ORDER
This case involves a stranger-originated life insurance scheme, in which the plaintiffs “loaned” money to pay the premiums on seven life insurance policies of six wealthy individuals. In their first amended complaint (“FAC”), the plaintiffs claim they were not aware this arrangement was against public policy and now seek to have the policies declared void ab initio and the premiums returned. Defendant American General Life Insurance Company (“American General”) has filed a motion to dismiss (# 55) as has Defendant Aviva Life and Annuity Company (“Aviva”) (# 90). The plaintiffs have also filed a motion to dis
BACKGROUND
Stranger-originated life insurance (“STOLI”) arrangements have become increasingly common over the past decade.
See Sun Life Assurance Co. of Canada v. Berck,
Plaintiffs Edwin and Lonnie Carton were first introduced to STOLI transactions by Defendant Bruce Plotnick, whom they met at a financial planning seminar in the early to mid 2000’s. (FAC (#43) at 12). Plotnick was the featured lecturer at the seminar and is the principal employee and owner of Defendant Estate Planning Solution Network (“EPSN”).
(Id.
at 7). Plotnick suggested the Cartons invest their retirement funds in a concept called “premium financing” through Defendant Robert Koppel (“R. Koppel”).
(Id.).
Plot-nick and R. Koppel told the Cartons that B
&
B Equities (“B & B”), a Nevada limited liability company whose managing members are Defendants R. Koppel and Robert Eberle, would organize limited liability companies which would be assigned the rights to the life insurance policies of the insured third-parties and would assume the liabilities in funding the policies.
(Id.
at 13). The Cartons were then informed they would receive an ownership interest in these limited liability companies and were guaranteed a return of 20% on their investment.
(Id.).
The Cartons were also told that the insurance premiums would be paid by the limited liability companies for a two year period, after which they would be repaid in one of two ways: (1) the insured keeps the policy and pays off the loan with interest, or (2) the insured sells the policy on the secondary market.
(Id.
at 10). The Cartons allege they were un
On July 16, 2008, the Cartons invested $700,000 with B & B through Plotnick and R. Koppel. (FAC (# 43) at 14). The investment was spread over seven insurance policies (collectively “the Policies”) which insured six individuals (collectively “the Insured”). (Id. at 17). Three of the Policies were through American General and insured Defendants Thomas E. Colbert, Wanda D. Dean, and Kenneth D. Huntley. (Id.). Thomas Colbert is a resident of Nevada, Wanda Dean is a resident of California, and Kenneth Huntley is a resident of Iowa. (Id. at 7-8). Three of the Policies were through Aviva, and insured Defendants Kenneth D. Huntley, Leon E. Dean, and Samuel L. Diggle. (Id. at 17). Leon Dean is a resident of California and Samuel Diggle is a resident South Carolina. (Id. at 7-8). The final policy was through Americo and insured Defendant Gloria Diaz Rivera, a resident of Puerto Rico. (Id. at 8, 17). The face amount of these policies ranged from $600,000 to $3,000,000. (Id. at 17). The beneficiaries of the Policies were irrevocable life insurance trusts which bore the name of the Insured (ex: the Kenneth D. Huntley Irrevocable Life Insurance Trust) (the “ILITs”). (Id. at 8, 18). The Insured served as trustee for each of their respective ILITs. (Id. at 19).
On the American General applications for life insurance, the Insured failed to answer the question which asked for information on the “Premium Payor” if it was different from the policy owner, even though a third party was providing financing for the policy. (FAC (# 43) at 26-28). On the Aviva applications for insurance, the Insured failed to inform Aviva of the premium financing arrangement. (Id.).
Promissory notes were signed by the Insured in their capacity as trustee of their ILITs promising to repay the loans obtained from the Cartons and agreeing to an interest rate of 20% per annum on those loans. (Id.). This amount became payable either: (a) the day following the two year anniversary of the note; (b) the date of the death of the insured; (c) the date of any breach; or (d) the date of any default. (Id. at 20). Limited liabilities companies were created which bore the name of the Insured (Plaintiffs Kenneth Huntley II, LLC, Leon Dean II, LLC, Gloria Diaz II, LLC, Thomas Colbert V, LLC, Wanda Dean II, LLC, and Samuel Diggle II, LLC) (the “LLCs”) and the Insured executed a collateral assignment, which assigned and pledged the insurance policies to the LLCs as collateral to secure the loan. (Id. at 21). The Cartons obtained an interest in the LLCs reflecting the percentage of the funding they provided, and in August 2008 received a package of documents which included the insurance application for each policy, the secured promissory note, the collateral assignment, and other relevant documents. (Id. at 16, 25).
