Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

2002 Lawrence R. Buchalter Alaska Trust v. Philadelphia Financial Life Assurance Co.

United States District Court, S.D. New York

February 5, 2017

THE 2002 LAWRENCE R. BUCHALTER ALASKA TRUST, ALASKA TRUST COMPANY, and STEPHEN C. HARRIS, Trustees, Plaintiffs,
v.
PHILADELPHIA FINANCIAL LIFE ASSURANCE COMPANY, f/k/a AGL Life Assurance Company, Defendant.

          Jonathan Thomas Shepard, Esq. Eric Donovan Dowell, Esq. Pryor Cashman LLP New York, NY Counsel for Plaintiffs.

          Kendall Johan Burr, Esq. Thomas F.A. Hetherington, Esq. Hutson Brit Smelley, Esq. Edison, McDowell & Hetherington LLP Houston, TX Counsel for Defendant.

          OPINION & ORDER

          KENNETH M. KARAS UNITED STATES DISTRICT JUDGE.

         Plaintiffs The 2002 Lawrence R. Buchalter Alaska Trust (the “Trust”), Alaska Trust Company, and Stephen C. Harris (“Harris”) filed the instant Complaint, Amended Complaint, and Second Amended Complaint against Defendant Philadelphia Financial Life Assurance Company alleging several claims related to the Trust's purchase from Defendant of a variable life insurance policy and subsequent investment decisions. At this stage in the proceeding, the offered as an investment in connection with the policy. Defendant moves for summary judgment on these claims. Plaintiffs and Defendant have both also moved to disqualify the expert offered by the opposing Party. For the reasons to follow, Defendant's Motion for Summary Judgment is granted. The Motions To Exclude Expert Testimony are denied as moot.

         I. Background

         A. Factual Background

         The following facts are taken from the Parties' statements of undisputed material facts and the documents submitted by the Parties in connection with the pending Motions.

         1. The Trust

         The Trust is an irrevocable trust created by Lawrence Buchalter (“Buchalter”) on November 1, 2002. (See Decl. of Hutson B. Smelley (“Smelley Decl.”) Ex. 1 (“Trust Agreement”) (Dkt. No. 104); see also Def. Philadelphia Financial Life Assurance Company's Consolidated Reply to Pls.' Resp. to Def.'s Local Rule 56.1 Statement of Uncontroverted Facts & Statement of Additional Material Disputed Facts ¶ 1 (Dkt. No. 119).)[1] The agreement creating the Trust (the “Trust Agreement”) provides for an independent Trustee, a role which Buchalter may not fill. (See Trust Agreement II-11; see also Def.'s Consolidated 56.1 ¶ 3.) Plaintiff Alaska Trust Company was the sole Trustee until June 2012, when Harris was added as a Trustee. (See Second Am. Compl. ¶¶ 23, 24, 31 (Dkt. No. 42); see also Def.'s Consolidated 56.1 ¶ 4.) The Trust Agreement grants the Trustee the authority to make investments, including the ¶ 5.) Notwithstanding the Trustee's authority regarding investment decisions, the Trust Agreement also provides for an Investment Advisor, whose stated duties are to “direct the investments and reinvestments of the property of such trust.” (Trust Agreement II-26-II-27; see also Def.'s Consolidated 56.1 ¶ 8.) At all relevant times, Jeffrey Brown was the appointed Investment Advisor. (See Def.'s Consolidated 56.1 ¶ 9.) Although the representative for Alaska Trust Company, one of the Trustees, testified that he received investment instructions from only Brown, (see Smelley Decl. Ex. 2, at 13-14), Brown indicated that he received instructions from Buchalter regarding investment decisions for the Trust, (see Smelley Decl. Ex. 25, at 9; see also Def.'s Consolidated 56.1 ¶ 9).

