PHL Variable Ins. Co. v. P. Bowie 2008 Irrevocable Trust

718 F.3d 1

PHL VARIABLE INSURANCE COMPANY, Plaintiff, Appellee,

v.The P. BOWIE 2008 IRREVOCABLE TRUST, by and through its trustee, Louis E. BALDI, Defendant, Appellant.

No. 12–2243.

United States Court of Appeals, First Circuit.

May 13, 2013.

Jesus E. Cuza Abdala, with whom Ina M. Berlingeri Vincenty and Holland & Knight LLP were on brief, for appellant.

Jessica Lynne Wilson, with whom Thomas F. A. Hetherington, Jarrett E. Ganer, Edison, McDowell & Hetherington LLP, Stephen M. Prignano, Raymond M. Ripple, and Edwards Wildman Palmer LLP were on brief, for appellee.

Before LYNCH, Chief Judge, LIPEZ and HOWARD, Circuit Judges.

LYNCH, Chief Judge.

This is an appeal from a grant of summary judgment in favor of plaintiff PHL Variable Insurance Company (“PHL”) in its equitable action for rescission of a life insurance policy and special damages incident to the rescission of that policy. See PHL Variable Ins. Co. v. P. Bowie 2008 Irrevocable Trust, 889 F.Supp.2d 275 (D.R.I.2012). The district court found that the defendant, The P. Bowie 2008 Irrevocable Trust (“the Trust”), by and through its trustee, Louis E. Baldi, had made false representations to induce PHL to issue the policy, and that this fraud caused PHL damages that would not be fully compensated by rescission alone. The court allowed PHL to retain the policy premium paid by the Trust in order to offset PHL's losses and to return the parties to the status quo ante.

The Trust argues on appeal that the district court erred, under Rhode Island law, in allowing PHL to both rescind the policy and retain the premium. It also argues that the question of whether the Trust made fraudulent misrepresentations was legally irrelevant to the rescission action, and, in any event, that the Trust did not commit fraud. The Trust asks this court to reverse the grant of summary judgment for PHL and to enter judgment for the Trust.

The court committed no errors of law, did not err in finding that the plaintiff was a victim of a fraudulent insurance scheme, and appropriately exercised its equity powers. Under Rhode Island principles of equity, we affirm.

I.

On February 28, 2008, an insurance broker, Richard Rainone, submitted an application from Peter Bowie to PHL for a life insurance policy on Bowie's life. Bowie's application represented that he was a self-employed real estate investor with a net worth of $7.5 million and an earned income of $250,000 per year. He sought to take out a $5 million policy. Rainone's letter accompanying the application stated that, upon a formal offer of a policy from PHL, the policy would be re-issued into a trust.

PHL then began its underwriting investigation, which included a third-party inspection by a vendor, Examination Management Services, Inc. (“EMSI”). EMSI contacted Bowie on March 14, 2008. Bowie told the EMSI inspector that his earned income was $250,000 per year and that his net worth was $7.35 million. He also stated that a trust would be the beneficiary of the policy. Based on the available information, PHL offered Bowie a $5 million policy on April 23, 2008.

On April 28, 2008, Rainone submitted a revised application that listed the Trust as the owner and sole beneficiary of the proposedpolicy.¹ Baldi, an attorney, acted for the Trust. The second application repeated the same information about Bowie's employment, net worth, and income. The application also answered “no” to all of the following questions:

Will any of the first year or subsequent premiums for the policy be borrowed by the proposed owner or proposed insured or by any other individual, trust, partnership, corporation or similar related entity?

Will the owner, now or in the future pay premiums funded by an individual and/or entity other than the proposed insured?

Is the policy being purchased in connection with any formal or informal program under which the proposed owner or proposed insured have been advised of the opportunity to transfer the policy to a third party within five years of its issuance?

Does the proposed insured or proposed owner have any understanding or agreement providing for a party, other than the owner, to obtain any legal or equitable right, title or interest in the policy or entity owning the policy?

Attorney Baldi (on behalf of the Trust), the broker Rainone, and Bowie all signed the April 28 application. Baldi signed under an attestation stating: “I have reviewed this application, and the statements made herein are those of the proposed insured and all such statements made by the proposed insured ... are full, complete, and true to the best knowledge and belief of the undersigned and have been correctly recorded.” Additionally, all three individuals signed a separate Statement of Client Intent, which also attested that the premium payments would not be borrowed and would be paid from Bowie's current income and/or his own cash and equivalents. The Statement represented that the purpose of the policy was estate planning and that there was no intent to transfer the policy.

