A recent opinion issued by the Delaware Supreme Court in an estate litigation case has provided the life settlement market with a degree of certainty – but, for now, only a degree.
In GWG DLP Master Trust Dated 03/01/06 v. Estate of Frank (Frank, originally filed as Estate of Norman Frank v. GWG DLP Master Trust Dated 03/01/06, et al.), the plaintiff (the estate) argued that the $5m death-benefit life insurance policy was a stranger-originated life insurance (STOLI) policy, which would be illegal in Delaware, and therefore, void under Delaware law; the consequence being that the estate of the insured decedent could sue the owner/beneficiary of the policy at the time of death under 18 Del. C. 2704(b) to seek to recover the benefits paid to that owner/beneficiary by the life insurer.
The defendant, DLP Master Trust Dated 03/01/06, argued that the claim fell outside of Delaware’s three-year statute of limitations, which would bar the estate from recovery (and provide something of a ‘time-shield’ for investors against long-dormant STOLI claims).
The United States District Court for the District of Delaware, where the action is pending, ‘certified’ the question to the Delaware Supreme Court, essentially seeking a definitive ruling from the state’s highest court. The opinion returned was indeed definitive.
“The Court held that an estate’s claim to recover the proceeds of a life under 18 Del. C. 2704(b) is an action based on a statute, which is governed by 10 Del. C. 8106(a), which prescribes a three-year statute of limitations for actions based on a statute,” said James Westerlind, a Partner at ArentFox Schiff in New York.
The estate in Frank argued that there is no statute of limitations applicable to an estate’s lawsuit to recover the benefits of a STOLI policy because, under the Delaware Supreme Court’s recent opinion in Malkin, section 2704 is a codification of Delaware’s common law. But the Delaware Supreme Court in Frank clarified that while the insurable interest requirement in section 2704 existed at common law, the remedy in subsection (b) of the statute, which provides the insured’s estate with a cause of action to recover the benefits of a policy issued in violation of the insurable interest requirement, did not exist in the common law and, therefore, was a remedy first created by the statute. As such, a cause of action by an estate under section 2704(b) is an “action based on a statute,” which is subject to the three-year statute of limitations under 10 Del. C. 8106(a).
So, the three-year statute of limitations, confirmed here by the Delaware Supreme Court, would seem to be helpful to the life settlement industry because asset managers holding policies where the policy maturity was more than three years ago would therefore have significantly lower litigation risk to factor into their models.
If only it were that simple.
There remains something of an ‘elephant in the room’, which is that the court didn’t actually clarify what the trigger event is from which the statute of limitations applies — in legal jargon, when the cause of action under section 2704(b) begins to accrue.
The reason they didn’t is simple.
“The Delaware Supreme Court wasn’t asked what the event is or was that starts the clock on the three-year time period,” said Westerlind.
“They were only asked what the statute of limitations is, and they responded to that question.”
So, for the time being, the life settlement market awaits more clarity with regards to this issue. Frank will now continue to be heard by the Delaware District Court, and there is no timeline currently as to when proceedings will resume, but when it does, all eyes will now focus squarely on what the District Court decides is the ‘accrual date’.
The Court already has two options. The defendant argues that the accrual date begins upon the payment of the death benefit. This view drove its argument, as the death benefit was paid on February 19, 2019, which would make the statute of limitations date February 19, 2022; the lawsuit was filed on May 18, 2023, more than a year later. The plaintiff, however, argued the clock couldn’t start until he was appointed as executor of the estate, which didn’t happen until 2023.
So, the life settlement market will have to wait a little longer to find out which one prevails – or whether another does.
Delaware has delivered good news and bad to the life settlement market over the years. Recently, Wells Fargo Bank v. Estate of Malkin, a 2022 Delaware case, ruled that ‘innocent’ downstream investors could not use standard commercial defences (like the Bona Fide Purchaser rule) to keep death benefits if the policy was deemed a STOLI one.
But the Frank decision, albeit in dicta, explained that common law defenses, including but not limited to a statute of limitations defense, is available to a defendant investor in a STOLI case if the defense is viable under its elements.
The Frank case will be a closely-watched one by the life settlement market, but for now, this latest update does provide the market with some reassurance.
“Investors generally like legal certainty and while Frank left a number of questions open, this opinion is a step towards a more defined structure with regards to estate litigation risk in Delaware,” said Westerlind.
Attorneys for the plaintiff and the defendant did not take the opportunity to comment prior to publication.