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Smith v. Life Partners

October 3, 2007


On appeal from Superior Court of New Jersey, Chancery Division, Camden County, Docket No. C-214-05.

Per curiam.



Argued September 11, 2007

Before Judges Wefing, R. B. Coleman and Lyons.

Defendants, Sterling Trust Co. ("Sterling"), Life Partners, Inc. ("LPI"), and Life Partners Holdings, Inc. ("LPHI") are, respectively, a trust company and purchasing agents of viatical settlements for individuals and corporate investors. They appeal from an order for summary judgment entered against them and in favor of plaintiff, a 52-year-old HIV-positive woman who sold LPI her life insurance policy in 1994. We affirm in part and reverse in part.

The following factual and procedural history is relevant to our consideration of the issues advanced on appeal. Plaintiff, 52-year-old M. Smith, was diagnosed with HIV/AIDS in 1992. She is insured under a group insurance plan with The Guardian Life Insurance Company ("Guardian"). The plan includes various components: term life insurance, health insurance and accidental death and disability coverage. The life insurance policy provides a $150,000 benefit at the time of death.

In early 1994, plaintiff read an advertisement in a magazine for HIV-positive readers offering prompt payment of cash to AIDS patients for their life insurance policies. The advertisement was placed by Page & Associates, a viatical settlement broker located in Ohio.

In August 1994, plaintiff entered into a "Purchase Agreement and Assignment of Life Insurance Policy," as well as a "Funds Transfer Agreement" to sell her life insurance policy to defendant, LPI. LPI is a Texas corporation, which serves as the purchasing agent of viatical settlements for individuals and corporate investors. As a result of the assignment and purchase agreement, LPI agreed to pay plaintiff $90,000 for the life insurance policy. Of that amount, $5,510.64 was placed into escrow to pay the anticipated premiums for the group insurance plan (including both the life insurance policy and the health policy for a period of two years). In the event that plaintiff outlived the initial two-year period, LPI undertook to make all future premium payments on the Guardian group insurance plan. The Assignment and Purchase Agreement specifically provides in relevant part:

8. . . . Purchaser agrees to make any necessary contributions to the escrow fund to pay future premiums in the event such escrowed funds are exhausted and Seller shall have no further liability for payment of premiums on the policy.

In addition, Article 2 § 2.04a of the Funds Transfer Agreement reads, in relevant part, as follows:

Premiums for both the Health and Life portion of this policy, being inseparably billed by the insurance carrier, will be paid by the Escrow Agent from funds escrowed for that purpose. Purchaser agrees to make any necessary contributions to the escrow fund to pay future premiums in the event such escrowed funds are exhausted and Seller shall have no further liability for payment of premiums on the policy.

In March 1998, LPI informed plaintiff that it would not pay her health insurance coverage. In that notice, LPI told plaintiff that the escrow account established in 1994 from funds withheld from plaintiff's share of the policy, while originally anticipated to be sufficient to pay the costs of both her health and life insurance coverage because they could not be billed or paid separately, had been exhausted and the investors in plaintiff's policy were no longer willing to support the cost of her health coverage. Accordingly, plaintiff was noticed that she had to contribute the funds to maintain her health insurance coverage. Following a letter from plaintiff's counsel asserting that LPI's denial of payment was a breach of contract, LPI agreed to continue to pay the full premiums of the policy acknowledging that section 8 of the Purchase Agreement and Assignment "binds us to pay the premiums for both health and life insurance". LPI noted at that time, however, that it was "under no obligation to keep this policy in force . . . should it become unfeasible to continue paying the premiums, LPI may decide to abandon the policy and allow it to lapse." Following this exchange, LPI continued to pay plaintiff's insurance premiums through the beginning of 2005.

On August 15, 2005, the day that payment of semi-annual premiums were due to be paid on the Guardian insurance plan, LPI wrote to plaintiff to inform her that it would not pay the Guardian premiums attributable to the health policy. LPI explained that plaintiff would be responsible for the premium on the health policy because at the time LPI purchased the policy, the billing for the life policy could not be separated from the health coverage, which it did not purchase. However, at the time the August 15, 2005 correspondence was written, the premium billing statements offered a specific breakdown of the amounts due for the life and health insurance separately and Guardian agreed to apply payments separately to the health coverage and the life coverage. Therefore, since LPI only purchased the life insurance policy, it stated it would pay the premium for the life policy but plaintiff would be responsible for the premium on the health policy to the extent it was kept in force.

On August 29, 2005, Ronda Goldfein of the AIDS Law Project of Pennsylvania wrote a letter to LPI on behalf of plaintiff. Goldfein's letter referred LPI to section 8 of the Purchase Agreement and Assignment and Article 2 § 2.04a of the Funds Transfer Agreement and noted that, "[t]he fact the health and life insurance premiums are identified as 'inseparably billed' does not render [LPI's] obligation to pay the premiums conditional . . . the obligation of payment is clear. . . ." Goldfein's letter also stated that LPI's "refusal to pay [plaintiff's] health insurance is a clear breach of the contract." Goldfein demanded proof of payment of the entire payment due in the sum of $8,502.59. Despite this correspondence, LPI did not make the requested payment and refused to pay the premium on the health policy. The grace period for payment of the premium expired on September 15, 2005, and plaintiff was unable to pay the premium for the health policy.