The loans were all set to expire between June and September of 2009. (Id. at 27-29). However, in July of 2009, the Cartons received letters informing them that additional investors were brought in to pay a third year of premiums on four of the Policies, thus decreasing the Cartons’ percentage interest in the Policies. (Id. at 25-26). None of the Policies were sold and apparently all of the policies have since lapsed for non-payment. (Mot. to Dismiss (# 90) at 5). The Cartons never received their principal or the guaranteed interest on their investment. (FAC (# 43) at 26-30).
The Cartons filed suit on behalf of themselves and the LLCs on May 10, 2011
American General filed a motion to dismiss (# 55) on July 28, 2011, and Aviva filed a motion to dismiss (# 90) on August 2, 2011. American General and Aviva (collectively, the “Insurers”) both claim the FAC should be dismissed for lack of subject matter jurisdiction under Rule 12(b)(1) and for failure to state a claim under Rule 12(b)(6). (Mot. to Dismiss (# 55) at 2; Mot. to Dismiss (# 90) at 3). The Insurers argue the Cartons lack standing to bring the claims against them because they were not parties to the insurance contracts, they are not the third-party beneficiaries of the contracts, and the contracts have lapsed. (Mot. to Dismiss (# 55) at 11-12; Mot. to Dismiss (# 90) at 11-13). The Insurers argue the Cartons have also failed to state a claim against them because the Policies have been terminated and the Cartons have unclean hands due to their participation in the fraud. (Mot. to Dismiss (# 55) at 17-28; Mot. to Dismiss (# 90) at 15-18). Of the claims brought in the FAC, the only causes of action applicable to the Insurers are those for: (a) declaratory relief and rescission of the Policies (claim two); (b) declaratory relief and refund of premiums (claim three); (c) unjust enrichment (claim ten); and (d) injunctive relief (claim eleven).
The Cartons filed a motion to dismiss, strike, and for entry of default (# 62) on August 1, 2011. They contend Defendants Eberle, R. Koppel, S. Koppel, B & B, Global Resources, Pro Financial, and Pro Fi all submitted an “Answer and Counterclaim” but no counterclaims were set forth in the pleadings and the pleadings were not signed. (Mot. to Dismiss, Strike, Entry of Default (# 62) at 4-5). They argue these counterclaims should be dismissed for failure to state a claim, and in the alternative move for a more definite statement. (Id. at 4). Additionally, the Cartons argue that these unsigned pleadings should be dismissed under Fed.R.Civ.P. 11(a). (Id. at 4-5). Finally, the Cartons note that Defendants EPSN, Pro Fi, Pro Financial, B & B, Global Resources and the Kenneth D. Huntley ILIT are artificial entities and have appeared without licensed legal counsel. (Id. at 5). Because unnatural entities must be represented by counsel, the Cartons argue a default judgment should be entered against these Defendants. (Id. at 5-6). None of the Defendants against whom this motion was brought filed a response and none of them appeared at the hearing on November 8, 2011.
DISCUSSION
I. The Insurers’ Motions to Dismiss
A. Lack of Subject Matter Jurisdiction
1. Legal Standard
The absence of standing is properly raised in a Rule 12(b)(1) motion because standing is a limitation on the court’s subject matter jurisdiction.
Thornhill Publ’g Co. v. Gen. Tel. & Elec. Corp.,
Under Article III, there are three foundational elements of standing. The plaintiff must plead (1) that she has suffered an actual or imminent injury in fact to a legally-protected interest, (2) that there was a causal connection between her injury and the conduct complained of, and (3) that her injury is likely to be redressed by a favorable decision.
Lujan,
Jurisdictional attacks based on Rule 12(b)(1) may be facial or factual.
