Lincolnway Community Bank v. Allianz Life Insurance Company of North America
Filing
114
MEMORANDUM Opinion and Order. This is the publicly available, redacted version of R. 111.Emailed notice(slb, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
LINCOLNWAY COMMUNITY BANK,
Plaintiff,
v.
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA,
Defendant.
)
)
)
)
)
)
)
)
)
)
No. 11 C 5907
Judge Edmond E. Chang
MEMORANDUM OPINION AND ORDER
I. Introduction
Plaintiff LincolnWay Community Bank seeks a declaration that a life
insurance policy it owns on Raymond Veselik is valid, or in the alternative, requests
restitution of the premiums it paid if the policy is invalid. 1 At the close of discovery,
Defendant Allianz Life Insurance Company filed this motion for partial summary
judgment on the validity claim, arguing that the undisputed facts show that the
Raymond Veselik policy is unlawful because it is a stranger-originated life
insurance policy procured by a party who had no interest in the continuation of
Raymond Veselik’s life. For the following reasons, Allianz’s motion for partial
summary judgment is granted.
1The
Court has subject matter jurisdiction over this case based on diversity
jurisdiction under 28 U.S.C. § 1332.
II. Background
For purposes of a summary judgment motion, the facts are viewed in the
light most favorable to LincolnWay, the non-moving party, and all reasonable
inferences are drawn in its favor. 2 Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 475 U.S. 574, 587 (1986). Scott Veselik was an independent insurance agent
who sold life insurance for Allianz, among other companies. DSOF ¶ 3; R. 80-5, Exh.
B, S. Veselik Dep. 20:3-26:22. William Passero was a real estate developer and Scott
Veselik’s neighbor, officemate, and social acquaintance. DSOF ¶ 3; R. 80-4; Exh. A,
Passero Dep. 35:9-56:5. In the mid-2000s, Scott and Passero went into the life
insurance business together as premium financiers, funding the initial premiums of
insured parties. DSOF ¶ 4; S. Veselik Dep. 41:15-50:18; Passero Dep. 57:15-59:10.
Scott and Passero themselves turned to a source for funding this business; in 2006,
they met with George Alexenko, the Chief Credit Officer and Executive Vice
President of LincolnWay Community Bank, to provide an overview on premium
financing and the secondary life insurance market. DSOF ¶ 23; R. 80-6, Exh. C.,
Alexenko Dep. 146:2-149:18. During that meeting, Passero proposed using
LincolnWay-funded loans to pay premiums on life insurance policies for a 26-month
2Citations
to the docket are noted as “R.” followed by the entry number. Citations to
the parties’ Local Rule 56.1 Statements of Fact are “DSOF” (for Allianz’s Statement of
Facts) [R. 79-1 (sealed), R. 80-2 (public)]; “PSOF” (for LincolnWay’s Statement of Additional
Facts) [R. 95 (sealed), R. 97 (public)]; “Pl.’s Resp. DSOF” (for LincolnWay’s Response to
Allianz’s Statement of Facts) [R. 95 (sealed), R. 97 (public)]; “Def.’s Resp. PSOF” (for
Allianz’s Response to LincolnWay’s Statement of Additional Facts) [R. 104-1 (sealed), R.
105-1 (public)]; and “Def.’s Reply to Pl.’s Resp. DSOF” (for Allianz’s Reply to LincolnWay’s
Response to Allianz’s Statement of Facts) [R. 104-2 (sealed), R. 105-2 (public)]. Where a fact
is admitted, only the asserting party’s statement of facts is cited; where an assertion is
otherwise challenged, it is so noted.
