Lincolnway Community Bank v. Allianz Life Insurance Company of North America

Filing 129

MEMORANDUM Opinion and Order signed by the Honorable Edmond E. Chang. For the reasons stated in the Opinion, Allianz's motion to add counterclaim 120 is denied. The status hearing of 03/03/2016 is reset to 03/16/2016 at 9:30 a.m., which is after the settlement conference with the magistrate judge.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.

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No. 11 C 5907
Judge Edmond E. Chang

MEMORANDUM OPINION AND ORDER
Defendant Allianz Life Insurance Company moves to amend its Answer to
assert a counterclaim for civil conspiracy against Plaintiff LincolnWay Community
Bank.1 LincolnWay originally filed suit seeking a declaration that a life insurance
policy it owned on Raymond Veselik was valid. In the alternative, LincolnWay
asserted an unjust enrichment claim, requesting the return of policy premiums it
paid to Allianz in the event that the Veselik Policy was found invalid. In November
2015, the Court granted Allianz’s motion for partial summary judgment, holding
that a reasonable factfinder could conclude only that the Raymond Veselik Policy
was invalid because it was a stranger-originated life insurance policy procured by a
party who had no interest in the continuation of Raymond Veselik’s life. Still
pending is LincolnWay’s unjust enrichment claim, which Allianz did not raise in its
motion for summary judgment. On January 27, 2016, two months after the
1The

Court has subject matter jurisdiction over this case based on diversity
jurisdiction under 28 U.S.C. § 1332.

summary judgment Opinion and fourteen months after the close of discovery,
Allianz moved for leave to amend its Answer to add a counterclaim of civil
conspiracy and to recover litigation costs, attorneys’ fees, and expenses incurred in
maintaining the Veselik Policy. For the reasons explained below, Allianz’s motion is
denied.
I. Background
The relevant facts are set out in the summary judgment Opinion issued on
November 17, 2015. R. 114, 11/17/15 Opinion;2 Lincolnway Cmty. Bank v. Allianz
Life Ins. Co. of N. Am., 2015 WL 7251931 (N.D. Ill. Nov. 17, 2015). Because most of
the underlying facts are relevant to Allianz’s motion for leave to amend, the Court
will repeat them below.
A. The Veselik Policy
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. 20:326:22. 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. 35:956:5. In the mid-2000s, Scott and Passero went into the life insurance business
together as premium financiers, funding the initial premiums of insured parties.
2Citations

to the docket are noted as “R.” followed by the entry number. Citations to
the parties’ summary judgment 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)].

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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 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, 90:21-91:11. 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

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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
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,

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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. 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.
B. Procedural Posture
LincolnWay brought this action on August 25, 2011, seeking (1) a declaratory
judgment that the Veselik Policy was valid; and (2) restitution of the premiums paid
to Allianz in the event that the Policy was found invalid. R. 1, Compl.; R. 20, Am.
Compl. After the Court denied Allianz’s motion to dismiss, R. 38, Allianz filed its
Answer, asserting several affirmative defenses—but no counterclaims, R. 40,
Answer. Its eighteenth affirmative defense was labeled “setoff or offset,” and stated
in relevant part that “[i]f Plaintiff prevails on its claim of unjust enrichment,
Allianz Life is entitled to an offset, or setoff, in the amount of the expenses it has
incurred in the origination, issuance and maintenance of the Policy.” Id. at 32-33.