See Safe Air for Everyone v. Meyer,
2. Analysis
The Cartons offer two arguments as to why they have suffered an injury and fact and thus have standing to sue. First, the Cartons argue that they have an interest in the Policies because the Policies were pledged to them under the collateral assignments. (Opp’n to Mot. to Dismiss (# 76) at 16; Opp’n to Mot. to Dismiss (# 113) at 18). Second, the Cartons contend that the Policies were void ab initio because they violated public policy. (Opp’n to Mot. to Dismiss (# 113) at 11-14). As the Policies never really existed, the Insurers now hold $700,000 in premium payments from the Cartons without providing coverage in return. The Cartons thus assert they have suffered an injury in fact because they paid the premiums on nonexistent policies.
Both of these arguments require the Court to first determine the validity of the Policies and whether they were void as against public policy. The Policies were issued in Nevada, California, Iowa, and South Carolina. (FAC (#43) at 7-8). Under the laws of these states — as is the case in most states — STOLI arrangements are against public policy. See J. Allan Jensen et al., Stranger-Owned Life Insurance: A PoiNT/CoUNTERPOINT DISCUSSION, 33 ACTEC J. 110, 115 (2007) (premium financing schemes are a “violation of the spirit if not the letter of the insurable interest law in every state in this country”).
i. The STOLI Arrangement Violated Public Policy
Under Nevada law, a person may not “procure or cause to be procured any insurance contract upon the life or body of another individual unless the benefits under the contract are payable to the person insured or the personal representatives of the person insured, or to a person having, at the time when the contract was made, an insurable interest in the person insured.” Nev.Rev.Stat. § 687B.040(1). A trust may also not obtain life insurance upon the life of a person unless each beneficiary of the trust has an insurable interest in the person insured. Nev.Rev.Stat. § 687B.040(2)(a). A party has an insurable interest if they are related closely by blood or law and have a substantial interest engendered by love and affection, or have a lawful and substantial economic interest in having the life, health or bodily safety of the insured continue. Nev.Rev. Stat. § 687B.040(4). The Supreme Court of Nevada has held that a party who pays the insurance premiums on the life of another has no insurable interest in the life of the insured.
Waldman v. Maini,
Under Iowa law, it is forbidden to commit a fraudulent viatical settlement act. Iowa Code § 508E.15(l)(a). A fraudulent viatical settlement act is defined as “[a]n act or omission committed by any person who, knowingly or with intent to defraud, for the purpose of depriving another of property or for pecuniary gain, commits or permits its employees or its agents to ... enterf ] into any practice or plan which involves stranger-originated life insurance.” Iowa Code § 508E.2(6)(a)(3). Stranger-originated life insurance practices include cases in which a life insurance policy is “purchased with resources or guarantees from or through a person or entity who, at the time of the policy inception, could not lawfully initiate the policy ... and where, at the time of the policy’s inception, there is an arrangement or agreement ... to directly or indirectly transfer the ownership of the policy or the policy benefits to a third party.” Iowa Code § 508E.2(12)(a). “Trusts that are
In South Carolina, “[o]ne cannot obtain valid insurance upon the life of another in whom he has no insurable interest.”
Warren v. Pilgrim Health & Life Ins. Co.,
STOLI arrangements are also against public policy under California law. In California, life insurance contracts are void if the insured has no insurable interest. Cal. Ins. Code § 280. An insurable interest exists where the party has an interest based upon a reasonable expectation of pecuniary advantage through the continued life of another person, or where the party is related by blood or law and has a substantial interest engendered by love and affection. Cal. Ins. Code § 10110.1(a). It is a violation of California law to create “[a]ny device, scheme, or artifice designed to give the appearance of an insurable interest where there is no legitimate insurable interest.” Cal. Ins. Code § 10110.1(e). “[A]ny arrangement by which a life insurance policy is initiated for the benefit of a ‘third party investor’ who has no insurable interest in the insured’s life at the time the policy is issued is deemed a STOLI, which is a prohibited ‘fraudulent life settlement act.’ ”
Ohio Nat’l Life Assurance Corp. v. Davis, No.