         2. The Policy

         In 2002, Buchalter and his legal counsel, William Lipkind, approached Defendant about purchasing a life insurance policy through the Trust. (See Smelley Decl. Ex. 3; see also Def.'s Consolidated 56.1 ¶ 10.) As a result of those conversations, Lipkind obtained and sent to Buchalter a Private Placement Memorandum (the “2002 PPM”) from Defendant outlining the terms of a flexible premium variable life insurance policy (the “Policy”) offered by Defendant. (See Smelley Decl. Ex. 5, at BUCH00000214-15; see also Def.'s Consolidated 56.1 ¶ 12.) The 2002 PPM provided that “THE POLICY OWNER BEARS THE ENTIRE INVESTMENT RISK FOR ALL AMOUNTS INVESTED IN THE POLICY, INCLUDING THE RISK OF LOSS OF PRINCIPAL. THERE IS NO GUARANTEED MINIMUM ACCOUNT VALUE.” (See Smelley Decl. Ex. 5, at BUCH00000216; see also Def.'s Consolidated 56.1 ¶ 13.) The 2002 PPM also provided that “PURCHASE OF THE POLICY IS SUITABLE ONLY FOR PERSONS OF SUBSTANTIAL ECONOMIC MEANS AND FINANCIAL THAT HE OR SHE MEETS CERTAIN MINIMUM FINANCIAL AND OTHER SUITABILITY STANDARDS.” (See Smelley Decl. Ex. 5, at BUCH00000217; see also Def.'s Consolidated 56.1 ¶ 14.)

         On December 18, 2002, the Trust executed an application for the Policy insuring the lives of Lawrence and Robin Buchalter with a $55, 000, 000 death benefit. (See Smelley Decl. Ex. 6, at PFLAC 001091, PFLAC 001124; see also Def.'s Consolidated 56.1 ¶ 15.) The Trust also executed an accredited investor form affirming ownership of over $5 million in investments, attesting that “I AM ABLE TO BEAR THE ECONOMIC RISK OF AN INVESTMENT IN A POLICY FOR AN INDEFINITE PERIOD OF TIME, ” that “I UNDERSTAND AND ACCEPT THE FULL NATURE AND RISK OF AN INVESTMENT IN A POLICY, ” that “I received, carefully reviewed, understand and am familiar with the [2002 PPM], . . . the Policy and the Investment Account(s) available to me, ” and that “I have had the opportunity to ask [Defendant] questions and to receive answers concerning the purchase of the Policy and to obtain any additional information . . . that is necessary to verify the information provided regarding the Policy.” (Smelley Decl. Ex. 8, at PFLAC 001012-15; see also Def.'s Consolidated 56.1 ¶ 17.) The Policy was issued to the Trust on December 20, 2002. (See Smelley Decl. Ex. 6; see also Def.'s Consolidated 56.1 ¶ 18.)

         The feature of the Policy at issue here is the allocation of premium payments to a variable account. (See Smelley Decl. Ex. 5, at BUCH00000229-30.) The variable account allows the policyholder to allocate premium payments to various investment funds offered by Defendant. (See Id. at BUCH00000251.) For example, the 2002 PPM offered the Trust the opportunity to allocate premium payments to Millennium Global Estate, L.P. (See Id. at BUCH00000252.) for the [i]nvestment [a]ccounts.” (Id. at BUCH00000216.)

         A policyholder can select its preferred investment funds from a platform of insurance-dedicated funds provided by Defendant. (See Smelley Decl. Ex. 20; see also Def.'s Resp. 56.1 ¶ 3.) Before adding a fund to the platform, Defendant conducts due diligence. (See Decl. of Jonathan T. Shepard in Opp'n to Def.'s Mot. for Summ. J. (“Shepard Decl.”) Ex. U, at 27-28 (Dkt. No. 105); see also Def.'s Resp. 56.1 ¶ 69.) A committee of senior managers, including, from 2002 through approximately 2010, John Hillman (Defendant's CEO), Joe Fillip (Defendant's General Counsel), and John Fischer (a research supervisor), would review the due diligence report for a fund, (see Shepard Decl. Ex. U, at 28; see also Def.'s Resp. 56.1 ¶ 68), and the members of the committee would then come to an agreement to either unanimously place the fund on the platform or to not move forward with the fund, (see Shepard Decl. Ex. X, at 17-18; see also Def.'s Resp. 56.1 ¶ 71).

