PHL v. Charter Oak Trust et al. (2011)

MEMORANDUM OF DECISION RE MOTION TO STRIKE

The defendants herein have filed a motion to strike count one and count two of the plaintiff's amended complaint on several grounds.   Similar motions are pending in several consolidated cases.¹  Since the factual basis of three of those cases is similar, and the legal claims are essentially identical, this memorandum and opinion will address those motions as well.²

FACTS

On July 16, 2010, the plaintiff, PHL Variable Insurance Co. (PHL), filed a four-count amended complaint against the defendants, Charter Oak Trust, by and through its trustee, Wayne H. Bursey.   Among other things, the complaint alleges that there has been a recent trend in the derivative market for life insurance, in which life insurance policies are sought with the intent that investors will obtain ownership of the policy, rather than for legitimate insurance needs.   Policies procured under such circumstances have become known as stranger originated insurance (STOLI) policies.   It is alleged that such policies are illegal wagering contracts.   It is also alleged that the policies lack an insurable interest at inception.   As such, the policies should be declared void ab initio.

The factual allegations are that on or about March 14, 2008, the defendants applied in writing to the plaintiff seeking the issuance of a policy insuring the life of Luella Mae Paulsrud.   The application requested material information regarding, among other things, Paulsrud's net worth and annual income, the purpose of the insurance, the source from which premiums would be paid and whether the premiums would at any time be funded by any source other than the insured.   In response to such questions, the defendants represented that Paulsrud had a net worth of $11,200,000, earned income of $175,000 and other income of $120,000.   The application also represented that the purpose of the insurance was for estate tax liquidity and wealth transfer, that premiums would not be financed, and that no individual or entity other than Paulsrud would pay the premiums on the policy.   In reliance on these responses, the plaintiff issued a life insurance policy with a death benefit of $6 million.   The plaintiff claims, however, that all such representations were falsely and knowingly made by Paulsrud and the defendants in order to obtain the policy and that the plaintiff would not have issued the policy, had accurate responses been provided.

In count one of its amended complaint, the plaintiff seeks a declaratory judgment that the policy is void ab initio due to the fraudulent, willfully false and or material misrepresentations and omissions that Paulsrud and the defendants made on the application.   In count two of its amended complaint, the plaintiff seeks declaratory judgment based on the alleged lack of an insurable interest.

On November 22, 2010, the defendants filed a motion to strike count one and count two of the plaintiff's amended complaint on the ground that it has failed to join all necessary parties to the present lawsuit.   The defendants also move to strike those portions of the complaint which seek damages inconsistent with the rescission claims made by the plaintiff.   The plaintiff has filed an objection to said motion.

DISCUSSION

Practice Book § 10–39(a) provides in relevant part:  “Whenever any party wishes to contest ․ (2) the legal sufficiency of any prayer for relief in any such complaint, counterclaim or cross complaint, or (3) the legal sufficiency of any such complaint, counterclaim or cross complaint, or any count thereof, because of the absence of any necessary party or, pursuant to Section 17–56(b), the failure to join or give notice to any interested person ․ that party may do so by filing a motion to strike the contested pleading or part thereof.”   “ ‘[A]s set forth in Practice Book § 10–39, the exclusive remedy for nonjoinder of parties is by motion to strike.’  Practice Book § 11–3.”   Bauer v. Souto, 277 Conn. 829, 839, 896 A.2d 90 (2006).  “Practice Book ․ § 10–39, allows for a claim for relief to be stricken only if the relief sought could not be legally awarded.”  Pamela B. v. Ment, 244 Conn. 296, 325, 709 A.2d 1089 (1998).  “It is fundamental that in determining the sufficiency of a complaint challenged by a defendant's motion to strike, all well-pleaded facts and those facts necessarily implied from the allegations are taken as admitted ․ Indeed, pleadings must be construed broadly and realistically, rather than narrowly and technically.”  (Internal quotation marks omitted.)   Connecticut Coalition for Justice in Education Funding, Inc. v. Rell, 295 Conn. 240, 252–53, 990 A.2d 206 (2010).

I Necessary Parties

The defendant argues that the plaintiff has failed to join all necessary parties to this action because Paulsrud has not been made a party.   The defendant asserts that the interests of Paulsrud to this action are direct, immediate and adverse to the interests of the plaintiff, and she should therefore be joined as a party.   The plaintiff counters that this declaratory judgment action will not affect, directly or indirectly, any interest of Paulsrud, as she is merely a third-party individual who is not the owner or beneficiary of the insurance policy in question.

