Garrett v. ITM TwentyFirst, LLC et al

Filing 143

ORDER granting 29 Motion to Dismiss. Please see attached Ruling and Order for details. Signed by Judge Robert N. Chatigny on 08/31/2024. (Bunnell, E)

UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
JERRY GARRETT, an individual,
as Special Administrator for
the ESTATE OF FRANK GARRETT,
JR.,
Plaintiff,
v.
VIVA CAPITAL 3, L.P.,
U.S. BANK, N.A.,
Defendants.

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Case No. 3:22-cv-89(RNC)

RULING AND ORDER
Plaintiff Jerry Garrett, administrator of the estate of his
late father, Jerry Garrett, Jr., brings this case against
defendants Viva Capital 3, L.P. (“Viva 3”) and U.S. Bank, N.A.
He claims that the estate is entitled to the proceeds of a
stranger-originated life insurance (“STOLI”) policy paid to U.S.
Bank as the securities intermediary for Viva 3, the beneficial
owner of the policy.

The policy was issued by a Connecticut-

based insurance company to the Jerry Garrett 2006 Life Insurance
Trust, a Delaware statutory trust.

In 2019, after plaintiff’s

father died, the Connecticut-based insurance company that issued
the policy processed U.S. Bank’s application for the death
benefit and paid the proceeds to U.S. Bank, which then credited
the proceeds to Viva 3’s securities account.
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Under Delaware law, which appears to govern all issues
relating to this policy, STOLI policies constitute illegal
wagers on human life and are therefore “void ab initio and can
never be enforced.”

Wilmington Trust, N.A. v. Sun Life

Assurance Co. of Can., 294 A.3d 1062, 1065 (Del. 2023).
However, if the issuer of a STOLI policy controlled by Delaware
law has already paid the death benefit, a Delaware statute
authorizes the decedent’s estate to bring an action to recover
the proceeds from the recipient.

See DEL. CODE. ANN. tit. 6, §

2704(a) and (b) (1953); Lavastone Cap. LLC v. Est. of Berland,
266 A.3d 964, 970-71 (Del. 2021)(construing Section 2704).
Plaintiff’s claims against Viva 3 and U.S. Bank are based on
this statute.

Subject matter jurisdiction is based on diversity

of citizenship.
The defendants have moved to dismiss the case for lack of
subject matter jurisdiction on the ground that both plaintiff
and Viva 3 are citizens of California.

Since the motion was

filed, Viva 3 has submitted an amended statement under Fed. R.
Civ. P. 7.1 demonstrating that its members include at least one
person who, like plaintiff, is a citizen of California.

In

light of this filing, plaintiff no longer disputes that complete
diversity is lacking.

Instead, he proposes to drop Viva 3 as a

defendant and proceed against U.S. Bank alone, thereby curing
the jurisdictional problem.

The defendants contend that
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plaintiff’s proposal is untenable because Viva 3 is an
indispensable party under Fed. R. Civ. P. 19.

The issue

presented by the motion to dismiss is thus whether the action
should proceed in the absence of Viva 3 or be dismissed as to
both defendants.
Plaintiff previously litigated a substantially similar
issue in another STOLI case involving the same scenario.

In

Garrett v. ITM TwentyFirst, LLC, No. 22-cv-10065-MGM (D. Mass.),
plaintiff sued Viva Capital Trust (“Viva Trust”), the beneficial
owner of an insurance policy issued on his father’s life, along
with its securities intermediary, Wilmington Trust, N.A., which
had received the proceeds of the policy and credited them to
Viva Trust’s securities account.

The suit was based on a South

Dakota statute like the Delaware statute at issue here.
S.D. CODIFIED LAWS § 58-10-3 (1966).

See

In opposing dismissal of the

action for lack of complete diversity, plaintiff argued that the
Court should drop Viva Trust as a defendant and allow the case
to proceed against Wilmington Trust.

The Court determined that

Viva Trust was a required party under Fed. R. Civ. P. 19(a) and
that dismissal was warranted under Rule 19(b).

See ITM

TwentyFirst, No. 22-cv-10065-MGM, Order Granting Mot. to Dismiss
and Denying Mot. to Stay, ECF No. 78 (D. Mass. Sept. 27, 2023).