         The 2002 PPM provided additional detail regarding the tax implications of the Policy. Specifically, the 2002 PPM indicated that favorable “tax treatment will only apply, however, if the investments of each Investment Account of the Variable Account are (1) ‘adequately diversified' in accordance with Treasury Department regulations, and (2) the Company, rather than the Policy Owner, is considered the owner of the assets of the Variable Account for federal income tax purposes.” (Smelley Decl. Ex. 5, at BUCH00000246; see also Def.'s Consolidated 56.1 ¶ 19.) The 2002 PPM also provided that “no published ruling of the IRS or any other precedential authority has addressed the tax treatment of a variable life insurance contract issued in a private placement transaction, ” and went on to state that “[f]or this reason, no Policy Owner should ever attempt to contact an investment advisor. Rather, any and all Company.” (Smelley Decl. Ex. 5, at BUCH00000247; see also Def.'s Consolidated 56.1 ¶¶ 20- 21.)

         On December 20, 2002, Defendant sent two letters to the Trust. The first letter indicated that “[a]s an inducement for and as a precondition to the execution and delivery of the Application, ” Defendant offered its assurance “that the proposed structure for investing the Assets will not cause the Policyowner to be deemed to control the investment of the Assets and result in the Policy's failure to qualify as life insurance for federal income tax purposes.” (Smelley Decl. Ex. 10, at PFLAC 000996; see also Def.'s Consolidated 56.1 ¶¶ 23-24.) The letter also included a provision indemnifying the Trust should a court or agency determine that the assets are held by the Trust. (See Smelley Decl. Ex. 10, at PFLAC 000998; see also Def.'s Consolidated 56.1 ¶ 25.)

         The second letter provided:

You have requested various assurances from Insurer with respect to Family Management Corporation (“FMC”). On behalf of the Insurer, this is to certify that . . . [t]he Insurer has conducted due diligence with respect to FMC, and as a result of such due diligence, Insurer has satisfied itself that FMC is a suitable party to allocate, on behalf of the Insurer, Assets that are invested in the Asset Allocation Account and/or the Discretionary Account. However, the Insurer in no way guarantees or otherwise warrants to the Policyowner or to any other person the future performance of FMC . . . .

(Smelley Decl. Ex. 11, at PFLAC 001002; see also Def.'s Consolidated 56.1 ¶ 26.)

         3. Strategic Stable Return Fund (ID), LP

         On or about October 18, 2004, Sandy Geyelin, Defendant's Director of Research, and Jeff Diercks, the head of the consulting firm InTrust Advisors, traveled to Dallas to meet the managers of Strategic Stable Return (“SSR”) Fund (ID) to conduct due diligence on SSR and determine whether it was suitable for inclusion on Defendant's platform. (See Smelley Decl. Ex. 56.1 ¶ 26.) The managers of SSR were Steve Helland and Tim Law. (See Diligence Report, at InTrust 000010; see also Def.'s Resp. 56.1 ¶ 26.) The same day as the meeting, Geyelin sent an email to Helland and Law asking them to provide some additional information and to complete a due diligence questionnaire. (See Shepard Decl. Ex. N; see also Def.'s Resp. 56.1 ¶ 29.) The questionnaire asked SSR to provide information relating to ownership structure, manager experience, assets under management, manager capital at risk, staffing, historical performance, service providers, investment strategy, and risk management. (See Shepard Decl. Ex. N; see also Def.'s Resp. 56.1 ¶ 30.) Geyelin and Diercks thereafter spoke with individuals at SSR at least three more times. (See Shepard Decl. Ex. O; see also Def.'s Resp. 56.1 ¶ 31.) In the notes Diercks made during those meetings, one page included the notations: “Review for while? See monthly reporting? See for a while, ” and “Wade in over time?” (Shepard Decl. Ex. P, at PFLAC 000390; see also Def.'s Resp. 56.1 ¶ 33.) Geyelin and Diercks also spoke with various references for Helland and Law and memorialized those conversations in their notes. (See Shepard Decl. Ex. R.)

