Brief of Appellant / Cross-Appellee

Conestoga Trust Serices, LLC v. Sun Life Assurance Company of Canada

Summary: This case concerns a Sun Life life insurance policy purchased by Erwin Collins in 2008. Erwin and his wife sold their interest in the policy to Life Asset. The policy was subsequently sold several times and was eventually purchased by Conestoga. When Erwin died, Sun Life refused to pay the proceeds of the policy to Conestoga claiming that the policy was a STOLI policy, and Sun Life instead filed suit alleging that the policy should be declared void. The parties filed cross motions for summary judgment. The district court denied Conestoga’s motion and granted Sun Life’s motion, ruling that the insurance agent who helped Erwin obtain and then try to sell the policy “improperly used Erwin Collins as a conduit to acquire a policy that Life Asset could not otherwise acquire.” Conestoga filed this appeal of both the grant of Sun Life’s motion and the denial of the company’s own motion.

 

Nos. 17-5877 & 17-5895

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT

 

CONESTOGA TRUST SERVICES, LLC, AS TRUSTEE
OF THE CONESTOGA SETTLEMENT TRUST
DATED MAY 1, 2010,

Appellant / Cross-Appellee

v.

SUN LIFE ASSURANCE COMPANY OF CANADA,

Appellee / Cross-Appellant

 

 

 

On Appeal from the United States District Court,

Eastern District of Tennessee, No. 3:14-cv-00539,

Honorable Pamela L. Reeves, Presiding

 

BRIEF OF APPELLANT / CROSS-APPELLEE

CONESTOGA TRUST SERVICES, LLC

 

STATEMENT IN SUPPORT OF ORAL ARGUMENT

Appellant respectfully requests oral argument. This appeal is appropriate for oral argument because: (a) this appeal is not frivolous; (b) the dispositive issues (concerning the validity of life insurance policies bought and sold on the secondary market) have not been authoritatively decided; and (c) given the somewhat complex facts and relatively lengthy record below[1], the decisional process would be significantly aided by oral argument. See FED. R. CIV. P. 34(a)(2).

 

STATEMENT OF JURISDICTION

The district court had diversity jurisdiction pursuant to 28 U.S.C. § 1332. Sun Life Assurance Company of Canada is a life insurance company organized under the laws of Canada with its principal place of business in the United States at One Sun Life Executive Park, Wellesley Hills, Massachusetts. Conestoga Trust Services, LLC, trustee of the Conestoga Settlement Trust, dated May 1, 2010, is a limited liability company organized and existing under the laws of Delaware and comprised of one member, which is a citizen of the State of Wyoming.

This Court has jurisdiction pursuant to 28 U.S.C. § 1291 because this is an appeal from the final judgment of a United States District Court that disposes of all parties’ claims.  The final judgment was entered July 12, 2017. (Judgment, RE 112 at 3035). Conestoga timely filed a notice of appeal on August 1, 2017. (Notice of Appeal, RE 113 at 3036-37).

 

STATEMENT OF ISSUES

The parties filed cross motions for summary judgment regarding whether a life insurance policy was void ab initio. The parties dispute whether there was already an agreement in place with a stranger investor to acquire the policy at its inception.

1.      Given that the evidence shows only that the insured (Erwin Collins) took out the policy on his own life intending to sell it but without any third-party already agreeing to buy it, did the district court err by failing to grant summary judgment in favor of Appellant Conestoga that the Policy was not void ab initio – because the insured’s unilateral intent to find a buyer would not defeat a valid insurable interest which existed at inception since the insured took out the policy on his own life and placed it in a trust with his wife as the sole beneficiary.

2.      Alternatively, given there was summary judgment evidence—favorable to the non-movant Conestoga—that the eventual third-party buyer did not procure the Policy and had not agreed to purchase or pay anything for the Policy at its inception, did the district court err by granting summary judgment in favor of Appellee Sun Life that the policy was void ab initio.

 

I.  STATEMENT OF THE CASE

A.      Overview.

This case concerns a Sun Life life insurance policy (“the Policy”) that Erwin Collins (“Erwin”) took out on his own life in 2008. (Complaint, RE 1 at 1-12; Answer & Counterclaim, RE 71-1 at 984-1010).[2] Appellant Conestoga now owns the Policy and seeks to recover the proceeds, and Appellee Sun Life alleges the Policy should be considered a “stranger-originated life insurance policy” (or “STOLI”) and thus void (See id.).

As detailed below, the record shows that, with the help of his insurance agent, Erwin took out two insurance policies, apparently in hopes of selling them for a profit. But Erwin did so without any preexisting agreement with an investor/buyer. One of his policies sold after it was issued, and one did not.

Specifically, Erwin took out one of the policies with Pacific Life (“the Pacific Life Policy”) and did not find a buyer.[3]  However, the Sun Life Policy did eventually find a buyer.  After the Policy issued, Erwin and his wife Ann (“the Collinses”) sold their interest in it to Life Asset G, LLC (“Life Asset” or “the Fund”). (Agreement, RE 73-8, 1203). Years later, Conestoga acquired the Policy. (Complaint, RE 1 at 4).

When Erwin died, Sun Life refused to pay the proceeds of the Policy at issue to Conestoga and instead filed this suit alleging the Policy should be declared void ab initio. (Id. at 1-12). The parties filed cross motions for summary judgment. (See Conestoga’s Amended Motion for Summary Judgment, RE 72 at 1013-15, and Supporting Memorandum, RE 73 at 1016-1335; Sun Life’s Motion for Summary Judgment, RE 74 at 1336-38, and Supporting Memorandum, RE 75 and 76 at 1339-2211).[4] The district court denied Conestoga’s motion and granted Sun Life’s motion. (Opinion, RE 111 at 3018-3034)

The insurance agent who helped Erwin obtain and then try to sell the two policies was named Gene Houchins. The district court concluded that “Houchins improperly used Erwin Collins as a conduit to acquire a policy that Life Asset could not otherwise acquire.” (Id. at 3028). In reality, the Collinses profited from the policies Erwin took out and were hardly a “conduit” for others.  The Collinses were paid $82,000 by the buyer when the Policy sold for $107,000 (the remainder was a commission for the agent’s help). (Settlement Statement, RE 76-50 at 2148; Form 1099, RE 76-51 at 2205). And, Ann will receive $900,000 from the other policy Erwin took out. See Section I(E), infra, at p. 8.

Significantly, the district court reached its conclusion that Erwin was just a “conduit” without hearing from any of the three parties it named: Erwin, Houchins, or Life Asset. Erwin is dead, Houchins refused to testify[5], and, significantly, Sun Life chose not to ask any questions of anyone representing Life Asset.

Instead, testimony regarding Life Asset’s acquisition of the Policy came almost exclusively from David Wolff, who acted as a go-between for the insurance agent Houchins and Life Asset. Apparently Houchins (not Erwin or Ann) approached Wolff about the possibility of Life Asset buying Erwin’s Policy before it issued. However, Wolff testified that Life Asset did not make an actual offer to buy the Policy until after the Policy was issued, that he was not aware of Life Asset ever making an offer to buy a policy before it had issued, that Life Asset was under no obligation to buy Erwin’s Policy when it issued, that Life Asset had nothing to with procuring Erwin’s Policy, that Life Asset did not pay anything to anyone for Erwin’s Policy to issue, and that Life Assert did not agree to buy the Policy until it could be shown to be already in force. (Wolff Deposition, RE 73-12 at 1324-29). There was no evidence contradicting Wolff’s testimony regarding Life Asset.

Conestoga argued that, accepting Wolff’s testimony (and other evidence favorable to Conestoga as the non-movant) as true and drawing all reasonable inferences in Conestoga’s favor, Sun Life did not establish as a matter of law that Erwin and Life Asset had any preexisting agreement for Life Asset to acquire the Policy. Even applying an opposite standard (i.e., drawing inferences in favor of Sun Life for purposes of Conestoga’s own motion), the evidence showed only that, before the Policy issued, the Collinses were hoping to sell the Policy after it issued with the help of agent Houchins, and Houchins was hoping to help his client Erwin accomplish this through his contact with Wolff, but no buyer had already agreed to buy it.

Nonetheless, the district court entered judgment for Sun Life. (Opinion, RE 111 at 3018-3034; Judgment, RE 112 at 3035). Conestoga timely filed a notice of appeal. (Notice of Appeal, RE 113 at 3036-37). Conestoga appeals both the grant of Sun Life’s motion and the denial of Conestoga’s motion. (Id.)  Sun Life has filed a cross appeal as to the district court’s ruling that Conestoga should be paid back the premiums it paid on the Policy. (Notice of Cross Appeal, RE 115 at 3041-42).

B.      Erwin and Ann Collins.

Erwin, a retired real estate investor, was married to Ann.  (Ann’s Deposition, RE 73-2 at 1050-1051). A neighbor introduced Erwin to Gene Houchins, an insurance agent. (Id. at 1056).

Erwin eventually took out two policies on his life with Houchins as agent. (Gordillo Deposition, RE 73-9 at 1216, 1232). One was issued by Sun Life, “the Policy” at issue herein, and the other was issued by Pacific Life (“the Pacific Life Policy”). (Id.)

