Wells Fargo Bank, N.A. v. Malkin

Decision Date26 May 2022
Docket Number172, 2021
Citation278 A.3d 53
Parties WELLS FARGO BANK, N.A., as Securities Intermediary, and Berkshire Hathaway Life Insurance Company of Nebraska, Defendants/Appellants/Cross-Appellees, v. ESTATE OF Phyllis M. MALKIN, Plaintiff/Appellee/Cross-Appellant.
CourtSupreme Court of Delaware

A. Thompson Bayliss, Esquire, Stephen C. Childs, Esquire, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Ginger D. Anders, Esquire (argued), Donald B. Verilli, Jr., Esquire, Brendan B. Gants, Esquire, MUNGER, TOLLES & OLSON LLP, Washington, DC, for Defendant/Appellant/Cross-Appellee Berkshire Hathaway Life Insurance Company of Nebraska.

Stephen L. Caponi, Esquire, Matthew B. Goeller, Esquire, K&L GATES LLP, Wilmington, Delaware; Samuel O. Patmore, Esquire (argued), Jenea M. Reed, Esquire, STEARNS WEAVER MILLER WEISSLER ALHADEFF & SITTERSON, P.A., for Defendant/Appellant/Cross-Appellee Wells Fargo Bank, N.A.

Donald L. Gouge, Jr., Esquire, DONALD L. GOUGE, JR., LLC, Wilmington, Delaware; Gregory J. Star, Esquire (argued), Michael L. Miller, Esquire, Joseph M. Kelleher, Esquire, COZEN O'CONNOR P.C., Philadelphia, Pennsylvania, for Plaintiff/Appellee/Cross-Appellant Estate of Phyllis M. Malkin.

David J. Baldwin, Esquire, Peter C. McGivney, Esquire, BERGER HARRIS LLP, Wilmington, Delaware; John E. Failla, Mark D. Harris, Nathan R. Lander, Elisa A. Yablonski, PROSKAUER ROSE LLP, New York, New York; Steven O. Weise, Esquire, PROSKAUER ROSE LLP, Los Angeles, California, for the Delaware Bankers Association as amicus curiae in support of Appellants.

Stephen B. Brauerman, Esquire, BAYARD P.A., Wilmington, Delaware; Andrew C. Smith, Esquire, Adam Marcu, Esquire, PILLSBURY WINTHROP SHAW PITTMAN LLP, New York, New York, for the Institutional Longevity Markets Association as amicus curiae in support of Appellants.

Brian E. Farnan, Esquire, FARNAN LLP, Wilmington, Delaware; Steven Sklaver, Esquire, SUSMAN GODFREY LLP, Los Angeles, California; Ari Ruben, Esquire, SUSMAN GODFREY LLP, New York, New York, for Hua Nan Commercial Bank, Ltd., Hua Nan Investment Trust Co., Bank Sinopac, Taichung Commercial Bank, Ltd., Entie Commercial Bank, Ltd., KGI Bank Co., Ltd, and Mediatek USA Inc. as amici curiae in support of Appellants.

Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and MONTGOMERY-REEVES, Justices, constituting the Court en Banc.

TRAYNOR, Justice:

In a stranger-originated life insurance ("STOLI") scheme, a speculator contrives to purchase a policy on the life of a stranger. If the stranger dies before the value of the premiums paid by the speculator exceeds the death benefit of the policy, the speculator's bet pays off. STOLI policies violate Article II, § 17 of the Delaware Constitution, which prohibits most forms of gambling. They also offend the longstanding public policy of this State. Hence, 18 Del. C. § 2704(b) allows the estate of a deceased STOLI insured to "maintain an action to recover" the death benefit from its recipient. Additionally, this Court has confirmed that STOLI policies are void ab initio , never come into legal existence, represent a "fraud on the court," and can never be enforced.1

This case is a proceeding under Article IV, § 11(8) of the Delaware Constitution and Supreme Court Rule 41. It concerns two questions certified to this Court by the United States Court of Appeals for the Eleventh Circuit. Question One requires us to decide whether, when faced with an action brought by an estate under Section 2704(b), an innocent downstream investor in a STOLI policy, or its securities intermediary, may assert certain defenses under the Delaware Uniform Commercial Code. The Eleventh Circuit framed the inquiry as follows:

Question One : If an insurance contract is void under Del. Code Ann. tit. 18, § 2704(a) and PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust, ex rel. Christiana Bank & Trust Co. , 28 A.3d 1059, 1073 (Del. 2011), is the party being sued under § 2704(b), as a third-party purchaser of the contract and holder of the proceeds, entitled to assert either a bona fide purchaser defense under Del. Code Ann. tit. 6, § 8-502, or a securities intermediary defense under Del. Code Ann. tit. 6, § 8-115 ?

