Opinion
601002/2009.
June 23, 2011.
The following papers were read on this motion to dismiss the complaint.
1 2, 3 4
PAPERS NUMBERED Notice of Motion/Order to Show Cause — Affidavits — Exhibits ... Answering Affidavits — Exhibits (Memo) Reply Affidavits — Exhibits (Memo)Cross-Motion: [] Yes [] No
This motion to dismiss arises from a series of cases in which the litigants wish to establish the boundaries of the controversial life settlement industry. Plaintiff, a trust apparently owned by investment bank Credit Suisse, sues for a declaratory judgment that a certain life insurance policy issued by the defendant, Phoenix Life Insurance Company ("Phoenix"), is "incontestable and that Phoenix is liable to pay a claim thereunder upon the occurrence of the Policy maturity event" (Complaint at 10).
In a life settlement transaction, the beneficiary of a life insurance policy sells its interest in the policy to a third party investor, rather than accepting a much smaller surrender value from the insurer. The investor is then responsible for paying the premiums on the policy.
Pursuant to Insurance Law § 3203[a][3], life insurance policies are incontestable after they have been in effect for two years during the life of the insured.
The subject policy, designated number 97303962, insures the life of a John Doe, and was issued to the John Doe Insurance Trust ("Doe Trust") on or about October 3, 2005. Jonathan Berck ("Berck"), a New York attorney, was trustee for the Doe Trust. Acting as trustee, Berck executed a Life Settlement Agreement, dated February 8, 2008, that assigned ownership of the subject policy to plaintiff. According to the complaint, insurance broker Steven Lockwood ("Lockwood") and Lockwood Pension Services, Inc. ("LPS") served as intermediaries in the sale of the Policy (Complaint ¶ 5).
Defendant makes this pre-answer motion to dismiss pursuant to CPLR § 3211 (a)(2) and (a)(7), and alternatively to stay the action pursuant to CPLR § 2201, pending the resolution of Kramer v Lockwood Pension Servs., Inc., (Index No. 08-CV-2429 [SDNY]). The portion of the motion seeking a stay has been rendered moot, and will not be discussed further (see CSSEL Bare Trust v Phoenix Life Ins. Co., 80 AD3d 536 [1st Dept 2010]; CSSEL Bare Trust v Phoenix Life Ins. Co., 66 AD3d 495 [1st Dept 2009]). The portion seeking dismissal centers on two arguments, the first grounded in CPLR § 3211(a)(2), for lack of subject matter jurisdiction, and the second in CPLR § 3211 (a)(7), for failure to state a cause of action upon which relief can be granted.
Defendant also seeks dismissal pursuant to § 3211 (a)(3), for lack of standing, but defendant did not present an argument to support that portion of their motion.
The crux of defendant's first argument is that there is no actual controversy raising a justiciable question. The insured on the subject policy is still alive, and defendant therefore maintains that this Court is powerless to grant a declaratory judgment, which would be an advisory opinion. Defendant's second argument is that the relief sought by plaintiff is "hopelessly overbroad" (Defendant's Memorandum in Support at 13). Defendant argues that there are several circumstances under which defendant would have no obligation to pay, and the existence of those circumstances cannot be known until the time of the insured's death. Specifically, defendant would not be obligated to pay on the subject policy if the same lapses due to non-payment of premiums, and defendant may not be obligated to pay plaintiff if the transfer of the subject policy from the Doe Trust to plaintiff was invalid.
Plaintiff opposes defendant's first argument, as to the existence of a justiciable controversy, by noting that defendant has expressly stated in legal documents that it intends to contest all policies similar to the subject policy or involving Berck, Lockwood, or LPS (collectively, the "Lockwood Entities"). In opposition to the defendant's second argument, plaintiff argues that the relief sought is not overbroad, because the applicability of the incontestability clause to a transferred policy is exactly the controversy here.
Defendant has raised two questions. 1) Do the facts herein present a justiciable controversy such that this Court has subject matter jurisdiction to grant a declaratory judgment? 2) Can the plaintiff's request for relief, that the subject policy be declared incontestable, be granted?
Motion to Dismiss Standard — Declaratory Judgments
CPLR § 3211(a) states that, "A party may move for judgment dismissing one or more causes of action asserted against him on the ground that, . . 2. the court has not jurisdiction of the subject matter of the cause of action[.]" In a declaratory judgment action, a court does not have subject matter jurisdiction where there is no "justiciable controversy" pursuant to CPLR § 3001 ( see Donaldson v State, 156 AD2d 290, 292 [1st Dept 1989]; see also New York State Inspection, Sec. and Law Enforcement Employs., et al. v Cuomo, 64 NY2d 233, n3 [1984] [CPLR § 3211 (a)(2) is "the proper vehicle to dismiss a nonripe controversy"]).