Houchins helped Erwin set up life insurance trusts to hold both polices. (Id.). Ann has verified her husband’s signature (and her own signature) on the pertinent insurance and trust documents. (Ann’s Depo, RE 73-2 at 1065, 1070). Beyond that, Ann explained that “Erwin took care of all this stuff; I didn’t.” (Id. at 1091).

Erwin named The Erwin A. Collins Irrevocable Life Insurance Trust – 2008 (“the Trust”) owner of the Sun Life Policy. (Policy and Application, RE 76-10 at 1695–1748). Erwin named his wife Ann sole beneficiary of the Trust. (Trust, RE 73-3 at 1103).

A second trust, the “Erwin A. Collins Family Insurance Trust,” was named owner of the Pacific Life Policy, and Ann was again named beneficiary. (Gordillo Deposition, RE 73-9 at 1216, 1222, 1232, 1238, 1256). Maria Gordillo was named Trustee for both of these trusts. (Id.; Trust, RE 73-3 at 1103).

C.      The Trust and Trustee.

As to the Sun Life Policy, Erwin’s Trust authorized “the Trustee to purchase or to receive by transfer from [Erwin] one or more life insurance policies on [his] life […] and to hold the same as an investment of the trust[.]” (Trust, RE 73-3 at 1104). Sun Life acknowledges the use of such a trust to own the Policy is “common.” (Wilkosky Deposition, RE 73-4 at 1131).

The Trustee, Maria Gordillo, “worked for the property management company that managed the building where Mr. Houchins, the son, and [Eugene] Houchins, the father, officed.”  (Gordillo Deposition, RE 73-9 at 1256). Houchins asked Gordillo “to serve as a trustee on a simple insurance trust” for the Collinses and Gordillo agreed. (Id.).

Gordillo’s understanding was that the purpose of the trust and policy was to provide life insurance “on the life of Erwin for the benefit of Ann.” (Id. at 1257). Gordillo was “not aware of anyone [being] involved in the application for or obtaining of the policy […] other than [herself], Erwin, Ann, Houchins and possibly Ms. Pennington.” (Id.).[6]

Gordillo explained that, to her knowledge, the “first involvement” of Life Asset (the eventual buyer of the Policy) was “when they bought the beneficial interest in the trust in June of 2008.” (Id. at 1257).   Gordillo did not recall “any discussions prior to June 2008 […] about any potential sale of the policy or an interest in the trust[.]” (Id. at 1258).

Despite serving as Trustee, Gordillo’s control over the Policy was strictly limited by the Trust. (Trust, RE 73-3 at 1105, ¶ IV(C) “Limitations on Powers”).  Specifically, Gordillo could not make “any transfer [of the Policy], change of ownership or change of beneficiary thereunder without the prior written consent of every Named Beneficiary.”  (Id. at ¶ IV(C) “Limitations on Powers). Erwin’s wife Ann was the only named beneficiary. (Id. at 1103).

D.     The Collinses sell the Sun Life Policy before Erwin’s death.

As discussed below, after the Policy was in force, Life Asset made an offer to buy Ann’s interest in the Sun Life policy (Offer letter, RE 76-1 at 1177). Thereafter, Life Asset and the Collinses did reach an agreement. (Agreement, RE 73-8, 1203).

E.      Ann will collect proceeds from the other policy taken out by the Collinses – the Pacific Life Policy.

Erwin’s Pacific Life Policy was not sold. Following Erwin’s death, Pacific Life filed an interpleader in California to resolve competing claims to the policy by Gordillo, as trustee, and a premium finance company. (Interpleader, RE 73-10 at 1261). A settlement followed summary judgment rulings in favor of the trust/Gordillo. (Order granting trust/Gordillo’s MSJ, RE 73-10 at 1277-1287; Order announcing settlement, RE 73-10 at 1288-1291). As a result of the settlement reached by Gordillo, Ann will receive $900,000 from the Pacific Life Policy. (Gordillo Deposition, RE 73-9 at 1222).

F.      Life Asset, the eventual buyer.

As to the Policy at issue, Sun Life has known since at least the beginning of 2016 that the beneficial interest in the Trust was eventually purchased from the Collinses by Life Asset. (Wilkosky Deposition, RE 73-4 at 1145). However, Sun Life never deposed or even attempted to depose anyone from Life Asset.

G.     David Wolff/Iron Ore Capital.

The sale and transfer of the Policy to Life Asset was brokered by insurance agent Houchins through David Wolff, who ran Iron Ore Capital and had contacts with parties who purchased policies. (Wolff Deposition, RE 73-12 at 1298, 1303). Houchins and Wolff apparently worked together on 12 relatively similar transactions. (Id. at 1305).

Wolff described the process “in connection with these 12 transactions […] from the time that Mr. Houchins or Bonded Life first contacted [him] with a potential purchase opportunity and the purchase was completed[.]” (Id. at 1305-1309). Wolff explained that sometimes before and sometimes after a policy had been issued Houchins might forward a policy “illustration”[7] and a life expectancy report to him. (Id.). Wolff testified he would then forward that information on to Life Asset (Wolff called it “the Fund”) and ask it for a “valuation.” (Id.). A “valuation” by Life Asset was “typically what they would pay,” “based on [the] information provided to it,” “if they saw something like this in the market at some point.” (Id. at 1306, 1324-1326). Wolff was clear that such an initial “valuation” was not an agreement to buy or sell anything on anyone’s part: “there were definitely policies that were submitted for consideration by the Fund that the Fund did not, ultimately, purchase.” (Id. at 1328). Indeed, Wolff was communicating with multiple insurance agents (not just Houchins) and saw “hundreds and hundreds, if not a thousand different illustrations” go through such a “valuation” process. (Id. at 1308-09). There were, in other words, policies that “Houchins submitted to [Wolff] that the Fund did not [thereafter] purchase.” (Id. at 1326). In fact, “[h]undreds were submitted [by Houchins] to [Wolff at] Iron Core and the Fund only purchased 12 of those[.]” (Id. at 1329). Similarly, there were also “policies and trusts that the Fund evaluated where the insured decided not to sell the beneficial interest in the trust in the policy.” (Id. at 1326). In short, obtaining a “valuation” through Wolff was hardly reaching an agreement to buy and sell.

Wolff said he would “relay [a valuation] to Houchins and then sometimes I would hear from him again on that valuation; sometimes I wouldn’t.” (Id. at 1305). To actually sell a beneficial interest to the Fund, the Fund first required, among other things, verification of coverage. (Id. at 1306-07). In other words, Life Asset only made offers to buy policies that were already in force:

Q. Are you aware of the Fund ever making a formal offer to buy a beneficial interest in a trust or to buy a life insurance policy prior to the time the policy was actually issued?

A. To my knowledge, no.

(Id. at 1327). Then, after a policy issued, there could possibly be an eventual agreement if the parties reached an agreement:

When I did hear from [Houchins], again, he would say, okay, my client is interested; my client has a policy that’s in force and is interested in selling the beneficial interests in the trust of his policy – or, sorry, in the trust. […] I then would get information from Houchins, such as a copy of a VOC, a verification of coverage, to make sure the policy was in force, a copy of the trust. And I’m sure there was a couple of other requirements or so that just escape me right now. And I would then send those on to the Fund, and if the Fund was interested in going through and purchasing the beneficial interests, they would send me contracts back to be sent to Houchins for him to fill out and his client to fill out.

(Id. at 1306 (emphasis added)).

The first “valuation” by Life Asset of Erwin’s Sun Life Policy at issue herein was made on March 24, 2008. (Id. at 1325). As with the other valuations obtained through Wolff, the “valuation” was not an offer; rather, “the Collins Trust and Collins Sun Life policy was just one of hundreds of trusts and policies that were submitted to Iron Core for consideration by the Fund.” (Id. at 1328; see also id. at 1324-25). In other words, as stated by Wolff, the March 2008 valuation “was not an offer” to buy the Sun Life Policy.  (Id. at 1324-25). Indeed, when the Policy was first issued, there was “no way” for Houchins or the Collinses “to know whether or not the Fund would ultimately purchase” it. (Id. at 1328).  “The Fund could have decided never to make a formal offer to purchase the beneficial interest in the Collins Trust” (id.)—just as neither the Fund nor any other investor decided to ever make a formal offer on the Pacific Life Policy Erwin took out with Houchins around the same time.

Neither Wolff nor Life Asset had any involvement with Erwin applying for the Sun Life Policy, with paying the initial premiums for the Policy, or otherwise with procuring the Policy:

Q. Did you ever have any involvement with procuring the Collins Sun Life policy? […]

A. No.

Q. Did you pay anything to anyone in connection with the issuance of the Collins Sun Life policy?

A. No.

(Wolff Deposition, RE 73-12 at 1329).

Q. To your knowledge, was the Fund involved in procuring the Collins Sun Life policy? […]

A. To my knowledge, no.

Q. Did the Fund, to your knowledge, pay anything to you or Mr. Houchins or Erwin prior to the issuance of the Collins Sun Life policy?

A. To my knowledge, no.

Q. To your knowledge, did the Fund pay anything to Sun Life in connection with the issuance of the Collins Sun Life policy?

A. To my knowledge, no.

(Id. at 1325).

