Estate of Martha Barotz v. Vida Longetivity Fund, L.P.

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
ESTATE OF MARTHA BAROTZ, by )
its Executor, Peter Barotz, )
)
Plaintiff/Counterclaim-Defendant, )
)
v. ) C.A. No. N20C-05-144 EMD CCLD
)
VIDA LONGEVITY FUND, L.P., )
)
Defendant/Counterclaim-Plaintiff. )
Submitted: October 17, 20221
Decided: November 9, 2022
Upon Plaintiff Estate of Martha Barotz’ Motion for Summary Judgment,
GRANTED
Upon Defendant Vida Longevity Fund, L.P.’s Motion for Summary Judgment,
DENIED
Donald L. Gouge, Jr., Esq., Donald L. Gouge, Jr., LLC, Wilmington, Delaware, Joseph M.
Kelleher, Esq., Cozen O’Connor, Philadelphia, Pennsylvania, Counsel for Plaintiff Estate of
Martha Barotz
David P. Primack, Esq., McElroy, Deutsch, Mulvaney & Carpenter, LLP, Wilmington,
Delaware, Eric A. Biderman, Esq., James M. Westerlind, Esq., Julius A. Rousseau, Esq., Arent
Fox LLP, New York, New York, Counsel for Defendant Vida Longevity Fund, L.P.
Davis, J.
I. INTRODUCTION
This civil action is assigned to the Complex Commercial Litigation Division of this
Court. The action concerns an $8 million life insurance policy (the “Policy”) issued by Pacific
Life Insurance Company insuring the life of Martha Barotz. When Martha Barotz passed away
in 2018, Defendant Vida Longevity Fund, L.P. (“VLF”) received the Policy’s death benefit. The
1
D.I. No. 214.
Estate of Martha Barotz (the “Estate”) claims it is entitled to recover the death benefit from VLF
under 18 Del. C. § 2704 (“Section 2704”) because the Policy is void for lack of insurable
interest. VLF claims the Policy is supported by a valid insurable interest and, alternatively, that
VLF is entitled to the payout based on various defenses and counterclaims.
Both parties moved for summary judgment on December 24, 2021. For the reasons
explained below, the Court GRANTS the Estate’s motion and DENIES VLF’s motion.
II. BACKGROUND
A. PARTIES
The Estate was established in New York after the death of Martha Barotz, a resident of
New York.2 The Executor of the Estate is Mrs. Barotz’s husband, Peter Barotz.3 Both the Estate
and Mr. Barotz are New York citizens.4 VLF is a Delaware limited partnership with its principal
place of business in Austin, Texas.5
B. THE POLICY
In 2006, the Barotz family became clients of Spalding Financial Group (“SFG”) through
Craig Stack, one of its insurance agents.6 The Court notes that the record contains no evidence
as to any discussions that may have occurred among the Barotz family and Mr. Stack regarding
the family’s insurance needs.
Lindsay Spalding—another insurance agent at SFG—offered testimony concerning the
business practices that SFG employed at the time. Although Ms. Spalding never met any
member of the Barotz family,7 she eventually signed the application for the Policy as the
2
Second Am. Compl. (“SAC”) ¶ 1 (D.I. 71).
3
Id.
4
Id.
5
Id. ¶ 2.
6
Estate’s Mot. for S.J., Ex. 10 at 13:22–14:17, 19:5–19:8.
7
Id., Ex. 10 at 11:2–11:13.
2
“Soliciting Agent.”8 Ms. Spalding also testified as a witness in Sun Life Assurance Co. Canada
v. U.S. Bank National Association (“Sol”), which concerned a life insurance policy that Ms.
Spalding brokered while working for SFG in late 2005.9 The policy in Sol was financed through
nonrecourse premium financing issued under Coventry Capital’s premium finance program (the
“PFP Program”).10
In the current case, Ms. Spalding testified that SFG maintained a “streamlined” process
under which SFG would contact various groups to secure financing for their clients’ insurance
needs.11 One such group was Coventry Capital.12 Although the record is silent as to any
discussions SFG may have had with the Barotz family, Ms. Spalding confirmed that SFG’s
internal records show that Coventry Capital provided financing for Mrs. Barotz’s Policy through
its PFP Program.13
The record indicates that, in March 2006, Coventry Capital provided Mrs. Barotz with a
“Loan Proposal” containing the “indicative terms and conditions upon which we may be able to
arrange [nonrecourse] financing” for her Policy.14 Mrs. Barotz was 71 year old at the time.15
According to Coventry Capital’s summary, Pacific Life Insurance Company would issue a life
insurance policy for Mrs. Barotz with a premium of $257,678 and a death benefit of $8 million.16
LaSalle Bank N.A. (“LaSalle”) would then issue a nonrecourse loan of $257,678 to pay the
premium.17 The loan’s term was to be 26 months with an annual interest of 9.50%.18 The
8
Id., Ex. 11 at 9.
9
369 F. Supp. 3d 601, 604–605 (D. Del. 2019).
10
Id. at 605.
11
Id., Ex. 10 at 25:22–26:23.
12
Id., Ex. 10 at 25:6–26:23.
13
Id., Ex. 10 at 25:6–25:21.
14
Estate’s Mot. for S.J., Ex. 14 at 1.
15
Id., Ex. 14 at 2.
16
Id., Ex. 14 at 3.
17
Id., Ex. 14 at 4.
18
Id., Ex. 14 at 4.