The relevant text of CPLR § 3001 states that, "The supreme court may render a declaratory judgment having the effect of a final judgment as to the rights and other legal relations of the parties to a justiciable controversy[.]" "A declaratory judgment action thus requires an actual controversy between genuine disputants with a stake in the outcome, and may not be used as a vehicle for an advisory opinion" ( Long Is. Light. Co. v Allianz Underwriters Ins. Co., 35 AD3d 253, 253 [1st Dept 2006]). "It is therefore settled law that an action may not be maintained if the issue presented for adjudication involves a future event beyond control of the parties which may never occur" ( Cuomo v Long Is. Light. Co., 71 NY2d 349, 354 [citations omitted]). However, "[w]here the probability of occurrence of the contingent event is great or the declaratory judgment may have an immediate and direct impact on the parties' conduct, the declaratory judgment relief should be granted" ( Remsen Apts., Inc. v Nayman, 89 AD2d 1014, 1015 [2d Dept 1982], affd 58 NY2d 1083; accord Buller v Goldberg, 40 AD3d 333, 333-34 [1st Dept 2007] [declaratory judgment appropriate where defendant advised plaintiff of their position that contract was unenforceable, and declaratory judgment would affect property marketability]).
Motion to Dismiss Standard — Failure to State a Cause of Action
CPLR § 3211 (a) states that, "A party may move for judgment dismissing one or more causes of action asserted against him on the ground that . . . 7. the pleading fails to state a cause of action[.]" Upon a § 3211 (a)(7) motion to dismiss for failure to state a cause of action, the "question for us is whether the requisite allegations of any valid cause of action cognizable by the state courts 'can be fairly gathered from all the averments" ( Foley v D'Agostino, 21 AD2d 60, 65 [1st Dept 1964], quoting Condon v Associated Hosp. Serv., 287 NY 411, 414 [1942]). In order to defeat a pre-answer motion to dismiss pursuant to CPLR § 3211, the opposing party need only assert facts of an evidentiary nature which fit within any cognizable legal theory. ( Bonnie Co. Fashions, Inc. v. Bankers Trust Co., 262 A.D.2d 188 [1st Dept 1999].)
When determining a CPLR § 3211(a) motion, "we liberally construe the complaint and accept as true the facts alleged in the complaint and any submissions in opposition to the dismissal motion" ( 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 NY2d 144, 151-52; Leon v Martinez, 84 NY2d 83, 87, [1994]; Sokoloff v Harriman Estates Dev. Corp., 96 NY2d 409; Wieder v Skala, 80 NY2d 628, [1992]). "We also accord plaintiffs the benefit of every possible favorable inference" ( 511 W. 232nd Owners Corp., 98 NY2d at 152; Sokoloff v Harriman Estates Dev. Corp., 96 NY2d at 414).
Discussion — Ripeness
The Court finds that an actual, justiciable controversy exists here. The contingent future event that defendant maintains should preclude declaratory judgment is defendant's refusal to pay policy benefits. This contingency is entirely within defendant's control, and appears likely to occur. Plaintiff's complaint notes the following: 1) defendant has contested at least two other policies owned by the plaintiff, those involved in the case of Kramer v Lockwood Pension Servs., Inc. (Index No. 08-CV-2429 [SDNY]), that involved the Lockwood Entities; 2) defendant has contested other policies with a similar or identical trust structure to Kramer and the case herein ( e.g., Phoenix Life Ins. Co. v Irwin Levinson Ins. Trust, Index No 600985/2008 [Sup Ct, NY County]); and 3) in Kramer, defendant went so far as to allege racketeering claims against the Lockwood Entities, stating among other things that, "[g]iven the nature of the businesses of the Lockwood Defendants, there is no reason to believe that the various STOLI schemes . . . reflect isolated transactions" (Complaint at 9). Defendant's pattern of litigation indicates that it is likely to contest the subject policy as well. This matter therefore does not "involve[] a future event beyond control of the parties which may never occur" ( Cuomo, 71 NY2d at 354), but rather one "[w] here the probability of occurrence of the contingent event is great [and] the declaratory judgment relief should be granted" ( Remsen Apts., 89 AD2d at 1015). Further, a declaratory judgment here would have an immediate impact on the parties' conduct. The marketability of the plaintiff's property, the subject life insurance policy, has been destroyed by defendant's refusal to honor similar policies involving the Lockwood Entities or that involve an alleged stranger-originated policy scheme with a trust structure similar to that used herein. As interest in a life insurance policy is a recognized property right, Phoenix's prior actions and express statements regarding trust schemes involving the Lockwood Entities create a cloud over the marketability of the subject policy. The likelihood that Phoenix will contest the policy upon the insured's death substantially diminishes the value of the policy, if it does not destroy the market entirely. If defendant prevails, then plaintiff may decide to cut its losses by ceasing payment of policy premiums. If plaintiff prevails, then a market for the policy will be recreated, and plaintiff may be able to sell the policy.
