LINCOLN NATIONAL LIFE INSURANCE COMPANY v. SNYDER

Wisner died on September 11, 2008 at age 79. ( Id. at ¶ 63) The Trust filed a claim for Wisner's death benefit in November 2008, after which plaintiff initiated a contestable death claim investigation (the "Claim Investigation"). ( Id. at ¶¶ 64-65) Plaintiff talked to Wisner's son and best friend, Steven B. Wisner, on March 6, 2009 during the Claim Investigation regarding the financial condition of Wisner and the purpose of the Wisner Policy. ( Id. at ¶¶ 66-67) In June 2009, plaintiff obtained a typed statement from Steven B. Wisner stating that: (1) he did not know the amount of his father's annual income or net worth; (2) he recognized Strauss's name because he had tried to obtain insurance through Strauss before; (3) he recalled Strauss mentioning a policy sale to his father but did not know they had become connected; (4) Fink's name was familiar to him but for uncertain reasons; (5) he did not know who paid the premiums on the Wisner Policy; (6) he did not know his father suggested a trust be established in connection with the Wisner Policy; (7) the beneficiary interest in the Trust was sold to an unknown party; and (8) his father received compensation in connection with the transfer of beneficiary interest. ( Id. at ¶ 68) The Claim Investigation also revealed — based on Wisner's federal income tax returns for 2005, 2006, and 2007 — that Wisner's earned and unearned income did not support the representations made in the Application. ( Id. at ¶¶ 55, 69)

Pursuant to Federal Rule of Civil Procedure 9(b), a heightened pleading standard applies to fraud claims, requiring that "in all averments of fraud . . . the circumstances constituting fraud . . . shall be stated with particularity." Trenwick Am. Litig. Trust v. Ernst Young, L.L.P., 906 A.2d 168, 207 (Del. Ch. 2006) (alterations in original), aff'd sub nom., Trenwick Am. Litig. Trust v. Billet, 931 A.2d 438 (Del. 2007). Federal Rule of

Civil Procedure 12(f) allows a court to "strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter."

In a diversity action, the court must first address the threshold issue of which law governs the rights and liabilities of the parties before it. For substantive issues, the court looks to the substantive law of the forum state in which it sits. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938). The forum state's choice of law doctrine is included within its substantive law. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496-97 (1941); Kruzits v. Okuma Machine Tool, Inc., 40 F.3d 52, 55 (3d Cir. 1994). Under the law of Delaware, the law of the place where an insurance contract was made governs the obligations imposed by such contract. Wilmington Trust Co. v. Mut. Life Ins. Co. of New York, 177 F.2d 404, 406 (3d Cir. 1949).

In reviewing a motion filed under Federal Rule of Civil Procedure 12(b)(6), the court must accept the factual allegations of the non-moving party as true and draw all reasonable inferences in its favor. See Erickson v. Pardus, 551 U.S. 89, 94 (2007); Christopher v. Harbury, 536 U.S. 403, 406 (2002). A court may consider the pleadings, public record, orders, and exhibits attached to the complaint. Oshiver v. Levin, Fishbein, Sedran Berman, 38 F.3d 1380, 1384-85 n. 2 (3d Cir. 1994).

A complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief, in order to give the defendant fair notice of what the . . . claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 545 (2007) (interpreting Fed.R.Civ.P. 8(a)) (internal quotations omitted). A complaint does not need detailed factual allegations; however, "a plaintiffs obligation to provide the `grounds' of his entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Id. at 545 (alteration in original) (citation omitted). The "[f]actual allegations must be enough to raise a right to relief above the speculative level on the assumption that all of the complaint's allegations are true." Id. Furthermore, "[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Ashcroft v. Iqbal, 129 S.ct. 1937, 1950 (2009). Such a determination is a context-specific task requiring the court "to draw on its judicial experience and common sense." Id.