3
collateral for the loan would be a security interest in “(i) each of the Policies or in the beneficial
interest of a statutory trust holding the Policies and (ii) insurance coverage maintained by the
Lender.”19 The “Borrower” was not Mrs. Barotz herself, but rather the “Martha Barotz 2006
Family Trust, Premium Finance Sub-Trust.”20
Coventry Capital instructed Mrs. Barotz to sign and submit several “Trust Agreements”
to effectuate the transaction.21 One Trust Agreement directed the creation of the “Martha Barotz
2006 Family Trust” (the “Trust”), a Delaware statutory trust, so that the Trust could apply for
and own the Policy.22 The Trust Agreement selected Wilmington Trust Company as trustee, and
designated that (i) Delaware law would govern the Trust and (ii) Delaware would act as the
Trust’s situs.23 Furthermore, the Trust Agreement provided that the Trust would be nominally
funded with “the sum of $1.”24 Ms. Spalding testified that Coventry Capital was the party that
would draft such Trust Agreements and their terms.25
Additionally, Coventry Capital provided a “Supplement to Trust Agreement” directing
the creation of the Martha Barotz 2006 Family Trust, Premium Finance Sub-Trust (the “Sub-
Trust”).26 The Supplement said that the Policy would pass directly to the Sub-Trust, which
would take out a loan to pay the premiums and pledge the “Policy, and all proceeds thereof” as
the sole collateral for the nonrecourse loan.27 Wilmington Trust Company, as trustee, took all
direction from Coventry Capital/LaSalle.28 In addition, Wilmington Trust Company held the
19
Id., Ex. 14 at 4.
20
Id., Ex. 14 at 2.
21
See id., Ex. 14 at 2, 6.
22
Id., Ex. 15 ¶ 3.
23
Id., Ex. 15 ¶¶ 10, 15
24
Id., Ex. 15 ¶ 2.
25
See id., Ex. 10 at 119:24–121:18.
26
Id., Ex. 15 at 8–18.
27
Id., Ex. 15 at 8.
28
Id., Ex. 15 at Art. II, § 3; id., Ex. 15 at Art. III, § 2.
4
Policy solely for the benefit of Coventry/LaSalle.29 During the term of the Loan, the Trust was
prohibited from holding any property other than the “Initial Trust Estate” of $1, the Sub-Trust
was prohibited from holding any property other than the “Sub-Trust Estate” (i.e., the Policy), and
Mrs. Barotz was prohibited from indicating to anyone that the Policy was her own asset or
attempting to instruct Pacific Life Insurance Company to change the owner or beneficiary of the
Trust.30
Coventry Capital also utilized a “Note and Security Agreement” between the Sub-Trust
and LaSalle. The Note established a nonrecourse loan for 26 months to finance the premiums
with total payments amounting to $327,557.31.31
Coventry Capital required the execution of two power of attorney forms. The power of
attorney appointed Coventry Capital as Mrs. Barotz’s attorney-in-fact “with full powers of
substitution to act in [her] name,” for purposes including “originating and/or servicing any life
insurance policies insuring [her] life” with the “power to complete and execute any applications
or other documents in connection with the maintenance, or liquidation of the Policies.”32 The
second power of attorney appointed Coventry Capital as attorney-in-fact for Mrs. Barotz’s
husband in his capacity as the named co-trustee of the Trust and Sub-Trust respectively, with
“full powers of substitution to act in [his] name, place and stead for the purpose of it originating,
maintaining, servicing, and/or liquidating . . . any life insurance policies . . . which are owned by
the Trust.”33
29
Id.
30
Id., Ex. 15 at Art. II, §§ 6, 7(b).
31
Id., Ex. 16 at 2, 3, 9.
32
Id., Ex. 17 at 1.
33
Id., Ex. 18 at 1.
5
Finally, Coventry Capital provided a Disclosure stating, in relevant part, that the Trust
Agreement creating the Trust (and the Supplement creating the Sub-Trust)
are not intended to satisfy Settlor [Mrs. Barotz’s] estate planning needs and have
not been designed as an estate planning tool. Settlor hereby confirms that the
Program Administrator has recommended to Settlor that Settlor consult with
Settlor’s own legal, tax, accounting and financial advisors regarding individual
estate planning needs.34
On March 30, 2006, Wilmington Trust Company applied for the Policy as proposed
owner and beneficiary in its capacity as trustee of the Trust.35 As noted previously, Ms. Spalding
signed the application as the Soliciting Producer.36 The Policy was issued on April 20, 200637
and delivered to Wilmington Trust Company as owner in Delaware.38 On April 26, 2006,
Coventry Capital paid the premium of $257,678 to put the Policy into effect.39
The material facts relating to Mrs. Barotz’s Policy are substantially identical to the policy
at issue in Sun Life Assurance Company Canada v. U.S. Bank National Association (“Sol”). In
Sol, Coventry Capital provided the insured, Harriet Sol, with the same set of documents as
Coventry Capital provided to Mrs. Barotz.40 By agreeing with Coventry Capital’s proposals, the
insured in Sol created a series of trusts that would obtain a life insurance policy through a
nonrecourse premium loan from LaSalle.41 The policy purchased by the loan served as the sole
collateral, capping the maximum amount of the borrower’s loss at the value of the policy.42 If
the sub-trust failed to pay back or refinance the loan in 26 months, the policy would be seized by
34
Id., Ex. 19 at 1–2 (emphasis added).
35
Id., Ex. 11 at 1, 6, 9.
36
Id., Ex. 11 at 9.
37
Id., Ex. 20.
38
Id., Ex. 21.
39
Id., Ex. 22.
40
See Sun Life Assurance Co. Canada v. U.S. Bank Nat. Assn., Sol, 369 F. Supp. 3d 601, 605–606 (D. Del. 2019).
