546 722 FEDERAL SUPPLEMENT, 2d SERIES · 546 722 FEDERAL SUPPLEMENT, 2d SERIES A, ... failed to create a prima facie case for ... fraudulent concealment doctrine. 10

546 722 FEDERAL SUPPLEMENT, 2d SERIES

A, Tab 13)) That the Corps developed acontingency position after waiting indefi-nitely for action on its permit application ishardly indicative of bad faith. Havingfailed to create a prima facie case foreither of the exceptions described supra,the court concludes that DNREC has notovercome the presumption of regularityassociated with the administrative record.

C. Availability of Discovery

The Third Circuit observes a strong pre-sumption against discovery in APA cases,allowing it only upon a showing of agencybias. NVE, Inc., 436 F.3d at 195.DNREC has not asserted, nor can thecourt discern, any instance of bias on thepart of the Corps. Moreover, the size ofthe submitted record is relevant to wheth-er discovery is appropriate. Id. at 196.The Corps has submitted an extensive ad-ministrative record containing approxi-mately 48,000 pages. Finally, DNREC’sassertion that the Corps created the rec-ord in bad faith is belied by the Corps’willing production of its entire file on theDeepening Project in response to theFOIA request. DNREC has not demon-strated the propriety of discovery in thiscase.

V. CONCLUSION

In view of the foregoing, DNREC’s mo-tion to expand the administrative record isdenied. An appropriate order will follow.

ORDER

At Wilmington this 15th day of July,2010, consistent with the memorandumopinion issued this same date;

IT IS ORDERED that plaintiff’s motionfor a declaration on the administrative rec-

ord and to expand the administrative rec-ord (D.I. 74), is denied.

,

The LINCOLN NATIONAL LIFEINSURANCE COMPANY,

Plaintiff,

v.

Bayard J. SNYDER, as Trustee of theHarry Wisner Irrevocable Life Insur-ance Trust Dated September 6, 2006,Landon Strauss and Robert Fink, De-fendants.

Civ. No. 09–888–SLR.

United States District Court,D. Delaware.

July 15, 2010.

Background: Insurer brought action al-leging that trustee of life insurance trust,insurance agent, and third party fraudu-lently procured stranger-originated life in-surance (STOLI) policy. Trustee moved todismiss.

Holdings: The District Court, Sue L.Robinson, J., held that:

(1) agent’s knowledge of alleged misrepre-sentations in application could not beimputed to insurer;

(2) insurer’s failure to timely disclaim cov-erage did not estop it from bringingsuit to rescind policy;

(3) insurer stated claim to rescind policyfor lack of insurable interest;

(4) insurer sufficiently pled loss causation;

(5) insurer pled fraud with sufficient par-ticularity;

547LINCOLN NAT. LIFE INS. CO. v. SNYDERCite as 722 F.Supp.2d 546 (D.Del. 2010)

(6) insurer pled facts necessary to toll lim-itations period;

(7) insurer stated negligent misrepresen-tation claim; and

(8) insurer had to return premiums it ob-tained if it rescinded policy.

Motion granted in part and denied in part.

1. Federal Civil Procedure O1832,2533.1

Ordinarily, on motion to dismiss forfailure to state claim, court may not con-sider documents that are outside of com-plaint, or not expressly incorporated there-in, unless motion is converted into one forsummary judgment, but if contract or es-sential document, whose authenticity is notchallenged, is basis of complaint, it is in-corporated by reference and properly re-lied on by court on motion to dismiss.Fed.Rules Civ.Proc.Rule 12(b)(6), 28U.S.C.A.

2. Insurance O1088

Under Delaware choice of law rules,law of place where insurance contract wasmade governs obligations imposed by suchcontract.

3. Principal and Agent O178(1)

Under Delaware law, knowledge ofagent acquired while acting within scope ofhis or her authority is imputed to princi-pal.

4. Insurance O1642

Under Delaware law, insuranceagent’s knowledge of alleged misrepresen-tations in application for life insurance pol-icy could not be imputed to insurance com-pany, where financial misrepresentationson application were allegedly made to ob-tain higher face value policy, which in turngenerated higher commissions for agentand higher investment vehicle for alleged

stranger-originated life insurance (STOLI)scheme.

5. Insurance O3110(2)Under Delaware law, insurer’s failure

to disclaim coverage under life insurancepolicy until more than one year after in-sured’s death did not estop it from bring-ing suit to rescind policy based on fraudu-lent statements in insurance application,where policy did not specify any particularsettlement period, and delay in filing ac-tion to rescind was due in part to its claiminvestigation. 18 West’s Del.C.§§ 2724(3), 2914.

6. Insurance O3117Under Delaware law, insurer’s reten-

tion of premiums paid under life insurancepolicy did not estop it from bringing suit torescind policy based on fraudulent state-ments in insurance application.

7. Insurance O1784, 1791(1)Under Delaware law, insurance poli-

cies without insurable interest at inceptionare wagering contracts that have tendencyto create desire for insured’s death, andthus they are, independently of any statuteon subject, condemned, as being againstpublic policy.

8. Insurance O1786, 1791(1)Under Delaware law, so long as in-

sured does not initially take out life insur-ance policy as mere cover for wager, bene-ficial interest may be legally transferred,after procurement, to individual or entitywithout insurable interest.

9. Insurance O1786, 1791(1)Under Delaware law, absent lack of

insurable interest at inception, it is legalfor policyholder to transfer beneficial in-terest in life insurance policy.

10. Insurance O1791(1), 3001Under Delaware law, insurer’s allega-

tions that insurance agent and his accom-


plice approached insured to participate instranger-originated life insurance (STOLI)scheme for benefit of stranger investors,that agent and accomplice solicited strang-ers to invest in policy prior to submissionof application, that material misrepresen-tations were made on application regard-ing insured’s income, net worth, and pur-pose for policy in order to conceal STOLInature of policy, and that insurer foundevidence of misrepresentations during con-testable death claim investigation after in-sured’s death were sufficient to state claimto rescind policy for lack of insurable inter-est at policy’s inception. 18 West’s Del.C.§ 2704(a).

11. Fraud O3Under Delaware law, prima facie ele-

ments of common law fraud and misrepre-sentation are: (1) false representation, usu-ally one of fact, made by defendant; (2)defendant’s knowledge or belief that repre-sentation was false, or was made withreckless indifference to truth; (3) intent toinduce plaintiff to act or to refrain fromacting; (4) plaintiff’s action or inaction tak-en in justifiable reliance upon representa-tion; and (5) damage to plaintiff as resultof such reliance.

12. Insurance O3415Under Delaware law, insurer’s allega-

tion that it would not have issued high faceamount life insurance policy if applicanthad disclosed policy’s stranger-originatedlife insurance (STOLI) nature and plan forpremiums to be advanced or financed bythird party, in contravention of representa-tions made on application, was sufficient toplead loss causation requirement in insur-er’s fraud action against procurers of andinvestors in policy.

13. Federal Civil Procedure O636Heightened pleading requirement for

fraud claims generally does not apply tostate law claims of negligent misrepresen-

tation. Fed.Rules Civ.Proc.Rule 9(b), 28U.S.C.A.

14. Federal Civil Procedure O636

Fraud allegation is legally sufficient ifit pleads circumstances of fraud so as toplace defendants on notice of precise mis-conduct with which they are charged.Fed.Rules Civ.Proc.Rule 9(b), 28 U.S.C.A.


Rule requiring that fraud claims bepled with particularity does not requirerecitation of every material detail of fraudsuch as date, location, and time; however,plaintiffs must use alternative means ofinjecting precision and some measure ofsubstantiation into their allegations offraud. Fed.Rules Civ.Proc.Rule 9(b), 28U.S.C.A.


Insurance company pled with suffi-cient particularity claim that insured andtrustee of life insurance trust misrepresen-ted in life insurance application form re-garding insured’s income, net worth, andpurpose for policy in order to conceal poli-cy’s stranger-originated life insurance(STOLI) nature, where insurer explainedhow STOLI scheme was designed to work,including trustee’s role, and identified falsestatements in application and explainedtheir purpose and why they were false.Fed.Rules Civ.Proc.Rule 9(b), 28 U.S.C.A.

17. Limitation of Actions O43, 95(1)

Under Delaware law, statute of limita-tions is calculated from time of wrongfulact, even if plaintiff is ignorant of cause ofaction. 10 West’s Del.C. § 8106.

18. Limitation of Actions O104(1)

Delaware law allows statute of limita-tions to be tolled where defendant hasacted to affirmatively conceal wrong. 10West’s Del.C. § 8106.


19. Limitation of Actions O104(2)Under Delaware law, fraudulent con-

cealment doctrine of tolling requires plain-tiff to show that defendant knowingly act-ed to prevent plaintiff from learning factsor otherwise made misrepresentations in-tended to put plaintiff off trail of inquiry.10 West’s Del.C. § 8106.

20. Limitation of Actions O104(2)Under Delaware law, insurer’s allega-

tion that it received premiums on life in-surance policy that were from strangerinvestors, rather than insured, if proven,was sufficient to toll statute of limitationsfor bringing fraud claim against purportedparticipants in stranger-originated life in-surance (STOLI) scheme pursuant tofraudulent concealment doctrine. 10West’s Del.C. § 8106.

