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Sun Life Assurance Company Canada v. U.S. Bank N. A.

United States District Court, D. Delaware

February 25, 2019

U.S. BANK NATIONAL ASSOCIATION, as Securities Intermediary, Defendants.

          UNSEALED ON MARCH 4, 2019

          Thomas J. Francella, COZEN O'CONNOR, Wilmington, DE, Michael J. Miller, Gregory J. Star, Charles J. Vinicombe, Daniel P. Thiel, COZEN O'CONNOR, Philadelphia, PA Attorneys for Plaintiffs

          David J. Baldwin, Ryan C. Cicoski, POTTER ANDERSON & CORROON LLP, Wilmington, DE, John E. Failla, Nathan Lander, Elise A. Yablonski, PROSKAUER ROSE LLP, New York, NY Attorneys for Defendant U.S. Bank National Association



         Plaintiff Sun Life Assurance Company of Canada ("Sun Life" or "Plaintiff) filed this action in January 2017 against U.S. Bank National Association ("U.S. Bank" or "Defendant") and Lindsay Spalding-Jagolinzer ("Spalding"). (D.I. 1) In its complaint, Plaintiff seeks a declaratory judgment that a Sun Life insurance policy ("the Policy") brokered by Spalding and eventually sold to U.S. Bank lacked an insurable interest at inception and constitutes an illegal human life wagering contract. (D.I. 1 at ¶¶ 39-52) As such, Sun Life asks the Court to declare the Policy void ab initio under Delaware law. (Id. at 17)[1] Based on a settlement, the claims against Spalding have since been dismissed with prejudice. (D.I. 180)

         Presently before the Court are Plaintiffs and Defendant's cross-motions for partial summary judgment. (D.I. 131, 135) For the reasons set forth below, the Court will grant Plaintiffs motion deny Defendant's motion.[2]

         I. BACKGROUND

         Spalding is a Miami-based insurance agent who was appointed by several carriers to sell life insurance policies. (D.I. 130-2, Spalding Dep. at 15, 31-32, 40-43) In particular, she had a "Sales Representative Agreement" with Sun Life, whereby she would solicit applications for Sun Life policies in exchange for a fee. (Id. at 42-43, 149; D.I. 130-3 at 140-46 (A576-82)) Between 2005 and 2008, Spalding also worked with Coventry Capital Partners ("Coventry") on behalf of her clients to finance the premiums those clients had to pay on life insurance policies Spalding helped them obtain. (D.I. 130-2, Spalding Dep. at 15, 85-87, 95) Coventry's terms for agents and prospective insureds, including all rates and fees, were non-negotiable. (Id. at 119-20) Any time Spalding originated a policy financed by Coventry, she and Coventry split the commission 50-50. (Id. at 160) Spalding did not, however, have an exclusive arrangement with Coventry, so she would generally contact several premium finance companies on behalf of her clients. (Id. at 120)

         In late 2005, Harriet Sol, then aged 71, was referred to Spalding for the purpose of securing a life insurance policy. (Id. at 51-52) During their initial phone conversation, Spalding and Sol discussed life insurance options, including the concept of premium financing. (Id. at 54-56) Spalding informed Sol that in order to secure premium financing, Sol needed to have a net worth over $5 million; Sol indicated that she wanted to pursue premium financing. (Id.) Sol allegedly claimed that her net worth was about $ 10 million and that she had an annual household income of over $200, 000, and Spalding apparently accepted these statements as true. (Id. at 89-90, 142, 147-48) Spalding then obtained Sol's medical records, compiled an informal application, and submitted the application and records to Sun Life to secure a tentative offer for a policy. (Id. at 63-65) Sun Life made such an offer in late January 2006. (Id. at 65, 173-74)

         Within days of receiving the offer, Spalding's company, Spalding Financial Group ("SFG"), obtained life expectancy reports on Sol. (D.I. 132-15; D.I. 132-16) A few months later, Coventry obtained its own independent life expectancy report on Sol. (D.I. 132-17) Spalding has testified in deposition that her regular practice is to obtain such reports for any client over the age of 70, and that the reports are useful for clients who may consider selling their policy on the secondary market. (D.I. 132-3 at 79-82)

