The Penn Mutual Life Insurance Company v. Blumberg

Filing 54

MEMORANDUM OPINION. Signed by Chief Judge Deborah K. Chasanow on 3/23/10. (sat, Chambers)

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND THE PENN MUTUAL LIFE INSURANCE COMPANY : v. :

:

Civil Action No. DKC 09-0578

JONATHAN S. BERCK, as trustee : of THE MARVIN ROSENBLATT IRREVOCABLE TRUST1 : MEMORANDUM OPINION Two motions are pending and ready for resolution in this life insurance case: Defendant's motion to dismiss (Paper 23) and Plaintiff's motion for leave to file a second amended

complaint (Paper 40).

The issues are fully briefed and the

court now rules pursuant to Local Rule 105.6, no hearing being deemed necessary. For the reasons that follow, Defendant's motion to dismiss will be denied and Plaintiff's motion for leave to file a second amended complaint will be granted. I. Background This case involves allegations of the existence of a

stranger originated life insurance, or STOLI, plan.

Plaintiff,

The Penn Mutual Life Insurance Company, alleges in the First Amended Complaint that Marvin Rosenblatt ("Rosenblatt") spoke

At the time the original complaint was filed, Shara Blumberg was the trustee. A second substitution made Mr. Berck the trustee.

1

with promoters of STOLI plans at some point before February 21, 2007. (Paper 14 ¶ 16). Plaintiff alleges that Rosenblatt made

an agreement with the promoters to apply for a life insurance policy to be issued by Plaintiff and then later to sell the policy or an interest in the policy to an investor in the

secondary market. On February

(Id.). 3, 2007, Rosenblatt created the Rosenblatt

Trust ("Trust"), which was intended to be the owner of the life insurance policy he planned to buy. (Paper 14 ¶¶ 20-21). On

February 21, 2007, Rosenblatt applied for a $6 million life insurance policy. reason (Id.). for the (Id. at ¶ 18). life insurance Rosenblatt indicated that the policy was "Estate Planning."

The application indicated that the primary source of (Id. at ¶ 26). The original Trustee

funds would be the Trust. was Shara Blumberg. Sullivan.

She was replaced in March 2007 by Brian

In August 2007, Jonathan Berck ("Berck") replaced (Id. at ¶ 34).

Brian Sullivan.

Plaintiff alleges that after the issuance of the Rosenblatt life insurance policy (the "Policy"), Rosenblatt took the steps necessary to transfer the Policy, or a beneficial interest in the same, to an investor whom Rosenblatt did not know prior to completing the application. (Id. at ¶ 30). Plaintiff further

alleges that Rosenblatt has relinquished or agreed to relinquish

2

any beneficial interest in the proceeds of the Policy, as well as interests in the Trust. (Id. at ¶ 32). As of the date of the amended complaint, Plaintiff had received an aggregate of $407,828 in premium payments for the Policy with at least one payment (of $60,000) being paid by Berck. In (Id. at ¶ 33). 2008, Plaintiff twice attempted to reach Rosenblatt.

First, Plaintiff called him to inquire about the circumstances surrounding the issuance of the Policy, but was unable to reach him. Then, on August 18, 2008, Plaintiff sent Rosenblatt a

letter advising him that it was performing an audit of certain life insurance policies, including his, and requesting that he contact Plaintiff. 40). Plaintiff filed its original complaint on March 9, 2009, and the case was assigned to United States District Judge Peter Messitte. count (Paper 1). On May 13, 2009, Plaintiff filed a two (Paper 14). First, it seeks a Rosenblatt never responded. (Id. at ¶¶ 39-

amended

complaint.

judicial declaration that the Policy is void ab initio because it was issued in reliance upon material misrepresentations, or in the alternative, that the misrepresentations constitute

ground for rescission.

(Paper 14 ¶ 53).

Second, Plaintiff

seeks a judicial declaration that the Policy lacked an insurable

3

interest at inception and is therefore void ab initio. 14 ¶ 58).

