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AEI Life LLC v. Lincoln Benefit Life Co.

United States Court of Appeals, Second Circuit

June 8, 2018

AEI Life LLC, Plaintiff-Appellee,
Lincoln Benefit Life Company, Defendant-Appellant.

          Argued: October 2, 2017

         AEI Life LLC is the beneficiary of a life insurance policy issued by Lincoln Benefit Life Company. A third party originally obtained the policy by fraudulent means. That party sold it to AEI several years later. AEI brought this action seeking a declaratory judgment that Lincoln was barred from challenging the validity of the policy because the two-year contestability period had lapsed. The United States District Court for the Eastern District of New York (Jack B. Weinstein, Judge) granted AEI's subsequent motion for summary judgment. The principal issues on appeal are whether New York or New Jersey law applies, and whether the incontestability law of that state will allow Lincoln to challenge the policy's validity. We conclude that the contract does not contain a choice-of-law provision and therefore New York conflict-of-law rules govern the dispute. Because those rules instruct the courts to look to the "center of gravity" of the events at issue to determine which state's substantive law applies, and the center of gravity here is New York, we look to New York's substantive law in analyzing the issues presented. New York's substantive incontestability law bars Lincoln's challenges to the policy in this litigation. Accordingly, the district court's judgment is:


          Julius A. Rousseau (Eric Biderman, on the brief), Arent Fox LLP, New York, NY, for Defendant-Appellant.

          Katherine L. Villanueva (Jason P. Gosselin, on the brief), Drinker Biddle & Reath LLP, Philadelphia, PA, for Plaintiff-Appellee.

          Before: Sack, Raggi, and Carney, Circuit Judges.

          Sack, Circuit Judge

         Lincoln Benefit Life Company ("Lincoln") is an insurance company with its principal place of business in Lincoln, Nebraska. In 2008, it approved and issued a life insurance policy for Gabriela Fischer, the insured. The policy application, amongst other misstatements, fraudulently exaggerated Fischer's wealth. The policy was paid for by a stranger to the transaction, which rendered the policy voidable. (The parties dispute on appeal whether it was void ab initio) Lincoln failed to contest the validity of the policy until after the policy's two-year contestability period had lapsed, and after the policy had been sold to an innocent third party, AEI Life LLC ("AEI"). AEI brought suit against Lincoln seeking a declaratory judgment that Lincoln was barred from contesting the validity of the policy under the incontestability clause it contained.

         The laws with respect to such incontestability clauses in New York and New Jersey differ in a crucial respect: Unlike New York, New Jersey allows an insurance company to contest the validity of a policy obtained by fraudulent means even after two years have expired since the policy became effective. The Fischer policy contains what the district court called a choice-of-law clause, but we refer to it, more accurately we think, as a conformity clause. It reads: "This certificate is subject to the laws of the state where the application was signed. If any part of the certificate does not comply with the law, it will be treated by us as if it did." Fischer Policy, Page 16, at Joint App'x 98. Although the policy purports to have been signed in New Jersey, the district court concluded that it was in fact signed in New York-the domicile of Fischer and her son. AEI contends that New York law applies and that its incontestability law bars Lincoln's challenges.

         The United States District Court for the Eastern District of New York (Jack B. Weinstein, Judge) granted AEI's motion for summary judgment. AEI Life, LLC v. Lincoln Benefit Life Co., 225 F.Supp.3d 136 (E.D.N.Y. 2016). Following an evidentiary hearing, the district court decided that: (1) The conflict-of-law rules of the state in which the district court sits, New York, determine the applicable choice-of-law principles, id. at 140; (2) under New York conflicts law, the court ordinarily would apply a choice-of-law clause included in an insurance contract, id. at 143; (3) in this case, however, the original beneficiary's "extensive fraud in the inducement" in obtaining the policy invalidated what the district court identified as the insurance contract's choice-of-law clause, id. at 148; (4) the district court was therefore required to use New York's "center of gravity rule" to identify which state's substantive law applied, id. at 148-49; (5) the dispute's center of gravity was New York because "every contact of significance [with respect to the issuance of the insurance policy] was in New York, " id. at 141; and (6) under New York law, Lincoln's challenges to the validity of the policy failed, id. at 149-50.

         We agree with the district court that New York law governs this policy and that under New York law, the policy is incontestable. We differ from the district court only in the reasoning we employ in rejecting the policy provision purportedly favoring New Jersey law. In our view, the provision is not a "choice-of-law" clause because it does not reflect the parties' intent to select the law of a specified state. We therefore need not decide whether the provision was rendered invalid by fraud, because we conclude that it never controlled the choice-of-law question in any event.

         The judgment of the district court is therefore affirmed.


