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Sun Life Assurance Company of Canada v. Wilmington Trust Co.

United States District Court, D. Utah

March 13, 2017

SUN LIFE ASSURANCE COMPANY OF CANADA, Plaintiff,
v.
WILMINGTON TRUST COMPANY, Defendant.

          MEMORANDUM DECISION AND ORDER GRANTING [46] MOTION TO DISMISS

          David Nuffer United States District Judge

         District Judge David Nuffer Defendant Wilmington Trust Company moves[1] to dismiss all claims made in Sun Life Assurance Company's Second Amended Complaint.[2] The Complaint seeks declaratory relief that a life insurance policy is void. Sun Life responds in opposition.[3] Wilmington replies in support of its motion.[4]

         Wilmington argues that Sun Life's claims are barred by an incontestability statute[5] while Sun Life argues that the insurance contract is void ab initio.[6] Because the incontestability statute bars the claims and the policy is not void ab initio, Wilmington's motion is GRANTED. Sun Life's claims are DISMISSED WITH PREJUDICE.

         Table of Contents

         Background ..................................................................................................................................... 2

         Standard of Review ......................................................................................................................... 5

         Discussion ....................................................................................................................................... 6 1.

         The Incontestability Statute Extinguishes the Claims. . .......................................... 7

         2. The policy is not void ab initio. . ............................................................................. 7

         A. The policy does not violate the Utah Constitution and is not invalidated by the requirement that there be an insurable interest. . ................................... 8

         B. Sun Life cannot have the policy declared void ab initio because of invalidity of the Trust..................................... 12

         3. Barring Sun Life's Claims is Not an Endorsement of STOLI Schemes. . ............. 15

         Order ........................................................................................................................................... 16

         BACKGROUND

         On June 4, 2007, an application for a $6 million dollar universal life insurance policy on Florence Creer was received by Sun Life.[7] The application listed the 85-year-old Forence Creer as the insured, the Florence Creer Irrevocable Trust (“the Trust”) as the owner and beneficiary of the policy, and Joseph E. Creer, Florence's husband, as the trustee.[8] It was represented that Florence Creer had a net worth of $7, 895, 000 and annual income of $300, 000.[9] The initial premium payments of $115, 335 were paid through Creer Industrial Park in early October 2008, with the actual monies coming from Steven Heinz, the broker who facilitated the Creer policy application.[10] Heinz in turn, was reimbursed for these monies by investors.[11] Sun Life issued the policy after the payments were received.[12]

         On November 29, 2007, the Trust was amended to name the Daily and Knudson Law Group, LLC, as the trustee instead of Joseph Creer.[13] Robert Creer was named as beneficiary of the Trust.[14] The remaining balance for the first year premiums of $346, 005 was wired to Sun Life on December 31, 2007, from an unidentified source.[15] In July 2008, another $454, 222 was received by Sun Life, again through wire payments from an unidentified source.[16] Sun Life asserts that all the monies used to pay the premiums for the Creer policy were in fact made with monies from investors.[17] Sun Life asserts that Private Equity Management Group, Inc. (PEM Group) was the investor group funding the Creer Policy from the beginning.

         In April 2009, an action was brought by the United States Securities and Exchange Commission against the PEM Group and others who were allegedly engaged in the fraudulent offer and sale of securities including life insurance policies on the elderly.[18] The court supervising the PEM Group action froze the assets of the PEM Group and appointed a receiver.[19]The receiver was appointed to serve as trustee for all the life insurance policies and trusts associated with the PEM Group action, some 275 polices, which included the Creer Policy.[20]

         Eventually, control of these policies was transferred back to the PEM Group where the investors still participating in the Trust chose Wilmington Trust to act as a securities intermediary.[21] In October 2011, Wilmington Trust was designated as both owner and beneficiary of the Creer Policy.[22] Wilmington Trust has continued to administer the Creer Policy since 2011. After the death of Florence Creer on August 31, 2015, Wilmington Trust submitted a claim for the death benefit on the Creer Policy.[23] Sun Life performed a routine review of the claim and learned from Florence Creer's son Edward that no member of the Creer family provided any funds for the payment of premiums and that the Creer family could not have afforded the policy.[24] Sun Life also received a copy of the 2007 Creer tax return which showed total income for the year as $73, 116.[25] Sun Life asserts that the Creer policy was always controlled by investors, and created to give the appearance of a legitimate policy when in reality it was just a sham policy set up for the benefit of investors.[26] These arrangements are often referred to as Stranger Originated Life Insurance (STOLI) Schemes.

         Sun Life first filed a complaint on October 26, 2015.[27] Eventually, a second amended complaint was filed March 24, 2016, setting forth three causes of actions.[28] Sun Life seeks a declaratory judgement that the policy is void ab initio as an illegal wagering contract, [29] or in the alternative a declaratory judgement that the policy is void ab initio for lacking an insurable interest, [30] or a declaratory judgement that the policy is void ab initio because the Trust was invalid and lacked the capacity to contract.[31] Wilmington moves to dismiss this complaint.[32]

         STANDARD OF REVIEW

         Wilmington moves to dismiss Sun Life's action pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.

         Defendants are entitled to dismissal under Rule 12(b)(6) when the complaint, standing alone, is legally insufficient to state a claim for which relief may be granted.[33] When considering a motion to dismiss for failure to state a claim, the thrust of all well-pleaded facts in the complaint is presumed, but courts need not consider conclusory allegations.[34] Nor are the complaint's legal conclusions and opinions accepted, whether or not they are couched as facts.[35]“In evaluating a Rule 12(b)(6) motion to dismiss, courts may consider not only the complaint itself, but also attached exhibits, and documents incorporated into the complaint by reference.”[36]

         The United States Supreme Court has held that satisfying the basic pleading requirements of the federal rules “demands more than an unadorned, the defendant-unlawfully-harmed-me accusation. A pleading that offers ‘labels and conclusions' or ‘a formulaic recitation of the elements of a cause of action will not do.'”[37] “[T]he tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.”[38]

         “[N]aked assertions devoid of further factual enhancement, ”[39] do not state a claim sufficiently to survive a motion to dismiss.