41
Id.42
Id.6
LaSalle and/or Coventry Capital.43 And once the financing was secured, an SFG employee
submitted a formal application to Sun Life for the policy.44 In short, Mrs. Barotz’s Policy was
the product of the same premium financing program involving the same entities as the policy in
Sol.
C. THE POLICY CHANGES HANDS AND MRS. BAROTZ PASSES AWAY
Coventry Capital ordered a life expectancy report for Mrs. Barotz in April 2008.45 In
July 2018, the Trust was sold to “2008 Barotz Insurance Trust” in July 2008,46 the registered
holder of which was Midas Life Settlements LLC (“Midas”).47 Midas paid $390,400 for the
Policy, which was $62,842.69 greater than the loan balance.48 Midas paid off the Coventry
Capital loan and remitted the excess $62,842.69 to Mrs. Barotz.49
In its opening brief, the Estate claims the Policy was then sold to Financial Credit
Investment II Limited (“FCI”), an Apollo entity.50 Although the record contains no documents
showing a transaction between Midas and FCI, FCI subsequently sold a portfolio containing the
Policy to VLF in December 2018.51 VLF paid a total of $155,714,020.81 for the portfolio that
contained the Policy.
Mrs. Barotz passed away less than a month after VLF obtained the Policy.52 VLF
received the Policy’s death benefit of $8,005,698.63.53
D. LITIGATION
43
Id.44
Id.45
Estate’s Mot. for S.J., Ex. 23.
46
Id., Ex. 24 at 1.
47
Id., Ex. 25 at B-1.
48
Id., Ex. 24 at 1
49
Id., Ex. 24 at 17–20.
50
Id. at 10–11.
51
Id., Ex. 26.
52
Id., Ex. 29.
53
Id., Ex. 30 at 2.
7
The Estate commenced this action in May 2020. The Estate’s Second Amended
Complaint brings two claims against VLF: (1) a claim for “Recovery of Insurance Proceeds Due
to Lack of Insurable Interest,” brought under Section 2704, and (2) a claim in the alternative for
unjust enrichment.54 VLF’s answer asserted fourteen affirmative defenses and four
counterclaims: (1) declaratory judgment, (2) breach of contract, (3) promissory estoppel, and (4)
indemnification/specific performance.55
Both parties filed motions for summary judgment on December 24, 2021.56 The Court
heard argument on April 8, 2022.57 The Supreme Court of Delaware issued a decision in the
case of Wells Fargo Bank, N.A. v. Estate of Phyllis M. Malkin on May 26, 2022.58 This Court
permitted the parties to file supplemental briefing addressing the effect of the Malkin decision on
the cross-motions.59 The parties filed their supplemental briefs on July 11, 2022.60
Subsequently, without prompting from the Court, the parties have submitted notices of
supplemental authorities and how these authorities might impact the decision in this case.61 The
last filing was submitted on October 17, 2022.62
III. STANDARD OF REVIEW
The standard of review on a motion for summary judgment is well-settled. The Court’s
principal function when considering a motion for summary judgment is to examine the record to
54
SAC ¶¶ 35–46.
55
Answer to SAC at 11–20, 35–41 (D.I. 73).
56
VLF’s Mot. for S.J. (D.I. 124); Estate’s Mot. for S.J. (D.I. 138).
57
D.I. No. 204.
58
Wells Fargo Bank, N.A. v. Est. of Malkin, 2022 WL 1671966 (Del. May 26, 2022).
59
See Estate’s Supp. Br. (D.I. 209); VLF’s Supp. Br. (D.I. 210).
60
D.I. Nos. 209 and 210.
61
D.I. Nos. 213 and 214. The new authority is Estate of Beverly M. Berland v. Lavastone Capital LLC, 2022 WL
15023450 (D. Del. Sept. 28, 2022).
62
D.I. No. 214.
8
determine whether genuine issues of material fact exist, “but not to decide such issues.”63
Summary judgment will be granted if, after viewing the record in a light most favorable to a
nonmoving party, no genuine issues of material fact exist and the moving party is entitled to
judgment as a matter of law.64 If, however, the record reveals that material facts are in dispute,
or if the factual record has not been developed thoroughly enough to allow the Court to apply the
law to the factual record, then summary judgment will not be granted.65 The moving party bears
the initial burden of demonstrating that the undisputed facts support his claims or defenses.66 If
the motion is properly supported, then the burden shifts to the non-moving party to demonstrate
that there are material issues of fact for the resolution by the ultimate fact-finder.67
“These well-established standards and rules equally apply [to the extent] the parties have
filed cross-motions for summary judgment.”68 Where cross-motions for summary judgment are
filed and neither party argues the existence of a genuine issue of material fact, “the Court shall
deem the motions to be the equivalent of a stipulation for decision on the merits based on the
record submitted with the motions.”69 But where cross-motions for summary judgment are filed
and an issue of material fact exists, summary judgment is not appropriate.70 To determine
63
Merrill v. Crothall-American Inc., 606 A.2d 96, 99-100 (Del. 1992) (internal citations omitted); Oliver B. Cannon
& Sons, Inc. v. Dorr-Oliver, Inc., 312 A.2d 322, 325 (Del. Super. 1973).
64
Id.65
See Ebersole v. Lownegrub, 180 A.2d 467, 470 (Del. 1962); see also Cook v. City of Harrington, 1990 WL 35244,
at *3 (Del. Super. Feb. 22, 1990) (citing Ebersole, 180 A.2d at 467) (“Summary judgment will not be granted under
any circumstances when the record indicates . . . that it is desirable to inquire more thoroughly into the facts in order
to clarify the application of law to the circumstances.”).
66
See Moore v. Sizemore, 405 A.2d 679, 680 (Del. 1970) (citing Ebersole, 180 A.2d at 470).