21. Limitation of Actions O104(1)Under Delaware law, fraudulent con-

cealment doctrine for tolling statute of lim-itations rests on premise that defendantsshould not be permitted to use limitationsperiod as shield when they have engagedin fraudulent acts that have denied plain-tiffs opportunity to timely discover allegedwrongs.

22. Fraud O13(3)Under Delaware law, negligent mis-

representation claim requires: (1) pecuni-ary duty to provide accurate information;(2) supplying of false information; (3) fail-ure to exercise reasonable care in obtain-ing or communicating information; and (4)pecuniary loss caused by justifiable reli-ance upon false information.

23. Insurance O3415Under Delaware law, insurance com-

pany’s allegations that trustee of life insur-ance trust signed application for life insur-ance policy as proposed owner, suppliedfalse financial and other information onapplication, failed to exercise reasonable

care in communicating relevant informa-tion regarding insured’s income, net worth,and purpose for policy in order to concealpolicy’s stranger-originated life insurance(STOLI) nature, and induced insurer toreasonably rely on alleged misrepresenta-tions and issue policy at high face value,which it otherwise might not have done,were sufficient to state negligent misrepre-sentation claim against trustee.

24. Insurance O2975Under Delaware law, insurer that is-

sued fraudulently procured life insurancepolicy was required to return premiums itobtained from policy if it rescinded policy.

25. Costs O194.16Under Delaware law, absent statute

or contract to contrary, prevailing litigantsare responsible for payment of their ownattorney fees.

26. Costs O194.12, 194.44Under Delaware law, decision to

award attorney fees under special circum-stance such as fraud or bad faith is discre-tionary one left to court.

27. Damages O91.5(1)Under Delaware law, punitive dam-

ages are only awarded in situations ofwillful and outrageous conduct that flowsfrom evil motive or reckless indifference torights of others.

David P. Primack, Esquire of DrinkerBiddle & Reath LLP, Wilmington, DE.Counsel for Plaintiff. Of Counsel:Charles J. Vinicombe, Esquire and Thom-as S. Downie, Esquire of Drinker Biddle &Reath LLP, Philadelphia, PA.

John M. Seaman, Esquire of Abrams &Bayliss LLP, Wilmington, DE. Counsel forDefendant Bayard J. Snyder, as Trustee of


the Harry Wisner Irrevocable Life Insur-ance Trust Dated September 6, 2006. OfCounsel: Steven G. Sklaver, Esquire andMatthew R. Berry, Esquire of SusmanGodfrey LLP, Los Angeles, CA.

MEMORANDUM OPINION

SUE L. ROBINSON, District Judge.

I. INTRODUCTION

On November 20, 2009, plaintiff TheLincoln National Life Insurance Company(‘‘plaintiff’’) filed the present action againstdefendants Bayard J. Snyder (the ‘‘Trus-tee’’), trustee of the Harry Wisner Irrevo-cable Life Insurance Trust (the ‘‘Trust’’);Landon Strauss (‘‘Strauss’’); and RobertFink (‘‘Fink’’) (collectively, ‘‘defendants’’).(D.I. 1) Plaintiff alleges in its complaintthat defendants fraudulently procured an$18.5 million insurance policy (the ‘‘WisnerPolicy’’) on the life of Harry Wisner (‘‘Wis-ner’’). (Id. at ¶ 1) Specifically, plaintiffbrings claims of breach of contract, negli-gent misrepresentation, fraudulent induce-ment, and fraud against Strauss, alongwith negligent misrepresentation, fraudu-lent inducement, and fraud against theTrust.1 (Id. at ¶¶ 84–117) Plaintiff seeksdeclaratory judgment that the Wisner Pol-icy: (1) is voidable or void ab initio for lackof insurable interest; (2) was illegally pro-cured; and (3) was procured through ma-terial misrepresentation. (Id. at ¶¶ 71–83)Plaintiff also seeks damages and a retain-ment of some or all of the premiums paidunder the Wisner Policy. (Id. at 24–25)The court has jurisdiction over this matterpursuant to 28 U.S.C. § 1332(a)(1). Pres-ently before this court is the Trustee’smotion to dismiss or, in the alternative, to

strike certain allegations. (D.I. 7) For thereasons that follow, the court grants inpart and denies in part the Trustee’s mo-tion.

II. BACKGROUND 2

Plaintiff is a life insurance company withits principal place of business in Indiana.(D.I 1 at ¶ 4) The Trustee and the Trustare citizens of Delaware, and both Straussand Fink are citizens of California. (Id. at¶¶ 5–7) Around or before November 25,2005, Strauss and Fink persuaded Wisner,who was 76 years old at the time, to applyfor a life insurance policy. (Id. at ¶ 43)Strauss was an insurance agent for plain-tiff, and Fink served as an intermediary,acting ‘‘in concert’’ with Strauss to procurethe Wisner Policy. (Id. at ¶¶ 6–7) Defen-dants allegedly sought the policy not forany legitimate insurance need, but as awagering contract to sell to stranger inves-tors on the secondary life insurance mar-ket. (Id. at ¶¶ 2, 43) The market for suchschemes, called stranger-originated life in-surance (‘‘STOLI’’) policies, has emergedover the last decade, comparable to unlaw-ful wagering policies that have beenaround and disfavored by courts for centu-ries. (Id. at ¶¶ 10–12) In a STOLI ar-rangement, speculators collaborate with anindividual to obtain a life insurance policyin the name of that individual and then sellsome or all of the death benefit payableupon the death of the insured to strangerinvestors. (Id. at ¶ 11) In turn, the soonerthe insured dies, the more profit thesestranger investors are positioned to reap.(Id. at ¶ 15, 18) To maximize the expectedrate of return, STOLI speculators often

1. Plaintiff originally brought a count of aidingand abetting fraud against Fink, but volun-tarily dismissed without prejudice all of itsclaims against Fink on January 4, 2010 pursu-ant to Federal Rule of Civil Procedure41(a)(1)(A)(i). (D.I 5)

2. For purposes of the motion to dismiss or, inthe alternative, to strike, the facts as allegedin plaintiff’s complaint are assumed to betrue.


target individuals who are over the age of70 and who have a net worth of at least $1million to apply for the life insurance poli-cies in which they will invest. (Id. at ¶ 14)The speculators will usually pay for theinsured’s related costs, such as applicationfees and premiums, and may even pay theinsured some compensation upon issuanceof the policy. (Id. at ¶ 16) In order toconceal the nature of such policies, theinsured individual in a STOLI policy willoften designate the policyholder and/orbeneficiary of the proceeds to be a shellthird-party entity. (Id. at ¶ 17) In thealternative, the insured individual maydesignate a legitimate beneficiary, like aclose relative, and then transfer the benefi-ciary interest to a STOLI entity after ob-taining the policy. (Id.)

As part of the alleged STOLI scheme,Wisner established the Trust on Septem-ber 6, 2006, naming his wife, Joan Wisner,as the beneficiary. (Id. at ¶ 48) On Sep-tember 12, 2006, Wisner submitted a for-mal application (the ‘‘Application’’) toplaintiff requesting $18.5 million in life in-surance coverage, naming the Trust as theproposed owner and beneficiary. (Id. at¶¶ 49–51) The Application indicated thatWisner had a net worth of $76,900,000 andan unearned annual income of $4,000,000.(Id. at ¶ 55) It was signed by the Trusteeon behalf of the Trust as the proposedowner; Strauss as the producing agent;and Wisner as the proposed insured. (Id.at ¶ 52) Both the Trustee and Wisner an-swered ‘‘no’’ in response to a question onthe Application asking if they had ‘‘beeninvolved in any discussion about the possi-ble sale or assignment of this policy to alife settlement, viatical or other secondarymarket provider.’’ (Id. at ¶ 53; D.I. 8, ex.

1 at Application p. 3) Strauss also declaredon the Application that he had ‘‘not beeninvolved in any discussion of the possiblesale or assignment of the policy to a lifesettlement, viatical or other secondarymarket provider’’ and that he ‘‘[knew] ofnothing affecting the insurability of theProposed Insured[ ] which [was] not fullyrecorded in [the] application.’’ (D.I. 1 at¶ 58; D.I. 8, ex. 1 Application at 6) Theend of the Application contained an agree-ment and acknowledgement clause thatread:

Each of the Undersigned declares that:

TTTT

6. I HAVE READ, or have had read tome, the completed Application for LifeInsurance before signing below. Allstatements and answers in this applica-tion are correctly recorded, and are full,complete and true. I UNDERSTANDthat any material false statements ormaterial misrepresentations may resultin the loss of coverage under the policy.3

(D.I. 8, ex. 1 at Application p. 6) Accord-ingly, plaintiff asserts that the signatoriesthe Trustee, Strauss, and Wisner—all un-derstood that they were required to pro-vide truthful responses to the questions inthe Application and that plaintiff wouldrely on their responses in determiningwhether to issue a policy. (D.I. 1 at ¶ 57)In reliance on the representations made inthe Application, plaintiff initially issued theWisner Policy on October 6, 2006, with aface value of $18.5 million and with theTrust as the owner and beneficiary. (D.I.1 at ¶¶ 57–59; D.I. 8, ex. 1 at 3)

[1] On October 12, 2006, Strauss sub-mitted an Amendment to the Application

3. Plaintiff misquotes the Application’s agree-ment and acknowledgement in its complaint.(D.I. 1 at ¶ 56 (‘‘All statements and answers inthis application are correctly recorded, andare full, complete and true to the best of my

knowledge and belief.’’)) (emphasis added)Plaintiff concedes this error in its responsebrief and requests the court allow it to amendthe mistake if necessary. (D.I. 14 at 33, n.23) Given this record, it is not necessary.