Q. To your knowledge, did Mr. Houchins or anybody at Bonded Life have any direct communications with the Fund regarding the Sun Life policy?

A. Not to my knowledge.

(Id. at 1311).

Q. Did Mr. Houchins or the trustee of the Collins Trust or Mr. or Ann ever have any direct contact with the Fund, to your knowledge?

A. Not to my knowledge.

(Id. at 1327).

Q. [W]hen the illustration was generated and forwarded to you, before that occurred, did you or the Fund have any input into any of the variables that went into the illustration that was supplied by Mr. Houchins?

A. No, no.

(Id. at 1306).

Q. Do you know how Ms. Gordillo became the trustee of this Trust?

A. No.

[*  *  *  *]

Q. Did anybody — did you review or approve this Trust agreement?

A. No.

Q. To your knowledge, did the Fund review or approve this Trust agreement?

A. Not to my knowledge.

(Id. at 1316).

Q. Do you know who paid the initial premium that had to be paid to Sun Life in connection with the issuance of the Collins Sun Life policy?

A. No, I do not know.

Q. To your knowledge, did the Fund have any involvement with that?

A. To my knowledge, no.

(Id. at 1325).

H.     Life Asset and the Collinses reach an agreement.

Life Asset made an offer to the Collinses to buy their interest in the Policy on May 8, 2008. (Offer letter, RE 76-1 at 1177). Wolff was not “aware of any offer by the Fund to purchase the beneficial interest in the Collins Trust prior to” the May 8, 2008 offer. (Wolff Deposition, RE 73-12, at 1327).

The offer was subject to several “contingencies.”  (Offer letter, RE 76-1 at 1177). More specifically, Life Asset did not commit to going through with a transaction with the Collinses until after Life Asset independently assessed the Policy and Trust. (See, e.g., Closing Documents required by Life Asset, RE 76-50 at 2092-2201).  Life Asset required “Verification of Coverage including evidence of initial premium payment.” (Id. at 2092).  The record shows that, even after the Collinses had indicated their willingness to sell, Life Asset spent time and effort investigating the Policy, the Collinses, and the Trust before deciding whether it would go forward with acquiring the Policy. (See, e.g., documents produced by the Fund, RE 73-7 at 1179-1201). For example, Life Asset researched public tax lien and UCC Debtor filings (id. at 1179-1194, 1197-98), collected and reviewed Sun Life records regarding the Policy (id. at 1199-1201), and conducted a review of the Trust (id, at 1195-96). In other words, the record shows that Life Asset did just as Wolff described: after Houchins expressed his clients’ interest, Wolff “gathered information from Houchins, such as a copy of a VOC, a verification of coverage, to make sure the policy was in force, a copy of the trust” and other items and then Life Asset determined “if the Fund was interested in going through and purchasing the beneficial interests.” (Wolff Deposition, RE 73-12. at 1306).

There simply was no “pre-existing agreement” for Life Asset to acquire the Policy back when the Policy was procured and issued:

Q. Prior to June 10, 2008, are you aware of any obligations on the part of the Fund to purchase the beneficial interest in the Collins Trust or the Collins Sun Life policy?

A. No.

Q. Did the Fund pay anything to anyone prior to June 10, 2008, related to the Collins Trust or the Collins Sun Life policy?

A. Not to my knowledge.

Q. Were there any obligations on the part of the trustee of the Collins Trust, prior to June 10, 2008, to sell the beneficial interest in the Collins Trust to the Fund?

A. Not to my knowledge.

Q. Were there any obligations, prior to June 10, 2008, on behalf of Ann Collins or Erwin Collins, to sell the beneficial interest in the Collins Trust or the Collins Sun Life policy that you’re aware of?

A. Not to my knowledge.

(Wolff Deposition, RE 73-12, at 1326).

Q. Are you aware of any obligation that existed on the part of the Fund, to purchase the beneficial interest in the Collins Trust prior to the time the closing documents were signed related to the sale of that interest?

A. No.

Q. And is it your understanding that that transaction occurred after the Collins Sun Life policy was issued?

A. That’s my understanding.

(Id. at 1324).

Q. Prior to the closing of the transaction [in June 2008] whereby the Fund purchased the beneficial interest in the Collins Trust, to your knowledge, was the Collins Trust free to be sold to anyone else?

A. To my knowledge, yes.

(Id. at 1327).

I.       Gene Houchins.

The agent Houchins was apparently interested in making commission from sales on the secondary market for life insurance. At his deposition, Houchins declined to answer questions, asserting Fifth Amendment rights.[8] But Houchins is not a party herein and this case does not turn on whether Houchins lived up to his obligations to Sun Life.[9] Rather, the question is whether there was an agreement between the Collinses and a stranger investor that pre-existed the issuance of the Policy to sell/transfer the Policy to the stranger investor. On the relevant issue, the record includes better sources than Houchins that there was no such agreement—namely, the records of the eventual buyer itself and the testimony and records of Wolff, who was Houchins’ sole point of contact with the eventual buyer.

There is, however, other evidence from Houchins pertinent to the issue. In June 2008, Houchins executed an “Agent/Professional Attestation Letter” declaring that:

2.  Prior to or in conjunction with the issuance of the Policies, the undersigned did not represent to any person that the Purchaser or any of its affiliates had made any commitment, written or oral, or otherwise to Seller, the Trust or the Insured that the Purchaser or any of its affiliates would purchase the Policies or Seller’s Interest in the Policies or Trust, at any particular time or price or at all, and the undersigned has no knowledge of the Purchaser or any of its affiliates making any such commitment prior to or in conjunction with the issuance of the Policies.

[*  *  *  *]

8. To the best of the knowledge of the Agent, there was no formal or informal agreement, arrangement or understanding between the Purchaser and the Seller or any of their respective affiliates, to sell or assign ownership of the Policies or the Trust interest or beneficial interest in the Policies, prior to such Policies being in force.

(Attestation Letter, RE 76-13 at 1333-35).

J.      Nicole Coppock and her father-in-law.

Nicole Coppock says she and her husband were paid by Houchins for referring clients to his life insurance agency. (Coppock Declaration, RE 76-2 at 1519). They referred Erwin to Houchins. (Id. at 1521-1522).

The Coppocks were paid referral fees by Houchins for both policies Erwin took out with Houchins (id. at 1522), even though, as noted above, the Collinses only sold one of those policies to a third-party investor. In short, the Coppocks were paid by Houchins for referring Erwin for life insurance business.  The fact that the Collinses may have hoped to sell any policies issued is neither inappropriate or illegal.

Coppock says her father-in-law took out a life policy with Houchins and tried unsuccessfully to find a buyer. (Id. at 1520-21). Although she does not say whether her father-in-law was obligated to repay Houchins, she implies that Houchins funded an initial premium. (Id.). Given that her father-in-law’s policy was then not sold to any investor, a reasonable inference is that there was no investor who had already agreed to buy the policy before it issued. Coppock’s father-in-law’s experience is consistent with the evidence regarding Erwin and both his Pacific Life and Sun Life policies: the Collinses (and the agent Houchins) may have hoped they had identified a future buyer but no buyer had already agreed to buy any policies before they issued.  On the contrary, as noted above, the Pacific Life Policy never sold.  (See Section I(E) supra, at p. 8).  And, as detailed above regarding the Sun Life Policy at issue, Wolff testified Life Asset did not agree to buy the Policy until after it was issued and after Life Asset had conducted its due diligence to confirm whether it wanted to buy the Policy or not. (See Sections I(G)-(H), supra at pp. 9-18).

This case is, of course, about Erwin Collins and not Coppock’s father-in-law. Coppock had nothing to say about who was responsible for the premium on Erwin’s policies.  (Coppock Declaration, RE 76-2 at 1519-22). And, she had nothing to say about whether there was any agreement between the Collinses and any investor/buyer before either of Erwin’s policies issued. (Id.).

K.     Conestoga acquires the Sun Life Policy.

About five years after the Policy had issued, Conestoga acquired the Policy in April 2013 and since November 2013 has been listed as “record owner and beneficiary of the policy.” (Complaint, RE 1 at 4-5). Sun Life does not contend “that Conestoga had anything to do with the procurement of the policy” or “anything to do with any third party investor or wagerer” related to the Policy.” (Wilkosky Deposition, RE 73-4 at 144). There is no suggestion that Conestoga is anything but a good-faith purchaser for value. Since acquiring the Policy, Conestoga has paid $40,700 in premiums to Sun Life.  (Premium History, RE 76-14 at 1797).

 

II.  SUMMARY OF THE ARGUMENT

Appellant Conestoga is now the owner and beneficiary of a life insurance policy issued by Appellant Sun Life on the life of Erwin Collins. After Erwin passed away, Sun Life filed this action alleging the policy should be declared void ab initio as a “stranger-originated life insurance policy.” In reality, no third-party buyer (no “stranger”) procured the Policy, and there was no “preexisting agreement” with any such third-party when the Policy was procured.

With the help of his insurance agent, Erwin took out not one but two life policies and, it appears, Erwin and his agent hoped to eventually find buyers for both. After the policies were issued, one of the policies was sold (the Policy at issue) and the other one was not sold.

