Sun Life Assurance Company of Canada v. U.S. Bank National Association, et al

REPLY BRIEF re MOTION to Dismiss for Failure to State a Claim re U.S. Bank's Counterclaims

D. Del.May 3, 2017

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE SUN LIFE ASSURANCE COMPANY OF CANADA, Plaintiff, v. U.S. BANK NATIONAL ASSOCIATION, as Securities Intermediary, and LINDSAY SPALDING-JAGOLINZER, Defendants. Civil Action No. 17-00075-LPS COUNTERCLAIM-DEFENDANT SUN LIFE ASSURANCE COMPANY OF CANADA’S REPLY BRIEF IN SUPPORT OF MOTION TO DISMISS COUNTERCLAIMS Dated: May 3, 2017 Joseph C. Schoell (I.D. No. 3133) DRINKER BIDDLE & REATH LLP 222 Delaware Avenue, Suite 1410 Wilmington, DE 19801 (302) 467-4245 Joseph.Schoell@dbr.com Michael J. Miller (admitted pro hac vice) Gregory J. Star (admitted pro hac vice) John M. Moore (admitted pro hac vice) DRINKER BIDDLE & REATH LLP One Logan Square, Suite 2000 Philadelphia, PA 19102 (215) 988-2700 Michael.Miller@dbr.com Gregory.Star@dbr.com John.Moore@dbr.com Attorneys for Counterclaim-Defendant, Sun Life Assurance Company of Canada Case 1:17-cv-00075-LPS Document 23 Filed 05/03/17 Page 1 of 15 PageID #: 276 i TABLE OF CONTENTS PAGE TABLE OF AUTHORITIES .......................................................................................................... ii I. INTRODUCTION .................................................................................................................. 1 II. LEGAL ARGUMENT ............................................................................................................ 2 A. Sun Life Has Not Denied U.S. Bank’s Claim or Otherwise Breached the Policy and U.S. Bank’s Breach of Contract Counterclaim is Duplicative of Sun Life’s Declaratory Judgment Claims .............................................................................................................. 2 B. Sun Life Has Not Breached the Duty of Good Faith ....................................................... 4 C. Sun Life Has Not Violated Chapter 93A of the Massachusetts General Laws ................ 6 D. U.S. Bank Cannot Use Promissory Estoppel To Validate a Contract Void Ab Initio ..... 8 III. CONCLUSION ..................................................................................................................... 10 Case 1:17-cv-00075-LPS Document 23 Filed 05/03/17 Page 2 of 15 PageID #: 277 ii TABLE OF AUTHORITIES PAGE(S) CASES Arthur D. Little Intern., Inc. v. Dooyang Corp., 979 F. Supp. 919 (D. Mass. 1997) .............................................................................................. 7 Bruno Int’l Ltd. v. Vicor Corp., Case No. 14-cv-10037, 2015 WL 5447652 (D. Mass. Sept. 16, 2015) ...................................... 8 Clinton Hosp. Ass’n v. Corson Group, Inc., 907 F.2d 1260 (1st Cir. 1990) ................................................................................................. 7, 8 Coregis Ins. Co. v. Law Offices of Carole F. Kafrissen, 2003 WL 220466 (3d Cir. Jan. 27, 2003) ................................................................................... 3 Data General Corp. v. Grumman Sys. Support Corp., 834 F. Supp. 477 (D. Mass. 1992) .............................................................................................. 7 Denison v. Redefer, No. CIV. A. 03C-01-002, 2006 WL 1679580 (Del. Super. Mar. 31, 2006) ............................... 9 Federated Life Ins. Co. v. Jafreh, 2010 WL 3278362 (5th Cir. Aug. 18, 2010)............................................................................... 3 First Fed. Sav. & Loan Ass’n of New Castle County v. Nationwide Mut. Fire Ins. Co., 460 A.2d 543 (Del. 1983) ........................................................................................................... 9 Kuwaiti Danish Computer Co. v. Digital Equipment Corp., 438 Mass. 459 (Mass. 2003) ....................................................................................................... 7 Lincoln Nat’l Life Ins. Co. v. Schwarz, No. 09-cv-3361, 2011 U.S. Dist. LEXIS 62031 (D.N.J. June 9, 2011) ...................................... 3 Old Line Life Ins. Co. v. Garcia, 411 F.3d 605 (6th Cir. 2005) ...................................................................................................... 2 Penn Mutual Life Ins. Co. v. Norma Espinosa 2007-1 Insurance Trust, 70 F. Supp. 3d 628 (D. Del. 2014) .............................................................................................. 3 PHL Var. Ins. Co. v. Price Dawe 2006 Ins. Trust, 28 A.3d 1059 (Del. 2011) ........................................................................................................... 5 PHL Variable Ins. Co. v. ESF QIF Trust, 2013 WL 6869803 (D. Del. Dec. 30, 2013)................................................................................ 8 Case 1:17-cv-00075-LPS Document 23 Filed 05/03/17 Page 3 of 15 PageID #: 278 iii Pine Polly, Inc. v. Integrated Packaging Films IPF, Inc., Case No. 13-cv-11302, 2014 WL 1203106 (D. Mass. March 19, 2014) .................................... 7 Principal Life Ins. Co. v. Lawrence Rucker 2007 Ins. Trust, 674 F. Supp. 2d 562 (D. Del. 2009) ............................................................................................ 3 Prudential Ins. Co. of Am. v. Prusky, 413 F. Supp. 2d 489 (E.D. Pa. 2005) .......................................................................................... 3 Settlement Funding, LLC v. AXA Equitable Life Ins. Co., No. 09-cv-8685, 2010 WL 3825735 (S.D.N.Y. Sept. 30, 2010) ................................................ 3 Sun Life Assur. Co. of Canada v. U.S. Bank N.A., 839 F.3d 654 (7th Cir. 2016) ...................................................................................................... 6 Sun Life Assur. Co. of Canada v. U.S. Bank Nat. Ass’n, No. 14-cv-62610, 2016 U.S. Dist. LEXIS 4732 (S.D. Fla. Jan. 13, 2016) ......................... 4, 5, 6 U.S. Bank Nat. Ass’n v. Sun Life Assur. Co. of Canada, No. 14-4703, 2016 WL 8116141 (E.D.N.Y. Aug. 30, 2016) ......................................... 4, 5, 6, 9 Waggoner v. Laster, 581 A.2d 1127 (Del. 1990) ......................................................................................................... 9 Weber v. Sanborn, 502 F. Supp. 2d 197 (D. Mass. 2007) ......................................................................................... 7 OTHER AUTHORITIES Mass. Gen. Laws 93A ............................................................................................................. 1, 6, 7 Case 1:17-cv-00075-LPS Document 23 Filed 05/03/17 Page 4 of 15 PageID #: 279 - 1 - I. Introduction At issue through Sun Life’s declaratory judgment claims is whether a life insurance policy (the “Policy”) on the life of Harriet Sol was procured as an illegal wager in violation of Delaware’s Constitution and insurable interest statute. If the Policy is declared valid, then Sun Life will promptly pay the death benefit to U.S. Bank, pursuant to the terms of the Policy. But if the Policy is declared void, then no death benefit is owed because no policy ever existed. In that event, Sun Life could not possibly be liable for breaching the contract, acting in bad faith, or violating Massachusetts’s consumer protection law. Moreover the Policy - which will have been declared an illegal wager in violation of Delaware law - could never be validated through a claim for promissory estoppel. Yet, these are the very theories that serve as the basis for U.S. Bank’s purported counterclaims, each of which should be dismissed. First, as to U.S. Bank’s counterclaim for breach of contract, this claim is at best premature because it hinges on a finding that has not yet been made - namely that the Policy is a valid contract. Moreover, this claim is entirely duplicative of Sun Life’s declaratory judgment claims, through which Sun Life seeks a declaration as to whether the Policy is valid and thus whether it must pay the death benefit to U.S. Bank, which is the only relief U.S. Bank seeks. Second, concerning bad faith, U.S. Bank admits that the Policy was procured pursuant to the same STOLI scheme that has been found by multiple federal courts to be a violation of Delaware’s prohibition against human life wagering. These undisputed facts alone are sufficient to find as a matter of law that Sun Life did not commit actionable bad faith. Third, with regard to U.S. Bank’s allegation that Sun Life has violated Chapter 93A of the Massachusetts General Laws, U.S. Bank has admitted that the actions complained of were not directed at, received in, or relied upon in, and did not cause any purported injury in, Massachusetts. Thus, even if the Policy is ultimately declared valid, U.S. Bank - a national bank Case 1:17-cv-00075-LPS Document 23 Filed 05/03/17 Page 5 of 15 PageID #: 280 - 2 - headquartered in Ohio - cannot take advantage of a Massachusetts statute meant to protect against unfair or deceptive conduct directed towards Massachusetts. Finally, U.S. Bank’s alternative claim for promissory estoppel contravenes Delaware law, which provides that courts lack the power to invoke the doctrine of estoppel to breathe life into an insurance policy procured as a wager in violation of the Delaware Constitution, Delaware statutes, and well-established Delaware public policy. For these and the other reasons set forth in Sun Life’s opening brief and below, U.S. Bank’s counterclaims should be dismissed, in their entirety and with prejudice. II. Legal Argument A. Sun Life Has Not Denied U.S. Bank’s Claim or Otherwise Breached the Policy and U.S. Bank’s Breach of Contract Counterclaim is Duplicative of Sun Life’s Declaratory Judgment Claims U.S. Bank’s primary argument is that Sun Life cannot “immunize itself against a breach of contract claim by filing a declaratory judgment action[.]” Id. at 11. As a preliminary matter, Sun Life seeks only clarification as to what is required under the law and the terms of the Policy. If the Policy is ultimately deemed to be valid and enforceable, Sun Life will promptly pay what is due under the Policy. The idea that U.S. Bank could somehow be harmed by the dismissal of its breach of contract counterclaim is illogical - regardless of whether this claim stays or goes, U.S. Bank’s entitlement to the death benefits will be adjudicated in this litigation. U.S. Bank’s duplicative counterclaim adds nothing to this case. Moreover, U.S. Bank cites only a single case in which an insurer actually requested but was denied the relief Sun Life now seeks. 1 This Court permitted the defendant in Penn Mutual 1 U.S. Bank cites a number of cases that it claims support its position; however, those cases are either inapposite or the issue was not argued. See, e.g., Old Line Life Ins. Co. v. Garcia, 411 F.3d 605 (6th Cir. 2005) (no argument that contract claim should be dismissed due to presence of declaratory judgment action); Federated Life Ins. Co. v. Jafreh, 2010 WL 3278362, at *1 (5th Case 1:17-cv-00075-LPS Document 23 Filed 05/03/17 Page 6 of 15 PageID #: 281 - 3 - Life Ins. Co. v. Norma Espinosa 2007-1 Ins. Trust, 70 F. Supp. 3d 628, 633 (D. Del. 2014) (“Espinosa”), to assert an amended counterclaim for breach of contract over objections from the insurer that it did not deny the trust’s claim for policy benefits but instead sought a declaratory judgment. However, as previously explained in Sun Life’s principal brief, other federal district courts have reached the opposite conclusion in identical or substantially similar circumstances to that at play here. For instance, while U.S. Bank correctly notes that Principal Life Ins. Co. v. Lawrence Rucker 2007 Ins. Trust, 674 F. Supp. 2d 562 (D. Del. 2009) (“Rucker”), involved a case where no claim had yet been asserted, the Rucker court recognized that a claim for anticipatory breach, like a claim for actual breach, requires that an insurer “wrongfully den[y] its coverage obligations[,]” and found that filing a declaratory judgment action does not constitute a wrongful denial of those obligations. Id. at 568. Moreover, the District of New Jersey specifically relied on Rucker when it determined, in a case with circumstances practically identical to those here, that the distinction between anticipatory repudiation and non-payment of a claim under a policy is “not significant[,]” and dismissed a counterclaim for breach of contract. Lincoln Nat’l Life Ins. Co. v. Schwarz, No. 09-cv-3361, 2011 U.S. Dist. LEXIS 62031 at *8-9 (D.N.J. June 9, 2011) (“Schwarz”). The Southern District of New York similarly relied upon Rucker in granting summary judgment on an identical claim. Settlement Funding, LLC v. AXA Equitable Life Ins. Co., No. 09-cv-8685, 2010 WL 3825735, at *11 (S.D.N.Y. Sept. 30, 2010). Rucker, Schwarz, and Settlement Funding were not cited to this Court in the Espinosa case, and to the extent that Cir. Aug. 18, 2010) (underlying breach of contract claim dismissed and no argument that damages claim should be dismissed due to presence of declaratory judgment action); Coregis Ins. Co. v. Law Offices of Carole F. Kafrissen, 2003 WL 220466, at *2 (3d Cir. Jan. 27, 2003) (collateral appeal from order requiring production of documents with no discussion or analysis of underlying contract claim); Prudential Ins. Co. of Am. v. Prusky, 413 F. Supp. 2d 489 (E.D.Pa. 2005) (no claim for benefits and no argument that contract claim should be dismissed due to presence of declaratory judgment action). Case 1:17-cv-00075-LPS Document 23 Filed 05/03/17 Page 7 of 15 PageID #: 282 - 4 - Espinosa stands for the proposition that U.S. Bank’s contract claim can proceed, it should be rejected in light of this additional authority. B. Sun Life Has Not Breached the Duty of Good Faith U.S. Bank next claims that it has properly pleaded a bad faith claim. This claim is primarily based upon its allegation that Sun Life refused to pay or unreasonably delayed payment of the benefits by filing a declaratory judgment action without any reasonable belief that the Policy is invalid rather than immediately paying. D.I. 19 at 13. To the extent such conduct could theoretically lead to an actionable claim in the absence of an actual denial of benefits, U.S. Bank’s claim should still be denied because its own allegations confirm that Sun Life’s actions were reasonable. Specifically, as set forth in Sun Life’s opening brief, U.S. Bank admits that the Policy here was financed through a non-recourse premium financing loan from LaSalle Bank, administered through Coventry Capital. See D.I. 4 ¶¶ 119-120. Moreover, Sun Life noted that it recently successfully litigated cases against U.S. Bank involving the validity of life insurance policies under Delaware law procured through this very program. See Sun Life Assur. Co. of Canada v. U.S. Bank Nat. Ass’n, No. 14-cv-62610, 2016 U.S. Dist. LEXIS 4732 (S.D. Fla. Jan. 13, 2016) (“Malkin”); U.S. Bank Nat. Ass’n v. Sun Life Assur. Co. of Canada, No. 14-4703, 2016 WL 8116141 (E.D.N.Y. Aug. 30, 2016) (“Van de Wetering”). U.S. Bank recognizes that the existence of these two recent federal court decisions involving the very same scheme at issue here makes Sun Life’s decision to bring a declaratory judgment action in this case reasonable, so it attempts to distinguish the case at hand by alleging that, unlike the Malkin and Van de Wetering cases, the initial premium financing loan was repaid Case 1:17-cv-00075-LPS Document 23 Filed 05/03/17 Page 8 of 15 PageID #: 283 - 5 - and the financing entities never took ownership of the Policy. 