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After discovery closed in November 2014, R. 61-63, Allianz moved for partial
summary judgment on LincolnWay’s validity claim, R. 79. The Court granted
Allianz’s motion, holding that there was no genuine issue of fact: the Veselik Policy
was procured by Passero, who had no insurable interest in Raymond Veselik’s life,
and was thus invalid under Illinois common law. 11/17/15 Opinion. That left only
LincolnWay’s second claim for unjust enrichment. Id. Allianz now moves for leave to
amend its Answer to assert a counterclaim of civil conspiracy against LincolnWay
and to recover the costs and expenses in issuing and maintaining the Veselik Policy,
as well as attorneys’ fees and litigation costs. R. 120, Def.’s Mot. Amend.
III. Legal Standard
After a party has amended its pleadings once as a matter of right, district
courts “should freely give leave [to amend] when justice so requires.” Fed. R. Civ. P.
15(a)(2). But leave to amend is not granted automatically. See Airborne Beepers &
Video Inc. v. AT&T Mobility LLC, 499 F.3d 633, 666 (7th Cir. 2007). “[District]
courts have broad discretion to deny leave to amend where there is undue delay,
bad faith, dilatory motive, repeated failure to cure deficiencies, undue prejudice to
the defendants, or where the amendment would be futile.” Johnson v. Cypress Hill,
641 F.3d 867, 871-72 (7th Cir. 2011) (citation and quotations omitted); see also
Foman v. Davis, 371 U.S. 178, 182 (1962). Undue prejudice may exist when “the
amendment would bring a new claim, and the amendment would require new
discovery.” Amendola v. Bayer, 907 F.2d 760, 764 (7th Cir. 1990); see also Cement
Masons’ Pension Fund, Local 502 v. Clements, 1993 WL 398643, at *2 (N.D. Ill. Oct.

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6, 1993) (amendment would be unduly prejudicial when “[it] results in the
incorporation of a new claim, the addition of a new party or expensive and time
consuming discovery” (citation and quotations omitted)). And while delay alone
usually does not warrant denying leave to amend, the “longer the delay, the greater
the presumption against granting leave to amend.” Johnson, 641 F.3d at 872
(citation and quotations omitted).
IV. Analysis
Allianz argues that adding a counterclaim at this stage will not unduly
prejudice LincolnWay. In Allianz’s view, the amendment adds no new factual
issues, so supposedly no more discovery is necessary; relatedly, Allianz contends
that this Court has already made the necessary factual findings on the proposed
civil conspiracy counterclaim. Def.’s Mot. Amend at 2-5. On timing, Allianz says
that the motion is timely because an October 2015 Seventh Circuit opinion “[was]
the first time that any federal [or Illinois] court has sustained a claim for civil
conspiracy against a STOLI conspirator on behalf of an insurer” and allowed the
insurer to recover damages. R. 128, Def.’s Reply at 2. None of these arguments,
however, are convincing: adding the counterclaim at this late stage would in fact
unduly prejudice LincolnWay.
The amendment would be unduly prejudicial because more discovery would
be needed on the claim of civil conspiracy, which really is a claim for fraud. In
Illinois, civil conspiracy is “a combination of two or more persons for the purpose of
accomplishing by concerted action either an unlawful purpose or a lawful purpose

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by unlawful means.” McClure v. Owens Corning Fiberglas Corp., 720 N.E.2d 242,
258 (Ill. 1999) (citation and quotations omitted). This means that “to state a claim
for civil conspiracy, a plaintiff must allege an agreement and a tortious act
committed in furtherance of that agreement.” Id. (citation omitted). Allianz
suggests that the relevant underlying tort is fraud.3 To Allianz’s way of thinking,
the Court already held, in deciding the summary judgment motion, that the Veselik
Policy was a STOLI and invalid, and the Court supposedly has already made all of
the factual findings necessary to establish a conspiracy for fraud.
But this is not so. The parties did not litigate an outright fraud theory as part
of LincolnWay’s declaratory judgment claim. To establish fraud, Allianz would have
had to demonstrate that a party
(1) [made] a false statement of material fact; (2) [that] the party
making the statement knew or believed it to be untrue; (3) [that] the
party to whom the statement was made had a right to rely on the
statement; (4) [that] the party to whom the statement was made did
rely on the statement; (5) [that] the statement was made for the
purpose of inducing the other party to act; and (6) [that] the reliance by
the person to whom the statement was made led to that person’s
injury.
Illinois State Bar Ass’n Mut. Ins. Co. v. Cavenagh, 983 N.E.2d 468, 481-82 (Ill. App.
Ct. 2012) (citations and quotations omitted).4 But these elements of fraud were not a
central part of the summary judgment motion. A fraud claim would have focused on
3Although

Allianz never explicitly articulates what underlying tort will form the
basis of its civil conspiracy claim, it implies that it would pursue a fraud claim. LincolnWay
framed the proposed counterclaim as “an agreement and conspiracy … to defraud Allianz,”
R. 127, Pl.’s Resp. at 8, a characterization that Allianz did not dispute.
4For

a civil conspiracy claim, Allianz would also have to show that LincolnWay
“knowingly and voluntarily participate[d]” in this fraud scheme by “plan[ing], assist[ing], or
encourag[ing] the act.” McClure, 720 N.E.2d at 258 (citations and quotations omitted).

