Dukes Bridge LLC et al v. Beinhocker et al
Filing
51
Judge Douglas P. Woodlock: MEMORANDUM AND ORDER entered granting in part and denying in part 31 Motion for Summary Judgment; denying 38 Motion for Summary Judgment, specifically granting Plaintiffs motion for summary judgment (Dkt. No. 31) as t o the Dukes Bridge contract claims against Phillips; and granting Defendants cross-motion for summary judgment (Dkt. No. 38) as to the claims by Miller and the claims against Beinhocker. The parties shall make submissions by October 5, 2012 proposing a procedure for bringing this case to final judgment by resolving the precise damages to be awarded to Plaintiffs in this case. (Woodlock, Douglas)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
DUKES BRIDGE LLC and
STANLEY MILLER, Trustee of
the TPCS Corporation
Irrevocable Life Insurance
Sub-Trust,
Plaintiffs,
v.
GILBERT D. BEINHOCKER and
LEONARD PHILLIPS,
Individually and as Trustee
of the TPCS Corporation
Irrevocable Life Insurance
Trust,
Defendants.
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CIVIL ACTION NO.
10-10877-DPW
MEMORANDUM AND ORDER
September 19, 2012
Plaintiffs Dukes Bridge LLC and Stanley Miller seek damages
from Defendants Gilbert Beinhocker and Leonard Phillips for
breach of contract and breach of fiduciary duty.
Plaintiffs have
moved for summary judgment, alleging that Beinhocker and Phillips
admit they breached the contract at issue.
Defendants oppose the
plaintiffs’ motion and have filed a cross-motion for summary
judgment, arguing that the Non-Contravention Agreement giving
rise to the breach of contract claim is unenforceable because
Aqua Blue, Dukes Bridge’s assignor, never signed the Agreement,
and that under either claim Dukes Bridge and Miller cannot prove
damages.
I will grant Plaintiffs’ motion for summary judgment as
to the liability of Phillips and the cross-motion of the
defendants as to the claims of Miller and the liability of
Beinhocker and direct the parties to prepare the case for an
assessment of damages.
I.
A.
BACKGROUND
The Parties
Dukes Bridge LLC is a limited liability corporation.
Stanley Miller is the Trustee of the Tamper Proof Container
Systems Corporation Irrevocable Life Insurance Sub-Trust (the
“Sub-Trust”).
Gilbert Beinhocker and Leonard Phillips own and operate
Tamper Proof Container Systems Corp.
Beinhocker is the insured
individual under the insurance policy at issue here.
Phillips is
the Trustee of the Tamper Proof Container Systems Corporation
Irrevocable Life Insurance Trust (the “TPCS Trust”).
B.
Stranger-Originated Life Insurance
So called “stranger-originated life insurance” plans are an
offshoot of the viatical-settlement industry that developed in
the 1980s when investors purchased the life insurance policies of
terminally ill AIDS patients.1
“Stranger-
1
A Fourth Circuit opinion has described the viatical-settlement
industry:
The viatical settlements industry was born in the 1980s
in response to the AIDS crisis. In the early years,
AIDS was a rapidly fatal disease, and its victims
usually died within months of diagnosis. Many AIDS
2
originated life insurance” (“STOLI”) plans allow an insured to
buy a large life insurance policy with a loan from an investor
who is named as the beneficiary of the policy.
For the first two
years,2 the insured pays the premiums using the loan from the
investor.
After two years, the insured sells the policy to the
investor for what is usually a substantial cash payment, and upon
death of the insured, the investor receives the life insurance
proceeds.
A typical complex stranger-originated life insurance
transaction may be structured as follows:
An agent attempts to sell a life insurance policy to an
elderly insurable candidate, and offers the candidate
up-front cash in exchange for promising a future sale
sufferers were in great need of cash to pay for their
care after they had become debilitated. Their life
insurance policies were not only expensive to maintain
but could, upon liquidation, provide some of the
desperately needed cash. Moreover, investors were
willing to purchase the life insurance policies of AIDS
sufferers. Inasmuch as AIDS sufferers had predictably
short life expectancies, their policies were reliable
investments.
Life Partners, Inc. v. Morrison, 484 F.3d 284, 287-88 (4th Cir.
2007).
2
Insurance policies frequently contain an incontestability
clause, in which the insurer agrees that after a policy has been
in force for a given period of time (here, two years), it will
not contest the validity of the policy based on any
misrepresentations made in the policyholder’s application.
Bertram Harnett & Irving I. Lesnick, The Law of Life and Health
Insurance § 5.07 (Matthew Bender, Rev. ed. 2010). Forty-three
states have mandatory incontestability clauses for life insurance
policies, and as a practical effect nearly all life insurance
policies contain them. Id.
3
of the policy. The agent informs the candidate that
the candidate will be able to obtain the policy at
virtually no cost to himself, because the agent has
secured non-recourse financing to purchase the policy.
