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Sun Life Assurance Co. of Canada v. Wells Fargo Bank, N.A.

United States District Court, N.D. Illinois, Western Division

May 7, 2018

Sun Life Assurance Company of Canada, Plaintiff,
v.
Wells Fargo Bank, N.A., et al., Defendants.

          ORDER

          Philip G. Reinhard, Judge

         For the reasons stated below, the portion of plaintiff's motion [32] directed to striking the first through thirteenth and the fifteenth affirmative defenses is denied as to the sixth, seventh and eighth affirmative defenses to the extent they relate to a return of premiums paid. Otherwise, the request to strike the first through thirteenth and the fifteenth affirmative defenses is granted. Plaintiff's motion to dismiss Counts I and II of the counterclaim are denied. Plaintiff's motion to dismiss Count III of the counter claim is granted. Plaintiff's motion to dismiss Count IV of the counterclaim is granted in part and denied in part. It is denied to the extent that Count IV seeks restitution for premiums paid by the Bank and otherwise is granted. Nelsen's motion [40] to dismiss is denied.

         STATEMENT-OPINION

         Plaintiff, Sun Life Assurance Company of Canada (a Canadian corporation with its principal place of business in Massachusetts), brings this action against Wells Fargo Bank, N.A., as securities intermediary (“Bank”) (a national banking association with its main office as designated in its articles of association in South Dakota), and Frank Nelsen[1]. Nelsen is an Illinois citizen. The amount in controversy exceeds $75, 000. Subject matter jurisdiction is based on diversity of citizenship. 28 U.S.C. § 1332(a)(1), (2). Counts I and II of the complaint are brought against the Bank under the Declaratory Judgment Act (28 U.S.C. § 2201) and ask the court to declare that a certain life insurance policy issued by plaintiff on the life of Robert Corwell was void ab initio as an illegal wager on human life (Count I) and lacked an insurable interest (Count II). It also seeks to recover from Nelsen, an Illinois insurance producer, for fraudulent inducement (Count III), fraud (Count IV), negligent misrepresentation (Count V), and breach of contract (Count VI). The Bank answered [20] the complaint, asserted affirmative defenses and filed counterclaims. Plaintiff moves [32] to strike all but one of the Bank's fifteen affirmative defenses and to dismiss the Bank's counterclaims. Nelsen moves [40] to dismiss the claims against him.

         Robert Corwell died on June 25, 2017. At the time of his death, the Bank, as securities intermediary, was the owner and beneficiary of a five million dollar insurance policy on Corwell's life issued by plaintiff in August 2006. In July 2017, the Bank submitted a death benefit claim. Plaintiff did not pay the claim or tell the Bank that it was denying the claim. Instead, on September 12, 2017, plaintiff filed this action, which as to the Bank, asks for a declaratory judgment that the policy was void ab initio as an illegal wager on human life because the policy was procured by persons who lacked an insurable interest in Corwell's life. Under controlling Illinois law, a policy procured by persons with no insurable interest in the life of the insured is void at its inception (ab initio). Charbonnier v. Chicago Nat'l Life Ins. Co., 266 Ill.App. 412 (1932). The result of a life insurance policy being found to be void ab initio is that the insurer does not have to pay the death benefit and gets to keep all of the premiums paid to it up until that point. Ohio Nat'l Life Assurance Corp. v. Davis, 803 F.3d 904, 911 (7th Cir. 2015); Penn Mutual Life Ins. Co. v. Greatbanc Trust Co., 887 F.Supp.2d 822, 831-32 (N.D. Ill. 2012). Illinois law does allow an exception for a party who paid premiums but was not in pari delicto as to the unlawful contract. Such a party is allowed to recover from the insurer the premiums it paid. Davis, 803 F.3d at 911. Illinois also has a statute that allows a court to tax as costs attorney fees, costs, and statutory penalties “[i]n any action by or against a company wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable thereunder, or for an unreasonable delay in settling a claim, and it appears to the court that such action or delay is vexatious and unreasonable.” 215 ILCS 5/155(1).

         In response to plaintiff's complaint, the Bank filed an answer, including affirmative defenses, and counterclaims asserting breach of contract (CC Count I), a statutory claim under 215 ILCS 5/155 (CC Count II) and in the event plaintiff succeeds in obtaining a declaration the policy was void ab initio, a claim for refund of premiums (CC Count III), and for restitution of premiums paid under an unjust enrichment theory (CC Count IV). Plaintiff moves to strike all but one of the affirmative defenses and to dismiss the counterclaims, arguing that plaintiff's declaratory judgment action bars the Bank from claiming breach of contract (CC Count I) and a vexatious and unreasonable refusal to pay under 215 ILCS 5/155(1) (CC Count II). Plaintiff argues CC Counts III and IV must be dismissed because a return of premiums is not allowed under Illinois law for a policy that is void ab initio and that, to the extent the Bank may be entitled to a refund on an unjust enrichment theory per Davis, that such a claim merely presents the mirror image of plaintiff's request for relief and is, therefore, duplicative.

         The Bank raises fifteen affirmative defenses. Plaintiff moves to strike all of the affirmative defenses except one, the fourteenth, which asserts plaintiff's claim to retain the premiums is barred by unjust enrichment. The Bank does not contest the motion to strike as to the first, tenth, twelfth, or fifteenth affirmative defenses and, therefore, they are stricken. Additionally, the Bank makes no argument in support of the ninth, eleventh, and thirteenth affirmative defenses. These three affirmative defenses relate to plaintiff's damages but, as plaintiff observes, it is not seeking damages against the Bank. These three affirmative defenses are also stricken. That leaves the second through eighth affirmative defenses in dispute.