Plaintiff's counsel contacted LPI's president and general counsel, R. Scott Peden ("Peden") to discuss the insurance situation. Plaintiff's counsel informed Peden that if LPI did not agree to pay the full premium, plaintiff would seek emergent injunctive relief. On September 19, 2005, Peden responded by e-mail and reiterated LPI's position that there was no legal or factual basis for plaintiff's claims. Peden set forth the reasons for LPI's position as follows:

1. Injunctive relief is inappropriate because irreparable harm cannot be demonstrated.

2. Your underlying claim fails because LPI never contracted to purchase or provide [plaintiff] with health insurance. The premium reference in the contract refers only to the unwillingness of Guardian Insurance to separate the health and life premiums at the time of the assignment. Guardian will now properly divide and attribute those premiums. To the extent your client claims to have misunderstood these terms, there was a mutual mistake which would void the contract, not result in damages.

3. The contract sets forth no fiduciary duty or relationship for LPI to have breached. Further, your client is not a consumer under the Consumer Frauds Act. She was the seller in our transaction, not a consumer.

Following a responding e-mail by plaintiff's counsel informing LPI that plaintiff would be filing suit, Peden e-mailed plaintiff's counsel on the afternoon of September 19, 2005 and informed him that while LPI had no liability for payment of plaintiff's health insurance premiums, LPI agreed to advance full payment of both the health and life premium on plaintiff's policy. The September 2005 payment by LPI provided plaintiff with health coverage through February 2006.

On November 21, 2005, plaintiff filed a complaint against defendants in the Chancery Division of the Superior Court. The complaint, composed of five counts, alleged breach of contract, Consumer Fraud Act violations, and breach of fiduciary duty. It sought injunctive relief, a constructive trust for the benefit of plaintiff as well as damages, punitive damages, and attorneys fees.

On January 6, 2006, defendants filed a motion to dismiss plaintiff's complaint on the ground that the court lacked personal jurisdiction over defendants and on the basis that plaintiff failed to state a cause of action since LPI had complied with the assignment and purchase agreement. The motion was supported by an affidavit of Peden filed February 13, 2006, "reaffirming LPI's contractual obligation to plaintiff" and "LPI's obligation under said contracts to pay plaintiff's health insurance premiums under Group Policy No. G-156141-VN".

On January 26, 2006, plaintiff cross-moved for an order to show cause for a preliminary injunction pursuant to Rule 4:52. The order to show cause specifically asked the court to enjoin defendants from refusing to pay the health insurance premiums until a final hearing on the merit of plaintiff's claim. In addition, in February 2006, LPI paid the semi-annual premium payment that became due that month.

Oral argument on the motion to dismiss was heard on February 17, 2006. The trial judge found that in light of the contradictions between Peden's prior e-mails and LPI's affidavit to the court reaffirming its obligation to pay plaintiff's health insurance, there was an anticipatory breach by LPI when it refused to pay her premiums, particularly when Peden sent his e-mails in September 2005. Thus, the court found that there was a justiciable issue. In addition, the court found that it had both specific and general jurisdiction. The court denied defendant's motion to dismiss and proceeded to consider the matter of the order to show cause.

The trial judge did not sign the order to show cause, finding at oral argument that the hearing concerned only the motion to dismiss. The judge instead encouraged plaintiff's counsel to discuss possible remedies for the alleged anticipatory breach of contract.

On the basis of the record before him, particularly the Peden affidavit and counsel's statements at the hearing, the judge believed he could relax the rules pursuant to Rule 1:1-2 and address the sole remaining issue, that of remedy, as a matter of law. At the hearing, plaintiff argued that she was entitled to one of three choices for a remedy: (1) a decree of specific performance; (2) an accelerated lump sum award of future anticipated benefits; or (3) the funding of a trust by defendants to pay future insurance premiums. In connection with the latter two choices, plaintiff's counsel stated that he was prepared at the appropriate time to put on evidence that AIDS is no longer a death sentence. And that [plaintiff] may be expected to live many more years. And number two, evidence of what her health care premiums are anticipated to rise to so that the court can do a calculation and come back to an in [sic] gross lump sum.

In response, defendants' counsel pointed out that there was no application before the court by plaintiff for relief. The trial judge consequently indicated that he was not prepared to rule on a remedy at that time. Defendants thereafter filed an answer with separate defenses on February 27, 2006.

On April 18, 2006, without notice to the parties and without a motion having been filed, the judge ruled sua sponte that judgment be entered against defendants. The court issued a letter to counsel ordering LPI "to place the sum of $837,357.00 in trust for plaintiff's benefit" with any corpus remaining upon plaintiff's death to be returned to LPI. On the same date, the court placed its reasoning for the decision on the record.

