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SPV-LS, LLC v. Transamerica Life Insurance Co.

United States District Court, D. South Dakota, Southern Division

April 14, 2016

SPV-LS, LLC, Plaintiff,
v.
TRANSAMERICA LIFE INSURANCE COMPANY, Defendant and Third-Party Plaintiff,
v.
NACHMAN BERGMAN, Trustee of the N Bergman Insurance Trust; MALKA SILBERMAN, Successor Trustee of the N Bergman Insurance Trust; LIFE TRADING TRUST; T-LEG LLC aka TLEG LLC; FINANCIAL LIFE SERVICES LLC; SPV II LLC; and THE REPRESENTATIVE OF THE ESTATE OF NANCY BERGMAN, Third-Party Defendants.

MEMORANDUM OPINION AND ORDER ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

Lawrence L. Piersol United States District Judge

Pending before the Court is Plaintiff SPV-LS, LLC's motion for summary judgment, Doc. 134. Through the motion, SPV requests this Court find that New York insurance law, as opposed to New Jersey insurance law, applies in the circumstances of this case. For reasons explained herein, New York law is applied and the motion is granted. The facts below were taken, in large part, from a previous Memorandum Opinion and Order of this Court, Doc. 78.

BACKGROUND

In 2007, Transamerica issued to the N Bergman Insurance Trust, which was established under the laws of New York, a life insurance policy insuring the life of Nancy Bergman, a New York resident, for $10 million (the Policy). The original owner of the policy was The N Bergman Insurance Trust dated December 18, 2006 (the Trust). In 2007, Nachman Bergman ("Nachman") as trustee of the trust, signed an Application Amendment form as "owner" of the policy. As trustee, Nachman provided a New York address as the primary address at which Nachman was to be contacted. Nachman and Malka Silberman (the trustees) are named in this lawsuit as trustee and successor trustee, respectively, of the Trust. Malka Silberman ("Silberman") is also a New York resident. They aver that Nachman was the original trustee of the Trust until Silberman took over as trustee in 2008.

In 2009, the principal of Financial Life Services (FLS), Michael Krasnerman, began negotiating the purchase of the Policy from the Trust. FLS is registered to do business in New York. Krasnerman thought he was dealing with Nachman, but Nachman denies it was him. In any event, FLS entered into an agreement to purchase the Policy in New York. After executing a purchase agreement, Mr. Krasnerman learned that the Trust had not paid recent premiums, and also that Ms. Bergman's life expectancy was longer than had initially been reported by the Trust. FLS attempted to rescind the contract. A lawsuit was filed against the Trust in the Eastern District of New York. Default was entered after the Trust failed to answer. Ultimately the court directed a sale of the Policy at auction, and the auction was completed in June 2012. FLS submitted the only bid, in the amount of $1, 194, 522.00. The Policy eventually was transferred to Plaintiff SPV, a Delaware limited liability company owned and controlled by a trust in South Dakota. SPV asserts ownership of the Policy. None of the persons or entities publicly associated with the Policy has a connection to New Jersey. The only connection New Jersey has to this case is in the form of Nancy Bergman's application for the Policy. In the application, the "Application State" is listed as New Jersey. Declaration of Gerald L. Kroll, Doc. 156-2 at 2.

Nancy Bergman died on April 6, 2014. On May 29, 2014, SPV submitted a claim for benefits to Transamerica. Transamerica declined to pay because it received an adverse claim for the proceeds from Silberman. SPV commenced this action on June 13, 2014, alleging a breach of contract claim against Transamerica and demanding payment of the Policy proceeds. On June 17, 2014, Transamerica filed its answer to SPV's complaint and its counterclaim and third-party complaint for statutory interpleader under 28 U.S.C. § 1335, asking this Court to determine the rights of SPV and the third-party defendants to the Policy proceeds. On July 24 and 25, 2014, Silberman and Nachman admitted service and acknowledged that they needed to file an answer or other response to Transamerica's interpleader complaint no later than August 28, 2014.

On March 30, 2015, this Court entered an Order, Doc. 78, resolving, at least temporarily, the parties' then pending motions, which included a motion for summary judgment, Doc. 19, from SPV. On December 1, 2015, SPV filed a second motion for summary judgment, Doc. 134. In this motion for summary judgment, SPV asks this Court to find that New York law, as opposed to New Jersey law, applies to the facts of this case. According to SPV, under New York law, stranger-originated life insurance policies ("STOLI"), which the Estate of Nancy Bergman (the "Estate") claims the Policy is, are not prohibited. See, infra, note 3 and accompanying text for the definition of a STOLI. In opposition, the Estate argues that the laws of New York and New Jersey do not conflict and that, under either States' laws, STOLI policies are prohibited. The motion has been fully briefed and the Court will address the issues.

