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Principal Life Insurance Company v. Mark Derose and Matthew Derose

May 10, 2012


The opinion of the court was delivered by: Judge Conner


At the core of this long-running dispute are three life-insurance policies that plaintiff Principal Life Insurance Company issued on the life of JoAnn DeRose. The complaint, filed in late December 2008, casts the controversy in the framework of the Declaratory Judgment Act, 28 U.S.C. § 2201, and seeks a declaration that the policies are void or voidable because of a lack of insurable interest at inception, a material misrepresentation in the application, or both. (Doc. 1, ¶ 1.) The complaint named only the two trustees of the JoAnn DeRose Family Trust, Mark and Matthew DeRose, as defendants.

In June 2010, First Priority Bank's motion to intervene as of right under FED. R. CIV. P. 24(a) was granted (Docs. 72, 76, 78, 85, 86 (motion and briefing); Doc. 90 (order granting motion)), and First Priority joined this action as a defendant, filing its answer with affirmative defenses (Doc. 91) on June 29, 2010. First Priority and the DeRose trustees both filed motions for summary judgment in the end of 2010.

(Docs. 104, 114, respectively.) Prompted by averments in Principal Life's response (Doc. 122) to First Priority's statement of material facts (Doc. 107), First Priority filed a motion (Doc. 133) seeking either the joinder of indispensable parties under Fed. R. Civ. P. 19(b) or for dismissal of the action, under Fed. R. Civ. P. 12(b)(1), on the basis of the purportedly indispensable parties' non-joinder.

Upon referral of First Priority's motion to dismiss or for joinder, Magistrate Judge Carlson issued a Report and Recommendation (R&R) (Doc. 207) recommending denial of the motion. Objections to the R&R and responses to those objections have been filed. (Docs. 209 to 213.) For the reasons set forth below, the court will adopt the R&R's recommendation and dismiss First Priority's motion (Doc. 133).

I. Background*fn1

A. Facts

Setting the stage for this action was the rise of stranger-originated life insurance (STOLI), which essentially turn life-insurance policies into investment vehicles for third parties unrelated and unknown to the person whose life is being insured. A typical STOLI transaction involves the sale of a life-insurance policy to an elderly person, in which the seller offers cash up front in exchange for a promise that the insured will sell the policies to a third party following the lapse of the two-year contestability period. (Id. at 2 & n.2 (quoting Lincoln Nat. Life. Ins. Co. v. Calhoun, 569 F. Supp. 2d 882, 885 (D.N.J. 2009).) As STOLI transactions grew in popularity, insurers like Principal Life grew concerned that many of the policies that they issued "were not being procured for legitimate needs," instead functioning as "wager[s] on the lives of strangers." (Doc. 178, at 4; see also Doc. 208, at 3 (citing Doc. 196, Ex. A).)

On January 30, 2006, Principal Life enacted a policy prohibiting the sale of any form of STOLI, including one which featured non-recourse premium financing. (Doc. 208, at 2 (citing Doc. 196, Ex. A, at 7).) It also amended its application process, requiring applicants and their brokers to fill out a Policy Owner Intent ("POI") form that asked 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 . . . .

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.

(Doc. 208, at 3--4 (citing Doc. 196, Ex. A, at 6).)

On December 5, 2006, JoAnn DeRose applied for a $25 million life-insurance policy with Principal Life. (Id. at 4 (citing Doc. 196, Ex. B).) The application listed the JoAnn DeRose Family Trust as the intended owner and beneficiary of the policy. (Id.) Ronald Perry, an independent broker authorized to sell Principal Life policies, was listed as the broker representative. (Id.)*fn2 After Ms. DeRose and Perry submitted a POI form,*fn3 the application was reviewed and accepted;*fn4 Principal Life issued three insurance policies on Ms. DeRose's life that together provided $25 million in coverage and became effective on February 15, 2007. (Doc. 208, at 5--6.)

Ms. DeRose and the trustees (collectively, the DeRoses) engaged Delaware Valley to help them obtain financing for the policies. (Id. at 6.) Among the Delaware Valley employees that assisted the DeRoses were Marc Smith and Tom Schirmer.*fn5 *fn6

(Id. at 6 (citing Doc. 182, Ex. J, at 63--71; Doc. 182, Ex. L, at 49, 91, 110--18, 123--2).) With Smith and Schirmer's aid, the Trust obtained a $1,515,000 loan from First Priority Bank, a sum intended to cover twenty-seven months' worth of premiums on the policies and of interest payable to First Priority, as well as a loan-commitment fee payable to First Priority. (Id. at 7 (citing Doc. 196, Ex. U).) Only the policies secured the loan. (Id.) Before executing this loan agreement, First Priority spoke to none of the DeRoses, required no collateral or personal guarantee from Ms. DeRose, and conducted no underwriting to determine whether the Trust could repay the loan. (Id. (citing Doc. 196, Ex. T, at 30, 36, 61--62, 173; Ex. U, at 7; Ex. Y, at 17--18; Ex. Z, at 29).) First Priority's Credit Approval Memorandum for the DeRose loan stated that the principal source of repayment was to be "the sale of the three assigned life insurance policies in the secondary market, via a life settlement transaction." (Id. (citing 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 7--8 (citing Doc. 196, Ex. W, at 6).) CPG guaranteed that it would repay the loan to First Priority if the policies could not be resold. (Id. (citing Doc. 196, Ex. AA).)

On February 23, 2007, the DeRose trustees executed forms of Assignment of Life Insurance on each of the policies. (Id. (citing Doc. 201, Ex. A).) Principal Life acknowledged these assignments at the end of the following month. (Id.)

More than three years later-and more than a year after the commencement of the instant action-on February 25, 2010, First Priority declared the trustees to be in default. (Id. at 9 n.10 (citing Doc. 184, Ex. C).) First Priority "determined that its security interest in the policies was in jeopardy," and elected to continue making ...

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