Cilente v. Phoenix Life, Index No. 600313/2008, 1/7/2014 (Kapnick, J.)

Fraud and Fraudulent inducement; NY GBL § 349; breach; Insurance Law §§ 4226 and 2123; breach; Fraud and Negligence. 

Plaintiffs allege that they were defrauded into purchasing life insurance policy from defendants.  Initially, plaintiffs created a trust which in turn purchased a $15 million life insurance policy with an annual premium payment of approximately $1.4 million.  A.I. Credit Corp (AIC) financed the premium payment in exchange for a “Master Promissory Note” from plaintiffs.  After plaintiffs’ initial purchase of the policy, defendant, Nesfield, provided plaintiffs with two faxes concerning premium financing.  On February 7, 2005, AIC informed plaintiffs that they were in default on their premium payments.  Plaintiffs could not afford to post the collateral amount of $250,000.  In early 2006, plaintiffs entered into a series of transactions with defendants to reduce their life insurance policy from $15 million to roughly $5.5 million – thus, reducing the premium payments to $335,508 (collectively referred as “2006 Transaction”).  In addition, plaintiffs purchased a new policy, which they then put up as collateral to AIC for the initial policy.  Eventually, in 2007, and after refinancing the original insurance policy, plaintiffs were not able to satisfy the re-structured premium payments, consequently, defaulting.  Thereafter, plaintiffs commenced suit on multiple counts.

First, plaintiffs alleged fraud and fraudulent inducement.  Plaintiffs claimed that defendants concealed material facts and misrepresented the essential risks of premium financing.  Plaintiffs asserted that they materially relied on defendants’ faxes containing “Capital Maximization Strategy Illustrations,” intended to illustrate the proper operation of premium financing.  The court determined that plaintiffs could not have relied on the faxes as the life insurance policy was executed prior to the date the plaintiffs received the faxes.  Furthermore, the court opined that plaintiffs were sophisticated businessmen and it would be difficult for such individuals to be confused by the plain language of the faxes.

Second, plaintiffs argued that defendants violated NY General Business Law § 349.  Defendants moved for summary judgment, arguing that they made no material misrepresentations.  The court held in favor of defendants, holding that the plaintiffs failed to satisfy the three basic elements of § 349.  Additionally, the Court held that for the same reasons articulated in rejecting plaintiffs’ fraud claims, under § 349, defendants made no misrepresentations to plaintiffs.

Third, plaintiffs alleged breach of Insurance Law Claims §§ 4226, and 2123.  Plaintiffs argued that defendants failed to present plaintiffs with any “Disclosure Statements” for the refinancing of the original policy and the subsequent purchase of the new policy.  Once again, plaintiffs’ contentions fell flat.  The Court opined that, with respect to § 4226(d), plaintiffs failed to make a prima facie showing that defendants “knowingly” violated Regulation No. 60.  All in while taking note that defendants conceded to a technical violation of Regulation No. 60.  Nonetheless, the Court denied defendants’ Motion for Summary Judgment to dismiss plaintiffs’ insurance law claims.  The Court reasoned that there were additional factual issues in dispute, mostly focusing on the issue of proximate cause, which the Court deemed is a question of fact for the jury.

Lastly, plaintiffs’ allege fraud and negligence in relation to the 2006 transactions.  Plaintiffs’ contended that defendants failed to disclose that the 2006 transactions would result in a $400,000 surrender charge for the initial insurance policy, and the subsequent conversion of the policy into a “Modified Endowment Contract” (MEC).  The Court asserted that the initial policy expressly disclosed the events that could potentially trigger a surrender charge.  The Court further opined that the faxes provided to the plaintiffs clearly illustrated that the initial policy would convert to a MEC in Year 4.  In closing, the Court stated, “the surrender charge and change to MEC were disclosed to plaintiffs prior to entering into the 2006 transaction.”  In short, the Court severed the Insurance Law claims against defendants, and dismissed all other causes of actions without prejudice.

Cilente v. Phoenix Life, Index No. 600313/2008, 1/7/2014 (Kapnick, J.).

Authored By:

Kumail Mirza

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