PHL Variable Insurance v. Lucille E. Morello 2007 Irrevocable Trust Ex Rel. BNC National Bank
645 F.3d 965
8th Cir.2011Background
- New Stream loaned funds to the insured to purchase a $10 million Phoenix policy obtained via STOLI.
- Insured Morello, age 78, provided inflated financials to induce underwriting; Claus, Chiaro, Mitan involved in scheme.
- Policy obtained through a trust; premiums funded by a loan from Cambridge-related entities via CFC of Delaware.
- Policy issued and premiums totaling about $518,562; Phoenix paid $570,418 in commissions.
- Morello died within the policy's contestability period; fraud discovered leading Phoenix to sue for rescission.
- New Stream intervened to seek declaratory judgment that premiums should be retained as setoff.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does procured-by-fraud exception apply to a third-party lender? | New Stream argues exception does not apply to lenders seeking to recover premiums. | Phoenix relies on Minnesota law applying procured-by-fraud to withhold premiums. | Minnesota procured-by-fraud rule applies; premiums may be retained. |
| What is controlling Minnesota law on rescission and premiums when fraud is involved? | Cast doubt on Minnesota's continued applicability to third-party lenders. | Minnesota Supreme Court precedents foreclose return of premiums when fraud by insured is actual. | Minnesota decisional law forecloses return of premiums where insured committed actual fraud. |
| Should the district court have denied New Stream's request based on Minnesota precedents? | New Stream contends rule does not bar relief for lenders as assignees. | District court correctly adopted Taylor/National Council framework. | District court correct; Phoenix may retain premiums. |
Key Cases Cited
- Taylor v. Grand Lodge A.O.U.W. of Minnesota, 105 N.W. 408 (Minn. 1905) (actual fraud by insured defeats premium return)
- National Council of Knights & Ladies of Security v. Garber, 154 N.W. 512 (Minn. 1915) (void ab initio with fraud; premium return depends on good faith)
- Madden v. Interstate Business Men's Accident Ass'n, 165 N.W. 482 (Minn. 1917) (consistency: fraud replaces premium return rule)