67
See Brzoska v. Olsen, 668 A.2d 1355, 1364 (Del. 1995).
68
IDT Corp., 2019 WL 413692, at *5 (citations omitted); see Capano v. Lockwood, 2013 WL 2724634, at *2 (Del.
Super. May 31, 2013) (citing Total Care Physicians, P.A. v. O’Hara, 798 A.2d 1043, 1050 (Del. Super. 2001)).
69
Del. Super. Civ. R. 56(h).
70
Motors Liquidation Co. DIP Lenders Tr. v. Allianz Ins. Co., 2017 WL 2495417, at *5 (Del. Super. June 19, 2017),
aff’d sub nom., Motors Liquidation Co. DIP Lenders Tr. v. Allstate Ins. Co., 191 A.3d 1109 (Del. 2018); Comet Sys.,
Inc. S’holders’ Agent v. MIVA, Inc., 980 A.2d 1024, 1029 (Del. Ch. 2008); see also Anolick v. Holy Trinity Greek
Orthodox Church, Inc., 787 A.2d 732, 738 (Del. Ch. 2001) (“[T]he presence of cross-motions ‘does not act per se as
a concession that there is an absence of factual issues.’”) (quoting United Vanguard Fund, Inc. v. TakeCare, Inc.,
693 A.2d 1076, 1079 (Del. 1997)).
9
whether there is a genuine issue of material fact, the Court evaluates each motion
independently.71 The Court will deny summary judgment if the Court determines that it is
prudent to make a more thorough inquiry into the facts.72
71
Motors Liquidation, 2017 WL 2495417, at *5; see Fasciana v. Elec. Data Sys. Corp., 829 A.2d 160, 167 (Del. Ch.
2003).
72
Ebersole, 180 A.2d at 470–72.
10
IV. PARTIES’ CONTENTIONS
A. THE ESTATE
The Estate contends the Policy is void under Section 2704 for two reasons: (1) the Policy
lacked insurable interest because Mrs. Barotz did not actually pay its premiums and (2) even if
Mrs. Barotz could be deemed to have paid the premiums, the Policy was not taken out in good
faith for a lawful insurance purpose but rather as a cover for a wager. The Estate also argues that
VLF’s affirmative defenses and counterclaims fail as a matter of law because they are
inconsistent with Delaware’s strong public policy against STOLIs and the statutory language of
Section 2704. Throughout its opening brief, the Estate claims this case is functionally identical
to other cases in which life insurance policies were held void for lack of insurable interest.
B. VLF
VLF’s counterarguments to the Estate’s motion double as affirmative arguments for its
own motion. VLF’s arguments fall into two general categories. First, VLF contends the Policy
was supported by valid insurable interest because the nonrecourse funding satisfied the
conditions described in PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust73 and
Lavastone Cap. LLC v. Est. of Berland.74 Second (and alternatively), VLF claims that Mrs.
Barotz or her Estate have waived, released, or otherwise forfeited any claims against VLF.
C. SUPPLEMENTAL CONTENTIONS
Through supplemental briefing, the Estate argues that Malkin simply confirms that VLF’s
counterclaims and affirmative defenses fail as a matter of law. Conversely, VLF claims that
Malkin permits a downstream purchaser like VLF to assert common-law defenses and
73
28 A.3d 1059 (Del. 2011).
74
266 A.3d 964 (Del. 2021).
11
counterclaims in actions brought under Section §2704(b), and that its defenses and counterclaims
prevail under the facts of this dispute.
V. DISCUSSION
The Court holds that: (1) the Policy lacks an insurable interest and thus is void under
Section 2704; (2) VLF’s affirmative defenses and counterclaims fail as a matter of law; and (3)
the Estate is entitled to the proceeds of the Policy under Section 2704(b). Thus, the Estate’s
motion is GRANTED and VLF’s motion is DENIED.
A. APPLICABLE LAW
“For hundreds of years, the law has prohibited wagering on human life through the use of
life insurance that was not linked to a demonstrated economic risk.”75 Delaware codified the
requirement that a person procuring a life insurance policy must have an “insurable interest” in
the life of the insured in Section 2704. Section 2704(a) provides:
Any individual of competent legal capacity may procure or effect an insurance
contract upon his or her own life or body for the benefit of any person, but no person
shall procure or cause to be procured any insurance contract upon the life or body
of another individual unless the benefits under such contract are payable to the
individual insured or his or her personal representatives or to a person having, at
the time when such contract was made, an insurable interest in the individual
insured.
The categories of persons that have an insurable interest in an individual’s life include the
individual insured and others, such as close family members or business associates and the
“trustee of a trust created and initially funded by” the insured.76
In Price Dawe, the Supreme Court answered three certified questions regarding the
application of Section 2704 to STOLI schemes.77 First, the Supreme Court held that “a life
75
Berland, 266 A.3d at 967–68.
76
Id. at 968 (citing 18 Del. C. § 2704(c)).
77
Price Dawe, 28 A.3d at 1065-76.
