Lincoln Life & Annuity Co. of NY v. Bernstein, 2009 NY Slip Op 51421(U) (N.Y. Sup. Ct. 6/29/2009)

Full title: THE LINCOLN LIFE AND ANNUITY COMPANY OF NEW YORK, Plaintiff, v. ROBERT…

Court: New York Supreme Court

Date published: Jun 29, 2009

2009 N.Y. Slip Op. 51421 (N.Y. Sup. Ct. 2009)

Opinion

08-2641

6-29-2009

THE LINCOLN LIFE AND ANNUITY COMPANY OF NEW YORK, Plaintiff, v. ROBERT BERNSTEIN, AS TRUSTEE OF THE ARTHUR LEVY INSURANCE TRUST, AND LPC HOLDINGS I LP, Defendants.

John C. Cherundolo

This is an action for a declaratory judgment, brought by plaintiff insurance company, Lincoln Life and Annuity Company of New York ("Lincoln Life" or "plaintiff"), seeking a determination as to its rights and obligations under a policy of life insurance. The complaint alleges that The Arthur Levy Insurance Trust, Robert Bernstein, as Trustee, and LPC Holdings I LP (collectively "defendants"), are not entitled to collect the death benefits under the policy because said policy was void ab initio—never in force, because it was predicated upon material misrepresentations made in the application for, and amendment to, the subject policy; and because there was no insurable interest at the inception of the policy. In response, defendants filed three counterclaims.

The motion before this court concerns only defendants' third counterclaim brought under New York General Business Law section 349. Plaintiff moves to dismiss defendant's third counterclaim pursuant to CPLR § 3211(a)(7) for failure to show that the acts complained of amount to anything more than a private contract dispute between the parties, and for failure to show that defendants were materially mislead by plaintiff's conduct. Defendants oppose this motion.

For the foregoing reasons, plaintiff's motion is DENIED, without prejudice to renew following the completion of all discovery.

BACKGROUND

The facts underlying plaintiff's complaint are as follows. Arthur Levy ("Mr. Levy") established an Insurance Trust on October 20, 2006 with himself as depositor, and his wife Barbara ("Mrs. Levy") designated as Trust Beneficiary, and Jerome Miller ("Mr. Miller") as initial Trustee. Plaintiff alleges that this was four months after Mr. Levy had a one-time meeting with Mr. Lockwood, a former insurance producer for Lincoln Life, to discuss the initial details of a possible life insurance policy. Around this time in late October, Lincoln Life began an investigation into Mr. Lockwood's business practices and eventually terminated his appointment with the company on December 26, 2006. Another insurance producer, Mr. Kurit, had meanwhile submitted an application for Life Insurance on behalf of Mr. Levy and Lincoln Life issued a pending policy on the life of Mr. Levy on December 28, 2006 with a death benefit of $20 million (twenty million dollars).

Lincoln Life received the first premium payment in the form of a personal check in the amount of $70,000.00 (seventy thousand dollars) from Mr. Levy, as well as an amendment to the application, on January 5, 2007. Shortly thereafter, Mrs. Levy received a solicitation letter from Mr. Fleisher of LPC Holdings I LP, dated January 8, 2009 offering to purchase Mrs. Levy's beneficial interest in the Trust for 3% of the face value of the policy, i.e. $600,000.00 (six hundred thousand dollars), plus the a reimbursement for the initial premium payment, i.e. $70,000.00 (seventy thousand dollars). The letter indicated a check for $670,000.00 (six hundred seventy thousand dollars) would be forwarded to Mrs. Levy within five days after receipt of the executed documents enclosed with the letter. On January 9, 2007, Lincoln Life placed the policy insuring the life of Mr. Levy in force. On January 10, 2007, Mrs. Levy executed the documents effectuating the sale of her beneficial interest in the Trust to LPC Holdings I LP. On January 12, 2007, Lincoln Life received and accepted a check for the remaining initial premium due under the policy by check written in the amount of $1,058,800.00 (one million fifty-eight thousand eight hundred dollars), executed by Jonathan S. Berck of LPC Holdings I LP.

Without indulging in every aspect of plaintiff's allegations, as they are not material to this motion, it bears mentioning that plaintiff sets forth in the affidavit of Valerie W. Loftin, Vice-President, Claims, for Lincoln Life that Mr. Berck shares an office space with Mr. Lockwood and LPC Holdings I LP. It appears that Mr. Berck, who executed the check, is alleged to be a known STOLI financier. There is nothing more than an off-hand inference that implicates Mr. Kurit as involved in the alleged conspiracy between Mr. Fleisher, Mr. Lockwood and Mr. Berck, to get Mr. Levy to purchase a life insurance policy for their eventually acquisition. It is alleged through inadmissible, circumstantial and speculative assertion that defendants held discussions with a life settlement company prior to the effective date of the life insurance policy and that defendants made material misrepresentations on the application and amendment for the life insurance policy by not admitting these alleged talks, this, it appears is the basis of Lincoln Life's recision. These allegations arose during the investigation of the claim for death benefits under the policy, and from the separate investigation into Mr. Lockwood's business practices.