(Paper

Defendant filed a motion to dismiss on June 18, 2009. (Paper 23). Plaintiff filed a response in opposition and a

motion for leave to file a second amended complaint on September 11, 2009. (Papers 39 and 40). Defendant responded in

opposition to the motion for leave to file an amended complaint and replied supporting its motion to dismiss on October 16, 2009. (Papers 45 and 46). Several motions hearings were set by

Judge Messitte, but were canceled due to scheduling conflicts. The case was transferred to the undersigned on February 17, 2010. In the motion and seeks in to for the add leave to file second the second amended

complaint, Plaintiff

proposed Marvin

amended and

complaint, Finfer

Rosenblatt

Robert

("Finfer") as defendants and elaborates on the allegations as follows: Plaintiff completed and states signed that an Finfer, Agent's an agent for the Trust, in

Underwriting

Report

connection with the Policy application on February 21, 2007. (Paper 40, Proposed Second Amended Complaint at ¶ 30). Finfer

answered "no" to questions concerning whether any part of the premium would be paid for by borrowed funds, or if any

discussion had occurred that would lead him to believe that this 4

policy would be sold or assigned to a secondary market provider. (Id. at ¶¶ 31-35). Plaintiff trustee of the also alleges Shara that in May 2009, the original spoke to

Trust,

Blumberg

("Blumberg"),

representatives from Penn Mutual.

(Id. at ¶ 36).

Blumberg

explained that she had no connection to Rosenblatt, and was asked by her brother-in-law to serve temporarily as the trustee. (Id. at ¶¶ 37-38). the application was When she received the Policy application, only partially completed and had tabs

labeled "sign here" to indicate where Blumberg should place her signature. in-law and (Id. at ¶ 42). Birute Adams, She communicated with her brotherthe chief to operating returning officer the of

Oceangate

Life

Settlements,

prior

executed Plaintiff in the

application to her brother-in-law. alleges that Oceangate Life

(Id. at ¶ 40). is

Settlements

involved

secondary market and is in the business of purchasing insurance policies. (Id. at ¶ 41). After she returned the executed

application, Blumberg was instructed by Birute Adams to debit the Trust account with funds that she had received from her brother-in-law's company, "Life Spring." (Id. at ¶ 44).

The proposed second amended complaint seeks a declaratory judgment judgment as only to as all to defendants the in count Trust one, in a declaratory two, and

Rosenblatt

count

damages for fraud against all defendants in count three. 5

As is discussed below, the motion for leave to file an amended complaint will be granted because it would survive a motion to dismiss and is not futile. dismiss will be denied. II. Motion for leave to file second amended complaint Fed.R.Civ.P. 15(a)(2) provides under circumstances relevant to this case that "a party may amend its pleading only with the opposing party's written consent or the court's leave. court should freely give leave when justice so requires." The Supreme Court has said that In the absence of any apparent or declared reason, such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc., the leave sought to amend a complaint should, as the rules require, be "freely given." The grant or denial of an opportunity to amend is within the discretion of the district court, but outright refusal to grant the leave without any justifying reason appearing for the denial is not an exercise of discretion; it is merely abuse of that discretion and inconsistent with the spirit of the Federal Rules of Civil Procedure. Foman v. Davis, 371 U.S. 178, 182 (1962). In this case, The Defendant's motion to

allowing the amended complaint will cause no undue delay, and there is no evidence of any bad faith or dilatory motive. The

only real question is whether the proposed amendments would be

6

futile.

That assessment turns, in part, on the arguments made The standard

by the parties in the motion to dismiss papers.

for futility is the same as a motion to dismiss under Fed. R.Civ.P. 12(b)(6). See Perkins v. United States, 55 F.3d 910, 917 (4th Cir. 1995)(amendment is futile if the amended claim would should fail be to survive on motion the to dismiss). of futility "Leave only to amend the

denied

ground

when

proposed amendment is clearly insufficient or frivolous on its face." Cappetta v. GC Services Ltd. Partnership, 2009 WL 482474

at *4 (4th Cir. 2009)(citing Davis v. Piper Aircraft Corporation, 615 F.2d 606, 613 (4th Cir. 1986); Johnson v. Oroweat Foods Co., 785 F.2d 503, 510 (4th Cir. 1986)). The purpose of a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) complaint. (4th Cir. is to test the sufficiency of the plaintiff's

See Edwards v. City of Goldsboro, 178 F.3d 231, 243 1999). Except in certain specified cases, a

plaintiff's complaint need only satisfy the "simplified pleading standard" of Rule 8(a), Swierkiewicz v. Sorema N.A., 534 U.S. 506, 513 (2002), which requires a "short and plain statement of the claim showing that the pleader is entitled "Rule blanket to relief." still of

Fed.R.Civ.P. requires a

8(a)(2). `showing,'

Nevertheless, rather than a

8(a)(2)

assertion,

entitlement to relief." 544, 555 n.3 (2007).

Bell Atl. Corp. v. Twombly, 550 U.S.