STANDARD OF REVIEW

Summary judgment is proper "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). "A party asserting that a fact cannot be . . . disputed must support the assertion" either by "citing to particular parts of materials in the record, " or by "showing that the materials cited do not establish the . . . presence of a genuine dispute[.]" Fed.R.Civ.P. 56(c)(1)(A)-(B). "The movant can also establish the absence of a disputed material fact by showing 'that an adverse party cannot produce admissible evidence to support the fact.'" Jensen v. Hy-Vee Corp., No. CIV. 09-4057-KES, 2011 WL 1832997, at *1 (D.S.D. May 13, 2011) (quoting Fed.R.Civ.P 56(c)(1)(B)). "The burden is initially placed on the moving party to establish the absence of a genuine issue of material fact and that the party is entitled to judgment as a matter of law." Id. (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). Once the party seeking summary judgment has met this initial burden, the burden then shifts to the non-moving party who must demonstrate "that a fact... is genuinely disputed" either "by citing to particular parts of materials in the record, " or by "showing that the materials cited do not establish the absence ... of a genuine dispute." Fed.R.Civ.P 56(c)(l)(A)-(B). "For purposes of summary judgment, the facts, and inferences drawn from those facts, are 'viewed in the light most favorable to the party opposing the motion.'" Jensen, 2011 WL 1832997, at *2 (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)).

DISCUSSION

This Court must determine which States' laws apply in this case. In a diversity action, the federal district court applies the choice of law rules of the State in which the court sits. See Mendonca v. Winckler, No. CIV 12-5007-JLV, 2013 WL 6528854, at *5 (D.S.D. Dec. 11, 2013) (citing Restatement (Second) Conflicts of Laws § 6(1) (1971)) ("A forum court applies its own conflict of laws rules."); 2004 Stuart Moldaw Trust v. XE L.I.F.E., LLC, 642 F.Supp.2d 226, 232 (S.D.NY. 2009), affirmed by 374 Fed.Appx. 78 (2nd Cir. 2010) (citing Klaxon Co v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941)) ("In this diversity action, the Court must apply the choice of law rules of New York, the forum state."). Thus, South Dakota conflicts of laws analysis applies here. First, a court must determine if an actual conflict of laws exists. Prudential Ins. Co. of America v. Kamrath, 475 F.3d 920, 924 (8th Cir. 2007) (citation omitted). Second, if a conflict does exist, the court then applies the relevant "most significant relationship" approach of the Restatement (Second) of Conflict of Laws. See Burhenn v. Dennis Supply Co., 685 N.W.2d 778, 784 (S.D. 2004) (citing Rothluebbers v. Obee, 668 N.W.2d 313, 320-21 (S.D. 2003); Chambers v. Dakotah Center, Inc., 488 N.W.2d 63, 68 (S.D. 1992)) ("It is well-settled that South Dakota employs the most significant relationship test when determining choice of law questions."); Andrews v. Ridco, Inc., 863 N.W.2d 540, 554 (S.D. 2015) (quoting Chambers, 488 N.W.2d at 67) (noting that, under Chambers, "[the South Dakota Supreme Court] adopted 'the most significant relationship approach [of Restatement (Second) of Conflict of Laws § 145] to govern multi-state tort conflicts.'" The Ridco court then applied Restatement (Second) of Conflict of Laws § 139's "most significant relationship" test to an attorney-client privilege issue); Dunes Hospitality, LLC v. Country Kitchen Intern., Inc., 623 N.W.2d 484, 488-89 (S.D. 2001) (applying Restatement (Second) of Conflict of Laws § 187 to a dispute stemming from a settlement agreement).