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the communications between the alleged fraudster or fraudsters (Passero, Scott
Veselik, and/or Alexenko) and Allianz; the main issues would have been what the
alleged fraudsters told Allianz, and whether Allianz relied on this communication in
deciding to issue the Policy. In contrast, the dispute over whether the Veselik Policy
was a STOLI focused on whether someone other than the “insured 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. Life Assur. Corp. v. Davis, 803 F.3d 904, 909 (7th Cir. 2015);
see 11/17/15 Opinion at 6-9. So unlike fraud, the STOLI inquiry centered on
whether “Passero procure[d] the Policy as an investment vehicle, using Raymond
Veselik as a straw man,” which in turn concentrated on the understandings
between Passero, Scott Veselik, Raymond Veselik, and Alexenko at the Policy’s
inception. See 11/17/15 Opinion at 10 (explaining that “the Court must … 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”); id. at 16-17 (“[T]he key question is the understanding between
Passero and Alexenko at the policy’s inception.”). But the communications with
Allianz and Allianz’s reaction to these communications—facts that would be crucial
to a fraud claim—were not critical or dispositive on summary judgment as to the
STOLI claim. See id. To be sure, there might be some overlap in the fraud and
STOLI analyses, such as the state of mind of Passero, Veselik, and Alexenko. But

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the bottom line is that in litigating Allianz’s motion for summary judgment, the
parties did not focus on or ask the Court to consider whether there were any
material misrepresentations, whether Allianz knew about the statements, or
whether Allianz relied on any misrepresentations. See Principal Life Ins. Co. v.
Lawrence Rucker 2007 Ins. Trust, 774 F. Supp. 2d 674, 679-80 (D. Del. 2011) (the
court’s prior conclusion that a policy was a STOLI because “the facts … clearly
demonstrate[d] a scheme or plan to evade the law against wagering contracts” did
not include “any finding of fraudulent activity” (quotations omitted)). In fact, the
Court actually pointed out that there was no misrepresentation about premium
financing in this case because there was no direct question on Allianz’s application
about financing. 11/17/15 Opinion at 3 (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”). There might have been
misstatements in response to other application questions about risk or financing,
but these were not facts that were teased out on summary judgment.5
Similarly, because the elements of fraud are different from those needed to
prove an invalid STOLI, LincolnWay did not get a chance to fully develop the record
on a fraud-conspiracy claim during discovery, particularly on the communications
made to Allianz and Allianz’s understanding of and reliance on those
5Nor

was the Court asked to consider whether there was any fiduciary relationship
or other duty to speak that would have given rise to fraud by omission. State Sec. Ins. Co. v.
Frank B. Hall & Co., 630 N.E.2d 940, 943 (Ill. App. Ct. 1994) (“The intentional omission or
concealment of a material fact may be the basis of a fraud action if a special or fiduciary
relationship exists which gives rise to the duty to speak.” (citation omitted)).

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communications. R. 127, Pl.’s Resp. at 9-10. Allianz argues there has already been
“exhaustive” discovery on this issue, noting that LincolnWay has repeatedly
emphasized that Allianz’s knowledge was important to its unjust enrichment claim
and Allianz’s affirmative defense of a setoff. Def.’s Reply at 7-9. True, defending
against a fraud claim has some similarities (but some differences too) to pursuing
an unjust enrichment claim, the latter of which involves “a defendant [who] has
unjustly retained a benefit to the plaintiff’s detriment, and [the] defendant’s
retention of the benefit[,] violat[ing] the fundamental principles of justice, equity,
and good conscience.” Cleary v. Philip Morris Inc., 656 F.3d 511, 516 (7th Cir. 2011)
(citation and quotations omitted). But there is an important difference: the two
theories—pursuing an unjust enrichment claim and defending against fraud—
would result in dramatic differences in liability exposure. Throughout this entire
litigation, Allianz never put LincolnWay on notice that LincolnWay could be on the
hook for affirmative damages to Allianz in the form of policy fees, litigation
expenses, or attorneys’ fees. LincolnWay believed that at worst, if the Court held
that the Veselik Policy was a STOLI, it might have lost its unjust enrichment claim
and failed to recover its premiums. Or, it might have won its unjust enrichment
claim but its recovery could have been reduced by Allianz’s expenses related to
maintaining the Policy (if Allianz won on its affirmative defense). Neither of these
options encompassed paying Allianz for fees and expenses related to the Policy and
the underlying litigation.