Plaintiff argues that the Wisner Policy is void ab initio or voidable due to: (1) lack of insurable interest at inception; (2) its illegal procurement under applicable law; and (3) material misrepresentations in the Application. (D.I. 1 at ¶ 3) To the extent that defendants were involved in fraud, fraudulent inducement, aiding and abetting fraud, negligent misrepresentation and/or breach of contract, plaintiff seeks compensatory and punitive damages, as well as retainment of some or all of the premiums paid on the Wisner Policy. ( Id.) In his motion to dismiss or, in the alternative, to strike, the Trustee asserts that: (1) each of plaintiffs claims fails because plaintiff is deemed to have full knowledge of the alleged misrepresentations; (2) plaintiff is estopped from rescinding the policy; (3) the Wisner Policy is not void or voidable due to lack of insurable interest; (4) plaintiffs fraud and misrepresentation claims fail because plaintiff did not adequately plead loss causation; (5) plaintiff failed to allege fraud with sufficient particularity; (6) plaintiffs fraud and misrepresentation claims are time-barred; (7) plaintiff cannot simultaneously seek to rescind the contract and seek damages on the same contract;

and (8) to the extent any claims are permitted to stand, the court should strike several of plaintiff's allegations because they are immaterial to the litigation. (D.I. 8; D.I. 14) For the reasons that follow, the court grants in part and denies in part the Trustee's motion.

"Delaware law states the knowledge of an agent acquired while acting within the scope of his or her authority is imputed 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 (1923) ("The general rule is that a principal is charged with the knowledge of the agent acquired by the agent in the course of the principal's business."). The Trustee argues that any knowledge Strauss had regarding the alleged fraud or misrepresentations related to the Wisner Policy are imputable to plaintiff because of the principal-agent relationship, which bars plaintiff from bringing any of its claims. Plaintiff counters that Strauss's fraud and knowledge are not imputable because he was acting outside the scope of his authority and he was acting as an independent contractor, not an agent. Furthermore, plaintiff contends that the adverse interest exception to the principal-agent relationship should apply because Strauss was acting in his own self-interest in profiting off of the alleged STOLI scheme.

Assuming for purposes of this motion practice that Strauss was acting as an agent, the court agrees that the adverse interest exception applies to prevent imputation of Strauss's fraud or knowledge to plaintiff. "Under agency law, the knowledge of an agent is generally imputed to his principal except when the agent's bwn interests become adverse." MetCap Sees. LLC v. Pearl Senior Care, Inc., Civ. No. 2129, 2007 WL 1498989, at *10 (Del. Ch. May 16, 2007) (emphasis added); see also In re HealthSouth Corp. S'holders Litig., 845 A.2d 1096, 1108 n. 22 (Del. Ch. 2003) ("An exception to the general rule that the knowledge of an officer or agent will be imputed to the corporation arises when an officer . . . is acting in a transaction in which he is personally or adversely interested or is engaged in the perpetration of an independent fraudulent transaction, where the knowledge relates to such transaction and it would be to his interest to conceal it."). In concealing the alleged fraud or misrepresentations related to the Wisner Policy, Strauss was acting out of his own self interest — the financial misrepresentations on the Application were allegedly made to obtain a higher face value policy, which in turn generated higher commissions for him and a higher investment vehicle for the defendants' alleged STOLI scheme.

Applying the adverse interest exception to prevent imputation of Strauss's fraud and knowledge to plaintiff in this case is also consistent with public policy concerns. The rationale behind imputation of an agent's knowledge to a principal is "the presumption that an agent has discharged his duty to disclose to his principal all material facts coming to his knowledge as to the subject of his agency." KE Property Mgmt., Inc. v. 275 Madison Mgmt. Corp., Civ. No. 12683, 1993 WL 285900, at *5 (Del. Ch. July 21, 1993). This rationale fails when the agent has an adverse interest which, by its very nature, he seeks to conceal from his principal. Plaintiff has sufficiently alleged such active concealment on Strauss's part. (D.I. 1 at § 42) Furthermore,

[i]n Delaware, well settled agency law provides [that] where an agent acquires knowledge in the course of his or her agency and has no personal interest in the transaction adverse to the interest of the principal, any knowledge of or notice to the agent is chargeable to the p incipal whether or not knowledge or notice is actually communicated to the principal. This rule promotes the underlying policy of holding accountable one who transacts his business through another for what the other does or does not do in conducting that business. The principal should bear the burden rather than a third party who has dealt with the agent to the third party's detriment.

The Trustee argues that plaintiff is estopped from rescinding the Wisner Policy for two independent reasons: (1) plaintiff failed to timely disclaim coverage; and (2) plaintiff elected to retain premiums after it obtained knowledge of the alleged fraudulent misrepresentations. The court finds neither argument to be an appropriate basis to grant the Trustee's motion to dismiss.

Plaintiff initiated the current case on November 20, 2009, more than one year after Wisner's death, which the Trustee urges should bar plaintiffs rescission action. He cites Delaware law, which provides:

There shall be a provision that when the benefits under the policy shall become payable by reason of the death of the insured, settlement shall be made upon receipt of due proof of death and, at the insurer's option, surrender of the policy and/or proof of the interest of the claimant. If an insurer shall specify a particular period prior to the expiration of which settlement shall be made, such period shall not exceed 2 months from the receipt of such proofs.