         The Inception of Gabriela Fischer's Life Insurance Policy

         In May 2008, Lincoln received an application to insure the life of then 77-year-old Gabriela Fischer ("Fischer"). The application represented that Fischer had a net worth of $87 million, an annual income of $1.5 million, and unearned income of $5 million. A confidential financial statement included in the application stated that Fischer had assets totaling $1 million in cash, $10 million in accounts receivable, $40 million in real estate, and $30 million in other business interests. Three individuals signed the application and declared the information truthful: Fischer, Irving Fischer (Fischer's son and the trustee of the Gabriela Fischer Trust ("Fischer Trust"), hereinafter "Irving"), and Joel Jacob (the insurance broker). A Brooklyn accountant also verified by letter Fischer's net worth as stated in the application. Lincoln approved Fischer's application shortly thereafter, agreeing to pay $6, 650, 000 to the policy's beneficiary-the Fischer Trust-upon the death of Fischer.

         It is uncontested that the financial information contained in the application was false and fraudulent. Fischer testified that she never owned one million dollars and that it was "absurd" for the application to report that she earned $1.5 million in one year. Joint App'x 824. The policy required an initial payment of $151, 450 and premiums totaling $205, 000 per year. Fischer testified that she did not have the resources to make these payments. Instead, account records show that a stranger to the policy deposited $1 million into the Trust shortly after Fischer's application was submitted, and this money was used to make payments related to the policy.

         A policy thus obtained is known as a Stranger-Originated Life Insurance ("STOLI") policy, which is generally procured as an investment for the stranger, rather than for the benefit of the insured's beneficiaries.[1] Nevertheless, Lincoln received all the payments it was due under the contract, and it is not alleged that the application was fraudulent with regard to Fischer's health.[2] Jacob, the broker, received a commission of approximately $100, 000 for his efforts with respect to Fischer's policy and, although he was aware that agents are forbidden by law to share their commissions with clients, transferred $50, 000 to Irving for acting as a "middleman." Joint App'x 892. Although everyone involved feigned ignorance during his or her testimony-testimony that the district court found untrustworthy, AEI Life, 225 F.Supp.3d at 148-the district court found little reason to doubt that they all knowingly engaged in what was a STOLI scheme.

         Some three years later, in 2011, the Fischer Trust sold the policy to Progressive Capital Solutions, LLC, which two days later resold it to the plaintiff, AEI. AEI is a bona fide purchaser: Lincoln does not allege that AEI knew about the fraud when it bought the policy.

         Lincoln discovered the fraud in 2013 and sought to invalidate the policy through a declaratory judgment action that it brought in the United States District Court for the District of New Jersey. After that court dismissed the case for lack of subject matter jurisdiction, [3] AEI filed this lawsuit in the Eastern District of New York seeking a declaratory judgment holding that the life insurance policy is incontestable as a matter of law. Both New York and New Jersey have enacted two-year incontestability laws, which prohibit insurance companies from successfully challenging the validity of a life insurance policy after accepting the policy's premiums for two years or more.[4] N.Y. Ins. Law § 3203(a)(3); N.J. Stat. Ann. § 17B:25-4. But the two states have interpreted their incontestability laws differently. Because of that difference, the central issue on appeal is whether New York or New Jersey law applies.

         District Court Hearing and Decision

         In the case at bar, the district court conducted a hearing related to the choice-of-law issue, making several findings of fact based on it. The court found that Fischer is a New Yorker who has lived in Brooklyn for the past sixty years. Her son is also a New York resident, having lived in Monsey, New York for thirty years. Jacob solicited the Fischers in New York, and evidence in the record establishes that the medical history portion of the application was completed by a New York doctor in Brooklyn. The Fischer Trust was formed and operated in New York. Transfers of the Trust's funds were made through a New York bank account. And the current beneficiary, AEI, is also a New York citizen.

         The principal portion of the life insurance application, however, purported to be signed in Lakewood, New Jersey, and the form used in the policy was submitted to the New Jersey Department of Insurance. Lincoln is licensed to provide insurance in New Jersey, not in New York. But the district court credited Fischer's testimony to the effect that she had never been to Lakewood, New Jersey, and Irving's testimony that the application was actually signed in New York. Based largely on that evidence, the court found that "[t]he policy was negotiated, contracted, signed, and issued in New York to individuals residing in New York." AEI Life, 225 F.Supp.3d at 149.

         After concluding that the policy's choice-of-law clause-which, as noted, we think is better denominated a conformity clause-was invalid due to fraud in the inducement, the court analyzed these contacts under New York's center-of-gravity test. Id. at 147-49. It concluded that New York had the most significant relationship to the transaction, and New York law therefore governed. Id. at 148-49. The district court then considered New York's substantive law and held that insurance companies cannot avoid the application of New York's incontestability law by alleging public policy concerns or lack of consent. Id. at 149-50. Finally, the court held that there was insufficient evidence to support Lincoln's argument that the Fischer Trust was improperly constituted. Id. at 150-51.

         Accordingly, the district court ruled that the policy was incontestable and granted judgment ...

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