Practice Book § 17–56 sets out the procedure for a declaratory judgment.   “All persons who have an interest in the subject matter of the requested declaratory judgment that is direct, immediate and adverse to the interest of one or more of the plaintiffs or defendants in the action shall be made parties to the action or shall be given reasonable notice thereof ․” Practice Book § 17–56(b).  Additionally, “[e]xcept as otherwise provided by law, no declaration shall be binding against any persons not joined as parties.   If it appears to the court that the rights of nonparties will be prejudiced by its declaration, it shall order entry of judgment in such form as to affect only the parties to the action.”  Practice Book § 17–56(d).

“Like the declaratory judgment notice rule, the purpose of our joinder rules is to ensure that all persons whose interests are implicated directly by an action are able to protect those interests through participation in the action.”  Batte–Holmgren v. Commissioner of Public Health, 281 Conn. 277, 288, 914 A.2d 996 (2007).  “In the past, there had been a distinction between ‘necessary’ and ‘indispensable’ parties ․ Over time, however, this distinction has become less pronounced ․ and provisions of our Practice Book and General Statutes currently refer only to necessary parties.”  (Citations omitted.)  In re Devon B., 264 Conn. 572, 580 n.12, 825 A.2d 127 (2003).   “Necessary parties ․ are those [p]ersons having an interest in the controversy, and who ought to be made parties, in order that the court may act on that rule which requires it to decide on, and finally determine the entire controversy, and do complete justice, by adjusting all the rights involved in it ․ [B]ut if their interests are separable from those of the parties before the court, so that the court can proceed to a decree, and do complete and final justice, without affecting other persons not before the court, the latter are not indispensable parties.”  (Internal quotation marks omitted.)  Id., 579–80.

In the present case, the complaint alleges that the policy in question lists Paulsrud as the insured.   The defendants argue that because the complaint alleges fraudulent conduct by both Paulsrud and the Trust, that Paulsrud's interests are therefore direct, immediate, and adverse to the interests of the plaintiff.   The defendants fail, however, to indicate what particular interest Paulsrud possesses in the litigation, beyond perhaps being an important factual witness, as suggested by the plaintiff.

Reading the complaint in the light most favorable to the plaintiff, the allegations suggest that all legal and pecuniary interests in the life insurance policy lie with the defendants.   It is alleged that the defendants own the policy, pay all premiums on it, and retain an interest in any and all benefits that the policy should render.   Accordingly, the court concludes that Paulsrud does not possess an interest in the subject matter of the requested declaratory judgment that is direct, immediate and adverse to the interests of the plaintiffs, and that the court can proceed to a decree, and do final justice, without affecting her rights.³

II Prayer for Relief

The defendants also argue that the plaintiff's claim that it is entitled to retain the premiums paid must be stricken pursuant to the election of remedies doctrine.   The defendants assert that the plaintiff is seeking inconsistent forms of relief by seeking both a declaratory judgment that the policy be void ab initio in addition to seeking to retain the premiums paid on that policy.   The plaintiffs counter that the election of remedies doctrine does not preclude a rescinding party from recovering damages caused by the other party's fraud, and even if it did, the plaintiffs need not make any election of remedies at this stage of the case.

The courts of our state have held that the election of remedies doctrine provides that “a party who manifests the choice of one available remedy among others ‘by bringing suit or otherwise’ has not barred his right to pursue any other remedy ‘unless the remedies are inconsistent and the other party materially changes his position in reliance on the manifestation.’  “ (Internal quotation marks omitted.)  Hill v. Raffone, 103 Conn.App. 737, 743, 930 A.2d 788 (2007), quoting Connecticut Light and Power Co. v. DaSilva, 231 Conn. 441, 449, 650 A.2d 551 (1994).  “The doctrine of election of remedies is equitable in nature, and its purpose is not to prevent recourse to any remedy, but to prevent double redress for a single wrong.”  DeLucia v. Burns, 11 Conn.App. 439, 447, 527 A.2d 1234 (1987).

Our Supreme Court has found rescission to be an appropriate remedy where “there has been a material misrepresentation of fact upon which a party relied and which caused [it] to enter the contract ․ Rescission, simply stated, is the unmaking of a contract.   It is a renouncement of the contract and any property obtained pursuant to the contract, and places the parties, as nearly as possible, in the same situation as existed just prior to the execution of the contract.”  (Citation omitted;  internal quotation marks omitted.)   Dorsey v. Mancuso, 23 Conn.App. 629, 635, 583 A.2d 646 (1990).   While, typically, “[a] definite election to rescind a contract is final and operates as a waiver of any claim for damages for breach of the contract,” (internal quotation marks omitted) Duksa v. Middletown, 192 Conn. 191, 197, 472 A.2d 1 (1984), “[t]here are instances ․ where the evidence is such that both [damages and rescission] are available.”  Kavarco v. T.J.E., Inc., 2 Conn.App. 294, 298 n.4, 478 A.2d 257 (1984), overruled on other grounds, Kaczynski v. Kaczynski, 294 Conn. 121, 130, 981 A.2d 1068 (2009).  “If, for example, repudiation of the contract requires that restitution for sums paid prior to rescission are the direct consequence of the fraudulent act of which the plaintiff complains, damages are also recoverable ․ A defrauded party may affirm the contract and sue for damages, seek rescission and restitution of any consideration paid, or seek rescission and any consequential damages.”   (Citation omitted.)  Id.