The candidate then acts as a “nominal grantor” of a
life insurance trust that is used to apply for the
policy. “At that time, the agent will tell the insured
that, in all probability, the policy will be sold to
investors for a price that will pay the loan and
accrued interest, leaving a profit to split between the
agent and the insured . . . . If the insured survives
[the two-year contestability period on the policy], the
owner (the life insurance trustee) typically has two
options, in addition to the sale of the policies to
investors: (1) have the insured pay the outstanding
debt with accrued interest and retain the policy; or
(2) transfer the policy to the lender in lieu of
foreclosure.”
Lincoln Nat. Life Ins. Co. v. Calhoun, 596 F. Supp. 2d 882, 885
(D.N.J. 2009) (quoting Alan Jensen & Stephan R. Leimberg,
Stranger–Owned Life Insurance:
A Point/Counterpoint Discussion,
33 AM. C. TR. EST. COUNS. L.J. 110, 111 (2007)).
Numerous states have passed legislation attempting to curb,
and sometimes ban, the practice.
See, e.g., N.Y. Ins. Law § 7815
(banning stranger-originated life insurance transactions); H.B.
660, 2009 Sess. (N.H. 2010) (banning the use of third parties to
apply for life insurance and increasing the contestability period
to five years); S.B. 513, 2009-2010 Leg. (Wis. 2009) (increasing
the contestability period to five years and instituting other
controls on their sale).
Insurers, perhaps recognizing the
danger that such transactions presented to their actuarial profit
models, have also tried to curb the practice.
See, e.g.,
Principal Life Ins. Co. v. DeRose, Civil Action No. 1:08-cv-2294,
4
2011 WL 4738114, at *1 (M.D. Pa. October 5, 2011) (involving a
policy that explicitly prohibited any form of stranger-originated
life insurance or non-recourse premium financing).
C.
Facts
1.
Background
Tamper Proof Container Systems Corp. (“TPCS”) is a
corporation that engineered and marketed a new method for
detecting intrusions in shipping containers.
Beinhocker and
Phillips each own one-third of the shares of TPCS, and Beinhocker
is TPCS’s sole employee.
Although TPCS has a corporate form,
Beinhocker has characterized TPCS as essentially a 50/50
partnership between him and Phillips.
Beginning in 2007, Beinhocker was approached by Richard
Salvato, an insurance broker with Bentley Assets, to gauge his
interest in buying a STOLI policy.3
Although Beinhocker had
initially declined the offer, by 2008 he reconsidered.
At that
time, TPCS was having difficulty raising capital due to the
financial market crash and could not meet operating expenses or
pay Beinhocker and Phillips a salary sufficient to cover their
3
Plaintiffs characterize the policy as a “key-man” policy. A
key-man policy refers to “[l]ife insurance taken out by a company
on an essential or valuable employee, with the company as
beneficiary.” Black’s Law Dictionary 1010 (9th ed. 2009).
Nevertheless, because I will grant Plaintiffs’ motion for summary
judgment, I recite the facts, including the characterization of
the life insurance policy, in the light most favorable to
Beinhocker and Phillips.
5
living expenses.
Beinhocker and Phillips saw the STOLI policy as
a way to get much needed capital for TPCS and to pay for their
own living expenses, so they agreed with Salvato to set up two
STOLI policies in the amount of $10 million each.
They expected
to sell the first $10 million policy to net them $300,000 (later
reduced to $200,000) up front, and to sell the second $10 million
policy, the policy at issue in this case, for one to two million
dollars after two years.4
Bentley Assets set up the transaction and provided the
closing documents which were reviewed by Beinhocker and his
counsel in advance of closing.
Those closing documents created
the TPCS Trust,5 which was established to hold the life insurance
policies.
Phillips was named the Trustee of the TPCS Trust and
signed the Trust Agreement.
The TPCS Trust is governed by
Massachusetts trust law.
Bentley Assets filled out Beinhocker’s application for the
two $10 million life insurance policies with John Hancock Life
Insurance Company.
Beinhocker reviewed the application, signed
4
Bentley Assets let the first policy lapse after being unable
to sell it. Only the second policy is at issue in this case, so
all further references to the life insurance policy refer to the
second $10 million policy issued by John Hancock.
5
In fact, the TPCS Trust was created before closing, on March
15, 2008. However, it was amended at closing to allow for the
creation of the Sub-Trust necessary for Beinhocker and Phillips
to obtain the loan from Aqua Blue, discussed infra. All
references to the TPCS Trust thus reference the Trust as amended
by the July 10, 2008 First Trust Amendment.
6
it, and sent it to John Hancock.
Although the application asked
whether “any party, other than the Owner, [would] obtain any
right, title or interest in any policy issued” and whether “all
or part of the premium [would] be financed,” both of which were
contemplated by Phillips and Beinhocker, Beinhocker signed his
name to the application with both of those questions answered
“No.”
John Hancock issued policy number 94139409 to the TPCS
Trust on June 12, 2008, insuring Beinhocker in the amount of $10
million.
