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American General Life v. Ellman Savings Irrevocable Trust

December 17, 2010

AMERICAN GENERAL LIFE INSURANCE COMPANY, PLAINTIFF,
v.
ELLMAN SAVINGS IRREVOCABLE TRUST, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Bongiovanni, Magistrate Judge

MEMORANDUM OPINION

This matter comes before the Court upon motion by Defendants Ellman Savings Irrevocable Trust and Jeffrey Levitin (collectively, "Defendants"), seeking an Order permitting them to amend their Counterclaim to assert with greater specificity their claims of fraud and bad faith against American General Life Insurance Company ("Plaintiff"). Plaintiff opposes Defendants' motion to amend arguing that Defendants' proposed amended Counterclaim is futile. The Court has fully reviewed and considered all arguments made in support of and in opposition to Defendants' motion and considers Defendants' motion without oral argument pursuant to FED.R.CIV.P. 78. For the reasons stated more fully below, Defendants' motion to amend is granted in part and denied in part.

I. Background

On July 28, 2010, Defendants filed the instant motion to amend in order to provide greater specificity in their Counterclaim of the alleged fraud and bad faith committed by Plaintiff. Relying on FED.R.CIV.P. 15(a), Defendants argue that they should be "freely given" leave to amend their Counterclaim because of the absence of undue delay, bad faith, dilatory motive or repeated failure to cure deficiencies by amendments previously allowed. Defendants also argue that leave to amend should be given because their proposed amendments will not unduly prejudice Plaintiff since fact discovery is still ongoing and Defendants simply seek to add allegations to causes of action that were included in their original Counterclaim. Further, Defendants claim that their motion should be granted because their proposed amendments cure any alleged deficiencies contained in the original Counterclaim and, as a result, their motion is not futile.

With regard to the fraud claim, Defendants argue that, at the time Plaintiff issued Flexible Premium Adjustable Life Policy UM 0030862L (the "Policy" or the "Ellman Policy"), Plaintiff did not intend to honor it and are now using Mr. Ellman's actual financial condition and the fact that the Policy was purchased for a secondary market, known as the life settlement market, as a pretext to improperly deny Defendants' claim for benefits. (Def. Reply Br. at 5, 8). In this regard, Defendants contend that Plaintiff's assertion that it would not have issued the Policy if it had known of Mr. Ellman's true financial condition is false because Plaintiff did not use the financial condition of the insured as an element of its actuarial practice. In support of this contention, Defendants allege various facts, including the following: (1) Plaintiff's underwriters ignored their underwriting guidelines and wrote high value policies, such as Ellman's, even when those polices were actuarially deficient based on the financial disclosures contained in the applications; (2) Plaintiff did not care about its insured's financial condition because same did not increase or decrease its insured's life expectancy; (3) Plaintiff was aware of and actively pursed the life settlement market as it created opportunities for Plaintiff to collect large premiums and increase its cash flow and market share; (4) Plaintiff was aware of the misrepresentations contained in Ellman's application, but continued to accept the payment of premiums on the Policy with the intention that the Policy would lapse for failure to pay premiums; (5) Plaintiff investigated twenty-eight policies that contained the same conditions as those present in Ellman's Policy that would allow it to rescind same, but Plaintiff did not rescind the policies; instead, Plaintiff chose to keep collecting the premiums without ever intending to pay any benefits on the policies or return the premiums collected; (6) Plaintiff knew that the Policy was a STOLI/IOLI ("Stranger Originated Life Insurance/Investor Originated Life Insurance") policy as Plaintiff identified it as same in March 2006 but did not care; and (7) Plaintiff clearly did not care that the Policy was STOLI/IOLI because in November 2006 when an agent asked if Plaintiff was going to take any action with respect to the Policy, which had been identified as STOLI, Plaintiff, after discussing the matter with its legal department, responded that it would not take any action to rescind the Policy. (See Proposed Amended Complt. ¶¶ 277-287).

Based on the aforementioned facts, Defendants argue that Plaintiff committed fraud. Specifically, Defendants argue that Plaintiff induced Defendants to purchase the Policy and pay premiums on same without ever having any intent of providing coverage under the Policy. Further, Defendants claim that, as alleged, the above-referenced facts more than adequately set forth their claim of fraud. Therefore, Defendants request that their motion to amend be granted.

Defendants rely on the same set of facts to support their proposed amended bad faith claim. Specifically, Defendants argue that in light of Plaintiff's alleged scheme not to honor any claims made under the Policy or other policies with similar conditions as the Policy, Plaintiffs acted in bad faith when it denied benefits under the Policy. As such, Defendants contend that their bad faith claim is adequately pled and that their motion to amend should be granted.

Plaintiff opposes Defendants' motion, arguing that it should be denied on futility grounds because Defendants' fraud and bad faith allegations fail to raise Defendants' right to relief beyond the mere speculative level. In this regard, Plaintiff argues that Defendants' proposed fraud claim fails to meet the pleading requirements of FED.R.CIV.P. 8(a)(2) and 9(b). Similarly, Plaintiff argues that Defendants' proposed bad faith claim fails to state a claim for which relief can be granted because Defendants' claim for benefits is "fairly debatable," which means it fails as a matter of law and is futile. (Pl. Br. at 9 (quoting Pickett v. Lloyd's, 131 N.J. 457, 473 (1993)).