We conclude that, in the sui generis context of STOLI schemes, these defenses are not available. We therefore answer Question One in the negative:

Answer to Question One : No, because defendants to an action brought under 18 Del. C. § 2704(b) do not face an "adverse claim" as the Delaware UCC defines that term.

The second certified question asks us to decide whether downstream investors in a STOLI policy may sue to recover any premiums they paid. Question Two reads:

Question Two : If an insurance contract is void under Del. Code Ann. tit. 18, § 2704(a) and PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust, ex rel. Christiana Bank & Trust Co. , 28 A.3d 1059, 1073 (Del. 2011), can the party that is being sued under § 2704(b) recover premiums it paid on the void contract?

We answer this question in the affirmative:

Answer to Question Two : Yes, if the party being sued can prove its entitlement to those premiums under a viable legal theory.

In answering the certified questions, we stress that, although the Delaware UCC defenses implicated in this case do not apply in the sui generis context of a Section 2704(b) action to recover the proceeds of a STOLI policy, our reasoning does not affect their validity in other contexts.

I. FACTUAL AND PROCEDURAL BACKGROUND

In 2005, Phyllis Malkin was retired and living in Florida with her husband when she met Larry Bryan.2 Bryan was an insurance broker who, through a company called Simba, specialized in arranging non-recourse premium financing to fund the purchase of life insurance policies by seniors. Simba's business model has, unfortunately, become well known in both Florida and Delaware.3 We described it last year in Lavastone Capital LLC v. Estate of Berland :

As Simba pitched it, the transaction allowed clients to "create dollars today by using a paper asset, (a life insurance policy not yet issued from a major insurance carrier insuring your life)" by selling it on the secondary market. Clients did not need to put up any money upfront. Instead, they got nonrecourse loans to finance the transactions, which allowed them to make all necessary payments without tapping into personal funds. The only collateral for the loan was the life-insurance policy itself. Simba played the role of a broker in these transactions, reaching out to both the insurers and banks on behalf of its client.4

The Eleventh Circuit found that, before meeting Bryan, Malkin neither wanted nor needed life insurance. Instead, she was interested in Simba's "risk free opportunity to make money."

Working with Simba, Malkin eventually procured $13 million worth of life insurance. The $4 million policy at issue in this case was written by American General Life Insurance Company (respectively, the "Policy" and "AIG"). Another policy, written by Sun Life Assurance Company, was for $5 million (the "Sun Life Policy"). The Eleventh Circuit eventually found that, under Delaware law, the Sun Life Policy was an illegal wager on Malkin's life and was therefore void ab initio according to our decision in PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Trust .5 Thus, under Price Dawe and 18 Del. C. § 2704(a), Sun Life was not required to pay the death benefit.

Malkin procured the AIG Policy concurrently with the Sun Life Policy, working through Simba's typical process. As the Eleventh Circuit explained:

This involved Simba introducing its clients to Coventry Capital I LLC ("Coventry"), and Simba and Coventry worked together to get approval from an insurer, in this case American General Life Insurance Company ("AIG").... Coventry acted as the program administrator and servicing agent of a life insurance premium financing program in connection with LaSalle Bank. In that capacity, Coventry first approved a non-recourse premium finance loan[.] Coventry required Ms. Malkin to fill out various forms that were "not negotiable," including a document in which she appointed Coventry as her attorney-in-fact, with full authority to originate, service, or liquidate "any life insurance policies on [her] life[.]" Ms. Malkin also signed a loan application form with LaSalle Bank, for which Coventry acted as the program administrator[.] And the Malkins agreed that a trust would be established to hold insurance policies on Ms. Malkin's life.6

Bryan eventually confirmed that Simba had given Malkin a "take it or leave it deal[ ]" and that she did not personally decide to seek coverage from Sun Life or AIG.7 Neither did Malkin personally foot the bill for any premiums: those were covered by the non-recourse loans set up by Simba through Coventry and Lavastone.

As discussed, the loan that funded the premiums on the AIG Policy was secured only by the Policy itself. When that debt came due on June 16, 2008, Coventry informed Malkin's trust, which was administered by the Wilmington Trust Company, that it would foreclose on the AIG Policy unless Malkin paid off the $360,265.34 loan. True to the scheme's design, the trust agreed to relinquish the AIG Policy to Coventry instead of paying the debt.

During the next four years, the AIG Policy on Malkin's life changed hands several times. Appellant Wells Fargo Bank, N.A. ("Wells Fargo") acquired the Policy in 2012 as securities intermediary for Coventry and another entity.8 In 2013, appellant Berkshire Hathaway Life Insurance Company of Nebraska ("Berkshire" and, together with Wells Fargo, "Appellants") purchased the Policy, again with Wells Fargo as securities intermediary. The purchase was part of a sale of 125 policies from Coventry to Berkshire, and "Coventry represented to Berkshire that to its knowledge none of the policies was originated in connection with a STOLI transaction." 9

Berkshire acquired the Policy for $322,103 and then kept up with its premiums, paying $137,194.20...

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