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Stuart Moldaw Trust v. XE L.I.F.E.

July 27, 2009


The opinion of the court was delivered by: P. Kevin Castel, District Judge


In 2004, Stuart Moldaw and his wife Phyllis were approached by their longtime estate-planning advisor with an interesting proposal: a group of investors would pay the couple a total of $4 million in exchange for their obtaining a number of insurance policies on their lives.*fn1 Advised by accountants and legal counsel, Stuart and Phyllis decided to participate in the plan. In or about 2004, ten to twelve policies were issued to insure Stuart's life, with coverage totaling $78 million. After Stuart died in May 2008, his estate executor and widow remained silent while the insurance carriers paid policy proceeds to the investors. The estate, the widow and an entity identified as The 2004 Stuart Moldaw Trust, all domiciled in California, have now sued the principal investor groups, domiciled in New York, to recover the insurance payments.*fn2 Plaintiffs rely principally on a New York statute that grants to the administrator or executor of an estate the right to sue someone who procures a policy on another's life without having an insurable interest. N.Y. Ins. L. § 3205(b).

Defendants move to dismiss the Complaint on various grounds, pursuant to Rule 12(b)(6), Fed. R. Civ. P. As explained below, the motion is granted because California law, and not New York law, governs Claims One and Two; under California law, only the insurer has the right to sue a person who has received insurance proceeds but holds no insurable interest. In addition, Claim Three, which is asserted by Phyllis under California's community property law, California Family Code § 1100(b), is time-barred because Stuart's transfer of the policies occurred more than three years before commencement of the action. Finally, Claims Four and Five, which seek equitable relief based on the other claims, are dismissed because the other claims fail.


For the purposes of this motion to dismiss, the allegations set forth below are accepted as true, with the exception of legal conclusions couched as factual allegations. See Iqbal v. Ashcroft, 129 S.Ct. 1937, 1949-50 (2009). All reasonable inferences are drawn in the plaintiffs' favor as the non-movants. United States v. City of New York, 359 F.3d 83, 91 (2d Cir. 2004), cert. denied, 543 U.S. 1146 (2005).

A. The Parties

This action is directed toward what the plaintiffs describe as the defendants' "illegal wagers on the life of Stuart G. Moldaw." (Compl. ¶ 1.) Stuart Moldaw died in California on May 24, 2008, at age 81. (Compl. ¶¶ 13, 50.)

Defendant XE Capital Management, LLC ("XE Capital") is an asset management and hedge fund and the sole member of defendant XE L.I.F.E. LLC ("XE Life"). (Compl. ¶¶ 15-16.) Randall K. Kau, a New York citizen, is the sole member of XE Capital, and XE Capital is the sole member of XE Life. (Compl. ¶¶ 15-16.) According to the plaintiffs, the defendants arranged for life insurance policies to issue on the life of Stuart Moldaw, for which they paid Stuart $2 million, under the premise that the payments to Stuart and the policy premiums would be less than the benefits to be realized upon payment at Stuart's death. (Compl. ¶¶ 4-5.) According to the defendants, "ten or twelve" policies were issued on Stuart's life by "four or five" different carriers. (July 22 Tr. at 24.) The policies provided for payment of approximately $78 million upon Stuart's death, and were written in or about 2004. (Compl. ¶ 4; Nawaday Dec. Exs. A, B.) Defendants and their co-conspirators allegedly paid all policy premiums, and Stuart Moldaw paid none. (Compl. ¶¶ 4, 32, 62, 79, 106.)

Plaintiff Susan Moldaw is the executor of the estate of Stuart Moldaw (the "Executor"). (Compl. ¶ 13.) She resides in California. (Compl. ¶ 13.) In both the caption and the body of the Complaint, she is identified in her capacity as estate executor, and not in any individual capacity. (Compl. ¶¶ 6, 13.) Plaintiff Phyllis Moldaw is Stuart's widow, and resides in California. (Compl. ¶¶ 14, 27.) The third plaintiff is The 2004 Stuart Moldaw Trust (the "Trust"), which is identified as an irrevocable trust organized under California law. (Compl. ¶ 12.) Its trustee, Normal Ferber, resides in California. (Compl. ¶ 12.) The Trust was formed as an unfunded trust on December 13, 2004, and, according to the Complaint, is "the rightful beneficiary of the Policies." (Compl. ¶¶ 6, 44.)

Plaintiffs contend that the Court should order defendants to pay to the Trust any proceeds from the policies; grant declaratory relief declaring the Trust the rightful beneficiary of the policies, as well as imposition of a constructive trust and an accounting; or, alternatively, order the defendants to pay the Executor all proceeds "for transfer to the 2004 Stuart Moldaw Trust . . . ." (Compl. ¶¶ 126-30, 142-44.) Elsewhere, the Complaint states that if the insurance proceeds are returned to the Trust, the plaintiffs "agree to repay" the $4 million cumulatively received by Stuart and Phyllis as compensation for their participation in the transaction. (Compl. ¶ 6; see also July 22 Tr. at 44 ("If we prevail on this, we recognize that [keeping the $4 million] would be inequitable and we would hand back the 4 million, and that's in our complaint.").)