(the ‘‘Amendment’’) 4 for the Wisner Poli-cy, signed by the Trustee and Wisner,stating:

Neither I nor any person or entity onmy behalf are [sic] receiving any com-pensation, whether via the form of cash,an agreement to pay money in the fu-ture, or a percentage of the death bene-fit.

TTTT

I am purchasing insurance for my bene-fit and the benefit of my personal benefi-ciaries.

TTTT

The premiums are not being advanced,loaned or financed by a third party.

(D.I. 1 at ¶ 54; D.I. 8, ex. 2) Following thereceipt of the Amendment, plaintiff issuedan Endorsement changing the policy date,issue date, and effective date of the WisnerPolicy from October 6, 2006 to October 18,2006.5 (D.I. 14, ex. 4) The Trust paid thefirst premium of $1,044,140 by wire trans-fer on or about October 12, 2006, then paidadditional premiums of $250,000 and$310,000 before Wisner’s death. (D.I. 1 at¶¶ 60–61)

In connection with the Wisner Policy,plaintiff paid Strauss a total of $951,865.73

4. The Trustee seeks to strike the allegationsbased on the Amendment. (D.I. 8 at 37; D.I.17 at 18–19) Ordinarily, on a motion to dis-miss, a court may not consider documentsthat are outside of the complaint, or not ex-pressly incorporated therein, unless the mo-tion is converted into one for summary judg-ment. However, if a contract or essentialdocument, whose authenticity is not chal-lenged, is the basis of a complaint, it is incor-porated by reference and properly relied onby the court on a motion to dismiss. See, e.g.,In re Burlington Coat Factory Sec. Litig., 114F.3d 1410, 1426 (3d Cir.1997) (explainingthat a document forms the basis of a claim ifit is ‘‘integral to or explicitly relied upon inthe complaint’’); see also In re Donald J.Trump Casino Sec. Litig., 7 F.3d 357, 368 n. 9(3d Cir.1993) (‘‘[A] court may consider anundisputedly authentic document that a de-fendant attaches as an exhibit to a motion todismiss if the plaintiffs claims are based onthe document.’’) (quoting Pension BenefitGuar. Corp. v. White Consol. Indus., 998 F.2d1192, 1196 (3d Cir.1993)).

The plain language of the complaint alsosuggests that the Amendment and Applicationwere relied on by plaintiff in issuing the con-tract for the Wisner Policy on October 18,2006, and the court may rely on that contract.(D.I. 1 at ¶¶ 55–59) Under Delaware law,‘‘[n]o application for the issuance of any lifeor health insurance policy or annuity contractshall be admissible in evidence in any actionrelative to such policy or contract, unless atrue copy of the application was attached toor otherwise made a part of the policy orcontract when issued.’’ 18 Del. C. § 2710(a)

(2010). According to the terms of the con-tract, the Amendment was attached to andincluded in the Wisner Policy. The Applica-tion’s agreement and acknowledgementclause contained a declaration that ‘‘[t]his Ap-plication consists of TTT any amendments tothe application(s) attached thereto’’ (D.I. 8,ex. 1 at Application p. 6), and the proposedpolicy issued on October 6, 2006 containedthe Amendment form for the Trust and Wis-ner to sign and return (D.I. 8, ex. 1 at Amend-ment to Application for Insurance). In addi-tion, the proposed policy itself provided:‘‘This policy, the attached copy of the applica-tion and/or endorsements, and any attachedsupplemental applications and riders form theentire contract.’’ (D.I. 8 at 6) Finally, theEndorsement, issued by plaintiff after receiptof the Amendment, clearly provided that thenew policy date, issue date, and effective datefor the Wisner Policy were all October 18,2006. (D.I. 14, ex. 4) It further provided:‘‘This Endorsement is attached to and be-comes a part of Your policy.’’ (Id.) (emphasisadded)

To the extent the Trustee wants to strike theAmendment completely, for the rest of litiga-tion, that is an issue of contract interpreta-tion, to be decided oh summary judgment, oran evidentiary issue, to be determined on amotion in limine. Plaintiff, therefore, mayrely on the Amendment to support its conten-tions at this stage.

5. Plaintiff and the Trustee contest the WisnerPolicy’s issue date due to the submission ofthe Amendment. For a discussion of thismatter, see footnote 4, supra.


and Advanced Planning Services a total of$297,778.07 in commissions. (Id. at ¶ 62)Strauss worked as an ‘‘executive generalagent’’ for plaintiff pursuant to an AgentContract signed by him and plaintiffs Ex-ecutive Vice President on June 29, 2006.(D.I. 1 at ¶ 36; D.I. 14, ex. 1) In the AgentContract, Strauss agreed to ‘‘solicit appli-cations for Life insurance on behalf of[plaintiff] using guidelines provided by[plaintiff];’’ to not ‘‘violate any published[plaintiff] policy on viatical sales;’’ and to‘‘abide by the terms and conditions of anyrules relating to [plaintiffs] business asmay be published, or contained on [plain-tiffs] Web site, from time to time.’’ (D.I. 1at ¶¶ 37–39; D.I. 14, ex. 1) Plaintiff’s poli-cies at the time prohibited Strauss, oranyone else, from producing STOLI poli-cies. (D.I. 1 at 1140) Yet, according toplaintiff, Strauss, along with Fink, ‘‘en-gaged in a pattern and practice of execut-ing STOLI schemes to fraudulently pro-cure life insurance policiesTTTT’’ 6 (Id. at¶ 41) Plaintiff alleges that Strauss andFink solicited stranger investors to investin the Wisner Policy both prior to enteringinto the Agent Contract and prior to sub-mission of the Application. (Id.) The con-cealment of his activities induced plaintiffinto entering the Agent Contract withStrauss and into paying his agent commis-sions. (Id. at ¶ 42)

Wisner died on September 11, 2008 atage 79. (Id. at ¶ 63) The Trust filed aclaim for Wisner’s death benefit in Novem-ber 2008, after which plaintiff initiated acontestable death claim investigation (the

‘‘Claim Investigation’’). (Id. at ¶¶ 64–65)Plaintiff talked to Wisner’s son and bestfriend, Steven B. Wisner, on March 6, 2009during the Claim Investigation regardingthe financial condition of Wisner and thepurpose of the Wisner Policy. (Id. at¶¶ 66–67) In June 2009, plaintiff obtained atyped statement from Steven B. Wisnerstating that: (1) he did not know theamount of his father’s annual income ornet worth; (2) he recognized Strauss’sname because he had tried to obtain insur-ance through Strauss before; (3) he re-called Strauss mentioning a policy sale tohis father but did not know they had be-come connected; (4) Fink’s name was fa-miliar to him but for uncertain reasons;(5) he did not know who paid the premi-ums on the Wisner Policy; (6) he did notknow his father suggested a trust be es-tablished in connection with the WisnerPolicy; (7) the beneficiary interest in theTrust was sold to an unknown party; and(8) his father received compensation inconnection with the transfer of beneficiaryinterest. (Id. at ¶ 68) The Claim Investiga-tion also revealed—based on Wisner’s fed-eral income tax returns for 2005, 2006, and2007—that Wisner’s earned and unearnedincome did not support the representationsmade in the Application. (Id. at ¶¶ 55, 69)

III. STANDARD

Pursuant to Federal Rule of Civil Proce-dure 9(b), a heightened pleading standardapplies to fraud claims, requiring that ‘‘inall averments of fraud TTT the circum-stances constituting fraud TTT shall bestated with particularity.’’ Trenwick Am.

6. Plaintiff’s complaint provides details of an-other policy it suspected of being a STOLIarrangement—the ‘‘Teren Policy.’’ (D.I. 1 at¶¶ 19–42) After litigation (the ‘‘Teren Action’’),the Teren Policy was declared fraudulent andvoid ab initio by the Superior Court of theState of California, San Diego County. Lin-coln Life and Annuity Co. of New York v.Teren, Civ. No. 37–2008–83905–CU–CO–CTL

(Sup.Ct. San Diego County August 27, 2009).During discovery in the Teren Action, plaintifffound that Strauss and Fink were involved inthe Teren STOLI scheme. (Id. at ¶ 30) Plain-tiff alleges that Strauss and Fink offeredstranger investors the opportunity to invest inthe Wisner and Teren Policies as a ‘‘pack-age.’’ (Id. at ¶ 44)


Litig. Trust v. Ernst & Young, LLP., 906A.2d 168, 207 (Del.Ch.2006) (alterations inoriginal), aff’d sub nom., Trenwick Am.Litig. Trust v. Billett, 931 A.2d 438 (Del.2007). Federal Rule of Civil Procedure12(f) allows a court to ‘‘strike from a plead-ing an insufficient defense or any redun-dant, immaterial, impertinent, or scandal-ous matter.’’