12
insurance policy lacking an insurable interest is void as against public policy and thus never
comes into force.”78 Therefore, an insurer could challenge the validity of a life insurance policy
based on a lack of insurable interest after the expiration of the contractual two-year contestability
period required by 18 Del. C. § 2908. Second, the Supreme Court held that Sections 2704(a) and
(c)(5) do not prohibit an insured from procuring a policy on his or her own life and immediately
transferring the policy, or a beneficial interest in a trust that owns and is the beneficiary of the
policy, to a person without an insurable interest in the insured’s life.79 This can be done so long
as (i) the insured procured or effected the policy and (ii) the transaction is not a mere cover for a
wager.80 Third, the Supreme Court held that a trust established by an individual insured has an
insurable interest in the life of that insured when, at the time of the application for the life
insurance, the individual intends that the beneficial interest in the trust would be transferred to a
third-party investor with no insurable interest in the individual’s life following the issuance of
the policy, but only if the individual insured created and funded the trust.81
In 2021, the Supreme Court answered three more certified questions in its decision in
Berland. Relevant here is the Supreme Court’s analysis of the second question:
Does 18 Del. C. § 2704(a) and (c)(5) forbid an insured or his or her trust to procure
or effect a policy on his or her own life using a non-recourse loan and, after the
contestability period has passed, transfer the policy, or a beneficial interest in a trust
that owns the policy, to a person without an insurable interest in the insured's life,
if the insured did not ever intend to provide insurance protection beyond the
contestability period?82
The Supreme Court explained that the analysis in Price Dawe emphasizes two considerations
when evaluating whether a policy lacks an insurable interest: (1) whether the insured or the
78
Id. at 1065.
79
Id. at 1068.
80
Id.
81
Id. at 1076.
82
Berland, 266 A.3d at 971.
13
trustee of the insured’s trust obtained the policy in good faith for a lawful insurance purpose, and
not as a cover for a wagering contract; and (2) the source of the funding for the premiums.83 The
Supreme Court found that the certified question effectively asked how these considerations apply
where (1) the source of the funding is a nonrecourse loan and not from any assets of the insured
and (2) the insured’s intent was to transfer ownership after the end of the contestability period,
rather than “immediately” as in Price Dawe.84 The Court explained that “Price Dawe directs
courts to determine who procured a policy by examining ‘who pays the premiums.’”85
Regarding the use of premium financing, the Supreme Court held:
If used to facilitate procurement of a policy for a legitimate insurance purpose, such
as estate planning, then premium financing is a recognized and permissible
tool. But the use of such financing might also be evidence of an impermissible
STOLI scheme, especially where the use of a nonrecourse loan means that a third
party, and not the insured, bears the entire financial liability for obtaining the
policy. The use of a nonrecourse loan to fund the premium therefore is not
dispositive, but should be viewed in the context of the entire transaction and in
conjunction with consideration of whether the insured intended, when obtaining the
policy, “to purchase the policy for lawful insurance purposes, and not as a cover for
a [wagering] contract.” If the use of nonrecourse funding allows the insured—
individually or as settlor or grantor of a trust—to obtain the policy “without actually
paying the premiums,” then the requirements of §§ 2704(a) and (c)(5) are not met.
* * *
For these reasons, our answer to the second certified question is No, so long as the
use of nonrecourse funding did not allow the insured or his or her trust to obtain the
policy “without actually paying the premiums” and the insured or his or her trust
procured or effected the policy in good faith, for a lawful insurance purpose, and
not as a cover for a wagering contract.86
In 2022, the Supreme Court answered another set of certified questions through its
Malkin decision. The first question was whether a third-party purchaser of an insurance contract
that is void under Section 2704(a) and Price Dawe could assert either a bona fide purchaser
83
Id.
84
Id. at 971–72.
85
Id.
86
Id. at 972–73.
14
defense or a securities defense under the Delaware UCC.87 The Supreme Court held that those
defenses are not available because the defendant in action brought under Section 2704(b) do face
an “adverse claim” as the Delaware UCC defines that term.88 However, the Court explained that
Section 2704(b) “is not inconsistent with all common-law defenses or counterclaims that a
downstream purchaser of a policy might assert against an estate” and that courts must look to the
“elements” of those defenses and counterclaims—“and, where appropriate, the public policy
underlying the ban on human-life wagering”—to decide their viability in an action brought under
Section 2704(b).89 The second question in Malkin was whether a defendant in a Section 2704(b)
action can recover any premiums it paid to maintain the policy. The Court held that such a
defendant may recover the premiums it paid on the void contract if it can “establish the elements
of a viable legal theory, such as unjust enrichment.”90
B. THE POLICY IS VOID FOR LACK OF INSURABLE INTEREST
1. Mrs. Barotz did not actually pay the Policy’s premiums.
Under Berland, the Policy is void for lack of insurable interest if the use of nonrecourse
funding allowed Mrs. Barotz to obtain the Policy without paying the premiums. The Court finds
that there is no genuine factual dispute that Mrs. Barotz paid the premiums.
The insurance agent from SFG who signed the application for the Policy, Ms. Spalding,
was asked at her deposition to explain the “big picture” of the financing provided under the
Coventry PFP Program.91 Ms. Spalding explained:
A: Coventry would agree to finance the policy for, like in this case 26 months. So
they would pay the premiums for two years and that would give the client insurance,
basically free insurance for two years. And it is kind of like a free look for the two
87
Malkin, 2022 WL 1671966, at *1.
88
Id. at *10.
89
Id. at *6.
90
Id. at *14.
91
Plaintiff’s Mot. for S.J., Ex. 10 at 89:16–89:19.
15
years, and they have that time to determine if they wanted to keep it. God forbid if
they had a health change they would keep it or if not, they would sell it in the life
settlement market.
Q: Did the insureds have any obligation to repay the loan?
A: No.
Q: So what happened if they didn’t repay the loan?
A: They, Coventry, would take the policy as the collateral and that was it.92
Ms. Spalding also testified that the arrangement allowed clients, like Mrs. Barotz, to obtain their
policies “risk free.”93 The undisputed facts confirm Ms. Spalding’s characterization of the
Policy. The record demonstrates that Mrs. Barotz and her family were not parties to the
nonrecourse loan. The record also shows that neither Mrs. Barotz nor her family members paid
the premiums using their own funds. The most Mrs. Barotz ever stood to lose under the
nonrecourse loan was the Policy itself, which would never have existed but for the loan that
funded it. The Court finds that there is no factual dispute that Mrs. Barotz paid the premiums
either individually or through a trust.