2
period. DSOF ¶ 24; Alexenko Dep. 176:4-177:16. This was the length of a policy’s
contestability period—the amount of time an insurance company generally has to
challenge the policy’s validity. DSOF ¶¶ 29-30; Alexenko Dep. 146:15-147:21. After
the 26-month period, there were three “exit options” for the financier: (1) the
insured could buy the policy back from the financier by repaying the loan; (2) the
financier could sell the policy on the secondary market to recoup the premiums
paid; or (3) the financier becomes the owner of the policy and either lets it lapse or
continues paying the premiums. DSOF ¶ 25; S. Veselik Dep. 64:22-65:10, 90:2191:11. Scott and Passero told Alexenko that they planned to “fill out applications
[for potential insured parties] at insurance companies that didn’t try to weed out
policies that would ultimately be sold.” DSOF ¶ 31; Alexenko Dep. 176:18-177:16. In
particular, Allianz was one of “the last [insurance companies] to change [the
application] to ask about where the premiums came from, was it financed, were
there any talks of life settlements, and was someone else helping you provide the …
funds for the policy.” R. 95-3, Exh. A., S. Veselik Dep. (LincolnWay Excerpt –
Sealed) 95:4-17. After Alexenko approved the plan, Passero and Scott coordinated
the financing for at least eleven life insurance policies, including the Veselik Policy,
using loans from LincolnWay. DSOF ¶ 47, R. 79-40, Exh. MM, Passero Financial
Statement at LW000730; R. 79-4, S. Veselik Dep. (Sealed) 68:5-83:16.
In early 2008, Passero, Scott, and Alexenko discussed the specific loan to
fund Raymond Veselik’s policy. DSOF ¶ 75 (citing R. 1 at ¶¶ 8-9). Scott was
Raymond Veselik’s son. S. Veselik Dep. 70:18-19. But Passero had no insurable
3
interest in Raymond’s life; the two were not related, had never lived in the same
house, and had never owed each other any money. DSOF ¶ 80; Passero Dep. 208:2209:18. In January 2008, Scott applied for an Allianz life insurance policy (the
Policy or Veselik Policy) on the life of his father, Raymond Veselik, and listed his
mother, Judith Veselik, as the beneficiary. DSOF ¶ 53; R. 79-15, Exh. N, Veselik
Policy at LW000158-165. On March 14, 2008, LincolnWay sent a letter to Passero
with loan documents and a check for $210,900 to fund the Veselik Policy premium.
DSOF ¶ 63; R. 79-29, Exh. BB, 3/14/08 Letter. Shortly afterward, Scott wrote a
personal check to Allianz for $210,900; Scott knew that the money from Passero and
LincolnWay would be available before his check to Allianz cleared. DSOF ¶ 63; S.
Veselik Dep. 112:1-12, 166:11-16. On March 17, 2008, Passero signed a document
called “Assignment of Life Insurance Policy as Collateral” for the LincolnWay loan.
DSOF ¶¶ 67-68; R. 79-9, Exh. H, 3/17/08 Assignment. This document stated that
the Veselik Policy was “to be held as collateral security for any and all present and
future liabilities of the above referenced Borrower, or any of them, to the Assignee,
of every nature and kind, whether now existing or that may hereafter arise … .”
3/17/08 Assignment at LW000007. LincolnWay argues that this was not a formal
assignment of the collateral but rather the rote completion of an automatically
generated form. Alexenko Dep. 178:2-16; Pl.’s Resp. DSOF ¶¶ 67-68. The next day,
on March 18, 2008, Allianz formally issued policy number ****8106, the Veselik
Policy. DSOF ¶ 65, Veselik Policy at LW000148.
4
On December 29, 2008, just nine months after the Policy’s issuance, Scott
filed a request with Allianz to transfer the Policy to Passero, DSOF ¶ 72, R.79-56,
Exh. 9, 12/29/08 Request, a change that Allianz confirmed on the following day, Pl.’s
Resp. to DSOF ¶ 72; R. 95-8, Exh. F, 12/30/08 Letter. Passero later transferred the
Veselik Policy to LincolnWay on August 31, 2010. DSOF ¶ 72; R. 79-14, Exh. M,
8/31/10 Letter. LincolnWay brought this action on August 25, 2011, seeking (1) a
declaratory judgment that the Veselik Policy is valid and (2) if the Policy is not
valid, then restitution of the premiums paid to Allianz. R. 1, Compl.; R. 20, Am.