That showing must consist of more than "a 7

formulaic recitation of the elements of a cause of action" or "naked assertion[s] v. Iqbal, devoid 129 In of S.Ct. its further 1937, factual 1949 enhancement."

Ashcroft citations consider

(2009)(internal the court as must true,

omitted). all well-pled

determination, in a

allegations

complaint

Albright v. Oliver, 510 U.S. 266, 268 (1994), and must construe all factual allegations in the light most favorable to the

plaintiff. F.3d 776,

See Harrison v. Westinghouse Savannah River Co., 176 783 (4th Cir. 1999)(citing Mylan Labs., Inc. v.

Matkari, 7 F.3d 1130, 1134 (4th Cir. 1993)).

The court need not,

however, accept unsupported legal allegations, Revene v. Charles County Comm'rs, 882 F.2d 870, 873 (4th Cir. 1989), legal

conclusions couched as factual allegations, Iqbal, 129 S.Ct. at 1950, or conclusory factual allegations devoid of any reference to actual events, United Black Firefighters v. Hirst, 604 F.2d 844, 847 (4th Cir. 1979). This case involves an allegation of fraud, which requires a higher showing that to "in survive all a motion of to dismiss. or Rule mistake, 9(b) the

provides

averments

fraud

circumstances constituting fraud or mistake shall be stated with particularity." and other Fed.R.Civ.P. 9(b). of mind of "Malice, intent, knowledge, a person may be averred

condition

generally."

Harrison v. Westinghouse Savannah River Co., 176 Not all the causes of action 8

F.3d 776, 784 n.6 (4th Cir. 1999).

alleged

in

the

complaint

at

issue

include

allegations

of

fraudulent behavior.

Only causes of action involving fraud must See Balt. County 922 Corp. (4th USA, Cir. 317

meet the higher standard imposed by Rule 9(b). v. Cigna Healthcare, 238 Fed. v. Appx. 914,

2007)(unpublished)(quoting

Vess

Ciba-Geigy

F.3d 1097, 1104 (9th Cir. 2003)). A plaintiff may choose not to allege a unified course of fraudulent conduct in support of a claim, but rather to allege some fraudulent and some non-fraudulent conduct. In such cases, only the allegations of fraud are subject to Rule 9(b)'s heightened pleading requirements. Id. at 1104. a Rule claim 9(b) be "does not with require that allegations when those

supporting

stated

particularity

allegations describe non-fraudulent conduct." III. Analysis In Count I of the proposed second

Id. at 1104.

amended

complaint,

Plaintiff asks the court to declare that the Policy is void ab initio for one of two reasons: either because of Plaintiff's reliance on material misrepresentations made in the application, or because the misrepresentations constitute grounds for

rescission of the Policy.

In Count II, Plaintiff asks the court

to issue a declaratory judgment that the Rosenblatt Trust lacked an insurable interest at inception and the Policy is therefore void ab initio. In Count III, Plaintiff seeks fraud damages.

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Plaintiff

alleges

that

the

application

contained

four

misrepresentations and one omission: 1. The application falsely stated that Mr. Rosenblatt and/or the Rosenblatt Trust had not been involved in any discussions about the possible sale or assignment of the Rosenblatt Policy to a Life Settlement, Viatical or other secondary market provider; 2. The Application falsely stated that the premiums would not be paid from borrowed funds; 3. The Application falsely stated that the source of the funds would be the Trust; 4. The Application falsely stated that the purpose of the Rosenblatt Policy was estate planning; and 5. The Application materially omitted the identity of the payor of the Rosenblatt Policy premiums. (Paper 40, Proposed Second Amended Complaint at ¶ 45). In its motion to dismiss2, Defendant argues that Plaintiff alleges no facts to support any of the misrepresentations that it alleges were made on the application. It also argues that Rather, on an

the facts offered to support Count II are inadequate. Defendant says, Plaintiff on makes conclusory and allegations belief,

"unspecificed

`scheme'

information

without

At the time the motion to dismiss was filed, there was only one defendant, the Trustee of the Rosenblatt Trust. As noted, Plaintiff seeks to add two additional defendants. The opposition to the motion for leave to amend is also filed on behalf of the Trustee, but advances arguments on behalf of Mr. Rosenblatt. 10

2

stating the facts that form the basis of that belief or the source further of the information." that there (Paper is no 23, at 17). support Defendant for the

maintains

factual

allegation that Rosenblatt misrepresented the primary source of funds for the payment of premiums, and that no facts support the contention that estate planning was not the purpose of the

policy, as Rosenblatt stated. Plaintiff standards. argues that

(Id. at 21-22). it has met the fraud pleading It

(Paper 39, at 11; Paper 40, Attach. 4, at 5).

maintains that although pleadings alleging fraud generally may not be based on information and belief, when the facts

constituting the fraud are within the adverse party's knowledge an exception to the general rule exists. (Paper 39, at 12).