The recent decisions in Kramer v Lockwood and Kramer v Phoenix do not make Phoenix less likely to contest the subject policy. Kramer was a federal district court case. The New York Court of Appeals, on certification from the Second Circuit, addressed only the narrow issue of whether an insured can transfer a policy immediately after procuring it, and this issue is only tangentially related to the matter herein ( Kramer v Phoenix Life Ins. Co., 15 NY3d 539 [2010]). On certain other issues in Kramer, the Southern District of New York thoroughly addressed, and rejected, Phoenix's positions ( Kramer v Lockwood Pension Servs., Inc., 653 FSupp2d 354, 376-82 [SDNY 2009, Batts, J.]). Because at least one of these issues has apparently not been addressed in New York State Court, Phoenix is still likely to contest the subject policy, and similar policies, in New York State Court.
The United States Supreme Court ruled in the case of Grigsby v Russell ( 222 US 149 [1911, Holmes, J.]) that whole life insurance policy benefits may be transferred to persons or entities with no insurable interest In the insured. In the Grigsby opinion, Justice Holmes wrote that, "life insurance has become . . . one of the best recognized forms of investment and self-compelled saving. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property" ( Grigsby, 222 US at 156).
The Court is also persuaded by plaintiff's reference to Golden v Planning Bd. of Ramapo ( 30 NY2d 359). In Golden, landowners challenged as unconstitutional a municipal ordinance that required the landowners to obtain special permits before applying for approval from the town planning board to subdivide their properties for residential development. These special permits were required to prevent urban sprawl, and the permit requirements were designed so that virtually no permits would be issued. Even though the landowners had never sought to obtain the special permits, the Court of Appeals held that there was a justiciable controversy, as the ordinance had the effect of destroying the marketability of the landowners' properties for residential purposes. ( Golden, 30 NY2d at 364-68.)
Defendant attempts to distinguish Golden from the instant case, in that Golden dealt with an ordinance that had the effect of barring residential development, which excluded the Golden plaintiffs from a portion of the real estate market. "Here, by contrast, no one is precluding CSSEL Bare from transferring the In-Force Policy; it simply is unhappy with the offers it has received (or lack thereof)" (Reply Affirmation at 4). This argument is unpersuasive because, as a practical matter, defendant is precluding plaintiff from transferring the subject policy. Plaintiff is "unhappy" because defendant's apparent intention to contest the policy effectively destroys the market for the subject policy, as few investors would be willing to purchase a policy unlikely to be honored, at any price.
The Court finds another case, Buller v Goldberg ( 40 AD3d at 333) to be even more applicable here than Golden. In Buller, the defendants granted to plaintiff an irrevocable option to purchase cooperative shares upon the defendants' death. The defendants thereafter indicated to plaintiff that they did not believe that the option contract was enforceable, whereupon the plaintiff sued for declaratory judgment as to its validity. The First Department held that a justiciable controversy existed, even though the issue was contingent on plaintiff's valid exercise of the option at some later date, because a declaratory judgment would have a "direct and present impact upon [the defendants'] ability to dispose of their shares" ( Buller, 40 AD3d at 333-34). The declaratory judgment therefore had "the immediate and practical effect of influencing the parties' current conduct" ( Buller, 40 AD3d at 333; accord Remsen Apts., 89 AD2d at 1015). Similarly, defendant here has all but stated that it intends to contest the subject policy, creating an actual controversy that would have an immediate impact on plaintiff's ability to dispose of the subject policy.
Discussion — Incontestability
Defendant argues that the relief sought by plaintiff is too broad. The controversy revolves around a statute requiring all life insurance policies in the State of New York to contain a provision "that the policy shall be incontestable after being in force during the life of the insured for a period of two years from its date of issue" (Insurance Law § 3203[a][3]), Judge Cardozo stated that incontestability "means only this, that within the limits of the coverage the policy shall stand, unaffected by any defense that it was invalid in its inception, or thereafter became invalid by reason of a condition broken" ( Simpson v Pheonix Mutual Life Ins. Co., 24 NY2d 262, 267, quoting Metropolitan Life Ins. Co. v Conway, 252 NY 449, 452 [1930] [Cardozo, J]). After the two year period, the insurer may not contest or rescind the policy on grounds that the contract was voidable or void ab initio (New England Mut. Life Ins. Co. v Caruso, 73 NY2d 74, 76 [policies are void from inception if successfully challenged on insurable interest grounds, and are voidable if successfully challenged on fraud grounds]). The incontestability clause does not bar an insurer from denying benefits under the policy on grounds of forfeiture or noncoverage of loss ( see Simpson, 24 NY2d at 266-67). The statute reflects "the legislative conviction that a policyholder should not indefinitely pay premiums to an insurer, under the belief that benefits are available, only to have it judicially determined after the death of the insured that the policy is void because of some defect existing at the time the policy was issued" ( Caruso, 73 NY2d at 78).