The competing States at issue are New York and New Jersey. SPV argues that New York law applies, which, it argues, does not bar STOLI arrangements, Plaintiffs Brief in Support, Doc. 138, at 2, and the Estate argues that the laws do not conflict; STOLIs are prohibited under either statutory scheme. Third-Party Defendants' Brief in Opposition, Doc. 154, at 7-8. The applicable New York law is New York Insurance Law (NYIL) § 3205(b)(l)-(2), (4).[1]Interpreting NYIL § 3205(b)(l)-(2), the New York Court of Appeals, New York's high court, has held that the owner of a life insurance policy need not have an insurable interest in the person insured. Integrated into NYIL § 3205(b)(l)-(2) is a "common-law rule that a policy valid at the time of procurement may be assigned to one without an insurable interest in the insured's life and, relatedly, no insurable interest is required when one holds a policy in another's life, so long as the policy was 'valid in its inception.'" Kramer v. Phoenix Life Ins. Co., 15 N.Y.3d 539, 551 (N.Y. 2010) (quoting Olmsted v. Keyes, 85 N.Y. 593, 598 (1881)). The Kramer decision was in response to a question certified from the United States Court of Appeals for the Second Circuit. The Kramer court further explained that NYIL § 3205(b)(1) permits '"a person of lawful age who has procured a contract of insurance upon his or her own life to immediately transfer or assign the contract, and does not require the assignee to have an insurable interest.'" Id. (quoting Hota v. Camaj, 299 A.D.2d 453, 453 (N.Y.App.Div. 2002)). Thus, under New York law, at the time Nancy Bergman entered into the insurance agreement, [2] an insured was not prohibited from procuring an insurance policy with the intent to immediately assign[3] the policy to someone else, so long as the policy was valid at its inception, i.e., had an insurable interest when first created.

As in New York, under New Jersey law, "an insurable interest [must] exist at the time a life insurance policy is issued." Lincoln Nat. Life. Ins. Co. v. Calhoun, 596 F.Supp.2d 882, 889 (D.N.J. 2009) (citing N.J.S.A. § 17B:24-l.l(b)[4]). Additionally, New Jersey law, like New York, does permit an insured to transfer ownership of the policy to one lacking an insurable interest. According to a New Jersey federal district court, however, New Jersey law goes a step further: "Insureds begin to run afoul of the insurable interest requirement [] when they intend at the time of the policy's issuance, to profit by transferring the policy to a stranger with no insurable interest at the expiration of the contestability period." Id. As of the Calhoun decision, however, neither the New Jersey Supreme Court nor the Third Circuit had been faced with similar circumstances. In addition, Calhoun predated Kramer. Given that, at the time of Kramer, both New York's and New Jersey's insurance laws were not materially distinguishable, compare NYIL § 3205(b)(2) with N.J.S.A. § 17B:24-1.1(b), this Court concludes that the Calhoun court would have found Kramer persuasive. In fact, in Calhoun, the New Jersey district court was comparing the insurance laws of New Jersey and California.[5] In so comparing, the Calhoun court noted that both states required that an insurable interest exist at the time of the policy's issuance and that an insured may transfer ownership of the policy to one without an insurable interest. Calhoun, 596 F.Supp.2d at 889. Based on the Kramer opinion, New York had the same requirements as New Jersey and California. See Kramer, 15 N.Y.3d at 550-51.

The New Jersey district court returned to the same issues it confronted in Calhoun in Lincoln National Life Ins. Co. v. Schwarz, No. 09-0336l(FLW), 2010 WL 3283550 (D.N.J. August 18, 2010). Also predating Kramer, the Schwarz court compared the laws of New Jersey and New York. Finding the laws of the two states not materially distinguishable, the Schwarz court noted that both states (1) required an insurable interest at a policy's inception and (2) permitted an insured to transfer the policy to one without an insurable interest. Schwarz, 2010 WL 3283550, at *6. Applying Calhoun as to New Jersey law, the Schwarz court also concluded that, under both New York and New Jersey insurance law, insureds violate the insurable interest requirement when, at the time of the policy's issuance, the insured intends to transfer the policy to one without an insurable interest. Id. For this proposition, the Schwarz court cited both the Calhoun decision and NYIL § 3205(b)(2) and Warnock v. Davis, 104 U.S. 775, 779, 26 L.Ed. 924 (1881) and New England Mut. Life Ins. Co. v. Caruso, 73 N.Y.2d 74, 77-78, 538 N.Y.S.2d. 217, 535 N.E.2d 270 (N.Y. 1989). Warnock was relied upon by the dissenters in Kramer. The Schwarz conclusions as to New York law are dicta as New Jersey law was applied for the holding. Based on Kramer, however, it is plain that the New York Court of Appeals would have found otherwise. See Principal Life Ins. Co. v. DeRose, No. 1:08-CV-2294, 2011 WL 4738114, at *7 (W.D. Penn. Oct. 5, 2011) (quoting Kramer, 15 ...


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