United States District Court, N.D. Illinois, Eastern Division
GREGORY PAPE, an individual, and STACEY PAPE, as trustee for the Gregory Pape Irrevocable Life Insurance Trust, Plaintiff,
v.
MARK BRAATEN, an individual; VOYA FINANCIAL ADVISORS, INC., a Minnesota Corporation; PACIFIC LIFE INSURANCE CO., a Nebraska corporation; MARKBRAATEN, Inc., a Wisconsin Corporation; ROHE LEVY, an individual, Defendants.
MEMORANDUM OPINIONS AND ORDER
REBECCA R. PALLMEYER United States District Judge.
In
2015, Plaintiff Gregory Pape borrowed approximately $1.1
million from a financing company to fund the purchase of two
sizeable life insurance policies. In the years that followed,
Mr. Pape borrowed another $1.2 million to continue paying the
premiums on those policies. But in 2017, according to Mr.
Pape, he discovered that these financial transactions were
"not suitable" for his goals. He then cancelled the
policies, paid off the loans, and-together with Stacey
Pape[1]-sued several of the individuals and
entities involved in selling him the insurance, claiming
negligence, breach of fiduciary duty, fraudulent
misrepresentation, and unjust enrichment. Plaintiffs allege
that prior to Mr. Pape's original purchase, and
throughout his three years of coverage, Defendant Mark
Braaten, an insurance producer who pitched Mr. Pape on the
policies, and Defendant Rohe Levy, who prepared financial
analyses regarding the policies, misrepresented key details
of the financial transactions they were encouraging Mr. Pape
to enter into. Those two Defendants along with MarkBraaten,
Inc., Braaten's company, now move to dismiss, arguing
that all the claims against them are barred by a statute of
limitations or, in the alternative, that several fail as a
matter of law. For the reasons stated herein, Defendants'
motions are granted in part and denied in part.
STATEMENT
OF FACTS
The
following allegations are derived from the Second Amended
Complaint, and assumed true for purposes of this motion. As
of 2014, Mr. Pape, a retiree living in Naperville, Illinois,
carried approximately $5, 000, 000 in life insurance
coverage. (Second Am. Compl. [104] ¶¶ 3, 21-22.) In
June of that year, Mr. Pape met for the first time with Mark
Braaten, a licensed insurance producer. (Id.
¶¶ 13, 21.) The Complaint does not specify how Mr.
Pape came to meet Braaten, but states that Braaten set up a
meeting at Mr. Pape's home, where Braaten proposed that
Mr. Pape double his insurance coverage, while saving $500,
000, through the use of “premium
financing.”[2] (Id. ¶¶ 21, 23.) In
doing so, Braaten made the following representations about
the policies: (1) “Mr. Pape would only have to make one
initial premium payment on the policies;” (2)
“Mr. Pape would not have to make any additional
payments after the initial premium payment;" and, (3)
“Interest would accrue on the policies.”
(Id. ¶ 24.)
In the
months that followed, Braaten and Mr. Pape held several more
meetings, during which Braaten repeated his initial
representations, and assured Mr. Pape that a premium-financed
insurance policy was “a suitable strategy for Mr.
Pape's goals, ” which were to make
"investments that would allow for cash flow" and
"avoid high risk investments with large commitments of
capital." (Id. ¶¶ 22, 30, 32.) The
two also participated in multiple conference calls,
[3]
during which Braaten reiterated the same representations, and
also made two others: (1) "The death benefit on each
policy could be lowered at any time without any charges or
other issues;" and (2) "Mr. Pape could get out of
the policies at any time without any penalties or
charges." (Id. ¶ 31.) The Complaint does
not specify why Mr. Pape considered either of these features
to be desirable in a life insurance policy that purportedly
called for a single initial premium payment.
At some
point, although the Complaint does not specify when, Braaten
involved Rohe Levy, another licensed insurance producer, in
this endeavor, apparently due to Levy's “experience
and purported expertise in the area of premium financing
policies.” (Id. ¶ 25.). Unbeknownst to
Pape, who never met Levy, Braaten and Levy agreed to split
the commission on an eventual sale of insurance, with Braaten
receiving an 80% share and Levy receiving 20%. (Id.
¶¶ 25, 34, 42.) For some reason, this arrangement
could only be facilitated by selling Mr. Pape two different
policies at once, a maneuver that conferred no benefit on Mr.
Pape (Plaintiff also does not allege that it caused a
detriment). (Id. ¶ 35.)
By July
2014, while Braaten was in the process of soliciting a sale
from Mr. Pape, Levy was communicating with Mike Howell, a
business supervisor and field case manager for Pacific Life
Insurance Company ("Pacific Life"), to discuss Mr.