B. The Life Insurance Policies and Related Transactions

According to the Complaint, non-party "conspirators" initiated the chain of events that culminated in this action. The Complaint alleges that Mark Ross, the principal owner of a firm called Mark Ross & Co. ("MR & Co."), advised Stuart Moldaw on life insurance and estate-planning matters for a period of about 10 years. (Compl. ¶¶ 18-19, 27.) Ross first proposed a transaction through which Stuart and Phyllis Moldaw would be paid $4 million in exchange for a series of insurance policies to be issued on their lives, after which the life insurance policies would be sold to investors. (Compl. ¶¶ 26, 28.) According to the Complaint, the Moldaws had no need or desire for additional insurance, but the defendants presented the proposal as a way for the Moldaws to make money with little risk. (Compl. ¶ 29.)

During a series of meetings in fall 2004, which were attended at least in part by Stuart, his accountant, and his attorney from the Heller Ehrman law firm, it was concluded that approximately $78 million in life insurance coverage could be written on the lives of both Stuart and Phyllis, without any premium payments from Stuart or Phyllis. (Compl. ¶¶ 30-32.) All costs associated with the transaction were to be incurred by the defendants and/or MR & Co. (Compl. ¶ 32.) Stuart agreed to proceed with the transaction, the effects of which the Complaint describes as follows:

[T]he Moldaws would earn $4 million in exchange for participating in the deal. Specifically, Ross explained that upon the issuance of the insurance policies on the lives of Stuart and Phyllis, Defendant XE Life and/or the other Defendants would pay Stuart and Phyllis a total of $4 million as consideration for their agreeing to become the insured lives and, in effect, giving up their rights to secure insurance coverage that they could otherwise own on their lives. (Compl. ¶ 33.)

According to the Complaint, the structure of the transaction was complex, since defendants were "[a]pparently aware of the legal prohibition of transactions by which a person is paid to take out insurance upon his or her life for the benefit of a stranger . . . ." (Compl. ¶ 35.) "[A] complicated scheme" was orchestrated to work around that statutory prohibition, using unfunded trusts, limited liability companies and financing agreements. (Compl. ¶ 35.) Once formed, the trusts and LLCs had no assets other than the life insurance policies. (Compl. ¶ 36.) The Complaint alleges that "the Defendants would make 'loans' to the trusts and/or the [LLCs] in the form of an agreement to pay the premiums due on the policies" in exchange for secured interest in the life insurance policies. (Compl. ¶ 36.) According to the Complaint, once the loans expired, the defendants were to take ownership of the policies. (Compl. ¶ 36.) The Complaint alleges that policies on the lives of Stuart and Phyllis were first purchased on October 6, 2004, with the LLCs and trusts named as beneficiaries and the premiums paid directly by the defendants. (Compl. ¶ 37.)

The Complaint asserts that in or about October 2004, the defendants, via Mark Ross, informed Stuart that they could not immediately pay Stuart and Phyllis the promised $4 million. (Compl. ¶ 40.) Instead, payment would be contingent on the expiration of a two-year "incontestability period," after which the policies on their lives would be available for sale. (Compl. ¶ 40.) At Stuart's suggestion, the defendants placed $4 million in escrow, payable to Stuart and Phyllis at the close of the incontestability period. (Compl. ¶¶ 40-41.) Ross promised Stuart that any sales transactions "would be undertaken so as to protect the names of Stuart and Phyllis as the insureds from the possible beneficial buyers of the insurance policies on their lives."*fn3 (Compl. ¶ 41.) An escrow agreement was entered between Stuart, Phyllis, XE Life and JP Morgan Trust Company, National Association of New York. (Compl. ¶ 45.) New LLCs and trusts formed as part of the transaction's restructuring. (Compl. ¶¶ 42-44.) One of these new trusts was plaintiff The 2004 Stuart Moldaw Trust. (Compl. ¶ 44.)

Ultimately, defendants XE Capital and XE Life acquired ownership over the Moldaw life insurance policies, following a "struggle" with MR & Co. and XE-R that occurred "in less than amicable circumstances." (Compl. ¶ 48.) The defendants made no effort to sell the insurance policies during the two-year incontestability period, and Stuart and Phyllis each received $2 million, plus interest, from the escrow account. (Compl. ¶ 49.) According to the Complaint, litigation followed between Ross and the defendants, which is ongoing. (Compl. ¶ 50.)*fn4

The plaintiffs commenced this action on November 3, 2008. As explained in the Complaint, "[t]he instant action does not arise out of the Policies themselves and does not seek to have those Policies voided or otherwise reformed." (Compl. ¶ 51.) Rather, the Complaint seeks relief directed toward what it broadly refers to as "the Transaction" -- the purchase of Stuart's life insurance policies by entities with no insurable interest in his life. (Compl. ¶¶ 35, 51.) According to the Complaint, the defendants violated New York Insurance Law § 3205 by causing life insurance policies to be issued solely for the benefit of the defendants rather than for the benefit of persons with an insurable interest. Claim One alleges violation of New York Insurance Law § 3205(b)(2), which prohibits a person without an insurable interest from procuring or causing to be procured an insurance policy on the life of another; Claim Two alleges violation of New York Insurance Law § 3205(b)(1), which permits individuals to procure an insurance policy on their own lives; and Claim Three alleges violation of California Family Law § 1100(b), which requires written consent of a spouse prior to disposing or giving away community property for less than fair and reasonable value. Claim Four seeks declaratory relief and Claim Five requests the Court to order a constructive trust and an accounting.

As to relief, the plaintiffs seek disgorgement of the insurance proceeds from the defendants and claim that any proceeds should be placed in the Trust as the rightful beneficiary. (Compl. ΒΆ 6.) They also propose alternative equitable remedies whereby Phyllis Moldaw or the Executor would receive the policy benefits. (Compl. ...

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