CV 10-4241 ODW (MANx),
Although an insured may generally purchase life insurance in good faith intending to keep it for himself and later assign it to a third party, regardless of whether the third party has an insurable interest, where a person who has an interest “lends himself to one without any, as a cloak to what is, in its inception, a wager” then the contract is void as against public policy.
Grigsby v. Russell,
The arrangement here is a typical STOLI scheme. The scheme was carefully structured so that although the Insured were technically the owners of the Policies, the true owners were the LLCs and investors. Even though the premiums were paid in the form of a “loan”, the Insured never intended to repay the premium payments. (Opp’n to Mot. to Dismiss (# 113) at 11). This is evidenced by the fact that none of them repaid the loan and allowed the Policies to default. (Mot. to Dismiss (# 90) at 5; FAC (# 43) at 26-30). The scheme was structured so that the Insured would get free life insurance for two years, and then after that time the Insured would allow the Policies to be sold on the secondary market to repay the Cartons and other investors. Indeed, the arrangement was specifically structured so that the Insured would not retain the Policies. At 20%, the interest rate was excessively high and discouraged the Insured from repaying the loan. (See FAC (#43) at 16). The loan period was also to last for two years, which happens to coincide with the period of time insurance companies have to contest information on the Insureds’ applications and is typical of STOLI schemes. The ILITs and the LLCs were created to hide from the Insurers the interest investors had in the Policies, which would have been unnecessary if the financing was intended merely as a loan. As this was a standard STOLI arrangement under which investors were in substance the true owners of the Policies, the arrangement violated public policy and the Policies were void ab initio.
ii. Plaintiffs Have Standing to Bring Their Claims
Because the Policies were void ab initio, the Policies were never truly in existence. The Cartons’ first argument that they have standing because they were the collateral assignees of the Policies therefore fails because the Policies were a nullity from inception. Although the Insured may have signed collateral agreements with the Cartons assigning them an interest in the Policies, because the Policies were void ab initio, there are no policies in which the Cartons could have a valid interest. The Cartons cannot claim standing as collateral assignees of nonexistent policies.
The Cartons’ second argument that they have standing because the Insurers are holding funds that rightfully belong to the Cartons however has more merit. The Cartons argues that they paid $700,000 in premiums on the Policies, which were void ab initio. (FAC (# 43) at 14; Opp’n to Mot. to Dismiss (# 113) at 11). Because the Policies never existed, the Cartons argue the Insurers were unjustly enriched because they are retaining the premium payments and never actually provided any coverage on the Policies because they were void. (Opp’n to Mot. to Dismiss (# 113) at 14-18). The Cartons contend that when a contract is void ab initio, the general rule is that the court is to restore the parties to their status quo. (Opp’n to Mot. to Dismiss (# 113) at 14 (citing
In re Cross,
B. Failure to State a Claim 1. Legal Standard
The purpose of a Rule 12(b)(6) motion to dismiss for failure to state a claim is to test the legal sufficiency of a complaint.
Navarro v. Block,
To avoid a Rule 12(b)(6) dismissal, a complaint must plead “enough facts to state a claim to relief that is plausible on its face.”
Clemens v. DaimlerChrysler Corp.,
If the court grants a motion to dismiss a complaint, it must then decide whether to grant leave to amend. The court should freely give leave to amend when there is no “undue delay, bad faith or dilatory motive on the part of the movant, ... undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of amendment.”
Foman v. Davis,
2. Analysis
The only claims against the Insurers in the FAC are those for: (a) declaratory relief and rescission of the Policies (claim two); (b) declaratory relief and refund of premiums (claim three); (c) unjust enrichment (claim ten); and (d) injunctive relief (claim eleven).
Under the two declaratory relief claims, the Cartons seek to have the Policies declared null and void ab initio and to have the premiums be disgorged. (FAC (# 43) at 35). The Cartons also seek to have the Court declare the rights and obligations of each of the parties with respect to the premiums. (Id. at 36). Under the Cartons’ claim for injunctive relief they seek to have the Insurers acknowledge the Policies were void ab initio, have the Policies rescinded, and disgorge the premium payments. (Id. at 42-43). Ultimately, these claims are dependent upon the Cartons’ claim for unjust enrichment because the Cartons are not entitled to be declared the rightful owner of the premiums and to have them disgorged unless they first prevail on this claim.