Mr. Levy was diagnosed with pancreatic cancer in 2007 and died on August 8th of that year. On October 9, 2007, Lincoln Life was notified of Mr. Levy's death by Mr. Bernstein, the successor Trustee. Lincoln Life informed Mr. Bernstein that it would be conducting a routine investigation into the claim because the death occurred within the two year contestability period of the policy. It appears that this type of investigation is well within plaintiff's statutory right and its right pursuant to the contestability provision in policy contract. The claim for benefits submitted by the Trust—still owner and beneficiary under the Policy—requested that Lincoln Life "process the claim under the policy and forward the death benefit due thereunder to the Trust." Lincoln later notified the Trust that Lincoln was declining to pay any benefit under the Policy.

On April 3, 2008, Lincoln life filed an action for declaratory relief after defendants challenged the denial of the claim.

STOLI polices are stranger-owned (or speculator-initiated) life insurance policies. According to insurance companies, individuals, usually having a net worth of more than $1,000,000.00 (one million dollars), are solicited by life settlement companies to purchase life insurance policies with a large face value. In some cases, the life settlement company loans money to the insured to pay the premiums on the policy for two years—or whatever the "wet ink" law in the state provides as the contestability period in which any claim on the proceeds can be "contested" by the insurance company. In some cases the premiums are reimbursed only after the life settlement company procures a beneficial interest in the policy. Under either arrangement, the life settlement company is loaning the insured the money for the premium payments in order to buy the beneficial interest in the policy.

When the beneficial interest in the policy is transferred, the life settlement company, in addition to any arrangements made with regard to the initial premiums, pays the insured a lump sum percentage of the total death benefit. Often there is also a "middleman" who ears a commission for selling the policy to the life settlement company, and in those circumstances the payout on the death penalty is split three ways. The commission to the salesperson is usually around 10% (ten percent) of the purchase price, while the brokers (life settlement companies) get the bulk of the death benefit. The insured receives a cash payment for the sale of their policy of anywhere between 10-30% (ten to thirty percent) of the totally death benefit. Sometimes companies will attempt to base the payout on the cash value of the policy which is significantly lower than the total death benefit; or the salesperson will ask for a commission based on the total death benefit payout instead of the purchase price. This is a buyer beware undertaking. Therefore, to the under-informed consumer, STOLI plans can end up being less than the cash value of the policy.

However, STOLI arrangements are legal as long as there is an insurable interest at the inception of the policy and there is not violation of any provision of the policy contract. As is clear, insurance trusts are a useful vehicle in such arrangements because the trust, as beneficiary of the policy, never changes; only the beneficial interest in the trust is changed. Not only are insurance trusts legitimate, but STOLI arrangements are also legal and many insurance companies, plaintiff company included, have life settlement subsidiaries active in the market of buying life insurance polices.

The issue in the case before this Court, lies, inter alia, in question (63) on the application for subject life insurance policy, which asks:

Have you been involved in any discussion about the possible sale or assignment of this policy to a life settlement, viatical or other secondary market provider?

And in the signed acknowledgment which reads:

I HAVE READ, or have had read to me, the completed application for life insurance before signing below. All statements and answers in this application are correctly recorded, and are full, complete and true to the best of my knowledge and belief. I UNDERSTAND that any material false statements or material misrepresentations may result in the loss of coverage under the policy.

(Original emphasis)

Plaintiff claims that Mr. Levy had been involved in discussions concerning the possible sale of the beneficial interest in a future life insurance policy prior to creating the Insurance Trust and prior to the inception of the policy. Plaintiff further contends that there were material misrepresentations concerning this — of a gravity that allows them to void the insurance contract.

Issues of fact and law exist as to whether Mrs. Levy¹ violated any provision of the policy contract or NY Ins. Law § 3205, which can then be imputed to defendants who are parties to this action.

1 Ms. Levy was not one of the "undersigned" on the application for the policy, was never the direct beneficiary of the Trust, and did not execute the papers effectuating the sale of her beneficial interest in the trust until after the policy was in force.

New York law allows an insurance trust to be the beneficiary of a life insurance policy at its inception. Furthermore, the law allows that the insurance policy can be immediately transferred or assigned. The purpose of the contestability period is not to prevent any transfer of the beneficial interest in the policy, but to allow the insurance company the chance to seek additional information on the insured or to conduct an in-depth investigation on the claim which would be too cumbersome to do initially at the time of its issue. The insurance company essentially has the opportunity to reassess the validity of the policy if a claim upon the policy is made during this period. While this may seem to advantage the insurance company, the contestability period actually gives the insured the same peace of mind derived from a statute of limitations, knowing that after the two years lapse the insurance company can no longer contest the claim and the insured can relay on the proceeds in estate and financial planning. In fact, it is incumbent upon the insurance company to discover anything "discoverable" during this period because the insurance company can not rescind for "lack of insurable interest" after the contestability period ends, regardless of the merits of their allegations.