There was a valid insurable interest at inception of the Policy at issue because Erwin took out the Policy (on his own life) and placed it in a life insurance trust which both named his wife Ann as the sole beneficiary and specifically provided that the Policy could not be sold or transferred without Ann’s written consent. Even if Erwin did hope to sell the Policy, that would not defeat the valid insurable interest he and his wife had in his life at the inception of the Policy.

A policy is void ab initio if it is procured by a stranger investor who lacks an insurable interest in the insured’s life or if it is procured under a preexisting agreement, between an insured and a stranger, to transfer the policy to the stranger. Here, Sun Life argues the eventual buyer of the Policy, Life Asset, was such a stranger investor. However, the summary judgment evidence shows that Life Asset did not make an offer to buy the Policy until after it was issued; Life Asset did not make offers to buy any policies before they issued; Life Asset was under no obligation to buy the Policy when it issued; Life Asset had nothing to do with procuring the Policy; Life Asset did not pay anything for the Policy to issue; and Life Assert did not agree to buy the Policy until it could be shown to be already in force. (Wolff Deposition, RE 73-12 at 1324-29).

For purposes of Conestoga’s motion, viewing the evidence in the light most favorable to Sun Life, the Collinses intended to sell their interest in the Policy to Life Asset even before it issued.  However, that does not render the Policy void as an illegal wagering contract.  What controls in this case is the absence of evidence that Life Asset actually procured the Policy itself and the absence of evidence of any agreement between the Collinses and Life Asset already in place when the Policy was procured that Life Asset would buy the Policy.  Given undisputed testimony that Life Asset did not agree to buy the Policy until after it was already in force and that Life Asset did not procure the Policy, the Policy is not void ab initio, the judgment below should be reversed, and Conestoga is entitled to summary judgment in its favor.

Of course, summary judgment was not necessarily appropriate solely because the parties filed cross motions for summary judgment. Even assuming Conestoga is not entitled to judgment at this stage, the district court’s decision must still be reversed. Accepting as true and drawing inferences from the evidence favorable to non-movant Conestoga (such as the testimony that Life Asset did not procure the Policy and did not agree to buy the Policy until after it was already in force), there are, at the very least, genuine issues of material fact as to whether Life Asset initially procured the Policy and/or whether it was procured under a preexisting agreement to transfer it to Life Asset.  Sun Life was not entitled to judgment as a matter of law, the judgment below should be reversed, and this case should be remanded for trial.

 

III.  ARGUMENT

A.      The law does not prohibit a person from taking out a life insurance policy and selling it on the secondary market.

The Collinses eventually sold their interest in the Sun Life Policy to Life Asset. Of course, the law has long allowed one to transfer his or her interest in a life insurance policy to another who lacks an insurable interest in the insured’s life. See, gen. Volunteer State Life Ins. Co. v. Pioneer Bank, 327 S.W.2d 59, 64-65 (Tenn.Ct.App. 1959) (“a policy of life insurance is an assignable instrument”); Clement v. New York Life Ins. Co., 101 Tenn. 22, 46 S.W. 561, 564 (1898) (“when a policy has once been issued to a beneficiary legally entitled, he may assign it to another, who has no insurable interest”). As long ago explained by the Supreme Court:

[L]ife insurance has become in our days one of the best recognized forms of investment and self-compelled saving. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property. […] To deny the right to sell [one’s life insurance policy] except to persons having such an [insurable] interest is to diminish appreciably the value of the contract in the owner’s hands.

Grigsby v. Russell, 222 U.S. 149, 156, 32 S. Ct. 58, 59, 56 L. Ed. 133 (1911).

Even assuming arguendo that Erwin purchased the Policy with the intent of trying to sell it, such conduct would simply be “consistent with the public policy recognizing that life insurance policies are legitimate investments, as well as insurance.” PHL Variable Ins. Co. v. Bank of Utah, 780 F.3d 863, 870 (8th Cir. 2015) (emphasis in original), citing First Penn–Pacific Life Ins. Co. v. Evans, 313 Fed.Appx. 633, 636 (4th Cir. 2009) (Evans) (one’s unilateral intent to purchase a policy on his own life to exploit the secondary market for life policies does not make the policy void ab initio).  Further, as the Fourth Circuit has rightly noted, a standard based on an insured’s unilateral, subjective intent at the time he procured a policy “would be unworkable.” Evans, 313 Fed. at 636. See also, e.g.  Hartford Life & Annuity Ins. Co. v. Doris Barnes Family 2008 Irrevocable Trust, 552 F. App’x 664, 665 (9th Cir. 2014) (“There is no merit to Hartford’s contention that the Barnes Policy is void ab initio because the Barnes family always intended to sell it. […] [A] pre-existing intent to transfer life insurance policies ‘does not negate the fact that when the trust acquired the policies, they were supported by an insurable interest.’”) (citation omitted); Principal Life Ins. Co. v. Lawrence Rucker 2007 Ins. Trust, 869 F. Supp. 2d 556, 565 (D. Del. 2012) (“Lawrence Rucker”) (“[T]he intent of the policyholder alone to immediately transfer a newly purchased life insurance policy [is] insufficient to create a STOLI scheme[.]”); Principal Life Ins. Co. v. DeRose, No. 1:08-CV-2294, 2011 WL 4738114, at *3 (M.D. Pa. Oct. 5, 2011) (insured’s intent to sell policies is irrelevant to whether insurable interest requirement is satisfied at inception); PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Trust, ex rel. Christiana Bank & Trust Co., 28 A.3d 1059, 1076  (Del. 2011) (“Price Dawe”) (“[T]he insured’s subjective intent for procuring a life insurance policy is not the relevant inquiry.”); Sun Life Assur. Co. of Canada v. Paulson, 2008 WL 5120953, at *4 (D. Minn. Dec. 3, 2008) (insured’s intent to transfer policy when procured is irrelevant without evidence of an agreement, at the time the policy is procured, with a third party that the policy will be transferred to the third party).

B.      The Policy was not “stranger-originated” and is not void ab initio.

Although one may sell their own policy to a stranger, a stranger is not allowed to procure a policy on another’s life: “a policy taken out on the life of another in whom the named beneficiary who procures the policy to be taken out has no insurable interest is void as a wagering contract and against public policy.” Washington v. Atlanta Life Ins. Co., 136 S.W.2d 493, 494 (Tenn. 1940). Similarly, a policy nominally issued to a proper insured is void if it was in fact procured under a “preexisting agreement” to transfer the policy to the stranger investor. See Clement, 46 S.W. at 562.  As will be shown in this case, the Policy was neither procured by a stranger investor nor under any preexisting agreement with a stranger investor. The Policy is not void ab initio and the judgment below should be reversed.  At a minimum, genuine issues of material fact exist on these issues that must be determined by a jury.

1.      The policy was procured by Erwin and held by his life insurance trust, which named his wife Ann as the sole beneficiary and left her in control of any disposition of the Policy.

It is undisputed that Erwin signed the relevant Policy application and trust documents.  (Ann’s Depo, RE 73-2 at 1065, 1070). Life Asset (who would later buy the Policy) was not involved:

Q. Did you [Wolff] ever have any involvement with procuring the Collins Sun Life policy? […]

A. No.

(Wolff Deposition, RE 73-12 at 1329).

Q. To your knowledge, was the Fund [Life Asset] involved in procuring the Collins Sun Life policy? […]

A. To my knowledge, no.

(Id. at 1325).

Q. Did Mr. Houchins or the trustee of the Collins Trust or Mr. or Ann ever have any direct contact with the Fund, to your knowledge?

A. Not to my knowledge.

(Id. at 1327).

Q. [W]hen the illustration was generated and forwarded to you, before that occurred, did you or the Fund have any input into any of the variables that went into the illustration that was supplied by Mr. Houchins?

A. No, no.

(Id. at 1306).

Erwin created and named an irrevocable life insurance trust as owner, but he also named his wife Ann as that Trust’s sole beneficiary.  (Trust, RE 73-3 at 1103). “The creation of an irrevocable life insurance trust has become an established and commonly used federal estate planning technique.”[10] Tennessee, like other states, expressly recognizes the validity of so-called “unfunded” life insurance trusts:

Life Insurance. It shall not be necessary to the validity of any such trust agreement or declaration of trust that it have a trust corpus other than the right of the trustee to receive the insurance proceeds as beneficiary.

Tenn. Code Ann. §35-50-103.

Sun Life acknowledges it is “common” for such a trust to serve as owner of a life policy. (Wilkosky Deposition, RE 73-4 at 1131).  And, there was obviously nothing improper about Erwin naming his wife Ann as the sole beneficiary of his life insurance trust. See, gen., Marquet v. Aetna Life Ins. Co., 159 S.W. 733, 735 (Tenn. 1913) (“Husband and wife, beyond all question under the authorities, have each a reciprocal insurable interest in the life of the other.”); see also id. (“insurable interest …. is tested … as of the date of original contract”); Volunteer State Life Ins. Co. v. Pioneer Bank, 327 S.W.2d 59, 64 (Tenn. Ct. App. 1959) (insurable interest is “fixed at the inception of the policy”).

