United States District Court, D. Delaware
REPORT AND RECOMMENDATION
SHERRY R. FALLON, Magistrate Judge.
In this declaratory judgment action filed pursuant to 28 U.S.C. § 2201 and Rule 57 of the Federal Rules of Civil Procedure, plaintiff PHL Variable Insurance Company ("Phoenix" or "plaintiff") seeks to adjudicate its rights and obligations under a life insurance policy (the "Policy") insuring the life of Phillip E. Skidmore ("Mr. Skidmore"). Specifically, Phoenix seeks a declaration that the policy is null and void due to the lack of an insurable interest at the Policy's inception. Presently pending before the court is a motion for judgment on the pleadings, filed pursuant to Fed.R.Civ.P. 12(c) by defendant Hudson Valley EPL, LLC ("Hudson Valley" or "defendant"). (D.I. 15) For the following reasons, I recommend that the court deny defendant's motion.
Plaintiff is a life insurance company incorporated and headquartered in Connecticut. (D.I. 1 at ¶ 2) Defendant is a Delaware corporation. ( Id. at ¶ 3)
The complaint alleges that stranger originated life insurance ("STOLI") policies have emerged in recent years, and are comparable to unlawful wagering policies that lack an insurable interest at inception. ( Id. at ¶¶ 8-9) The policies are not sought for legitimate insurance needs, but rather are manufactured for the benefit of third parties in the secondary insurance market. ( Id. at ¶ 8) 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 ¶¶ 7-8) To maximize the expected rate of return, STOLI speculators often target individuals who are elderly, and material information concerning the insured is often inflated or otherwise misrepresented in order to qualify for the most valuable policies with the highest death benefits at the lowest premiums. ( Id. at ¶¶ 10-11) To conceal the nature of such policies, the insured often designates the policy holder and/or beneficiary of the proceeds to be a shell third-party entity such as a trust, and then transfers the beneficiary interest to a STOLI entity after obtaining the policy. ( Id. at ¶ 12)
On October 16, 2007, the Phillip E. Skidmore Irrevocable Life Insurance Trust 2007-2 (the "Skidmore Trust"), by and through its trustee, U.S. Bank, N.A. ("U.S. Bank"), applied to plaintiff (the "Application") for a life insurance policy (the "Policy") in the amount of four million dollars for Mr. Skidmore. (D.I. 1 at ¶ 17) The Application represented that the Skidmore Trust, which was created on July 13, 2007, would be the proposed owner and sole beneficiary of the Policy. ( Id. ) The Application contained representations about Mr. Skidmore's net worth and income, the financing of premiums, and the applicant's intent not to transfer a beneficial interest to a third party. Plaintiff relied on such representations in determining whether Mr. Skidmore was insurable and qualified for the insurance requested. ( Id. at ¶ 18) Specifically, the Application represented that Mr. Skidmore had a net worth of $4, 500, 000, earned income of $200, 000, and other income of $25, 000. ( Id. at ¶ 19) The Application also represented that the Skidmore Trust did not intend to sell the Policy to a third party, the premiums would not be financed, and the Skidmore Trust planned to pay $165, 048 in first year premiums. ( Id. ) Mr. Skidmore signed the Application in Florida and U.S. Bank, on behalf of the Skidmore Trust, signed the Application in Minnesota. ( Id. at ¶ 21)
On December 3, 2007, Mr. Skidmore and the Skidmore Trust also executed a Statement of Client Intent Form (the "SOCI"), which requested material information regarding the purpose of the insurance, the source of funding for premiums, whether there was any understanding that a third party would obtain an interest in the Policy and whether the insured or related parties would receive inducements in connection with the purchase of the Policy. ( Id. at ¶ 22) Mr. Skidmore and the Skidmore Trust represented that premiums would not be financed, the funds used to pay premiums would be contributed by Mr. Skidmore, the Policy was not being purchased in connection with a program under which Mr. Skidmore had been advised of an opportunity to transfer the Policy, that there was no intent that the Policy would be sold or transferred to a third party, and that neither Mr. Skidmore nor the Skidmore Trust would receive cash or other inducement in connection with the Application. ( Id. )
Plaintiff offered the Policy to the Skidmore Trust with a planned first year premium of $165, 048 and a face amount of $4 million. ( Id. at ¶ 25) The offer was conditioned upon receipt of an executed Policy Acceptance Form and premium payment. ( Id. ) On March 28, 2008, Mr. Skidmore, U.S. Bank, and Mark Resnick, an insurance agent affiliated with R. Binday Plans & Concepts, Ltd., executed an Acceptance of Resignation of Trustee and Appointment of Successor Trustee Form ("Resignation Form"). ( Id. at ¶ 26) Plaintiff subsequently received the executed Policy Acceptance Form and received payment of the premium. ( Id. at ¶ 27)
On April 2, 2010, plaintiff received a Designation of Ownership form designating Marcy Trachtenberg, Resnick's sister-in-law, as the new owner of the Policy. ( Id. at ¶ 28) On July 6, 2010, plaintiff received a second Designation of Ownership form designating defendant as the new owner of the Policy. ( Id. at ¶ 29) The Designation of Ownership form was executed by Robert Schernwetter, in his capacity as president of Hudson Valley. ( Id. ) Mr. Schernwetter is the father-in-law of Michael Binday, the vice president of R. Binday Plans & Concepts Ltd. ( Id. )
On February 15, 2012, Resnick and Binday were indicted on numerous counts of mail and wire fraud, conspiracy, and obstruction of justice for orchestrating a $100 million STOLI scam. ( Id. at ¶ 30) The indictment alleged that Binday and Resnick fraudulently induced insurance companies to issue more than $100 million in life insurance coverage to straw buyers, which they then sold on the secondary market prior to the issuance of the policies. ( Id. at ¶¶ 30-32)
Mr. Skidmore passed away on March 6, 2012. ( Id. at ¶ 34) Plaintiff grew concerned that the Policy was procured in connection with a fraudulent STOLI scheme when it began processing Mr. Skidmore's death claim. ( Id. at ¶ 35) To verify that a valid insurable interest was present at the time of the Policy's issuance, plaintiff requested certain information from defendant regarding the application for the Policy and its subsequent transfer. ( Id. ) Defendant refused to respond to plaintiffs request for information, and plaintiff did not make a decision on the Skidmore death claim in the absence of that information. ( Id. )
Plaintiff determined that Mr. Skidmore did not have any significant net worth or income at the time he and the Skidmore Trust executed the Application, and Mr. Skidmore did not contribute the funds used to pay the Policy premiums, which were instead funded by individuals without an insurable interest in Mr. Skidmore's life. ( Id. at ¶¶ 37-38) Plaintiff further determined that the Policy was procured by a third-party investor who lacked an insurable interest in Mr. Skidmore's life, and there was an understanding that a party other than the Skidmore Trust would obtain a legal or equitable right, title, or interest in the Policy. ( Id. at ¶¶ 39-40) According to plaintiff, there was an understanding that Mr. Skidmore or a related party would receive cash or other inducement in connection with the application ...