The first year’s planned premium was $477,079 and for
years two through twenty-four, the planned annual premium was
$441,865.
Because Beinhocker and Phillips could not afford the annual
premiums, they sought a loan from Aqua Blue Wealth Management,
LLC to cover the cost ($918,944 in premium payments) for the
first two years until Beinhocker and Phillips could sell the life
insurance policy.
As a condition of the loan, Aqua Blue required
that Beinhocker and Phillips create the Sub-Trust at closing and
transfer the life insurance policy to the Sub-Trust as collateral
for the loan.
Unlike the TPCS Trust, the Sub-Trust is governed
by Delaware trust law.
At the time of the lapse, the Sub-Trust had used the Aqua
Blue loan to pay the first-year premium of $477,079 and $288,600
of the second-year premium.
Aqua Blue also incurred $79,439.74
in costs administering the loan.
Under the Specialty Finance
7
Loan Agreement, interest accrued on the Aqua Blue loan in the
amount of 10% per annum, compounded on a daily balance basis.
In
the event of a default, the interest rate increased to 13% on the
amount in default from the date payment was due.
2.
Closing the Deal
Closing occurred on July 10, 2008.
The closing involved a
number of documents: (1) an amendment to the TPCS Trust Agreement
allowing for the creation of a Sub-Trust; (2) the Sub-Trust
Agreement, creating the Sub-Trust; (3) the Assignment of Assets
which assigned the life insurance policy to the Sub-Trust; (4)
the Acceptance of Appointment naming Miller as the Trustee of the
Sub-Trust; and (5) the Specialty Finance Loan Agreement, which
consisted of (a) an Assignment Agreement between the Sub-Trust
and Aqua Blue, whereby the life insurance policy was put up as
collateral, and (b) a Promissory Note in the amount of $935,417
to pay the first two years worth of premium payments on the life
insurance policy.
Also at the closing, Beinhocker, Phillips, and Miller signed
a Non-Contravention Agreement, which was additional consideration
for the Specialty Finance Loan Agreement.
The Non-Contravention
Agreement provided that Beinhocker and Phillips “have not, and
will not, contravene or take any action that will cause an event
of default under the Specialty Finance Loan Agreement or any
other contract, understanding, or commitment described in the
8
Loan Documents.”
§ 3.1.
By signing the Agreement, Beinhocker
and Phillips agreed “that they will not tender, exchange, sell,
offer to sell, transfer, pledge, assign, hypothecate, or
otherwise dispose of, or encumber with any Lien, the Life Policy
without the prior, written consent of [Miller].”
§ 3.2.
They
further agreed “that they will not make any withdrawals from or
obtain any policy loans against the Life Policy without the
prior, written consent of [Miller],” § 3.3, nor would they
“communicate verbally or in writing with the Insurer without the
prior written consent of [Miller].”
§ 3.5.
Finally, Beinhocker
and Phillips agreed to hold Aqua Blue and Miller harmless for
“any and all loss, liability, or damage resulting from any breach
or non-fulfillment” of the Non-Contravention Agreement, and “any
and all actions, suits, proceedings, claims, demands,
assessments, judgments, out-of-pocket costs and expenses,
including without limitation, legal fees and expenses incident
to” the breach.
§ 4.1.
Beinhocker, Phillips, and Miller signed
the agreement.
3.
Policy Lapse
In early 2009, Beinhocker and Phillips began to be concerned
that Bentley Assets would be unable to sell the life insurance
policy to investors and pay them the proceeds that had been
discussed.
Beinhocker said he became concerned that Bentley
Assets would sell his life-insurance policy to “any anonymous
9
party in Russia or Asia” who “would have a $10 million incentive
to have [him] anonymously assassinated.”
To recover some benefit from their STOLI transaction,
Beinhocker and Phillips sought a loan from John Hancock against
the life insurance policy in the amount of $200,000, an amount
that had been allegedly promised to them by Bentley Assets.
Phillips, with Beinhocker’s knowledge but without Miller’s
consent, contacted John Hancock directly numerous times to
discuss taking out a loan.
Phillips applied for the $200,000 loan on August 10, 2009 as
Trustee for the TPCS Trust, despite the fact that at that point
he had already assigned the life insurance policy to the SubTrust.
The loan agreement provided that the “loan must be repaid
to the applicable issuing company with interest, or the loan
amount plus interest will be deducted from any proceeds paid by
this policy for the cash surrender value or death benefit.”
Beinhocker and Phillips never intended to repay the loan, and
Beinhocker admitted that he took out the loan to facilitate the
lapse of the policy.
Phillips admitted that he and Beinhocker
had signed the Non-Contravention Agreement, and that in doing so
they had promised not to take out a loan.
Phillips also admitted
that by taking out the loan, his actions breached the NonContravention Agreement.
10
On August 21, 2009, John Hancock approved the loan with a
6.75% interest rate and paid Phillips $200,000, which he split
evenly with Beinhocker.
