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Sun Life Assurance Company of Canada v. Wilmington Savings Fund Society FSB

Superior Court of Delaware

December 19, 2019

WILMINGTON SAVINGS FUND SOCIETY, FSB, Solely as Securities Intermediary Defendant. WILMINGTON SAVINGS FUND SOCIETY, FSB, Solely as Securities Intermediary Counterclaim-Plaintiff,

          Submitted: September 20, 2019

         Upon Defendant/Counterclaim-Plaintiff's Motion to Disqualify, GRANTED.

          Simon E. Fraser, Esquire and Thomas Francella, Esquire, Cozen O'Connor, Wilmington, Delaware, Attorneys for Plaintiff and Counterclaim-Defendant.

          Steven L. Caponi, Esquire and Matthew B. Goeller, Esquire, K&L Gates LLP, Wilmington, Delaware, Attorneys for Defendant and Counterclaim-Plaintiff.


          Paul R. Wallace, Judge

         Plaintiff Sun Life Assurance Company of Canada issued a life insurance policy in the amount of $6 million to Gordon Bartelstein in May 2007 (the "Policy"). The current beneficiary of the policy is EP Legacy Trust C ("EPL Trust"), whose beneficiary in turn is 2018 Life Settlement LP, previously known as Ocean Gate Life Settlement Program LP. Wilmington Savings Fund Society, FSB ("WSFS") is securities intermediary for the beneficiaries.

         This suit is Sun Life's attempt to obtain a judicial finding that the Policy is void as a stranger-oriented life insurance ("STOLI")[1] wager on Bartelstein's life procured for investors lacking any insurable interest therein. WSFS's counterclaims: (1) assert that the Policy was procured for Bartelstein's wife and validly assigned; (2) demand payment of the face policy benefits; and, (3) seek recovery for unfair trade practices and other related causes of action.

         The instant Motion to Disqualify concerns prior representation by Sun Life's current counsel, Cozen O'Connor ("Cozen") of Ocean Gate on matters allegedly related to the Policy.[2]


         The Court has the power to disqualify counsel for a conflict of interest it finds violates the Delaware Lawyers' Rules of Professional Conduct (the "Delaware Conduct Rules").[3] But "disqualification of counsel is an extreme remedy that should be employed only when necessary to ensure the fairness of the litigation process."[4]And disqualification motions are generally disfavored because they are too often filed for tactical reasons.[5]

         A motion to disqualify counsel must be grounded on clear and convincing evidence establishing a violation of the Delaware Conduct Rules.[6] Evidence is clear and convincing when it produces an abiding conviction that the truth of the contentions is highly probable.[7] This standard is more exacting than a mere preponderance, but less than beyond a reasonable doubt.[8]

         It is rare for a Delaware court to deny a party's engagement of its chosen counsel.[9] The conflict found before doing so must be "so extreme that it calls into question the fairness" of the proceeding.[10] Only potential unfairness towards a party can necessitate disqualification as opposed to a less extreme remedy.[11] Divining such unfairness requires "painstaking analysis of the facts."[12] And then the interests of fairness and of the right to chosen counsel must be weighed with "cautious scrutiny" before disqualifying counsel.[13]


         A. Concurrent Litigation and WSFS's Waiver.

         Cozen is WSFS's longstanding outside counsel and currently manages an ongoing matter for WSFS involving life insurance trusts ("Concurrent Litigation").[14]Just two days after Sun Life filed the original Complaint, WSFS learned that Cozen was representing Sun Life in this action.[15] Given the apparent incipient conflict of interest, WSFS contacted Cozen insisting that Cozen withdraw from representing Sun Life.[16]

         Following negotiations, the parties reached an agreement memorialized in a letter signed in August 2018 by John Olson of and on behalf of WSFS, and Jeff Cedrone of and on behalf of Sun Life (the "Conflict Agreement").[17] The Conflict Agreement included Sun Life's assurance that "[Sun Life] is not pursuing in any manner, and will not be pursuing in any manner, any claim(s) against [WSFS] for any money judgment or affirmative monetary relief."[18] Reciprocally, WSFS agreed that "there is no disabling conflict and [WSFS] will not claim or contend that Cozen O'Connor should be disqualified."[19]

         B. Cozen's Previous Related Representation of Ocean Gate.

         The alleged conflict of interest underlying the instant Motion to Disqualify Counsel arises not from the Concurrent Litigation, but from Cozen's prior representation of Ocean Gate.[20] Ocean Gate has since been renamed 2018 Life Settlement LP, but is the same entity and the current beneficiary of the EPL Trust and thus the ultimate beneficiary of the Policy.[21]

         Ocean Gate managed investment portfolios that included life insurance assets.[22] Ocean Gate's investment model involved acting through an aggregator to purchase beneficiary rights to an array of existing life insurance policies for which it had no prior contact with the insured, trustee, or beneficiary.[23] Ocean Gate contends in this suit that it became the ultimate owner of the beneficial interest in the Policy through this process.[24] The California Public Employees' Retirement System ("CalPERS") is the majority owner and secured creditor of Ocean Gate.[25]

         In order to perform due diligence when considering a 2010 loan to Ocean Gate, CalPERS and Ocean Gate retained Cozen as special regulatory counsel to evaluate the validity and enforceability of the life insurance policies in Ocean Gate's investment plan under the laws of various states.[26] Ocean Gate and CalPERS disclosed confidential information to Cozen in order to permit Cozen to fully analyze the legal status of these assets.[27]

         Cozen prepared at least five opinion letters (collectively, the "Opinion Letters") discussing, among other things, (i) the facts about Ocean Gate's proposed investment program, (ii) pertinent state insurance law principles such as insurable interest, transfer of insurance assets, and the contestability of life insurance policies, and (iii) existence of an insurable interest and the potential to collect death benefits under those policies.[28] The Opinion Letters provided analysis under the laws of Florida, California, New Jersey, New York, and Delaware.[29]