The Court finds additional support for this conclusion in the District of Delaware’s Sol
decision. As discussed above, the policy in Sol was the product of the same Coventry Capital
PFP Program as Mrs. Barotz’s Policy. On summary judgment, the Sol Court found that “a
reasonable juror, taking the evidence in the light most favorable to [the defendant], could find
only that Ms. Sol [the insured] did not procure the Policy” because “[Ms.] Sol did not pay the
premiums herself, with funds she had prior to the series of transactions relating to issuance of the
92
See id., Ex. 10 at 89:20–90:11 (emphasis added).
93
See id., Ex. 10 at 128:9–129:6; see also id., Ex. 10 at 25:17–25:21 (“Q: Do you recall that these premium finance
programs . . . would be called nonrecourse and that the insured who borrowed the money would have no personal
obligation to repay the loans? A: Yes.”); see id., Ex. 10 at 45:15–46:3 (re-iterating that the Policy was effectively a
“two-year free look”).
16
Policy.”94 The Sol Court rejected the defendant’s argument that Ms. Sol “procured the Policy by
obtaining a loan from Coventry Capital/LaSalle that she had a contractual obligation to repay and
which, ultimately, she did repay” because Ms. Sol did not have a “genuine obligation” to repay
loan.95 One reason for this conclusion was that “it was not actually [Ms.] Sol, but instead the
Sub-Trust, which was the borrower on the loan (as well as being the holder of the Policy)”—
thus, the Sub-Trust owed the obligation to repay the loan, not Sol.96 Even if Ms. Sol was
considered the borrower, “the non-recourse nature of the loan meant that neither she nor the Sub-
Trust had an ‘obligation to repay’ sufficient to support a conclusion that [she] actually ‘procured’
the Policy.”97 Accordingly, the Sol Court concluded that the Policy lacked an insurable interest
at its inception, making it void ab initio under Delaware law.98 The same rationale and
conclusion prevail in this litigation because Mrs. Barotz’s Policy was the product of the same
scheme as the policy in Sol.
During argument, VLF urged the Court to disregard Sol because it was decided before the
Supreme Court issued its decision in Berland and Berland did not expressly endorse its
reasoning. This argument fails for at least two reasons. First, Berland made clear that a life
insurance policy lacks an insurable interest if the use of nonrecourse financing allows the insured
to obtain the policy “without actually paying the premiums.”99 Appropriately, Sol rested on the
court’s conclusion that the use of nonrecourse financing allowed the insured to obtain her policy
without “pay[ing] the premiums herself.”100 Sol is therefore entirely consistent with Berland
despite pre-dating it. Second, the Court would reach the same conclusion concerning Mrs.
94
Sol, 369 F. Supp. 3d at 610 (emphasis in original).
95
Id.96
Id.97
Id. at 611.
98
Id. at 617.
99
Berland, 266 A.3d at 973.
100
Sol, 369 F. Supp. 3d at 610.
17
Barotz’s Policy even if it were to disregard Sol as persuasive precedent. Again, Coventry
Captial’s PFP Program was designed to provide the insured “free insurance for two years” and
imposed no “obligation [on the insured] to repay the loan.”101 Therefore, there is no genuine
dispute that Mrs. Barotz did not pay the premiums.
2. VLF fails to raise a factual dispute precluding summary judgment for the Estate.
VLF argues that there are factual disputes concerning the Estate’s claims that: (1) the
loan was “part of a program by Coventry to manufacture policies” for the life settlement market;
(2) Mrs. Barotz was “induced” to participate in the PFP Program; and (3) that Coventry Captial
dictated every part of the transaction.102 The Court finds that these purported factual disputes are
irrelevant to the operative question of whether Mrs. Barotz actually paid the premiums under her
Policy.
More pertinently, VLF attempts to raise a factual dispute by invoking the representations
and warranties Mrs. Barotz made in connection with the sale of Policy.103 Among other things,
Mrs. Barotz warranted that she “had not engaged in any conduct that would preclude buyer’s
recovery of benefits under the Policy” and agreed to indemnify the buyer and its successors for
“any lack by the Trust of an insurable interest in the life of the Insured at the time of the issuance
of the Policy.”104 VLF contends it is entitled to summary judgment in its favor based on these
representations and warranties or, “at the very least, they create an issue of fact with respect to
the factual allegations that the Estate relies upon for its motion.”105 The Court disagrees and will
101
Estate’s Mot. for S.J., Ex. 10 at 89:20–90:11.
102
See VLF’s Answering Br. at 4–16.
103
See id. at 15–16.
104
Id. (citing VLF’s Answering Br., Ex. 25 at §§ 1.10, 2.4).
105
Id. at 16.
18
address VLF’s argument in more detail below. Thus, there are no factual disputes precluding
summary judgment in the Estate’s favor.
3. VLF’s arguments under Berland fail.
VLF argues that the Estate has failed to establish that the Policy is an illegal human life
wager under Delaware law. In relevant part, VLF claims that Mrs. Barotz should be deemed to
have paid the Policy’s premiums because the Trust, “at [Mrs. Barotz’s] direction, borrowed the
money to pay premium on the Policy using a PFP Loan that [Mrs. Barotz] herself applied for.