         In February 2006, Spalding received a Coventry Loan Proposal through Coventry's Premium Financing Program, offering Sol non-recourse premium financing. (D.I. 132-18) Spalding describes non-recourse premium financing as an option for individuals who do not want to be exposed to the risk of repaying a loan, since the policy being purchased with the loan is pledged as the sole collateral, capping the maximum amount of the borrower's loss at the value of the policy. (D.I. 132-3 at 88-89) For Sol's premium financing, Coventry enlisted LaSalle Bank National Association ("LaSalle") to serve as the lender. (D.I. 130-2, Spalding Dep. at 99, 149, 166; D.I. 130-3 at 185-90 (A621-26)) Coventry's initial Loan Proposal was for premium financing on a $5 million Sun Life policy, proposing that the borrower be the then nonexistent Harriet Sol 2006 Family Trust, Premium Finance Sub-Trust. (D.I. 132-3 at 89; see also D.I. 132-18; D.I. 132-19) Subsequently, the Loan Proposal was increased, in contemplation of Sol acquiring a $10 million Sun Life policy instead of $5 million. (D.I. 132-3 at 93-94)

         Sol eventually executed a series of trust agreements. Sol first established the Harriet Sol Irrevocable Insurance Trust ("Insurance Trust"), naming her daughter Jacqueline Sol ("Jacqueline") as the trustee and her husband and descendants - excluding her son, Allen Sol -as beneficiaries. (D.I. 132-22 at 26 (COVCAP584)) The Insurance Trust Agreement did not disclose any specific property being held in trust. (Id.) ("I have delivered or will deliver certain assets to the Trustee.")

         The Insurance Trust then created the Harriet Sol 2006 Family Trust ("Family Trust"), naming the Wilmington Trust Company ("WTC") as trustee and Sol's daughter Jacqueline as co-trustee, with the Insurance Trust as beneficiary. (Id. at 5) The Family Trust was nominally funded with $1.00. (Id.)

         The Insurance Trust also established the Harriet Sol 2006 Family Trust, Premium Finance Sub-Trust ("Sub-Trust") to secure premium financing for the life insurance policy. (Id. at 13, 24) As with the Family Trust, the Sub-Trust's trustees were WTC and Jacqueline and its beneficiary was the Insurance Trust. (Id. at 24)

         With the Insurance Trust, Family Trust, and Sub-Trust (collectively, the "Trusts") in place, Jacqueline, on behalf of the Insurance Trust, entered into a Settlor Non-Recourse Security Agreement ("Security Agreement") with LaSalle, pledging the Family Trust and Sub-Trust as collateral for a loan to purchase a $10 million life insurance policy. (Id. at 41-45) Pursuant to the Security Agreement, LaSalle agreed to provide non-recourse premium financing via a loan to the Sub-Trust in exchange for a note providing LaSalle an exclusive beneficial ownership interest in the Family Trust and Sub-Trust (as well as any assets, such as the Policy, held therein) should the loan default. (Id.) Coventry was named the servicing agent under the Security Agreement. (Id. at 42) Coventry was also granted an irrevocable durable power of attorney with respect to Sol regarding any policies owned by the Family Trust and Sub-Trust, the release of her medical records, and the originating or servicing of any life insurance policies in her name. (Id. at 47, 59)

         WTC, on behalf of the Sub-Trust, then executed a separate Note and Security Agreement ("Note Agreement") with LaSalle, which constituted the loan agreement between LaSalle and the Sub-Trust. (D.I. 132-26) Coventry again was named as the servicing agent of the Note Agreement. (D.I. 132-26 at 5 (COVCAP31)) The Note Agreement called for a 26-month loan of $355, 000 to the Sub-Trust with an interest rate of 17.24%, plus a $10, 262.92 "Origination Fee" and $5, 142.70 "Trust Administration Fee." (Id. at 10) In total, then, the premium finance agreement required payments of $508, 764.47 at maturity. (Id.) The Sub-Trust would have to pay back (or refinance) that amount in 26 months or the loan would go into default and the Policy, which was pledged as collateral, would be seized by LaSalle and/or Coventry.