"It is plaintiff's burden to prove promptness, not defendant's to prove delay." Id. at *18. Plaintiff at bar has alleged sufficient facts for promptness in seeking rescission of the Wisner Policy. First, the Wisner Policy did not specify any particular settlement period so, by the statute's plain meaning, the two-month period does not apply as a legal bar. In addition, plaintiff's delay in filing the present action was due in part to the Claim Investigation, which it began following submission of the death claim and continued prior to commencement of this action. Under 18 Del. C. § 2724(3) (2010), "investigating any loss or claim under any policy" does not "constitute a waiver of any provision of a policy or of any defense of the insurer thereunder." Therefore, the alleged facts in the complaint support plaintiffs reasonable promptness in filing its rescission action.

In the alternative, the Trustee argues that plaintiff cannot maintain its action for rescission because it chose to retain premiums even after obtaining knowledge of the alleged STOLI scheme. The Trustee, however, is unable to reference any Delaware precedent for this argument. In contrast, under Delaware law,

there are cases where the complete administration of justice between the parties does not require the return of property acquired under a fraudulent contract, in order that it may be rescinded. That is true when the defrauded party has received nothing under the contract which it was not entitled, in any event, to retain, or what it has received is utterly worthless, and of no possible use or benefit to the defendant.

A separate issue arises as to whether plaintiff has sufficiently pled facts alleging a lack of insurable interest. The court finds that plaintiff has sufficiently pled facts to state a claim that the Wisner Policy was void ab initio for lack of any insurable interest.

Delaware law prohibits procurement of life insurance if the insured does not have an insurable interest. 18 Del. C. § 2704(a) (2010). An insurable interest is defined as benefits that are payable to individuals related closely by blood or by law who have a substantial interest out of love and affection; or to any other individual with a lawful and substantial interest in having the life, health or bodily safety of the insured continue. 18 Del. C. § 2704(c) (2010). The Trustee contends that: (1) under Delaware law, the trustee of a trust established by an individual also has an insurable interest in the life of that individual; and (2) Wisner was entitled to name the trust as the owner and beneficiary because he had an insurable interest in his own life. See 18 Del. C. § 2704(c) (2010). While there is no doubt an insured can name his owh trust as the owner and beneficiary, the insurable interest doctrine developed in common law and out of public policy concerns that deem insurance policies without an insurable interest at inception to be illegal wagering contracts. "[Wagering contracts] have a tendency to create a desire for the [death of the insured]. They are, therefore, independently of any statute on the subject, condemned, as being against public policy." See Warnock v. Davis, 104 U.S. 775, 779 (1881) (emphasis added).

Wagering contracts have long been condemned as being against public policy. Id. at 779; see also, e.g., Herman v. Provident Mut. Life Ins. Co. of Philadelphia, 886 F.2d 529, 534 (2d Cir. 1989); North American Co. for Life and Health Ins. v. Lewis, 535 F. Supp. 2d 755, 759 (S.D. Miss. 2008). The insurable interest requirement emerged in order "to curtail use of insurance contracts as wagering contracts by distinguishing between contracts that sought to dampen the risk of actual future loss and those that instead sought to speculate on whether some future contingency would occur." Sun Life Assurance Co. of Canada v. Paulson, Civ. No. 07-3877, 2008 WL 451054, at *2 n. 4 (D. Minn. Feb. 15, 2008) (citation omitted). The Supreme Court has long ago explained that a wagering contract "gives the [policyholder] a sinister counter interest in having the life come to an end." Grigsby v. Russell, 222 U.S. 149, 154 (1911).

Lack of insurable interest is an issue that arises only at the time of policy procurement. 18 Del. C. § 2704(a) (2010) ("[N]o person shall procure or cause to be procured any insurance contract upon the life or body of another individual unless the benefits under such contract are payable to the individual insured or his/her personal representatives or to a person having, at the time when such contract was made, an insurable interest in the individual insured.") (emphasis added). However, neither the Third Circuit nor the Delaware Supreme Court has addressed what constitutes a lack of insurable interest at the time of policy procurement, and no clear consensus has emerged across jurisdictions regarding this issue. Compare Paulson, 2008 WL 451054 at *1-*2 (holding, under Minnesota law, that a mutual intent of the insured and a third party to avoid the prohibition on wagering contracts is required to allege lack of insurable interest), with Lincoln Nat'l Life Ins. Co. v. Calhoun, 596 F. Supp. 2d 882, 890 (D.N.J. 2009) (finding that unilateral intent was sufficient in alleging an insurable interest challenge).