John Hancock included a letter with its
check explaining that “[i]f at any time the loan balance exceeds
the cash value of the policy, coverage may lapse.”
As a result of the loan, the life insurance policy’s future
premium reserves fell below the net cash surrender value by
$53,993.28, causing the policy to enter the sixty-one day grace
period.
John Hancock sent Phillips a letter informing him of the
shortage on October 9, 2009.
Beinhocker.
The letter was forwarded to
Beinhocker and Phillips did not inform Miller or
Aqua Blue of the loan, nor did they inform Miller or Aqua Blue
that the life insurance policy was in its sixty-one day grace
period and would expire without further action.
Neither
Beinhocker nor Phillips did anything to cure the account shortage
or prevent the lapse of the policy.
On November 2, 2009, Dukes Bridge LLC acquired Aqua Blue’s
loan to Beinhocker and Phillips by assignment, and provided
notice to them on December 14, 2009.
On December 18, Phillips
received notice from John Hancock that as of December 9, 2009,
the life insurance policy had lapsed for non-payment.
D.
Procedural History
On May 25, 2010, Dukes Bridge and Miller filed suit against
Beinhocker and Phillips for breach of the Non-Contravention and
11
Sub-Trust Agreements, and for breach of Phillips’s fiduciary duty
to the Sub-Trust.
Now before me is their motion for summary
judgment as to both claims.
For their part, Beinhocker and
Phillips have filed a cross motion for summary judgment barring
their liability.
II.
STANDARD OF REVIEW
A movant is entitled to summary judgment when “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.”
R. Civ. P. 56(a).
Fed.
“A dispute is genuine if the evidence about
the fact is such that a reasonable jury could resolve the point
in the favor of the non-moving party,” and “[a] fact is material
if it has the potential of determining the outcome of the
litigation.” Farmers Ins. Exch. v. RNK, Inc., 632 F.3d 777, 782
(1st Cir. 2011) (citation omitted).
However, “conclusory
allegations, improbable inferences, and unsupported speculation”
are insufficient to create a genuine issue of material fact to
survive summary judgment.
Sullivan v. City of Springfield, 561
F.3d 7, 14 (1st Cir. 2009) (quotation and citation omitted).
As I must, I “view the facts in the light most favorable to
the party opposing summary judgment.”
F.3d 9, 10 (1st Cir. 2011).
Rivera–Colón v. Mills, 635
Because I am addressing cross-
motions for summary judgment, I “must view each motion,
12
separately, through this prism.”
Estate of Hevia v. Portrio
Corp., 602 F.3d 34, 40 (1st Cir. 2010).
III.
DISCUSSION
Under Massachusetts law, to prove a breach of contract,
plaintiffs must show (1) the existence of a valid and enforceable
agreement, (2) that the defendants breached the agreement through
their acts or omissions, and (3) that the plaintiffs were harmed
by the defendants’ breach.
Gemini Investors Inc. v. Ameripark,
Inc., 643 F.3d 43, 48 (1st Cir. 2011).
An agreement is valid and
enforceable if there is a manifestation of mutual assent to be
bound, coupled with consideration given by each party.
Stagikas
v. Saxon Mortg. Servs., Inc., 795 F. Supp. 2d 129, 136 (D. Mass.
2011).
A.
Valid and Enforceable Agreement
1.
Dukes Bridge
Beinhocker and Phillips allege that Aqua Blue never signed
the Non-Contravention Agreement, and therefore Dukes Bridge
cannot meet its burden of proving that the Non-Contravention
Agreement is valid and enforceable against them.
Dukes Bridge
has produced two copies of the Non-Contravention Agreement, both
of which show the signatures of Beinhocker, Phillips, and Miller.
Neither copy is signed by Aqua Blue, however.
A non-signatory to a contract may nonetheless enforce a
contract under Massachusetts law if the third-party plaintiff can
13
“show that [it] was the intended beneficiary of the contract, not
merely an incidental one.”
Katz v. Pershing, LLC, 806 F. Supp.
2d 452, 459, at *4 (D. Mass. 2011) (citations omitted).
The
third-party plaintiff “must show with special clarity that the
contracting parties intended to confer a benefit on [it]” in
order to be able to enforce the contract.
McCarthy v. Azure, 22
F.3d 351, 362 (1st Cir. 1994).
Here, the evidence is clear that the parties intended for
Aqua Blue (now Dukes Bridge, via assignment) to benefit from the
Non-Contravention Agreement.
The preamble to the Agreement notes
that it was “entered into by and between” Beinhocker, Phillips,
Miller, and Aqua Blue, even though Aqua Blue does not appear on
the signature page of the agreement.
The third “whereas” clause
in the preamble notes that Aqua Blue would make the loan
discussed in the Specialty Finance Loan Agreement “provided that
[Phillips] and [Beinhocker] also agree to execute [the NonContravention Agreement] contemporaneously with the execution and
delivery of the Specialty Finance Loan Agreement and other Loan
Documents by [Miller] and [Aqua Blue].”