There is no evidence Life Asset had anything to do with creating the Trust or choosing the Trustee. All evidence is to the contrary:

Q. Do you know who [the Trustee] Ms. Gordillo is?

A. No.

Q. Did you ever have any communications with Ms. Gordillo?

A. No.

Q. Do you know how Ms. Gordillo became the trustee of this Trust?

A. No.

[*  *  *  *]

Q. Did anybody — did you review or approve this Trust agreement?

A. No.

Q. To your knowledge, did the Fund review or approve this Trust agreement?

A. Not to my knowledge.

(Wolff Deposition, RE 73-12 at 1316).

Significantly, the Trust places Erwin’s wife Ann, and not any investor, in control of the Policy. (Trust, RE 73-3 at 1103). Specifically, even the Trustee may not make “any transfer [of the Policy], change of ownership or change of beneficiary thereunder without the prior written consent of every Named Beneficiary”, i.e., Ann. (Id. at 1305, ¶ IV(C) “Limitations on Powers”).

It appears the initial premium payment was advanced by the insurance agent Houchins. However, there is no evidence the Collinses were not obligated to reimburse Houchins.  On the contrary, the record evidences that the Collinses were obligated to, and did, reimburse the agent. (RE 76-51 at 2203 (email from Houchins directing Collinses to pay $22,000 reimbursement)). Tennessee specifically permits insurance agents to loan premium funds. Tenn. Code Ann. § 56-37-114(3); see also Ga. Code Ann. § 33-22-16 (same).

In any event, in Tennessee, the ownership and validity of a life insurance policy is “not dependent upon who pays the premium for the insurance.” Haun v. Haun, 872 S.W.2d 186, 188 (Tenn. Ct. App. 1993), citing Peeler v. Doster, 627 S.W.2d 936, 940 (Tenn. 1982).  Rather, one who takes out a policy on his life “is possessed with all of the rights under such policy, and such rights are not dependent upon who pays the premium for the insurance.” Id. Thus, in Peeler, the Tennessee Supreme Court held:

Although Doster did pay the annual premiums, the policies were taken out by Peeler, who possessed all the rights incident to ownership including the right to change the beneficiary. Therefore, Robert N. Peeler was the legal owner of the insurance policies on his life.

Peeler, 627 S.W.2d at 940; see also Quinn v. Supreme Council Catholic Knights of Am., 41 S.W. 343, 345 (Tenn. 1897) (“It was lawful for Carter [who had no insurable interest in Quinn’s life] to advance the money to reimburse Quinn, and to keep alive [Quinn’s] insurance”).

In the present case, because the Policy was taken out by Erwin for the benefit of and subject to the control of his wife Ann as beneficiary of the Trust, the Policy is not void ab initio because money for the initial premium came from Erwin’s insurance agent. Indeed, this case is far easier than Peeler.  In Peeler, the party who paid the premium (Doster) was also the named beneficiary entitled to the policy’s benefit at Peeler’s death. Here, the agent (who was reimbursed by the Collinses!) never held any interest in the Policy’s benefit.

Citing a Delaware case, the district court stated that “[i]f a third party funds the premium payments by providing the insured the financial means to purchase the policy then the insured does not procure or affect the policy.” (Id. at 3028). However, Delaware has specific statutes which “require the insured to fund the premiums.” See Price Dawe, 28 A.3d at 1075, citing Del. Code Ann. tit. 18, §§ 2704(a) and 2705.  Again, in Tennessee, the ownership and validity of a life insurance policy is “not dependent upon who pays the premium for the insurance.” Haun, 872 S.W.2d at 188, citing Peeler, 627 S.W.2d at 940. Furthermore, even in Delaware, “Price Dawe does not foreclose an insured from borrowing money to pay for premiums.” Lawrence Rucker, 869 F.Supp.2d at 563-65 (holding fact issue as to whether insured borrowed money from agent for premium precluded summary judgment in favor of carrier arguing policy was STOLI, even though there was “no official loan agreement” between insured and agent).

The Policy was procured by Erwin for his trust, naming his wife Ann as the sole beneficiary and requiring her consent to any disposition of the Policy. While Erwin may have had every intention of selling it as a life settlement after issuance, such an intention would not change the fact that the Policy was not originally procured by any stranger investor.

2.      Even if the Collinses and their agent Houchins hoped to sell the Policy to Life Asset, there was no agreement between the Collinses and Life Asset when the Policy was procured that Life Asset would acquire the Policy.

The Policy was also not procured pursuant to any preexisting agreement with a stranger investor. The agent Houchins solicited a “valuation” from Wolff and later communicated what may have been the hope of the Collinses to sell the Policy through Wolff at that price. However, there is no evidence of any agreement between the Collinses and Life Asset before the Policy issued.  First, as to Erwin and Ann, there is no evidence they agreed to sell the Policy to Life Asset before the Policy issued.  Second, even assuming the Collinses were ready to sell, it is undisputed that Life Asset, the eventual buyer, had not already agreed to buy the Policy when it was being procured and when it first issued. To the contrary, the evidence is that Life Asset did not agree to buy the Policy until after first determining, among other things, that the Policy was already in force. (See, e.g., Sections I(G)-(H), supra, at pp. 9-18.).

A formal written contract is certainly not necessary to establish a “pre-existing agreement” with a stranger investor to procure a policy.  However, to be an “agreement,” there must be, at a minimum, “a meeting of the minds of the parties in mutual assent to the terms.” Johnson v. Cent. Nat. Ins. Co. of Omaha, Neb., 356 S.W.2d 277, 281 (Tenn. 1962) (emphasis added).

In contrast to the circumstances of this case, Clement illustrates an improper preexisting agreement to procure a policy. In that case, Clement and Kerr “had no insurable interest in the life of the deceased.” Clement, 46 S.W. at 564. Evidence at trial established that Clement and Kerr entered into an agreement with the deceased “prior to the delivery of the policy, and doubtless to the application” that Clement and Kerr would pay all costs of the policy, pay also for a separate policy to benefit the deceased’s wife and pay the deceased $25 all in exchange for the deceased’s agreement to obtain and then transfer the policy to Clement and Kerr. Id., at 562. The Clement court reasoned that “while this policy was taken out by the assured, payable to his executors, etc., it was done under a pre–existing agreement with Clement and Kerr that they would pay the premiums and the other considerations named, and have the benefit of the policy; and the assignment to them was in furtherance of this agreement, and it was therefore a wagering policy.” Id. at 564-565 (emphasis added).

In a case with similarities to the circumstances of Erwin’s Policy, Hartford Life & Annuity Ins. Co. v. Doris Barnes Family 2008 Irrevocable Trust, 552 F. App’x 664, 666 (9th Cir. 2014) (“Barnes”), the court found there was no preexisting agreement. The facts are detailed in the district court decision in Barnes. See 2012 WL 688817 (C.D.Cal. Feb. 3, 2012).  Husband and wife Donald and Doris took out an $8.75 million policy on the life of Doris.  2012 WL 688817, at *1. “Doris and Donald intended to sell the life insurance policy after it went into effect.” Id. Doris established an irrevocable trust to own the policy, appointed her son Gary as the trustee, and named Donald as the beneficiary of the trust. Id.  “Donald and Doris received funds from [one of the insurance agents involved] to make the first premium payment.” Id.

The policy application was submitted to Hartford through an agency called Volios. Id. “[A]round the time Hartford issued the Policy to the Trust, a principal at Volios contacted a hedge fund, KBC Financial Products, Inc. (“KBC”), about a possible sale of the Policy.”  Id. at *2.  “About two months after the first premium for the Policy had been paid, Donald signed documents effectuating a transfer of his beneficial interest in the Trust to KBC.” Id.

Hartford filed suit to rescind the policy. Hartford argued that although the “transaction here was structured to appear legitimate,” it was in reality “a wagering contract in disguise, and it cannot withstand scrutiny” because “there existed an agreement to sell the Policy before the Policy became effective and therefore there was no insurable interest.” Id., at *4. The district court rejected Hartford’s arguments and entered judgment for the trust.  Id.

The Ninth Circuit affirmed:

[A]n insurance policy is an impermissible “gaming or wagering” policy only if there is no insurable interest at the time the policy takes effect.  […] At the time the Barnes Policy took effect, the trust, as the owner and beneficiary of the Policy, had an insurable interest in the life of its settlor. […] Donald Barnes, the beneficiary of the trust, had an insurable interest in the life of his wife. […] And Doris Barnes had an insurable interest in her own life.  […] Thus, the Barnes Policy is not void as a “gaming or wagering” policy.

Barnes, 552 F. App’x at 665 (emphasis added).

There is no merit to Hartford’s contention that the Barnes Policy is void ab initio because the Barnes family always intended to sell it. […] California […] permits owners of life insurance policies to transfer such policies to third parties who lack an insurable interest. […] And the California Court of Appeal recently explained that a pre-existing intent to transfer life insurance policies “does not negate the fact that when the trust acquired the policies, they were supported by an insurable interest.”

Id.

