The opinion of the court was delivered by: Judge Edmond E. Chang
MEMORANDUM OPINION AND ORDER
Plaintiff Penn Mutual Life Insurance Company seeks a declaration that the policy of life insurance issued on the life of Defendant Horace Windham is void or voidable due to a lack of insurable interest at inception and/or material misrepresentations in the application for the Policy.*fn1 Defendants GreatBanc Trust Company and Horace Windham move for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c). R. 147. For the following reasons, Defendants' motion is denied.
In evaluating a defense motion for judgment on the pleadings, the Court must accept as true the complaint's factual allegations. In September 2007, Horace Windham applied to Penn Mutual for a $6 million life insurance policy. R. 1 (Compl.)
¶ 22. According to the application, Windham desired to procure the policy for "financial planning" purposes. Id. ¶¶ 23, 30. However, Penn Mutual claims that this representation was false and that, from the outset, Windham actually intended to transfer the policy to a third-party investor in exchange for payment. Id. ¶¶ 38-41.
Penn Mutual alleges that Windham's arrangement is unlawful because the investor/transferee was a stranger. Id. ¶¶ 10-12. Specifically, Penn Mutual claims that Defendants Kevin Bechtel and Steven Brasner approached Windham about applying for a life insurance policy. Id. ¶ 20. Neither Bechtel nor Brasner has a familial relationship with Windham, or any other legally recognized interest in Windham's life. Id. ¶ 57. Rather, according to Penn Mutual, Bechtel and Brasner solicited Windham's participation in a "stranger originated life insurance" scheme (commonly referred to as a "STOLI" scheme). Id. ¶ 20. Pursuant to the scheme, Windham created a trust, named the Horace Windham 2007 Insurance Trust, to serve as the owner and the beneficiary of the life insurance policy. Id. ¶ 21. Windham's insurance application listed the Windham Trust as the intended owner of the policy, and Defendant GreatBanc Trust Company as the trustee of the Windham Trust. Id. ¶ 24. Penn Mutual alleges in its complaint that in exchange for the beneficial interest in Windham's life, Bechtel, Brasner, and/or GreatBanc likely paid the premium payments in connection with the policy, as well as compensation to Windham for his participation in the scheme. Id. ¶¶ 16, 41, 50-51, 54.
Windham's insurance application and its accompanying agent's underwriting report affirmatively represented that the policy was not being sought for purposes of resale in the secondary market. Id. ¶¶ 24-28, 33-36. For instance, the application asked whether Windham had been involved in any discussion about the possible sale or assignment of the policy to a secondary market provider. Id. ¶ 25-27. The application also asked whether any part of the premiums would be paid from funds that were borrowed or otherwise financed. Id. ¶ 28. Windham answered "no" to both of those questions. Id. ¶¶ 27-28. Based on these and other representations in the insurance application and agent's underwriting report, Penn Mutual issued a life insurance policy in October 2007 for $6 million in total coverage. Id. ¶ 37.
Later, Windham took steps to effectuate a transfer of the policy to the investor(s), and Penn Mutual brought this action. Id. ¶ 40. Penn Mutual claims that Defendants made material misrepresentations in the documents submitted for the life insurance policy and that the Windham Trust never had an insurable interest in the policy. Id. ¶¶ 47-66. Therefore, Penn Mutual claims that it is entitled to a judicial declaration that the policy is void and to an award of damages. Id. ¶¶ 55, 60, 66.
Federal Rule of Civil Procedure 12(c) permits a party to move for judgment on the pleadings after both the plaintiff's complaint and the defendant's answer have been filed. Fed. R. Civ. P. 12(c). Rule 12(c) motions are reviewed under the same standard as Rule 12(b)(6) motions to dismiss. Piscotta v. Old Nat'l Bancorp, 499 F.3d 629, 633 (7th Cir. 2007). "A motion under Rule 12(b)(6) challenges the sufficiency of the complaint to state a claim upon which relief may be granted." Hallinan v. Fraternal Order of Police Chicago Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009). As with Rule 12(b)(6) motions, the Court must view the facts alleged in the light most favorable to the non-moving party. Emergency Servs. Billing Corp. v. Allstate Ins. Co., 668 F.3d 459, 464 (7th Cir. 2012). The Court will grant the motion only if no genuine issues of material fact exist and if it appears beyond doubt that the non-moving party is unable to prove any set of facts to support its claim for relief. Brunt v. Serv. Emps. Int'l Union, 284 F.3d 715, 718-19 (7th Cir. 2002).
Defendants GreatBanc and Horace Windham argue that their Rule 12(c) motion should be granted because they consent to the relief Penn Mutual requests in Counts 1 and 2 of the complaint (a declaration that the policy is void), and thus there is no longer a controversy to be adjudicated in this case.*fn2 R. 149 (Defs.' Br.) at 1-2. It is Defendants' position that the relief sought in Counts 1 and 2 is limited to a declaration rescinding the life insurance policy. Id. Because Defendants now concede to the rescission of the policy, they agree that Penn Mutual should be relieved of its obligation to pay out on the policy in the event of Windham's death. However, the sticking point that led to the filing of the present motion is whether Penn Mutual must return over $400,000 in premiums paid on the policy to GreatBanc, which is the trustee of the Windham Trust and the supposed owner of the life insurance policy. The parties' dispute centers on this issue.
Penn Mutual argues that a rescission is not the appropriate remedy in this case because Windham's life insurance policy was an illegal contract. R. 158 (Pl.'s Resp.) at 7. Penn Mutual contends that the policy was based on an illegal STOLI scheme, thereby making the subject matter of the contract illegal. Id. at 7-8. Under Illinois law,*fn3 "if the subject matter of a contract is illegal, that contract is void ab initio." Ill. State Bar Ass'n Mut. Ins. Co. v. Coregis Ins. Co., 821 N.E.2d 706, 712 (Ill. App. Ct. 2004). And "a contract that is void ab initio is treated as though it never existed." Id. at 713. Thus, Penn Mutual argues that because the policy was void at its inception, it does not have the option to simply rescind the policy and get back the paid premiums. Because the policy was (in Penn Mutual's view) void from the start, the parties should be left "where, by their own acts, they have placed themselves." Pl.'s Br. at 8 (quoting Keenan v. Tuma, 240 Ill. App. 448, 456 (Ill. App. Ct. 1926)). In other words, Penn Mutual gets to keep all of the premiums already paid for the Windham policy.
Under Illinois law, "a life insurance policy must not be sold to or be procured by an individual who has no insurable interest in the life of the insured." Bajwa v. Metro. Life Ins. Co., 776 N.E.2d 609, 616-17 (Ill. App. Ct. 2002). Here, Penn Mutual claims that the owner listed on the policy application, the Windham Trust, did not have an insurable interest in Windham's life. Compl. ¶¶ 57-59. Penn Mutual contends that Defendants formed the Trust solely to create the illusion of an insurable interest, and the Trust was then used to procure the policy for investors. Pl.'s Br. at 9-10. Penn Mutual argues that this exact arrangement is prohibited by the Illinois Viatical Settlements Act of 2009, 215 ILCS 159/5 (West 2012). Id. at 9. The Act defines "stranger-originated life insurance" as an "arrangement to initiate a life insurance policy for the benefit of a third-party investor who, at the time of the policy origination, has no insurable interest in the insured." 215 ILCS 159/5. Likewise, arrangements to ...