And the “now, therefore”
clause immediately following states that the terms of the NonContravention Agreement are valuable consideration necessary “in
order to induce [Miller] and [Aqua Blue] to enter into the Loan
Agreement.”
Finally, under the indemnification section of the
Agreement, Beinhocker agreed “to indemnify and hold [Miller] and
14
[Aqua Blue] harmless” in the event of a breach by Beinhocker or
Phillips of the Non-Contravention Agreement.
§ 4.1.
Thus, even though there is no evidence Aqua Blue signed the
Non-Contravention Agreement, it is apparent from the terms of the
Agreement that Aqua Blue was an intended third-party beneficiary
thereof.
Further, Aqua Blue manifested its intent to be bound by
the Non-Contravention Agreement by entering into a loan
transaction with Miller that was supported, in part, by the NonContravention Agreement as consideration.
I conclude that Dukes
Bridge, as Aqua Blue’s assignee, can sue Beinhocker and Phillips
for breach of the agreement.
2.
Miller
As to whether the Non-Contravention Agreement is valid with
respect to Miller, Beinhocker and Phillips allege that Miller did
not sign the Non-Contravention Agreement at the time of the
closing, and therefore the later signature page with his
signature is of questionable authenticity.
However, even if
Beinhocker and Phillips are correct that Miller’s signature was
only added after the fact, “[a] written contract, signed by only
one party, may be binding and enforceable even without the other
party’s signature if the other party manifests acceptance.”
Haufler v. Zotos, 845 N.E.2d 322, 332 (Mass. 2006).
Here, the uncontroverted evidence in the record shows that
Miller manifested his acceptance of the Non-Contravention
15
Agreement, and therefore it is a valid and enforceable agreement.
Phillips appointed Miller as the Trustee of the Sub-Trust, and
Miller accepted the appointment.
The Non-Contravention Agreement
noted that by signing the agreement, Beinhocker and Phillips
“acknowledge and agree that [Miller] is about to enter into a
loan arrangement with [Aqua Blue],” the details of which had been
provided to and reviewed by them in advance of closing.
The
Agreement also noted that Aqua Blue was willing to make the loan
to Beinhocker and Phillips “provided that [Phillips] and
[Beinhocker] also agree to execute [the Non-Contravention
Agreement] contemporaneously” with the loan to Miller.
Indeed,
the next paragraph notes that the terms of the Non-Contravention
Agreement were necessary “in order to induce [Miller] and [Aqua
Blue] to enter into the Loan Agreement.”
After Beinhocker and Phillips signed the Non-Contravention
Agreement, Miller entered into the Specialty Finance Loan
Agreement with Aqua Blue, and took assignment of the life
insurance policy as collateral.
Aqua Blue paid Miller an amount
sufficient (at the time) to cover the premiums to John Hancock
for the life insurance policy, and Miller in turn paid those
premiums as Trustee of the Sub-Trust.
This is sufficient
evidence to show that Miller intended to be bound by the NonContravention Agreement, and thus is sufficient to manifest his
contemporaneous acceptance, even if Beinhocker and Phillips are
16
correct that he did not actually sign the Non-Contravention
Agreement or did so belatedly.
Beinhocker and Phillips do not dispute that the NonContravention Agreement was supported by valid consideration.
Therefore, a binding contract existed between Beinhocker,
Phillips, and Miller.
B.
Breach
Assuming that the Non-Contravention Agreement was valid and
enforceable, Beinhocker and Phillips cannot genuinely dispute
that they breached it.
By taking out the $200,000 loan,
Beinhocker and Phillips acted in direct contravention of sections
3.1, 3.3, and 3.5 of the Agreement.
Under those sections,
Beinhocker and Phillips agreed not to (1) “take any action that
will cause an event of default” § 3.1; (2) “make any withdrawals
from or obtain any policy loans against the Life Policy without
the prior, written consent of [Miller],” § 3.3; or (3)
“communicate verbally or in writing with the Insurer without the
prior written consent of [Miller].”
§ 3.5.
Beinhocker and
Phillips admit that their actions broke all three of those
covenants.
Phillips contacted John Hancock without prior approval from
Miller to inquire about obtaining a loan, in direct violation of
section 3.5.
Beinhocker and Phillips obtained the $200,000
policy loan against the life insurance policy without Miller’s
17
consent, in direct violation of section 3.2.
And by taking out
the loan, as Beinhocker described it, they “facilitated the lapse
of the policy” in direct violation of section 3.1.
The evidence is uncontroverted that Beinhocker and Phillips
breached a valid and enforceable Non-Contravention Agreement.6
C.
Damages
Beinhocker and Phillips argue that Dukes Bridge and Miller
cannot prove damages, and therefore cannot prevail on their
claims.
They make three7 distinct arguments, which I address in
turn.
1.
Miller Cannot Show Damages
Beinhocker and Phillips claim that Miller effectively
admitted in his deposition that he has not been damaged by the
alleged breach of contract.