The courts also rejected Hartford’s claim that there was evidence of a preexisting agreement to transfer the policy.  The district court found:

As for the supposed agreement to sell the Policy before the Policy became effective, Hartford relies on an email sent from an employee of a subsidiary of KBC to a principal of Volios. The email, sent on May 1, 2008 represented that KBC could buy the Policy for “3% over premiums paid.” TUF ¶ 82. The email then stated “Please let me know if you would like to move forward.” Id. Hartford has also presented evidence of prior communications between KBC and Volios, but Hartford relies on the May 1 email to establish that an agreement existed prior to the Policy taking effect. […] Contrary to Hartford’s argument, the May 1 email is not evidence of an agreement. As the quoted portions indicate, the email was at most an offer to purchase the Policy at a certain price. Furthermore, it was Donald who ultimately sold his beneficial interest in the Trust, and he is not a party to this email. In short, the email does not establish that Donald had already sold his beneficial interest in the Trust to KBC before the Policy went into effect. Contrary to Hartford’s argument, the evidence before the Court shows Donald agreed to sell his interest on July 28 and that KBC paid Donald for his interest on August 7.

2012 WL 688817, at *5 (emphasis added). Affirming on appeal, the Ninth Circuit summarily rejected Hartford’s claim of a pre-existing agreement as “speculation”: “Hartford proffers no evidence from which a rational trier of fact could conclude that an agreement to sell the Barnes Policy was reached before the Policy took effect.” Barnes, 552 F. App’x at 666 (emphasis added).

In the Fourth Circuit’s Evans case, Moore took out seven polices on his life, totaling $8.5 million in coverage, over the course of about 30 days, undoubtedly with the intent to sell them as life settlements. Evans, 313 F. App’x at 635. “Shortly thereafter, Moore met with a viatical settlement broker to discuss selling the policies he had obtained[.]” Id. Within a few months, “Moore had sold at least six of his policies.” Id. One of these was issued by First Penn and eventually acquired by Evans. Id.

First Penn filed suit to rescind the policy, but the district court granted summary judgment in favor of Evans instead. Id., at 643-635. The Fourth Circuit affirmed:

The district court correctly held that in this case-in which Moore intended to sell the policy when he applied for it but where “[t]here is no evidence that anyone other than Moore was a participant in the scheme at the time Moore obtained the First Penn policy” – Moore had an insurable interest when he obtained the policy. […] No third party participated in the procurement of Moore’s policy and therefore no one was “wagering” on Moore’s life in violation of public policy.

Id., at 636 (emphasis added).

As these cases illustrate, to constitute an improper “wagering contract” because of an improper “preexisting agreement,” there must of course be an “agreement.”

Mutuality of obligation is essential to the validity of an executory bilateral contract … mutuality is absent when only one of the contracting parties is bound to perform, and the other party remains entirely free to choose whether or not to perform, and the rights of the parties exist at the option of one only.

Stinger Indus., LLC v. Hill-Rom Co. Inc., Hill-Rom Medaes, Inc., 23 Fed. Appx. 472, 474 (6th Cir. 2001) (emphasis added; citations omitted). “A promise that does not put any limitation on the freedom of the alleged promisor but leaves his future action subject only to his own will is illusory. It is not enforceable against the one making it nor operative as consideration for a return promise.” Id., citing Pippin Way v. Four Star Music Co. (In re Four Star Music Co.), 2 B.R. 454, 460 (Bankr.M.D.Tenn.1979); Loudenback Fertilizer Co. v. Tennessee Phosphate Co., 121 F. 298, 302 (6th Cir.1903) (holding that mutuality of obligation is essential for contracts based on mutual promises and that a contract is unenforceable where a party is free to perform or not perform the contract.); see also Ward v. Berry & Associates, Inc., 614 S.W.2d 372, 375 (Tenn. Ct. App. 1981) (“the mutual intent of the parties is not shown by mere evidence of how one party ‘felt,’ or ‘intended’ or ‘understood’ or ‘believed’ about the terms of an agreement”).

In this case, when the Policy was issued, the Collinses and Life Asset were both entirely free to choose to enter into an agreement or to choose not to.  First, as to the Collinses, “[p]rior to the closing of the transaction [in June 2008] whereby the Fund purchased the beneficial interest in the Collins Trust,” the Trust was “free” to sell its interest in the Policy “to anyone else.” (Wolff Deposition, 73-12 at 1327).  The Collinses and the Trustee were under no obligation to sell it to Life Asset. (Id. at 1326).

Second, and in any event, Life Asset remained completely free to buy or not buy the Policy when it was procured. In other words, even assuming arguendo that the Collinses had decided they wanted to sell their Policy to Life Asset before it issued, Life Asset had not agreed and thus there was no “mutual assent,” no “meeting of the minds,” no “mutuality of obligation.”

Despite providing a “valuation” of the Policy, “[t]he Fund could have decided never to make a formal offer to purchase the beneficial interest in the Collins Trust[.]” (Wolff Deposition, RE 73-12. at 1328). Life Asset’s “valuation” of the Policy “was not an offer” to buy it.  (Id. at 1324-25). Indeed, that Life Asset had provided a “valuation” made the Policy no different than “hundreds of trusts and policies that were submitted to Iron Core for consideration by the Fund.” (Id. at 1328; see also id. at 1324-25).

Wolff saw “hundreds and hundreds, if not a thousand different illustrations” go through the Fund’s “valuation” process (id. at 1308-09), and “there were definitely policies that were submitted for consideration by the Fund that the Fund did not, ultimately, purchase.” (Id. at 1328). There were numerous policies “Houchins submitted to [Wolff] that the Fund did not [thereafter] purchase.” (Id. at 1326). In fact, “[h]undreds were submitted [by Houchins] to [Wolff at] Iron Core and the Fund only purchased 12 of those[.]” (Id. at 1328-29). Wolff was not aware of Life Asset “ever making a formal offer to buy a beneficial interest in a trust or to buy a life insurance policy prior to the time the policy was actually issued[.]”  (Id. at 1327).

An initial “valuation” by Life Asset was simply based on “information provided to it” by would-be sellers and brokers. (Id. at 1325). Whereas, as the record herein shows, before actually agreeing to buy the Policy, Life Asset undertook its own independent research (see, e.g., documents produced by the Fund, RE 73-7 at 1179-1201), and required, among other things, “Verification of Coverage including evidence of initial premium payment.” (Closing Documents, RE 76-50 at 2092; see also Wolff Deposition, RE 73-12 at 1306 (explaining Life Asset required “verification of coverage, to make sure the policy was in force” before deciding “if the Fund was interested in going through and purchasing the beneficial interests”)). In short, at the time the Policy was issued, there was no obligation “on the part of the Fund to purchase the beneficial interest in the Collins Trust or the Collins Sun Life policy.” (Wolff Deposition, RE 73-12, at 1326; see also id. at 3124).

The ultimate question is always “whether the policy was initially procured by one without [a valid] insurable interest.” Aetna Life Ins. Co. v. Hooker, 62 F.2d 805, 806 (6th Cir. 1933) (emphasis added).[11] The focus is always on “initially procured” because Tennessee follows the general rule that whether there was an insurable interest in the life of the insured is always tested as of the inception of the policy. See, Marquet, 159 S.W. at 735; Volunteer State Life Ins. Co., 327 S.W.2d at 64. There is no vague, indeterminate period following inception when it is “too soon” for an insured to consider exploiting the secondary market such that his policy will be declared void ab initio if he does so.

Here, when the Policy issued, Life Asset remained free to buy or not buy the Policy. There was no agreement in place that Life Asset would buy the Policy. See, e.g., Stinger Indus., 23 Fed. Appx. at 474 (“mutuality is absent when […] the other party remains entirely free to choose whether or not to perform”). Even though it appears the Collinses were interested in selling policies as life settlements, there is no evidence Erwin or Ann were even aware of Houchins’ communications with Wolff much less that the Collinses reached an agreement with Life Asset to sell the Policy to Life Asset before it issued. In any event, as to Life Asset itself, the only evidence is that Life Asset had not agreed it would acquire the Policy when the Policy was procured and issued. Accordingly, regardless of whether the Collinses hoped and intended to sell, the Policy was not procured under any preexisting agreement with Life Asset and is not void ab initio.

C.      The district court failed to apply summary judgment standards.

1.      When faced with cross-motions for summary judgment, the court must evaluate each party’s motion on its own merits, taking care in each instance to draw all reasonable inferences against the party whose motion is under consideration.

This Court reviews a district court’s grant of summary judgment de novo. Savage v. Gee, 665 F.3d 732, 737 (6th Cir. 2012). Summary judgment is proper if the materials in the record “show[ ] that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “A dispute is ‘genuine’ “if the evidence is such that a reasonable jury could return a verdict for the non-moving party.” Miller v. Maddox, 866 F.3d 386, 389 (6th Cir. 2017) (citations omitted). “In deciding a motion for summary judgment, the court must view the factual evidence and draw all reasonable inferences in favor of the nonmoving party.” Banks v. Wolfe Cnty. Bd. of Educ., 330 F.3d 888, 892 (6th Cir.2003) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

Here, both parties demanded a jury (Complaint, RE 1 at 1, 12; Answer, RE 71-1 at 1010) and a jury trial was scheduled. (Scheduling Order, RE 17, at 141-148). “The filing of cross-motions for summary judgment does not necessarily mean that the parties consent to resolution of the case on the existing record or that the district court is free to treat the case as if it was submitted for final resolution on a stipulated record.” Taft Broadcasting Co. v. United States, 929 F.2d 240, 248 (6th Cir. 1991) (citations omitted). “Rather, the court must evaluate each party’s motion on its own merits, taking care in each instance to draw all reasonable inferences against the party whose motion is under consideration.” Craig v. Bridges Bros. Trucking LLC, 823 F.3d 382, 387 (6th Cir. 2016), quoting Taft Broadcasting Co., 929 F.2d at 248.  For example, it may be that “neither party met its burden of demonstrating that no genuine issue of material fact existed when all inferences were drawn, in turn, for the non-moving party, such that it would be proper for the case to go to trial.” B.F. Goodrich Co. v. U.S. Filter Corp., 245 F.3d 587, 593 (6th Cir. 2001). “Therefore, summary judgment was not necessarily appropriate solely because the parties filed cross-motions for summary judgment.” Id.