Pape's potential application for a Pacific Life policy.
(Id. ¶ 26.) Notably, although Pacific Life
allegedly authorized Braaten to act as its agent throughout
this process (id. ¶ 20), the Complaint alleges
no such relationship with Levy, and the Complaint does not
explain Levy's role in communicating with Pacific Life
about Pape's potential application.
By
August 2014, Levy was communicating with Thomas McGee, a
Morgan Stanley affiliate “who worked with Mr. Pape on
matters of financial planning.” (Id. ¶
26.) The Complaint does not explain how the two came into
contact, or what they discussed. Thereafter, Levy's
primary role appears to have been to prepare loan analysis
documents for Mr. Pape's review, which detailed the terms
of a potential financing arrangement to fund the insurance
policies. (Id. ¶ 27.)
On or
before September 19, 2014, Levy prepared the first of three
documents titled “Life Insurance Premium Finance
Analysis Prepared for Greg Pape.” (Id. ¶
27.) On September 19, Braaten attached an excerpt from this
document-the section titled “loan analysis”-to an
e-mail to McGee. (Id.) This numbers in this excerpt,
in the Complaint's characterization, showed that (1)
"Any interest on the premium financed loan was
capitalized into the loan"; (2) "Mr. Pape would not
have to make any loan payments after the first year;”
and (3) "Mr. Pape would have an annual net outlay of
zero after the first year." (Id.) At some point
not specified, Braaten reaffirmed these representation to Mr.
Pape in a conference call.[4] (Id. ¶ 31.) Segments of
the document Levy prepared that were not included in this
excerpt (and thus, potentially, not shown to McGee or Mr.
Pape) state information “explaining how the rate of
return related to the costs of the plan.” (Id.
¶ 28.)
On
September 29, 2014, Mr. Pape signed applications for two life
Pacific Life insurance policies, as did the then-appointed
trustee for his trust. (Id. ¶ 36.) Braaten
signed the policies as the licensed insurance producer, and
submitted the applications to Pacific Life. (Id.
¶¶ 37, 39.)
At some
point prior to October 24, 2014, Levy prepared another
document titled “Life Insurance Premium Finance
Analysis Prepared for Greg Pape.” (Id. ¶
44.) On October 24, Braaten e-mailed the “loan
analysis” section of this document to McGee, writing
that the analysis illustrated Mr. Pape's death benefit
under either a $5 million or $10 million policy.
(Id. ¶ 43.) This analysis again confirmed that
(1) "Mr. Pape would only have to make one initial
payment on the policies;” (2) “Mr. Pape would not
have to make any additional payments after the initial
payment;" and (3) "Interest would accrue and be
capitalized into the loan." (Id.)
As of
January 14, 2015, Levy had prepared a third document bearing
the title “Life Insurance Premium Finance Analysis
Prepared for Greg Pape.” (Id. ¶ 47.)
Although the Complaint does not specify how, the “loan
analysis” section of this document found its way to
McGee, who on January 14, 2015 e-mailed it to Braaten,
writing, “I have spoken to [Mr. Pape] and he has
determined that he will be going with the policy that has the
attached illustration.” (Ex. G-1 to Second Am. Compl.)
This document, in the Complaint's characterization,
showed “that Mr. Pape would only have to make one
initial payment and would have an annual net outlay of zero
after year one, ” and “showed interest
capitalizing into the premium finance loan.” (Second
Am. Compl. ¶ 46.)[5]
The
next day, Levy prepared a “premium financing input
summary for Pacific Life that was for producer use
only.” (Id. ¶ 48.) The Complaint does not
explain what a "premium financing input summary"
is, why Levy was preparing an internal document for a company
with which he is not alleged to have had a formal
relationship, how Plaintiffs came to be in possession of this
document, or why it is relevant to their claims. The
following day, Levy exchanged e-mails with a Pacific Life
employee; these emails, according to the Complaint,
“indicat[ed] that Mr. Levy was working on new loan term
sheets” that would, pursuant to Pacific Life's
underwriting guidelines, match the illustration for which Mr.
Pape had already given approval. (Id. ¶ 49.)
Plaintiffs further allege that Mr. Pape's application
“was not in compliance with [Pacific Life's]
guidelines because loan fees were not reflected in the
illustrations and the illustrations were not signed.”
(Id.)
On
January 27, 2015, McGee sent an e-mail to Levy, copying
Braaten and Pape, stating that Mr. Pape wished to “move
forward with the insurance.” (Id. ¶ 50.)
The next day, Pacific Life issued two policies insuring Mr.