Compl. In September 2013, this Court denied Allianz’s motion to dismiss,
concluding that the Amended Complaint on its face did not establish that the Policy
was an unenforceable stranger-originated life insurance scheme. R. 38. Discovery is
now complete, and Allianz moves for partial summary judgment on LincolnWay’s
validity claim, arguing that the undisputed facts show that the Policy was procured
by Passero, who had no insurable interest in Raymond Veselik’s life, and is thus
invalid under Illinois common law. R. 79.
III. Legal Standard
Summary judgment must be granted “if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(a). A genuine issue of material fact exists if “the
evidence is such that a reasonable jury could return a verdict for the nonmoving
party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In evaluating
summary judgment motions, courts must view the facts and draw reasonable
5
inferences in the light most favorable to the non-moving party. Scott v. Harris, 550
U.S. 372, 378 (2007). The Court may not weigh conflicting evidence or make
credibility determinations, Omnicare, Inc. v. UnitedHealth Grp., Inc., 629 F.3d 697,
704 (7th Cir. 2011), and must consider only evidence that can “be presented in a
form that would be admissible in evidence.” Fed. R. Civ. P. 56(c)(2). The party
seeking summary judgment has the initial burden of showing that there is no
genuine dispute and that they are entitled to judgment as a matter of law.
Carmichael v. Village of Palatine, 605 F.3d 451, 460 (7th Cir. 2010); see also Celotex
Corp. v. Catrett, 477 U.S. 317, 323 (1986); Wheeler v. Lawson, 539 F.3d 629, 634 (7th
Cir. 2008). If this burden is met, the adverse party must then “set forth specific
facts showing that there is a genuine issue for trial.” Anderson, 477 U.S. at 256.
IV. Analysis
1. STOLIs and the “Insurable Interest” Requirement
The parties agree that Illinois law governs this diversity action. Illinois
maintains the longstanding rule that “the procurer of an insurance policy on the life
of another must have an insurable interest in the other’s life.” Bajwa v. Metro. Life
Ins. Co., 776 N.E.2d 609, 617 (Ill. App. Ct. 2002) (citing Guardian Mutual Life Ins.
Co. of N.Y. v. Hogan, 80 Ill. 35, 39 (1875)). An insurable interest means “an interest
in having the life [of the insured] continue,” Colgrove v. Lowe, 175 N.E. 569, 571 (Ill.
1931) rather than an interest in the insured’s early death, Ohio Nat’l Life Assur.
Corp. v. Davis, — F.3d —, 2015 WL 6163138, at *3 (7th Cir. Oct. 20, 2015) (citing
Grigsby v. Russell, 222 U.S. 149, 155 (1911)). This requirement stems from “the
6
unseemliness of gambling on when a person will die.” Ohio Nat’l, 2015 WL 6163138
at *3. Life insurance purchased by an individual with no insurable interest is a
wager on the insured’s life. See Bajwa, 776 N.E.2d at 617. Now called strangeroriginated life insurance (STOLI), these transactions have been prohibited by the
Illinois common law for at least a century and a half and are considered illegal and
void from their inception. See Ohio Nat’l, 2015 WL 6163138 at *5; Ill. State Bar
Ass’n Mut. Ins. v. Coregis Ins., 821 N.E.2d 706, 712 (Ill. App. Ct. 2004) (“[I]f the
subject matter of a contract is illegal, that contract is void ab initio.”). STOLI
transactions are now also statutorily prohibited by the 2009 Viatical Settlements
Act. 215 ILCS 159/1 et seq. 3
The
insurable-interest
requirement,
however,
does not
prohibit
the
legitimate, post-procurement transfer of a policy to someone without an interest in
the continued life of the insured, “such as when an insured sells a policy on the open
market as a means of liquefying the asset.” Penn Mut. Life Ins. Co. v. Greatbanc
Trust Co., 887 F. Supp. 2d 822, 824 (N.D. Ill. 2012). The Illinois Supreme Court
approved those types of transfers in 1919, holding that there is “no reasonable basis
for public policy forbidding the owner of the insurance policy to sell it and assign it
to any one who would pay more than the cash surrender value which the company
was willing to pay.” Hawley v. Aetna Life Ins. Co., 125 N.E. 707, 709 (Ill. 1919). An
active secondary life insurance market—called the “life settlement” or “viatical
3Illinois
common law applies to this case because the Viatical Settlements Act was
enacted after the Veselik Policy was issued. Even though Allianz states that the Act
codified the common law’s prohibition on STOLI, R. 80-1, Def.’s Br. at 9, the parties have
not briefed this issue nor argued that the Act applies retroactively, R. 96, Pl.’s Resp. at 6-7.
