Monday, December 30, 2013

No. 16: A STOLI Civil Case in Federal Court in Utah

On December 3, 2013, U.S. District Judge Robert J. Shelby issued a 19-page Memorandum Decision and Order (Order) in a stranger-originated life insurance (STOLI) civil lawsuit. The plaintiff was PHL Variable Insurance Company, a unit of Phoenix Companies, Inc. The defendants were the Sheldon Hathaway Family Insurance Trust and Windsor Securities, LLC. The Order was issued five days after the Minnesota order discussed in my posting No. 13. (PHL v. Sheldon Hathaway Trust et al., U.S. District Court, District of Utah, Case No. 2:10-cv-67.)

The Sale
The lawsuit arose out of a $4 million life insurance policy issued by PHL on the life of Sheldon Hathaway, a retired heavy equipment operator and welder. PHL issued the policy on January 31, 2008. The beneficiary was a family insurance trust of which Hathaway's son David was trustee.

Hathaway lives on 15 acres of rural property in Payson, Utah. He owns a residence and a non-commercial farm. The residence is worth about $380,000. The farmland was valued at $530,000 in 2008, but by 2012 it had decreased in value to $340,000. He owns other minor assets, including farm equipment, an old Jeep, and a Ford truck. He receives annual income of about $30,000 from Social Security and company pensions.

Jay Sullivan, Hathaway's neighbor, showed Hathaway a brochure about investor-financed life insurance that supposedly carried no liability for the insured. Sullivan said the policy would cost nothing and Hathaway would receive $300,000 when the policy was sold after two years.

The Misrepresentations
Sullivan initially estimated Hathaway's net worth as $4 million. Hathaway later testified he questioned Sullivan's estimate, but Sullivan assured Hathaway the property was worth more than Hathaway thought. On the final application, Sullivan listed Hathaway's net worth as $6,250,000 and annual income as $484,500. Also, the application said that premiums would not be financed, and that neither Hathaway nor the trust intended to transfer an interest in the policy to a third party. Hathaway signed the application.

Brock Diediker, an insurance intermediary working with Sullivan, passed the application to Gabriel Giordano, a licensed insurance producer, and Giordano's company, PRG Financial Resources, Inc. Giordano submitted the application to PHL. Giordano also submitted a producer's report on December 10, 2007, saying he had met Hathaway. However, neither Diediker nor Giordano ever met Hathaway.

The Infolink Report
PHL sought confirmation of Hathaway's net worth from Infolink, which submitted an inspection report dated December 5, 2007. The report said the information in the application appeared accurate based on a conversation with Hathaway. PHL later learned that Infolink never contacted Hathaway or otherwise confirmed his net worth.

The Money Trail
Sullivan and other intermediaries worked with David to transfer to the trust's bank account enough money to pay the $200,000 initial policy premium. The source of the money was the San Diego law firm of Sadr & Barrera APLC (S&B), which was active in the secondary market for life insurance. On March 7, 2008, the day before the initial premium was due, S&B transferred $200,000 to the trust's bank account. The money stayed there about one day before it was sent to PHL. David saw Sullivan perform the transfers telephonically during a bank visit.

When the policy was issued, PHL paid a commission to Giordano. PHL also paid a commission to Crump Life Insurance Services, Inc., a PHL broker. Crump had an agreement under which Giordano received a portion of Crump's commission under certain conditions. Giordano paid a portion of his commission to Diediker and New Concepts Financial Corporation, with which Sullivan was affiliated. Through PRG, Giordano also paid Windsor $40,000. Windsor paid $200,000 to S&B. PHL contended the latter payment was to refund the money S&B provided to pay the initial premium. Windsor said it had no knowledge of S&B's involvement and believed the payment was a reimbursement to the trust.

The Investigations
On December 18, 2008, the Utah Department of Insurance wrote to PHL requesting information about Giordano. Alerted to the department's investigation, PHL undertook its own investigation of five policies connected to Giordano, including the Hathaway policy. When PHL was unable to confirm certain information, PHL began legal action to rescind the policies.

The PHL Lawsuit
On January 28, 2010, PHL filed a civil lawsuit against the trust. On April 13, 2011, Judge Shelby granted Windsor's motion to intervene. On September 17, 2012, PHL filed a motion for summary judgment and Windsor filed a cross motion for summary judgment. On December 3, 2013, Judge Shelby's Order granted PHL's motion for summary judgment and denied Windsor's cross motion for summary judgment. The Order instructed the court clerk to enter judgment rescinding the Hathaway policy, allowing PHL to retain the initial policy premium, and permanently dismissing Windsor's claims.

This is another of many STOLI civil lawsuits involving gross misrepresentations in policy applications. Here is a sentence in Judge Shelby's Order:
The court finds that there are no genuine issues of disputed fact and that the false statements in the policy application were material misrepresentations upon which PHL Variable relied.
I am offering the Order as a complimentary PDF. Send an e-mail to and ask for Judge Shelby's Order.