2.      Despite this case being at the summary judgment stage, the district court below improperly drew numerous inferences against the non-movant Conestoga and improperly failed to credit (or even address) evidence favorable to Conestoga.

The opinion below concludes that “undisputed facts support the conclusion Houchins improperly used Erwin Collins as a conduit to acquire a policy that Life Asset could not otherwise acquire.” (Opinion, RE 111 at 3028). Of course, the question at summary judgment is not whether “undisputed facts” support a conclusion for the movant. Instead, the question is whether, after drawing all inferences from the evidence in favor of the non-movant, “a reasonable jury could return a verdict for the non-moving party.” Miller, 866 F.3d at 389. Here, unquestionably, a reasonable jury could consider the facts (including “disputed” and “undisputed” facts) and conclude that Life Asset did not initially procure the Policy and that there was no preexisting agreement by Life Asset to buy the Policy. Indeed, the jury would only need to accept Wolff’s description of what happened in order to reach such conclusions.

In any event, the district court’s conclusion is not supported by “undisputed facts.” Rather, the district court’s summary judgment for Sun Life is built on a series of inferences improperly drawn against the non-movant Conestoga and on improperly ignoring evidence favorable to Conestoga. More specifically, the opinion below is based on: (1) the use of a trust to hold the policy, (2) email by the agent Houchins, (3) the payment of the initial policy premium, and (4) the policy being issued in Georgia. As to every issue, the district court applied the reverse of the correct standard; it credited evidence and drew inferences in favor of the movant Sun Life and against the non-movant Conestoga.

First, as noted, Erwin placed the Policy in the Trust, naming his wife Ann the sole beneficiary. The district court erroneously ruled that a life insurance trust can only satisfy the insurable interest requirement if it is otherwise “funded” by the grantor. (Opinion, RE 111 at 3028). The district court cited no authority for its position. (Id.). In reality, so-called “unfunded” life insurance trusts are not only commonplace throughout the country but expressly recognized in Tennessee.  (See Section III(B)(1), supra, at pp. 29-30). The Trust here was sufficiently “funded” with the Policy itself.  As the Policy was sold and transferred soon thereafter, it is hardly surprising the grantor and trustee did nothing more with this trust.

The district court also concluded that “Houchins controlled the Georgia trust with his friend Gordillo as trustee[.]” (Opinion, RE 111, 3024). But the actual evidence was that Gordillo had a “friendly professional relationship” with Houchins and they “didn’t hang out outside of work.” (Gordillo Deposition, RE 73-9 at 1224 (emphasis added)). Do any of us “control” others just because we have a “friendly professional relationship” with them? The district court’s leap from “friendly professional relationship” to “control” over the actions of “his friend” hardly constitutes looking at the evidence in the light most favorable to the non-movant.

More importantly, the district court ignored that the Trust itself left the beneficiary Ann in ultimate control of the Policy:

Trustee shall not purport to amend or modify the Policy in any way, including by making any transfer thereof, change of ownership or change of beneficiary thereunder without the prior written consent of every Named Beneficiary.

(Trust, RE 73-3 at 1105, ¶ IV(C) “Limitations on Powers”). Thus, even assuming Houchins “controlled” Gordillo, neither Houchins nor Gordillo could sell or transfer the Policy without Ann’s written consent.  A reasonable inference is that Houchins did not “control” the Policy, the Collinses did.

The district court also failed to draw inferences in favor of Conestoga from evidence regarding Gordillo’s role as trustee for Erwin’s Pacific Life policy. As noted above, evidence showed that Gordillo performed that role for Ann’s benefit and, at her deposition, Gordillo expected to be soon distributing policy proceeds to Ann. (Gordillo Deposition, RE 73-9 at 1222). In sum, the district court’s negation of the Trust was based on the reverse of the proper standard: the court ignored evidence favorable to the non-movant and drew inferences favorable to the movant.

The district court also misapplied the standard when examining whether an improper “preexisting agreement” between the Collinses and Life Asset was established as a matter of law. The opinion states that “four weeks before the policy was issued, Houchins informed Wolff that Mrs. Collins would sell her beneficial interest in the trust at 4% of face amount Life Asset had quoted.” (Opinion, RE 111, at 3024 (emphasis added)).  The evidence relied on by the district court is an April 3, 2008 email from Houchins (not Ann) stating: “Collins (SUN) – is being re-issued in GA. We will then close with you at 4%.” (Email from Houchins, RE 76-41). The district court drew two critical inferences from this email improperly in favor of the movant Sun Life.

First, and most inappropriately, the district court essentially treated this email from Houchins as the acceptance of an offer from Life Asset. In so doing, the district court ignored altogether (rather than accept as true, as it should have) Wolff’s testimony that there was no offer from Life Asset until the Policy was issued and that there was no agreement on Life Asset’s part to buy the Policy until, among other things, the Policy was demonstrated to be already in force. (See Wolff Deposition, RE 73-12 at 1324-25 (“valuation” of the Policy “was not an offer” to buy the Policy)); id. at 1327 (Wolff not aware of any offer by Life Asset to buy Policy prior to its May 8, 2008 offer); id. (Wolff not aware of Life Asset “ever making a formal offer to buy a beneficial interest in a trust or to buy a life insurance policy prior to the time the policy was actually issued”); id. at 1328 (when the Policy issued, there was “no way” for Houchins or the Collinses “to know whether or not the Fund would ultimately purchase” the Policy and “[t]he Fund could have decided never to make a formal offer to purchase the beneficial interest in the Collins Trust[.]”); see also, Documents produced by Life Asset, RE 73-7 at 1179-1201 (researching validity of policy and trust); Closing Documents, RE 76-50 at 2092-2092) (requiring, among other things, “Verification of Coverage including evidence of initial premium payment.”).  As to Sun Life’s motion, the proper standard is to accept Wollf’s testimony and other evidence favorable to Conestoga as true and draw all inferences therefrom in favor of Conestoga.  The district court failed to do so.

Second, the court improperly inferred that “we” included Ann.  In fact, there is no evidence that Ann (or Erwin) had any knowledge of Houchins’ communication with Wolff at this time. Furthermore, “we” may have meant, among others, Houchins and his father, Houchins and Wolff, and/or Houchins and Gordillo.[12]

Even setting aside those two improper inferences, the district court’s decision based on the April 3, 2008 email is improper for yet another reason.  The court’s finding incorrectly presupposes the Policy had not issued yet as of April 3, 2008. (Opinion, RE 111, at 3024 (“…before the policy had issued”).  The opinion applies a policy issue date of April 30, 2008 (id. at 3025) despite admissions and evidence that Sun Life issued the Policy back on March 13, 2008. (Complaint, RE 1 at 4, ¶¶ 15-16 (Sun Life asserting Policy issued and premium received March 13, 2008); Sun Life Premium Records, RE 76-11 at 1294 (stating initial premium received March 13, 2008)); see also Kay v. Minacs Group (USA), Inc., 580 Fed. Appx. 327, 331 (6th Cir. 2014) (“Factual assertions in pleadings …, unless amended, are considered judicial admissions conclusively binding on the party who made them.”). Viewing the evidence in the light most favorable to the non-movant, the Policy had already issued when Houchins sent the email in April.

The district court’s opinion also states that, “[w]ith the arrangements in place to sell the beneficial interest, Houchins paid the $27,000 initial premium to place the policy in force” on April 22 and 25, 2008. RE 111 at 3024-3025. Again, the district court ignored (rather than accepted as true as it should have) Wolff’s testimony that there was no offer, much less agreement, to buy the policy until after the Policy was issued and shown to already be in force. (See Sections I(G)-(H), supra at pp. 9-18). For that matter the district court also ignored the import of evidence that similar “arrangements [were allegedly] in place” for Coppock’s father-in-law and Houchins to try to sell a policy when it was issued and yet that policy did not sell. (See Coppock Declaration, RE 76-2 at 1520-21).[13] A reasonable inference is that Houchins helped clients (such as Coppock’s father-in-law) obtain policies in hopes of selling them even though no buyer had committed to buying.

More specifically, a reasonable inference from the full record in this case is that even though the Collinses (with the help of Houchins) had a desire before the Policy issued to sell it upon issuance, they did not have a commitment from a buyer. Indeed, as to the eventual buyer, Wolff explained that verification of existing coverage, among other things, was required before Life Asset would have agreed to acquire the Policy.  (See, e.g., Wolff Deposition, RE 73-12 at 1324-28).