This is not to be confused with coverage limitations, i.e. non-coverage of loss, which can be valid grounds for denying coverage on a two-plus year old policy ( See Simpson, 24 NY2d at 267-68; see also Ilyaich v Bankers Life Ins. Co. of New York, 2006 WL 6103242 [New York County 2006].)
The Court of Appeals has stated in dicta that an insurer can still contest a two-plus year old policy based upon fraud grounds provided that the policy carves out such a fraud exception ( New England Mut. Life Ins. v Doe, 93 NY2d 122, 130 [1999]). This fraud exception has been followed by the New York Appellate Courts, including the First Department ( e.g., Security Mut. Life Ins. Co. of New York v Herpaul, 36 AD3d 449 [1st Dept 2007]).
It is worth noting here that defendant's motives in making the instant motion are suspect. Pursuant to Insurance Law § 3214, an insurer that loses litigation contesting the validity of a life insurance policy must pay interest from the date of the insured's death. Defendant has a potentially multi-million dollar interest incentive to litigate issues pertaining to contestability prior to the insured's death, and it appears defendant may be ignoring this incentive in order to maximize the premiums collected on the policy. As stated above, the incontestability clause is statutorily required to prevent precisely this scenario.
Plaintiff's request for relief is not overbroad. The complaint expressly seeks a judicial declaration that the defendant must pay the policy benefit upon the policy maturity event (Complaint at 10). Phoenix maintains that the Court cannot grant this relief because such a declaration would create an absolute obligation to pay the policy benefit under all circumstances, including certain scenarios where Phoenix is not and should not be legally bound to do so. Phoenix gives two examples: 1) "Phoenix would not be obligated to pay such benefits if the policy is surrendered or lapsed due to a failure to pay premiums"; 2) situations such as Kramer, where "the Estate [of decedent] alleges that pursuant to applicable provisions of the New York Insurance Law, Phoenix must pay it, and not the investors who subsequently purchased the policies-in-suit" (Phoenix Aff in Support at 13). Phoenix's argument fails because the declaration sought by plaintiff would not require payment in the former scenario, and the allegation in the latter scenario does not affect Phoenix's obligation to pay the policy benefit.
Phoenix does provide additional examples in footnote 7 of its Affirmation in Support, but these other examples are also distinguished by being clear cases of policy forfeiture or failure to abide by policy terms, rather than examples of the policy being void ab initio.
The declaration language sought by plaintiff is that defendant be obligated "to pay a claim [on the subject policy] upon the occurrence of the Policy maturity event" (Complaint at 10). The incontestability statute expressly excludes scenarios where the policy lapses (Insurance Law § 3203[a][3]). However, if the policy lapses or is otherwise forfeited before the insured's death, then no policy maturity event occurs, as the policy is no longer in effect. Therefore, the first scenario presented by Phoenix is unpersuasive.
Regarding the second scenario, the Court of Appeals recently decided, in Kramer v Phoenix Life Ins. Co. ( 15 NY3d 539), that an insured can immediately transfer a policy upon procuring same. This means that the initial assignment from the insured to investors in Kramer is valid, and cannot be legitimately challenged by the insured's estate after the death of the insured. Therefore, a claim such as the one presented as Phoenix's second scenario is, necessarily, fatally flawed, and should not prevent Phoenix from paying the policy benefit to the plaintiff.
The Court also notes that, even if the claim in Phoenix's second scenario was potentially valid, there would be no question that Phoenix would have to pay the policy benefit; the only question would be to whom Phoenix was obligated to pay said benefit. In the event of a valid claim by the estate similar to the second scenario, Phoenix's proper course of action upon the insured's death would be to pay the death benefit to the investor assignee unless the insured's estate first obtained an injunction preventing such payment. Accordingly, the Court finds that plaintiff has stated a cause of action upon which relief may be granted.
The parties' remaining arguments have been considered and found unavailing.
For these reasons and upon the foregoing papers, it is therefore,
ORDERED that the motion to dismiss by defendant Phoenix Life Insurance Company is denied in its entirety; and it is further,
ORDERED that the parties shall appear in this Part (60 Centre Street, Room 341) for a preliminary conference on July 27, 2011, at 11:00 A.M.
This constitutes the Decision and Order of the Court