In the claim for unjust enrichment, the Cartons note that the premiums were paid on the Policies for the purpose of providing insurance coverage to the Insured. (Id. at 42). Yet because the Policies were void ab initio, the Policies never existed and the Insurers accepted the premiums without actually providing any coverage. (Id. at 35). Consequently, the Cartons argue, the Insurers have been unjustly enriched. (Id. at 41-42).
Unjust enrichment is alleged where there is the retention of a benefit which in equity and good conscience belongs to another.
In re Amerco Derivative Litigation,
The Cartons allege they were defrauded into financing the Policies, not knowing the STOLI arrangement was against public policy. (FAC (#43) at 31-32; Opp’n to Mot. to Dismiss (# 113) at 11). By paying the premiums, they certainly conferred a benefit on the Insurers. The Policies were also void ab initio, and as a result the Insured never really had the life insurance coverage the Cartons paid for.
Yet the Cartons have ultimately failed to state a claim against the Insurers because it is not inequitable to allow the Insurers to retain the premium payments. The Insurers were the clear victims of the STOLI scheme. Although the Policies were void as against public policy, the Insurers are not alleged to have had any knowledge of the scheme or that the Policies were void ab initio.
1
Consequently, the Insurers bore the risk that the scheme would not be uncovered and that they would unknowingly pay the death benefits to the Insured even though the Policies never actually came into existence. In contrast, the Cartons were at least on inquiry notice of the illicit scheme. The Supreme Court of the United States noted as early as 1881 that an insurable interest is required to purchase a life insurance policy,
Warnock v. Davis,
Because it would be unjust to allow an innocent party who had inquiry notice of the illicit scheme to obtain disgorgement from another innocent party without similar notice and who bore the risk that the scheme would not be uncovered, the Court finds that the Cartons have failed to state a claim for unjust enrichment against he Insurers. As all of the Cartons’ claims against the Insurers relied on their claim
II. The Cartons’ Motion to Dismiss, Strike, and for Entry of Default
The Cartons have also filed a motion to dismiss certain Defendants’ counterclaims, strike unsigned pleadings, and for entry of default against Defendants who are entities who have not yet obtained legal counsel. (Mot. to Dismiss, Strike, and Entry of Default (# 62)). This motion is granted in part and denied in part for the following reasons.
A. Failure to State a Claim
The Cartons contend that Defendants Eberle, R. Koppel, S. Koppel, B & B, Global Resources, Pro Financial, and Pro Fi all submitted an “Answer and Counterclaim” but no counterclaims were set forth in the pleadings. (Id. at 4). Plaintiffs argue that these counterclaims should be dismissed for failure to state a claim. (Id.).
Federal Rule of Civil Procedure 8(a)(2) requires a counterclaim to state “a short and plain statement of the claim showing that the pleader is entitled to relief.” To avoid a Rule 12(b)(6) dismissal for failure to state a claim, the counterclaims must plead “enough facts to state a claim to relief that is plausible on its face.”
Clemens v. Daimler Chrysler Corp.,
Because no counterclaims have been stated in the pleadings, the counterclaims of the above-named Defendants are dismissed with leave to amend.
B. Motion to Strike
The Cartons have also moved to strike the pleadings of Defendants Eberle, R. Koppel, S. Koppel, B & B, Global Resources, Pro Financial, and Pro Fi because the pleadings were unsigned. (Mot. to Dismiss, Strike, and Entry of Default (# 62) at 5). Under Rule 11(a), every pleading “must be signed by at least one attorney of record in the attorney’s name — or by a party personally if the party is unrepresented.” “The paper must state the signer’s address, e-mail address, and telephone number.” Fed.R.Civ.P. 11(a). The Court must strike an unsigned paper unless the omission is promptly corrected after being called to the party’s attention. Id.
