On Could 26, 2022, the Supreme Court docket of the State of Delaware issued its choice in Wells Fargo Financial institution, N.A. and Berkshire Hathaway Life Insurance coverage Firm of Nebraska v. Property of Phyllis M. Malkin (19-14689, 17-cv-23136, 172, 2021) (“Malkin”). The Malkin holding is especially vital for all times settlement traders as a result of it categorically rejects the proposition that Part 2704(b) (Delaware’s so-called “property statute”) forecloses all defenses and doesn’t permit the occasion being sued to recuperate premium beneath any circumstances. As an alternative, the Court docket made clear that widespread regulation defenses and counterclaims can be found in response to a declare beneath Part 2704(b) and that an investor could recuperate premium paid on a void coverage relying on the information of every case.

In Malkin, the Delaware Supreme Court docket determined two vital licensed questions regarding the Delaware Uniform Business Code’s utility to transactions involving so-called “stranger-originated life insurance coverage” (STOLI) insurance policies. First, Malkin held that, when confronted with an motion introduced by an property beneath 18 Del. C. § 2704(b) (Delaware’s insurable curiosity statute), an harmless downstream investor-owner of a STOLI coverage, or the investor’s securities middleman, can not assert the bona fide purchaser and securities intermediatory defenses codified in Delaware Uniform Business Code (UCC) Sections 8-502 and 8-115, respectively. Second, an investor could assert widespread regulation defenses in response to a Part 2704(b) declare and could recuperate the premium it paid to the insurer to maintain the coverage from lapsing even when the coverage is decided to be void ab initio, if the investor can present entitlement to premium based mostly on a viable concept comparable to unjust enrichment.

In Malkin, the insured Phyllis Malkin, was issued a life insurance coverage coverage by insurer American Common Life Insurance coverage Firm (AIG) in 2005. To pay the coverage’s premiums, Mrs. Malkin used a non-recourse premium financing mortgage. The one collateral for the mortgage was the life insurance coverage coverage itself, which had a face worth of $4 million. When the mortgage got here due in 2008, Mrs. Malkin selected to relinquish the coverage in satisfaction of the mortgage as a substitute of paying the quantity due on the mortgage.

Between 2008 and 2012, Mrs. Malkin’s coverage was transferred a number of instances and was finally acquired by appellant Wells Fargo Financial institution, N.A. (Wells Fargo), as securities middleman for its consumer, Berkshire Hathaway Life Insurance coverage Firm of Nebraska (Berkshire Hathaway). Berkshire Hathaway paid all coverage premiums to maintain the coverage from lapsing.

Mrs. Malkin handed away in 2014, and AIG paid the dying profit to Wells Fargo as a securities middleman for Berkshire Hathaway. By 2014, Berkshire Hathaway had paid roughly $137,000 in premiums to AIG. In 2017, Mrs. Malkin’s property sued Wells Fargo in america District Court docket for the Southern District of Florida to recuperate all the dying profit beneath 18 Del. C. § 2704(b). The property claimed, amongst different issues, that the coverage was ruled by Delaware regulation and was void as a result of it was issued in violation of Delaware’s insurable curiosity statute.

The District Court docket held that Delaware regulation utilized to the Malkin coverage and that the coverage lacked insurable curiosity and was subsequently void ab initio. The Court docket of Appeals for the Eleventh Circuit affirmed the District Court docket’s willpower that the coverage was void ab initio beneath Part 2704(b) and licensed two inquiries to the Delaware Supreme Court docket in Malkin: (1) can an harmless downstream investor, or its securities middleman, assert bona fide purchaser and securities intermediatory defenses beneath Delaware UCC Sections 8-502 and 8-115, respectively, to an property’s Part 2704(b) declare and (2) could a celebration towards whom a Part 2704(b) declare is asserted recuperate premium from an property even when the coverage is void ab initio?

On Query 1, the Court docket held that the UCC defenses are usually not accessible as a matter of regulation. The Court docket held that the UCC protection beneath Part 8-502 applies solely to “adversarial claims,” which the Delaware UCC defines as “a declare {that a} claimant has a property curiosity in a monetary asset and that it’s a violation of the rights of the claimant for one more particular person to carry, switch, or cope with the monetary asset.” Based on the Supreme Court docket, purchasers of a STOLI coverage by no means purchase the best to the dying profit. As an alternative, they purchase solely a void ab initio coverage that, beneath established regulation, doesn’t exist and doesn’t entitle the holder to obtain any proceeds. The Court docket, subsequently, held that as a result of “[n]obody can have a ‘property curiosity’ in a STOLI coverage or its proceeds,” Part 8-502 doesn’t apply to a declare by an property beneath Part 2704(b).

The Court docket reached an analogous conclusion concerning Part 8-115 of the Delaware UCC, which gives {that a} securities middleman “shouldn’t be liable to an individual having an adversarial declare to [a] monetary asset,” except sure circumstances are met. The Court docket concluded {that a} declare beneath Part 2704(b) shouldn’t be an adversarial declare and, subsequently, the protection was not accessible towards such a declare by an property.

Importantly, the Court docket additionally held that Part 2704 doesn’t bar a defendant from asserting widespread regulation defenses and counterclaims comparable to unjust enrichment in response to a declare beneath Part 2704(b). The Court docket held that to find out the supply of such defenses, “courts should look to the weather of the common-law defenses or counterclaims asserted—and, the place applicable, the general public coverage underlying the ban on human-life wagering—to determine the viability of such defenses or counterclaims to an property’s motion beneath Part 2704(b).”

The Court docket then addressed the second licensed query and held {that a} occasion that’s being sued beneath Part 2704(b) could recuperate premiums it has paid on a void coverage as long as it proves its entitlement to these premiums beneath a “viable authorized concept.” The court docket defined that restoration is feasible based mostly upon widespread regulation defenses and counterclaims comparable to unjust enrichment since such counterclaims don’t on their “face violate the Delaware Structure’s common prohibition of wagering or the State’s longstanding coverage of stopping STOLI insurance policies from paying out to traders.” The court docket held that “Part 2704(b) defendants could recuperate the premiums they paid on a coverage later decided to be STOLI if they’ll set up the weather of a viable authorized concept, comparable to unjust enrichment.”

Malkin is a big improvement within the subject of STOLI litigation as a result of it gives traders with potential counterclaims and defenses towards claims asserted by estates beneath 18 Del. C. § 2704(b), together with for the recoupment of premiums within the occasion a coverage is deemed STOLI. Along with unjust enrichment, different widespread regulation defenses that could be pursued embrace ratification and laches, which have been relied upon within the 2019 United States Court docket of Appeals, Second Circuit choice John Hancock Life Ins. Co. of New York v. Solomon Baum Irrevocable Fam. Life Ins. Tr., or different widespread regulation defenses which might be routinely raised, together with promissory estoppel, forfeiture, and unclean arms. As many circumstances arising beneath Part 2704(b) typically contain realizing and willful participation by the deceased insured in STOLI conduct, Malkin gives a number of fronts on which to assault these so-called property circumstances based mostly on the insured’s information and participation within the procurement, sale or switch of a coverage. Though traders and securities intermediaries defending towards property claims beneath Delaware regulation after Malkin could not assert Delaware UCC defenses to Part 2704(b) claims, they could assert widespread regulation counterclaims comparable to unjust enrichment to recuperate damages from estates for the insured’s participation in STOLI conduct and recoup premium paid to the insurer to maintain a STOLI coverage from lapsing.

[View source.]