7
settlement” market—developed across the country in the 1980s during the AIDS
crisis. PHL Variable Ins. Co. v. Bank of Utah, 780 F.3d 863, 865 (8th Cir. 2015)
(citing Martin, Betting on the Lives of Strangers: Life Settlements, STOLI, &
Securitization, 13 U. Pa. J. Bus. L. 173, 185-86 (2010)). An owner may wish to sell
his policy on the secondary market because of “a desperate need for money; the
policy may be his only substantial asset; and if he’s elderly or in very poor health
the present value of that asset may be substantial and he may have a pressing
interest in being able to cash it in by selling the beneficial interest” or the policy
itself. Ohio Nat’l, 2015 WL 6163138, at *3. Once sold, the policy belongs to an
investor who collects the payouts when the insured dies. Id.
Although transfers to those without an insurable interest “do not always run
afoul of state laws … they often do.” Penn Mut., 887 F. Supp. 2d at 824 (citation
omitted). The key to legality, then, is that the policyholder must have an insurable
interest in the insured’s life at the inception of the policy; in contrast, it is
impermissible to participate in an arrangement “solely to create the illusion of an
insurable interest … to procure the policy for investors.” Penn Mut. Life Ins. Co. v.
GreatBanc Trust Co., 2012 WL 2074789, at *3 (N.D. Ill. June 8, 2012). See also
Hawley, 125 N.E. at 708 (there is a “difference between the cases in which the policy
was procured by a person who had no insurable interest in the life of the person
insured, thus making a wager contract, and the cases where a policy was procured
in good faith by the person himself to be assigned thereafter”); Ohio Nat’l, 2015 WL
6163138, at *4 (“‘cases in which a person having an interest lends himself to one
8
without any, as a cloak to what is, in its inception, a wager, have no similarity to
those where an honest contract is sold in good faith’ to a stranger.”) (quoting PHL,
780 F.3d at 867-68). A policy is a STOLI and void if someone other than the
“insured[s] owned and controlled the policy before attempting to sell it,” meaning
the “insureds were the defendants’ puppets and the policies were bets by strangers
on the insureds’ longevity.” Ohio Nat’l, 2015 WL 6163138, at *4.
2. The Veselik Policy
Allianz argues that the Veselik Policy is an invalid STOLI where a
“speculator attempts to profit through financing the procurement of and effectively
controlling a life insurance policy and either retaining it or selling it to other
investors in a secondary market for a profit.” R. 80-1, Def.’s Br. at 2-3. As the Court
put it in a previous order, the relevant question is: “was Scott Veselik truly the one
who procured the Policy?” R. 38 at 10. Or did Passero procure the Policy as an
investment vehicle, using Raymond Veselik as a straw man? In making this
determination, courts “should look beyond the mere form of the transactions in
question and consider their substance.” Cisna v. Sheibley, 88 Ill. App. 385, 394
(1899). Technical compliance with the insurable interest requirement is not
dispositive, id., so it is not enough by itself that Scott, who had an interest in the
life of his father, signed the Policy application. See Penn Mut., 2012 WL 2074789, at
*4 (an investor may not use someone with an insurable interest “to disguise the true
owner of the policy.”). On the other hand, it is not dispositive that a third party—
Passero, through LincolnWay—did not have an insurable interest in Raymond’s life
9
but funded his life insurance premiums. This practice of premium financing is legal
and regulated in Illinois. See 215 ILCS 5/513a2(c) (“‘Premium finance agreement’
means a promissory note, loan contract, or agreement by which an insured or
prospective insured promises to pay to another person an amount advanced or to be
advanced thereunder to an insurer in payment of premiums on an insurance
contract … .”) As another district court explained, “an insured’s ability to procure a
policy is not limited to paying the premiums with his own funds; borrowing money
with an obligation to repay would also qualify as an insured procuring a policy.”