When that loan came due, [she] decided that she wanted to sell the Policy for money and directed
her Trust to sell the Policy and repay the loan in full.”106 According to VLF, it is therefore
“indisputable that the insured’s trust actually paid the premiums as required under Berland,
which recognizes that an insured may use a nonrecourse loan to pay policy premiums so long as
the insured or trust actually pays the policy premiums.”107 VLF adds that “nonrecourse loans
and obligations are both lawful and commonly used, and the fact that LaSalle had no recourse
against [Mrs. Barotz] personally and was limited to recovering the Policy in the event of default
does not negate the Trust’s obligation to repay the loan.”108
VLF is correct that “nonrecourse loans and obligations are both lawful and commonly
used”—Berland acknowledged that. But Berland makes clear that the analysis does not end
there:
Price Dawe directs courts to determine who procured a policy by examining “who
pays the premiums.” The estate argues that the premium-financing structure here—
through which the premium payments were funded by a nonrecourse loan to the
subtrust, and Berland did not use any of her own assets—reflects that third parties
procured the policy. Lavastone argues that Delaware law permits the use of
premium financing to obtain a life-insurance policy, and that the “only relevant
question, then, is whether the loan transaction constitutes an unlawful wager under
106
VLF’s Answering Br. at 18.
107
Id. at 18–19
108
Id. at 20.
19
the Price Dawe factors.” If used to facilitate procurement of a policy for a
legitimate insurance purpose, such as estate planning, then premium financing is a
recognized and permissible tool. But the use of such financing might also be
evidence of an impermissible STOLI scheme, especially where the use of a
nonrecourse loan means that a third party, and not the insured, bears the entire
financial liability for obtaining the policy.109
Thus, the Court does not agree that Berland categorically permits the use of nonrecourse loans.
Moreover, VLF cannot reasonably argue that the nonrecourse loan here was “used to facilitate
procurement of a policy for a legitimate insurance purpose, such as estate planning.”110 Mrs.
Barotz was explicitly warned from the outset that “the Trust Agreement and the Supplement to
Trust Agreement are not intended to satisfy [her] estate planning needs and have not been
designed as an estate planning tool.”111
Finally, it bears repeating that nonrecourse premium financing “might also be evidence of
an impermissible STOLI scheme, especially where the use of a nonrecourse loans means that a
third party, and not the insured, bears the entire financial liability for obtaining the policy.”112
The undisputed facts establish that was just the situation here. Mrs. Barotz never paid any
premiums using her own funds, and the most she ever stood to lose was the Policy itself. Mrs.
Barotz bore no financial liability whatsoever—like the insured in Sol, Mrs. Barotz “did not have
a genuine obligation to repay the full amount of the Coventry/LaSalle loan.”113
Price Dawe established that “an insured cannot ‘procure or effect’ a policy without
actually paying the premiums.”114 There can be no genuine dispute that Mrs. Barotz did not
actually pay the premiums under her Policy, which was designed and marketed to function as
109
Berland, 266 A.3d at 972 (internal citations omitted) (emphasis added).
110
Id.
111
Plaintiff’s Mot. for S.J., Ex. 19 at 1–2.
112
Berland, 266 A.3d at 972.
113
Sol, 269 F. Supp. at 610 (emphasis added).
114
Price Dawe, 28 A.3d at 1076.
20
“free insurance for two years.”115 The Policy therefore lacks an insurable interest as required
under Section 2704, making it void ab initio.
C. VLF’S AFFIRMATIVE DEFENSES FAIL AS A MATTER OF LAW
VLF’s answer raised fourteen affirmative defenses.116 In its opening brief, the Estate
argues none of the defenses preclude summary judgment in the Estate’s favor because none are
viable under Delaware law. Conversely, VLF contends it is entitled to summary judgment on its
affirmative defenses asserting: (1) waiver; (2) release; and (3) that the Estate’s claims are barred
under the Delaware Uniform Commercial Code. The Court agrees with the Estate and holds that
VLF’s affirmative defenses fail.
1. Waiver and release
First, VLF’s waiver defense asserts that the Estate “has no rights to the Policy under 18
Del. C. § 2704 because Martha Barotz, Nathan Barotz, Peter Barotz, and the Trust waived them
in connection with the knowing and intentional relinquishment of the Policy.”117 Separately,
VLF asserts that the Estate’s cause of action is “also barred under the doctrine of release.”118
Both defenses rest on one paragraph from the Acknowledgement and Consent that Mrs. Barotz
signed in connection with her sale of the Policy:
The Insured, for itself and on behalf of its respective successors, assigns, hereby
remises, releases and forever discharges each of the Buyer and its present and
former officers, directors, stockholders, employees, agents, attorneys, successors,
affiliates and assigns from any and all claims, rights, actions, causes of action, suits,
liabilities, defenses, damages and costs that challenge or invalidate Buyer’s right
to, or the proceeds of the Policy, that may exist now or in the future, that relate to
alleged wrongdoing of third parties, including those parties involved in the
origination of the Policy or any financing to pay premiums thereon.119
115
See Plaintiff’s Mot. for S.J., Ex. 10 at 89:20–90:11.
116
See Answer to SAC at 12–20.
117
Id. at 13.
118
Id. at 14.
119
See Answer to SAC, Ex. A at 5.
