(Photo: Bigstock)

The U.S. Court of Appeals for the Third Circuit has ruled that under New Jersey law, stranger-originated life insurance policies are void from the get-go, but parties to the policy may be entitled to a refund of premium payments, depending on the case.

A three-judge panel of the court upheld a district judge in granting partial summary judgment in favor of Sun Life Assurance Co. of Canada in its case with Wells Fargo Bank.

The Third Circuit's ruling is based on two questions it certified to the New Jersey Supreme Court: whether STOLI policies are void from the beginning, and whether beneficiaries who are not complicit in any illicit conduct can get a refund.

"The New Jersey Supreme Court has confirmed that such an arrangement violates the public policy of New Jersey and is void at the outset," Third Circuit Judge Michael Chagares wrote in the court's Aug. 21 opinion.

In April 2007, Sun Life received an application for a $5 million insurance policy on the life of Nancy Bergman. The application listed the Nancy Bergman Irrevocable Trust as the sole owner and beneficiary of the policy. Bergman signed the application as the grantor of the trust, and her grandson, Nachman Bergman, signed as trustee.

The trust had four additional members. All of them were investors, and all were strangers to Bergman. The investors deposited money into the trust account to pay most if not all of the policy's premiums. The original trust agreement provided that any proceeds of the policy would be paid to the younger Bergman.

According to court documents, the elder Bergman was a retired middle school teacher. Sun Life received an inspection report that listed her annual income as more than $600,000 and her overall net worth at $9.235 million. In reality, her income was about $3,000 a month from Social Security and a pension, and her estate was later valued at between $100,000 and $250,000. Although Bergman represented that she had no other life insurance policies, five policies were taken out on her life in 2007 from various insurance companies, including Sun Life, for a total of $37 million.

Sun Life issued the $5 million policy July 13, 2007. At the time, the trust was the sole owner and beneficiary. The policy had an incontestability clause that barred Sun Life from challenging the policy—other than for non-payment of premiums—after it had been "in force during the lifetime of the Insured" for two years.

On Aug. 21, 2007, about five weeks after the policy was issued, Nachman Bergman resigned as trustee and appointed the four investors as successor co-trustees. The trust agreement was amended so that most of the policy's benefits would go to the investors; they also were empowered to sell the policy on their own.

In December 2009, the trust sold the policy to SLG Life Settlements for $700,000. The investors received nearly all of the proceeds from the sale. Afterward, a company named LTAP acquired the policy for a brief period, and around 2011, Wells Fargo Bank obtained it in a bankruptcy settlement. Wells Fargo continued to pay the premiums. It claimed that it paid $1.93 million through a combination of direct premium payments and loans to LTAP to pay premiums.

After Nancy Bergman died in 2014 at age 89, Wells Fargo sought to collect the policy's death benefit.

Sun Life investigated the claim and declined to pay, and filed an action in federal court seeking a declaratory judgment that the policy was void ab initio as part of a STOLI scheme. Wells Fargo counterclaimed for breach of contract and sought the policy's $5 million face value; or, alternatively, a refund of the premiums it paid and funded in the event that the court voided the policy.

The district court partially granted Sun Life's motion for summary judgment, finding that New Jersey law applied and concluding that "this was a STOLI transaction lacking insurable interest in violation of [the state's] public policy. … As such, it should be declared void ab initio." The district court also granted Wells Fargo's motion to recover its premium payments. The district court reasoned that "Wells Fargo is not to blame for the fraud here" and that "allowing Sun Life to retain the premiums would be a windfall to the company."

Wells Fargo appealed the determination that the policy was void, and Sun Life cross-appealed the order to refund the premiums.

The state Supreme Court in June 2019 issued an opinion addressing the Third Circuit's certified questions.

"Based on that answer, we will affirm the district court's grant of partial summary judgment to Sun Life.

"The district court found that the undisputed facts demonstrated that the policy was procured with the intent of benefiting the investors in the STOLI arrangement, and not benefiting anyone with an insurable interest in Ms. Bergman's life," Chagares wrote.

Chagares added, "The second question was: if such a policy is void ab initio, is a later purchaser of the policy, who was not involved in the illegal conduct, entitled to a refund of any premium payments that they made on the policy? The court answered: 'a party may be entitled to a refund of premium payments it made on the policy, depending on the circumstances.'"

"The district court proceeded in just this way," and "agreed with Wells Fargo that permitting Sun Life to keep Wells Fargo's premium payments would be an unfair windfall, because, as a later innocent purchaser of the policy, Wells Fargo was not responsible for and did not have knowledge of the STOLI arrangement when it continued to make payments on the policy."

Eric Biderman of Arent Fox represents Wells Fargo, and John Bloor of Drinker Biddle & Reath represents Sun Life. Neither responded to requests for comment.