         In its complaint, what plaintiff seeks against the Bank is a determination that the policy was procured by parties with no insurable interest in Corwell's life. Such a policy is void at its inception (ab initio) under Illinois law. Charbonnier v. Chicago Nat'l Life Ins. Co., 266 Ill.App. 412 (1932). A contract is void ab initio if it expressly contravenes the law or known public policy of Illinois. In re Marriage of Newton, 955 N.E.2d 572, 584 ( Ill. App. 2011). A contract that is void ab initio “is treated as though it never existed; neither party can choose to ratify the contract by simply waiving its right to assert the defect.” Id.

         The Bank's second affirmative defense asserts plaintiff's claim is barred by the applicable statute of limitations and/or by the policy's incontestability period. In its argument, the Bank addresses only the incontestability issue. It argues that if the policy is found to be valid (i.e. not void ab initio), then the incontestability provision of the policy bars plaintiff from challenging the policy. Plaintiff does not dispute this, acknowledging that if the policy is found to be valid (i.e. not void ab initio), then the Bank “would have already prevailed on the merits” and “the affirmative defense would be moot.” The Bank acknowledges that if a policy is found to be void ab initio, then it is not subject to an incontestability clause contained in the policy. Therefore, there is no disagreement between plaintiff and the Bank on this point. If the policy never came into existence, there is no policy and, necessarily, no incontestability provision. If the policy did come into existence, the Bank is entitled to enforce it. The second affirmative defense, therefore, is moot.

         The Bank's third affirmative defense is that plaintiff's “purported claim for rescission (and/or declaratory relief)” is barred by ratification. However, plaintiff is not seeking rescission and if it establishes the policy was void ab initio, the policy cannot be ratified by either party. Id. Ratification is not an available defense to the claim against the Bank. The fifth affirmative defense asserting waiver by plaintiff is also not an available defense for the same reason. Id.

         The Bank's fourth affirmative defense asserts plaintiff's claim is barred for failing to make an election of remedies by seeking to “rescind and/or void the policy” and return the parties to the status quo ante by returning all premiums paid to date. However, when a contract is found to be void ab initio, the court does not return the parties to the status quo ante but leaves them where it finds them in the position they have placed themselves with no recovery of money paid for illegal services. Ohio Nat'l Life Assurance Corp. v. Davis, 803 F.3d 904, 911 (7th Cir. 2015); Penn Mutual Life Ins. Co. v. Greatbanc Trust Co., 887 F.Supp.2d 822, 831-32 (N.D. Ill. 2012). Election of remedies is not a defense to a claim a contract is void ab initio.

         The Bank's sixth (estoppel), seventh (laches), and eighth (unclean hands) affirmative defenses all go to the Bank's claim plaintiff knew long before Corwell's death that it was going to attack the policy as void ab initio but that, despite that knowledge, plaintiff took no action prior to Corwell's death in order to dupe the Bank into continuing to pay the premiums which plaintiff knew it would be able to retain if it succeeded in having the policy declared void ab initio. Under Illinois law, even if this proves to be true, plaintiff's wrongful conduct does not make a contract that was void at inception enforceable. The Bank, however, may be entitled to equitable relief of restitution for premiums innocently paid. If the Bank was not in pari delicto as to the unlawful contract, then Illinois allows it to recover from plaintiff the premiums it paid. Davis, 803 F.3d at 911. Plaintiff acknowledges that it was for this reason that the Bank's unjust enrichment affirmative defense to plaintiff's claim to retain the premiums was the one affirmative defense plaintiff did not seek to strike. While it is probably true that unjust enrichment is the correct equitable theory under which to seek to defeat plaintiff's attempt to keep the premiums, id.; Greatbanc, 887 F.Supp.2d at 832, at this time, the court will not foreclose estoppel, laches, and unclean hands as alternative equitable theories for doing so.

         Fed. R. Civ. P. 13(a)(1)(A) requires that a pleading must state as a counterclaim any claim the pleader has against an opposing party if the claim “arises out of the transaction or occurrence that is the subject matter of the opposing party's claim. “[W]hen an insurer sues for a declaratory judgment of nonliability, the insured must plead his claim under the policy as a Rule 13(a) counterclaim.” 6 Wright and Miller, Federal Practice and Procedure Civil 3d § 1410.1. Pursuant to Rule 13(a), the Bank has filed a counterclaim pleading its claim under the policy to the death benefit asserting breach by plaintiff (CC Count I). The Bank also seeks to recover under 215 ILCS 5/155(1) for a vexatious and unreasonable action or delay by plaintiff concerning payment of the death benefit (CC Count II).

         The counterclaim alleges plaintiff issued a $5 million life insurance policy to Corwell with the Corwell Family Limited Partnership as beneficiary. The partners of the Corwell Family Limited Partnership, which had been established in 1993, were Corwell, his wife, and his children. The initial premium payment in the amount of $147, 059.49 was made with a check drawn on a Corwell Family Limited Partnership account. In September 2006, the Robert M. Corwell 2006 Insurance Trust became the owner and beneficiary. Corwell's wife was co-trustee and beneficiary of this trust. In August 2009, the Bank became the owner and beneficiary. Plaintiff recorded and recognized the Bank was the sole owner and beneficiary of the policy. All of the premiums were paid throughout the term of the policy. ...


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