         Once the financing was secured, on March 30, 2006 Maria Lacayo, an SFG employee, submitted a formal application to Sun Life for a $10 million life insurance policy. (D.I. 132-27) The application designated Harriet Sol as the insured and the Family Trust as the policy owner and beneficiary. (Id. at 5-7 (SunLife52-54)) The application represented that Sol had a net worth of $10 million, an annual household income of over $200, 000, and that the payor of the premium was the same as the owner of the policy, i.e., the Family Trust. (Id. at 7-8) Spalding certified that the answers provided in the application were "complete and true to the best of [her] knowledge." (Id. at 11)

         As part of the subsequent underwriting process, Sun Life sought to verify Sol's financial information. (D.I. 132-3 at 176-77; D.I. 132-9 at 254-56) To that end, SFG enlisted an outside vendor, Infolink, to prepare an inspection report. (D.I. 132-14; D.I. 132-29) SFG's Lacayo sent the Infolink inspector, Jewel Sutton (formerly Jewel Strader), an e-mail summarizing Sol's purported finances, but without any supporting documentation. (D.I. 132-29; D.I. 132-31 at 74-78) While Sutton claimed it is "unusual" for an agent to provide her the insured's financial information directly and she would typically disregard it, she also admits that in this case the information in her report matches exactly the information provided by SFG: that Sol had an annual income of over $200, 000 and a net worth of $10 million. (D.I. 132-14; D.I. 132-29; D.I. 132-31 at 77, 92-95)

         Upon receiving the inspection report, Sun Life requested further justification for a $10 million policy. (D.I. 132-32 at 8 (SunLife43)) Spalding responded that the estate planned to grow at a rate of 6% annually, resulting in a total estate of over $20 million by the end of Sol's 14-year life expectancy, thereby justifying a $10 million policy (after a 50% discount). (Id. at 7) Sun Life then approved the application (id. at 2), which was issued on May 12, 2006, with a Policy date of June 4, 2006 (D.I. 132-33). One week later, Sun Life received a wire transfer for the initial premium payment of $355, 000. (D.I. 132-34)

         As the 26-month maturity date on the Coventry/LaSalle loan approached, Spalding began exploring bridge loans, [3] to provide Spalding sufficient time to sell Sol's policy on Sol's behalf on the secondary market. (D.I. 132-3 at 196-99) Spalding and Sol eventually secured a bridge loan from W Capital Partners, LLC ("W Capital") and, soon thereafter, Sol's policy was sold on the secondary market to Life Settlement Solutions ("LSS") for $700, 000. (Id. at 198-201; D.I. 132-36; D.I. 132-37) Of those proceeds, $508, 764.47 was paid to W Capital to pay off the bridge loan (which had been used to pay Coventry/LaSalle the $508, 764.47 owed for the original loan) and the remaining $191, 235.53 was paid to Isidore Sol, Sol's husband. (D.I. 132-38; D.I. 132-39) LSS later sold the Policy to another entity before it was finally acquired by Defendant U.S. Bank in May 2009. (D.I. 137-2 Ex. 25 at 11, Ex. 35)

         Sol died on November 21, 2016. (Id. Ex. 38) U.S. Bank then filed a claim under the Policy with Sun Life. (Id.) However, by no later than May 10, 2007, Sun Life had become aware of Coventry's premium financing operations, which Sun Life considered to be part of a scheme to foster the issuance of Stranger-Owned Life Insurance ("STOLI") policies, [4] and Sun Life had at that time begun barring applications associated with Coventry. (D.I. 130-2, Foley Dep. at 109-10 (A212-13); D.I. 130-3 at ¶ 438-42) Sun Life further identified a series of "flags" that its underwriters should look for before approving policy applications that may be STOLI. (D.I. 130-3 at ¶ 437) Additionally, Sun Life had copied Spalding on an e-mail dated January 26, 2006 (prior to the submission of Sol's application) stating, "Sun Life does not accept non recourse premium financed business. If premium financed we would need complete details." (D.I. 132-32 at 13 (SunLife78)) By at least 2009, Sun Life had specifically placed Sol's Policy on a suspected STOLI list. (D.I. 130-2, Lawrence Dep. at 89-90 (A23-24))[5]

         Thus, after Sol's death, Sun Life, instead of paying U.S. Bank's claim, initiated a death claim investigation. (D.I. 132-10 at 138-41) As part of that investigation, Sun Life learned that Sol could not afford the premiums on her policy. (D.I. 132-41 at 9-10 (¶16)) In fact, according to her son, Richard, Sol had previously entered into bankruptcy and had been financially dependent on him since approximately 2000-2001. (Id.; D.I. 132-6 at 19-30) Considering Sol's Policy to be an illegal STOLI policy, Sun Life commenced this action.

         II. ...

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