Miller said at his deposition that
6
Because I find that Defendants are liable under Plaintiffs’
contract theory of liability, the claim that Phillips breached a
fiduciary duty to Miller becomes superfluous. If required to
address the issue, I would find that Phillips did not owe a
fiduciary duty to Miller under the Sub-Trust Agreement. That
Agreement only created fiduciary duties for Miller, which he owed
to Phillips, but not the other way around. Indeed, Plaintiffs
appeared to abandon this theory in their reply brief and at oral
argument.
7
Beinhocker and Phillips argue a fourth reason why plaintiffs
cannot show damages: if Aqua Blue was not a party to the NonContravention Agreement, its only recourse for damages is via the
Specialty Finance Loan Agreement. However, because I have found
above that Aqua Blue, now Dukes Bridge, was an intended thirdparty beneficiary of the Non-Contravention Agreement, its remedy
is not limited to that found in the Specialty Finance Loan
Agreement. Thus, Beinhocker’s and Phillips’s fourth argument
regarding damages fails.
18
he was not aware of any lawsuits against him or the Sub-Trust,
and had not lost any money as a result of the lapse of the
insurance policy.8
Therefore, Beinhocker and Phillips argue,
Miller cannot meet his burden of proof to show damages from the
loss of the life insurance policy, and thus summary judgment
should enter for them as to Miller’s claims.
They are correct.
The Sub-Trust received the life insurance
policy by assignment from the TPCS Trust.9
Phillips caused the policy to lapse.
Beinhocker and
Thus, because of their
actions, the Sub-Trust no longer owned the life insurance policy.
That is, the Sub-Trust was in a worse position than before
Beinhocker’s and Phillips’s actions.
However, while they may
mean that Duke Bridge has been harmed, there has been no showing
that Miller has suffered cognizable harm at this point.
Without
any evidence of harm, summary judgement must enter in defendants’
favor with regard to claims for damages by Miller.
8
This is likely because section 10.12 of the Loan Agreement
granted Miller immunity from liability, and because the Sub-Trust
no longer had any assets which would be the subject of a suit
once the insurance policy lapsed.
9
Beinhocker and Phillips make a half-hearted attempt to contest
the validity of the assignment, claiming in a single footnote
that it was ineffective to divest ownership and power from
Phillips as Trustee to the TPCS Trust because John Hancock was
not notified of the assignment. But notification has never been
a requirement for validity of an assignment (unless required by
separate agreement or by statute), only for collection of the
debt underlying the assignment—a separate issue. See 29
Williston on Contracts § 74.3 (4th ed. 1989) (discussing the
requirements for a valid assignment).
19
2.
Non- and Limited-Recourse Provisions
Next, Beinhocker and Phillips argue that their liability is
limited by the Non-Recourse and Limited-Recourse provisions in
the Specialty Finance Loan Agreement.
Specifically, they contend
that sections 1.1,10 2.1(c),11 and 9.512
10
That section reads, in relevant part:
“Loan Document” and “Loan Documents” shall respectively
mean any one or more of this Loan Agreement, the Note,
the Security Agreement, the Assignment, any other note,
letter of credit application, guaranty, security
agreement, hypothecation, assignment, mortgage, deed of
trust or other instrument, agreement or document with
or issued or given by the Borrower [the Sub-Trust]
creating, evidencing, governing, supporting, securing,
perfecting or respecting (in whole or in part) any of
the Obligations, and all waivers, consents, agreements,
reports, statements, certificates, schedules and other
documents executed by the requisite Person(s) pursuant
to or in connection with any of the foregoing and
accepted or delivered by the Lender [Aqua Blue].
§ 1.1 (emphasis added).
11
That section reads, in relevant part:
The Loans are non-recourse loans. Notwithstanding
anything contained herein to the contrary, the
Borrower’s [Sub-Trust’s] obligations under this Loan
Agreement may only be satisfied from and by the
Collateral . . . . The foregoing provisions of this
Section 2.1© shall in no way affect, impair, or
otherwise limit: (I) the indemnification obligation of
the Borrower [Sub-Trust] in Section 10.3 of this Loan
Agreement, or (ii) the obligation of the Borrower [SubTrust] pursuant to its collateral assignment of the
Life Policy to the Lender [Aqua Blue] in Section 5.1 of
this Loan Agreement. Notwithstanding any other
provision of this Speciality Finance Loan Agreement or
any other Loan Documents, Lender [Aqua Blue] agrees
that . . . there are not any circumstances, including
but not limited to the recourse obligations of the
20
Borrower [Sub-Trust], under which . . . Beinhocker will
personally be responsible for any obligations owed to
the Lender [Aqua Blue] or any affiliate of the Lender
[Aqua Blue] or the Insured’s [Beinhocker’s] assets will
be subject to any claims, liens or judgments of the
Lender [Aqua Blue] or any affiliates of the Lender[Aqua
Blue].
