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Principal Life Insurance Company v. Mark Derose

October 5, 2011


The opinion of the court was delivered by: Judge Conner


Presently before the court is the report (Doc. 178) of the United States Magistrate Judge, the Honorable Martin C. Carlson, recommending that the motions for summary judgment (Docs. 104, 114) filed by defendants First Priority Bank ("First Priority") and Mark DeRose and Matthew DeRose, as Trustees of the JoAnn DeRose Family Trust ("the Trustees") be denied. The Trustees and First Priority have filed objections to the magistrate judge's report and recommendation ("R&R"). For the reasons set forth below, the court will adopt the R&R in part and reject it in part.

I. Background*fn1

The instant litigation is a declaratory judgment action filed by Principal Life Insurance Company ("Principal") to determine its rights and obligations under three life insurance policies issued on the life of JoAnn DeRose ("Ms. DeRose").

A. Principal's Prohibition of Stranger Originated Life Insurance On January 30, 2006, Principal enacted a policy prohibiting the sale of stranger originated life insurance ("STOLI"). In a STOLI transaction, a person purchases life insurance on his or her own life "in order to subsequently assign the policy to a third party following the lapse of the two-year contestability period."*fn2 Lincoln Nat. Life Ins. Co. v. Calhoun, 596 F. Supp. 2d 882, 885 (D.N.J. 2009). Principal's policy explicitly prohibited any form of STOLI, "including non-recourse premium financing . . . as these are almost always tied directly or indirectly to a sale to an investor group." (Doc. 196, Ex. A). Principal also amended its application process to require all applicants and their brokers to fill out a Policy Owner Intent form ("POI"). (Id.) The form asked the following three questions:

1. Is there an intention that any group of investors will obtain any right, title, or interest in any policy issued on the life of the Proposed Insured(s) as a result of the policy applied for? . . . If yes, explain.

2. Will you borrow money to pay the premiums for this policy or have someone else pay these premiums for you in return for an assignment of the policy values back to them? . . . If yes, explain and complete premium financing acknowledgment form (DD2588).

3. Have you transferred or assigned any right, title, or interest in any life insurance or annuity contract other than absolute assignment for Internal Revenue Code 1035 exchange? . . . If yes, explain. (Id.) The premium acknowledgment form stated that Principal would not accept applications submitted as part of a non-recourse loan arrangement.*fn3 (Id.)

B. The DeRose Life Insurance Policies

On December 5, 2006, Ms. DeRose submitted an application for a life insurance policy for $25 million of coverage.*fn4 (Doc. 196, Ex. B). The application listed the JoAnn DeRose Family Trust ("Trust") as the intended owner and beneficiary of the policy.*fn5 (Id.) The application listed Ronald Perry ("Perry"), an independent broker authorized to sell Principal life insurance policies, as the broker representative. (Id.) Perry was affiliated with Delaware Valley Financial Group ("Delaware Valley"), a business center which marketed and sold insurance and financial products on behalf of Principal.*fn6 All brokers at Delaware Valley were subject to broker agreements with Principal, which provided, inter alia, that they must "conform to and comply with all of [Principal's] policies and procedures." (See, e.g., Doc. 196, Ex. D). The broker agreements also provided that brokers could not "[a]ccept risks of any kind, determine insurability, or bind [Principal] in any way" nor "[w]aive any provision of any policy." (Id.)

Ms. DeRose and Perry submitted a POI as part of the application process. (Doc. 196, Ex. B). Ms. DeRose and Perry answered yes to the first two questions. The explanation to the first question stated, "[s]he has policies on her life owned by her children and also policies owned by Irrevocable Trusts. This policy is in place for the benefit of her grandchildren." (Id.) The explanation to the second question stated, "[s]he is making gifts to Irrevocable Trusts for the benefit of the grandchildren. The trust will pay the premiums." (Id.) Along with the application, Ms. DeRose and Perry submitted a check for the first quarter premiums on the policies drawn on an escrow account belonging to Perry. (Doc. 196, Ex. G).

The application was reviewed by Joanie Cherrier ("Cherrier"), an underwriter for Principal. (Doc. 196, Ex. I, at 6-7). Cherrier testified at her deposition that she believed that Perry and Ms. DeRose did not understand the questions on the POI and that Ms. DeRose was merely explaining the purpose of the life insurance policies. (Id. at 71-77, 91-92, 99). Cherrier also testified that she did not believe the policies were intended to be re-sold on the secondary market or that premium financing would be used to pay for the policies. (Id. at 71-77, 98-99).