[2] In a diversity action, the courtmust first address the threshold issue ofwhich law governs the rights and liabilitiesof the parties before it. For substantiveissues, the court looks to the substantivelaw of the forum state in which it sits.Erie R.R. Co. v. Tompkins, 304 U.S. 64,78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938).The forum state’s choice of law doctrine isincluded within its substantive law. Klax-on Co. v. Stentor Electric Mfg. Co., 313U.S. 487, 496–97, 61 S.Ct. 1020, 85 L.Ed.1477 (1941); Kruzits v. Okuma MachineTool, Inc., 40 F.3d 52, 55 (3d Cir.1994).Under the law of Delaware, the law of theplace where an insurance contract wasmade governs the obligations imposed bysuch contract.7 Wilmington Trust Co. v.Mut. Life Ins. Co. of New York, 177 F.2d404, 406 (3d Cir.1949).

In reviewing a motion filed under Fed-eral Rule of Civil Procedure 12(b)(6), thecourt must accept the factual allegations ofthe non-moving party as true and draw allreasonable inferences in its favor. SeeErickson v. Pardus, 551 U.S. 89, 94, 127S.Ct. 2197, 167 L.Ed.2d 1081 (2007);Christopher v. Harbury, 536 U.S. 403, 406,122 S.Ct. 2179, 153 L.Ed.2d 413 (2002). Acourt may consider the pleadings, publicrecord, orders, and exhibits attached to thecomplaint. Oshiver v. Levin, Fishbein,Sedran & Berman, 38 F.3d 1380, 1384–85n. 2 (3d Cir.1994).

A complaint must contain ‘‘a short andplain statement of the claim showing thatthe pleader is entitled to relief, in order togive the defendant fair notice of what theTTT claim is and the grounds upon which itrests.’’ Bell Atl. Corp. v. Twombly, 550U.S. 544, 545, 127 S.Ct. 1955, 167 L.Ed.2d929 (2007) (interpreting Fed.R.Civ.P. 8(a))(internal quotations omitted). A complaintdoes not need detailed factual allegations;however, ‘‘a plaintiffs obligation to providethe ‘grounds’ of his entitle[ment] to reliefrequires more than labels and conclusions,and a formulaic recitation of the elementsof a cause of action will not do.’’ Id. at545, 127 S.Ct. 1955 (alteration in original)(citation omitted). The ‘‘[f]actual allega-tions must be enough to raise a right torelief above the speculative level on theassumption that all of the complaint’s alle-gations are true.’’ Id. Furthermore,‘‘[w]hen there are well-pleaded factual alle-gations, a court should assume their verac-ity and then determine whether they plau-sibly give rise to an entitlement to relief.’’Ashcroft v. Iqbal, ––– U.S. ––––, 129 S.Ct.1937, 1950, 173 L.Ed.2d 868 (2009). Sucha determination is a context-specific taskrequiring the court ‘‘to draw on its judicialexperience and common sense.’’ Id.

IV. DISCUSSION

Plaintiff argues that the Wisner Policy isvoid ab initio or voidable due to: (1) lack ofinsurable interest at inception; (2) its ille-gal procurement under applicable law; and(3) material misrepresentations in the Ap-plication. (D.I. 1 at ¶ 3) To the extent thatdefendants were involved in fraud, fraudu-lent inducement, aiding and abetting fraud,negligent misrepresentation and/or breachof contract, plaintiff seeks compensatoryand punitive damages, as well as retain-ment of some or all of the premiums paid

7. Both parties’ briefs argue the issues underDelaware law and, if facts regarding where

the Wisner Policy was made are not contest-ed, Delaware law will govern.


on the Wisner Policy. (Id.) In his motionto dismiss or, in the alternative, to strike,the Trustee asserts that: (1) each of plain-tiffs claims fails because plaintiff isdeemed to have full knowledge of the al-leged misrepresentations; (2) plaintiff isestopped from rescinding the policy; (3)the Wisner Policy is not void or voidabledue to lack of Insurable interest; (4) plain-tiffs fraud and misrepresentation claimsfail because plaintiff did not adequatelyplead loss causation; (5) plaintiff failed toallege fraud with sufficient particularity;(6) plaintiffs fraud and misrepresentationclaims are time-barred; (7) plaintiff cannotsimultaneously seek to rescind the contractand seek damages on the same contract;and (8) to the extent any claims are per-mitted to stand, the court should strikeseveral of plaintiffs allegations becausethey are immaterial to the litigation. (D.I.8; D.I. 14) For the reasons that follow, thecourt grants in part and denies in part theTrustee’s motion.

A. Imputation of Strauss’s Knowl-edge to Plaintiff

[3] ‘‘Delaware law states the knowl-edge of an agent acquired while actingwithin the scope of his or her authority isimputed to the principal.’’ Albert v. Alex.Brown Mgmt. Servs., Inc., Civ. Nos. 762–N and 763–N, 2005 WL 2130607, at *11(Del.Ch. Aug. 26, 2005); see also Curtis,Collins & Holbrook Co. v. United States,

262 U.S. 215, 222, 43 S.Ct. 570, 67 L.Ed.956 (1923) (‘‘The general rule is that aprincipal is charged with the knowledge ofthe agent acquired by the agent in thecourse of the principal’s business.’’). TheTrustee argues that any knowledgeStrauss had regarding the alleged fraud ormisrepresentations related to the WisnerPolicy are imputable to plaintiff because ofthe principal-agent relationship, whichbars plaintiff from bringing any of itsclaims. Plaintiff counters that Strauss’sfraud and knowledge are not imputablebecause he was acting outside the scope ofhis authority and he was acting as anindependent contractor, not an agent.8

Furthermore, plaintiff contends that theadverse interest exception to the principal-agent relationship should apply becauseStrauss was acting in his own self-interestin profiting off of the alleged STOLIscheme.

[4] Assuming for purposes of this mo-tion practice that Strauss was acting as anagent, the court agrees that the adverseinterest exception applies to prevent impu-tation of Strauss’s fraud or knowledge toplaintiff. ‘‘Under agency law, the knowl-edge of an agent is generally imputed tohis principal except when the agent’sown interests become adverse.’’ MetCapSecs. LLC v. Pearl Senior Care, Inc., Civ.No. 2129, 2007 WL 1498989, at *10 (Del.Ch. May 16, 2007) (emphasis added); seealso In re HealthSouth Corp. S’holders

8. Plaintiff argues that Strauss could not havebeen acting as plaintiff’s agent because hisAgent Contract explicitly categorized him as‘‘an independent contractor and not an em-ployee of [plaintiff].’’ (D.I. 14, ex. 1 at 1)(emphasis added) However, the same contractalso classifies Strauss as an ‘‘executive gener-al agent.’’ (Id.) (emphasis added) ‘‘[T]he gen-eral rule is that the liability of an independentcontractor may not be imputed to the princi-pal,’’ but ‘‘[s]erving concurrently as an agentand as an independent contractor is not mu-tually exclusive.’’ Anne M. Jayne, ‘‘Indepen-

dent Contractors,’’ 41 Am.Jur.2d § 2. ‘‘Thedistinction drawn between these terms [agentand independent contractor] centers on theprincipal’s right of control over the activitiesof the agent[ ].’’ Barnes v. Towlson, 405 A.2d137, 138 (Del.Super.1979) (citing Restate-ment of Agency 2d, §§ 2(2) and 2(3)). Be-cause determining whether Strauss was anagent or independent contractor necessarilypresents an issue of fact, the court will notresolve this issue for purposes of the motionto dismiss.


Litig., 845 A.2d 1096, 1108 n. 22 (Del.Ch.2003) (‘‘An exception to the general rulethat the knowledge of an officer or agentwill be imputed to the corporation ariseswhen an officer TTT is acting in a transac-tion in which he is personally or adverselyinterested or is engaged in the perpetra-tion of an independent fraudulent transac-tion, where the knowledge relates to suchtransaction and it would be to his interestto conceal it.’’). In concealing the allegedfraud or misrepresentations related to theWisner Policy, Strauss was acting out ofhis own self interest—the financial misrep-resentations on the Application were alleg-edly made to obtain a higher face valuepolicy, which in turn generated highercommissions for him and a higher invest-ment vehicle for the defendants’ allegedSTOLI scheme.

Applying the adverse interest exceptionto prevent imputation of Strauss’s fraudand knowledge to plaintiff in this case isalso consistent with public policy concerns.The rationale behind imputation of anagent’s knowledge to a principal is ‘‘thepresumption that an agent has dischargedhis duty to disclose to his principal allmaterial facts coming to his knowledge asto the subject of his agency.’’ KE Proper-ty Mgmt., Inc. v. 275 Madison Mgmt.Corp., Civ. No. 12683, 1993 WL 285900, at*5 (Del.Ch. July 21, 1993). This rationalefails when the agent has an adverse inter-est which, by its very nature, he seeks toconceal from his principal. Plaintiff hassufficiently alleged such active conceal-ment on Strauss’s part. (D.I. 1 at § 42)Furthermore,

[i]n Delaware, well settled agency lawprovides [that] where an agent acquiresknowledge in the course of his or heragency and has no personal interest inthe transaction adverse to the interest ofthe principal, any knowledge of or noticeto the agent is chargeable to the princi-pal whether or not knowledge or notice

is actually communicated to the princi-pal. This rule promotes the underlyingpolicy of holding accountable one whotransacts his business through anotherfor what the other does or does not do inconducting that business. The principalshould bear the burden rather than athird party who has dealt with the agentto the third party’s detriment.

