New York Life Insurance Company v. Justofin et al

Filing 54

MEMORANDUM (Order to follow as separate docket entry)For the aforementioned legal and equitable reasons, the Court concludes that Defendant Bankes Motion for Reconsideration (Doc. 38) must be denied and that the proceeds of the insurance policy at issue in this case must be distributed to Defendant Justofin. An Order consistent with this conclusion will be filed contemporaneously herewithSigned by Honorable Richard P. Conaboy on 6/25/14. (cc)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
New York Life Insurance Company

:

Plaintiff

:

v.

: Civil Case No. 3:13-CV-02110

Kelly O. Justofin

: (Judge Richard P. Conaboy)

and
Twila Bankes as Custodian for

:

KRB, a Minor
Defendants.

:

_________________________________________________________________

Memorandum
We consider here a Motion for Reconsideration (Doc. 38) of
this Court’s Order of March 25, 2014 (Doc. 36) filed by Defendant
Twila Bankes.

The motion has been extensively briefed (Docs. 39,

43, 45 and 51) by the parties and is now ripe for disposition.

For

the reasons that follow, Defendant Bankes’ motion will be denied.
I.

Background.
This Court’s Order of March 25, 2014 (Doc. 35) provided that

the proceeds of an insurance policy that had been paid
into Court by Plaintiff in Interpleader New York Life Insurance
Company should be distributed to Defendant Kelly Justofin.
Defendants Bankes and Justofin had made competing claims to the
proceeds of the policy.

Defendant Bankes’ claim was predicated on

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a change of beneficiary form executed by decedent Christopher O.
Justofin shortly before his death.

However, the Court, after

thoroughly reviewing a Marital Settlement Agreement (the
“Agreement”) that both Defendants have included as an exhibit to
their submissions and obviously recognize to be authentic and in
effect at all times pertinent to this litigation, concluded that
Defendant Justofin had the superior claim to the proceeds of the
policy in question.
The Court had understood that the policy was a “whole life
policy” and based its decision largely on the fact that
§ 8.5.1 of the Agreement conferred ownership of the parties’
(Defendant Justofin and her now deceased husband, Dr. Christopher
O. Justofin) whole life insurance policies on Defendant Justofin.
It has now been brought to the Court’s attention that the policy in
question was a “term” policy rather than a “whole life policy”.
This, Defendant Bankes asserts, constitutes a “mistake of fact” by
this Court that justifies a reconsideration and reversal of the
Order of March 25, 2014.

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In the alternative, Defendant Bankes

requests that she be given an opportunity to conduct discovery
designed to test the veracity of Defendant Justofin in regard to an
alleged oral modification of the Agreement.

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Because the Court does

The Court feels compelled to note that Defendant Bankes did not apprise the Court that the
policy was a “term” policy in its submissions prior to the Court’s issuance of the Order of March 25,
2014. Thus, if a “mistake of fact” has been made, Defendant Bankes must bear some responsibility
therefor.
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not reach the issue of oral modification, Defendant Bankes’ request
to be permitted discovery will be denied.
The Court’s task now is to determine whether this “mistake” is
of a character and magnitude to require issuance of an Order
vesting ownership of the policy proceeds in Defendant Bankes.

For

the reasons that follow, the Court concludes that Defendant Bankes’
Motion for Reconsideration must be denied because sound legal and
equitable principles require that Defendant Justofin must prevail.
II.

Legal Discussion.
The parties have acknowledged that the Court has diversity

jurisdiction over this case.
23, ¶ 6).

(Doc. 1, ¶ 6; Doc. 15, ¶ 6; and Doc.

It is axiomatic that a federal court sitting in

diversity must apply the substantive law of the state in which it
sits.

Knapp v. North American Rockwell Corp., 506 F.2d 361, cert.

denied 421 U.S. 965 (3d. Cir. 1974).

The parties have also

acknowledged that Defendant Justofin and her late husband were
parties to a valid written Agreement and that the Agreement
remained in force on the date of his death.
at 20-21).

(Doc. 27 at 5; Doc. 31

The Agreement contains clauses requiring that it be

interpreted under the Pennsylvania Divorce Code and that the rules
regarding equitable distribution of marital assets in the
Commonwealth of Pennsylvania be applied. (See Agreement, ¶¶ 2.1,
4.1, 8, and 19.1 and 26).
Most significantly, Section 19.1 of the Marital Settlement

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Agreement specifies:
In the event of a breach of any of the provisions of
this Agreement by one of the parties, the remedies
available to the non-breaching party are cumulative
and includes all remedies at law and in equity
including those for breach of contract, under
theories of equity, under the Divorce Code, as
amended, including Section 3105 (which includes
contempt), as if this Agreement had been an Order of
the Court, and shall not be limited to those
remedies specifically referred to in this Agreement.