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After due consideration of the parties’ extensive submissions,
I reach the same decision here. 1
Plaintiff contends that Viva 3 is not a required party
under Rule 19(a) because U.S. Bank is jointly and severally
liable under Section 2704(b), which provides a cause of action
against “any payee” of the proceeds of a STOLI policy.

Yet it

is far from clear that the statute should be interpreted to
enable plaintiff to proceed solely against U.S. Bank,
notwithstanding Viva 3’s acknowledgement that it is the
recipient of the proceeds.

See Wells Fargo v. Est. of Malkin,

278 A.3d 53, 56-57 (Del. 2022)(observing that ”a securities
intermediary who merely acts on the instructions of the
beneficial owner of a STOLI policy and credits the policy
proceeds to the beneficial owner is unlikely to face ultimate
liability under Section 2704(b)”).

Even assuming, however, that

such a possibility exists, plaintiff’s claim against U.S. Bank
cannot be resolved on the merits without determining Viva 3’s
rights vis-à-vis the Estate.

In this regard, Viva 3 states that

it has viable affirmative defenses as well as counterclaims for
breach of contract, fraud, negligent misrepresentation,
promissory estoppel, and indemnification. 2

The Court of Appeals

My decision makes it unnecessary to decide whether collateral estoppel
applies to the ruling in the Massachusetts case.
2 Viva 3 alleges that Frank Garrett, Jr. “caused his trust to voluntarily
relinquish the Policy while making numerous representations and warranties
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has stated that “[i]f the resolution of a plaintiff’s claim
would require the definition of a non-party’s rights under a
contract, it is likely that the non-party is necessary under
Rule 19(a).”

Jonesfilm v. Lion Gate Intern., 299 F.3d 134, 141

(2d Cir. 2002).

Accordingly, I find that Viva 3 is a required

party.
Plaintiff contends that its claim against U.S. Bank can be
adjudicated in Viva 3’s absence without prejudicing Viva 3’s
interest in the litigation because “prejudice to absent parties
approaches the vanishing point when the remaining parties are
represented by the same counsel, and when the absent and
remaining parties' interests are aligned in all respects.”
Marvel Characters, Inc. v. Kirby, 726 F.3d 119 (2d Cir. 2013).
However, it is not clear that Viva 3’s and U.S. Bank’s interests
are “aligned in all respects.”
Massachusetts case.

This issue was addressed in the

In its order dismissing the case, the Court

stated that it was unclear whether Wilmington Trust would have
standing to assert counterclaims and defenses on behalf of Viva
Trust, and further noted that the two defendants’ interests
could diverge.

See ITM TwentyFirst, No. 22-cv-10065-MGM, Order

Granting Mot. to Dismiss and Denying Mot. to Stay, ECF. No. 78
(D. Mass. Sept. 27, 2023)(citing Est. of Malkin, 278 A.3d at 67
that would appear to be false if the Court were to invalidate the policy,
including that the Policy was valid and supported by an insurable interest.”
ECF 78, at 9-10.

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in support of the proposition that a securities intermediary is
likely to seek indemnification from a STOLI policy’s beneficial
owner).
Even assuming U.S. Bank has standing to assert Viva 3’s
affirmative defenses and counterclaims, their interests are not
identical because U.S. Bank can look to Viva 3 for
indemnification.

Therefore, Viva 3 argues, to avoid prejudicing

its interest in the subject matter of this action, in which
plaintiff has sued it under Section 2704 as a recipient of the
policy proceeds, plaintiff should be required to proceed in a
court where Viva 3 will have an opportunity to litigate its
defenses and counterclaims directly.

After pragmatically

examining the interests of the parties as Rule 19 requires and
balancing Viva 3’s interest against plaintiff’s interest in
maintaining the present action in Viva 3’s absence, I agree with
Viva 3. 3