Our Appellate Court, in Dockter v. Slowik, 91 Conn.App. 448, 455–56, 881 A.2d 479, cert. denied, 276 Conn. 919, 888 A.2d 87 (2005), affirmed a trial court decision awarding rescission of a land purchase contract in addition to damages, including attorneys fees.   In that case, the plaintiffs claimed that the defendant seller knowingly misrepresented that there was an adequate water supply on the property, and such misrepresentations induced the plaintiffs to enter into the contract.   The court ordered, in addition to rescission of the land purchase contract, that the defendant return the purchase price of the contract, the total cost expended by the plaintiffs to have the well deepened, as well as attorneys fees.  Id.

In the present case, the plaintiff claims that they were induced to issue a life insurance policy based on false and fraudulent answers to questions in the insurance application.   The complaint further asserts that the plaintiff would not have issued said insurance policy if these questions had been answered truthfully, and therefore, the plaintiff has suffered damages, including but not limited to, commissions it paid to its sales representatives and attorneys fees.   When the complaint is read in the light most favorable to the plaintiff, these damages could be found to be the direct consequence of the fraudulent act that induced the plaintiff to enter into the life insurance contract, and therefore, may be recoverable in addition to rescission, in order to restore the plaintiff to its position prior to the contract.

Additionally, the plaintiff does not seek damages under the very contract that they claim should be rescinded, as the defendants suggest.   Rather, the damages claimed by the plaintiff are costs that were incurred incidental to the formation of the contract, and as a result of being fraudulently induced to enter into such contract.

Finally, even if the plaintiff could not be awarded both rescission as well as the damages they claim, they are entitled to plead claims for both remedies.   ‘[O]ur liberal pleading rules would seem to support a comment in 25 Am.Jur.2d ‘Election of Remedies,’ § 13, pp. 673–74 where it says:  ‘Under some authority, a plaintiff may plead and prove his or her entitlement to either or both of two or more alternative remedies but the plaintiff may not recover both.   Thus, it has been held that a plaintiff need not make a pretrial election between alternative theories but is entitled to have the case submitted to the jury on both theories.’  “ Versat Group, LLC v. Access Point Openings, LLC, Superior Court, judicial district of New Haven, Docket No. CV 05 4013814 (May 22, 2006, Corradino, J.).

CONCLUSION

For the foregoing reasons, the defendants' motion to strike is denied in its entirety.

Robaina, J.

FOOTNOTES

FN1. HHDCV106009432S PHL Variable Insurance v. Charter Oak Trust.HHDCV106010842S PHL Variable Insurance v. Charter Oak Trust.HHDCV106011236S Penn Mutual Life Insurance v. Wayne Bursey, TrusteeHHDCV106011360S PHL Variable Insurance v. Charter Oak Trust..  FN1. HHDCV106009432S PHL Variable Insurance v. Charter Oak Trust.HHDCV106010842S PHL Variable Insurance v. Charter Oak Trust.HHDCV106011236S Penn Mutual Life Insurance v. Wayne Bursey, TrusteeHHDCV106011360S PHL Variable Insurance v. Charter Oak Trust.

FN2. The following case:  HHDCV106011236S Penn Mutual Life Insurance v. Wayne Bursey, Trustee, will not be addressed by this decision because the legal claims contained in the motion to strike, filed on January 18, 2011, are sufficiently different..  FN2. The following case:  HHDCV106011236S Penn Mutual Life Insurance v. Wayne Bursey, Trustee, will not be addressed by this decision because the legal claims contained in the motion to strike, filed on January 18, 2011, are sufficiently different.

FN3. Additionally, the plaintiff has complied with Practice Book § 17–56(b) by attaching to the complaint a certificate of joinder of all interested parties..  FN3. Additionally, the plaintiff has complied with Practice Book § 17–56(b) by attaching to the complaint a certificate of joinder of all interested parties.

Robaina, Antonio C., J.