§ 2.1(c) (emphasis added).
12
That section reads, in relevant part:
(a) Notwithstanding any other provision hereof, the
lender [Aqua Blue] (or any party appointed by the
Lender [Aqua Blue]) shall have recourse against the
Borrower [Sub-Trust], the Insured [Beinhocker] and
Gilbert D Beinhocker in respect of the Obligations only
to the extent secured by the Collateral (as defined and
provided for under the Security Agreement), and, having
realized the same, neither the lender [Aqua Blue] nor
anyone acting on it’s [sic] behalf shall be entitled to
take any further steps against the Borrower [Sub-Trust]
or the Insured [Beinhocker] to recover any sum and the
right to receive any such sum shall be extinguished.
(b) No recourse for or under any obligation, covenant
or agreement of the Borrower [Sub-Trust] contained in
this Loan Agreement shall be had against any trustee or
agent of the Borrower [Sub-Trust] and by the
enforcement of any assessment or by any proceeding, by
virtue of any statute or otherwise; it being expressly
agreed and understood that this Loan Agreement is an
obligation of the Borrower [Sub-Trust] and that no
personal liability shall attach to or be incurred by
the trustees or agents of the Borrower [Sub-Trust] or
the Insured [Beinhocker] or Gilbert D Beinhocker, as
such, or any of them under or by reason of any of the
obligations, covenants or agreements of the Borrower
[Sub-Trust] contained in this Loan Agreement or implied
therefrom and that any and all personal liability for
breaches by the Borrower [Sub-Trust] of any of such
obligations, covenants or agreements, either at law or
by statute or constitution of every such trustee or
agent is hereby expressly waived as a condition of and
in consideration for the execution of this Loan
Agreement.
21
of the Specialty Finance Loan Agreement control over the NonContravention Agreement’s provision that Beinhocker and Phillips
agreed to hold Miller and Aqua Blue (now Dukes Bridge) harmless
for “any and all loss, liability, or damage resulting from any
breach” as well as “any and all . . . out-of-pocket costs and
expenses, including without limitation, legal fees and expenses.”
§ 4.1.
Though Beinhocker’s and Phillips’s argument is poorly
formed, consisting only of a recitation of the above sections of
the Loan Agreement and a conclusory, and erroneous, assertion
that those sections prevent them both from being personally
liable, a generous reading of their briefs might develop the
following argument:
Under section 1.1 of the Specialty Finance Loan Agreement,
Loan Documents are defined to include “all waivers, consents,
agreements . . . and other documents executed . . . in connection
with any [agreement relating to the loan] and accepted or
delivered by the Lender [Aqua Blue].”
§ 1.1.
The Non-
Contravention Agreement was an agreement between the parties in
connection with the Loan Agreement, and was entered into on the
same day as the Specialty Finance Loan Agreement.
Aqua Blue
“accepted” the Non-Contravention Agreement by entering into the
§ 9.5 (emphasis added).
22
Loan Agreement with Miller, because the Non-Contravention
Agreement states that it was partial consideration to induce Aqua
Blue to enter into the Loan Agreement.
Therefore, for purposes
of the Loan Agreement, the Non-Contravention Agreement is a Loan
Document.
Section 2.1(c) of the Specialty Finance Loan Agreement says
that “[n]otwithstanding . . . any other Loan Documents, the
Lender [Aqua Blue] agrees that . . . there are not any
circumstances . . . under which . . . Beinhocker will personally
be responsible for any obligations owed to the Lender [Aqua
Blue].”
§ 2.1(c).
Because the Non-Contravention Agreement is a
Loan Document, the Non-Contravention Agreement falls under the
non-recourse provision contained in section 2.1(c), wherein Aqua
Blue (now Dukes Bridge) agreed that it would not hold Beinhocker
personally liable under “any circumstances.”13
Therefore, the
non-recourse provision immunizes Beinhocker from Dukes Bridge’s
claim for damages under the Non-Contravention Agreement.
Therefore, summary judgment is appropriate as to the plaintiffs’
claims against Beinhocker.
13
Section 9.5(b) of the Loan Agreement does not help Beinhocker
or Phillips. That section by its very terms is limited to claims
of liability under the Loan Agreement itself. See § 9.5(b)
(waiving personal liability for “any of the obligations,
covenants or agreements of the Borrower [Sub-Trust] contained in
this Loan Agreement or implied therefrom . . . .” (emphasis
added)).
23
Unlike Beinhocker, Phillips is liable to Dukes Bridge.
It
is well established that trustees may be subject to personal
liability arising from contractual relationships entered into
with third parties.
Bogert on Trusts § 712 (6th ed. 1987);
Restatement (Second) of Trusts § 262 (1959).
To be sure, this
liability may be waived in the trust agreement.
Restatement
(Second) of Trusts § 263.
Sections 7.08 and 8.06(b) of the TPCS Trust govern trustee
liability.
