PHILIP G. REINHARD, District Judge.
For the reasons stated below, the portion of plaintiff's motion [32] directed to striking the first through thirteenth and the fifteenth affirmative defenses is denied as to the sixth, seventh and eighth affirmative defenses to the extent they relate to a return of premiums paid. Otherwise, the request to strike the first through thirteenth and the fifteenth affirmative defenses is granted. Plaintiff's motion to dismiss Counts I and II of the counterclaim are denied. Plaintiff's motion to dismiss Count III of the counter claim is granted. Plaintiff's motion to dismiss Count IV of the counterclaim is granted in part and denied in part. It is denied to the extent that Count IV seeks restitution for premiums paid by the Bank and otherwise is granted. Nelsen's motion [40] to dismiss is denied.
Plaintiff, Sun Life Assurance Company of Canada (a Canadian corporation with its principal place of business in Massachusetts), brings this action against Wells Fargo Bank, N.A., as securities intermediary ("Bank") (a national banking association with its main office as designated in its articles of association in South Dakota), and Frank Nelsen
Robert Corwell died on June 25, 2017. At the time of his death, the Bank, as securities intermediary, was the owner and beneficiary of a five million dollar insurance policy on Corwell's life issued by plaintiff in August 2006. In July 2017, the Bank submitted a death benefit claim. Plaintiff did not pay the claim or tell the Bank that it was denying the claim. Instead, on September 12, 2017, plaintiff filed this action, which as to the Bank, asks for a declaratory judgment that the policy was void ab initio as an illegal wager on human life because the policy was procured by persons who lacked an insurable interest in Corwell's life. Under controlling Illinois law, a policy procured by persons with no insurable interest in the life of the insured is void at its inception (ab initio).
In response to plaintiff's complaint, the Bank filed an answer, including affirmative defenses, and counterclaims asserting breach of contract (CC Count I), a statutory claim under 215 ILCS 5/155 (CC Count II) and in the event plaintiff succeeds in obtaining a declaration the policy was void ab initio, a claim for refund of premiums (CC Count III), and for restitution of premiums paid under an unjust enrichment theory (CC Count IV). Plaintiff moves to strike all but one of the affirmative defenses and to dismiss the counterclaims, arguing that plaintiff's declaratory judgment action bars the Bank from claiming breach of contract (CC Count I) and a vexatious and unreasonable refusal to pay under 215 ILCS 5/155(1) (CC Count II). Plaintiff argues CC Counts III and IV must be dismissed because a return of premiums is not allowed under Illinois law for a policy that is void ab initio and that, to the extent the Bank may be entitled to a refund on an unjust enrichment theory per
The Bank raises fifteen affirmative defenses. Plaintiff moves to strike all of the affirmative defenses except one, the fourteenth, which asserts plaintiff's claim to retain the premiums is barred by unjust enrichment. The Bank does not contest the motion to strike as to the first, tenth, twelfth, or fifteenth affirmative defenses and, therefore, they are stricken. Additionally, the Bank makes no argument in support of the ninth, eleventh, and thirteenth affirmative defenses. These three affirmative defenses relate to plaintiff's damages but, as plaintiff observes, it is not seeking damages against the Bank. These three affirmative defenses are also stricken. That leaves the second through eighth affirmative defenses in dispute.
In its complaint, what plaintiff seeks against the Bank is a determination that the policy was procured by parties with no insurable interest in Corwell's life. Such a policy is void at its inception (ab initio) under Illinois law.
The Bank's second affirmative defense asserts plaintiff's claim is barred by the applicable statute of limitations and/or by the policy's incontestability period. In its argument, the Bank addresses only the incontestability issue. It argues that if the policy is found to be valid (i.e. not void ab initio), then the incontestability provision of the policy bars plaintiff from challenging the policy. Plaintiff does not dispute this, acknowledging that if the policy is found to be valid (i.e. not void ab initio), then the Bank "would have already prevailed on the merits" and "the affirmative defense would be moot." The Bank acknowledges that if a policy is found to be void ab initio, then it is not subject to an incontestability clause contained in the policy. Therefore, there is no disagreement between plaintiff and the Bank on this point. If the policy never came into existence, there is no policy and, necessarily, no incontestability provision. If the policy did come into existence, the Bank is entitled to enforce it. The second affirmative defense, therefore, is moot.
The Bank's third affirmative defense is that plaintiff's "purported claim for rescission (and/or declaratory relief)" is barred by ratification. However, plaintiff is not seeking rescission and if it establishes the policy was void ab initio, the policy cannot be ratified by either party.
