In a ruling that sets up North Carolina as a favorable jurisdiction for the life settlement business, a judge has ruled in favor of Wells Fargo in a dispute over the legality of a policy that North Carolina resident Dr. Gordon E. Trevathan Jr. took out on himself to later sell purely as a profit-making venture.
The Hon. Mark A. Davis, Special Superior Court Judge for Complex Business Cases, issued an order in May finding that the Columbus Life Insurance Co. policy Dr. Trevathan had obtained to cover his own life — and which later came under the control of Wells Fargo Bank NA — was not an illegal wagering contract.
The judge emphasised that Dr. Trevathan always had full discretion over the choice of whether to keep, renounce, or sell the insurance policy, writing that, “it is important to note that our Supreme Court has made clear that a life insurance policy is a form of property and that, once lawfully issued, it can be assigned or sold to any third party—for investment purposes or otherwise.”
“The ultimate issue in this case lies at the crossroads of two well-settled doctrines in North Carolina,” Judge Davis continued. “First, life insurance policies that are merely ‘wagering contracts’ on the life of the named insured are void from their inception as contrary to public policy. Second, the holder of a valid life insurance policy is free to sell or assign that policy to any third party for any reason following the policy’s issuance.
“The point is that Dr. Trevathan was at all times in complete control over the decision as to whether he would keep, abandon, or sell the policy,” Judge Davis wrote.
Andrew Dykens, an attorney with ArentFox Schiff in New York City, called it an important decision for the life settlement industry because even though the court concluded that Dr. Trevathan bought the policy with premium financing intending to sell it, “the court enforced the policy and determined that it was not a wagering contract because the insured had control over the policy’s disposition”.
Dykens pointed out that Dr. Trevathan used non-recourse premium financing which has been attacked across the US in negative court decisions.
“This decision is important for life settlement investors because it reaffirms that a prearranged agreement with an investor is required for a policy to qualify as an unlawful wagering contract, even where the insured uses a non-recourse loan. It is not enough for the insured to hope to eventually sell a policy to an investor. This is important because some courts have held in recent years that an insured’s use of a non-recourse loan to purchase a policy that they intend to sell amounts to an unlawful wager, rendering the policy void. Trevathan rejects this conclusion,” Dykens said.
“On a practical level, North Carolina is now a favorable jurisdiction for investors,” Dykens said.
The case began in 2004 or early 2005 when Dr. Trevathan learned from his friend, Fred Webb, that Webb had made extra money — with no required upfront investment on Webb’s part — by allowing a life insurance policy to be taken out on his life that would subsequently be sold to investors.
In 2005, Dr. Trevathan secured a $1m life insurance policy along with a $1m rider from Columbus Life with the aid of an insurance producer. The initial two years’ premiums for the policy were covered through a premium finance loan obtained from E&W LLC, a financial firm located in North Carolina. This loan was backed by the policy itself, which served as collateral.
After two years of coverage, Dr. Trevathan could choose from three options at the maturity of the premium finance loan:
1) surrendering the policy to E&W in full satisfaction of the loan;
2) paying off the loan balance to E&W and keeping the policy for himself going forward; or;
3) selling the policy and using the proceeds to pay off the loan balance.
In his deposition, Dr. Trevathan testified that he had not been in the market for life insurance prior to his initial discussions with Webb and the producer. When asked if he had any beneficiaries for whom he wished to provide financial benefits by means of life insurance coverage, Dr. Trevathan responded that “they weren’t his thoughts at that time”.
Instead, Dr. Trevathan testified that he believed that obtaining an insurance policy on his life “looked like an easy way to accumulate some funds.” Additionally, Dr. Trevathan testified that at the time the policy was taken out he had no intention of either paying the premiums himself or subsequently paying back the loan and retaining the policy.
In 2007, the policy was sold to LifeTrust LLC on behalf of its client, Assured Holdings, leaving Dr. Trevathan with more than $200,000. The policy underwent another change in ownership in June 2012 when it was acquired by Wells Fargo, acting as the securities intermediary for the policy owner, LSH Co.
In 2011, Columbus Life included the Trevathan policy in an internal roster titled “potential investor-owned/life settlement policies.” This decision was based on a series of “red flags” that suggested the policy might be a stranger-oriented life insurance policy (STOLI), as detailed in the order.
The insurer initiated legal action in January 2021, seeking a declaratory judgment. Their objective was to establish that the policy is unenforceable due to its classification as an illegal wagering contract on human life and void because it lacks an insurable interest.
Judge Davis, in his ruling, pointed out several key aspects. First, he determined that the policy does not qualify as a wagering contract, stemming from the fact that the insurance producer who facilitated the policy’s acquisition was not the ultimate assignee of the policy post-issuance, and there was no actual assignment of the policy to the insurance producer. Additionally, LifeTrust and Assured Holdings were not involved in the policy’s procurement process.
“No such wager by a ‘stranger’ on the life of Dr. Trevathan existed at the time of the policy’s issuance,” the judge said. Judge Davis concluded that the life insurance policy issued by Columbus Life to Dr. Trevathan is legally valid and enforceable.
Attorneys for Columbus Life Insurance Co. or Wells Fargo didn’t respond to an emailed request for comment from Life Risk News in time for publication.