Plaintiff argues that it has met the pleading standards of all alleged misrepresentations and that it does not have specific knowledge of the underlying STOLI transaction and it is not required to plead such details when they are within the unique knowledge of the STOLI perpetrators. (Id.).

Plaintiff's proposed second amended complaint is adequate under the pleading requirements imposed by the federal rules. Plaintiff has adequately identified four misrepresentations and one omission that are specific, and has adequately stated its basis of knowledge about each transaction. Plaintiff alleges

specifics regarding the underwriting report and its completion, 11

as well as facts describing the tenuous connection that the first trustee had to Rosenblatt. Plaintiff has knowledge about

where initial funds for the Trust came from, and has described the trustee's interactions with someone These from and a company that

purchases

insurance

policies.

other

allegations

suffice for purposes of satisfying pleading requirements of the federal rules. requirements allegations of of Also, courts have held that the particularity Rule 9(b) do not See apply v. to omissions or

concealment.

Hill

Brush

Engineered

Materials, Inc., 383 F.Supp.2d 814, 819 (D.Md. 2005); Shaw v. Brown & Williamson Tobacco Corp., 973 F.Supp. 539, 552 (D.Md. 1997)(both citing to Flynn v. Everything Yogurt, 1993 WL 454355 at *9 (D.Md. 1993), to the effect that "omissions cannot be described in terms or of the time, place, of and contents of the the

misrepresentation

the

identity The

the

person

making the

misrepresentation.").

facts

underlying

STOLI

transaction in this case are within the unique knowledge of Defendants, and requiring details such as the time and place of meetings and transactions would preclude nearly all potential plaintiffs from bringing a claim of this type. Furthermore, Defendant is aware of the factual basis of Plaintiff's claims. The United States Court of Appeals for the

Fourth Circuit has held that a court should hesitate to dismiss a complaint under Rule 9(b) "if the court is satisfied (1) that 12

the

defendant

has

been

made

aware

of

the

particular

circumstances for which she will have to prepare a defense at trial, and (2) that plaintiff has substantial prediscovery

evidence of those facts."

Harrison v. Westinghouse Savannah In this case,

River Co., 176 F.3d 776, 784 (4th Cir. 1999).

Defendant has full knowledge of the circumstances for which it will have to prepare a defense. Furthermore, it is clear from

the proposed second amended complaint that Plaintiff does have substantial prediscovery evidence of facts based on meeting with the first trustee and from gathering information regarding the completion of the underwriting report and application, and

payment of premiums.

Therefore, Plaintiff is able to support

its claims adequately for this stage of the proceedings. Defendant also moves to dismiss Count I because, it

alleges, Plaintiff failed to plead that it tendered return of the premiums, which is an essential element of the substantive claim of rescission. (Paper 23, at 8). Defendant refers to

Maryland case law establishing that an "insurer must return or offer to return life insurance premiums to effectuate a

rescission, even where the rescission is for alleged fraud." (Paper 23, at 8). Furthermore, Defendant notes that "both the

insurance policy issued to the Trust and Maryland's insurance laws provide that the Policy is uncontestable after two years." (Paper 23, at 13). The Policy was 13 issued on March 9, 2007

according to Defendant, and so the contestability period ended on March 9, 2009. (Id.). Therefore, Defendant maintains, any

leave to replead this cause of action would be futile because the premiums needed to be tendered before the end of the

contestability period.

Finally, Defendant argues that Plaintiff (Id. at 11).

is not entitled to keep the premiums as an offset.

In response to Defendant's argument, Plaintiff maintains that the court, when sitting in equity, may allow Plaintiff to retain an amount of the premium as an offset to its expenses and costs incurred in relation to the Policy. Plaintiff also contends that its cause of (Paper 39, at 5). action is for a

declaratory judgment, not a rescission, and that there is a clear distinction between the two actions. Defendant's claim that the (Id.). must be dismissed

complaint

because Plaintiff failed to return the premium within the two year contestability period is without merit. Plaintiff has not

brought a claim for rescission, but for a declaratory judgment. The Declaratory Judgment Act provides that "[i]n a case of

actual controversy within its jurisdiction . . . any court of the United States . . . may declare the rights and other legal relations of any interested party seeking such a declaration, whether or not further relief is or could be sought." § 2201. The Fourth Circuit has held: 28 U.S.C.