The Bank's fourth affirmative defense asserts plaintiff's claim is barred for failing to make an election of remedies by seeking to "rescind and/or void the policy" and return the parties to the status quo ante by returning all premiums paid to date. However, when a contract is found to be void ab initio, the court does not return the parties to the status quo ante but leaves them where it finds them in the position they have placed themselves with no recovery of money paid for illegal services.
The Bank's sixth (estoppel), seventh (laches), and eighth (unclean hands) affirmative defenses all go to the Bank's claim plaintiff knew long before Corwell's death that it was going to attack the policy as void ab initio but that, despite that knowledge, plaintiff took no action prior to Corwell's death in order to dupe the Bank into continuing to pay the premiums which plaintiff knew it would be able to retain if it succeeded in having the policy declared void ab initio. Under Illinois law, even if this proves to be true, plaintiff's wrongful conduct does not make a contract that was void at inception enforceable. The Bank, however, may be entitled to equitable relief of restitution for premiums innocently paid. If the Bank was not in pari delicto as to the unlawful contract, then Illinois allows it to recover from plaintiff the premiums it paid.
Fed. R. Civ. P. 13(a)(1)(A) requires that a pleading must state as a counterclaim any claim the pleader has against an opposing party if the claim "arises out of the transaction or occurrence that is the subject matter of the opposing party's claim. "[W]hen an insurer sues for a declaratory judgment of nonliability, the insured must plead his claim under the policy as a Rule 13(a) counterclaim." 6 Wright and Miller, Federal Practice and Procedure Civil 3d § 1410.1. Pursuant to Rule 13(a), the Bank has filed a counterclaim pleading its claim under the policy to the death benefit asserting breach by plaintiff (CC Count I). The Bank also seeks to recover under 215 ILCS 5/155(1) for a vexatious and unreasonable action or delay by plaintiff concerning payment of the death benefit (CC Count II).
The counterclaim alleges plaintiff issued a $5 million life insurance policy to Corwell with the Corwell Family Limited Partnership as beneficiary. The partners of the Corwell Family Limited Partnership, which had been established in 1993, were Corwell, his wife, and his children. The initial premium payment in the amount of $147,059.49 was made with a check drawn on a Corwell Family Limited Partnership account. In September 2006, the Robert M. Corwell 2006 Insurance Trust became the owner and beneficiary. Corwell's wife was co-trustee and beneficiary of this trust. In August 2009, the Bank became the owner and beneficiary. Plaintiff recorded and recognized the Bank was the sole owner and beneficiary of the policy. All of the premiums were paid throughout the term of the policy. Corwell died in 2017. The Bank provided proof of death and filed a death benefit claim. Plaintiff refused to pay the Bank the death benefit even though the Bank had performed all that was required of it under the policy.
The Bank has alleged the existence of a contract, the Bank's performance, and plaintiff's breach resulting in damage to the Bank. These are the elements of a breach of contract claim in Illinois.
Addressing first CC Count II, the filing of a declaratory judgment action by an insurer can be a vexatious and unreasonable action supporting an award under 215 ILCS 5/155(1). The statute's language is clear on this point when it states "[i]n any action by . . . [an insurance] company wherein there is in issue the liability of a company on a policy . . . and it appears to the court that such action . . . is vexatious and unreasonable the court may allow as part of the taxable costs in the action reasonable attorney fees, other costs plus [statutory penalties]." 215 ILCS 5/155(1);
Taking the allegations and drawing all inferences favorably to the Bank for purposes of this motion to dismiss, plaintiff knew the policy was validly issued with Corwell as the owner and the Corwell Family Limited Partnership (with the partners being Corwell, his wife and children) as the beneficiary and that ownership and the beneficial interest in the policy was assigned, with plaintiff's consent, in September 2006 to the Robert M. Corwell 2006 Insurance Trust of which Corwell's wife was co-trustee and beneficiary. Thus, plaintiff knew the policy was not void ab initio because it knew the policy was procured by and owned by an individual or entity with an insurable interest in Corwell's life at inception and for three years after the policy was issued. The counterclaim, therefore, states a claim that plaintiff's decision to delay paying the claim and its decision to file this declaratory judgment action were vexatious and unreasonable since plaintiff knew its claim that the policy was void ab initio was not true.