Ambrose v. Thomas, Civ. No. 90C–03–020,1992 WL 208478, at *2 (Del.Super. Mar.13, 1992). Where the third party, in thiscase Wisner, has allegedly dealt withStrauss to his benefit rather than detri-ment, the principal should not bear theburden of the agent’s fraud or misrepre-sentation.

B. Estoppel of Rescission

The Trustee argues that plaintiff is es-topped from rescinding the Wisner Policyfor two independent reasons; (1) plaintifffailed to timely disclaim coverage; and (2)plaintiff elected to retain premiums after itobtained knowledge of the alleged fraudu-lent misrepresentations. The court findsneither argument to be an appropriate ba-sis to grant the Trustee’s motion to dis-miss.

1. Timely disclaiming coverage

Plaintiff initiated the current case onNovember 20, 2009, more than one yearafter Wisner’s death, which the Trusteeurges should bar plaintiffs rescission ac-tion. He cites Delaware law, which pro-vides:

There shall be a provision that when thebenefits under the policy shall becomepayable by reason of the death of theinsured, settlement shall be made uponreceipt of due proof of death and, at theinsurer’s Option, surrender of the policyand/or proof of the interest of the claim-ant. If an insurer shall specify a par-ticular period prior to the expirationof which settlement shall be made,


such period shall not exceed 2 monthsfrom the receipt of such proofs.

18 Del. C. § 2914 (2010) (emphasis added).The Trustee asserts that the two-monthperiod serves as a benchmark set by theDelaware legislature on the reasonableamount of time for settling claims andthat, because plaintiff failed to timely dis-claim coverage, its rescission claim isbarred by law. For support, the Trusteecites Gaffin v. Teledyne, Inc., Civ. No.5786, 1990 WL 195914, at *17 (Del.Ch.Dec. 4, 1990), aff’d in relevant part, 611A.2d 467 (Del.1992), in which the court,barring a stockholder’s claim for rescissionagainst a defendant corporation, com-mented that ‘‘[i]t is a well-established prin-ciple of equity that a plaintiff waives theright to rescission by excessive delay inseeking it.’’ However, the delay in ques-tion in Gaffin was three years duringwhich the stockholder had the chance ‘‘tosit back and ‘test the waters,’ waiting toassert a claim for rescission after [defen-dant’s] stock price had increasedTTTT’’ Id.By contrast, plaintiffs delay was muchshorter in this case and does not raise thesame equitable concerns.

[5] ‘‘It is plaintiffs burden to provepromptness, not defendant’s to prove de-lay.’’ Id. at *18. Plaintiff at bar hasalleged sufficient facts for promptness inseeking rescission of the Wisner Policy.First, the Wisner Policy did not specifyany particular settlement period so, by thestatute’s plain meaning, the two-month pe-riod does not apply as a legal bar. Inaddition, plaintiff’s delay in filing the pres-ent action was due in part to the ClaimInvestigation, which it began followingsubmission of the death claim and contin-ued prior to commencement of this action.Under 18 Del. C. § 2724(3) (2010), ‘‘investi-gating any loss or claim under any policy’’

does not ‘‘constitute a waiver of any provi-sion of a policy or of any defense of theinsurer thereunder.’’ Therefore, the al-leged facts in the complaint support plain-tiffs reasonable promptness in filing itsrescission action.

2. Retainment of premiums

[6] In the alternative, the Trustee ar-gues that plaintiff cannot maintain its ac-tion for rescission because it chose to re-tain premiums even after obtainingKnowledge of the alleged STOLI scheme.The Trustee, however, is unable to refer-ence any Delaware precedent for this ar-gument. In contrast, under Delaware law,

there are cases where the completeadministration of justice between theparties does not require the return ofproperty acquired under a fraudulentcontract, in order that it may be re-scinded. That is true when the de-frauded party has received nothingunder the contract which it was notentitled, in any event, to retain, orwhat it has received is utterly worth-less, and of no possible use or benefitto the defendant.

Eastern States Petroleum Co. v. UniversalOil Prods. Co., 49 A.2d 612, 616 (Del.Ch.1946) (emphasis added) (citations omitted).Plaintiffs situation falls under the first sce-nario because it may, depending on theoutcome of this action, be entitled to retainthe premiums collected on the Wisner Poli-cy. In the event the policy is rescinded,plaintiff must refund the premiums, as dis-cussed infra, and in the event the policy isdeemed valid, it may retain the premiums.Therefore, plaintiff is not barred frombringing the action for rescission simplybecause it has retained the premiums thusfar.9

9. This ruling is consistent with the ruling,infra, that should the Wisner Policy be re-

scinded, plaintiff must return the premiumsas a matter of equity to return the parties to


C. Insurable Interest in the WisnerPolicy

A separate issue arises as to whetherplaintiff has sufficiently pled facts alleginga lack of insurable interest. The courtfinds that plaintiff has sufficiently pledfacts to state a claim that the WisnerPolicy was void ab initio for lack of anyinsurable interest.

[7] Delaware law prohibits procure-ment of life insurance if the insured doesnot have an insurable interest. 18 Del. C.§ 2704(a) (2010). An insurable interest isdefined as benefits that are payable toindividuals related closely by blood or bylaw who have a substantial interest out oflove and affection; or to any other individ-ual with a lawful and substantial interestin having the life, health or bodily safety ofthe injured continue. 18 Del. C. § 2704(c)(2010). The Trustee contends that: (1)under Delaware law, the trustee of a trustestablished by an individual also has aninsurable interest in the life of that individ-ual; and (2) Wisner was entitled to namethe trust as the owner and beneficiarybecause he had an insurable interest in hisown life. See 18 Del. C. § 2704(c) (2010).While there is no doubt an insured canname his own trust as the owner andbeneficiary, the insurable interest doctrinedeveloped in common law and out of publicpolicy concerns that deem insurance poli-cies without an insurable interest at incep-tion to be illegal wagering contracts.‘‘[Wagering contracts] have a tendency tocreate a desire for the [death of the in-sured]. They are, therefore, independent-ly of any statute on the subject, con-demned, as being against public policy.’’See Warnock v. Davis, 104 U.S. 775, 779,26 L.Ed. 924 (1881) (emphasis added).

Wagering contracts have long been con-demned as being against public policy. Id.at 779; see also, e.g., Herman v. ProvidentMut. Life Ins. Co. of Philadelphia, 886F.2d 529, 534 (2d Cir.1989); North Ameri-can Co. for Life and Health Ins. v. Lewis,535 F.Supp.2d 755, 759 (S.D.Miss.2008).The insurable interest requirementemerged in order ‘‘to curtail use of insur-ance contracts as wagering contracts bydistinguishing between contracts thatsought to dampen the risk of actual futureloss and those that instead sought to spec-ulate on whether some future contingencywould occur.’’ Sun Life Assurance Co. ofCanada v. Paulson, Civ. No. 07–3877, 2008WL 451054, at *2 n. 4 (D.Minn. Feb. 15,2008) (citation omitted). The SupremeCourt has long ago explained that a wager-ing contract ‘‘gives the [policyholder] asinister counter interest in having the lifecome to an end.’’ Grigsby v. Russell, 222U.S. 149, 154, 32 S.Ct. 58, 56 L.Ed. 133(1911).

[8] Lack of insurable interest is an is-sue that arises only at the time of policyprocurement. 18 Del. C. § 2704(a) (2010)(‘‘[N]o person shall procure or cause to beprocured any insurance contract upon thelife or body of another individual unlessthe benefits under such contract are pay-able to the individual insured or his/herpersonal representatives or to a personhaving, at the time when such contractwas made, an insurable interest in theindividual insured.’’) (emphasis added).However, neither the Third Circuit nor theDelaware Supreme Court has addressedwhat constitutes a lack of insurable inter-est at the time of policy procurement, andno clear consensus has emerged acrossjurisdictions regarding this issue.10 Com-

their status quo prior to the contractual ar-rangement.

10. It is also well established that, so long asthe insured does not initially take out thepolicy as a mere cover for a wager, the benefi-


pare Paulson, 2008 WL 451054 at *1–*2(holding, under Minnesota law, that a mu-tual intent of the insured and a third partyto avoid the prohibition on wagering con-tracts is required to allege lack of insur-able interest), with Lincoln Nat’l Life Ins.Co. v. Calhoun, 596 F.Supp.2d 882, 890(D.N.J.2009) (finding that unilateral intentwas sufficient in alleging an insurable in-terest challenge).