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As a result, LincolnWay would have adopted a different discovery strategy
had it been defending against a counterclaim of civil conspiracy and facing the
prospect of affirmative damages from the outset. For example, LincolnWay asserts
that it would have more aggressively pursued discovery about other Allianz policies
(in addition to the Veselik Policy) involving Scott Veselik, Passero, and LincolnWay
funds. Pl.’s Resp. at 9-10. (Remember, there were at least eleven of these policies.)
These records would have been relevant because they “are sources of information as
to Allianz’s interactions with its agent, Scott Veselik, and its insureds and its
awareness of facts that would reveal the alleged conspiracy.” Id. at 10. In addition,
LincolnWay’s strategy was informed by the theory of this case, which from the
beginning involved a single policy—the Veselik Policy. But had LincolnWay been
facing a claim of civil conspiracy to defraud Allianz, LincolnWay would also have
wanted more information about the other policies because it would have been
exposed to damages related not just to the Veselik Policy, but for all of them. Thus,
the addition of the counterclaim at this late stage would unduly prejudice
LincolnWay because it would require reopening discovery.
In response, Allianz argues that it could not have brought a civil conspiracy
counterclaim earlier because the Seventh Circuit’s October 2015 Ohio National case
“[was] the first time that any federal [or Illinois] court has sustained a claim for
civil conspiracy against a STOLI conspirator on behalf of an insurer” and for the
first time held that a procurer of a STOLI was liable to the insurer for damages.
Def.’s Reply at 2 (citing 803 F.3d at 910-11). There are several problems with this

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argument. First, the conclusion itself is dubious because the district court in Ohio
National held—more than a year earlier—that the defendants conspired to
fraudulently procure life insurance policies without an insurable interest. Ohio
Nat’l Life Assurance Corp. v. Davis, 13 F. Supp. 3d 876, 887 (N.D. Ill. 2014). Federal
courts outside this circuit have also entertained claims for civil conspiracy with
regards to procuring a STOLI. See, e.g., PHL Variable Ins. Co. v. Abrams, 2012 WL
10686, at *6 (S.D. Cal. Jan. 3, 2012) (denying a motion to dismiss a civil conspiracy
claim based on fraudulent misrepresentations made on an insurance application).
Second, there are several cases alleging that a STOLI was procured by fraud, and
Allianz cannot explain why it did not know at the beginning of this litigation, or
sometime during the pendency of discovery, that it could have counterclaimed for
fraud. See, e.g., Ohio Nat’l, 13 F. Supp. 3d at 887 (defendant committed fraud by
making misrepresentations on policy applications); PHL Variable Ins. Co. v. Robert
Gelb Irrevocable Trust, 2010 WL 4363377, at *1 (N.D. Ill. Oct. 27, 2010) (defendant
allegedly committed fraud when it “did not accurately state its reason for obtaining
the policy at issue” and “procured the policy in furtherance of a stranger originated
life insurance … scheme”). Finally, even assuming that Ohio National was the first
Circuit decision on the issue, nothing stopped Allianz from asserting—as Ohio
National did—that there should be affirmative recovery of damages and attorneys’
fees arising from a civil conspiracy to procure a STOLI. Put another way, Allianz
could have made the argument, just as Ohio National did. In sum, the timing of
Ohio National does not excuse Allianz’s delay in filing a counterclaim for fraud or

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civil conspiracy. And because its counterclaim raises new legal elements as well as
new theories of damages that would have affected LincolnWay’s litigation strategy
and would require additional discovery, adding the counterclaim at this late stage
would unduly prejudice LincolnWay.
IV. Conclusion
For the reasons discussed above, Allianz’s motion for leave to amend its
Answer, R. 120, is denied.

ENTERED:

s/Edmond E. Chang
Honorable Edmond E. Chang
United States District Judge
DATE: March 1, 2016

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