         “But where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not ‘show[n]'-‘that the pleader is entitled to relief.'”[40] “[T]he mere metaphysical possibility that some plaintiff could prove some set of facts in support of the pleaded claims is insufficient; the complaint must give the court reason to believe that this plaintiff has a reasonable likelihood of mustering factual support for these claims.”[41] That is, “[t]he allegations must be enough that, if assumed to be true, the plaintiff plausibly (not just speculatively) has a claim for relief.”[42] “This requirement of plausibility serves not only to weed out claims that do not (in the absence of additional allegations) have a reasonable prospect of success, but also to inform the defendants of the actual grounds of the claim against them.”[43]

         Measured against this legal standard, Sun Life's second amended complaint fails to state a claim for the reasons stated below.

         DISCUSSION

         Sun Life's claims are barred by Utah's Incontestability Statute.[44] Sun Life's attempt to avoid the statute-arguing that for various reasons the life insurance policy is void ab initio-is meritless.

         1. The Incontestability Statute Extinguishes the Claims.

         Utah law states that after a life insurance policy has been in force two years, it is almost beyond challenge: “a life insurance policy is incontestable after the policy has been in force for a period of two years from the policy's date of issue.”[45] There are limited exceptions.[46] None apply.

         The policy was issued near the early part of October, 2007.[47] The complaint contesting the validity of the Creer policy was filed October 26, 2015. Because the incontestability statute cuts off the ability of Sun Life to contest the Creer policy after two years, Sun Life is barred from seeking to invalidate the policy. Sun Life is six years too late.

         Sun Life could have investigated and contested the policy within the first two years. Indeed, it may have even had information alerting it to the need to investigate and contest the validity of the policy.[48] Yet, for whatever reason, it chose to do nothing other than continue receiving significant premium payments.

         2. The policy is not void ab initio.

         Sun Life attempts to avoid the incontestability statute by arguing that the policy was void ab initio.[49] If true, Sun Life argues, the incontestability statute would not apply. It would be as if the policy never existed.

         The policy is not void ab initio because the policy was not a wagering contract and because Sun Life's challenge of the validity of the Trust has no merit.

         A. The policy does not violate the Utah Constitution and is not invalidated by the requirement that there be an insurable interest.[50]

         The Utah Constitution states, “The Legislature shall not authorize any game of chance, lottery or gift enterprise under any pretense or for any purpose.”[51] In Commercial Travelers' Ins. Co. v. Carlson, [52] the Utah Supreme Court, interpreting the anti-gambling provision of the Utah Constitution, stated The almost universally accepted rule is that a party insuring a human life must have an insurable interest therein if the insurance is effected for his own benefit, or the policy will be void; and he must prove such interest in order to recover, since public policy does not permit one having no insurable interest to procure a policy of insurance upon the life of a human being, and pay the premiums as a speculation, or on a chance of collecting the insurance money.[53]

         In other words, one person cannot make an insurance wager on the life of another unless that person has “an interest in having the insured life persist, ”[54] i.e. an insurable interest. Without an insurable interest, it is unconstitutional gambling. As Justice Holmes said in Grigsby v. Russell, [55] “A contract of insurance upon a life in which the insured has no interest is a pure wager that gives the insured a sinister counter interest in having the life come to an end.”[56]

         Appropriately, Section 21-104 of the Insurance Code states, in part,

2(a) An insurer may not knowingly provide insurance to a person who does not have or expect to have an insurable interest in the subject of the insurance. (b) A person may not knowingly procure, directly, by assignment, or otherwise, an interest in the proceeds of an insurance policy unless that person has or expects to have an insurable interest in the subject of the insurance.[57]

         Yet Section 21-104 also states,

(6)(a) An insurance policy is not invalid because:
(i) the insurance policy is issued or procured in violation of Subsection
(2)[58]
The determinative question, then, is how does (6)(a) square with the Utah Constitution,

Carlson, and general common law expressed in Grigsby?

         Sun Life argues that 6(a) hinges on the difference between “knowingly” and “intentionally.”[59] The acts prohibited in Subsection (2) are those taken “knowingly”: “knowingly provide”[60] and “knowingly procure.”[61] Sun Life argues that “[b]y including only knowledge and omitting any reference to intent in Subsection 2(b) of the Insurable Interest Statute, the Legislature manifested its view that intentional conduct falls outside this subsection [2(b)] and is treated differently.”[62] Sun Life continues, “Because the strangers in this case intentionally originated the Policy without an insurable interest, the second scenario (set forth at Subsection 2(b)) did not occur.”[63]

         Sun Life's argument is not persuasive. First, Sun Life fails to explain why the legislature would prohibit knowing conduct in 2(b) and ignore intentional conduct. The result of Sun Life's argument that 2(b) does not apply because the strangers acted intentionally in procuring a policy without an insurable interest also means that the saving provision of 6(a) does not apply and would allow Sun Life to claim the policy is invalid. While this explains Sun Life's argument, Sun Life does not explain why the legislature would make this distinction. Therefore, Sun Life's interpretation of Section 21-104 as excluding knowing conduct is not persuasive.

         Second, it is not clear how Sun Life's distinction between “knowingly” and “intentionally” is consistent with Sun Life's arguments that the policy is void ab initio because the owner had no an insurable interest. The alleged constitutional and common-law concerns Sun Life raises when a policy is procured without an insurable interest are just as significant if someone knowingly originated a policy ...


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