In support of its complaint for findingthe Wisner Policy lacked an insurable in-terest at inception, plaintiff has allegedthat: (1) Strauss and Fink approachedWisner to participate in a STOLI schemefor the benefit of stranger investors (D.I. 1at ¶ 43); (2) Strauss solicited strangers,with the help of Fink as an intermediary,to invest in the Wisner Policy prior tosubmission of the Application (Id. at ¶ 41);(3) material misrepresentations were madeon the Application regarding Wisner’s in-come, net worth and purpose for the policyin order to conceal the STOLI nature ofthe policy (Id. at ¶¶ 2, 41, 53–55); (4) plain-tiff found evidence of the misrepresenta-tions during a contestable death claim in-vestigation after Wisner’s death (Id. at¶¶ 65–69); (5) plaintiff also found evidencethat the beneficiary interest in the Trustwas sold (Id. at ¶ 60); (6) stranger inves-tors paid the premiums on the policy andcompensated Wisner for his participationin the alleged STOLI scheme (Id. at ¶¶ 54,68); (7) Strauss and Fink helped obtainthe Teren Policy, which was found by aCalifornia court to be have been fraudu-lently procured and void ab initio for lackof insurable interest (Id. at ¶¶ 21, 22–23,33–35); (8) Strauss and Fink solicited in-vestors to invest in the Wisner Policy andthe Teren Policy as a package (Id. at ¶ 44).

[9, 10] Absent a lack of insurable inter-est at inception, it is legal for a policy-holder to transfer beneficial interest in apolicy. The court finds that the complaintsufficiently alleges, beyond a speculativelevel, that there was an arrangement inplace, at the time of procurement, to trans-fer the Wisner Policy. In the eyes of thecourt, plaintiffs allegations regarding alack of insurable interest meet the Iqbalplausibility standard.

D. Issues Pertaining to the Fraudand Misrepresentation Claims

The Trustee further asserts that thefraud and misrepresentation claims raisedagainst it in counts III, V, VI, and VII ofthe complaint should be dismissed underthree alternative theories: (1) plaintifffailed to adequately plead loss causation;(2) plaintiff failed to plead the ‘‘knowledgeand belief’’ standard against the Trustee;(3) plaintiff failed to plead fraud with par-ticularity; and (4) the fraud and negligentmisrepresentation claims are time barred.

1. Loss causation requirement

[11, 12] The Trustee argues in this re-gard that plaintiff did not allege its losseswere actually caused by the Trustee’s al-leged misrepresentations. The Trusteeframes the loss causation issue to require‘‘plaintiff to prove not only that ‘but-for’[the Trustee’s] alleged misrepresentations[plaintiff] would not have issued the Policy,but also that [the Trustee’s] alleged mis-representations caused the alleged harm—the payment of death benefits.’’ (D.I. 8 at22) Under Delaware law, the prima facieelements of common law fraud and misrep-resentation are: ‘‘(1) a false representa-tion, usually one of fact, made by the de-fendant; (2) the defendant’s knowledge orbelief that the representation was false, or

cial interest may be legally transferred, afterprocurement, to an individual or entity with-out an insurable interest. See, e.g., Product

Clearing v. Angel, 530 F.Supp.2d 646, 648(S.D.N.Y.2008) (citing Grigsby, 222 U.S. at154–56, 32 S.Ct. 58).


was made with reckless indifference to thetruth; (3) an intent to induce the plaintiffto act or to refrain from acting; (4) theplaintiffs action or inaction taken in justifi-able reliance upon the representation; and(5) damage to the plaintiff as the result ofsuch reliance.’’ Stephenson v. Capano De-velopment, Inc., 462 A.2d 1069, 1074 (Del.1983); see also Simons v. Cogan, 549 A.2d300, 304 (Del.1988) (reciting the same ele-ments but specifically requiring that theplaintiff reasonably relied on the misrepre-sentation to its detriment). Therefore, thecausation requirement under common lawfraud and misrepresentation is measuredby the relationship between plaintiffs reli-ance and plaintiffs loss.11 In its complaint,plaintiff has asserted that defendants’ fi-nancial misrepresentations in the Applica-tion were ‘‘false and grossly overstated inorder to procure a high face amount lifeinsurance policy, which [Wisner] could nototherwise obtain.’’ (D.I. 1 at ¶ 55) Fur-thermore, plaintiff alleges that defendantsconcealed the STOLI nature of the WisnerPolicy and planned for the premiums to beadvanced or financed by a third party, incontravention to the representations madeon the Application and the Amendment.(D.I. 1 at ¶ 54) Plaintiff claims that itissued the policy in reliance upon thoserepresentations: and, if so, it did so to itsdetriment because had the Applicationbeen truthful, plaintiff would have issued alower face value policy or no policy at all.(D.I. 1 at ¶¶ 55, 57, 59)

2. Knowledge and belief standard

In his opening brief in support of themotion to dismiss, the Trustee also arguesthat plaintiff failed to plead any allegationsthat the Trustee was in a position to know

that the information in the Application wasfalse. (D.I. 8 at 27) This Argument wasmade based on the wording in plaintiff’scomplaint, which misquoted the Applica-tion’s agreement and acknowledgementclause in part: ‘‘All statements and an-swers in this application are correctly re-corded, and are full, complete and true tothe best of my knowledge and belief.’’(D.I. 1 at ¶ 56) (emphasis added) The rele-vant clause actually read: ‘‘All statementsand answers in this application are correct-ly recorded, and are full, complete andtrue.’’ (D.I. 8, ex. 1 at Application p. 8,¶ 6) Therefore, the above argument ismoot because the Trustee signed the Ap-plication stating the representations wereall true, rather than only believing them tobe true.

A new related issue arises, however:whether plaintiff should properly be per-mitted to amend its complaint to fix theapparent misquote. The Trustee arguesin its reply brief that plaintiff cannotamend its complaint in order to contradictits original allegations because doing sowould ‘‘change stride in the middle of [the]litigation and disavow the allegations TTT

solely to survive a motion to dismiss.’’ABS Indus., Inc. v. Fifth Third Bank, Civ.No. 3:07CV1339, 2008 WL 2185378, at *3(N.D.Ohio May 23, 2008), aff’d, 333 Fed.Appx. 994 (6th Cir.2009). However, asnoted supra, the court may properly con-sider the Amendment as part of the con-tract for purposes of the motion to dismissand, absent a showing of bad faith, thecourt may freely use its discretion to granta party leave to amend its complaint. SeeFed.R.Civ.P. 15; Foman v. Davis, 371U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222

11. Plaintiff cites several Delaware securitiesfraud cases in support of its argument that itonly needs to show it has been harmed as aresult of its reliance on the Trustee’s misrep-resentations. Although securities fraud law

differs from other law, ‘‘[t]he standards forproving fraud claims under federal securitieslaw and under state law are similar.’’ Brug v.Enstar Group, Inc., 755 F.Supp. 1247 (1991).


(1962) (‘‘In the absence of any apparent ordeclared reason—such as undue delay, badfaith or dilatory motive on the part of themovant TTT the leave sought should, as[Rule 15] require[s], be ‘freely given.’ ’’)Because the Application itself is attachedas an exhibit in the record and there hasbeen no showing of bad faith on plaintiffspart, the court will allow leave for plaintiffto amend its complaint to correct the mis-quote.

3. Particularity of pleadings

[13] Federal Rule of Civil Procedure9(b) provides that ‘‘[i]n alleging fraud TTT aparty must state with particularity the cir-cumstances constituting fraudTTTT’’ Whileplaintiff does not dispute the application ofthe heightened requirement to its fraudclaims, it does contend that the heightenedpleading requirement does not apply to itsnegligent misrepresentation claim. ‘‘Al-though there is a dearth of case law, theRule 9(b) heightened pleading requirementgenerally does not apply to the state lawclaims of TTT negligent misrepresentation.’’In re Fruehauf Trailer Corp., 250 B.R.168, 197 (D.Del.2000) (citation omitted).Therefore the court will only examine thefraud and material misrepresentationclaims under the Rule 9(b) heightenedpleading standard. As applied to theseclaims, plaintiff has sufficiently pled factsto allege fraud with particularity.

[14, 15] The Trustee argues that plain-tiff failed to allege, under the heightenedpleading standard for fraud claims, that:(1) the Trustee was in a position to knowthat he was making false statements; (2)the Trustee had an incentive to misrepre-sent facts; and (3) the Trustee gained a

benefit by making the alleged misrepre-sentations. Generally, a fraud allegation islegally sufficient if it pleads the ‘‘circum-stances’’ of the fraud so as ‘‘to place thedefendants on notice of the precise miscon-duct with which they are charged.’’ Viet-nam Veterans of Am., Inc. v. GuerdonIndus., Inc., 644 F.Supp. 951, 959 (D.Del.1986) (citation omitted). ‘‘Rule 9(b) doesnot require the recitation of every materialdetail of the fraud such as date, locationand time[; however,] plaintiffs must usealternative means of injecting precisionand some measure of substantiation intotheir allegations of fraud.’’ In re StudentFin. Corp., 2004 WL 609329, at *1 (D.Del.Mar. 24, 2004) (citation omitted) (alterationin original). Nothing in Rule 9(b) requiresspecific types of details to be pled, such aswhat the Trustee might have gained fromthe alleged fraud.12 See Klein v. Gen.Nutrition Co., 186 F.3d 338, 345 (3d Cir.1999) (stating that the minimum pleadingthreshold of Rule 9(b) is ‘‘that the plaintiffidentify the speaker of the fraudulentstatements.’’).