Principal Life Ins. Co. v. Lawrence Rucker 2007 Ins. Trust, 869 F. Supp. 2d 556, 563
(D. Del. 2012).
Instead, the Court must look past form and consider the nature of the
understanding between Passero and Scott at the Policy’s inception, such as who had
control over the Policy, whether there was a pre-existing agreement to transfer the
Policy to Passero, and whether Scott intended to repay the premiums. See Ohio
Nat’l, 2015 WL 6163138 at *4. In the recent Ohio National case, for example, the
Seventh Circuit affirmed summary judgment in favor of the insurance company
when a lawyer and insurance agent “targeted as nominal buyers individuals who
they thought would have short life expectancies,” such as the elderly, and
persuaded them to apply for policies. 2015 WL 6163138 at *1. In return, the
individuals received a small amount of money. Id. The insured parties assigned the
policies’ beneficial interests to the insurance agent’s husband, who paid the initial
premiums and then resold the interests to an investor. Id. at *2. This arrangement
10
was unlawful because “[t]he insureds merely lent their names to the insurance
applications, in exchange for modest compensation, and the defendants forthwith
transferred control over (effectively ownership of) the policies to themselves.” Id. at
*4. Critical to the case’s holding was control: “The defendants, who had no interest
in the insureds’ lives (as distinct from their deaths), initiated, paid for, and
controlled the policies from the outset.” Id. And “[t]he insureds’ family members …
retained beneficial interests in the policies only briefly and never controlled the
trusts. The insureds were the defendants’ puppets and the policies were bets by
strangers on the insureds’ longevity.” Id.
The arrangement here was not as glaring as the one in Ohio National but
still establishes that the Veselik Policy is a STOLI. Passero, who had no interest in
Raymond’s life, was the true owner of the Policy at its inception because Passero
had control over the Policy and expected the Policy to be transferred to him after its
issuance. Def.’s Br. at 2. The evidence shows, even when viewed in LincolnWay’s
favor, that in the mid-2000s, Passero and Scott worked together to identify and
finance life insurance policies for various acquaintances and family members,
including Passero’s mother, Scott’s father, and Scott’s father-in-law. S. Veselik Dep.
(Sealed) 70:8-75:9. They knew that in the secondary life insurance market, “the
older [the insured] the better.” Id. 58:12-22. “[Scott] Veselik’s plan … was that they
would fill out the applications at insurance companies that didn’t try to weed out
policies that would ultimately be sold.” Alexenko Dep. 177:2-10. In particular,
Allianz was one of “the last [insurance companies] to change [the application] to ask
11
about where the premiums came from, was it financed, were there any talks of life
settlements, and was someone else helping you provide the—you know, the funds
for the policy.” S. Veselik Dep. (LincolnWay Excerpt – Sealed) 95:4-17. Those are all
features of a STOLI arrangement, where the default state of affairs from the start—
if nothing more were to happen—is that the stranger would own the policy. On the
front end, the insureds agreed to this plan because they got two years of free
insurance. S. Veselik Dep. 75:20-76:4. Although some tried to buy the policies back
(by repaying the loan) after the 26-month period, all parties ultimately transferred
their policies to Passero. Id. 104:15-21; Passero Dep. 220:21-221:11. 4
Passero and Scott also procured the Veselik Policy in this manner in 2008.