Pape's life, one for $2 million, and another for $8
million. (Id. ¶ 51.) Based on the reference
numbers Pacific Life assigned these policies, the Complaint
refers to them as “Policy 550” and “Policy
540, ” respectively. (Id.) The annual premiums
for these policies exceeded $750, 000 in total. (Id.
¶ 53.) (It is unclear at what point Mr. Pape learned
that he would be making “annual” premium
payments; as described above, Braaten allegedly promised
there would be just one initial payment.) Around this time,
Braaten also advised Mr. Pape to cease making payments on
life insurance policies that he held prior to this purchase.
(Id. ¶ 59.)
Braaten
furthermore encouraged Pape to enter into an agreement with
First Insurance Funding Corp., a Wintrust Company
(“Wintrust”) to finance the premiums on his new
life insurance policies. (Id. ¶ 55.) On
February 12, 2015, Mr. Pape obtained a loan from Wintrust in
the amount of $1, 192, 564.49. (Id. ¶ 56.) For
reasons not explained in the Complaint, Mr. Pape immediately
tendered an "initial payment" on the Wintrust loan,
which totaled approximately $33, 379. (Id. ¶
58.) Levy earned a commission on this loan as its broker, a
fact that was not shared with Mr. Pape. (Id.
¶¶ 55, 57.)
In
early 2016, following Braaten's recommendation, Mr. Pape
took out an additional loan from Wintrust in the amount of
$605, 065. (Id. ¶ 62.) Despite the apparent
conflict with Braaten's purported promise of a one-time
payment, there is no indication in the Complaint that this
transaction set off alarm bells for Pape or his financial
advisor, McGee. The Complaint alleges that Braaten
“continued to represent to Mr. Pape that the premium
financed policy strategy was suitable for his investment and
insurance needs and encouraged Mr. Pape to continue with the
financing of the [p]olicies.” (Id.) (The
Complaint does not identify Pape's insurance
“needs” with any specificity.) On this loan, as
with the prior one, Levy received an unspecified commission.
(Id. ¶ 63.)
Around
December 2016, Mr. Pape began a relationship with new
investment advisors, and requested that Braaten provide
information relating to the "approaching second
anniversary" on his Wintrust loan, which apparently
required renewal by the end of January 2017. (Id.
¶¶ 64- 65.) (What led Mr. Pape to believe the loan
required "renewal," given information allegedly
given to him earlier, is a mystery.) On December 21, 2016,
Braaten sent Mr. Pape and McGee a loan analysis section
excerpted from yet another “Life Insurance Premium
Financing Analysis” prepared by Levy, showing “an
annual net outlay of zero” and “interest . . .
capitalized into the loan.” (Id. ¶ 66.)
Mr.
Pape thereafter requested an illustration of what his costs
would be if he were to reduce the death benefit on his
insurance policy. (Id. ¶ 67.) (The court notes
that Pape's request suggests that he knew, by this point,
that his policies required recurring payments.) In January
2017, Braaten and Levy discussed with one another the
possibility of providing Mr. Pape with two loan analyses:
“one with everything kept as-is but with a 6.48% rate
and, the other, with a lowered death benefit, but without the
policies becoming modified endowment
contracts.”[6] (Id. ¶ 67.) The Complaint
does not specify what the 6.48% interest rate refers to, be
it loan payment that Mr. Pape was making, or interest that
would be capitalized into the loan amount, to be paid
ultimately from insurance proceeds. Levy prepared the first
of these analyses and e-mailed it to Braaten. (Id.)
Like its predecessors, this document showed interest
capitalizing into the loan and an annual net outlay of zero.
(Id.) MarkBraaten, Inc. then prepared “a very
similar analysis but with the annual interest calculated
differently.”[7] (Id.) Levy followed up with yet
another draft, which included “the same
misrepresentations concerning annual outlay and interest
rolling into the loan.” (Id.)
On
January 30, 2017, a Pacific Life representative informed Levy
via email that Mr. Pape's desired reduction in his
insurance policy's death benefit could not be
accomplished until “year seven, ” due to
“modified endowment contract
testing.”[8] (Id. ¶ 68.) Braaten then
told Mr. Pape that Braaten could not provide an illustration
of the adjusted policy until after February 2017-Mr.
Pape's apparent deadline for renewing the loan, although
the Complaint does not specify who or what imposed such a
deadline-and encouraged Mr. Pape to sign the documents to
obtain a new loan. (Id. ¶ 69.) Pape allegedly
did so, taking out an additional loan from Wintrust in the
amount of $605, 065 (the same amount he had borrowed a year
earlier), from which Levy received another commission.
(Id. ¶ 71.) After Mr. Pape renewed the policy,
Braaten allegedly relayed to Pape that his death benefit
could not be lowered without “triggering a modified
endowment contract with negative consequences to Plaintiffs,
” presumably related to taxes. (Id. ¶
72.)