[16] The plaintiff has pled the follow-ing facts averring fraud by the Trustee:(1) the alleged STOLI scheme called forthe establishment of the Trust that wouldbecome the record owner and beneficiaryof the Wisner Policy (D.I. 1 at ¶ 45); (2)the Trust, from the outset, was intendedfor transfer on the secondary market, notfor estate liquidity, financial planning, orother legitimate insurance-related pur-poses (Id.); (3) the Trust was used toconceal the true purpose of the WisnerPolicy (Id. ); (4) the premiums, which arealleged to have been funded by stranger

12. The Trustee relies on a Delaware Court ofChancery case for its assertion that an allega-tion of fraud also requires a plaintiff to pleadfacts referring to what a defendant gainedfrom making the misrepresentation. SeeTrenwick Am. Lit. Trust v. Ernst & Young,

L.L.P., 906 A.2d 168, 207–08 (Del.Ch.2006),aff’d sub nom. Trenwick Am. Litig. Trust v.Billett, 931 A.2d 438 (Del.2007). However,the court in Trenwick was interpreting Courtof Chancery Rule 9(b) under state commonlaw, not Federal Rule of Civil Procedure 9(b).


investors, were paid from an account in theTrust’s name (Id. at ¶¶ 54, 60); (5) Wisnerand the Trustee both represented to plain-tiff, in both the Application and the relatedAmendment, that they had not been in-volved in any discussion regarding possiblesale or transfer of the policy, which plain-tiff alleges is false (Id. at ¶¶ 53, 80, 94–95);(6) the Trustee, as the proposed owner ofthe Wisner Policy, signed the Applicationdeclaring everything in it was completeand true (Id. at ¶¶ 54, 56; D.I. 8, ex. 1Application at 8, ¶ 6); and (7) the misrep-resentations were made in order to inten-tionally conceal the alleged STOLI schemeand to secure a higher face value for thepolicy (Id. at ¶¶ 55, 80–81, 103; D.I. 8, ex.1 at Application p. 8, ¶ 6).13 Thus, plaintiffhas clearly identified the Trust as a partyin the fraud and has alleged sufficient cir-cumstances to put the Trustee on notice ofthe particular instances of fraud at issue.

As noted supra, the prima facie ele-ments of common law fraud and misrepre-sentation under Delaware law are: ‘‘(1) afalse representation, usually one of fact,made by the defendant; (2) the defen-dant’s ‘knowledge or belief that the repre-sentation was false, or was made withreckless indifference to the truth’; (3) anintent to induce the plaintiff to act or torefrain from acting; (4) the plaintiffs ac-tion or inaction taken in justifiable relianceupon the representation; and (5) damageto the plaintiff as the result of such reli-ance.’’ Stephenson v. Capano Develop-ment, Inc., 462 A.2d 1069, 1074 (Del.1983).Plaintiff has adequately pled elements fourand five, as discussed supra. The firstelement, false representation, is sufficient-ly pled by all the alleged misrepresenta-tions in the Application (pertaining to Wis-

ner’s income, net worth, participation in asecondary market scheme, and purpose forthe policy), which the Trustee signed anddeclared was true. The second element,the Trustee’s knowledge that the represen-tation was false, is plausibly inferred fromthe alleged facts that the STOLI schemecalled for the establishment of the Trust,the investor-funded premiums were paidfrom the Trust, and the Trust was used topurposefully conceal the true nature of theWisner Policy. Together, when viewed inthe light most favorable for the non-mov-ing party, these allegations reflect possibleinformed participation by the Trustee inthe purported fraud and misrepresenta-tions. The final element, an intent to in-duce the plaintiff to act, is adequately pledby the facts relating to the Trustee’s de-sire to induce plaintiff to issue a high facevalue policy based on the misrepresenta-tions. Therefore, the Trustee is on noticeof the precise misconduct that the fraudand misrepresentation claims charge, andplaintiff has met the Rule 9(b) heightenedpleading standard.

4. Time bar

[17] The Trustee urges the court todismiss plaintiff’s fraud and misrepresen-tation claims by asserting the claims aretime-barred. The statute of limitations forfraud and negligent misrepresentation inDelaware is three years. 10 Del. C.§ 8106 (2010). The statute of limitations‘‘is calculated from the time of the wrong-ful act even if plaintiff is ignorant of thecause of action,’’ which means the statuteof limitations for the present case expiredon September 12, 2009, three years afterthe allegedly fraudulent Application wassubmitted to plaintiff. See Krahmer v.

13. Plaintiff seems to assert that its allegationsin D.I. 1 at ¶¶ 43–44 also support its fraudclaims against the Trustee. (D.I. 14 at 35)However, those paragraphs refer to ‘‘the STO-LI Promoters’’ soliciting investors for the Wis-

ner Policy, and ‘‘the STOLI Promoters’’ areexplicitly defined as Strauss and Fink. (D.I. 1at ¶ 35) Therefore, none of the allegations inthe complaint that refer to ‘‘the STOLI Pro-moters’’ apply to the Trustee.


Christie’s Inc., 911 A.2d 399, 407 (Del.Ch.2006). The present action was not fileduntil November 20, 2009. Thus, plaintiffsfraud and misrepresentation claims wouldbe barred unless the statute of limitationsperiod was tolled.

[18–20] Delaware law allows the stat-ute of limitations to be tolled ‘‘[w]here thedefendant has acted to affirmatively con-ceal the wrong.’’ EBS Litig. LLC v. Bar-clays Global Investors, N.A., 304 F.3d 302,305 (3d Cir.2002). Under the fraudulentconcealment doctrine of tolling, a plaintiffmust show that a defendant ‘‘knowinglyacted to prevent plaintiff from learningfacts or otherwise made misrepresenta-tions intended to put [ ] plaintiff off thetrail of inquiry.’’ Krahmer, 911 A.2d at407 (quoting State ex rel. Brady v. Petti-naro Enters., 870 A.2d 513, 531 (Del.Ch.2005)) (internal quotations omitted).Fraudulent inducement thus requires ashowing that the Trustee affirmativelyacted to conceal the fraud in question. Id.The statute of limitations would then betolled only until plaintiff discovers or, exer-cising reasonable diligence, could have dis-covered its injury. Id.; see also EBS Li-tig., 304 F.3d at 305 (calculating tolling thesame way under Delaware law). Withouttolling, plaintiffs present action would be alittle over two months late. However, thecourt finds that plaintiff sufficiently allegesfacts that, if proven, would toll the statuteof limitations.

The main point of contention in thisregard is whether plaintiff sufficiently pledfacts pointing to the Trustee’s affirmativeconcealment after the issuance of the Wis-ner Policy. In Smith v. Mattia, Civ. No.4498–VCN, 2010 WL 412030, at *5 (Del.Ch. Feb. 1, 2010), the Delaware Court ofChancery, on a motion to dismiss, foundthat defendant home buyers had pled suffi-

cient facts against plaintiff constructioncompany to toll the statute of limitationson grounds of fraudulent concealment.The home buyers in Smith alleged that theconstruction company fraudulently inducedthem to approve draws upon a construc-tion loan for which the funding never wenttoward the construction of their house.Id. The court found that this fact alone, ifproven, was sufficient to toll the start timeof the statute of limitations. Id. Similarly,plaintiff in the present case has allegedthat it received premiums on the WisnerPolicy which were not from the purportedsource. If plaintiffs allegation that theWisner Policy premiums were financed orfunded by stranger investors is true, thenit may be inferred that the payment of thepremiums through the Trust was onemethod of concealing the alleged STOLInature of the policy. (D.I. 1 at ¶¶ 54, 60–61) This inference is plausible, given thatthe Trustee declared that ‘‘[t]he premiumsare not being advanced, loaned or financedby a third party’’ in the Amendment. (D.I.8, ex. 2) The transactions in question werecompleted between October 12, 2006 andApril 18, 2008; the statute of limitationswould be tolled until April 18, 2008.

[21] Moreover, the Trustee cannot usethe statute of limitations as a shield inlight of the fraud allegations. The fraudu-lent concealment doctrine for tolling restson the premise ‘‘that defendants should notbe permitted to use a limitations period asa shield when they have engaged in fraud-ulent acts that have denied plaintiffs theopportunity to timely discover the allegedwrongs.’’ Litman v. Prudential–BacheProperties, Inc., Civ. No. 12137, 1994 WL30529, at *3 (Del.Ch. Jan. 14, 1994). Thus,it would be inappropriate for the court atthis time to dismiss plaintiff’s fraud andmisrepresentations claims as timebarred.14

14. Although plaintiffs claims have survived the early assertion of the Trustee’s time-bar


E. Appropriateness of Negligent Mis-representation Claim

[22, 23] Finally, the Trustee contendsthat plaintiff’s action for negligent misrep-resentation should be dismissed becausethe nature of the alleged misrepresenta-tion requires proof of an intentional orknowing act. Contrary to this contention,however, a negligent misrepresentationdoes not require a knowing or intentionalstate of mind. Instead, it only requires:‘‘(1) a pecuniary duty to provide accurateinformation; (2) the supplying of false in-formation; (3) failure to exercise reason-able care in obtaining or communicatingthe information; and (4) a pecuniary losscaused by justifiable reliance upon thefalse information.’’ Grunstein v. Silva,Civ. No. 3932–VCN, 2009 WL 4698541, at*14 (Del.Ch. Dec. 8, 2009); see also Out-door Techs., Inc. v. Allfirst Fin., Inc., Civ.No. 99C–09–151–JRS, 2001 WL 541472, at*5 (Del.Super. Apr. 12, 2001); StudentFin. Corp. v. Royal Indem. Co., 2004 WL609329, at *3. Plaintiff has adequately pledthat the Trustee: (1) signed the Applica-tion and Amendment as the proposed own-er of the Trust (D.I. 1 at ¶ 52; D.I. 8, ex.2); (2) supplied false financial and otherinformation on both the Application andAmendment (Id. at ¶ 94); (3) failed to ex-ercise reasonable care in communicatingthe relevant information (Id. at ¶ 96); and(4) induced plaintiff to reasonably rely onthe alleged misrepresentations and issuethe Wisner Policy at a high face value,which it otherwise might not have done(Id. at ¶¶ 55, 59, 98). Given the languageof the Application’s agreement and ac-knowledgement clause (‘‘All statementsand answers in this application are correct-ly recorded, and are full, complete and

true’’), there is no need for plaintiff, in itsnegligent mispresentation claim, to provethat the Trustee knew the representationswere false. Thus, plaintiff has adequatelypled its action for negligent misrepresenta-tion.