In its oral decision, the court reiterated its findings that there "was absolutely an anticipatory breach of this contract." Relying upon Cipala v. Lincoln Technical Institute, 179 N.J. 45 (2004), the court held, "[i]n light of the defendant['s] blatant anticipatory repudiation and the language of the e-mail, it is noted that . . . plaintiff is entitled to some comfort and should be put at ease, requiring the defendant to establish a trust." The court then explained how it arrived at the trust value. It calculated this amount by taking plaintiff's approximately 28.79-year life expectancy as supplied by the Table of Mortality and Life Expectancy adopted by the Court Rules and multiplied it by the then-current annual premium on the Guardian group plan. To adjust the calculation to take account of the possibility that plaintiff's condition will shorten her lifespan, the court did not provide for any increases in the annual premiums charged by Guardian.

By correspondence to the court dated April 24, 2006, defendants raised an objection on the ground that the court's sua sponte judgment was procedurally irregular and contrary to Rule 1:6-2(a). The judge convened a telephone conference on May 4, 2006, and vacated his decision of April 18, 2006. At the conclusion of the telephone conference, the judge instructed plaintiff to file a motion for summary judgment with the court. The court entered its order vacating the decision of April 18, 2006, on May 16, 2006.

Plaintiff filed her summary judgment motion on June 9, 2006, returnable July 7, 2006. Defendants opposed the motion and filed a cross-motion to compel discovery on or about June 21, 2006. In addition, on June 21, 2006, defendants filed a motion that the trial judge recuse himself based on his sua sponte judgment and comments in his decision of April 18, 2006, allegedly indicating that he prejudged the case.

The trial judge heard oral argument on July 10, 2006, and denied the motion for recusal. The trial court also denied defendants' cross-motion on this date, placing his findings on the record. The trial court also heard oral argument on plaintiff's summary judgment motion. It deferred decision on this motion until July 28, 2006, to permit defendants to obtain discovery concerning the Guardian insurance policy and plaintiff's medical condition and so that interrogatories may be prepared. The court further deferred its decision until August 18, 2006 at the request of defendants, who were awaiting medical records from plaintiff's primary treating physician.

At the July 10, 2006 hearing, defendants' counsel requested a stay pending appeal which was denied by the court. On this date, defendants made a motion for emergent relief staying the trial court proceedings with the Appellate Division. The Appellate Division denied defendants' application for emergent relief on July 10, 2006. On August 15, 2006, the Appellate Division also denied defendants' motion for leave to appeal from the order denying the disqualification of the trial judge.

Prior to the second oral argument on August 18, 2006, defendants obtained an expert's report from Steven M. Smith, M.D., of CFO Medical Services; the report was submitted to the court in opposition to plaintiff's motion for summary judgment.

Dr. Smith opined that plaintiff's health risks "substantially" reduced her life expectancy of 27.94 years, but did not specifically mention by how many years or give an approximate time. At oral argument, LPI asked the court for additional time to obtain a report from an actuary to further adduce the reduction in plaintiff's life expectancy.

After oral argument, the judge ruled that plaintiff was entitled to partial summary judgment and that the proper remedy was to require that defendants deposit funds to pay for further insurance premiums. While ruling that LPI had anticipatorily repudiated its contract with plaintiff and finding that a decree of specific performance and the establishment of a trust was appropriate, the court deferred final judgment concerning the proper amount of security LPI should provide. The judge instead indicated that a proof hearing would be appropriate to permit defendants to obtain an additional expert's report regarding plaintiff's life expectancy.

Without having had the proof hearing referred to on August 18, 2006, the trial judge issued a letter opinion on August 23, 2006 granting final summary judgment to plaintiff in the amount of $837,357.15, the same amount he ordered in April. In that opinion, the court stated in relevant part:

Upon further reflection, the Court finds that Defendant, while submitting an expert report that claims Plaintiff's life expectancy is less than that set forth in the Mortality Table found in the Rules of Court, does not state or suggest how much less. Accordingly, the Court, as noted at oral argument is forced to speculate. . . .

As a result of the foregoing, the court grants final summary judgment and orders the Defendant to deposit the sum of $837,357.15 with the Clerk of the Court. This sum is computed by multiplying the plaintiff's life expectancy of her attained age set forth in the said mortality table times the present premium. While the premium has increased without interruption since the relationship with the parties was established, the Court does not factor in further increases. Similarly, the above sum has not been reduced to present value. . . .

Upon deposit of the sum of $75,000 with the Clerk of the Superior Court, the Court will grant a stay of this decision pending an appeal if taken within 45 days of the execution and service of the order. . . .

That portion of Plaintiff's motion seeking summary judgment for consumer fraud is denied because plaintiff has failed to set forth an adequate basis for the computation of damages. Consequently, if plaintiff wishes to pursue a money damages claim based on ...

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