With respect to Defendants' fraud claim, Plaintiff argues that Defendants have not provided any factual support for their conclusions as to Plaintiff's fraudulent intent. Indeed, according to Plaintiff, the evidence relied upon by Defendants to establish that Plaintiff identified the Ellman Policy as STOLI and then made an affirmative decision to keep the Policy anyway, does nothing of the sort. Instead, Plaintiff argues that it merely establishes that Plaintiff identified several policies as being "suspect." (Id. at 7). Further, Plaintiff contends that it took action with respect to many policies that were issued based on similar misrepresentations as those made in the application at issue in this case. For example, Plaintiff notes that, in addition to numerous lawsuits filed in other jurisdictions, it brought four separate legal actions in this Court alone seeking recision of STOLI/IOLI policies. As a result, Plaintiff argues that the facts alleged by Defendants are "at least equally indicative of lawful conduct" on the part of Plaintiff in response to Defendants' own fraud and Plaintiff's conduct is "at least equally consistent with a lawful purpose as it could be with an unlawful purpose." (Id. at 8). For these reasons, Plaintiff argues that Defendants proposed amended fraud claim fails as a matter of law under FED.R.CIV.P. 12(b)(6) and therefore would also be futile.

Similarly, Plaintiff argues that Defendants' proposed amended bad faith claim is futile. In this regard, Plaintiff argues that Defendants' proposed amended bad faith claim fails because under New Jersey law, a claim for bad faith must be dismissed if the claimant is not entitled to judgment as a matter of law with respect to the claim for benefits. Here, Plaintiff argues that its basis for denying Defendants' claim for benefits is at a minimum "fairly debatable" and, as such, Defendants cannot establish a right to summary judgment on its proposed amended bad faith claim. Indeed, Plaintiff contends that the fact that the Court denied Defendants' motion to dismiss the First Amended Complaint establishes that Plaintiff's claims against Defendants "were properly alleged and supported with specific factual allegations under Fed. R. Civ. P. 8 and 9" and thus also establishes that Plaintiff's basis for denying Defendants' claim for benefits is at least reasonably debatable. (Id. at 9)

Further, Plaintiff argues that to the extent Defendants' proposed amended bad faith claim is based on Plaintiff's alleged fraudulent intent at the time the parties were contracting for the Policy, the bad faith claim is futile because fraud in the inducement of a contract cannot support a cause of action for bad faith in connection with the denial of a claim. In this regard, Plaintiff contends that a claim that an insurer denied benefits in bad faith is contingent upon the insurer breaching the duty of good faith and fair dealing in the course of rendering a claim decision. Consequently, Plaintiff argues that Defendants' claim that it acted in bad faith when it denied their claim for benefits must fail because that claim is premised on the notion that Plaintiff "committed bad faith by virtue of its pre-contract intent not to honor a claim under the policy, if and when presented" and such conduct does not give rise to a cause of action for bad faith claim denial (Id. at 10).

II. Analysis

A. Standard of Review According to FED.R.CIV.P. 15(a), leave to amend the pleadings is generally given freely. See Foman v. Davis, 371 U.S. 178, 182(1962); Alvin v. Suzuki, 227 F.3d 107, 121 (3d Cir. 2000). Nevertheless, the Court may deny a motion to amend where there is "undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of the amendment." Id. However, where there is an absence of undue delay, bad faith, prejudice or futility, a motion for leave to amend a pleading should be liberally granted. Long v. Wilson, 393 F.3d 390, 400 (3d Cir. 2004). In the context of Defendants' motion to amend their Counterclaim, the only issue raised by Plaintiff is whether Defendants' proposed amendments are futile.*fn1 As such, that is the only issue addressed by the Court herein.

An amendment is futile if it "is frivolous or advances a claim or defense that is legally insufficient on its face." Harrison Beverage Co. v. Dribeck Imp., Inc.,, 133 F.R.D. 463, 468 (D.N.J. 1990) (internal quotation marks and citations omitted). In determining whether an amendment is "insufficient on its face," the Court employs the Rule 12(b)(6) motion to dismiss standard (see Alvin, 227 F.3d at 121) and considers only the pleading, exhibits attached to the pleading, matters of public record and undisputedly authentic documents if the party's claims are based upon same. See Pension Benefit Guar. Corp. v. White Consol. Indus., 998 F.2d 1192, 1196 (3d Cir. 1993). When considering whether a pleading would survive a Rule 12(b)(6) motion, the Court must accept all facts alleged in the pleading as true and draw all reasonable inferences in favor of the party asserting them. Lum v. Bank of Am., 361 F.3d 217, 223 (3d Cir. 2004). "[D]ismissal is appropriate only if, accepting all of the facts alleged in the [pleading] as true, the p[arty] has failed to plead 'enough facts to state a claim to relief that is plausible on its face[.]'" Duran v. Equifirst Corp., Civil Action No. 2:09-cv-03856, 2010 WL 918444, *2 (D.N.J. March 12, 2010) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). In other words, the facts alleged must be sufficient to "allow[] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009).

While a pleading does not need to contain "detailed factual allegations," a party's "obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do[.]" Twombly, 550 U.S. at 555 (citation omitted). Thus, the "[f]actual allegations must be enough to raise a right to relief above the speculative level." Id. In addition, although the Court must, in assessing a motion to dismiss, view the factual allegations contained in the pleading at issue as true, the Court is "not compelled to accept unwarranted inferences, unsupported conclusions or legal conclusions disguised as factual allegations." Baraka v. McGreevey, 4 ...


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