2 D.I. 19 at 14. That U.S. Bank believes this purported fact affects the analysis in any way is mystifying. The Delaware Supreme Court has clearly recognized that, for the purpose of determining whether a Policy was void as an unconstitutional wager or for lack of an insurable interest, a court only considers whether there was an insurable interest “at the time of issuance” of a policy. PHL Var. Ins. Co. v. Price Dawe 2006 Ins. Trust, 28 A.3d 1059, 1074 (Del. 2011). Therefore, as U.S. Bank well knows, whether the STOLI financier (Coventry) actually formally took ownership of the Policy at the maturity of the “loan” is not, by itself, dispositive of the question of whether, at issuance, the Policy was an illegal wager lacking an insurable interest. What’s more, the Malkin and Van de Wetering courts specifically contemplate the scenario that U.S. Bank claims occurred here. Both recognized the hypothetical possibility that the trusts that initially owned the policies at issue could exercise options other than relinquishing those policies to Coventry (which is what U.S. Bank claims occurred in this case). Sun Life Assur. Co. of Canada v. U.S. Bank Nat. Ass’n, 2016 U.S. Dist. LEXIS 4732, at *62 (S.D. Fla. Jan. 13, 2016); U.S. Bank Nat. Ass’n v. Sun Life Assur. Co. of Canada, 2016 WL 8116141, at *18. Indeed, in Van de Wetering, the court recognized that the insured actually shopped the policy at issue to various potential buyers (like U.S. Bank alleges Ms. Sol did here) before eventually relinquishing it to Coventry. U.S. Bank Nat. Ass’n v. Sun Life Assur. Co. of Canada, 2016 WL 8116141, at *18. Both courts agreed that these facts did not impact the analysis, because whether the insured or the initial owner could hypothetically sell the policy to someone other than Coventry was merely “part and parcel of the gamble” taken by Coventry when it 2 Sun Life assumes the truth of these allegations only for the purposes of this motion. These allegations will be the subject of discovery and Sun Life expects to prove that the Policy was never intended to benefit the insured or her family but was, in fact, procured by Coventry as a wager from inception, contrary to U.S. Bank’s allegations. Case 1:17-cv-00075-LPS Document 23 Filed 05/03/17 Page 9 of 15 PageID #: 284 - 6 - procured those policies in violation of Delaware law. Sun Life Assur. Co. of Canada v. U.S. Bank Nat. Ass’n, 2016 U.S. Dist. LEXIS 4732, at *62; U.S. Bank Nat. Ass’n v. Sun Life Assur. Co. of Canada, 2016 WL 8116141, at *18. Even if this Court ultimately disagrees with the Malkin and Van de Wetering decisions, no reasonable factfinder could find that Sun Life acted unreasonably in relying on those cases in filing this action, and U.S. Bank’s counterclaim for bad faith should therefore be dismissed. 3 C. Sun Life Has Not Violated Chapter 93A of the Massachusetts General Laws In addressing its counterclaim under Chapter 93A of the Massachusetts General Laws, U.S. Bank claims that Sun Life “misstates … U.S. Bank’s allegations” as being only that Sun Life’s principal place of business is in Massachusetts. D.I. 19 at 17. Sun Life has never denied that U.S. Bank is alleging various actions taken by Sun Life from this principal place of business. However, the place where a defendant’s purported actions occurred is only one factor in the analysis of whether Chapter 93A applies. And Sun Life pointed to significant Massachusetts authority for the proposition that this alone is insufficient to sustain a claim under Chapter 93A when there is no evidence that the actions (1) were received by the plaintiff in Massachusetts; (2) deceived the plaintiff and were acted upon in Massachusetts; or (3) caused injury to the plaintiff in Massachusetts. See, e.g., Arthur D. Little Intern., Inc. v. Dooyang Corp., 979 F. Supp. 919, 3 U.S. Bank also claims that the Seventh Circuit rejected the argument made here by Sun Life in Sun Life Assur. Co. of Canada v. U.S. Bank N.A., 839 F.3d 654 (7th Cir. 2016). This is patently misleading. As U.S. Bank well knows, the district court in that case granted judgment on the pleadings in favor of U.S. Bank based upon its belief that Wisconsin law unambiguously held that a policy cannot be deemed invalid based upon a purported lack of insurable interest. Id. Here, the Delaware Supreme Court in Price Dawe has specifically held that such arguments are available to insurers under Delaware law. Case 1:17-cv-00075-LPS Document 23 Filed 05/03/17 Page 10 of 15 PageID #: 285 - 7 - 926 (D. Mass. 1997); Data General Corp. v. Grumman Sys. Support Corp., 834 F. Supp. 477, 487 (D. Mass. 1992) (internal quotations omitted). 4 U.S. Bank is correct that, in a typical case, the determination of whether a defendant has carried its burden of showing that the actions complained of did not occur primarily and substantially within Massachusetts requires a fact-specific analysis that cannot be made based upon contested pleadings. Courts, however, do still dismiss Chapter 93A claims when doing so is warranted because the pleadings themselves make the insufficiency of the claim plain. See, e.g., Pine Polly, Inc. v. Integrated Packaging Films IPF, Inc., Case No. 13-cv-11302, 2014 WL 1203106, at *8-9 (D. Mass. March 19, 2014) (adopting recommendation to dismiss Chapter 93A claim because “the center of gravity did not take place primarily and substantially in Massachusetts” even though plaintiff pleaded injury in Massachusetts); Weber v. Sanborn, 502 F. Supp. 2d 197, 199 (D. Mass. 2007) (dismissing Chapter 93A claim on the pleadings). Here, based upon U.S. Bank’s own admissions, the Court can conclude that the “center of gravity” is not Massachusetts. To be sure, U.S. Bank focuses exclusively on where Sun Life’s actions originated. However, this factor is relatively insignificant when the plaintiff neither received the effects of those actions in, nor suffered any damages in, Massachusetts. U.S. Bank’s opposition, however, does not even mention these factors. U.S. Bank is silent on these key points because U.S. Bank’s 4 U.S. Bank appears to argue that Kuwaiti Danish Computer Co. v. Digital Equipment Corp., 438 Mass. 459 (Mass. 2003) rejected the Dooyang factors as relevant to the analysis as to whether an action is “primarily or substantially” in Massachusetts. While Digital Equipment did caution against substituting a formulaic analysis for a reasoned consideration of the facts of any individual case, it did not find these factors inapplicable. Indeed, the cases relied upon by the Dooyang court explicitly recognize that the factors set forth are not meant to be a mechanical, formulaic test; to the contrary, those cases recognize that there is no bright line test to be applied and that a transactional approach should be applied. See, e.g., Clinton Hosp. Ass’n v. Corson Group, Inc., 907 F.2d 1260 (1st Cir. 1990). These cases merely provide guidance on how certain facts should be viewed in considering how to serve the purposes of Chapter 93A. Case 1:17-cv-00075-LPS Document 23 Filed 05/03/17 Page 11 of 15 PageID #: 286 - 8 - own pleadings allege that these actions were directed towards U.S. Bank in Ohio, not Massachusetts. D.I. 4 ¶ 105. To the extent U.S. Bank can prove that Sun Life engaged in the actions it alleges, it has admitted that those actions were directed into a state other than Massachusetts, were received and relied upon in a state other than Massachusetts, and that they caused damages in a state other than Massachusetts. This is precisely the type of scenario where dismissal of a Chapter 93A claim on the pleadings is warranted. See Bruno Int’l Ltd. v. Vicor Corp., Case No. 14-cv-10037, 2015 WL 5447652, at *18-20 (D. Mass. Sept. 16, 2015) (stating that dismissal is appropriate where “plaintiff has not pled that it suffered a loss within the Commonwealth” and granting motion to dismiss Chapter 93A claim where plaintiff’s “principal place of business is in Israel, and it felt the consequences of [defendant’s] conduct in the Israeli market.”); see also Clinton Hosp., 907 F.2d at 1265-66 (“The location of the dissembler at the time he makes a deceptive statement is not the linchpin of the deception for the purpose of the consumer protection law. . . . Rather, the critical factor is the locus of the recipient of the deception at the time of reliance. The victim’s ingestion of a deceptive statement and the subsequent effects from reliance on it are what give the deceptive statement its venomous sting. The site of the victim’s ingestion is therefore critical to a determination of whether the deceptive or unfair acts were committed primarily and substantially in the Commonwealth.”). D. U.S. Bank Cannot Use Promissory Estoppel To Validate a Contract Void Ab Initio Finally, U.S. Bank suggests that this Court’s prior decision in PHL Variable Ins. Co. v. ESF QIF Trust, 2013 WL 6869803 (D. Del. Dec. 30, 2013), is controlling authority requiring that U.S. Bank’s counterclaim for promissory estoppel be permitted to go forward. But at the same time it accuses Sun Life of ignoring ESF QIF Trust, U.S. Bank does not even address, let alone refute, the multiple cases cited by Sun Life that have applied Delaware law and found that Case 1:17-cv-00075-LPS Document 23 Filed 05/03/17 Page 12 of 15 PageID #: 287 - 9 - estoppel is inapplicable when a contract - including, in some instances, a STOLI policy - is void as against public policy. In its primary brief, Sun Life cited multiple Delaware cases in which Delaware courts, including the Supreme Court of Delaware, have come to this conclusion. See, e.g., Waggoner v. Laster, 581 A.2d 1127, 1137 (Del. 1990); Denison v. Redefer, No. CIV. A. 03C-01-002, 2006 WL 1679580, at *2 (Del. Super. Mar. 31, 2006). And Sun Life went on to cite three separate federal district court opinions - including one from the District of Delaware - where courts have held estoppel inapplicable as a matter of law to a life insurance policy alleged to be void as an illegal wager or lacking an insurable interest at inception. Wilmington Savings Fund Soc’y, FSB v. PHL Variable Ins. Co., No. 13-cv-499, 2014 WL 1389974, at *12 (D. Del. Apr. 9, 2014) (rejecting claim to enforce any policies declared void ab initio through promissory estoppel because “a contract that is void ab initio may not be enforced equitably through estoppel.”); Sun Life Assur. Co. of Canada v. U.S. Bank Nat. Ass’n, 2016 U.S. Dist. LEXIS 4732 at *69-70 (same); U.S. Bank Nat. Ass’n v. Sun Life Assur. Co. of Canada, 2016 U.S. Dist. LEXIS 117799 at *56-57 (same). Refusing to even acknowledge these cases, U.S. Bank hangs all of its hopes on ESF QIF Trust, where this Court declined to dismiss a counterclaim for promissory estoppel because it believed the case presented factual questions regarding whether enforcement of the insurance policy would be against public policy. Id. at *6. 5 Notably, the insurer in ESF QIF Trust did not cite to any of the aforementioned cases in arguing - almost in passing - that the trust’s estoppel claim should be rejected, citing only to case law for the proposition that a court may not enforce 5 Besides ESF QIF Trust, U.S. Bank relies almost exclusively on cases from other jurisdictions that do not apply Delaware law. The only Delaware case, besides ESF QIF Trust, cited by U.S. Bank, First Fed. Sav. & Loan Ass’n of New Castle County v. Nationwide Mut. Fire Ins. Co., 460 A.2d 543, 545 (Del. 1983), did not involve an insurance policy that was void ab initio and therefore is wholly inapposite to the question now before the Court. Case 1:17-cv-00075-LPS Document 23 Filed 05/03/17 Page 13 of 15 PageID #: 288 - 10 - agreements that are void ab initio. See Ex. A (PHL’s primary brief) at 18-19; Ex. B (PHL’s reply brief) at 9. The insurer failed to take the next step, and cite to cases establishing that the doctrine of estoppel cannot be applied to validate a contract that is void ab initio. Those cases (now cited by Sun Life) were never placed before this Court for its consideration; nor, obviously, were the three subsequent federal district court cases which firmly rejected the idea that under Delaware law a STOLI policy could be enforced through the doctrine of estoppel. The Delaware authority cited to this Court by Sun Life requires the dismissal of U.S. Bank’s counterclaim, and to the extent that ESF QIF Trust suggests otherwise, it should be rejected in favor of the interpretation of Delaware law adopted by other courts considering this issue. III. Conclusion For the reasons set forth herein and in Sun Life’s primary brief, Sun Life respectfully requests that the Court enter an order dismissing each of U.S. Bank’s counterclaims with prejudice. Dated: May 3, 2017 Respectfully submitted, /s/ Joseph C. Schoell Joseph C. Schoell (I.D. No. 3133) DRINKER BIDDLE & REATH LLP 222 Delaware Avenue, Suite 1410 Wilmington, DE 19801 (302) 467-4245 Joseph.Schoell@dbr.com Michael J. Miller (admitted pro hac vice) Gregory J. Star (admitted pro hac vice) John M. Moore (admitted pro hac vice) DRINKER BIDDLE & REATH LLP One Logan Square, Suite 2000 Philadelphia, PA 19103 (215) 988-2736 Attorneys for Counterclaim-Defendant, Sun Life Assurance Company of Canada Case 1:17-cv-00075-LPS Document 23 Filed 05/03/17 Page 14 of 15 PageID #: 289 CERTIFICATE OF SERVICE I, Joseph C. Schoell, do hereby certify that on the 3 rd day of May, 2017, a copy of the within Counterclaim-Defendant Sun Life Assurance Company of Canada’s Reply Brief in Support of Motion to Dismiss Counterclaims was served on the following person via CM/ECF: David J. Baldwin, Esquire Potter Anderson & Corroon LLP 1313 N. Market Street Wilmington, DE 19801 /s/ Joseph C. Schoell Dated: May 3, 2017 Joseph C. Schoell (ID No. 3133) Case 1:17-cv-00075-LPS Document 23 Filed 05/03/17 Page 15 of 15 PageID #: 290 EXHIBIT A Case 1:17-cv-00075-LPS Document 23-1 Filed 05/03/17 Page 1 of 32 PageID #: 291 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE PHL VARIABLE INSURANCE COMPANY, Plaintiff/ Counterclaim-Defendant, v. ESF QIF TRUST, by and through its trustee, DEUTSCHE BANK TRUST COMPANY, Defendant/ Counterclaim-Plaintiff. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) C.A. No.: 12-cv-319-LPS Jury Trial Demanded OPENING BRIEF IN SUPPORT OF PLAINTIFF’S MOTION TO DISMISS DEFENDANT ESF QIF TRUST’S COUNTERCLAIMS Keith A. Walter (#4157) Daniel M. Attaway (#5130) CONNOLLY BOVE LODGE & HUTZ LLP The Nemours Building 1007 N. Orange Street PO Box 2207 Wilmington, DE 19899 Telephone: (302) 658-9141 Facsimile: (302) 658-5614 Thomas F.A. Hetherington Jarrett E. Ganer EDISON, MCDOWELL & HETHERINGTON LLP Phoenix Tower 3200 Southwest Freeway, Suite 2100 Houston, Texas 77027 Telephone: (713) 337-5580 admitted pro hac vice Attorney for Plaintiff/Counterclaim-Defendant PHL Variable Insurance Company Dated: June 29, 2012 Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 1 of 31 PageID #: 86Case 1: 7-cv-0 75-LPS Document 23-1 il 5/03/ 7 2 f 2 I : 292 ii TABLE OF CONTENTS TABLE OF AUTHORITIES .............................................................................................. iii I. STATEMENT OF CASE AND SUMMARY OF ARGUMENT ...................................... 1 II. FACTUAL BACKGROUND ............................................................................................. 5 III. STANDARD OF REVIEW ................................................................................................ 8 IV. ARGUMENT .................................................................................................................... 10 A. The Trust is Not Entitled to A Declaratory Judgment that Phoenix Must Pay Future Claims that May be Submitted on the Policies ....................................................... 10 a. The Trust Fails to Set Forth a Justiciable Controversy Regarding the Unrelated Policies ........................................................................................ 10 b. The Trust Failed to State an Independent Cause of Action for Declaratory Judgment Related to the Validity of the Griggs Policy ............................... 14 c. The Trust Failed to Allege Facts Sufficient to Support a Declaration that any of the Policies are Valid ............................................................................... 16 B. The Court Cannot Enforce Illegal Contracts .......................................................... 18 C. The Trust Has Failed to Set Forth Facts Sufficient to be Entitled to Relief on Any of its Tort Claims .................................................................................................... 19 D. The Trust Has Failed to Set forth a Claim Under the Delaware Consumer Fraud Act .......................................................................................................................... 20 a. The CFA Cannot Be Applied Extraterritorially ........................................... 20 b. The Trust Has Not Alleged Wrongful Conduct in the Sale of the Policy as Required Under the CFA ............................................................................. 