         WSFS advised Cozen of the newly-discovered Sun Life conflict of interest as to the prior matter in December 2018 and requested Cozen voluntarily withdraw.[30]Cozen refused, claiming that the Conflict Agreement waived any conflict of interest.[31] Cozen also noted that "in the event WSFS fails to abide by [the Conflict Agreement], Sun Life would obviously be unconstrained by the agreement and free to pursue claims directly against WSFS."[32]

         C. Cozen's Ethics Screen.

         Three days after WSFS revealed the alleged conflict, Cozen instituted a "computer lock-out" preventing Cozen attorneys representing Sun Life in this case (the "Sun Life Team") from accessing all files related to Cozen's previous work with Ocean Gate."[33] Additionally, all physical files related to the previous work were collected and delivered to Cozen's Conflicts Counsel.[34] Cozen also promptly prepared and circulated a formal ethics screen (the "Ethics Screen").[35] The Ethics Screen prohibits the Sun Life Team from accessing files and discussing confidential information related to the previous work with Ocean Gate, and is enforced through a disciplinary system whose sanctions can include dismissal.[36] The Court has absolutely no doubt that Cozen's attorneys have fully complied with the Ethics Screen.[37]


         A. Cozen's Representation of Sun Life Here Implicates its Duty of Loyalty to a Former Client.

         Delaware Conduct Rule 1.9 explains and governs attorneys' duties to former clients:

A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.[38]

         Therefore, to show that an opposing counsel's current representation would run afoul of Rule 1.9, the moving party must show that "(1) the lawyer had an attorney-client relationship with the former client; (2) the present client's matter is the same or substantially related to the first client's matter; (3) the interests of the second client must be materially adverse to the former client; and (4) the former client must not have consented to the representation after consultation."[39] WSFS presents sufficient evidence demonstrating that Cozen's representation of Sunlife meets all four criteria.

         1. The parties agree that Cozen represented Ocean Gate.

         Cozen admits it had an attorney-client relationship with Ocean Gate.[40] So, while the parties dispute whether Cozen represented CalPERS on this matter as well, that need not be resolved. The prior Ocean Gate representation alone satisfies the first Rule 1.9 element.

         2. The present action is substantially related to Cozen's previous work for Ocean Gate.

         Matters are substantially related under Delaware Conduct Rule 1.9 "if they involve the same transaction or legal dispute or if there otherwise is a substantial risk that confidential factual information as would normally have been obtained in the prior representation would materially advance the client's position in the subsequent matter."[41]

         Cozen's extensive investigation into the procedures Ocean Gate and the aggregators followed in acquiring life insurance contracts are closely related to how Ocean Gate behaved in acquiring the Policy. Sun Life alleges that when Bertelstein obtained the Policy in 2007, he misrepresented his wealth and income at the specific behest of the investors with whom he had contracted to secretly assign the Policy without informing Sun Life.[42] Cozen's inquiry into Ocean Gate's practices in 2010 thus potentially uncovered conduct that informs the truth or falsity of the allegations in this suit, constituting the same matter and not merely a similar one.

         3. Sun Life has materially adverse interests to its former client.

         Though Ocean Gate has undergone several name changes, the entity has not been dissolved, nor has any other legal event severed the continuity of its existence and interests.[43] Because Ocean Gate, under its new name, is the beneficiary of the policy Sun Life seeks to void, Sun Life's interests are directly adverse.[44]

         4. No purported consent from WSFS relieves Cozen of its Delaware Conduct Rule 1.9 obligations.

         The Conflict Agreement is a contract, and as such the first and most important interpretive source is its text.[45] The parties disagree as to the scope of conflicts disclaimed by the text. Sun Life urges a broader reading, denying all conflicts known and unknown. Even assuming Sun Life's broader reading is correct, the Conflict Agreement does not relieve the Court of its duty to ensure the fairness of the litigation process in this case and the appropriateness of counsel's representation under Delaware's rules.

         The Delaware Conduct Rules' prohibition against conflicts with past clients recognizes an exception only for informed consent in writing from the former client, not the later adverse party.[46] WSFS may be the now-adverse party, but Ocean Gate is the former client here. So it is hardly clear that WSFS was empowered to provide the consent needed. But that does not settle the further question Cozen has raised: Whether the Conflict Agreement bars WSFS from filing a motion to disqualify Cozen, or what position WSFS can take on any such motion?

         Granted, the Conflict Agreement language might support a broad reading requiring WSFS to refrain from filing such a motion and opposing one should others raise them.[47] But, when appropriate, the Court has the authority to consider disqualification sua sponte.[48] Had WSFS merely brought the later-discovered (i.e., post-Conflict Agreement) disqualification concern to the Court's attention, the Court would have had the parties provide the necessary background of the concern WSFS had uncovered and brief the disqualification issue. The vehicle by which this concern arrived to the Court, therefore, is of little moment. But the Court should, at least, address whether WSFS now has a contractual obligation under the Conflict Agreement to resist Cozen's disqualification.

         Each counsel before this Court is not only "a representative of clients" but also "an officer in the legal system" and when potential conflicts between these responsibilities arise they "must be resolved through the exercise of sensitive professional and moral judgment guided by the basic principles underlying the [Delaware Conduct] Rules."[49] These include transparency and forthrightness to the Court, independence of counsel's professional judgment, and a duty to aid in securing observance of professional duties required by others.[50] These principles would be contravened if a contract could bind parties and their counsel to take a particular position on an ethical dilemma ...

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