Section 7.08 provides, in relevant part, that:
any trustee serving hereunder shall not incur any
liability by reason for any error of judgment, mistake
of law, or action of any kind taken or not taken in
connection with the administration of any trust created
hereunder if in good faith reasonably believed by the
trustee to be in accordance with the provisions and
intent of this Trust. This shall not apply in any
matter involving the trustee’s own willful misconduct
or gross negligence proved by clear and convincing
evidence.
§ 7.08 (emphasis added).
Section 8.06(b) provides, in relevant
part, that:
No trustee shall be personally liable to any person or
entity under any circumstances in connection with any
of the transactions contemplated by this Trust, except
that such limitation shall not relieve any trustee of
personal liability it may have for such trustee’s own
bad faith, willful misconduct or gross negligence.
§ 8.06(b) (emphasis added).
There is no basis in the record before me to dispute that
Phillips’s decision to take out the John Hancock loan which
caused the policy to lapse was at least grossly negligent if not
24
fundamentally fraudulent.
Phillips’s deposition is replete with
examples of his willful ignorance of his duties as trustee of the
TPCS Trust.
See, e.g., Phillips Dep. 74:17-75:1 (“Q.
Even as a
trustee of a trust that has ownership over the life policies, you
could care less as to who paid the premiums on those policies?
A.
That’s correct.
Q.
So you didn’t take your fiduciary
obligations as a trustee too significantly, did you?
Connelly: Objection.
Q.
How would you describe - - A.
Casual.”); id. 91:8-24 (“Q.
agreement.
me.
This is a non-contravention
Want to turn to the last page of this document for
That’s your signature, right?
A.
You received this document, correct?
Q.
Mr.
Looks like it. . . . Q.
A.
I signed this document.
Did you read this document before you signed it?
Probably not.
Q.
But maybe?
enough that I might have.
Q.
responsibilities within it?
A.
It’s possible.
A.
It’s short
Talk to anybody about the
A.
Not that I recall.”).
And
Phillips admitted, when informed of the terms of the agreements
and responsibilities of which he was purportedly ignorant, that
his actions had contravened those agreements and
responsibilities.
See Phillips Dep. 106:15-21 (“Q.
loan against the policy, you and Mr. Beinhocker?
correct.
Q.
A.
You took a
That’s
Your actions were in direct violation of this
contractual obligation, correct?
Mr. Connelly: Objection.
It appears that way.”); id. 114:13-18 (“Q.
25
A.
He and you signed
this agreement, correct?
A.
Correct.
promised not to take out that loan?
Q.
He and you both
Mr. Connelly: Objection.
A.
It appears that way.”).
It is plain that a trustee is grossly negligent when his
action on behalf of a trust directly contravenes an agreement of
the trust, as to the terms of which he was willfully ignorant.
Therefore, the TPCS Trust Agreement’s provisions immunizing
Phillips from liability do not apply, and he is liable for the
breach of the Non-Contravention Agreement.
3.
Any Damage Award Must be Limited to $200,000
Finally, Beinhocker and Phillips argue that if they are
liable, their liability must be capped at $200,000, the amount of
the loan they took out.
This is clearly incorrect.
Beinhocker
and Phillips admitted that they knew that by taking out the loan
they would cause the $10 million life insurance policy to lapse.
They knew that if the policy lapsed, the collateral for the loan
would evaporate, and the Sub-Trust would lose its ability to
repay Aqua Blue for the loan used to pay the first and second
year insurance premiums.
Thus the lost insurance premiums were
the proximate result of Beinhocker’s and Phillips’s breach.
The Non-Contravention Agreement makes clear that such
damages were also within the contemplation of the parties at the
time the Agreement was made.
Thus, Phillips’s liability is not
limited to the value of the loan he and Beinhocker took out which
26
in turn caused the lapse in the insurance policy that they
intended.
See Pierce v. Clark, 851 N.E.2d 450, 454 (Mass. App.
Ct. 2006) (“The rule of damages in an action for breach of
contract is that the plaintiff is entitled in general to damages
sufficient in amount to compensate him for the loss actually
sustained by him, and to put him in as good position financially
as he would have been in if there had been no breach . . . . He
may not insist upon extraordinary or unforeseen elements of
damage, but only such as flow according to common understanding
as the natural and probable consequences of the breach and such
as may be presumed to have been in the contemplation of the
parties at the time the contract was made.” (quotations and
citations omitted)).
IV.
CONCLUSION
For the reasons set forth above, I GRANT Plaintiffs’ motion
for summary judgment (Dkt. No. 31) as to the Dukes Bridge
contract claims against Phillips; and GRANT Defendants’ crossmotion for summary judgment (Dkt. No. 38) as to the claims of
Miller and the claims against Beinhocker.
The parties shall make
submissions by October 5, 2012 proposing a procedure for bringing
this case to final judgment by resolving the precise damages to
be awarded to Plaintiffs in this case.
/s/ Douglas P. Woodlock
DOUGLAS P. WOODLOCK
UNITED STATES DISTRICT
27
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