ML Servicing Co. v. Coles
235 Ariz. 562
| Ariz. Ct. App. | 2014Background
- Mortgages, Ltd. became insolvent and reorganized through bankruptcy into ML Servicing Co., Inc.; ML Liquidating Trust was created and owns ML Servicing.
- Scott Coles (insured) died in 2008; life insurance proceeds (over $60 million) were paid to his widow, Ashley Coles.
- Appellants allege Scott misappropriated Mortgages, Ltd. funds to pay the policies’ premiums and sued Ashley seeking the proceeds (constructive trust/restitution theories).
- Ashley moved to dismiss under A.R.S. § 20-1131, arguing life-insurance proceeds paid to a beneficiary are exempt from decedent-creditor claims; the trial court granted dismissal and awarded attorney fees to Ashley.
- On appeal, the court considered (1) whether Appellants are “creditors” under § 20-1131, (2) whether the statute bars recovery of proceeds obtained via alleged premium fraud, (3) availability of a constructive trust, and (4) entitlement to attorney fees.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Appellants qualify as "creditors" under A.R.S. § 20-1131 | Appellants contend they are owners of misappropriated funds, not creditors seeking collection | Ashley argues Appellants are creditors owed money by the decedent/estate and thus barred from proceeds | Appellants are creditors (a person with a claim/right to payment) and fall within § 20-1131’s protection for beneficiaries |
| Whether § 20-1131 bars Appellants from recovering life-insurance proceeds paid to a beneficiary | Appellants: statute shouldn't shield beneficiaries when policies were purchased with stolen funds; they seek the proceeds as rightful owners | Ashley: statute exempts proceeds paid to a lawful beneficiary (Ashley had insurable interest) even if premiums were paid unlawfully | § 20-1131 bars Appellants’ recovery of the proceeds; Ashley was a lawful beneficiary (spouse) and proceeds are exempt |
| Whether a constructive trust can trace and recover proceeds despite § 20-1131 | Appellants: constructive trust permits tracing of wrongfully obtained property and should override exemption | Ashley: constructive-trust theory was not pleaded below (waiver) and, in any event, equity is unavailable where an adequate legal remedy exists | Constructive trust not appropriate because § 20-1131.B provides an adequate statutory remedy (recovery of premiums paid in fraud), so equitable relief is improper |
| Whether Ashley was entitled to attorney fees under A.R.S. § 12-341.01 | Appellants: fee statute applies only to contract-based actions; their claims are tort/quasi-contract | Ashley: the dispute arises out of the insurance contract/payments and fees are recoverable; claims are intertwined with the contract | The action "arose out of contract" for § 12-341.01 purposes; trial court’s award of fees was proper |
Key Cases Cited
- Coleman v. City of Mesa, 230 Ariz. 352 (de novo review of 12(b)(6) dismissals)
- Turley v. Ethington, 213 Ariz. 640 (pleading standards and dismissal when no relief available)
- Cullen v. Auto-Owners Ins. Co., 218 Ariz. 417 (notice-pleading standard; court assumes truth of well-pled facts)
- In re Estate of King, 228 Ariz. 565 (life-insurance proceeds not owned until insured’s death; construing § 20-1131)
- DeVries v. State, 221 Ariz. 201 (statutory interpretation de novo)
- Sierra Tucson, Inc. v. Pima Cnty., 178 Ariz. 215 (use ordinary meaning for undefined statutory terms)
- Harmon v. Harmon, 126 Ariz. 242 (constructive trust tracing discussed; caution in accepting equitable petitions)
- Murphy Farrell Dev., LLLP v. Sourant, 229 Ariz. 124 (constructive trust elements; unjust enrichment)
- Sult v. O’Brien, 15 Ariz. App. 384 (equity follows the law; no equitable relief when adequate legal remedy exists)
- Loiselle v. Cosas Mgmt. Grp., LLC, 224 Ariz. 207 (limits on equitable relief when legal remedies suffice)
- Rudinsky v. Harris, 231 Ariz. 95 (broad interpretation of "arising out of contract" for attorney-fee awards)
- Ramsey Air Meds, L.L.C. v. Cutter Aviation, Inc., 198 Ariz. 10 (test whether claim exists absent contract)
- Sparks v. Republic Nat. Life Ins. Co., 132 Ariz. 529 (tort claims intertwined with contract can support fee award under § 12-341.01)
- State v. Affordable Bail Bonds, 198 Ariz. 34 (statutory construction should avoid absurd results)