F. Striking Allegations

The Trustee urges the court to strikeseveral of plaintiff’s allegations, including:(1) allegations based on the Amendment;(2) plaintiffs request to retain premiums;(3) plaintiffs request for attorney fees; and(4) plaintiff’s request for punitive damages.As discussed supra, it is not improper forthe court to consider the substance of theAmendment on this motion, so the courtwill begin by addressing plaintiff’s requestto retain premiums.

1. Plaintiffs request toretain premiums

In the event the Wisner Policy is re-scinded for being voidable or void ab initio,plaintiff seeks to retain some or all of thepremiums it obtained from the policy.Plaintiff asserts that Delaware law doesnot require an insurer to return premiumspaid thereon in order to have a policydeclared void, while the Trustee assertsthat an election of remedies prevents aninsurer from both rescinding a policy andretaining the premiums.

[24] The court agrees with the Trus-tee on this issue. This court has previ-ously held that rescission of benefit in-creases on a life insurance policy requiresthe insurer to refund premiums. Oglesbyv. Penn Mut. Life Ins. Co., 877 F.Supp.872, 890 (D.Del.1994). Other Delawarecourts have also held that rescission is anequity claim that requires all parties to be

defense, the defense raises substantial issuesfor further analysis after discovery. ‘‘It is notso much that [the defense is] without merit asit is that a motion to dismiss is not the most

useful device for presentation of affirmativedefenses.’’ See Smith, 2010 WL 412030 at *6,n. 46.


returned to the status quo. See Strass-burger v. Earley, 752 A.2d 557, 578 (Del.Ch.2000) (returning the parties ‘‘to the po-sition they occupied before the challengedtransaction’’); see also Sannini v. Cass-cells, 401 A.2d 927, 927 (Del.1979) (findingthat election of remedies in equity pre-cludes inconsistent judgments). Plaintiffcites Delaware cases purportedly support-ing its position that it can retain premi-ums on a rescinded policy, but a closerinspection reveals that those courts al-lowed damages to be awarded, not premi-ums to be retained. See Creative Re-search Manufacturing v. Advanced Bio–Delivery LLC, Civ. No. 1211–A, 2007 WL286735, at *10 (Del.Ch. Jan. 30, 2007)(awarding ‘‘operating costs and out-of-pocket expenses’’ incurred by plaintiff inequitable rescission action); Martin New-ark Dealership, Inc. v. Grube, Civ. No.97–11–064, 1998 WL 1557485, at *4 (Del.Ct.Com.PI. Dec. 22, 1998) (allowing aplaintiff to be awarded ‘‘money or otherproperty of which it has been deprived.’’).‘‘The payment TTT [of] premiums is theconsideration for which the insurer agreesto assume the risk specified in the policy.’’Couch on Insurance § 69:2 (3d ed.1996).If an insurance company could retain pre-miums while also obtaining rescission of apolicy, it would have the undesirable effectof incentivizing insurance companies tobring rescission suits as late as possible,as they continue to collect premiums at noactual risk.

Therefore, although plaintiff may prop-erly seek damages for expenses incurredas a result of the Trustee’s alleged con-duct,15 the court dismisses plaintiffs claimseeking retainment of premiums in light of

the fact that it also seeks to rescind theWisner Policy. In an equitable action suchas this, plaintiff may not have it bothways.16

2. Plaintiff’s request for attorney fees

[25] Absent a relevant federal statute,state rules generally determine the awardof attorney fees in diversity cases. SeeMontgomery Ward & Co., Inc. v. Pac.Indem. Co., 557 F.2d 51, 56–57 (3d Cir.1977). Delaware follows the Americanrule where, absent a statute or contract tothe contrary, ‘‘prevailing litigants are re-sponsible for the payment of their ownattorney fees.’’ Goodrich v. E.F. HuttonGroup, Inc., 681 A.2d 1039, 1043–44 (Del.1996). ‘‘In the ordinary adversary litiga-tion the losing party is not assessed thecounsel fees of his opponent unless theaction was fraudulent.’’ WilmingtonTrust Co. v. Coulter, 208 A.2d 677 (Del.Ch.1965); see also Gans v. MDR LiquidatingCorp., Civ. No. 9630, 1998 WL 294006, at*3 (Del. Ch. May 22, 1998) (listing ‘‘fraud,bad faith, or other outrageous conductfrom which the claim arose’’ as a specialbasis for which a court may award attor-ney fees); Tandycrafts, Inc. v. Initio Part-ners, 562 A.2d 1162, 1164 (Del.1989) (‘‘Un-der the ‘equity’ exception a litigant maysecure an award of counsel fees upon ashowing of bad faith by an opposing par-ty.’’) (citing Division of Child Support En-forcement v. Smallwood, 526 A.2d 1353,1356–57 (Del.1987)).

[26] The decision to award attorneyfees under a special circumstance such asfraud or bad faith is a discretionary oneleft to the court. See Gans, 1998 WL294006 at *3. As such, the court will only

15. Pursuant to this reasoning, the court alsodenies the motion to dismiss regarding theTrustee’s argument that plaintiff cannot si-multaneously seek to rescind the contract andseek damages on that same contract.

16. Plaintiff may not simultaneously seek re-scission of the policy and retainment of thepremiums. In the event the Wisner Policy isheld to be valid, plaintiff may retain the pre-miums pursuant to the contract terms.


make this determination after all the factshave been determined through discoveryand will not strike plaintiff’s request forattorney fees at this stage of the proceed-ings.

3. Plaintiff’s request forpunitive damages

[27] In Delaware, ‘‘[p]unitive damagesare only awarded in situations of ‘willfuland outrageous’ conduct that flows from‘evil motive or reckless indifference to therights of others.’ ’’ Segovia v. EquitiesFirst Holdings, LLC, C.A. No. 06C09–149–JRS, 2008 WL 2251218, at *24 (Del.Super.May 30, 2008) (citation omitted); see alsoStephenson v. Capano Dev., Inc., 462 A.2d1069, 1076–77 (Del.1983) (awarding puni-tive damages is proper only ‘‘[i]f the fraudis gross, oppressive, or aggravated, orwhere it involves breach of trust or confi-denceTTTT’’). Like the award of attorneyfees, the court cannot determine whetherthe Trustee’s actions constitute ‘‘willfuland outrageous’’ conduct or ‘‘gross fraud’’at this point in the litigation; therefore,the motion to strike plaintiff’s request forpunitive damages is denied.

V. CONCLUSION

For the aforementioned reasons, thecourt grants in part and denies in part theTrustee’s motion to dismiss or, in the al-ternative, to strike certain allegations.Plaintiff has sufficiently pled grounds fordeclaratory judgment and facts for fraud,misrepresentation, and negligent misrep-resentation. The court grants the Trus-tee’s motion to strike plaintiff’s claim toretain premiums on the Wisner Policy inthe event of rescission. An appropriateorder shall issue.

ORDERAt Wilmington this 15th day of July,

2010, consistent with the memorandumopinion issued this same date;

IT IS ORDERED that the Trustee’smotion to dismiss or, in the alternative, tostrike certain allegations (D.I. 7) is grant-ed in part and denied in part.

,

GRACEWAY PHARMACEUTICALS,LLC, and 3M Innovative Properties

Co., Plaintiffs,

v.

PERRIGO COMPANY, Perrigo IsraelPharmaceuticals Ltd., and Nycomed

U.S. Inc., Defendants.

Civil Action No. 2:10–cv–00937.

United States District Court,D. New Jersey.

June 10, 2010.

Background: Exclusive licensee of patentfor pharmaceutical drug formulation in-volving oleic acid sued competitor for pat-ent infringement. Licensee moved for apreliminary injunction.

Holdings: The District Court, William J.Martini, J., held that:

(1) licensee’s alleged dilatory conduct didnot preclude injunctive relief;

(2) licensee continued to have standing tosue competitor even after it grantedsublicense to a former defendant;

(3) licensee failed to show it had substan-tial likelihood of success on merits ofits infringement claim;

(4) licensee failed to show that it wouldlikely suffer irreparable harm absentthe injunction; but

Documents

546 722 FEDERAL SUPPLEMENT, 2d SERIES · 546 722 FEDERAL SUPPLEMENT, 2d SERIES A, ... failed to create a prima facie case for ... fraudulent concealment doctrine. 10