21 E. The Trust Fails to Allege Fraud With Particularity ................................................ 22 F. The Trust Fails to Set for Allegations Sufficient to Establish Fraud or Negligent Misrepresentations .................................................................................................. 23 G. The Trust’s Claim For Breach of the Duty of Good Faith and Fair Dealing Must Be Dismissed ............................................................................................................... 24 H. The Trust’s Bad Faith Claim Must Be Dismissed .................................................. 26 V. PRAYER ........................................................................................................................... 26 Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 2 of 31 PageID #: 87Case 1: 7-cv-0 75-LPS Document 23-1 il 5/03/ 7 3 f 2 I : 293 iii TABLE OF AUTHORITIES Cases Aetna Life Ins. Co. v. Haworth, 300 U.S. 227 (1937) ....................................................................11 Aldens, Inc. v. Packel, 524 F.2d 38 (3d Cir. 1975) ........................................................................14 Ashcroft v. Iqbal, 556 U.S. 662 (2009) ................................................................................9, 19, 24 Ashwander v. Tenn. Valley Auth., 297 U.S. 288 (1936) ................................................................10 Baker v. Carr, 369 U.S. 186 (1962) .................................................................................................8 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) ..........................................................9, 19, 24, 25 Brine v. Fertitta, 537 So. 2d 113 (Fla. Dist. Ct. App. 1988) .........................................................18 Byrnes v. DeBolt Transfer, Inc., 741 F.2d 620 (3d Cir. 1984) ......................................................22 Casson v. Nationwide Ins. Co., 455 A.2d 361 (Del. Sup. Ct. 1982) ..............................................25 Cities Service Company v. Department of Energy, 520 F. Supp. 1132 (D. Del. 1981) .................12 E.I. DuPont de Nemours & Co. v. Pressman, 679 A.2d 436 (Del. 1996) .....................................25 Eames v. Nationwide Mut. Ins. Co., 412 F. Supp. 2d 431 (D. Del. 2006) .....................................21 In re Rockefeller Ctr. Prop., Inc., Sec. Litig., 311 F.3d 198 (3d Cir. 2002) ....................................9 Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375 (1994) ..................................................8 Kost v. Kozakiewicz, 1 F.3d 176 (3d Cir. 1993) ..............................................................................9 Kuroda v. SPJS Holdings, L.L.C., 971 A.2d 872 (Del. Ch. 2009).................................................24 Lincoln Nat. Life Ins. Co. v. Joseph Schlanger 2006 Ins. Trust, 28 A.3d 436 (D. Del. 2011) .............................................................................................................................18 Maryland Casualty Co. v. Pacific Coal and Oil Co., 312 U.S. 270, 61 S.Ct. 510, 85 L.Ed. 826 (1941) ...................................................................................................................10 Nieves v. All Star Title, Inc., No. 10C-03-191 PLA, 2010 WL 2977966 (Del. Super. July 27, 2010)........................................................................................................................20 Norman Gershman's Things To Wear, Inc. v. Mercedes-Benz of N. Am., Inc., 558 A.2d 1066 (Del. Super. 1989) ...............................................................................................21 Ohio Nat’l Life Assurance Co. v. Davis, No. CV 10-4241, 2010 WL 4916643 (C.D. Cal. Dec. 1, 2010) ...................................................................................................................6 Outdoor Technologies, Inc. v. Allfirst Fin., Inc., CIV.A.99C-09-151-JRS, 2001 WL 541472 (Del. Super. Apr. 12, 2001)......................................................................................22 Penn Mut. Life Ins. Co. v. Barbara Glasser Life Ins. Trust, No. 09-677-JJF, 2010 WL 3023420 (D. Del. July 30, 2010) .............................................................................15, 24 Penn Mut. Life Ins. Co. v. Norma Espinosa 2007-1 Ins. Trust, No. 09-300-JJF, 2010 WL 3023402 (D. Del. July 30, 2010) ...................................................................................15 Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 3 of 31 PageID #: 88Case 1: 7-cv-0 75-LPS Document 23-1 il 5/03/ 7 4 f 2 I : 294 iv Phillips v. County of Allegheny, 515 F.3d 224 (3d Cir. 2008) ...................................................9, 19 PHL Variable Ins. Co. v. Abrams, No. 10-cv-521 BTM(NLS), 2012 WL 10686 (S.D. Cal. Jan. 3, 2012) ...........................................................................................................6 PHL Variable Ins. Co. v. Hyman Davidson 2008 Irrev. Life Ins. Trust, No. 10-cv- 1219 (S.D. Cal.) ......................................................................................................................7 PHL Variable Ins. Co. v. James Evens Family Ins. Trust, No. 10-cv-00240 (S.D. Cal.) .........................................................................................................................................7 PHL Variable Ins. Co. v. Kenneth Green Ins. Trust, No. 09-cv-02606 (S.D. Cal.) ........................7 PHL Variable Ins. Co. v. Patricia Sanford Family Ins. Trust, No. 10-cv-00784 (S.D. Cal.) ...............................................................................................................................7 PHL Variable Ins. Co. v. The Britt-Marie Johnson Family Ins. Trust, Civ. No. 10- 2370-VBF (MANx), (C. Dist. Cal. May 9, 2011)...................................................................6 PHL Variable Insurance Company v. Price Dawe 2006 Insurance Trust, 28 A.3d 1059 (Del. 2011) .......................................................................................................3, 6, 7, 16 Principal Life Ins. Co. v. Lawrence Rucker 2007 Ins. Trust, 675 F. Supp. 2d 562 (D. Del. 2009) .................................................................................................................14, 15, 16 Pub. Serv. Comm’n of Utah v. Wycoff Co., Inc., 344 U.S. 237, 244 (1952) ............................11, 12 Schmeusser v. Schmeusser, 559 A.2d 1294, 1297 (Del. 1989) ......................................................22 Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 901 A.2d 106, 117 (Del. 2006) ...........................20, 25 Statutes 28 U.S.C. § 2201 ............................................................................................................................10 6 Del. C. § 2512 .............................................................................................................................20 6 Del. C. § 2513. ............................................................................................................................21 Rules FED. R. CIV. P. 12(b)(6) ....................................................................................................................8 FED. R. CIV. P. 8(a)(2) ................................................................................................................9, 25 FED. R. CIV. P. 9(b) ....................................................................................................................9, 21 Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 4 of 31 PageID #: 89Case 1: 7-cv-0 75-LPS Document 23-1 il 5/03/ 7 5 f 2 I : 2 5 1 I. STATEMENT OF CASE AND SUMMARY OF ARGUMENT Plaintiff/Counterclaim-Defendant PHL Variable Insurance Company (“Phoenix”) filed this declaratory judgment action against Defendant/Counterclaim-Plaintiff ESF QIF Trust (the “Trust”), seeking a declaration that a $10 million life insurance policy (the “Griggs Policy”) insuring the life of Roberta Griggs (“Mrs. Griggs”) acquired as part of an impermissible stranger originated life insurance (“STOLI”) scheme was void ab initio due to a lack of insurable interest and as an illegal wagering contract. See Phoenix’s Complaint [Doc. 1].1 In response to Phoenix’s Complaint, the Trust filed its Answer and Counterclaims (the “Counterclaim”). [Doc. 8]. The Counterclaim attempts to expand this action to include fourteen additional life insurance policies issued by Phoenix that the Trust is alleged to currently own (the “Unrelated Policies”). The Trust asserts in conclusory fashion that the Unrelated Policies were issued with a valid insurable interest and seeks a declaratory judgment that the Policies are valid and that Phoenix is obligated to pay any claims submitted under the Policies once the insureds die. The Counterclaim does not allege that any claims have been denied or even submitted under the Unrelated Policies, or that Phoenix has represented that it will deny claims that may be submitted in the future. Despite the fact that there is no allegation of a current dispute between Phoenix and the Trust regarding the validity of the Unrelated Policies, the Trust seeks an advisory opinion regarding the payment of hypothetically submitted future claims. The Trust’s alleged basis for seeking this advisory opinion is that the Trust has been damaged as a result of the unwillingness of the “market” to purchase the Unrelated Policies from the Trust due to a “belief among market participants” that Phoenix either “plans to, or is likely to 1 Phoenix also brought a separate action, in civil action number 12-cv-317, seeking a declaration that a policy insuring John Szalay (the “Szalay Policy”) owned by the Trust is void due to lack of insurable interest (the “Szalay Action”). The Trust has also asserted counterclaims in the Szalay Action, thought that counterclaim is restricted to the Szalay Policy and does not involve the Unrelated Policies. Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 5 of 31 PageID #: 90Case 1: 7-cv-0 75-LPS Document 23-1 il 5/03/ 7 6 f 2 I : 296 2 challenge” the Unrelated Policies at some point in the future. The “market” is not alleged to have formed this belief based on any action taken by Phoenix regarding the Unrelated Policies; rather, the “market” is alleged to have formed this opinion based upon Phoenix’s involvement in litigation in other contexts involving other parties. The crux of the Trust’s allegations on this point is that, since 2008, Phoenix has exercised its legal rights by seeking rescission of contracts procured through fraud and seeking declarations that policies issued without an insurable interest and in violation of the law are void and unenforceable. In turn, the “market” apparently treats as toxic life insurance policies viewed as having been potentially procured through fraud or as illegal wagering contracts due to the potential that an insurer may challenge payment on such policies. Without articulating any actual dispute between Phoenix and the Trust with respect to the Unrelated Policies, the Trust requests that the Court step in and provide the market with assurance, in the form of a judicial guaranty, that the Trust’s allegedly toxic assets are actually worth the Trust’s asking price. If courts issued such advisory opinions, litigants would flood courts with hypothetical scenarios every time they felt the “market” was undervaluing their assets due to the potential for the occurrence or non-occurrence of a hypothetical future event. Fortunately, the Constitution and the Declaratory Judgment Act require an actual, justiciable controversy before issuance of declaratory judgments and simply do not require or permit courts to assume the role of the market’s playground monitor. As such, with respect to the fourteen Unrelated Policies, the declaratory judgment sought by the Trust regarding the potential payment of future benefits fails due to lack of a justiciable controversy. At least two courts in this district have already expressly declined to issue such advisory opinions regarding the hypothetical validity of life insurance policies. Additionally, Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 6 of 31 PageID #: 91Case 1: 7-cv-0 75-LPS Document 23-1 il 5/03/ 7 7 f 2 I : 297 3 with respect to the Griggs Policy, the declaratory relief sought by the Trust (that the Griggs Policy is valid) is duplicative of the relief sought by Phoenix (that the Griggs Policy is void) and should be dismissed as redundant. On at least three prior occasions, courts in this district have dismissed such redundant counterclaims. Moreover, even if this Court were to entertain the Trust’s request for a declaratory judgment that claims submitted under the Policies are valid, the Trust has failed to set forth facts that, if true, would be sufficient to establish that any of the Policies were issued with a valid insurable interest, as recently enunciated by the Delaware Supreme Court in PHL Variable Insurance Company v. Price Dawe 2006 Insurance Trust, 28 A.3d 1059 (Del. 2011). The Trust’s counterclaims related to the Policies’ validity should therefore be dismissed for failure to state a claim upon which relief can be granted. Within its Counterclaim, the Trust also asserts claims for violation of the Delaware Consumer Fraud Act, fraud, negligent misrepresentation, breach of the duty of good faith and fair dealing, and promissory estoppel.2 The Trust has failed to set forth facts sufficient to maintain a cause of action under any of these theories. This is especially apparent with respect to the Unrelated Policies, where the Trust seeks to hold Phoenix liable based solely on the belief held in the “market” that Phoenix may in the future take some action with respect to the Unrelated Polices. In other words, the Trust is seeking to impose preemptive liability for something it believes Phoenix might do in the future, which might then be actionable. Regardless, with respect to all of the Policies, the Trust cannot establish that Phoenix owes it any duty to provide it notice of whether or not it will challenge a policy against which a claim has not been made. The law simply imposes no duty upon Phoenix to provide either the 2 The Trust also asserts a claim for breach of contract with respect to the Griggs Policy, which Phoenix does not move to dismiss. Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 7 of 31 PageID #: 92Case 1: 7-cv-0 75-LPS Document 23-1 il 5/03/ 7 8 f 2 I : 298 4 Trust or the “market” with any assurances regarding the enforceability of the Unrelated Policies, and whether or not the “market” views the Unrelated Policies as toxic assets is not something within Phoenix’s control. Additionally, the Trust impermissibly seeks to apply the Delaware Consumer Fraud Act extraterritorially, as the complained of conduct-the alleged intention or potential intention to eventually deny coverage or initiate legal action-took place in Connecticut. Moreover, the Trust has not alleged that Phoenix committed any actionable conduct in connection with the sale of any of the Policies, which is a fundamental element of a Consumer Fraud Act claim. Even viewing the pleadings in the light most favorable to the Trust, at best, the Trust has alleged that, at some point after the Policies were issued, Phoenix formulated an intent to challenge the Policies but did not communicate this intent to the Trust and, instead, continued accepting premiums paid by the Trust and other prior owners. These allegations fail to establish a violation of the Consumer Fraud Act as a matter of law. The Trust’s allegations also fail to satisfy the Rule 9 heightened pleading standard with respect to either the Delaware Consumer Fraud Act or the standalone fraud claim, as the trust does not allege the allegedly fraudulent conduct with the requisite particularity. In addition to failing to satisfy Rule 9, the Trust has failed to allege any facts that would support an actionable fraudulent representation or concealment by Phoenix. Similarly, the Counterclaim does not allege an actionable negligent misrepresentation or concealment. In asserting a claim for breach of the duty of good faith and fair dealing, the Trust fails to articulate a specific, implied contractual obligation that Phoenix has breached, as is required under Delaware law. Moreover, with respect to the Griggs Policy, courts in this District have Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 8 of 31 PageID #: 93Case 1: 7-cv-0 75-LPS Document 23-1 il 5/03/ 7 9 f 2 I : 299 5 previously held that an insurance carrier bringing a declaratory judgment action that a policy is void ab initio is not a breach of the implied covenant of good faith and fair dealing. Finally, the Trust shamelessly requests that this Court invoke the equitable doctrine of estoppel to require Phoenix to pay death benefits on the Policies, even if the Policies were issued without an insurable interest in contravention of the Delaware Constitution’s prohibition against wagering on human life. Astonishingly, the Trust is alleging that equity requires that tertiary market purchasers of interests in contracts receive the benefit of the contracts regardless of whether the contracts are illegal in nature. In other words, the Trust seeks to establish a legal mechanism through which illegal contracts can be enforced by laundering them through the tertiary market. Equity does not require, nor does it permit, the enforcement of illegal contracts. II. FACTUAL BACKGROUND The Trust sets forth a few general, mostly conclusory allegations regarding the Policies. See Counterclaim at ¶¶ 2, 4, 23, 30. The Trust alleges for each of the Policies, that in 2006 or 2007, the insured “procured” a policy, issued to a trust the insured “established”, whose beneficial interest was owned by a person who had an insurable interest in the insured’s life. Id. at ¶ 2. The Trust alleges that the insured paid an unspecified portion of the policy’s initial premium. Id. at ¶ 2. “Shortly” after each policy was issued, the trust beneficiary sold their beneficial interest to an unidentified third-party investor. Id. at ¶ 30. The Trust asserts that this sale was not prearranged and was an “arms-length” transaction. Id. at ¶ 2. The Trust alleges that it now owns each of the Policies but does not provide any details regarding the ownership history of the Policies. Id. at ¶ 23. The Trust indicates that four of the Policies were owned by an entity named White Cliff Holdings L.P. during the first half of 2010 and that the Trust subsequently obtained ownership. Id. at ¶ 28. For each Policy, the Trust alleges the total amount of premiums paid since the issue date but does not specify what amount, Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 9 of 31 PageID #: 94Case 1: 7-cv-00 75-LPS Document 23-1 il 5/03/ 7 10 of 32 PageID #: 300 6 if any, of that premium was paid by the Trust. Id. at ¶ 23. The Trust also alleges the amount of each Policy’s upcoming scheduled premium. Id. The Trust alleges that the secondary market for life insurance policies, known as the life settlement market, provides a benefit to consumers by allowing them to sell unwanted insurance policies for more than the cash surrender value provided by the policy.3 Counterclaim at ¶ 12. The Trust alleges that, in 2006 and 2007, in California and New York, an insured and a third- party investor with no insurable interest in the insured’s life could conspire to acquire a life insurance policy for the sole purpose of immediately transferring the policy from the insured to the investor. Id. at ¶ 15.4 The Trust alleges that in 2006 and 2007, Phoenix knew that life insurance brokers were attempting to acquire Phoenix policies for use in STOLI transactions, that it tacitly encouraged STOLI in an effort to generate premium revenue, and that it tracked 3 The Dawe Court differentiated between the legitimate life settlement market, whereby an insured can receive cash in exchange for unneeded life insurance, and STOLI, whereby life insurance policies are created for the benefit of third-parties lacking an insurable interest in the life of the insured. Dawe, 28 A.3d at 1069-70. STOLI policies, the Dawe Court concludes, “lack an insurable interest and are thus an illegal wager on human life.” Id. at 1070. 4 Despite the Trust’s assertion, there is an abundance of California law to the contrary. See Court Order re: Britt-Marie Johnson Trust’s Motion for Summary Judgment [Doc. 97], PHL Variable Ins. Co. v. The Britt-Marie Johnson Family Ins. Trust, Civ. No. 10-2370-VBF (MANx) (C. Dist. Cal. May 9, 2011) (finding that there was a triable issue on whether the policy at issue was procured for the benefit of an investor, based on evidence of the investor’s clandestine financing of policy premiums on “terms that virtually assured the Policy would be transferred to [the investor]”); Ohio Nat’l Life Assurance Co. v. Davis, No. CV 10-4241, 2010 WL 4916643, at *1 (C.D. Cal. Dec. 1, 2010) (concluding that “any arrangement by which a life insurance policy is initiated for the benefit of a ‘third-party investor’ who has no insurable interest in the insured’s life at the time of the policy is issued is deemed a STOLI, which is a ‘fraudulent life settlement act’”); PHL Variable Ins. Co. v. Abrams, No. 10-cv-521 BTM(NLS), 2012 WL 10686 (S.D. Cal. Jan. 3, 2012) (noting that while “an irrevocable trust normally has an insurable interest in the life of its settlor . . . if the trust is merely acting as a ‘straw man’ to carry out a STOLI scheme, that is a different matter”). Moreover, the Delaware Supreme Court expressly declined to follow New York law on this point. See Dawe, 28 A. 3d at 1068. By selectively quoting Dawe out of context, the Trust attempts to imply that Delaware law also permitted these STOLI arrangements at the time the Policies were issued. As discussed more fully below, Delaware law clearly has never permitted the insurable interest requirement to be papered around. Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 10 of 31 PageID #: 95Case 1: 7-cv-0 75-LPS Document 23-1 il 5/03/ 7 1 f 2 I : 301 7 suspected STOLI policies. Id. at ¶¶ 17-22. The Trust alleges that following the financial crisis in late 2008, Phoenix changed course and began suing to rescind or void STOLI policies and requesting to retain premiums paid on STOLI policies. Id. at ¶ 7. The gravamen of the Trust’s Counterclaim is that it believes Phoenix will challenge the Unrelated Policies because, since 2008, Phoenix has supposedly embarked upon a systematic challenge of policies issued in 2006 and 2007 due to lack of insurable interest.5 Id. at ¶¶ 1, 4-5, 26, 28-29. In support of this assertion, the Trust identifies a number of lawsuits in which Phoenix has been involved. The lawsuits identified by the Trust do not support this contention. In fact, setting aside the six other cases Phoenix filed in this district in March 2012, the Trust has identified approximately thirty other lawsuits involving Phoenix. Only four of these actually involve a claim of lack of insurable interest on a policy issued in 2006 or 2007. See PHL Variable Insurance Company v. Price Dawe 2006 Insurance Trust; PHL Variable Life Ins. Co. v. LaSalle Bank N.A., et al., No. 08-cv-11562 (D. Mich); PHL Variable Ins. Co. v. Clifton Wright Family Ins. Trust, No. 09C-2344 (S.D. Cal); PHL Variable Ins. Co. v. Edwin Fuld Ins. Trust Nov. 2007, No. 2009-cv-1222 (M.D. Fl).6 Combining these four cases, with this case and the six others contemporaneously filed by Phoenix, the Trust has identified eleven instances in support of its alleged “systematic challenges to the legality” of insurance policies issued in 2006 and 5 Although the Trust attempts to define criterion for the types of policies it believes Phoenix is likely to challenge as STOLI policies, the definition is largely circular. Specifically, while almost every STOLI policy is a high face amount universal life insurance policy insuring an older individual, not every high face amount universal life insurance policy insuring an older individual is STOLI. 6 Additionally, 4 of the 16 cases identified in paragraph 29 of the Counterclaim do not involve a request that a policy be declared void due to a lack of insurable interest, which is directly contrary to the Trust’s assertion. See PHL Variable Ins. Co. v. Kenneth Green Ins. Trust, No. 09-cv-02606 (S.D. Cal.); PHL Variable Ins. Co. v. James Evens Family Ins. Trust, No. 10-cv- 00240 (S.D. Cal.); PHL Variable Ins. Co. v. Hyman Davidson 2008 Irrev. Life Ins. Trust, No. 10- cv-1219 (S.D. Cal.); PHL Variable Ins. Co. v. Patricia Sanford Family Ins. Trust, No. 10-cv- 00784 (S.D. Cal.). Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 11 of 31 PageID #: 96Case 1: 7-cv-0 75-LPS Document 23-1 il 5/03/ 7 2 f 2 I : 302 8 2007. The fact that on less than a dozen occasions, over a five-year period, Phoenix sought a declaration that a particular policy lacks an insurable interest does not create a justiciable controversy regarding the validity of these fourteen Unrelated Policies. Even allowing for all of the cases identified by the Trust, the Trust cannot allege that the policies challenged by Phoenix represent anything more than an insignificant fraction of Phoenix’s book of business. The Trust bases both the existence of a justiciable dispute and the damages it has allegedly suffered on the “market’s” purported reaction to Phoenix’s anti-STOLI business practices and litigation history. Id. at ¶ 32.7 The Trust’s request that this Court intervene into and regulate the tertiary market’s perception of the Unrelated Policies, and polices issued by Phoenix generally, crescendos in Paragraphs 32 and 33 of the Counterclaim. There, the Trust alleges that Phoenix’s pattern of litigation indicates that it is likely to contest the Policies here as well and, regardless of whether it plans to initiate litigation, the economic value of each and every policy issued by Phoenix owned by the Trust is diminished by Phoenix’s alleged anti-STOLI business practices which has already created a cloud over the marketability of and impaired the resale value of the Policies. . . . The likelihood that Phoenix will contest the policy upon the insured’s death or after additional premiums payments substantially diminishes the value of the policy and/or destroys the market entirely. As a practical matter, Phoenix is precluding the Trust from transferring the policies as no one is willing to purchase the policies that is [sic] perceived by the market as unlikely to be honored given Phoenix’s litigation history and business practices. Id. at ¶¶ 32-33 (emphasis added). III. STANDARD OF REVIEW A complaint must be dismissed under Rule 12(b)(1) of the Federal Rules of Civil Procedure if the court lacks subject matter jurisdiction. Baker v. Carr, 369 U.S. 186, 198 (1962). 7 The Trust also claims to be “economically harmed by having to continue to pay substantial premiums to keep the Policies in force without knowing whether Phoenix will pay benefits upon the death of the insureds or instead will challenge the Policies as void ab initio . . . .” Id. at ¶ 36. Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 12 of 31 PageID #: 97Case 1: 7-cv-0 75-LPS Document 23-1 il 5/03/ 7 3 f 2 I : 303 9 A federal court is presumed to lack subject matter jurisdiction until a plaintiff establishes otherwise. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a defendant may move for dismissal based on a plaintiff's “failure to state a claim upon which relief can be granted.” FED. R. CIV. P. 12(b)(6). While a court must accept factual allegations as true and view them in the light most favorable to the plaintiff, the court is “not required to accept legal conclusions either alleged or inferred from the pleaded facts.” Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993). Under Rule 8 of the Federal Rules of Civil Procedure, a complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” FED. R. CIV. P. 8(a)(2). The “factual allegations must be enough to raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). While the complaint need not make detailed factual allegations, “a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than mere labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id. (internal quotations and citations omitted). Thus, stating a claim upon which relief can be granted “‘requires a complaint with enough factual matter (taken as true) to suggest’ the required element” of a cause of action. Phillips v. County of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008) (quoting Twombly, 550 U.S. at 556). In sum, to be “plausible on its face,” and survive a motion to dismiss under Rule 12(b)(6), a complaint must plead “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged . . . .” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Twombly, 550 U.S. at 570. Pursuant to Rule 9 of the Federal Rules of Civil Procedure, when alleging fraud or mistake, “a party must state with particularity the circumstances constituting fraud or mistake.” Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 13 of 31 PageID #: 98Case 1: 7-cv-0 75-LPS Document 23-1 il 5/03/ 7 4 f 2 I : 304 10 FED. R. CIV. P. 9(b). The purpose of the heightened pleading requirement serves several important objectives by (1) giving defendants notice of claims against them, (2) providing an increased measure for their reputations, and (3) reducing the number of frivolous suits brought solely to extract settlements. In re Rockefeller Ctr. Prop., Inc., Sec. Litig., 311 F.3d 198, 216 (3d Cir. 2002). IV. ARGUMENT A. The Trust is Not Entitled to A Declaratory Judgment that Phoenix Must Pay Future Claims that May be Submitted on the Policies Through its Counterclaim, the Trust asserts that all of the Policies were issued with an insurable interest are valid and therefore seeks a declaration that “(i) Phoenix is liable to pay a claim on each of the Policies upon the occurrence of the Policies’ maturity event, and that (ii) Phoenix is estopped from challenging the Policies as void ab initio and/or that Phoenix has waived its right to challenge the Policies as void ab initio.” This cause of action must be dismissed for a number of reasons. With respect to the Unrelated Policies, the Trust has failed to set forth an actual controversy ripe for judicial determination and has therefore not established that the Court has subject matter jurisdiction over this claim. With respect to the Griggs Policy, the relief sought by the Trust is redundant of the relief sought by Phoenix and should therefore be dismissed. Moreover, even if the Court had jurisdiction over the claims on the Unrelated Policies and there was not redundancy with respect to the Griggs Policy, the Trust has failed to set forth sufficient facts to entitle itself to the relief sought. a. The Trust Fails to Set forth a Justiciable Controversy Regarding the Unrelated Policies In order to establish subject matter jurisdiction under Article III, a plaintiff must allege facts that “show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 14 of 31 PageID #: 99Case 1: 7-cv-0 75-LPS Document 23-1 il 5/03/ 7 5 f 2 I : 305 11 Maryland Casualty Co. v. Pacific Coal and Oil Co., 312 U.S. 270, 273 (1941). Relatedly, under the Declaratory Judgment Act, a court may “declare the rights and other legal relations of any interested party seeking such declaration,” only where a “case of actual controversy” exists. 28 U.S.C. § 2201. A “case of actual controversy” means one of a justiciable nature. Ashwander v. Tenn. Valley Auth., 297 U.S. 288, 325 (1936). “The controversy must be definite and concrete, touching the legal relations of parties having adverse legal interests.” Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240-241 (1937). “It must be a real and substantial controversy admitting of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical set of facts.” Id. at 241. “Further, the controversy must be ripe for judicial adjudication, meaning that it cannot be ‘nebulous or contingent but must have taken on fixed and final shape so that a court can see what legal issues it is deciding, what effect its decision will have on the adversaries, and some useful purpose to be achieved in deciding them.’” Espinosa, 2010 WL 3023402, at *7 (quoting Pub. Serv. Comm’n of Utah v. Wycoff Co., Inc., 344 U.S. 237, 244 (1952)). The Trust has not alleged that Phoenix has taken any action with respect to the Unrelated Policies. Throughout its Counterclaim, the Trust states varyingly that it either believes Phoenix intends to take some action regarding the Unrelated Policies or that Phoenix is likely to do so, based on the dozen or so occasions over the past five years in which it has challenged policies the Trust considers similar to the Policies the Trust seeks to place at issue. See Counterclaim at ¶¶ 17, 19, 21, 24, 29, 30, 32. Moreover, the harm the Trust alleges it has suffered-concern over paying premiums and undervaluation by the market in the face of uncertainty as to whether the Unrelated Policies are valid-is a self-imposed harm that cannot be attributed to any action by Phoenix with respect to the Unrelated Policies. These allegations simply do not present a Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 15 of 31 PageID #: 100Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 16 of 32 PageID #: 3 6 12 concrete controversy that is ripe for judicial determination. As such, the Court lacks jurisdiction and must dismiss this cause of action. Numerous courts have addressed the justiciability and ripeness doctrines in the analogous context of preemptory challenges to regulations. For example, Cities Service Company (“Cities”) brought an action against the Department of Energy (“DOE”), seeking a declaration that certain transactions were lawful under DOE regulations and that Cities’s accounting for and reporting of those transactions was in conformity with the regulations. See Cities Serv. Co. v. Department of Energy, 520 F. Supp. 1132, 1137-38 (D. Del. 1981).8 The court found, however, that Cities had failed to satisfy the constitutional requirement of concrete adversity, as it could not show that the DOE had taken a final position regarding Cities’ actions. Id. at 1140. Specifically, the court found that Cities had not satisfied the requirement that the dispute with the DOE “‘not be nebulous or contingent but . . . have taken on fixed and final shape so that a court can see what legal issues it is deciding, what effect its decision will have on the adversaries, and some useful purpose to be achieved in deciding them.’” Id. (quoting Public Serv. Comm’n, 344 U.S. at 244). The court dismissed Cities’s claims for lack of controversy, stating that what Cities “seeks is judicial insurance against the possibility that DOE might someday bring an enforcement action against it. To do so, however, would require this Court to render an advisory opinion that Cities complied with the regulations simply because Cities speculates that DOE might eventually allege that Cities violated the regulations.” Id. at 1140-41 (emphasis added). Judicial insurance is exactly what the Trust seeks here, based solely on its speculation that 8 After the case was filed, Cities moved for summary judgment and the DOE moved to dismiss due to lack of a justiciable controversy. The court stayed the matter while Cities requested a formal opinion on the issues from the DOE. Id. at 1138. The DOE responded with an interpretation that the court deemed “ambiguous.” Id. The court then proceeded to rule on the dispositive motions. Id. Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 16 of 31 PageID #: 101Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 17 of 32 PageID #: 307 13 Phoenix might someday seek to deny a potential claim or seek to rescind or have declared void the Unrelated Policies, Additionally, the court in Cities noted that the plaintiff had failed to establish an immediate or certain future injury sufficient to establish a case or controversy. Id. at 1141. Cities argued that its current business planning was affected by the possibility of future DOE action. Id. The court rejected this argument noting that “[w]hile the Court assumes for present purposes that these concerns are both substantial and real, this harm to Cities cannot be traced to any final DOE action.” Id. at 1142. The court concluded there was no justiciable case or controversy, “as any hardship to Cities cannot be traced to final agency action, but rather stems from its own concerns about what DOE might do in the future.” Id. Again, such is the case here. The harm alleged by the Trust is that it must continue paying premiums in the face of uncertain coverage and that the market has undervalued its assets for the same reason. As in Cities, this action cannot be traced to anything Phoenix has done with respect to the Unrelated Policies but stems only from the Trust’s apprehension about what Phoenix might do in the future. In summarizing its decision to dismiss the Cities case for lack of a justiciable controversy and due to lack of ripeness, the court stated that [w]hile certainty regarding business transactions may be a legitimate goal, there would be no ripeness requirement left if a plaintiff could sue whenever it was concerned about its potential liability for past transactions. Businessmen and others must live with their considered choices. Presumably, when Cities engaged in the transactions at issue it had either determined that they were clearly consistent with the regulations, or that the meaning of the regulations was unclear but the transactions at least arguably satisfied them. If the regulations are clear in their meaning, Cities should have no concerns over possible enforcement actions. If the meaning of the regulations is unclear, Cities will have to bear that uncertainty as a self-imposed cost of entering the transactions. Id. at 1143. Just as in Cities, the Trust must live with its decision to purchase the Unrelated Policies. If, as the Trust claims, they were issued with a valid insurable interest in compliance Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 17 of 31 PageID #: 102Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 18 of 32 PageID #: 308 14 with Delaware law, then the Trust should have no concerns over possible claims denials. If the Unrelated Policies were issued without a valid insurable interest or otherwise fail to comply with the law, the Trust will have to bear that uncertainty as a self-imposed cost of entering into the transactions. There is simply no justiciable dispute that the Court can rule on with respect to the Unrelated Policies, and the fact that the Trust would feel more comfortable paying future premiums or believes that the “market” would revalue its assets if the Court provided an advisory opinion regarding the Unrelated Policies’ validity does not provide this Court with jurisdiction to do so.9 b. The Trust Failed to State an Independent Cause of Action for Declaratory Judgment Related to the Validity of the Griggs Policy A counterclaim for declaratory relief may be dismissed as redundant where “there is a complete identity of factual and legal issues between the complaint and the counterclaim.” Principal Life Ins. Co. v. Lawrence Rucker 2007 Ins. Trust, 675 F. Supp. 2d 562, 566 (D. Del. 2009) (quoting Aldens, Inc. v. Packel, 524 F.2d 38, 51-52 (3d Cir. 1975)). Redundant claims should be dismissed because “the counterclaim will become moot upon disposition of the complaint.” Id. 9 Moreover, it is worth noting that, in the absence of any contest at all concerning the Unrelated Policies, it would be inappropriate for the Court to resolve a dispute premised on a pure hypothetical, as such resolution necessarily entails the Court rendering an advisory opinion. There numerous scenarios that could arise in the future under which Phoenix might have no obligation to pay death benefits to the Trust. For example, any of the Policies could be surrendered or lapse. As another example, the original insured or his heirs may bring a challenge to a policy or assert competing claims against a policy. There are simply any number of potential ways in which a death benefit may not ultimately be payable to the Trust. It was for this reason that the courts in Espinoza and Glasser concluded that the defendant’s counterclaim seeking declarations that the policies were “valid and in full force and effect” failed for lack of an actual, justiciable controversy. Espinosa, 2010 WL 3023402, at *7; Glasser, 2010 WL 3023420, at *4. Such is similarly the case here where the Trust seeks a declaration that the Policies are valid and that Phoenix must pay a death benefit when the insureds die. See Counterclaim at ¶ 51. Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 18 of 31 PageID #: 103Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 19 of 32 PageID #: 309 15 Phoenix seeks a declaration that the Griggs Policy is void due to lack of insurable interest and that therefore no death benefits are payable. See Phoenix’s Complaint at ¶¶ 3, 39, 42. Through its Counterclaim, the Trust asserts that an insurable interest exists and that Phoenix is “liable to pay a claim on each of the Policies upon the occurrence of the Policies’ maturity event.” Counterclaim at ¶ 51. As applied to the Griggs Policy, this counterclaim must be dismissed, as the Court will necessarily determine this issue when adjudicating Phoenix’s claim for a declaratory judgment on these exact claims. See Phoenix’s Complaint at ¶¶ 40-42. Either the Griggs Policy has an insurable interest or it does not; either it is valid or it is not.10 In three prior cases in this District, the defendant trust has filed counterclaims similar to the counterclaim asserted by the Trust herein. Unsurprisingly, in all three cases, a court in this District held that counterclaims seeking a declaration that a policy is valid should be dismissed as redundant and duplicative of the insurance carrier’s claim that a policy is void. For instance, in Rucker, the court dismissed the defendant trust’s counterclaim seeking a declaration that an insurable interest existed and that the policy is not invalid, finding that the counterclaim was redundant. Rucker, 675 F. Supp. 2d at 566. The court explained that “[b]ecause Principal Life requests a declaration that the Policy lacked an insurable interest at its inception, a finding adverse to Principal Life on this issue would necessarily grant the relief the Trust desires . . . .” 10 Additionally, in its Answer to Phoenix’s Complaint, the Trust asserts as affirmative defenses the existence of an insurable interest and the doctrines of waiver and estoppel. See Counterclaim at ¶¶ 45-46. In its declaratory judgment claim, the Trust simply repackages these affirmative defenses as a counterclaim, seeking a declaration that “Phoenix is estopped from challenging the Policies as void ab initio and/or that Phoenix has waived its right to challenge the Policies as void ab initio.” Id. at ¶ 51. In resolving Phoenix’s Complaint, the Court will necessarily adjudicate these affirmative defenses and, in turn, moot the declaratory relief the Trust seeks with respect to the Griggs Policy. If Phoenix’s claims are barred by the existence of an insurable interest, waiver, or estoppel, then the Court will decide as such when disposing of Phoenix’s Complaint. The Trust’s pursuit of these affirmative defenses as a declaratory judgment is overtly redundant and, as such, they should be dismissed. See Rucker, 675 F. Supp. 2d at 566. Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 19 of 31 PageID #: 104Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 20 of 32 PageID #: 310 16 Id. at 566-67. Courts in this District reached the same conclusion in two subsequent cases. See Penn Mut. Life Ins. Co. v. Norma Espinosa 2007-1 Ins. Trust, No. 09-300-JJF, 2010 WL 3023402, at *6 (D. Del. July 30, 2010) (dismissing as redundant counterclaims for declarations that plaintiff had no basis for rescission of the insurance policy at issue and that an insurable interest existed at the inception of the policy); Penn Mut. Life Ins. Co. v. Barbara Glasser Life Ins. Trust, No. 09-677-JJF, 2010 WL 3023420, at *2-3 (D. Del. July 30, 2010) (same). As in Rucker, Espinosa, and Glasser, this Court should dismiss the Trust’s counterclaims seeking declarations concerning the validity of the Griggs Policy. c. The Trust Failed to Allege Facts Sufficient to Support a Declaration that Any of the Policies are Valid In Dawe, the Delaware Supreme Court answered three Certified Questions related to an insurer’s ability to contest a life insurance policy for lack of insurable interest after the expiration of the policy’s contestability period and confirming the paramount importance of the insurable interest requirement. See Dawe, 28 A.3d at 1064. The Dawe Court emphatically held that a life insurance policy “procured as a mere cover for a wager” violates Delaware’s insurable interest requirement. Id. at 1068, 1074 (“[A] life insurance policy that is validly issued is assignable to anyone, with or without an insurable interest, at any time. The key distinction is that a third party cannot use the insured as a means or instrumentality to procure a policy that, when issued, would otherwise lack an insurable interest.”). The Trust misreads Dawe to stand for the proposition that, so long as, on paper, the insured funded the initial premium and did not have a “prearranged” agreement to sell the policy, the policy is valid. Contrary to this misinterpretation, the Dawe Court held that, under the Delaware Constitution, Delaware common law, and Delaware Insurance Code, insurable interest is a substantive requirement that requires more than mere “technical compliance” and which Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 20 of 31 PageID #: 105Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 21 of 32 PageID #: 311 17 cannot be papered around. Id. at 1078. Specifically, the Dawe Court concluded that a third- party cannot “use[]the insured as an instrumentality to procure the policy . . . .” Id. at 1074. “‘If the insured procures the policy at the behest of another, the policy may . . . lack a legally insurable interest.’” Id. at 1075 (quoting Rucker, 735 F. Supp. 2d at 140). Moreover, “if a third party financially induces the insured to procure a life insurance contract with the intent to immediately transfer the policy to a third party, the contract lacks an insurable interest. Stated differently, if an insured procures a policy as a mere cover for a wager, then the insurable interest requirement is not satisfied.” Id. The Dawe Court concluded that for the insurable interest requirement to be satisfied “either the individual insured or the trustee must intend to purchase the policy for lawful insurance purposes, and not as a cover for a waging contract.” Id. at 1078. In support of its claim that it is entitled to a declaration that the Policies are valid, the Trust asserts only that the Policies were “procured” by various insureds and issued to trusts “established” by the insureds, and that the beneficial interests in these trusts were sold to unidentified investors “shortly” after the policies were issued. See Counterclaim at ¶¶2, 30. In Dawe, the Delaware Supreme Court charged courts with “scrutiniz[ing] the circumstances under which the policy was issued” when examining whether an insurable interest exists. Dawe, 28 A.3d at 1076. The Dawe Court also held that a “bona fide insurance policy sale or assignment requires that the insured take out the policy in good faith-not as a cover for a wagering contract.” Id. Despite five pages listing various “facts” the Trust deemed relevant to establishing the validity of the Policies, the Trust did not provide this Court with information that is unquestionably within the Trust’s control and that was expressly identified by the Dawe Court as Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 21 of 31 PageID #: 106Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 22 of 32 PageID #: 312 18 critical to a court’s examination of insurable interest. For instance, the Trust does not allege what amount of the initial premium was allegedly paid by each insured, what specific dates the original beneficial interest transfer agreements were initiated and completed, what amount of money was paid in consideration for those transfers, and whether those figures included a “repayment” of the initial premiums allegedly paid by the insured. The