A decision in June by the Delaware Court of Chancery in Estate of Martha Barotz v. Wilmington Savings Fund Society, FSB (Barotz) resulted in a partial win for the defendants.
The case involves an estate suing to recover the death benefits of a life insurance policy taken out on the life of Martha Barotz in 2006. The ruling by Vice Chancellor Laster applies the precedent set by the Delaware Supreme Court in Estate of Norman Frank v. GWG DLP Master Trust Dated 03/01/06, et al (Frank) in February this year that held that claims by estates to recover the death benefits of so-called STOLI (stranger-originated life insurance) policies — which are generally illegal in the US states as they are considered a wager on human life — are subject to a three-year statute of limitations. Frank did not clarify when the statute of limitations begins to accrue. The Barotz decision did so.
Barotz concluded that the Estate was on “inquiry notice”, meaning that the Estate had sufficient information to have known of its claim, in February 2021.
The Estate did not file suit against the downstream investors who ultimately received the death benefit proceeds back in 2019 until April 2024, which the Court of Chancery found to be too late.
“That is not a reasonable time to wait before filing suit, rendering the Estate’s reliance on fraudulent concealment ineffective,” said Vice Chancellor Laster in his ruling.
The Frank decision did not specify when the three-year statute of limitations begins to accrue because the Delaware District Court did not certify that question to the Supreme Court. Thus, the “inquiry notice” standard referenced by Vice Chancellor Laster in Barotz provides an additional layer of clarity to life settlement investors on how courts measure the filing window.
The original complaint contained seven counts covering constructive fraudulent transfer, actual fraudulent transfer, fraud claims, disgorgement, and the improper dissolution of the trusts which received the death benefit. While the Court of Chancery dismissed the fraud, disgorgement, and transfer claims as untimely, it denied the motion to dismiss regarding the improper dissolution of trust claim. This allows the Estate to proceed with its accusation that the defendants dissolved the first two intermediate holding entities without making adequate reserves for claims the trustee knew or should have known of.
Under the Delaware Statutory Trust Act, § 3808(e), a trustee responsible for winding up an entity must pay or make reasonable provision for all obligations—including contingent claims reasonably likely to arise within ten years—before distributing assets.
Vice Chancellor Laster concluded that no statute of limitations applies to this specific wind-down claim and furthermore, the court held that trustees cannot escape responsibility by arguing they were merely “directed trustees” taking instructions from beneficial owners, and that standard “no-recourse” provisions in the trust agreements do not protect trustees from statutory dissolution violations.
Vice Chancellor Laster’s ruling on the motion to dismiss is an interlocutory order; a temporary, mid-case decision, not a final judgment. The court was required to accept all of the allegations of the Complaint in favour of the Estate on the defendant’s motion to dismiss, including that the trustee knew or should have known of the Estate’s claim for the death benefit. The next steps in cases such as Barotz would therefore tend to be that the parties proceed directly into discovery and a trial for Counts 4 and 5 of the original complaint (the improper dissolution and veil-piercing claims).
