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Pape v. Braaten

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

September 30, 2019

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, ...


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