Trust also does not make any allegations as to how, when, and from whom it acquired the Policies. The Trust also fails to make any allegations that the Policies were sought for legitimate insurance purposes or were otherwise obtained as part of a bona fide transaction and not as part of a cover for a wagering transaction. Instead, the Trust provides the Court only with conclusory allegations. Simply put, the Trust has failed to allege facts that, if true, would entitle them to a declaration that the Policies were issued with an insurable interest and has therefore failed to state a claim upon which relief could be granted. B. The Court Cannot Enforce Illegal Contracts The Trust seeks a declaratory judgment that Phoenix has waived its right to or is estopped from challenging the Policies as void ab initio. See Counterclaim at ¶ 51. The Trust also asserts a claim for promissory estoppel, asking the Court to enforce the Policies on the basis of equity. In making these claims, the Trust is essentially asking the Court to enforce a contract regardless of whether it is illegal and unconstitutional in nature. As a matter of public policy, courts may not enforce illegal or void contracts. See Dawe, 28 A.3d at 1067-68 (“Under Delaware common law, if a life insurance policy lacks an insurable interest at inception, it is void ab initio because it violates Delaware’s clear public policy against wagering.”); Lincoln Nat. Life Ins. Co. v. Joseph Schlanger 2006 Ins. Trust, 28 A.3d 436, 441 (D. Del. 2011) (“A court may never enforce agreements void ab initio, no matter what the intentions of the parties may be.”); see also Brine v. Fertitta, 537 So. 2d 113, 114 (Fla. Dist. Ct. App. 1988) (holding that a contract void as against Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 22 of 31 PageID #: 107Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 3 of 32 PageID #: 313 19 public policy cannot provide the basis for a claim for promissory estoppel). As the Court cannot grant the relief sought by the Trust, these claims must be dismissed. C. The Trust Has Failed to Set Forth Facts Sufficient to be Entitled to Relief on Any of its Tort Claims The Trust alleges claims for violations of the Delaware Consumer Fraud Act (“CFA”), for fraud, for negligent misrepresentation, and for breach of the duty of good faith and fair dealing. As detailed in the following sections, the Trust has failed to plead a claim upon which relief could be granted for any of these causes of action because the allegations contained in the Counterclaim are insufficient to allow this Court to “draw the reasonable inference that [Phoenix] is liable for the misconduct alleged” with respect to any of these claims, all of which should be dismissed. See Iqbal, 556 U.S. at 678; see also Twombly, 550 U.S. at 556; Phillips, 515 F.3d at 234. Although true with respect to the Griggs Policy as well, this is especially apparent with respect to the Unrelated Policies, as the only action the Trust alleges that Phoenix has taken with respect to the Unrelated Policies is accepting premium payments. While the Trust also makes conclusory allegations that Phoenix either intends to or is likely to contest the Unrelated Policies at some unspecified time in the future, these are insufficient to maintain a cause of action. More fundamentally, assuming arguendo that the denial of a claim could be sufficient to maintain any of these causes of action, Phoenix cannot be held liable in tort for something it might do in the future. Indeed, the Trust notably does not make an allegation that Phoenix has affirmatively stated that it intends to deny coverage-the Trust’s entire assertion on this issue is merely based on its belief that Phoenix may intend to do something. Unless and until Phoenix actually does something with respect to the Unrelated Policies, there is simply no basis to hold Phoenix liable in tort, and these claims must all be dismissed. Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 23 of 31 PageID #: 108Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 24 of 32 PageID #: 314 20 D. The Trust Has Failed to Set Forth a Claim Under the Delaware Consumer Fraud Act The Trust’s CFA claim appears to be based on an amorphous, conclusory theory that Phoenix should have known by 2007 that there were misrepresentations made in the applications for the Policies and that the Policies lacked an insurable interest but decided not to investigate the Policies as part of a plan to lull the Trust into paying additional premiums before Phoenix ultimately challenges the Policies. See Counterclaim at ¶¶ 53-56. Based on this convoluted theory, the Trust demands that Phoenix pay it $97,500,000 plus interest. It bears repeating at this point that Phoenix had not actually challenged any of the Unrelated Policies, is not alleged to have communicated that it will challenge any of the Unrelated Policies, and none of the individuals insured under any of the Unrelated Policies have died. With respect to both the Griggs Policy and the Unrelated Policies, the Trust has failed to set forth facts sufficient to support a cause of action upon which relief could be granted, and the CFA claims must be dismissed. a. The CFA Cannot Be Applied Extraterritorially Phoenix is a Connecticut insurance company with its principal place of business in Connecticut. Counterclaim at ¶ 9. By its express terms, the CFA applies only to fraudulent conduct that occurs within Delaware. See 6 Del. C. § 2512 (stating that the CFA applies only to conduct “in part or wholly within” the state); see also Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 901 A.2d 106, 117 (Del. 2006) (dismissing plaintiff’s claim under the CFA for failure to allege that conduct at issue took place in Delaware);. Nieves v. All Star Title, Inc., No. 10C-03-191 PLA, 2010 WL 2977966, at *5 (Del. Super. July 27, 2010) (noting that in determining whether a claim falls under the CFA the focus must be “on the location of the transaction and the defendant’s conduct.”). Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 24 of 31 PageID #: 109Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 25 of 32 PageID #: 315 21 In this case, Phoenix is alleged to have formulated some sort of plan to not investigate Policies only to later challenge them. See Counterclaim at ¶¶ 19, 22, 24, 25. Whatever the nature of the alleged plan, it must have been developed by Phoenix in Connecticut, as the Counterclaim does not allege that Phoenix took any actions in Delaware. The only connection to Delaware is the allegation that a Delaware Statutory Trust was harmed by the plan. This, however, is insufficient to establish liability under the CFA, as the wrongful conduct, not the harm, must have occurred in Delaware. See Wal-Mart Stores, Inc., 901 A.2d at 117. b. The Trust Has Not Alleged Wrongful Conduct in the Sale of the Policy as Required Under the CFA The CFA prohibits “the act, use or employment by any person of any deception, . . . misrepresentation, or the concealment, suppression, or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale . . . .” 6 Del. C. § 2513. By its express terms, the CFA only applies during the sale and does not apply after the sale has been completed. Id. Indeed, Delaware courts have held that post-sale representations are not actionable under the CFA as a matter of law. Norman Gershman's Things To Wear, Inc. v. Mercedes-Benz of N. Am., Inc., 558 A.2d 1066, 1074 (Del. Super. 1989). There is no allegation by the Trust of any false representation or concealment made by Phoenix in connection with the sale of the Policies. Rather, the allegation is that after the Policies were sold, Phoenix decided that it would eventually challenge the Policies but concealed this information from the Trust. This allegation does not constitute an actionable concealment under the CFA and must be dismissed. Moreover, even if the Court were to consider a post-sale concealment actionable, the Trust has provided only conclusory allegations of concealment and has failed to set forth actual Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 25 of 31 PageID #: 110Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 26 of 32 PageID #: 316 22 facts to support its assertion that Phoenix formed and concealed an intent to challenge the Policies. E. The Trust Fails to Allege Fraud With Particularity Rule 9 of the Federal Rules of Civil Procedure “requires plaintiffs to plead with particularity the circumstances of the alleged fraud in order to place the defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges.” Eames v. Nationwide Mut. Ins. Co., 412 F. Supp. 2d 431, 438 (D. Del. 2006); see also FED. R. CIV. P. Rule 9(b). Claims of fraudulent concealment are equally subject to the particularity requirement as fraudulent misrepresentation. Byrnes v. DeBolt Transfer, Inc., 741 F.2d 620, 626 (3d Cir. 1984) (noting that “fraud, and thus fraudulent concealment, must be pleaded with particularity”). The Trust alleges that Phoenix fraudulently concealed its intent to challenge the Policies in order to induce the Trust into paying premiums but provides no details regarding when this plan was formulated, who formulated the plan, what the details of the plan were, over what period of time the concealment is alleged to have occurred, and how the Trust discovered the concealment. The Trust’s allegations of fraud are pure speculation and are exactly the type of spurious allegation of fraudulent conduct that Rule 9 is designed to prevent. Eames, 412 F. Supp. 2d at 438. As the Trust has failed to plead the circumstances surrounding the allegedly fraudulent scheme with particularity, the Trust’s fraud claim should be dismissed. Id.11 11 Claims asserted pursuant to the CFA are also subject to the Rule 9 heightened standard of pleading. Eames, 412 F. Supp. 2d at 438. In Eames, the defendant argued in its motion to dismiss that the plaintiffs failed to plead the circumstances surrounding an alleged misrepresentation made and the particular harm suffered as a result. Id. The court agreed, holding that the complaint did not provide “any facts concerning what documents the [p]laintiffs received, or when or from whom they received such documents. Thus, the [c]omplaint fails to allege fraud with the particularity necessary to satisfy Rule 9(b).” Id. Accordingly, the Court Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 26 of 31 PageID #: 111Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 27 of 32 PageID #: 3 7 23 F. The Trust Fails to Set for Allegations Sufficient to Establish Fraud or Negligent Misrepresentations Under Delaware law, a negligent misrepresentation claim requires proof of (1) a defendant who owes plaintiff a pecuniary duty (2) failing to exercise reasonable care in communicating (3) false information that is (4) justifiably relied upon by plaintiff (5) resulting in a pecuniary loss. Outdoor Technologies, Inc. v. Allfirst Fin., Inc., No. CIV.A.99C-09-151-JRS, 2001 WL 541472, at *5 (Del. Super. Apr. 12, 2001). Fraud essentially requires these elements plus a defendant’s intent to deceive. Schmeusser v. Schmeusser, 559 A.2d 1294, 1297 (Del. 1989). As described above, the Trust seeks to hold Phoenix liable for its alleged concealment of an intent to challenge the Policies as void ab initio for lack of insurable interest at some future time. Counterclaim at ¶¶ 19, 22, 24, 25. The Trust alleges that Phoenix withheld this information with the intent that policy owners would continue to pay premiums. See id. at ¶ 19. The Trust claims that it relied on Phoenix’s silence in purchasing the Policies from prior owners and for paying premiums on the Policies. Id. at ¶ 65. Notwithstanding the fact that Phoenix has only contested one of the Policies-the Griggs Policy-and the Trust has not alleged that Phoenix has affirmatively stated any intent to challenge any of the Unrelated Policies, the Trust cannot establish that Phoenix owed it any duty to inform it of Phoenix’s alleged decision to challenge the Policies. Indeed, the Trust is asking the Court to hold that Phoenix owed the Trust a duty to investigate whether or not the Trust or its predecessors in interest perpetrated a fraud against Phoenix and obtained an illegal wagering policy, and then, if it determined such were the case, that Phoenix owed the Trust a duty to should dismiss the Trust’s counterclaim pursuant to the CFA, as the Trust has failed to meet the Rule 9 heightened pleading requirement and these claims should be dismissed. Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 27 of 31 PageID #: 112Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 28 of 32 PageID #: 318 24 inform the Trust that Phoenix had concluded that such policy was illegal. There is simply no support in the law for the creation of such a duty. Moreover, the Trust alleges that Phoenix began systematically challenging policies with characteristics similar to the Policies in 2008. Id. at ¶ 29. Although the Trust does not expressly articulate the circumstances by which it came to own the Policies, the only reasonable conclusion from the allegations present is that the Trust is a tertiary market purchaser, meaning the Trust did not purchase the Policies directly from the original owners and beneficiaries. See id. at ¶ 23. Indeed, the Trust acknowledges within its Counterclaim that, with respect to at least four of the Unrelated Policies, it did not purchase the Policies until at least sometime after mid-2010, well after when it alleges Phoenix began systematically and publically challenging the validity of STOLI policies through lawsuits. See id. at ¶ 28 n.5. As such, even if the Trust’s allegations in this regard were true, which they are not, by the Trust’s own theory, the Trust would have been well apprised of the potential that Phoenix may challenge the validity of the Policies at the time the Trust purchased the Policies. See id. at ¶ 28. This necessarily vitiates any claim of reliance, an essential element of both negligent misrepresentation and fraud. Finally, the fraud and negligent misrepresentation claims are based on conclusory and unsupported allegations that do not support a cause of action. See Iqbal, 556 U.S. at 678; Twombly, 550 U.S. at 556. G. The Trust’s Claim For Breach of the Duty of Good Faith and Fair Dealing Must Be Dismissed The court in Glasser held that bringing a declaratory judgment action seeking a declaration that a policy is void due to a lack of insurable interest is not a breach of the duty of good faith and fair dealing. 2010 WL 3023420, at *4. The Glasser court stated that it was “not persuaded that the mere initiation of a declaratory judgment action to determine rights and Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 28 of 31 PageID #: 113Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 29 of 32 PageID #: 319 25 obligations under an insurance contract is sufficient to state a claim for breach of the duty of good faith.” Id. The court noted that [t]he Delaware Supreme Court has stated that application of the implied duty of good faith should be a rare and fact-intensive exercise, governed solely by issues of compelling fairness. Only when it is clear from the writing that the contracting parties would have agreed to the act later complained of had they though to negotiate with respect to that matter may a party invoke the covenant’s protections . Id. (citations removed). Thus, with respect to the Griggs Policy, this claim must be dismissed. Moreover, with respect to all of the Policies, Delaware law is clear that the covenant of good faith and fair dealing cannot be invoked to override the express terms of the contract. Kuroda v. SPJS Holdings, L.L.C., 971 A.2d 872, 888 (Del. Ch. 2009) (dismissing plaintiff’s claim for breach of duty of good faith and fair dealing for failure to state a claim). Rather, it can “only be used conservatively to ensure the parties’ reasonable expectations are fulfilled.” Id. (citations removed). Thus, general allegations of bad faith conduct are not sufficient to maintain a cause of action for breach of the duty of good faith and fair dealing; rather, the claimant must allege a “specific implied contractual obligation.” Id. Accordingly, this implied covenant is rarely invoked successfully. Id.; see also Wal-Mart Stores, Inc., 901 A.2d at 116 (dismissing claim for breach of duty of good faith and fair dealing for failure to identify implied contract term). The Trust has failed to plead any facts which, taken as true, could lead the Court to infer that an implied contractual obligation in the Policies requires Phoenix to inform the Trust that it intends to challenge the Policies for lack of insurable interest. As such, the claim for breach of the implied covenant of good faith and fair dealing must be dismissed. Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 29 of 31 PageID #: 114Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 30 of 32 PageID #: 320 26 H. The Trust’s Bad Faith Claim Must Be Dismissed To establish a claim for bad faith, the Trust “must show that the insurer’s refusal to honors its contractual obligation was clearly without any reasonable justification.” Casson v. Nationwide Ins. Co., 455 A.2d 361, 369 (Del. Sup. Ct. 1982). Similarly, to establish an entitlement to punitive damages, the Trust must establish that Phoenix acted with “reckless indifference or malice” toward the Trust, or that Phoenix’s alleged breach of contract was particularly egregious. See E.I. DuPont de Nemours & Co. v. Pressman, 679 A.2d 436, 445-46 (Del. 1996). With respect to the Griggs Policy, the Trust has failed to set forth facts that, if true, would establish that Phoenix’s denial of the claim was anything more than an ordinary breach of contract. Therefore, its counterclaim for punitive damages for bad faith breach of contract must be dismissed. See Twombly, 550 U.S. at 555; see also FED. R. CIV. P. Rule 8(a)(2). V. PRAYER For the reasons stated above, Phoenix respectfully requests that the Court dismiss the Trust’s counterclaims for declaratory judgment, bad faith, violations of the Delaware Consumer Fraud Act, fraud, negligent misrepresentation, breach of the duty of good faith and fair dealing, and promissory estoppel, and grant Phoenix such other and further relief to which it may be justly entitled. Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 30 of 31 PageID #: 115Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 31 of 32 PageID #: 321 27 Respectfully submitted, /s/ Keith A. Walter Keith A. Walter (#4157) Daniel M. Attaway (#5130) CONNOLLY BOVE LODGE & HUTZ LLP The Nemours Building 1007 N. Orange Street PO Box 2207 Wilmington, DE 19899 Telephone: (302) 658-9141 Facsimile: (302) 658-5614 Email: KWalterJr@cblh.com Thomas F.A. Hetherington Jarrett E. Ganer EDISON, MCDOWELL & HETHERINGTON LLP Phoenix Tower 3200 Southwest Freeway, Suite 2100 Houston, Texas 77027 Telephone: (713) 337-5580 Attorney for Plaintiff/Counterclaim-Defendant PHL Variable Insurance Company Dated: June 29, 2012 Case 1:12-cv-00319-LPS Document 13 Filed 06/29/12 Page 31 of 31 PageID #: 116Case 1:17-cv-0 75-LPS Document 23-1 Filed 05/03/17 Page 32 of 32 PageID #: 322 EXHIBIT B Case 1:17-cv-00075-LPS Document 23-2 Filed 05/03/17 Page 1 of 16 PageID #: 323 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE PHL VARIABLE INSURANCE COMPANY, Plaintiff/ Counterclaim-Defendant, v. ESF QIF TRUST, by and through its trustee, DEUTSCHE BANK TRUST COMPANY, Defendant/ Counterclaim-Plaintiff. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) C.A. No.: 12-cv-319-LPS Jury Trial Demanded PLAINTIFF PHL VARIABLE INSURANCE COMPANY’S REPLY IN SUPPORT OF ITS MOTION TO DISMISS DEFENDANT ESF QIF TRUST’S COUNTERCLAIMS Keith A. Walter (#4157) Daniel Attaway (#5130) CONNOLLY BOVE LODGE & HUTZ LLP The Nemours Building 1007 N. Orange Street PO Box 2207 Wilmington, DE 19899 Telephone: (302) 658-9141 Facsimile: (302) 658-5614 Thomas F.A. Hetherington Jarrett E. Ganer EDISON, MCDOWELL & HETHERINGTON LLP Phoenix Tower 3200 Southwest Freeway, Suite 2100 Houston, Texas 77027 Telephone: (713) 337-5580 Counsel for Plaintiff/Counterclaim-Defendant PHL Variable Insurance Company Dated: August 6, 2012 Case 1:12-cv-00319-LPS Document 17 Filed 08/06/12 Page 1 of 15 PageID #: 248Case 1:17-cv-0 75-LPS Document 23-2 Filed 05/03/17 Page 2 of 16 PageID #: 324 i TABLE OF CONTENTS I. INTRODUCTION .............................................................................................................. 1 II. ARGUMENT ...................................................................................................................... 2 A. The Trust is Not Entitled to An Advisory Opinion .................................................. 2 1. CSSEL Bare Trust is Inapposite ..................................................................... 3 2. The Counterclaim Fails to Allege Sufficient Facts that the Policies are Valid .............................................................................. 4 B. The Trust’s Common Law and Statutory Claims Fail ............................................. 5 1. The Trust Fails to Allege a Misrepresentation ............................................... 5 2. The Trust Fails to State A Claim Under the Delaware Consumer Fraud Act ....................................................................................................... 7 3. The Trust Fails to Allege Facts Necessary to Support Claims for Bad Faith and Breach of the Duty of Good Faith and Fair Dealing .............. 8 4. Courts Cannot Enforce Illegal Contracts ....................................................... 9 5. The Trust Fails to Allege Damages ............................................................... 9 III. CONCLUSION ................................................................................................................. 10 IV. PRAYER ........................................................................................................................... 10 Case 1:12-cv-00319-LPS Document 17 Filed 08/06/12 Page 2 of 15 PageID #: 249Case 1:17-cv-0 75-LPS Document 23-2 Filed 05/03/17 Page 3 of 16 PageID #: 325 ii TABLE OF AUTHORITIES Cases Ayers v. Quillen, No. Civ. A. 03C-02-004-RFS, 2004 WL 1965866 (Del. Super. June 30, 2004) ................................................................. 7 Chiarella v. U.S., 445 U.S. 222 (1980) ............................................................................................................ 6 Coleman Dupont Homsey v. Vigilant Ins. Co., 496 F.Supp.2d 433 (D. Del. 2007) ...................................................................................... 8 ConAgra Foods, Inc. v. Lexington Insurance Company, No. 09C-02170 FSS, 2010 WL 663746 (Del. Super. Jan. 21, 2010). ................................. 9 CSSEL Bare Trust v. Phoenix Life Ins. Co., No 601002/09, 2011 WL 2941357 (N.Y. Sup. Ct. July 5, 2011) ................................... 3, 4 Encarnacao v. Phase Forward Inc., No. CV-11-05090 ODW (PLA), 2012 WL 404971 (C.D. Ca. Feb. 7, 2012) ..................... 5 Fulkerson v. MHC Operating Ltd., No. Civ. A. 01C-07-020, 2002 WL 32067510 (Del. Super. June 18, 2002) ............................................................... 8 Grace Holdings LP v. Sunshine Min. & Refining Co., 901 F. Supp. 853 (D. Del. 1995) ......................................................................................... 3 Grunstein v. Silva, No. 3932-VCN, 2009 WL 4698541 (Del. Ch. Dec. 8, 2009). ............................................ 6 Kuroda v. SPJS Holdings, L.L.C., 971 A.2d 872 (Del. Ch. 2009)......................................................................................... 6, 8 Lee ex rel. B.L. v. Picture People, Inc., No. K10C-07-002 (RBY), 2012 WL 1415471 (Del. Super. March 19, 2012) ................... 7 Medimmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007) ............................................................................................................ 2 Moore Corp. Ltd. v. Wallace Computer Services, Inc., 898 F. Supp. 1089 (D. Del. 1995) ....................................................................................... 3 Mut. Life Ins. Co. of N.Y. v. Phinney, 178 U.S. 3272 (1900) .......................................................................................................... 6 Case 1:12-cv-00319-LPS Document 17 Filed 08/06/12 Page 3 of 15 PageID #: 250Case 1:17-cv-0 75-LPS Document 23-2 Filed 05/03/17 Page 4 of 16 PageID #: 326 ii Nieves v. All Star Titles, Inc., No. 10C-03-191 PLA, 2010 WL 2977966 (Del. Super. July 27, 2010) .................................................................. 7 PHL Variable Insurance Company v. Price Dawe 2006 Insurance Trust, 28 A.3d 1069 (Del. 2011) ............................................................................................... 4, 9 Pinkert v. John J. Olivieri, P.A., No. CIV. A. 99-380-SLR, 2001 WL 641737 (D. Del. May 24, 2001) .......................................................................... 5 Pittsburgh Mack Sales & Serv., Inc. v. Int'l Union of Operating Engineers, Local Union No. 66, 580 F.3d 185 (3d Cir. 2009) .............................................................. 2 Preiser v. Newkirk, 422 U.S. 395 (1975) ............................................................................................................ 2 Sanders v. Apple Inc., 672 F.Supp.2d 978 (N.D. Cal. 2009) .................................................................................. 6 Step-Saver Data Systems, Inc. v. Wyse Tech., 912 F.2d 643 (3d Cir.1990)............................................................................................. 2, 3 Sykes v. Joseph O’Neal & Sons Auctioneers & Appraisers, No. Civ. A. 07-01-076, 2009 WL 2449259 (Del. Com. Pl. Aug. 11, 2009) ....................... 8 Statutes 6 Del. C. § 2512 .............................................................................................................................. 7 Case 1:12-cv-00319-LPS Document 17 Filed 08/06/12 Page 4 of 15 PageID #: 251Case 1:17-cv-0 75-LPS Document 23-2 Filed 05/03/17 Page 5 of 16 PageID #: 327 1 I. INTRODUCTION The Counterclaim filed by ESF QIF Trust, by and through its trustee, Deutsche Bank Trust Company Delaware (the “Trust”) [D.I. 8] is a thinly veiled attempt by an undisclosed life settlement investor to lock in profits through an advisory opinion from this Court. The Counterclaim is wholly reliant on the premise that Phoenix has an undisclosed intent to deny claims when insureds die, then to seek a judicial declaration that the policy in question is void, and finally to request judicial permission to retain policy premiums received. Yet, the premise cannot sustain the claims asserted for three independent reasons: 1) no Policy insured has died; as such, the Trust seeks a mere advisory opinion as to the parties’ rights should a Policy be in force when its insured dies; 2) Phoenix has no control over whether a Policy is void for lack of insurable interest; insurable interest is measured at the time of issuance; and 3) Phoenix has made no representations regarding an intent to deny claims or contest the validity of a Policy; the Trust’s entire theory is based simply on its belief as to what Phoenix’s intent may be. In its Opposition to Phoenix’s Motion to Dismiss (“Opposition”) [D.I. 15], the Trust asserts that Phoenix “plans or is likely” to assert that the Unrelated Policies are void because (a) according to the Trust, Steven Lockwood and/or Jonathon Berck had some involvement with roughly half of the Unrelated Policies, (b) four years ago, Phoenix brought lawsuits related to policies involving Lockwood, and (c) Phoenix has been party to a scattering of litigation since. The Trust asserts that these factors have soured the market’s appetite to purchase the Unrelated Policies and requests that this Court declare that the Unrelated Policies are valid to assuage potential investors’ concerns. This is a classic example of an advisory opinion. The Trust’s other claims similarly fail due to the lack of an actionable misrepresentation or breach. Case 1:12-cv-00319-LPS Document 17 Filed 08/06/12 Page 5 of 15 PageID #: 252Case 1:17-cv-0 75-LPS Document 23-2 Filed 05/03/17 Page 6 of 16 PageID #: 3 8 2 II. ARGUMENT A. The Trust is Not Entitled to An Advisory Opinion “Article III of the Constitution limits the ‘judicial power’ of the United States to the adjudication of ‘Cases’ or ‘Controversies.’ Courts enforce this requirement through several justiciability doctrines that ‘cluster about Article III.’ They include standing, ripeness, mootness, the political-question doctrine, and the prohibition on advisory opinions.” Pittsburgh Mack Sales & Serv., Inc. v. Int'l Union of Operating Engineers, Local Union No. 66, 580 F.3d 185, 190 (3d Cir. 2009) (citations omitted). As noted by the Trust, the Third Circuit outlined the ripeness test in Step-Saver Data Systems, Inc. v. Wyse Tech. 912 F.2d 643, 646 (3d Cir.1990).1 At its essence, the investors behind the Trust worry that they might have invested in a series of illegal life insurance transactions. Fearful that the spotlight of judicial scrutiny may one day fall on what amounts to a wager on human life, the Trust seeks an advisory opinion from this Court. Preiser v. Newkirk, 422 U.S. 395, 401 (1975) (references omitted); see also MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007) (references omitted) (“[T]here [must be] a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.”). The Trust does not allege that Phoenix has taken or threatened any action with respect to the Unrelated Policies. Instead, the Trust alleges only that Phoenix has an undisclosed intent to do so in the future and on that basis alone seeks a declaration that the Unrelated Policies are valid and that Phoenix must pay death benefits when the insureds die. The Trust makes vague allegations about Lockwood’s and 1 The Trust implies that cases cited by Phoenix predating Step-Saver are no longer authoritative. Opposition at 17. Such is not the case. Step-Saver did not represent a change in the law; rather, the Third Circuit simply gleaned from prior decisions (some, the same cases cited by Phoenix) what it considered the most important principles of ripeness: adversity of interests, conclusiveness of judicial judgment, and utility of judgment. Case 1:12-cv-00319-LPS Document 17 Filed 08/06/12 Page 6 of 15 PageID #: 253Case 1:17-cv-0 75-LPS Document 23-2 Filed 05/03/17 Page 7 of 16 PageID #: 329 3 Berck’s involvement in some of the Policies (though it does not identify which ones) and asserts that a justiciable controversy exists regarding the validity of the Policies. The Trust is mistaken. Under the three factors set forth in Step-Saver, the case is unripe.  Adversity of Interests: The Trust states that the Unrelated Policies are valid. Phoenix is not alleged to have taken a position to the contrary. The Trust asserts that Phoenix’s failure to take a position on the issue in the Motion to Dismiss is evidence of an ongoing dispute. This is a complete red-herring as it would be inappropriate for Phoenix to state such an opinion in a 12(b)(6) motion. Moreover, Phoenix’s belief regarding the validity of each Unrelated Policy is irrelevant. Either the Policies are valid or they are void, and, whatever the status, it is a result of events that transpired during contract formation. The Trust acknowledges that these events all took place years ago. Unless Phoenix takes an adverse position regarding the Policies, no actual case or controversy exists.  Conclusiveness: The Trust argues it can side-step the contingencies raised in Phoenix’s Motion by asserting that it is asking for a conclusive declaration. However, a “court must consider whether judicial action at the present time would amount to more than an advisory opinion based on a hypothetical set of facts.” Moore Corp. Ltd. v. Wallace Computer Services, Inc., 898 F. Supp. 1089, 1097 (D. Del. 1995). What the Trust seeks is a declaration that if a set of hypotheticals occurs, then a contingency will happen. This is not a conclusive result.  Utility: The Trust confuses legal utility with investment utility. See Grace Holdings LP v. Sunshine Min. & Refining Co., 901 F. Supp. 853, 860 (D. Del. 1995) (holding that defendant's refusal to take a position as to whether it will redeem the plaintiff's preferred stock does not constitute a present injury necessary to create a justiciable controversy). 