Raymond had an underperforming insurance policy and relied on Scott to research
alternatives. R. 95-6, Exh. D, R. Veselik Dep. (Sealed) 65:22-66:18. After a
conversation with Scott, Raymond “was told that [Scott] was going to be the owner,
and [his] wife was the beneficiary.” Id. 49:13-17. Because his life circumstances
were “crazy” at the time, Raymond did not pay much attention to the research or
application process and left the details to Scott. Id. 70:18-71:2. Raymond, who had
been an insurance agent since 1971, id. 16:20-17:1, had never seen the Policy until
shortly before this litigation nor known the face amount. Id. 50:8-18. Although
Raymond knew that Scott was going to pay the initial premiums, he did not know or
ask about the source of the funds. Id. 51:6-21. Just nine months after Allianz
4This
was a lucrative arrangement—Passero made money by selling the policies for
more than he paid on the premiums. Passero Dep. 77:13-22. And Scott received over $1.2
million in commissions, approximately $190,000 of which was for the Veselik Policy. R. 7951, Exh. 2 (sealed), Veselik Policy Commission; R. 79-49, Rice Decl. ¶ 56 (sealed)
12
formally issued the Veselik Policy on March 18, 2008, Veselik Policy at LW000148,
Scott filed a request with Allianz to transfer the Policy to Passero on December 29,
2008, 12/29/08 Request. Like the other insureds whose premiums were financed by
Passero, Scott and Raymond gave the Policy to Passero at the end of the two-year
period. R. 97-3, S. Veselik Dep (LincolnWay Excerpt) 130:6-11. The stranger—
Passero—planned to own the Policy via this transfer: “it was [Passero’s] intention to
have ownership transferred to him under some arrangement so that he could
ultimately sell that policy after the two-year contestability period.” Alexenko Dep.
264:1-7. Put another way, in substance—looking past the form—Passero was
wagering that Raymond Veselik would live for 26 months, and then Passero would
own the Policy. The reason Passero was not listed as the owner in the first place
was because the application had to meet technical insurable interest requirements:
he and Scott had explained to Alexenko that “when the insurance policy is
originally obtained, it needs to be obtained by the insured, a beneficiary and an
owner who had the appropriate relationship to the insured.” Id. 263:13-264:7. And
Scott never had the intention of repaying Passero—when asked what assurances
Passero had of recouping the money, Scott responded: “[Passero] was hoping I
couldn’t pay him back and he could sell it for more.” S. Veselik Dep. 115:17-116:2. 5
Further, Passero’s assignment of the Policy as collateral on March 17, 2008,
and Alexenko’s approval of this assignment, reflected their understanding that
5There
does not appear to be evidence about whether Scott would have had any
obligation to repay the $210,000 premium had Raymond passed away before nominal
ownership transferred to Passero in December 2008. If not, this would be additional
evidence that Scott was never on the hook for the initial premium payments and that
Passero was the true owner.
13
Passero would later retain legal rights in the Policy. As of March 17, if Raymond or
Scott really owned the Policy, then the security could not be perfected because
Passero was not the actual owner of the Policy and Allianz did not know about the
assignment. Alexenko Dep. 262:8-20; Pl.’s Resp. DSOF ¶ 13. This undermines
characterizing the Policy as belonging to Raymond or Scott, because “the deal with
Passero was that he would assign the policies to us as collateral.” Id. 180:1-9.
LincolnWay’s loan policies required loan collateral to be “readily marketable” and
“capable of being assigned and/or a security interest perfected.” R. 79-43, Exh. PP,
Loan Policies at LW001323. Indeed, Alexenko explained that there were no
“circumstances under which LincolnWay would accept as collateral for a loan
property the borrower does not own and where Lincolnway has not obtained some
kind of assurance from the owner of that property[.]” Alexenko Dep. 195:6-12. Yet
Alexenko was comfortable with the situation because he knew that Passero would
eventually perfect the security interest by becoming the owner and alerting Allianz
of the assignment. Id. 262:13:20. Passero waited until January 2009, after he
became the formal owner of the Policy, to notify Allianz about the assignment. R.
79-57, Exh. 10, 1/15/09 Letter. That Passero and Scott chose Allianz, whose
application did not ask questions about financing and did not try to weed out
policies designed to be sold, also shows that Passero delayed notifying Allianz in
order to avoid arousing Allianz’s suspicions that the Policy was a STOLI. Alexenko
Dep. 177:2-10, S. Veselik Dep. (LincolnWay Excerpt – Sealed) 95:4-17.