The parties here are all unrepresented and none of the above-mentioned pleadings comply with Rule 11(a). The only party who came close to compliance was Eberle, who signed a cover letter that was filed concurrently with his answer but did not state his e-mail address and telephone number as required. (Answer (# 44)). The Court therefore will allow the named Defendants ten (10) days from the issu
C. Motion for Entry of Default
The Cartons have additionally moved for the entry of a default judgement against Defendants EPSN, Pro Fi, Pro Financial, B & B, Global Resources and the Kenneth D. Huntley ILIT because they are artificial entities that have appeared without council. (Mot. to Dismiss, Strike, and Entry of Default (# 62) at 5-6).
An unnatural entity must be represented by licensed counsel.
Rowland v. California Men’s Colony,
III. Diggle’s Motion to Dismiss
Defendant Samuel Diggle has also filed a motion to dismiss pursuant to Rule 12(b)(1) for lack of subject matter jurisdiction. Diggle chiefly argues that none of the federal claims in this action are directed against him, and the claims that are directed against him are unrelated to the federal claims upon which federal jurisdiction is based. For this reason, according to Diggle, the Court lacks subject matter jurisdiction over the claims against him and the Samuel L. Diggle ILIT. (Id. at 4-7).
Federal courts are of limited jurisdiction, possessing only those powers granted by the Constitution or statute.
See Kokkonen v. Guardian Life Ins. Co.,
Federal courts have original jurisdiction over “civil actions arising under the Constitution, laws, or treaties of the United States.” 28 U.S.C. § 1331. Federal courts also have supplemental jurisdiction “over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy.” 28 U.S.C. § 1367(a). “A state law claim is part of the same case or controversy when it shares a ‘common nucleus of operative fact’ with the federal claims and the state and federal claims would normally be tried together.”
Bahrampour v. Lampert,
The Cartons’ basis for subject matter jurisdiction in this Court is that the arrangement violated federal securities laws, and therefore this Court has jurisdiction over the matter as it relates to the laws of the United States. See 28 U.S.C. § 1331. The remaining state causes of actions are then brought in under the basis of supplemental jurisdiction.
Diggle also argues the Cartons do not have standing to bring the claims against Diggle because the security interest in the Diggle Policy was granted not to the Cartons, but to Plaintiff Samuel Diggle II, LLC. (Mot. to Dismiss (# 102) at 3-4). Diggle further claims that Plaintiff Samuel Diggle II, LLC cannot sue Diggle because its charter has been revoked.
(Id.).
The Cartons however have standing to sue Diggle because all the money they put into Samuel Diggle II, LLC went straight into the STOLI scheme. Where an LLC is being used simply as a vehicle through which investments are made and the members of the LLC receive one unit in exchange for one dollar that is ultimately invested in the scheme, the investors have standing because there is a direct correlation between the investment and their membership interests.
See Burnett v. Rowzee,
No. SA CV 07-641 DOCANX,
CONCLUSION
For the above reasons, IT IS ORDERED American General’s Motion to Dismiss (# 55) and Aviva’s Motion to Dismiss (# 90) are granted without prejudice. The Cartons’ are permitted to later add American General and Aviva as defendants so long as they can show that American General and Aviva had knowledge of sufficient facts that would have put them on at least inquiry notice that they were issuing policies to parties with uninsurable interests.
IT IS FURTHER ORDERED that the Cartons’ motion to dismiss, strike and for entry of default judgment (# 62) is granted as to the Cartons’ motion to dismiss the counterclaims, but denied as to the Cartons’ motions to strike and for entry of default judgment.
IT IS FURTHER ORDERED that Defendants R. Koppel, S. Koppel, B
&
B,
IT IS FURTHER ORDERED that Defendants EPSN, Pro Fi, Pro Financial, B & B, Global Resources are to file with the Court a notice that they have obtained licensed legal counsel no later than ten (10) days from the issuance of this order.
IT IS FURTHER ORDERED that Diggle’s motion to dismiss for lack of subject matter jurisdiction (# 102) is denied.
Notes
. Although the Cartons asserted at oral argument that the Insurers had knowledge of the scheme because they accepted the premium payments from a party other than the insured, this is not enough to show the Insurers were aware of the arrangement, as it is not uncommon for trusts and other entities to pay the premiums on life insurance policies.
. Compare the striking similarities between the description given to the Cartons of the investment plan and the description of STOLI schemes in 3 Leo Martinez et al., New Appleman Insurance Law Practice Guide § 34.09[3] (2011).