1. CSSEL Bare Trust is Inapposite The Trust contends that its declaratory judgment counterclaim regarding the Unrelated Policies is ripe, even though Phoenix has not taken any action on the Unrelated Policies, because “future STOLI disputes between the Trust and Phoenix are imminent and real.” Opposition at 13. The Trust mistakenly relies upon CSSEL Bare Trust v. Phoenix Life Insurance Company and New York law in making this argument. See id. at 9-11. CSSEL Bare Trust, however, was a New York state trial court ruling, decided under New York procedural and substantive law, and involving unique circumstances. See CSSEL Bare Case 1:12-cv-00319-LPS Document 17 Filed 08/06/12 Page 7 of 15 PageID #: 254Case 1:17-cv-0 75-LPS Document 23-2 Filed 05/03/17 Page 8 of 16 PageID #: 330 4 Trust v. Phoenix Life Ins. Co., No 601002/09, 2011 WL 2941357 (N.Y. Sup. Ct. July 5, 2011). As the Delaware Supreme Court noted, New York insurance law is in many respects unique, especially as to contestability clauses and insurable interest requirements, which were central to the court’s decision in CSSEL Bare Trust. PHL Variable Insurance Company v. Price Dawe 2006 Insurance Trust, 28 A.3d 1069, 1075 (Del. 2011). This Court is not bound by a New York trial court’s decision applying inapplicable law to an inapplicable set of facts. 2. The Counterclaim Fails to Allege Sufficient Facts that the Policies are Valid Even if a justiciable controversy existed, the Trust fails to set forth facts that, if true, would entitle it to a declaration that the Policies are valid. In an unabashed attempt to limit the Delaware Supreme Court’s holding in PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Trust,2 the Trust asserts that the only fact necessary to determine the existence of an insurable interest is that the insured paid the initial policy premiums. The Trust goes so far as to contend that the facts regarding how the Trust came to own the Unrelated Policies are irrelevant. Opposition at 18. Yet, the Delaware Supreme Court charged courts with “scrutiniz[ing] the circumstances under which the policy was issued” when examining whether an insurable interest exists. Dawe, 28 A.3d at 1076. Dawe requires courts to look past mere “technical compliance” in determining the existence of an insurable interest. See id. at 1078. The identity of the premium payor is not dispositive to determining whether an insurable interest exists. Id. The requirement that courts scrutinize the so-called “laundry list” of circumstances that led to a policy’s creation is exactly what differentiates Delaware law from New York law, as set forth in Kramer v. Phoenix Life Insurance Company, and relied upon in CSSEL Bare Trust. Id. 2 Id. Case 1:12-cv-00319-LPS Document 17 Filed 08/06/12 Page 8 of 15 PageID #: 255Case 1:17-cv-0 75-LPS Document 23-2 Filed 05/03/17 Page 9 of 16 PageID #: 331 5 B. The Trust’s Common Law and Statutory Claims Fail The Trust bases its common law and statutory claims on a contention that Phoenix (1) encouraged brokers to place STOLI policies, (2) tracked suspected STOLI policies on a spreadsheet, and (3) has filed lawsuits seeking to void policies for lack of insurable interest. Even if true, the allegations give rise to no liability, as the Trust points to no misrepresentation by Phoenix, and cannot establish that Phoenix concealed anything from the Trust. Further, as noted in the Motion, the Trust failed to allege fraud with requisite particularity. 1. The Trust Fails to Allege a Misrepresentation The Trust cannot establish the most basic elements of fraud or negligent misrepresentation. The Trust asserts that it purchased the Policies in reliance on a belief that the Policies were valid. Opposition at 5, 24. The Trust admits that it did not purchase the Policies from Phoenix. The Trust does not allege that Phoenix made any representations in connection with the Trust’s purchase of the Policies. The Trust also asserts that Phoenix induced it to pay premiums even though Phoenix does not intend to pay claims. Id. at 24. To the extent Phoenix denies a claim that it is legally obligated to pay, it will be Phoenix’s breach of contract that causes the Trust’s damages. See Pinkert v. John J. Olivieri, P.A., No. CIV. A. 99-380-SLR, 2001 WL 641737, at *5 (D. Del. May 24, 2001) (“A breach of contract claim cannot be bootstrapped into a fraud claim merely by adding the words ‘fraudulently induced’ or alleging that the contracting parties never intended to perform.” (internal quotations omitted)). Of course, as none of the insureds have died, this is entirely speculative. Unless and until a breach occurs, the Trust has not suffered damages. The Trust also alleges that Phoenix fraudulently concealed a plan to deny hypothetical claims under the Policies. Opposition at 3, 22. The Trust couches this as a fraud claim, but it is, Case 1:12-cv-00319-LPS Document 17 Filed 08/06/12 Page 9 of 15 PageID #: 256Case 1: 7-cv-0 75-LPS Document 23-2 il 5/ 3/ 7 10 of 16 PageID #: 332 6 at best, either a representation regarding future performance or a claim for anticipatory repudiation of a contract. Representations regarding future performance are non-actionable. See, e.g., Grunstein v. Silva, No. 3932-VCN, 2009 WL 4698541, at *13 (Del. Ch. Dec. 8, 2009). Moreover, the Trust does not allege facts establishing the central element of a fraudulent concealment claim-a duty of disclosure obligating Phoenix to disclose any alleged secret intent to deny death claims. See, e.g., Chiarella v. U.S., 445 U.S. 222, 227-28 (1980) (“There must be a duty to disclose, however, for there to be a claim of fraud for failure to disclose.”). Further, Delaware law does not permit tort recovery for a breach of contract, reasoning that such expansive recovery would unjustifiably burden business interests. Kuroda v. SPJS Holdings, L.L.C., 971 A.2d 872, 889 (Del. Ch. 2009) (“Where, however, the plaintiff's claim arises solely from a breach of contract, the plaintiff ‘generally must sue in contract, and not in tort.’”). Here, the Trust alleges no non-economic losses in connection with its fraud claim and, indeed, it has none. Thus, it has not alleged a cognizable tort. To the extent Phoenix intends to-and actually does-breach the Policies, the Trust may pursue its contractual remedies. Moreover, even if the Trust alleged a representation regarding the Policies’ validity, as the Trust does not contend that any of the Policies are void, it appears that the Trust is alleging that Phoenix misrepresented Phoenix’s belief concerning the Policies’ validity. This is the very definition of a non-actionable legal opinion. See Mut. Life Ins. Co. of N.Y. v. Phinney, 178 U.S. 327, 328-42 (1900) (statement by insurance agent that policy had lapsed where, under applicable New York statute it had not, could not form basis of fraud claim because parties are “presumed, as a matter of law, to know [statutes’] legal effect and operation”). Case 1:12-cv-00319-LPS Document 17 Filed 08/06/12 Page 10 of 15 PageID #: 257Case 1:17-cv-0 75-LPS Document 23-2 Filed 05/03/17 Page 11 of 16 PageID #: 333 7 2. The Trust Fails to State A Claim Under the Delaware Consumer Fraud Act The Delaware Consumer Fraud Act (“CFA”) applies only to fraudulent conduct occurring in Delaware. See 6 Del. C. § 2512. The Trust claims that it meets this requirement, essentially because the Policies were issued to Delaware statutory trusts; thus, any fraudulent representations were made to Delaware trusts. See Opposition at 21. The mere fact that the injured parties are located in Delaware, however, is not sufficient to constitute a “nexus” to Delaware under the CFA. See Nieves v. All Star Titles, Inc., No. 10C-03-191 PLA, 2010 WL 2977966, at *5 (Del. Super. July 27, 2010). The court in Nieves dismissed the plaintiff’s CFA claim, even though he was a Delaware resident and the settlement involved property in Delaware. Id. The court focused instead on the defendant’s location in Maryland and that the defendant’s conduct occurred in Maryland. Id. The court concluded that the plaintiff failed to allege facts to support that the defendant “provided services or made any representations or omissions in Delaware.” Id. Similarly, Phoenix is a Connecticut company with its principal place of business in Connecticut. Counterclaim at ¶ 9. Any alleged conduct by Phoenix in developing a fraudulent plan occurred in Connecticut. That the subsequent harm the Trust claims it suffered occurred in Delaware has no bearing on the Court’s CFA analysis. Moreover, the Trust wrongly claims that post-sale misrepresentations can support a CFA claim. Opposition at 22. The single case to which it cites is contradicted by the great weight of Delaware law. See, e.g., Lee ex rel. B.L. v. Picture People, Inc., No. K10C-07-002 (RBY), 2012 WL 1415471, at *9 (Del. Super. March 19, 2012) (finding that statements made after signing of contract were “post-sale” and thus not “in connection with the sale or advertisement of the merchandise”); Ayers v. Quillen, No. Civ. A. 03C-02-004-RFS, 2004 WL 1965866, at *6 (Del. Super. June 30, 2004) (“[P]ost-sale representations do not constitute consumer fraud under the Case 1:12-cv-00319-LPS Document 17 Filed 08/06/12 Page 11 of 15 PageID #: 258Case 1:17-cv-0 75-LPS Document 23-2 Filed 05/03/17 Page 2 of 16 PageID #: 334 8 [CFA].”); Fulkerson v. MHC Operating Ltd., No. Civ. A. 01C-07-020, 2002 WL 32067510, at *3 (Del. Super. June 18, 2002) (same); Sykes v. Joseph O’Neal & Sons Auctioneers & Appraisers, No. Civ. A. 07-01-076, 2009 WL 2449259, at *6 (Del. Com. Pl. Aug. 11, 2009) (same). The conduct cited by the Trust, such as Phoenix’s alleged misrepresentations regarding its intention to “comply with its contractual obligations” each time it accepted premiums, occurred after the Policies’ issuance. See Opposition at 21. Accordingly, given the above, this Court should dismiss the Trust’s CFA counterclaim. 3. The Trust Fails to Allege Facts Necessary to Support Claims for Bad Faith and Breach of the Duty of Good Faith and Fair Dealing A breach of the duty of good faith and fair dealing only arises when there is a death claim; as such, it does not apply to the Unrelated Policies. See Coleman Dupont Homsey v. Vigilant Ins. Co., 496 F.Supp.2d 433, 437 (D. Del. 2007). Moreover, a claim for breach of the duty of good faith and fair dealing requires the invocation of a specific implied contractual obligation that does not override the express terms of the contract itself. Kuroda, 971 A.2d at 888. The Trust claims that Phoenix’s alleged failure to “investigate the Trust’s claims and pay the contractually due death benefits” is a breach of its duty of good faith and fair dealing to the Trust. Opposition at 25. The duty to investigate claims and pay benefits is not an implied obligation; it is an express obligation arising directly from the contract. Accordingly, this Court should grant Phoenix’s Motion. See Kuroda, 971 A.2d at 888 (“To the extent that Kuroda’s implied covenant is premised on the failure of defendants to pay money due under the contract, the claim must fail because the express terms of the contract will control such a claim.”). The Trust misstates the type of conduct that is liable in a bad faith insurance claim. As stated in ConAgra Foods, Inc. v. Lexington Insurance Company, cited in the Opposition, “[a] bad faith breach of insurance claim requires the insurer to have failed in bad faith to investigate or Case 1:12-cv-00319-LPS Document 17 Filed 08/06/12 Page 12 of 15 PageID #: 259Case 1:17-cv-0 75-LPS Document 23-2 Filed 05/03/17 Page 13 of 16 PageID #: 335 9 process the claim or to have delayed in its payment obligation.” No. 09C-02170 FSS, 2010 WL 663746, at *1 (Del. Super. Jan. 21, 2010). The Trust fails to make any such assertion, claiming instead that Phoenix’s alleged “fraudulent scheme” is in and of itself bad faith. See Opposition at 25-26. As such, the Trust fails to state a claim upon which relief can be granted. Finally, the Trust conflates its own arguments regarding bad faith and breach of duty of good faith and fair dealing. It claims that Phoenix cites Penn Mutual Life Insurance Company v. Barbara Glasser 2007 Insurance Trust to support the contention that initiation of an action for declaratory judgment constitutes bad faith. Opposition at 26. This is not the case. Phoenix relies upon Glasser as precedence that a declaratory judgment action does not constitute a breach of duty of good faith and fair dealing, a separate cause of action from bad faith. Motion at 24-25. 4. Courts Cannot Enforce Illegal Contracts The Trust asks for an order requiring, under theories of equitable estoppel and waiver, enforcement of the Policies, regardless of validity. Yet, contracts lacking an insurable interest cannot be enforced. See, e.g., Dawe, 28 A.3d at 1067 (“A court may never enforce agreements void ab initio, no matter what the intentions of the parties.”). As such, these claims fail. 5. The Trust Fails to Allege Damages The Trust claims it has suffered damages, and will continue to suffer damages, as a result of Phoenix’s actions, due to a loss of market value. Any claim that the market’s devaluation of the Policies is caused by Phoenix’s secret intent is a vassal argument. The original Policy owners contracted with Phoenix for insurance coverage, not for an assurance as to the Policies’ market value. Phoenix is not a guarantor of secondary market value and is not alleged to have any obligation to support the Policies’ value on the secondary market. Phoenix’s alleged secret plan, not disclosed to anyone nor affirmatively represented to the Trust, simply could not Case 1:12-cv-00319-LPS Document 17 Filed 08/06/12 Page 13 of 15 PageID #: 260Case 1:17-cv-0 75-LPS Document 23-2 Filed 05/03/17 Page 14 of 16 PageID #: 336 10 proximately cause any injury, and the assertion that it could is far too nebulous to be a proximate cause of any fluctuation within the market. Finally, whether it relates to paying premiums or the market’s valuation of the Policies, to the extent that the Trust’s damages stand and fall based on whether the Policies are void or valid, their “damages” are caused not by Phoenix, but by the inherent legal condition of the Policies themselves at the time of issuance. III. CONCLUSION The Trust asks this Court to issue a guaranty that if a life insurance policy happens to be in force when an insured dies that Phoenix will pay the death benefits, regardless of whether the policy is legally void. All of this to avoid a secret scheme by Phoenix to look to courts for guidance if questions arise regarding a Policy’s validity. Because no insured has died, because nothing Phoenix does today can impact whether the Policies are valid or void, and because Phoenix cannot be liable for any secret plan to look to the Courts for guidance on whether a policy might be valid or void, this Court should dismiss the Trust’s Counterclaims noted above. IV. PRAYER For the foregoing reasons, Phoenix respectfully requests that the Court dismiss the Trust’s Counterclaims for declaratory judgment, bad faith, violations of the Delaware Consumer Fraud Act, fraud, negligent misrepresentation, breach of the duty of good faith and fair dealing, and promissory estoppel, and grant Phoenix such other relief to which it may be justly entitled. Case 1:12-cv-00319-LPS Document 17 Filed 08/06/12 Page 14 of 15 PageID #: 261Case 1:17-cv-0 75-LPS Document 23-2 Filed 05/03/17 Page 15 of 16 PageID #: 337 11 Dated: August 6, 2012 Respectfully submitted, /s/ Keith A. Walter Keith A. Walter (#4157) Daniel Attaway (#5130) CONNOLLY BOVE LODGE & HUTZ LLP The Nemours Building 1007 N. Orange Street P.O. Box 2207 Wilmington, DE 19899 Telephone: (302) 658-9141 Facsimile: (302) 658-5614 Email: KWalterJr@cblh.com Thomas F.A. Hetherington Jarrett E. Ganer EDISON, MCDOWELL & HETHERINGTON LLP Phoenix Tower 3200 Southwest Freeway, Suite 2100 Houston, Texas 77027 Telephone: (713) 337-5580 Counsel for Plaintiff/Counterclaim-Defendant PHL Variable Insurance Company 4947746_1 Case 1:12-cv-00319-LPS Document 17 Filed 08/06/12 Page 15 of 15 PageID #: 262Case 1:17-cv-0 75-LPS Document 23-2 Filed 05/03/17 Page 16 of 16 PageID #: 338