After
hearing this, Mr. Pape asked his financial advisors to
evaluate the Pacific Life policies and the Wintrust loan, as
well as the other life insurance policies on which, at
Braaten's direction, Mr. Pape had ceased making payments.
(Id. ¶ 73.) Mr. Pape thereafter purportedly
learned that “the representations of Mr. Braaten
concerning the Pacific Life Insurance Policies were
false”; the Complaint does not specify to which
representations this allegation refers. (Id. ¶
74.) Plaintiffs also assert that Mr. Pape at this point
learned that the policies were "not suitable" for
him in light of (1) "[h]is retirement"; (2)
"[h]is investment goals"; (3) "[t]he
undisclosed costs of the policies and the impact of those
costs on the need to take out additional loans"; (4)
“[t]he high costs of the premium financed
structure"; (5) "[t]he additional costs of riders
on each policy"; (6) Mr. Pape's previously existing
insurance policies; and (7) "[t]here being no legitimate
investment reason to place Mr. Pape in two indexed universal
life insurance policies as opposed to
one."[9] (Id. ¶ 74.) Mr. Pape also
allegedly discovered that ceasing payment on his other
insurance policies had caused “a change in lapse
structure” that would cost $100, 000 to repair.
(Id. ¶ 75.)
The
Complaint emphasizes that Braaten “never
disclosed” that “unlike whole life policies where
costs are already deducted from guaranteed and projected
results, indexed universal policies have monthly deducted
costs for insurance charges, policy charges, transaction
charges, policy issue charges, premium charges and costs for
additional riders.” (Id. ¶ 76.) Nor did
Braaten reveal “that the policy expenses and fees each
month would be 7% or more, which would offset the performance
of the index and cause the policies to lose money unless
Plaintiffs took out more and more loan money to cover the
gap.” (Id. ¶ 77.)
In
November of 2017, Mr. Pape sent Pacific Life a letter
asserting that he believed Braaten and Levy had
misrepresented details about the life insurance policies they
had sold him, including that (1) “He would not have to
make any additional payments after the first year;” and
(2) “The policies would make enough money after the
first year to pay the lender back the premiums borrowed plus
the accrued interest at a future date.” (Id.
¶ 79.) Pape's letter also stated that “[t]he
illustration provided by Braaten violated Pacific Life
Insurance Company's own rules concerning premium financed
policies.” (Id.) Pacific Life did not respond
to this letter. (Id. ¶ 80.)
Braaten
thereafter advised Mr. Pape to take out yet another loan to
keep the Pacific Life policies in force. (Id.) Pape
did not do so, instead surrendering the policies in January
2018. (Id. ¶ 81.) This yielded $1.8 million in
surrender values, which Pape used to pay part of an
outstanding $2, 542, 406.02 owed on the Wintrust loan,
including over $250, 000 in interest. (Id. ¶
82.) To pay off the remainder of the Wintrust loan, Mr. Pape
took out a separate $700, 000 loan. (Id. ¶ 82.)
Mr. Pape also incurred approximately $150, 000 in
“surrender charges, ” and was deprived of $33,
379 in “cash collateral” previously posted.
(Id. ¶ 84.)
In
total, Plaintiffs allege that they have incurred more than $1
million in damages as a result of Mr. Pape's purchase of
the Pacific Life policies. (Id. ¶ 86.) Mr. Pape
further alleges that, at some point, Braaten acknowledged
that he received commission in the approximate amount of
$240, 000 on the policies. (Id. ¶ 85.)
PROCEDURAL
HISTORY
On
February 28, 2018, Plaintiffs filed the original complaint
[1] in this court. The Second Amended Complaint [104] (the
“Complaint”), filed January 30, 2019, names as
Defendants Levy, Braaten, and Pacific Life, along with
Markbraaten, Inc. and Voya Financial Advisors, Inc.
(“Voya”). MarkBraaten, Inc. is a company owned by
Braaten, through which Braaten sells life insurance policies.
(Id. ¶ 17.) Voya is a Minnesota corporation of
which Braaten was allegedly a registered representative, and
which is not a party to this motion.[10] (Id.
¶¶ 7, 16.)
Relevant
here, the Second Amended Complaint brings two counts against
both Braaten and MarkBraaten, Inc. (together, the
“Braaten Defendants”), one count against only
Braaten, and three counts against Levy. Specifically: Counts
I and II charge the Braaten Defendants with common law
negligence and breach of fiduciary duty, respectively; Count
III charges Braaten individually with fraudulent
misrepresentation; and Counts VII, ...