On May 5, 2008, PHL approved a $5 million policy (“the Policy”) on Bowie's life, pursuant to the April 28 application. On May 14, 2008, Bowie and Baldi signed a Policy Acceptance Form, which stated that “[t]he Insured(s) declares that the statements made in the application remain full, complete, and true as of this date.” Also on May 14, Baldi wrote a check from his client account to PHL for the Policy premium, in the amount of $192,000. On May 15, 2008, PHL paid Rainone a commission of $172,365.

As it turned out, almost all of the representations made to PHL were patently untrue. Notably, Bowie, Rainone, and Rainone's business partner, Christopher Vianello, all invoked their Fifth Amendment privilege not to testify in this case. Nonetheless, discovery showed the following facts.

Bowie was not a wealthy real estate investor, but rather a retired city employee, used car salesman, and blackjack dealer. He could not afford to pay the Policy premium on his own. Instead, the plan to pay the premium had originated with brokers Rainone and Vianello, who began negotiating with Imperial Premium Finance, LLC ² (“Imperial”) even before filling out the original February 28 application. Imperial is a company whose business model consists of lending money to pay for life insurance policy premiums and, when borrowers default on those loans, taking possessionof the policies as collateral.³ This arrangement allows Imperial to attempt to avoid the longstanding legal prohibition on holding a life insurance policy on a life in which the owner has no insurable interest.⁴See Warnock v. Davis, 104 U.S. 775, 779, 26 L.Ed. 924 (1881).

Here, the plan was for Imperial to finance the premiums on Bowie's Policy and, in return, take a security interest in the Policy. This plan was directly contrary to the multiple representations in the application documents that Bowie himself would pay the premiums and that there was no plan for any third party to obtain an interest in the Policy.

The Trust, by and through Baldi, was the mechanism for accomplishing this insurance fraud. Before being deposed in this lawsuit, Baldi had never met or even spoken to Bowie. Baldi came to be trustee of the Trust at the request of Rainone and Vianello. When he spoke with Rainone and Vianello about the Policy, Baldi did not inquire as to the purpose of the Trust, his responsibilities as trustee, the basis for any of the representations in the April 28 application, what the Policy premiums would be, or how the premiums would be paid. Baldi did not see Bowie sign the application.

Baldi testified that he did not know where the money for the May 14, 2008 premium check from his lawyer's account had come from—that “somebody” must have deposited it into his account. In fact, Baldi's bank records show that Vianello had endorsed over to Baldi a cashier's check payable to Vianello for the entire $192,000.

On May 26, 2008—twelve days after Baldi and Bowie had executed the Policy Acceptance Form—Baldi, on behalf of the Trust, entered a loan agreement with Imperial. The agreement provided that Imperial would loan $189,000 to the Trust, at a floating interest rate starting at more than 12 percent, for the express purpose of paying premiums on the Policy. In addition, Imperial charged a $19,400 origination fee and a $48,164.83 “lender protection insurance charge.” The loan was set to mature on July 26, 2010. In short, the terms of the loan virtually dictated that it could not be paid back. The Policy served as collateral in the event of default.

On June 13, 2008, Imperial deposited $189,050 into Baldi's account, and on June 17, Baldi wrote a check to Vianello for $186,550, “to repay for the premium.” Baldi testified that he wrote this check at Vianello's direction. He never inquired as to why he should make out the check to Vianello or whether the Trust instrument authorized Vianello to direct Baldi to make such payments.

Baldi never notified PHL that the representations in the application regarding the identity of the premium payor were no longer accurate; in fact, he claimed to have no awareness that the Policy had any restrictions on premium financing. He also never notified PHL of the assignment of an interest in the Policy to Imperial, although the Policy included a requirement for such notice.

On August 19, 2008, Baldi, on behalf of the Trust, signed an amendment to the Trust instrument that appointed an “Independent Professional Trustee” (“IPT”) to serve as co-trustee with Baldi. Baldi claimed that he could not remember whether it was PHL or Imperial that had required the appointment of a co-trustee. The amendment provided that in the event of default on the Imperial loan, the IPT was required to assign the Policy to Imperial. An Amended and Restated Trust Agreement, dated October 6, 2008 and signed by Bowie, Baldi, and the IPT, added a requirement that, if the Policy were rescinded and the premiums refunded to the Trust...