Submitted: October 16, 2018
Appeals from United States District Court for the District of
South Dakota - Sioux Falls
SHEPHERD, KELLY, and STRAS, Circuit Judges.
SHEPHERD, CIRCUIT JUDGE.
Estate of Nancy Bergman (the Estate), through its personal
representative, appeals a district court order denying its
motion for reconsideration of an adverse grant of summary
judgment. SPV-LS, LLC (SPV) cross-appeals the district
court's denial of 28 U.S.C. § 1927 and Fed. R. Civ.
P. 26(g)(3) sanctions against the Estate's attorneys. The
district court had jurisdiction under 28 U.S.C. § 1332,
and we have jurisdiction pursuant to 28 U.S.C. § 1291.
For the following reasons, we affirm in part and reverse in
part, remanding for further consideration the denial of
sanctions against attorney Gerald Kroll.
case concerns a $10 million life insurance policy (the
Policy) issued by Transamerica Occidental Life Insurance
Company (Transamerica) on the life of octogenarian Nancy
Bergman. While the Estate and SPV differ in their
interpretations of the motives underlying much of what
happened, the basic facts are as follows.
prior to October 2006, Nancy's grandson, Nachman Bergman,
approached her about procuring life insurance as part of an
investment scheme. Nachman explained that 82-year-old Nancy
would apply for life insurance, which would be funded by a
group of investors led by Jacob Herbst. The investors would
then sell all acquired policies on the secondary market after
the two-year contestability period expired, giving Nancy a
small share of the profits. Nancy agreed to participate and
Transamerica issued a $10,000,000 certificate of insurance to
her in October 2006. In December 2006, Nancy executed a trust
instrument establishing the N Bergman Insurance Trust (the
Trust) and appointing Nachman as its sole trustee and primary
beneficiary. Pursuant to paperwork filed by Nancy and
Nachman, Transamerica then issued the Policy in March 2007.
The Policy certificate designated the Trust as the
Policy's intended owner. The investors provided funds for
Policy premiums, which were paid through the Trust.
2009, Financial Life Services (FLS) contracted with the Trust
to purchase the Policy for $1,350,000. FLS is a life
settlement provider-a company which purchases life insurance
policies for more than the cash surrender value but less than
the amount of death benefits payable under the policy, then
collects the death benefits when the insured individual dies.
Shortly after executing the purchase agreement, FLS learned
that the Trust had failed to pay $64,500 in Policy premiums.
FLS paid these premiums to prevent the Policy from lapsing.
FLS then learned that Nancy's life expectancy was
materially longer than represented and that, contrary to the
Trust's representations, investor funds, not family
funds, had paid for the Policy. FLS found this significant
because life insurance policies paid for by and intended to
benefit strangers (stranger-originated life insurance
policies, or STOLIs), are worth less on the secondary market
than policies funded by the insured individual or her family
members. This is because, in the secondary insurance market,
STOLIs are widely considered to be indicia of fraud.
discovered these facts before paying the Trust for the Policy
and therefore invoked a provision of the purchase agreement
allowing it to rescind its purchase of the Policy based on
fraud in the procurement of the sale contract. It also
requested reimbursement of the premiums it paid. When its
efforts to rescind the transaction failed, FLS instead
exercised its contractual right under the purchase agreement
to tender a reduced purchase price in light of the
Trust's misrepresentations as to Nancy's life
expectancy and the Policy's funding source. FLS tendered
the contractually-determined alternate purchase price of
$610,500, which the Trust rejected. FLS filed a breach of
contract suit against the Trust in the Eastern District of
New York, seeking rescission of the purchase agreement and
reimbursement of advanced premiums. It continued to pay
premiums to prevent the Policy from lapsing.
York district court ultimately entered judgment in FLS's
favor for over a million dollars, including premium
reimbursements, post-judgment interest, and attorneys'
fees. Because the Trust admitted it could not pay, the
district court ordered a sale of the Policy-the Trust's
only asset-at auction to satisfy that judgment. FLS submitted
the winning-and only-bid of $1,194,522 and eventually
transferred the Policy to SPV.
Bergman died on April 6, 2014. SPV submitted a claim for
death benefits under the Policy to Transamerica on May 29,
2014. Transamerica refused to pay SPV's claim because it
received competing claims from Nachman Bergman and from Jacob
Herbst's wife Malka Silberman, both of whom claimed to be
trustee of the Trust. Seeking payment of the Policy proceeds,
SPV filed a complaint against Transamerica for breach of
contract in the United States District Court for the District
of South Dakota. In the same action, Transamerica asserted
a statutory interpleader under 28 U.S.C. § 1335,
deposited the Policy death benefits of $10,000,000 with the
district court, and asked the court to determine the
respective rights of SPV, the Trust, and Nancy's Estate.
The Estate then asserted a cross-claim to the Policy proceeds
under N.J. Stat. Ann. § 17B:24-1.1, a New Jersey statute
that allows the insured's estate to disgorge proceeds
from the contractual beneficiary of a STOLI.
moved for summary judgment on the Estate's cross-claim on
two grounds. First, SPV asserted that, under South Dakota
choice-of-law analysis, New York law governed the case,
making the Estate's statutory claim irrelevant. Second,
SPV argued that STOLIs were legal in New York at the time the
Policy was procured. The Estate countered that New Jersey law
should apply, that New York law was in accord with New Jersey
law, and that the Estate should prevail on public policy
district court held that New York law applied. It found that,
at the time the Policy was procured, New York allowed STOLIs
as long as the policy in question was initially procured by
the insured or someone with an insurable interest in the life
of the insured and that, under Kramer v. Phoenix Life
Insurance Co., 940 N.E.2d 535 (N.Y. 2010), an insured
could procure a policy with the intent to immediately assign
it to stranger investors. See id. at 551-52. The
district court further found, as a matter of law, that
Nachman Bergman had an insurable interest in his