         In December 2004, Geyelin and Diercks put together a due diligence report entitled “Manager Due Diligence Package.” (See Diligence Report; see also Def.'s Consolidated 56.1 ¶ 29.) The report relayed a number of foundational facts about SSR, including: (1) SSR had launched in July 2003 and did not launch its first fund until September 2003; (2) the SSR ID Fund (the “ID Fund”), in which the Trust was considering investing, was launched in July 2004 and had approximately $20 million in assets under management; (3) SSR was then running at a break-even profitability; and (4) Helland and Law were the only employees of SSR. (See Diligence Report, at InTrust 000010; see also Def.'s Resp. 56.1 ¶¶ 39-42.) The report indicated entity owned by “silent partner” William Lee Gunlicks. (See Diligence Report, at InTrust 000011; see also Def.'s Resp. 56.1 ¶ 46.)

         The report stated that the “largest” risk posed by SSR and the ID Fund was the fact that 44% of the assets of the ID Fund were invested in the Stable Value Fund, a fund run by Gunlicks. (See Diligence Report, at InTrust 000011.) The report noted that the Stable Value Fund invested in a single industry, and thus the Stable Value Fund, and the ID Fund in turn, could be negatively affected by changes in that industry. (See id.) The report also questioned the managerial skills of Helland and Law given that the ID Fund's returns were consistently lower than that of the Stable Value Fund. (See id.) The report concluded this section by noting that “[t]he concentration risk makes adding this fund to the . . . platform a risk without appropriate disclosure of the concentrated nature of the fund's investments. Without such disclosure, we would be unable to recommend this fund for inclusion on [the] platform.” (Id.)

         The report went on to note that the ID Fund had “delivered on its stated goals, ” and that it was “currently the top performing Fund of Fund” for the year on Defendant's investment platform. (Id. at InTrust 000012-13.) With respect to operations, the report warned that managing the firm was “an overwhelming task for four people let alone two who are married with children. One of the areas is most likely not being attended to as much as necessary.” (Id.) The report added, however, that SSR was planning on hiring an analyst and possibly a marketing employee once it reached $40 or $50 million in assets under management. (See id.)

         In discussing the risk associated with the ID Fund's portfolio, the report again pointed to the allocation of 44% of the ID Fund's assets with the Stable Value Fund, and noted that given The report noted that SSR claimed to have commitments for at least $20 million more in assets under management, and that if it obtained such assets, it would be able to hire the support staff it needed. (See Id. at InTrust 000015.) The report also indicated that background checks were run on the firm, Helland, and Law. (See id.) There is no indication that a background check was run on Gunlicks.

         The report concluded with the following observations:

SSR needs to increase its assets under management. Although they are currently at break-even point financially, [Helland] and [Law] will soon be at a breaking point emotionally and physically, if additional support staff is not added. We feel confident that their assets under management will rise to the necessary level to ensure the sustainability of the business, given their performance track record and alleged commitments for new assets.
SSR investments are heavily concentrated in one fund in one strategy. Although this meets the diversification requirements of Rule 817, it hardly qualifies as diversified from an[] investment position. This information should be more prominently displayed in materials related to them, so policyholders are aware of this attribute.
The concentration risk in one single fund and strategy (Stable Value Fund-44%) makes adding this fund to the . . . platform a risk without appropriate disclosure of the concentrated nature of the fund's investments. Without such disclosure, we would be u ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.