21
VLF’s reliance on the release form is misplaced. Price Dawe made clear that a life
insurance policy lacking an insurable interest is void ab initio because it violates Delaware’s
“clear public policy against wagering.”120 Because the insurable interest requirement “serves the
substantive goal of preventing speculation on human life,” Section 2704(a) requires “more than
just technical compliance at the time of issuance. Indeed, the STOLI schemes are created to
feign technical compliance with insurable interest statutes.”121
Similarly, Berland rejected arguments that the estate’s claim was barred under the
doctrines of in pari delecto and unclean hand because “the General Assembly has prescribed that
the estate should receive the proceeds of the policy [created through a STOLI scheme] as a
matter of public policy.”122 In light of Price Dawe and Berland, VLF should not be allowed to
circumvent Delaware’s strong public policy against STOLIs simply because Mrs. Barotz agreed
to sign a boilerplate release form. To hold otherwise would legitimize the attempts of STOLI
promoters to “feign technical compliance with insurable interest statutes.”123
This conclusion is consistent with Malkin. In Malkin, the Supreme Court directed trial
courts to assess the “elements of the common-law defenses . . . asserted—and, where
appropriate, the public policy underlying the ban on human-life wagering—to decide the
viability of such defenses . . . to an estate’s action under Section 2704(b).”124 Here, VLF’s
defenses of waiver and release stand in direct conflict with public policy. “Under Delaware
common law, if a life insurance policy lacks an insurable interest at inception, it is void ab initio
120
Price Dawe, 28 A.3d at 1067–68.
121
Id. at 1074.
122
Berland, 266 A.3d at 974.
123
Price Dawe, 28 A.3d at 1074; see also Est. of Malkin v. Wells Fargo Bank, N.A., 379 F. Supp. 3d 1263, 1276–77
(S.D. Fla. 2019), aff’d sub nom. Est. of Malkin v. Wells Fargo Bank, N.A., 998 F.3d 1186 (11th Cir. 2021) (holding
an insured did not relinquish her estate’s right to recover a policy’s death benefit under Section 2704 by signing a
boilerplate release form).
124
Malkin, 2022 WL 1671966, at *6.
22
because it violates Delaware’s clear public policy against wagering.”125 If VLF’s defenses of
waiver or release were accepted, they would allow a downstream purchaser to retain the death
benefit paid under a void policy in clear contradiction to Delaware common law and Section
2704(a). Accordingly, those defenses are not “viab[le]” in the STOLI context.126
2. UCC defenses
VLF argues the Estate’s claims are barred under UCC Section 8-502.127 Malkin
expressly held that a defendant in a Section 2704(b) action cannot assert a UCC Section 8-502
defense.128 Thus, this defense likewise fails as a matter of law.
Because the affirmative defenses for which VLF seeks summary judgment fail, they do
not preclude summary judgment for the Estate.
D. VLF’S COUNTERCLAIMS FAILS AS A MATTER OF LAW
The Estate moves for summary judgment on VLF’s four counterclaims, whereas VLF
moves for summary judgment on its counterclaims for breach of contract and
indemnification/specific performance. The Court holds that the Estate prevails on all four
counterclaims as a matter of law.
First, the declaratory judgment counterclaim asks the Court to enter a judgment
“declaring the rights, status and legal relations among [VLF] and the Estate with respect to the
Policy’s proceeds.”129 The Court has done so by finding the Policy lacks an insurable interest
under Section 2704, making the declaratory judgment counterclaim moot.
125
Price Dawe, 28 A.3d at 1067–68.
126
See Malkin, 2022 WL 1671966, at *6.
127
VLF’s Mot. for S.J. at 29–30.
128
Malkin, 2022 WL 1671966, at *10.
129
Answer to SAC at 35–36.
23
Second, the breach of contract claim alleges the Estate “materially breached the
representations and warranties in the Acknowledgment and Consent signed by Martha
Barotz.”130 This counterclaim is simply rehashes VLF’s defenses of waiver and release, and fails
for the same reasons.
Third, VLF’s promissory estoppel claim is a repackaging of its breach of contract claim,
again resting on the Acknowledgment and Consent.131 Thus, this counterclaim fails as well.
The final counterclaim “seeks specific performance of the Estate’s obligation to hold it
harmless [from] any and all claims, losses, liabilities, costs and expenses, including without
limitation reasonable attorneys’ fees and disbursements, that it has incurred, and will in the
future incur, with respect to this action.”132 This counterclaim asks the Court to give effect to the
terms of the Acknowledgment and Consent. Again, the Court declines to do so. “At its core,
Price Dawe reaffirmed the unsavory truth about STOLI policies: they are nothing more or less
than a bet that a stranger will die. Price Dawe held that in Delaware, at least, such bets never
pay off.”133 Thus, VLF’s counterclaims uniformly fail as a matter of law.
E. THE ESTATE IS ENTITLED TO THE POLICY’S PROCEEDS
Section 2704(b) provides that “[i]f the beneficiary, assignee or other payee under any
contract made in violation of this section receives from the insurer any benefits thereunder
accruing upon the death . . . of the individual insured, the individual insured or his or her
executor or administrator, as the case may be, may maintain an action to recover such benefits
from the person so receiving them.” Section 2704(b) “directs that if a death benefit is paid under
an insurance policy that lacks an insurable interest, the estate of the insured may recover the
130
Id. at 36–37.
131
Id. at 38–39.
132
Id. at 40–41.
133
Estate of Malkin, 379 F. Supp. 3d at 1279 (internal citations omitted).
24
death benefit from the recipient.”134 Because the Estate has succeeded in demonstrating that
Mrs. Barotz’s Policy lacked an insurable interest at inception as a matter of law, the Estate is
entitled to the death benefit paid to VLF under the Policy.
Furthermore, because the Estate prevails on its Section 2704(b) claim, the Court does not
need to consider the Estate’s claim in the alternative for unjust enrichment.
VI. CONCLUSION
The Estate’s motion for summary judgment is GRANTED and VLF’s motion for
summary judgment is DENIED.
IT IS SO ORDERED
November 9, 2022
Wilmington, Delaware
/s/ Eric M. Davis
Eric M. Davis, Judge
cc: File&ServeXpress
134
Berland, 266 A.3d at 969.
25