14
3. LincolnWay’s Arguments
LincolnWay advances four arguments to preclude summary judgment: (1)
Scott’s attempts to sell the Policy at the end of the 26-month period contradict a preexisting arrangement to transfer; (2) there is a factual dispute over the
circumstances of the March 17, 2008 assignment; (3) the circumstances surrounding
Raymond Veselik’s need for additional insurance coverage shows that the Policy
was legitimate; and (4) there is a factual dispute about Passero’s ownership status.
LincolnWay argues that there is a genuine dispute about the existence of a
pre-existing agreement because Scott later attempted, but failed to come up with,
the money to repay the loan. R. 96, Pl.’s Resp. 10-11; S. Veselik Dep. (LincolnWay
Excerpt) 130:5-14. The relevant point of time, however, is the Policy’s inception, and
the parties’ intent at that time, not two years later. For example, if there was an
original agreement to transfer a policy back to the investor, but the insured party
later changed his mind, broke the agreement, and kept the policy, this would still be
a STOLI arrangement because the parties agreed to the transfer at the time of
issuance. At that moment, the investor was making a wager on the life of the
insured because the investor arranged for the eventual ownership of the policy.
Furthermore, even if Scott’s actions at the end of the two-year period were evidence
of intent at the time of the Policy’s inception, the undisputed evidence still shows
that the default agreement was that the Policy would be transferred to Passero
unless Scott or Raymond could come up with the money to pay back the $210,900
loan. In other words, even though Scott and Raymond theoretically had this option
15
at the end of the two-year period, no one expected it to be a realistic possibility—it
was form over substance. Scott’s efforts to repay the loan only involved “ma[king] a
few calls.” S. Veselik Dep. (LincolnWay Excerpt) 130:12-14. As for Raymond—he did
not even know that there was a loan to repay. R. Veselik Dep. 55:11-17. Passero
“was hoping [Scott] couldn’t pay him back and [Passero] could sell it for more.” S.
Veselik Dep. 115:17-116:6. In fact, “Bill [Passero] and [Scott] Veselik in the initial
meeting [with Alexenko] described that Bill would try to gain control of the policies
in order to sell them for a profit.” R. 95-5, Alexenko Dep. (Sealed) 207:11-16. That is,
Passero understood that “[o]wnership would be transferred to him.” Id. 207:17-20.
And “[Passero] would gain control [of] as many of [the policies] as he could.” Id.
207:21-208:6. Indeed, all of the other insured parties had handed over their policies
to Passero. Passero Dep. 220:21-221:11; S. Veselik Dep. 104:18-21. In these
circumstances, a reasonable jury could only conclude that Passero was making a
wager on Raymond’s life.
LincolnWay also argues that the March 17, 2008 collateral assignment does
not prove Passero’s ownership of the Policy because the assignment paperwork was
a formality as a result of a “computer form automatically generated at the inception
of loans by the same software that generated the other loan documents.” Pl.’s Resp.
at 8; Alexenko Dep. 178:2-16. And “LincolnWay understood the Collateral
Assignment would not be effective unless and until Passero actually became the
owner of the Policy and the Collateral Assignment was accepted by the insurance
company.” Id. But this does not preclude summary judgment because the key
16
question is the understanding between Passero and Alexenko at the policy’s
inception. Alexenko knew that the Policy would ultimately be transferred to
Passero, who would file the assignment paperwork with Allianz as soon as he
received formal ownership of the Policy. Alexenko Dep. 262:8-20. Even though
Alexenko did not know precisely when Passero would file the assignment with
Allianz, Alexenko knew it was inevitable because “that’s what was necessary to
perfect the lien.” Id. Given that LincolnWay’s practice was to accept only collateral
owned by the borrower and capable of being perfected, Alexenko Dep. 195:6-12, it
makes sense that “[Passero] was getting the screws put to him at the bank” and
that LincolnWay “required [Passero] to change the ownership into his name” as
soon as possible. S. Veselik Dep. 178:12-179:7. Thus, the facts show an
understanding between Passero and Alexenko that Passero controlled the Policy at
inception and that Passero’s formal ownership was certain to occur.
