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Financial Life Services, LLC v. N. Bergman Insurance Trust

September 22, 2011


The opinion of the court was delivered by: Hurley, Senior District Judge:


Plaintiff Financial Life Services, LLC ("plaintiff" or "FLS") commenced the present action alleging that defendant N. Bergman Insurance Trust ("defendant" or the "Trust") breached a Life Insurance Policy Purchase and Sales Agreement (the "Agreement") entered into on November 4, 2009. (Compl. ¶ 1.) On February 7, 2011, the Court granted plaintiff's motion for entry of default judgment against defendant and referred the case to Magistrate Judge William D. Wall, pursuant to 28 U.S.C. § 636(b)(3), for a report and recommendation as to damages and attorneys' fees. On June 27, 2011, Judge Wall issued a Report and Recommendation that judgment be entered against defendant in the following amounts: (1) $408,700.00 in damages (plus additional amounts conditioned upon plaintiff's submission of proper supporting documentation), (2) $40,671.47 in interest through July 15, 2011 (plus additional interest accrued through the entry of judgment, as well as interest on additional damages amounts), (3) post-judgment interest calculated at the statutory rate prescribed by 28 U.S.C. § 1961(a), (4) a contractual Termination Charge of $5,000.00, (5) attorneys' fees in the amount of $17,999.50, and (6) $894.65 in costs. Judge Wall also recommended that the ownership of the life insurance policy at issue in the Agreement "revert to defendant, and that plaintiff maintain a lien upon that Policy." (R&R at 1.)

Plaintiff timely filed objections to Judge Wall's Report and Recommendations ("Pl.'s Obj."). (See Docket No. 13.) In response, defendant submitted a document entitled "Defendant's Confirmation of Report and Recommendation and Objections to Plaintiff's Objections to Report and Recommendation" ("Def.'s Resp."). (See Docket No. 15.) Plaintiff submitted a reply ("Pl.'s Reply") (see docket no. 16) as well as a follow-up letter dated September 16, 2011 (see docket no. 17).

For the reasons set forth below, the Court hereby modifies certain portions of Judge Wall's June 27, 2011 Report and Recommendation, and adopts the remainder in its entirety.

I. Factual Background

In the Report and Recommendation, Judge Wall found that the factual allegations in the Complaint were deemed admitted by virtue of defendant's default, and that those admitted facts were sufficient to establish defendant's liability for breach of contract under New York state law. (R&R at 2, 5-6.)

Defendant owned a life insurance policy (the "Policy"), which was issued by Transamerica Occidental Life Insurance Company ("Transamerica") and insured the life of Nancy Bergman (the "Insured") for the amount of $10,000,000. (Compl. ¶ 4.) On November 4, 2009, the parties entered into the Agreement, which provided that defendant would transfer all of its rights, title, and interest in and to the Policy to plaintiff in exchange for plaintiff's payment of a purchase price of $1,350,000. (Id. ¶¶ 8, 9.) The Agreement set forth, however, that plaintiff would not be obligated to pay the purchase price until several "Conditions Precedent" were satisfied. One such Condition Precedent was that plaintiff "verified the accuracy of all material information relied upon by [FLS] in making the offer to [defendant, including] . . . [defendant's] representations, warranties and covenants contained herein." (Compl., Ex. A at 3(c).) The Agreement further provided that verification of defendant's representations and warranties was to be completed after the execution of the Agreement and assignment of the Policy to plaintiff. (Compl. ¶ 14.)

A. FLS's Advances of Policy Premiums

Pursuant to the Agreement, defendant requested a change of ownership of the Policy from Transamerica, which subsequently notified plaintiff that it had been recognized and accepted as the new owner or beneficiary under the Policy.*fn1 (Id. ¶ 16.) According to plaintiff, upon Transamerica's recognition of the change in ownership, FLS became "the lawful owner of the Policy." (Id.)

Subsequently, on November 16, 2009, Transamerica notified defendant that the Policy had entered into a grace period and was "in danger of lapsing." (Id. ¶ 17.) By permitting the Policy to enter a grace period before all the Conditions Precedents were satisfied, defendant breached Section 7(cc) of the Agreement. (Id.; R&R at 3.) As expressly authorized by that Section of the Agreement, on December 15, 2009 plaintiff advanced $64,500 in Policy premiums to Transamerica "in order to cure Defendant's breach." (Compl. ¶ 18.) Section 7(cc) further provided that the amount of any premiums so advanced could be deducted from the purchase price. (Id. ¶ 13.)

B. The Life Expectancy Reports

Prior to the execution of the Agreement, defendant provided plaintiff with a life expectancy report for the Insured, which was prepared on July 3, 2009 by a vendor called 21st Services. According to plaintiff, it relied on the information contained in this life expectancy report in deciding to enter into the Agreement. (Id. ¶ 15.) As part of the Agreement, defendant warranted and represented that all "Essential Information" it provided to plaintiff, including the information in the life expectancy report, was accurate. (Id. ¶ 10.)

After the Agreement was executed, plaintiff attempted to verify the various representations and warranties made by defendant. To that end, FLS submitted the Insured's medical records to 21st Services and obtained a second life expectancy report, dated December 16, 2009. (Id. ¶ 19.) The second report, however, contained a longer life expectancy projection than was set forth in the original report. (Id.) Because an insured's estimated life expectancy "is a critical component to determining the value of a life insurance policy," the difference between the projections contained in the first and second life expectancy reports "was material in the context of the transaction." (Id. ¶ 20.)

C. FLS's Pursuit of Contractual Remedies

The Agreement provided that if defendant made any material representation that proved to have been incorrect when made, FLS could pursue one of two contractual remedies. First, pursuant to Section 7(aa), FLS could choose to reduce the purchase price by $675,000.00 as liquidated damages. In the alternative, FLS could elect (pursuant to Section 7(k)) to require defendant to repurchase the Policy by tendering the purchase price as well as (1) any premiums paid by FLS after the Agreement was entered into, (2) a $5,000.00 Termination Charge, and (3) interest.

Based upon defendant's act of allowing the Policy to enter a grace period as well as making material misrepresentations regarding the Insured's life expectancy, FLS sought to exercise the first option described above; plaintiff tendered to defendant the original purchase price of the Policy reduced by $675,000.00 (the liquidated damages amount set forth in Section 7(aa)), as well as an additional $64,500.00 (the amount of premiums advanced, as ...

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