Thus, under Section 19.1 of the Agreement, the remedies of the
non-breaching party are co-extensive with all legal and equitable
remedies available under Pennsylvania Law.

It follows that this

Court, sitting in diversity and construing the substantive law of
the Commonwealth of Pennsylvania, is vested with the power and,
indeed, the obligation to enforce the clear terms of this Agreement
and to fashion a remedy, legal and/or equitable to place the
parties in the position that the contract had contemplated.
III. Discussion.
Defendant Bankes argues, essentially, that because the
insurance policy in question was a term policy, Section 8.5.1 of
the Agreement, which alludes only to whole life policies, cannot be

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an appropriate basis for awarding the policy proceeds to Defendant
Justofin.

The Court agrees with this point.

Defendant Bankes also argues that Section 8.1 of the Agreement
requires that she be declared the rightful owner of the policy
proceeds.

(Doc. 39 at 7)

Section 8.1 provides, in pertinent part:

...each party shall keep and retain sole ownership,
control and enjoyment of all assets retained by him
or her, transferred to him or her pursuant to the
terms of the agreement, titled in his or her name or
in his or her possession or control as of the date
of the execution of this Agreement...free and clear
of any claim, right or interest by the other party,
and each party shall have the exclusive right to
dispose of such assets without interference or
restraint by the other, as if the marriage had not
taken place and he or she had remained unmarried.
Because the term policy in question was not transferred to
Defendant Justofin pursuant to the Agreement and because it was
titled in the decedents’ name and it remained in his possession
after the Agreement was executed, Defendant Bankes reasons that
Section 8.1 of the Agreement empowered the decedent to change the
beneficiary on the policy and thus, compels distribution of the
policy proceeds to her (Doc. 39 at 7). While this argument is
facially plausible, it fails to account for critical and undisputed
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facts which necessarily impact the rights of the parties to the
Agreement.
The critical and undisputed facts of which we speak are these:
(1) the decedent Justofin breached Paragraph 8.5.1 of the Agreement
when he negotiated, for his unilateral benefit, two whole life
policies with an aggregate value of more than $400,000.00 (See Doc.
51-1, ¶ 14 and Doc. 52-1, Exs. A and C); and (2) decedent Justofin
negotiated these policies in clear derogation of his contractual
obligation (See Agreement, ¶ 17) to do nothing contradictory to the
terms of the Agreement without procuring written authorization from
Defendant Justofin.

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Given these undisputed facts, the Court must now determine the
consequences that flow from them.

Paragraph 19.1 of the Agreement

empowers the Court to fashion legal or equitable remedies.

In

terms of a legal remedy, it is clear that Defendant Justofin had a
legitimate contractual expectation that, should her husband
predecease her, she would receive $400,000.00 at a minimum through
the whole life policies her husband improperly negotiated.

A

contracting party’s legitimate expectation interest is something
that the Court must protect.

Trosky v. Civil Service Commission,

City of Pittsburgh, 539 Pa. 356, 363-64, 652 A2d. 813, 817-18
2

Defendant Bankes neither alleges nor contends that the Agreement was ever modified in
writing or otherwise. See Doc. 53 at 2. Yet, she blithely ignores the reality that the contract from
which she claims to benefit was breached by the party through whom she claims that benefit. This
crucially important fact is completely unaddressed in Defendant Bankes’ various submissions to the
Court.
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(1995)(citing the Second Restatement of Contracts at Section 344).
Because decedent Justofin negotiated the whole life contracts
without the requisite written authorization before he died,
Defendant Justofin’s legitimate expectation interest pursuant to
Section 8.5.1 of the Agreement was defeated to the tune of more
than $400,000.00.
Defendant Bankes’ tenuous rights as an incidental beneficiary
of the Agreement are in direct competition with Defendant
Justofin’s clear contractual right to have realized the benefits of
the whole life policies upon her husband’s death.3

Incidental

beneficiaries like Defendant Bankes have no legal rights under a
contract. Isbrandtsen Co. V. Longshore Men’s Assoc., 204 F.2d 495
(3d. Cir. 1953); also Commonwealth v. Zeid, 36 Pa. D&C 2d 101
(1964) affirmed, 211 A.2d 285 (Pa. Super. 1965).