Principal approved Ms. DeRose's application. (Id. at 117, 130, 137, 147-48, 159). On December 27, 2009, Principal issued three insurance policies (the "policies") on Ms. DeRose's life; two policies provided $12.5 million in coverage (Policy No. 6076175 and 6076176), and one provided $10 million in coverage (Policy No. 6075463). The policies would become effective once all delivery requirements, including a signed delivery receipt and payment for the balance of the premium due, were returned to Principal's home office. (Doc. 196, Ex. M).

On January 22, 2007, Michele Madden ("Madden"), a team leader for Delaware Valley, contacted Erik McMaster at Principal's home office to tell him that she had mistakenly sent back the delivery requirements on January 19th. (Doc. 196, Ex. N). Madden requested that Principal mark the delivery requirements as still pending. (Id.) Principal accommodated Madden's request. (Id.) On February 15, 2007, the delivery requirements were resent to Principal and the polices became effective. (Doc. 196, Ex. O).

C. Financing Arrangements

Delaware Valley employees, including Marc Smith ("Smith") and Tom Schirmer ("Schirmer"), assisted Ms. DeRose and the Trustees in obtaining financing for the policies.*fn7 (See Doc. 182, Ex. J, at 63-71; Doc. 182, Ex. L, at 49, 91, 110-18, 123-24). Both Schirmer and Smith knew that the Trust intended to obtain premium financing.*fn8 (Doc. 182, Ex. J, at 72-80; Doc. 196, Ex. P). Approximately one month before Ms. DeRose applied for life insurance from Principal, Ms. DeRose submitted an application for non-recourse premium financing to Coventry Capital ("Coventry"). (Doc. 196, Ex. P). Smith signed the application as an agent. (Id.) Coventry approved the application, however, the Trust ultimately chose to obtain financing from First Priority. (Doc. 196, Ex. R; Doc. 196, Ex. U). The loan transaction with First Priority closed on February 22, 2007, seven days after the delivery requirements were returned to Principal. (Doc. 196, Ex. U).

Under terms of the Loan and Security Agreement, First Priority agreed to loan the trust $1,515,000 to cover twenty-seven months of premiums, twenty-seven months of interest payable to First Priority, and a loan commitment fee payable to First Priority. (Id.) Only the policies secured the loan. (Id.)Prior to entering into this loan agreement, First Priority did not speak to Ms. DeRose or her sons, did not require Ms. DeRose to post any collateral to secure the loan or personally guarantee repayment, and did not conduct any underwriting to determine whether the Trust could repay the loan. (Doc. 196, Ex. T, at 30, 36, 61-62, 173; Doc. 196, Ex. U, at 7; Doc. 196, Ex. Y, at 17-18; Doc. 196, Ex. Z, at29). First Priority's Credit Approval Memorandum ("memorandum") for the DeRose loan stated that the principal source of repayment "is the sale of the three assigned lifeinsurance policies in the secondary market, via a life settlement transaction." (Doc. 196, Ex. W, at 8).The memorandum also stated that the Corporate Planning Group ("CPG") would market and sell the policies in the secondary market. (Id. at 6). CPG guaranteed that it would repay the loan to First Priority if the policies could not be resold.*fn9 (Doc. 196, Ex. AA).

On February 23, 2007, the Trustees executed forms of Assignment of Life Insurance on each of the policies. (Doc. 201, Ex. A). Principal acknowledged these assignments on March 30, 2007. (Id.)

D. Procedural History

On December 23, 2008, Principal filed the instant declaratory judgment action against Mark Derose and Matthew DeRose as Trustees of the JoAnn DeRose Family Trust. (Doc. 1). Principal alleges that the Trustees purchased the policies as part of a STOLI scheme and that the Trustees concealed their intended use of non-recourse financing on the application for the policies. Principal seeks a declaration that the policies are void or voidable on grounds that: (1) the policies lacked an insurable interest at inception, and/or (2) the POI contained material misrepresentations. (Id.) Principal also seeks a declaration that it may retain some or all of the premiums paid as an off-set to the costs and expenses it has incurred. (Id.)

On May 17, 2010, First Priority filed a motion to intervene in the lawsuit.*fn10 (Doc. 72). The magistrate judge granted the motion on June 29, 2010. (Doc. 90). After the close of discovery, First Priority and the Trustees filed separate motions for summary judgment. (Docs. 104, 114). On July 15, 2011, Magistrate Judge Carlson issued his report (Doc. 178) recommending that the court deny the Trustees' and First Priority's motions for summary judgment. (Doc. 178). Both First Priority and the Trustees filed timely ...

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