Turning to CC Count I, the policy provides that the "Policy Proceeds will be paid in a lump sum upon our receipt of Due Proof of the Insured's death." "Due Proof" is defined in the policy as "[s]uch evidence as we may reasonably require in order to establish that the Policy Proceeds or any other benefits are due and payable." Illinois law provides that for a death claim "settlement shall be made upon receipt of due proof of death and not later than 2 months after receipt of such proof." 215 ILCS 5/224(1)(j). Drawing all inferences in favor of the Bank, the evidence plaintiff had in its possession (that an insurable interest was present at inception and for three years thereafter) demonstrated the policy was valid at inception, and, therefore, Due Proof had been presented. The proceeds were not paid within two months of Due Proof being presented. Therefore, plaintiff breached the contract by refusing or delaying payment since it had all the evidence it could "reasonably require."
Also, normally, a declaratory action would not take precedence over a substantive action. The exercise of jurisdiction by a district court under the Declaratory Judgment Act (28 U.S.C. § 2201) is discretionary not obligatory.
Count III of the counterclaim seeks a refund of all premiums paid to plaintiff if the policy is found to be void. Count IV of the counterclaim seeks restitution on an unjust enrichment theory of all premiums paid to plaintiff if the policy is found void. As noted above in the discussion of affirmative defenses, if the policy is found to be void ab initio, the Bank may be entitled to restitution for premiums paid by the Bank if the Bank is found not to have been in pari delicto as to the unlawful contract.
In addition to suing the Bank, plaintiff also sues defendant Nelsen, an insurance producer for fraudulent inducement (Count III), fraud (Count IV), negligent misrepresentation (Count V), and breach of contract (Count VI) relating to the issuance of the policy. Nelsen moves to dismiss the claims against him arguing the policy's incontestability provision bars the suit and that the complaint does not meet the pleading requirements of Fed. R. Civ. P. 9(b).
Where a policy is void ab initio, the incontestability provision never comes into play because the policy is treated like it never existed.
Moreover, Nelsen is not a party to the insurance policy nor an intended beneficiary of it and, therefore, cannot invoke the incontestability clause. Under Illinois law, there is a strong presumption "that the contracting parties intend that the terms of their agreement apply only to them, not to others. Even the fact that the contracting parties may have known, expected, or even intended that others would indirectly benefit from their agreement is not enough to overcome the presumption that the contract was intended only to directly benefit the contracting parties. Only direct beneficiaries have rights against the promisor and incidental beneficiaries have no rights whatsoever. If the contract does not identify [an individual] by name or the class to which he belongs, then [the individual] is not a third-party beneficiary of the contract."
Nelsen also argues the complaint fails to meet the pleading standard of Fed. R. Civ. P. 9(b). Rule 9(b) provides: "In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." This standard "ordinarily requires describing the `who, what, when, where and how' of the fraud."
Plaintiff has met the requirements of Rule 9(b). Plaintiff alleges that Nelsen made knowingly false statements and representations and intentional omissions of material facts to induce plaintiff to issue a policy it otherwise would not have issued on Corwell's life. These misrepresentations and omissions are alleged to include misrepresenting the source of the premium payments as Corwell himself, that the purpose of the insurance was primarily for estate planning, that the premiums would not be funded by a premium finance loan either at issuance or in the future and failing to disclose that Corwell had previously been included in a life settlement transaction, that there had been discussions about transferring the policy to an investor group or other third party within five years of issuance and that Corwell had previously had a policy underwritten by a life settlement company. The misrepresentations and omissions occurred in Corwell's application for insurance which was signed by Nelsen and in the "Life Insurance Source of Premium Eligibility Worksheet" executed by Nelsen. Plaintiff alleges it reasonably relied on Nelsen's misrepresentations and omission and was damaged thereby. Plaintiff further alleges that these misrepresentations and omissions by Nelsen violated the duty of care he, as a licensed insurance producer, owed to plaintiff and breached the insurance producer contract between them. These allegations provide Nelsen enough detail to effectively dispute plaintiff's claim. Id. It is quite clear what plaintiff is alleging Nelsen did that plaintiff claims was fraudulent and how it was injured by Nelsen's actions.
For the foregoing reasons, the portion of plaintiff's motion [32] directed to striking the first through thirteenth and the fifteenth affirmative defenses is denied as to the sixth, seventh and eighth affirmative defenses to the extent they relate to a return of premiums paid. Otherwise, the request to strike the first through thirteenth and the fifteenth affirmative defenses is granted. Plaintiff's motion to dismiss Counts I and II of the counterclaim are denied. Plaintiff's motion to dismiss Count III of the counter claim is granted. Plaintiff's motion to dismiss Count IV of the counterclaim is granted in part and denied in part. It is denied to the extent that Count IV seeks restitution for premiums paid by the Bank and otherwise is granted. Nelsen's motion [40] to dismiss is denied.