In support of its complaint for finding the Wisner Policy lacked an insurable interest at inception, plaintiff has alleged that: (1) Strauss and Fink approached Wisner to participate in a STOLI scheme for the benefit of stranger investors (D.I. 1 at ¶ 43); (2) Strauss solicited strangers, with the help of Fink as an intermediary, to invest in the Wisner Policy prior to submission of the Application ( Id. at ¶ 41); (3) material misrepresentations were made on the Application regarding Wisner's income, net worth and purpose for the policy in order to conceal the STOLI nature of the policy ( Id. at ¶¶ 2, 41, 53-55); (4) plaintiff found evidence of the misrepresentations during a contestable death claim investigation after Wisner's death ( Id. at ¶¶ 65-69); (5) plaintiff also found evidence that the beneficiary interest in the Trust was sold ( Id. at ¶ 68); (6) stranger investors paid the premiums on the policy and compensated Wisner for his participation in the alleged STOLI scheme ( Id. at ¶¶ 54, 68); (7) Strauss and Fink helped obtain the Teren Policy, which was found by a California court to be have been fraudulently procured and void ab initio for lack of insurable interest ( Id. at ¶¶ 21, 22-23, 33-35); (8) Strauss and Fink solicited investors to invest in the Wisner Policy and the Teren Policy as a package ( Id. at ¶ 44).

Absent a lack of insurable interest at inception, it is legal for a policyholder to transfer beneficial interest in a policy. The court finds that the complaint sufficiently alleges, beyond a speculative level, that there was an arrangement in place, at the time of procurement, to transfer the Wisner Policy. In the eyes of the court, plaintiffs allegations regarding a lack of insurable interest meet the Iqbal plausibility standard.

The Trustee further asserts that the fraud and misrepresentation claims raised against it in counts III, V, VI, and VII of the complaint should be dismissed under three alternative theories: (1) plaintiff failed to adequately plead loss causation; (2) plaintiff failed to plead the "knowledge and belief" standard against the Trustee; (3) plaintiff failed to plead fraud with particularity; and (4) the fraud and negligent misrepresentation claims are time barred.

The Trustee argues in this regard that plaintiff did not allege its losses were actually caused by the Trustee's alleged misrepresentations. The Trustee frames 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 misrepresentations caused the alleged harm — the payment of death benefits." (D.I. 8 at 22) Under Delaware law, the prima facie elements of common law fraud and misrepresentation are: "(1) a false representation, usually one of fact, made by the defendant; (2) the defendant's knowledge or belief that the representation was false, or was made with reckless indifference to the truth; (3) an intent to induce the plaintiff to act or to refrain from acting; (4) the plaintiff's action or inaction taken in justifiable reliance upon the representation; and (5) damage to the plaintiff as the result of such reliance." Stephenson v. Capano Development, Inc., 462 A.2d 1069, 1074 (Del. 1983); see also Simons v. Cogan, 549 A.2d 300, 304 (Del. 1988) (reciting the same elements but specifically requiring that the plaintiff reasonably relied on the misrepresentation to its detriment). Therefore, the causation requirement under common law fraud and misrepresentation is measured by the relationship between plaintiff's reliance and plaintiff's loss. In its complaint, plaintiff has asserted that

defendants' financial misrepresentations in the Application were "false and grossly overstated in order to procure a high face amount life insurance policy, which [Wisner] could not otherwise obtain." (D.I. 1 at ¶ 55) Furthermore, plaintiff alleges that defendants concealed the STOLI nature of the Wisner Policy and planned for the premiums to be advanced or financed by a third party, in contravention to the representations made on the Application and the Amendment. (D.I. 1 at ¶ 54) Plaintiff claims that it issued the policy in reliance upon those representations and, if so, it did so to its detriment because had the Application been truthful, plaintiff would have issued a lower face value policy or no policy at all. (D.I. 1 at ¶¶ 55, 57, 59)

In his opening brief in support of the motion to dismiss, the Trustee also argues that plaintiff failed to plead any allegations that the Trustee was in a position to know that the information in the Application was false. (D.I. 8 at 27) This argument was made based on the wording in plaintiff's complaint, which misquoted the Application's agreement and acknowledgement clause in part: "All statements and answers in this application are correctly recorded, and are full, complete and true to the best of my knowledge and belief." (D.I. 1 at ¶ 56) (emphasis added) The relevant clause actually read: "All statements and answers in this application are correctly recorded, and are full, complete and true." (D.I. 8, ex. 1 at Application p. 8, ¶ 6) Therefore, the above argument is moot because the Trustee signed the Application stating the representations were all true, rather than only believing them to be true.