The district court also improperly viewed evidence regarding the initial premium payment in the light most favorable to the movant Sun Life.  The opinion below claims there is “no evidence that Mr. Collins or any other person with an insurable interest in his life funded any of the premiums paid on the policy.” (RE 111, Opinion at 3029).[14] In reality, there is evidence that the agent advanced money for the premium (as is allowed) and that the Collinses were obligated to repay it. (RE 76-51 at 2203 (email from Houchins, directing Collinses to pay $22,000 reimbursement). As to the eventual buyer, Wolff testified that Life Asset did not pay or agree to pay anything to anyone for the Policy to issue.  (Wolff Deposition, RE 73-12 at 1324-29). A reasonable inference is that the Collinses were responsible for reimbursing their insurance agent for advancing the initial premium.  Yet the district court again applied a reverse standard: ignoring evidence favorable to the non-movant and drawing inferences favorable to the movant. The opinion thus states that Ann received only $60,000 from the buyer despite the relevant evidence showing that Ann received $82,000 from the buyer (See RE 76-50 at 2148 (Settlement Statement showing that of $107,000 paid by Life Asset, Ann received $82,000)); RE 76-51 at 2205 (1099 issued to Ann for $82,000). Ann later paid $22,000 to the Houchinses toward reimbursement of the premium advance. (RE 76-51 at 2203 (email from Houchins directing the Collinses to pay $22,000 reimbursement)).

Finally, Erwin applied for the Policy as a Georgia resident though he lived in Tennessee.[15] This may have been done because the agent Houchins was led to believe a Georgia policy would be more marketable to secondary buyers such as Life Asset.  Thus, it may be reasonable to infer that Houchins and/or Erwin were already thinking about trying to sell the Policy.  However, as noted above, under established law, Erwin was allowed to obtain a policy with the intent to try to sell it. (See Section III(A), supra, pp. 25-27). For purposes of Sun Life’s motion for summary judgment, it was not permissible for the district court to infer, as it clearly did, that Erwin had a preexisting agreement with a buyer to sell the Policy because Erwin applied as a Georgia resident. (See Opinion, RE 111 at 3024). Regardless of whether Houchins and/or Erwin believed they had a potential buyer to buy the policy after it was issued, there is no evidence the Collinses and Life Asset reached any agreement until after Erwin obtained the Policy and after Sun Life issued the Policy.

In sum, despite referencing the proper standard (see, id, at 3022: “at the point of summary judgment …[t]he Court does not weigh the evidence or determine the truth”), the district court improperly used the cross motions to try the case on the merits.  In so doing, the district court repeatedly disregarded evidence favorable to the nonmovant Conestoga and drew inferences in favor of the movant Sun Life.

D.     When proper standards are applied, Conestoga is entitled to summary judgment or, at the very least, fact issues preclude summary judgment for either party.

It is likely that Erwin did take out the Policy intending to sell it later and misrepresented such an intention on the application.  However, as Sun Life concedes, that would not mean there was already an agreement with a stranger investor:

Q. Does Sun Life contend that someone taking out — taking out a policy with the intent to later sell it and lying on the application about that intent, by itself, makes a policy an illegal wagering contract or a STOLI policy?

THE WITNESS: Those facts in itself, no.

(Wilkosky Deposition, RE 73-4 at 1138).

For purposes of Conestoga’s motion, viewing the evidence in the light most favorable to Sun Life, the Collinses intended to sell their interest in the Policy to Life Asset even before it issued.  However, that does not render the Policy void as an illegal wagering contract.  What controls in this case is the absence of evidence that Life Asset actually procured the Policy itself and the absence of any agreement between the Collinses and Life Asset already in place when the Policy was procured that Life Asset would buy the Policy. Wolff’s testimony that Life Asset did not agree to buy the Policy until after determining it was already in force and his testimony that Life Asset had nothing to do with procurement of the Policy precludes any finding that the Policy was an illegal wagering contract.  The Policy is not void ab initio, the judgment below should be reversed, and Conestoga is entitled to summary judgment in its favor.

Alternatively, “summary judgment was not necessarily appropriate solely because the parties filed cross-motions for summary judgment.” B.F. Goodrich, 245 F.3d at 593. “Rather, the court must evaluate each party’s motion on its own merits, taking care in each instance to draw all reasonable inferences against the party whose motion is under consideration.” Craig, 823 F.3d at 387, quoting Taft Broadcasting Co., 929 F.2d at 248.  At the very least, for all the reasons set forth herein, there are genuine issues of material fact as to whether Life Asset initially procured the Policy and/or whether it was procured under a preexisting agreement to transfer it to Life Asset.  Sun Life was not entitled to judgment as a matter of law, the judgment below should be reversed, and this case should be remanded for trial.

 

CONCLUSION AND PRAYER

The judgment below should be reversed and summary judgment granted in Appellants Conestoga’s favor.  Alternatively, the summary judgment in favor of Appellee Sun Life should be reversed and this case remanded for trial.

Respectfully submitted,

James C. Orr, Jr.
(admitted pro hac vice)
jim@hop-law.com
Heygood, Orr, & Pearson
6363 North State Highway 161,
Suite 450
Irving, TX 75038
(214) 237-9001 (phone)
(214) 237-9002 (fax)

 

[1] Conestoga’s Amended Motion for Summary Judgment, RE 72 at 1013-15, and Supporting Memorandum, RE 73 at 1016-1335; Sun Life’s Motion for Summary Judgment, RE 74 at 1336-38, and Supporting Memorandum, RE 75 and 76 at 1339-2211; Conestoga’s Response, RE 84 at 2612-2645; Sun Life’s Response, RE 90 and 91 at 2688-2809; Conestoga’s Reply, RE 95 at 2814-2837; Sun Life’s Reply, RE 96 and 97 at 2834-2879; Sun Life’s Notice of Supplemental Authority, RE 107 at 2974-2982; Conestoga’s Notice of Supplemental Authority, RE 108 at 2983-3009.

[2] “RE” refers to the record entry on the district court docket and “at [page number]” refers to the “Page ID #” from the referenced entry. See 6th Cir. R. 28(a)(1).

[3] The Pacific Life Policy is discussed at Section I(E), infra, at p. 8.

[4] See also Conestoga’s Response, RE 84 at 2612-2645; Sun Life’s Response, RE 90 and 91 at 2688-2809; Conestoga’s Reply, RE 95 at 2814-2837; Sun Life’s Reply, RE 96 and 97 at 2834-2879; Sun Life’s Notice of Supplemental Authority, RE 107 at 2974-2982; Conestoga’s Notice of Supplemental Authority, RE 108 at 2983-3009.

[5] See notes 8 and 9, infra, at p. 18.

[6] Pennington was Houchins’ administrative assistant. (Id. at 1226).

[7] An illustration is “the economics provided by the insurance carrier as to how the policy might work in terms of how much premium payment you have to pay in order to keep the policy in force.” Id. at 1306..

[8] Houchins apparently knew Erwin misrepresented items on his Sun Life application—such as being a Georgia resident and not intending to sell the policy after it issued. Houchins may have also been familiar with other clients making similar misrepresentations on applications. It is reasonable to conclude that such issues (irrelevant to whether the Policy was a STOLI policy) explain why Houchins refused to answer Sun Life’s questions. There is no evidence that Houchins’ refusal to testify must mean there was a preexisting agreement between Erwin and Life Asset that Life Asset would buy the Policy.

[9] Because of the Policy’s “incontestability clause,” this case does not concern whether Houchins or Erwin made any misrepresentations in the application. See Tenn. Code Ann. § 56–7–2307(3); see also Clement, 46 S.W. at 563 (stating that an incontestability clause “prevents the insurer from lying by and receiving the premiums during the life of the insured, and after his death … contesting the policy upon the ground that the insure[d’s] representations were false or untrue.”).

[10] C. Daniel Yates Michael O. Chenoweth, Estate Planning: The Use of Irrevocable Life Insurance Trusts, 23 Ind. L. Rev. 517, 517-520 (1990) (explaining tax and non-tax benefits of creating an irrevocable life insurance trust); see also William Sidney Smith & Joan M. Denton, Life Insurance Trusts in the Estate Plan, 43 Drake L. Rev. 847, 849 (1995) (same).

[11] In Hooker, it was alleged that, at the time the policy was procured, the nominal insured had already agreed the policy would be for the benefit of the stranger investor and the stranger investor had already agreed “to pay all premiums and expenses” in exchange for “the sole interest in and benefit to any sums paid thereunder.”  62 F.2d at 805.

[12] As noted, the Trustee Gordillo could not sell or transfer the Policy without Ann’s written consent.

[13] Indeed, as to everything that Coppock said and did not say, the district court improperly accepted evidence favorable to movant Sun Life as true and drew all inferences in favor of Sun Life.

[14] This finding expressly misplaced the burden.  As the movant, Sun Life had the burden to prove no “person with an insurable interest in his life funded any of the premiums paid on the policy.”

[15] Again, because of the Policy’s “incontestability clause,” this case does not concern whether Houchins or Erwin made any misrepresentations when the Policy was applied for and issued. See note 9, supra, at p. 18. Conestoga certainly had nothing to with any misrepresentations.