Plaintiff submits that “[f]ederal courts are extremely reluctant to grant
motions to dismiss based on nonjoinder and, in general, dismissal will be
ordered only when the defect cannot be cured and serious prejudice or
inefficiency will result.” Am. Trucking Ass'n, Inc. v. N.Y. State Thruway
Auth., 795 F.3d 351, 357 (2d Cir. 2015) (quoting 7 Charles Alan Wright &
Arthur R. Miller, Fed. Practice & Procedure § 1609 (3d ed.2015)). However,
Am. Trucking Ass’n is readily distinguishable. In that case, the Court of
Appeals held that New York State was not an indispensable party because the
State’s asserted interests in the litigation were not protected by Rule 19
and the New York Attorney General, which represented an existing party, would
fully protect the State’s interests. Am. Trucking Ass’n, 795 F.3d at 357-60.
Here, in contrast, Viva 3’s interest makes it a required party under Rule
19(a) and, as just discussed, there is no assurance that this interest would
be fully protected by U.S. Bank if the litigation were to proceed in Viva 3’s
absence.
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Plaintiff submits that the risk of prejudice identified by
the defendants is illusory because Viva 3 has no viable defenses
and counterclaims under Delaware law.

He relies on a recent

Delaware Supreme Court decision in which the court refused to
permit defenses that, if successful, would have resulted in
enforcement of a STOLI policy in violation of Delaware’s strong
public policy against wagering on human life.

See Est. of

Malkin, 278 A.3d at 63 (establishing that defenses typically
available to bona fide purchasers and securities intermediaries
under Delaware’s version of the Uniform Commercial Code are
unavailable in actions under Section 2704(b)).

Other courts

applying Delaware law have held that certain common law
equitable defenses and claims are likewise barred as a matter of
law in STOLI cases.

See, e.g., Est. of Barotz by Barotz v. Vida

Longevity Fund, L.P., No. N20C-05-144 EMD CCLD, 2022 WL
16833545, at *10-11 (Del. Super. Nov. 9, 2022) (holding that the
affirmative defenses of waiver and release, as well as
counterclaims for declaratory judgment, breach of contract, and
promissory estoppel, fail as a matter of law in Section 2704(b)
cases).

These decisions appear to cast doubt on whether any

defenses or counterclaims Viva 3 might assert in this action
could be legally sufficient to prevent plaintiff from recovering
the policy’s death benefit under Section 2704.

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However, the Delaware Supreme Court has expressly held 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.”
A.3d at 62.

Est. of Malkin, 278

In Malkin, the Court did not attempt to identify

defenses or counterclaims that could be available to a
downstream purchaser like Viva 3.

Instead, it instructed courts

to “look to the elements of the common-law defenses or
counterclaims asserted — and, where appropriate, the public
policy underlying the ban on human-life wagering — to decide the
viability of such defenses or counterclaims to an estate's
action under Section 2704(b).”

Id. at 62-63.

Undertaking such

an analysis at this juncture would not be appropriate because it
would effectively convert the pending motion to dismiss for lack
of subject matter jurisdiction into a vehicle for adjudicating
the case on the merits. 4
Based on counsel’s comments during oral argument, it is my
understanding that dismissal of this action will not prejudice
plaintiff because he can refile the action in Delaware state
In further support of dismissal, defendants contend that proceeding in Viva
3’s absence would lead to piecemeal litigation. I agree that this risk
weighs in favor of dismissal. If this case proceeded against U.S. Bank
alone, it could be dismissed on the ground that the cause of action conferred
on the Estate by Section 2704 must be brought against Viva 3 as the
acknowledged recipient of the proceeds. In that event, the judgment would
leave unresolved plaintiff’s claim against Viva 3. Alternatively, if the
plaintiff were to obtain a judgment in favor of the Estate as a previous
payee of the proceeds, U.S. Bank would be left to seek indemnification from
Viva 3.

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court and both defendants are amenable to litigating in that
forum. 5

Plaintiff submits that he would prefer not to start over

in Delaware.

However, Rule 19 instructs federal courts to

prioritize the public’s interest in the “efficient settlement of
controversies.”

Provident Tradesman Bank & Trust Co. v.

Patterson, 390 U.S. 102, 111.

This action has been effectively

stayed pending a ruling on the motion to dismiss.

Allowing the

litigation to proceed in Delaware presents the best opportunity
to secure an efficient, legally sound, final disposition of all
three parties’ rights and obligations.
Accordingly, the motion to dismiss is hereby granted for
lack of subject matter jurisdiction.

The Clerk may enter

judgment and close the file.
So ordered this 31st day of August 2024.

___________/s/ RNC_____________
Robert N. Chatigny
United States District Judge

Litigation between the parties is already pending in state court in
California, but that action has been stayed and at this point the parties
appear to prefer Delaware as a forum for the litigation.

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