill v. Scholz , 962 F.3d 360, 363 (7th Cir. 2020). We begin by laying out the undisputed facts, starting with Corwell's purchase of the life insurance policy from plaintiff Sun Life and the later assignment of that policy in the secondary market.
Around 2005, Robert Corwell's insurance broker told him about a program that would allow him to take advantage of the secondary market for life insurance policies. The program was run by a company called Coventry Capital I LLC and was created to increase the supply of life insurance policies available for purchase by investors on the secondary market. As we explain below, Coventry Capital's program essentially provided the insured with free life insurance for a couple of years before a nearly inevitable assignment of the policy to the strangers who had funded it from the beginning, at no expense or risk to the insured.
A policyholder like Corwell would receive a non-recourse loan to fund his policy premiums. In exchange, he assigned the policy as collateral for the loan. Non-recourse loans can be a legal way to fund insurance policies, but they also raise warning flags indicating that the policy may in fact be stranger-originated life insurance that amounts to a wager on a stranger's life.
The first step of the Coventry Capital program was for Corwell to apply to plaintiff Sun Life on May 31, 2006 for a $5 million life insurance policy on his own life. The application said that the Corwell Family Limited Partnership would be the primary beneficiary of the policy and Corwell would be the owner. Given Corwell's age and health, the expected premiums for the $5 million policy were almost $300,000 per year. The annual premium exceeded Corwell's adjusted gross income in almost every year the policy was in effect.
On Sun Life's premium eligibility worksheet, Corwell said that the premiums would all be paid by individual check, not premium financing. That was not true. Corwell paid for the policy with a non-recourse loan, i.e., secured only by the policy itself, so that he would not be personally liable for the borrowed money. Sun Life would not have issued the policy if it had known that Corwell would be using a non-recourse loan to pay the premiums. But on July 31, 2006, Coventry Capital sent Corwell a letter explaining that it would lend all the money needed to pay the premiums for Corwell's policy. It would do so through a loan it would administer on behalf of LaSalle Bank. Corwell would need to make the initial premium payment on the policy, but he would be reimbursed promptly as long as he signed over the Sun Life policy to LaSalle Bank as collateral for the loan. Corwell agreed and sent the signed collateral assignment form to Coventry around August 2, 2006. Two days later the Corwell Family Limited Partnership paid Sun Life the initial six-month premium of $147,059, and Sun Life issued the policy to Corwell on August 10, 2006.1
As promised, on October 31, 2006, LaSalle Bank provided the non-recourse loan to Corwell, by way of a Trust he created to hold the policy. In exchange, LaSalle Bank received a security interest in the policy. That same day, the Corwell Family Limited Partnership was also reimbursed for the initial premium payment. At that point, Corwell was not out even a penny. To Sun Life, though, he looked like the owner of a brand-new $5 million policy on his life for which he was willing to pay almost $300,000 per year. Under the terms of the loan, on paper Corwell continued to borrow money to pay the policy premiums, but he never saw a dime. The lender paid the money directly to Sun Life for the premiums.
The LaSalle Bank loan had a thirty-month term. In the lead up to the loan's maturity, Coventry sent notices to Corwell in February and March 2009. The notices explained that the loan was coming due at the end of April, that the balance was $569,572, and that Corwell had two options to satisfy the debt—either repay it himself or relinquish his interest in the insurance policy to LaSalle Bank. As everyone involved in the financing expected, Corwell decided in April 2009 to relinquish the policy to LaSalle Bank.
After Corwell relinquished the policy, the successor of LaSalle Bank's interest in the policy sold it on August 25, 2009. The buyer was Coventry First LLC, an affiliate of Coventry Capital. Coventry First was in the business of purchasing life insurance policies on the secondary market. It was acting under an agreement to procure policies exclusively for AIG Life Settlements LLC if the policies met certain criteria. The insured had to be 60 years old or older with a life expectancy of more than 25 months but less than 180 months, and the policy had to have been in force beyond the contestability and/or suicide period. (That period is no more than two years in Illinois, 215 Ill. Comp. Stat. § 5/224(1)(c) ; hence the 30-month term of the original loan to Corwell.)
Coventry First did not simply happen upon Corwell's policy in 2009 when LaSalle Bank's successor transferred it. Rather, Coventry First had been part of the original scheme in 2006, when Corwell was preparing to purchase a life insurance policy from Sun Life with the promise that his first premium would be reimbursed and that he would never need to pay another penny for the policy. Even back then, Coventry First was planning with AIG to purchase Corwell's policy when it would...
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