The appeal of STOLI arrangements is "fast cash". Even though the consumer has the option of taking out loans against the cash value of their policy, or surrendering the policy for its cash value (far below the face value of the policy); STOLI agreements seem to offer "something for nothing." The insured, whose premiums are being paid, gets a payout upon the transfer of the beneficial interest in the policy, without having invested any money in the plan. However, the insured must authorize the company access to all medical records and may require periodic health updates. These policies are sold to those in their sixties and seventies and who are, for the most part, in poor health. Ideally, the broker targets someone who will live long enough to transfer the policy, but not live so long that the broker cannot get a quick return.

There is pending legislation in many states, including New York State, addressing STOLI arrangements. However, this Court would be imprudently treading on legislative ground if it addressed the validity of the insured consumer's behavior in relation to such an agreement. For now, STOLI arrangements, transacted according to the law, are legitimate. The public policy behind life insurance is to aid people in providing for their own end of life expenses and to ensure from beyond the grave that their family and beneficiaries will be cared for. While it is sometimes necessary to utilize the cash value of a policy during the insured's life, courts must approach with caution any route to doing so which ultimately underpays the insured and enriches a disinterested third party.

If the subject policy in the case before this Court was contracted for in a legitimate manner then, barring other grounds for recision, the insurance company is bound to pay out the proceeds of the policy to the Trust. There are questions of fact, not currently before this Court concerning the manner of procurement of the policy and whether the life insurance policy was procured with the intention of circumventing governing Insurable Interest Laws or otherwise in contravention of the policy contract.² However, for purposes of this motion under CLPR § 3211(a)(7), this Court must take as true the facts as presented to it in defendants' third counterclaim alleging that subject policy was legally obtained and that plaintiff's refusal to pay out on the policy violates NY Gen. Bus. Law § 349.

2 The role of Mr. Lockwood, his position with Lincoln Life, his "business practices", and his transactions in this and other matters become distinctly relevant to the issue here.

STANDARD OF REVIEW FOR A CPLR § 3211 MOTION TO DISMISS

When moving to dismiss a pleading on the ground that it fails to state a cause of action, the court, for purposes of deciding the motion, will give the pleader the benefit of every favorable inference and will assume arguendo that all the allegations in the pleading are true. Valentino v. County of Tompkins, 284 AD2d 898 (3d Dep't 2001). "As such, we accept, as we must, each and every allegation forwarded by the plaintiff without expressing any opinion as to the plaintiff without expressing any opinion as to the plaintiff's obligation to establish the truth of these averments before the trier of the facts." 219 Broadway Corp. v. Alexander's Inc., 46 NY2d 506, 509 (1979). The affidavits received for the motion to dismiss, which was not converted to a motion for summary judgement, are not to be examined for the purpose of determining whether there is evidentiary support for the pleading. Rovello v. Orofino Realty Co., 40 NY2d 633 (1976). In fact there is no burden to come forward with any proof unless the court treats the CPLR 3211(a)(7) motion as one for summary judgment. Thus under CPLR 3211 (a)(7), the court must simply look to see if the cause of action has been pleaded and need not look into the merits of the cause of action whether there is evidence to support the complaint. Hejna v. Reilly, 237 AD2d 809 (3d Dep't 1997).

Plaintiff, in support of this motion to dismiss, raises a challenge only to the first two elements of the GBL § 349 claim: that the conduct was consumer-oriented and that defendants were misled in a material way. Therefore, this Court need only address whether defendants properly allege these two elements.

(1) Consumer Protection Law—deceptive acts and practices unlawful, Generally:

Section 349 of New York's General Business Law which makes "deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service" unlawful, was intended to be broadly applicable, extending far beyond the reach of common law fraud, and to apply to virtually "all economic activity," and may be invoked regardless of whether the allegedly deceptive activity is covered by other laws. New York v. Feldman, 210 F. Supp. 2d 294 (2002); see also Small v. Lorillard Tobacco Co., Inc., 94 N.Y.S. 43, 698 NYS2d 615, 720 NE2d 892 (1999). The statute is to be liberally construed in order to carry out intended reforms and to promote justice. Blue Cross and Blue Shield of New Jersey Inc., v. Phillip Morris, Inc., 178 F. Supp. 2d 198 (2001). The New York consumer protection statute eliminates the reliance and scienter requirements necessary to bring an action for common law fraud, and permits recovery for attorneys' fees, costs, and punitive damages. Blue Cross and Blue Shield of New Jersey, Inc. v. Philip Morris, Inc., 178 F. Supp. 2d 198 (2001).

