In Pruco Life Ins. Co. v. Brasner, No. 10-cv-80804, slip op. (S.D. Fla. Jul. 25, 2012) (Brasner III), the US District Court for the Southern District of Florida granted defendant Wells Fargo Bank, N.A.’s (Wells Fargo) post-trial motion for reconsideration, holding that, based on newly discovered evidence, it was entitled to a trial on the issue of whether the plaintiff, Pruco Life Insurance Company (Pruco), should be required to return premiums paid by Wells Fargo for the subject policy after Wells Fargo had acquired the policy in the secondary market. The newly discovered evidence — an internal Pruco report (SIU Report) — shows that Pruco was aware in 2008 of the facts that established that the policy lacked insurable interest, yet Pruco failed to challenge the validity of the policy and continued to accept premiums until 2010, when it finally commenced the lawsuit. Brasner III concluded that “the SIU Report raises a disputed issue of fact warranting a trial as to whether this Court should depart from the general rule articulated in TTSI [Irrevocable Trust v. Reliastar Life Ins. Co., 60 So. 3d 1148 (Fla. Dist. Ct. App. 2011) — that contracts that are void as against public policy will not be enforced by the courts and the parties will be left as the court found them —] and order the premium payments from 2009 and 2010 returned to Wells Fargo.” Brasner III, slip op. at 8. The decision is a victory for bona fide third-party investors that have purchased policies in the secondary market.

Pruco commenced the Brasner lawsuit in 2010 to rescind a $10 million life insurance policy that it had issued on the life of Helene Berger in 2006 (Berger Policy). Pruco claimed that the Berger Policy was a STOLI policy that was ab initio for lack of insurable interest. Pruco also sought to retain all premiums paid on the Berger Policy, in the event the Berger Policy was declared void by the Court. At the time the lawsuit was commenced, the Berger Policy was owned by an entity represented by Wells Fargo. Wells Fargo’s client had purchased the Berger Policy in a life settlement transaction in 2008. Pruco had acknowledged Wells Fargo’s client to be the record owner of the Berger Policy, and accepted premium payments from Wells Fargo’s client in 2009 and 2010.

In November 2011, the Brasner Court granted summary judgment in favor of Pruco, and held that, under Florida law, the Berger Policy was void ab initio for lack of insurable interest. Pruco Life Ins. Co. v. Brasner, No. 10-cv-80804, slip op. (S.D. Fla. Nov. 14, 2011) (Brasner II). The Court also held that, based on the general rule articulated in the TTSI decision, Pruco was permitted to retain all of the premiums paid on the Berger Policy. Brasner I, slip op. at 27. Although the Court recognized that Wells Fargo may not have been the party responsible for the Berger Policy’s wrongful placement, the court determined that it was ultimately bound by the Florida common law rule that requires a court to leave the parties to an illegal contract as it found them. Id.

Subsequent to the Brasner II decision, Wells Fargo came into possession of an internal Pruco report (SIU Report). The SIU Report indicated that Pruco began to have suspicions about the Berger Policy in as early as 2008, when Pruco investigated the agent of record on the Berger Policy, Steve Brasner. Pruco’s investigation of Brasner, which was completed in 2008, caused it to conclude that “the Policy ‘appeared suspicious as a potential settlement case,’” and that there was a “strong indication of inflated net worth” on the part of Mrs. Berger. Brasner III, slip op. at 5. Nonetheless, according to the SIU Report, Pruco decided against taking any action to void the Berger Policy in 2008. Id. Since the SIU Report had not been before the court when it decided Brasner II, Wells Fargo filed a motion under Rule 60(b) of the Federal Rules of Civil Procedure to set aside the prior summary judgment ruling on the issue of return of premium based on the newly discovered SIU Report.

The court granted Wells Fargo’s motion, holding that the SIU Report raised factual issues regarding which party, Pruco or Wells Fargo, is entitled to the premiums that Wells Fargo paid on the Berger Policy. The Court found the SIU Report to be compelling because it indicated that Pruco may have been less than truthful with the Court:

Throughout this litigation, Pruco has always maintained that it sued for rescission of the Burger Policy as soon as it learned of Brasner’s fraudulent activities through the April 2010 Wall Street Journal article. The Court relied on this representation in reaching its decision in the Summary Judgment Order, noting, “Pruco had no reason to know the Berger Policy was an illegal wagering contract until the Wall Street Journal published a story about Mr. Brasner’s frauds in 2010.” However, the SIU Report raises a factual dispute as to Pruco’s knowledge of the fraud and the fact that the Berger Policy was an illegal wagering contract.

Brasner III, slip op. at 8.

The court also recognized that Wells Fargo had made valid arguments that: (1) the SIU Report demonstrated that Pruco was aware of the questionable nature of the Berger Policy well before the Berger Policy was purchased by Wells’ client; (2) the SIU Report verified that Pruco turned a blind eye to several facts that, if timely and properly investigated, would have led Pruco to rescind the Berger Policy before it was sold to Wells Fargo’s client, an innocent purchaser for value; and (3) because Pruco’s inattentiveness and laxity led to the availability of the Berger Policy on the secondary market, Pruco does not deserve to retain the premiums paid by Wells Fargo’s client after it purchased the Berger Policy in 2008. Brasner III, slip op. at 8-9. The Brasner case will now proceed to trial in October on the return of premium issue.

Brasner II demonstrates that a carrier’s actions subsequent to policy issuance will be taken into account by a Florida court when deciding the extent to which the carrier may retain premiums on the policy. The descision also reiterates that carriers may not be the innocent victims of STOLI that they purport to be. Earlier this year, Lincoln National Life Insurance Company (“Lincoln”) was ordered by a jury to pay the death benefit on a $5 million policy that Lincoln claimed was STOLI. Sciarretta v. The Lincoln National Life Insurance Company, No. 9:11-cv-80427 (S.D. Fla. Mar. 2, 2012). In Sciarretta, Lincoln’s anti-STOLI stance was belied by a 2006 Lincoln internal memo showing that that Lincoln’s concern with STOLI policies simply was a loss in profits for the company — a concern that resulted in Lincoln increasing the price of its universal life insurance products to protect its anticipated internal rate of return (IRR) (rather than avoiding the sale of high face value policies to seniors). Much like in Sciarretta, it appears that Pruco’s purported shock and outrage over the insurable interest violation in Brasner was belied by the SIU Report, which evidences that Pruco accepted premiums on the Berger Policy for two years after it had knowledge of the facts that supported the claims that it asserted in the lawsuit in 2010.