LincolnWay also argues that Raymond had a legitimate desire for additional
policy coverage and designated his wife as the beneficiary, so the transaction was
not a sham. Pl.’s Resp. 9-12. Allianz does not dispute that Raymond’s prior life
insurance policy was underperforming or that Raymond had a son getting married,
two sons getting divorced, and a wife with worsening health. R. Veselik Dep.
(Sealed) 60:11-24. But Raymond’s legitimate desire for coverage does not prevent
the Policy from being a STOLI—in fact, the typical STOLI scheme attracts potential
insureds “through the promise of two years of free life insurance.” Carton v. B & B
Equities Grp., LLC, 827 F. Supp. 2d 1235, 1239 (D. Nev. 2011) (citing 3 Leo
17
Martinez et al., New Appleman Insurance Law Practice Guide § 34.09[3] (2011))
(explaining that “[i]f the insured dies within the two-year contestability period, the
speculator is repaid plus interest out of the proceeds of the policy.”). Nor does
Raymond’s need for coverage contradict the evidence that Passero and Scott had a
pre-existing arrangement to transfer the Policy to Passero. On the contrary,
Raymond’s (lack of) involvement in the insurance process actually shows that it was
Scott and Passero who came up with the idea for the Policy and controlled it. Even
though Raymond was an experienced life insurance agent, he was not involved in
researching replacement insurance policies, did not know how Scott would pay the
premium, and had never seen the Policy or known its face amount until shortly
before the litigation. R. Veselik Dep. (Sealed) 16:20-17:1, 50:8-18, 51:6-21.
Finally, LincolnWay suggests that there is a genuine dispute as to Passero’s
ownership status at the Policy’s inception because Passero testified that he did not
recall if he was the owner at the time. R. 105, Def.’s Reply 11; Pl.’s Resp. at 7; Pl.’s
Resp. Def.’s DSOF ¶ 16; Passero Dep. 63:8-11. But in certain circumstances—
including this one—“[a] statement of ‘I don’t recall,’ suggests a ‘mere possibility’ of a
dispute, which not does satisfy the requirements of Rule 56.” Hammel v. Eau Galle
Cheese Factory, 2003 WL 21067091, at *12 (W.D. Wis. Apr. 15, 2003) (citing Posey v.
Skyline Corp., 702 F.2d 102, 105 (7th Cir. 1983)). To be sure, there are
circumstances where a witness’s lack of memory could create a genuine issue of fact,
because the circumstances dictate interpreting (or at least allowing a reasonable
jury to interpret) the “I don’t recall” statement as the equivalent of “I don’t believe
18
that happened.” But here, given all of the other evidence of Passero’s control over
the Policy at its inception, Passero’s failure to remember is not affirmative evidence
that he was not the owner at the time of inception. See Rodriguez v. Kane Cnty.
Sheriff’s Merit Comm’n, 2012 WL 280360, at *5 (N.D. Ill. Jan. 31, 2012) (citing
Chicago United Indus., Ltd. v. City of Chicago, 669 F.3d 847, 853 (7th Cir. 2012)). In
view of the evidence showing that Passero controlled the Veselik Policy at its
inception and that there was an agreement that it would be transferred, a
reasonable factfinder could only find that the Policy is an invalid STOLI because
Passero had no insurable interest in Raymond’s life. 6
V. Conclusion
For the reasons discussed above, Allianz’s motion for partial summary
judgment on the validity claim, R. 79, is granted.
ENTERED:
s/Edmond E. Chang
Honorable Edmond E. Chang
United States District Judge
DATE: November 6, 2015
National suggests that when there is a void STOLI contract, courts leave the
parties as they are without requiring the insurance company to return the premiums paid.
Ohio Nat’l, 2015 WL 6163138, at *6-7 (“Generally when an illegal contract is voided, the
parties will be left where they have placed themselves with no recovery of the money paid
for illegal services.”) (citation and quotations omitted). The exception is when “the party
that made the payments is not to blame for the illegality.” Id. (citation omitted).
LincolnWay’s unjust enrichment claim is not currently before the Court, but the parties are
encouraged to engage in settlement discussions given Ohio National’s recent guidance on
this claim.
6Ohio
19
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?