(2) Elements of a GBL § 349 Claim:

To state a claim for deceptive practices under New York's General Business Law, a plaintiff must show: (1) that the act or practice was consumer-oriented; (2) it was misleading in a material way; and (3) that the plaintiff was injured as a result of the deceptive act. In re Evergreen Mut. Funds Fee Litigation, 392 F. Supp. 2d 597 (2005); In re Rezulin Products Liability Litigation, 390 F. Supp. 2d 319 (2005). Additionally, there is no requirement of privity to maintain an action under NY Gen. Bus. Law § 349 and victims of indirect injuries are permitted to sue under statute. Blue Cross and Blue Shield of New Jersey, Inc. v. Philip Morris, Inc., 178 F. Supp. 2d 198 (2001).

CONSUMER OR PUBLIC IMPACT

As to the first requisite element of a deceptive acts and practices claim, the claimant must demonstrate that the complained of acts are "consumer-oriented." Shapiro v. Berkshire Life Ins. Co., 212 F.3d 121 (2000). In order to qualify as consumer-oriented conduct, the act or practice must have a broader impact on consumers at large. P. Kaufmann, Inc. v. Americraft Fabrics, Inc., 232 F. Supp. 2d 220 (2002). This threshold requirement of consumer oriented conduct is met by proof that the acts or practices have a broader impact on the consumer at large in that they are directed to consumers or potentially affect similarly situated consumers. Parex Bank v. Russian Sav. Bank, 166 F. Supp. 2d 415 (2000) (emphasis added). The critical question is whether the matter affects the public interest in New York, not whether the matter is brought by a consumer. New York v. Feldman, 210 F. Supp. 2d 294 (2002). The defendant in a deceptive acts and practices action engages in consumer oriented activity if his actions cause any consumer injury or harm to the pubic interest. New York v. Feldman, 210 F. Supp. 2d 294 (2002).

Defendants have properly alleged that plaintiff's conduct was consumer-oriented. Defendants set forth in their complaint that the policy issued by Lincoln Life was a standard-form policy sold by Lincoln life to many consumers.

MISLEADING THE CONSUMER IN A MATERIAL WAY

A violation of New York's Consumer Protection statute making deceptive acts and practices unlawful requires defendant to mislead the claimant in some material way. Conboy v. AT & T Corp., 241 F.3d 242 (2001). An act is "deceptive" under the statute if it is likely to mislead a reasonable consumer. Marcus v. AT & T Corp., 138 F.3d 46 (1998). The reasonable consumer standard is an objective one and the test to determine if a representation or an omission is a "deceptive act" within the meaning of the statute, lies in whether such act is likely to mislead a reasonable consumer acting reasonably under the circumstances. Champion Home Builders Co. v. ADT Sec. Services, Inc., 179 F. Supp. 2d 16 (2001); Andre Strishak & Associates, P.C. v. Hewlett Packard Co., 300 AD2d 608, 752 NYS2d 400 (2d Dep't 2002). However, the reasonable consumer does not mean the least sophisticated consumer. Sokolski v. Trans Union Corp., F. Supp. 2d 307 (1999). Nor can there be a claim for deceptive acts or practices when the allegedly deceptive practice was fully disclosed. Broder v. MBNA Corp, 281 AD2d 369, 722 NYS2d 524 (1st Dep't 2001).

In New York law, the issues of whether a representation is material for purposes of a deceptive acts and practices claim, and whether the representation is likely to mislead a reasonable consumer, may be determined as a matter of fact or law. Anunziatta v. Orkin Exterminating Co., Inc., 180 F. Supp. 2d 353 (2001). Here, there are a myriad of factual issues that must be resolved through the discovery process.

Defendants have properly alleged that plaintiff's conduct was consumer-oriented. Defendants set forth in their complaint that Lincoln's representations in the policy, were misleading in a material way in that the Trust and its Trustee were led to believe that the Trust's claim for payment under the policy would be investigated and processed in good faith and in a timely manner, and that the benefits would be paid in accordance with the terms of the policy.

CONCLUSION

Defendants have properly pleaded a cause of action under GBL § 349 ; therefore this Court is precluded, at this phase, from looking into the merits of the cause of action or into whether there is evident to support the complaint. Hejna v. Reilly, 237 AD2d 809 (3d Dep't 1997). Therefore, plaintiff's motion must be DENIED.

In conclusion, the plaintiff's motion is DENIED, without prejudice to renew following all discovery.

Counsel for the defendant, Robert Bernstein, as Trustee of The Arthur Levy Insurance Trust, is directed to submit a proposed Order in keeping with the Decision and to attach a copy of this decision thereto.