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Robert Bernstein, As Trustee of the Fletcher Johnson Insurance Trust, et al v. Principal Life Insurance Company

December 2, 2010


The opinion of the court was delivered by: Pitman, United States Magistrate Judge


I write to resolve several discovery issues raised by defendant. The issues are addressed in correspondence from defendant's counsel dated August 17, September 2 and October 29, 2010 and correspondence from plaintiffs' counsel dated August 24 and November 1, 2010.

I. Background

This is an action to collect on a life insurance policy issued on the life of the late Dr. Fletcher Johnson in the amount of $5 million that was issued in 2007 when Johnson was 76 years old. Shortly after the policy was issued, the policy was transferred to the plaintiff trust. Johnson died approximately 16 months after the policy was issued.

Defendant has refused to pay the proceeds of the policy, claiming that the purchase of the policy and its transfer to the plaintiff trust were the product of a "STOLI" scheme, i.e. a stranger originated life insurance scheme in which a life insurance policy is procured for the purpose of selling the policy to investors who, although they have no insurable interest in the life of the insured, will fund the premiums and receive the benefits when the insured dies. In such transactions, all costs are usually borne by the investors who are, in essence, betting that the insured will die before the total cost of the premiums paid exceeds the proceeds of the policy. See generally Life Prod. Clearing LLC v. Angel, 530 F. Supp. 2d 646, 652-55 (S.D.N.Y. 2008) (Chin, D.J., now Cir. J.).

In its counterclaim, defendant seeks a declaratory judgment that the policy is void or voidable and alleges that third-party investors and/or STOLI promoters approached Johnson and solicited his participation in plan to procure a life insurance policy to sell to third-party investors in the secondary market (Amended Counterclaims, dated December 15, 2009 (Docket Item 20) ("Am. Countercl."), ¶ 16). According to defendant, the plan called for the creation of a trust that would own the policy and be the beneficiary; premiums would be paid by third parties (Am. Countercl. ¶ 17).

Pursuant to the alleged plan, Dr. Johnson applied to defendant for a life insurance policy in the amount of $5 million on April 26, 2007; the application disclosed that the policy would be owned by a trust (Am. Countecl. ¶¶ 18-19). Notwithstanding the foregoing disclosure, defendant alleges that application for the policy was accompanied by a "Policy Owner Intent form" in which the following questions were, according to defendant, falsely answered in the negative:

* Is there any 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?

* 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 policy values back to them? (Am. Countercl. ¶ 21). According to defendant, both questions were falsely answered 'no' by the trustee of the trust and by Steve Lockwood, the insurance agent who procured the policy in issue (Am. Countercl. ¶ 22). Defendant also claims that Johnson misrepresented the status of his health in the application (Am. Countercl. ¶¶ 23-24).

As a result of the foregoing and other allegations, defendant seeks a declaratory the policy is void because the policy was issued to a party or parties with no insurable interest in Johnson, that the plan to do so was fraudulently concealed (Am. Countercl. ¶¶ 40-45), and that the policy is void because the trust and its agents made fraudulent misrepresentations to defendant (Am. Countercl. ¶¶ 47-50).

II. The Pending Discovery Disputes

1. Discovery from Lockwood Regarding other Policies -Defendant first seeks to compel non-party Lockwood to produce documents concerning other 12 other putative STOLI policies in which Lockwood participated. Defendant claims that documents concerning these other policies are relevant to show Lockwood's intent to defraud pursuant to Fed.R.Evid. 404(b).

At the time of defendant's application for this discovery, it appeared to be the law in New York that "[o]nly one who obtains a life insurance policy on himself 'on his own initiative' and in good faith -- that is, with a genuine intent to obtain insurance protection for a family member, loved one, or business partner, rather than an intent to disguise what would otherwise be a gambling transaction by a stranger on his life --may freely assign the policy to one who does not have an insurable interest in him." Life Prod. Clearing, LLC v. Angel, supra, 530 F. Supp. 2d at 653. The New York Court of Appeals has recently rejected that view and held that "New York law permits a person to procure an insurance policy on his or her own life and immediately transfer it to one without an insurable interest in that life, even where the policy was obtained for just such a purpose." Kramer v. Phoenix Life Ins. Co., No. 176, 2010 WL 4628103 at 1 (N.Y. Ct. of Apps. Nov. 17, 2010). Thus, even if I construe defendant's counterclaims to allege a scheme or conspiracy among Johnson, Lockwood and others to conceal the purpose for which the policy was procured, i.e., a STOLI transaction, and that Lockwood's intent is attributable to Johnson, such a scheme would not affect the validity of the policy.*fn1

Accordingly, the documents concerning other policies are immaterial, and defendant's application to compel ...

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