14

it is elementary that a federal court may properly exercise jurisdiction in a declaratory judgment proceeding when three essentials are met: (1) the complaint alleges an actual controversy between the parties of sufficient immediacy and reality to warrant issuance of a declaratory judgment; (2) the court possesses an independent basis for the jurisdiction over the parties (e.g., federal question or diversity jurisdiction); and (3) the court does not abuse its discretion in its exercise of jurisdiction. Volvo Equip. N. Am. v. CLM Equip. Co., Inc., 386 F.3d 581, 592 (4th Cir. 2004)(citing 28 U.S.C. § 2201; Cont'l Cas. Co. v. In this case, all

Fuscardo, 35 F.3d 963, 965 (4th Cir. 1994)).

three of these requirements are met, and Defendant does not argue otherwise. Plaintiff's claim for a declaratory judgment

is adequately pleaded and will not be dismissed. In moving to dismiss Count II, Defendant argues that a sale of the Policy of the kind alleged by Plaintiff is lawful and therefore Plaintiff fails to state a claim upon which relief can be granted. Defendant cites Fitzgerald v. Rawlings, 114 Md. 470

(1911), arguing that the Court of Appeals of Maryland refused to hold "that a life insurance policy was void ab initio for lack of an insurable interest, when the insured purchased the policy pursuant to an agreement made prior to the date of the policy, to transfer it to a creditor." Plaintiff asserts that (Paper 23, at 24). Defendant's arguments are

disingenuous and that Maryland courts have not yet addressed the 15

standard

to

be is

applied a

in

determining

whether an

a

policy

transaction interest.

STOLI-transaction 39, at 9).

lacking

insurable the three

(Paper

Plaintiff

explains

different standards that have been adopted by courts around the country, and maintains that under any of these standards the Policy lacks an insurable interest. Plaintiff also cites a

recent case decided by the Fourth Circuit, First Penn-Pac. Life Ins. Co. v. Evans, 2009 WL 497394 (4th Cir. 2009)(unpublished decision), standard. third which adopts the "third-party participation"

This standard requires a plaintiff to show that some "participated" for the in a scheme of with the the insured policy to or

party a

procure

policy

purpose

selling

beneficial interest in the policy after policy issuance. at 9).

(Id.

In First Penn-Pac. Life Ins. Co. v. Evans, the Fourth

Circuit said that, under Arizona law, "an `insurable interest' in the context of a life insurance policy is an interest in having the insured life persist, as opposed to an interest only in the loss of that life." 2009 WL 497394 at *2 (referencing In that case, an and then

Grigsby v. Russell, 222 U.S. 149, 155 (1911)). insured applied for multiple insurance

policies,

offered them for sale, falsely holding out that he was suffering from a terminal illness. Id. at 2-3. After First Penn-Pacific

attempted to rescind the policy and was rejected by the insured, it filed suit. The Fourth Circuit upheld a grant of summary 16

judgment for the insured, holding that there was no "evidence that anyone other than Moore [the insured] was a participant in the scheme at the time Moore obtained the First Penn policy." Id. at *3. party The Fourth Circuit added that there was no third in the "procurement of Moore's policy and

participant

therefore no one was `wagering' on Moore's life in violation of public policy." are clearly Id. In this case, Plaintiff alleges facts that and may fit the third party

distinguishable

participation standard: it alleges that there was third party participation in the procurement of the policy and that people besides policy. Rosenblatt Though were involved may in a scheme to obtain on the the

Defendant

ultimately

prevail

substance, Plaintiff has met its burden for surviving a motion to dismiss. The Maryland case cited by Defendant as defining insurable interest is inapposite at this stage of the proceedings. In

that case, the insurance company did not claim that no policy existed and the parties admitted that the fund was legal and valid. Fitzgerald, 114 Md. at 474-476. The issue before the

court concerned the assignability of life insurance contracts and whether that particular policy was made as part of a wager, which the court found that it was not. Id.

At this stage, it would be premature to dismiss the claim. Plaintiff has adequately pleaded 17 a cause of action that no

insurable interest existed because the insured was participating in a scheme with a third party to purchase the Policy. IV. Conclusion For the foregoing reasons, Defendant's motion to dismiss will be denied, and Plaintiff's motion for leave to file an amended follow. complaint will be granted. A separate Order will

/s/ DEBORAH K. CHASANOW United States District Judge

18