Moreover, to

allow Defendant Bankes to obtain the proceeds of the policy in
question would be to allow the decedent to benefit from his breach
of the Agreement.

This is simply a result that this Court cannot

countenance. Thus, to fashion an appropriate legal remedy for
decedent Justofin’s obvious and undisputed breach of the Agreement,
and pursuant to the policies underlying the doctrine of equitable
distribution as stated in the Pennsylvania Divorce Code, the Court
concludes that the proceeds of the policy in question must be
3

We characterize Defendant Bankes as an incidental beneficiary because we have been
presented no evidence to indicate that her benefit was in any way contemplated by either party at the
time they entered the Agreement.
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distributed to Defendant Justofin as a partial recovery of her
proper measure of contractual damages to vindicate her legitimate
expectation interest pursuant to Section 8.5.1 of that Agreement.

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In the alternative, with respect to a purely equitable remedy,
the doctrine of constructive trust may be appropriately applied to
this case. Defendant Justofin has advanced argument based on the
equitable principle of constructive trust since her first
submission in this case (Doc. 31 at 22-24) and renewed this
argument in her Brief in Opposition to Defendant Bankes’ Motion for
Reconsideration (Doc. 43 at 15-16). Defendant Bankes has simply not
responded to Defendant Justofin’s argument in support of the
imposition of a constructive trust here.
“A constructive trust is the formula through which the
conscience of equity finds expression.

When property has

been acquired in such circumstances that the holder of
the legal title may not in good conscience retain the
beneficial interest, equity converts him to a trustee.”
Makozy v. Makozy, 874 A.2d 1160 (Pa. Super. 2005), citing
Chambers v. Chambers, 406 Pa 50 (1962). While the equitable duty to

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Defendant Justofin’s damages total at least $404,050.70 representing the value of Policy
No. 49 389 337 ($253,700.70) on September 28, 2012 (Doc. 52-1, Ex. A) plus the value of Policy
No. 39 675 720 ($150,350.00) on December 27, 2012 (Doc. 52-1, Ex. C). The value of the funds
paid into Court by New York Life Insurance Company are not sufficient to provide Defendant
Justofin with a complete recovery. (See Doc. 16). This Court can do no more than order that the total
policy proceeds be distributed to Defendant Justofin.
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convey property generally exists only in the presence of fraud,
duress, undue influence, mistake or an abuse of a fiduciary
relationship, there is “...no rigid standard for determining
whether the facts of a particular case require a court of equity to
impose a constructive trust; the test is merely whether unjust
enrichment can be avoided.”

Koffman v. Smith 682 A.2d 1282, 1291

(Pa. Super. 1996). Thus, unjust enrichment is the sine qua non to
the creation of a constructive trust.
The Superior Court of Pennsylvania recognized in a closely
analogous case that an agreement not to change the beneficiary of a
life insurance policy, entered into by the insured individual and
his designee for valuable consideration, is binding and may be
enforced against subsequently named beneficiaries such as Defendant
Bankes in this case.
(Pa. Super. 1985).

See Torchia v. Torchia, 499 A.2d 581, 582-84
In a situation where a claim of constructive

trust has been lodged, the requisite unjust enrichment can be
demonstrated against a counter party even where that counter party
has not wrongfully secured a benefit but, rather, as here, has
merely passively received the benefits.

Roman Mosaic & Tile

Company v. Vollraph, 313 A.2d 305, 307 (Pa. Super. 1973).

In the

context of these equitable principles as interpreted in the
decisional law of the Pennsylvania Appellate Courts, we can
conclude only that to allow Defendant Bankes to retain the benefit
of decedent Justofin’s breach of contract (if not outright

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fraudulent conduct) would result in an obvious unjust enrichment
that is inimical to Defendant Justofin’s equitable rights under the
Agreement.

Accordingly, we find that sound principles of equity

compel the imposition of a constructive trust requiring that the
proceeds of the policy in question must be distributed to Defendant
Justofin.
III. Conclusion.
For the aforementioned legal and equitable reasons, the Court
concludes that Defendant Bankes’ Motion for Reconsideration (Doc.
38) must be denied and that the proceeds of the insurance policy at
issue in this case must be distributed to Defendant Justofin.

An

Order consistent with this conclusion will be filed
contemporaneously herewith.
BY THE COURT
S/Richard P. Conaboy
Honorable Richard P. Conaboy
United States District Court
Dated: June 25, 2014

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