A new related issue arises, however: whether plaintiff should properly be permitted to amend its complaint to fix the apparent misquote. The Trustee argues in its reply brief that plaintiff cannot amend its complaint in order to contradict its original allegations because doing so would "change stride in the middle of [the] litigation and disavow the allegations . . . 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 F. App'x 994 (6th Cir. 2009). However, as noted supra, the court may properly consider the Amendment as part of the contract for purposes of the motion to dismiss and, absent a showing of bad faith, the court may freely use its discretion to grant a party leave to amend its complaint. See Fed.R.Civ.P. 15; Foman v. Davis, 371 U.S. 178, 182 (1962) ("In the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on the part of the movant . . . the leave sought should, as [Rule 15] require[s], be `freely given.'") Because the Application itself is attached as an exhibit in the record and there has been no showing of bad faith on plaintiffs part, the court will allow leave for plaintiff to amend its complaint to correct the misquote.

Federal Rule of Civil Procedure 9(b) provides that "[i]n alleging fraud . . . a party must state with particularity the circumstances constituting fraud. . . ." While plaintiff does not dispute the application of the heightened requirement to its fraud claims, it does contend that the heightened pleading requirement does not apply to its negligent misrepresentation claim. "Although there is a dearth of case law, the Rule 9(b) heightened pleading requirement generally does not apply to the state law claims of . . . negligent misrepresentation." In re Fruehauf Trailer Corp., 250 B.R. 168, 197 (D. Del. 2000) (citation omitted). Therefore the court will only examine the fraud and material misrepresentation claims under the Rule 9(b) heightened pleading standard. As applied to these claims, plaintiff has sufficiently pled facts to allege fraud with particularity.

The Trustee argues that plaintiff failed to allege, under the heightened pleading standard for fraud claims, that: (1) the Trustee was in a position to know that he was making false statements; (2) the Trustee had an incentive to misrepresent facts; and (3) the Trustee gained a benefit by making the alleged misrepresentations. Generally, a fraud allegation is legally sufficient if it pleads the "circumstances" of the fraud so as "to place the defendants on notice of the precise misconduct with which they are charged." Vietnam Veterans of Am., Inc. v. Guerdon Indus., Inc., 644 F. Supp. 951, 959 (D. Del. 1986) (citation omitted). "Rule 9(b) does not require the recitation of every material detail of the fraud such as date, location and time[; however,] plaintiffs must use alternative means of injecting precision and some measure of substantiation into their allegations of fraud." In re Student Fin. Corp., 2004 WL 609329, at *1 (D. Del. Mar. 24, 2004) (citation omitted) (alteration in original). Nothing in Rule 9(b) requires specific types of details to be pled, such as what the Trustee might have gained from the alleged fraud. See Klein v. Gen. Nutrition Co., 186 F.3d 338, 345 (3d Cir. 1999) (stating that the minimum pleading threshold of Rule 9(b) is "that the plaintiff identify the speaker of the fraudulent statements.").

The plaintiff has pled the following facts averring fraud by the Trustee: (1) the alleged STOLI scheme called for the establishment of the Trust that would become the record owner and beneficiary of the Wisner Policy (D.I. 1 at ¶ 45); (2) the Trust, from the outset, was intended for transfer on the secondary market, not for estate liquidity, financial planning, or other legitimate insurance-related purposes ( Id.); (3) the Trust was used to conceal the true purpose of the Wisner Policy ( Id.); (4) the premiums, which are alleged to have been funded by stranger investors, were paid from an account in the Trust's name ( Id. at ¶¶ 54, 60); (5) Wisner and the Trustee both represented to plaintiff, in both the Application and the related Amendment, that they had not been involved in any discussion regarding possible sale or transfer of the policy, which plaintiff alleges is false ( Id. at ¶¶ 53, 80, 94-95); (6) the Trustee, as the proposed owner of the Wisner Policy, signed the Application declaring everything in it was complete and true ( Id. at ¶¶ 54, 56; D.I. 8, ex. 1 Application at 8, ¶ 6); and (7) the misrepresentations were made in order to intentionally conceal the alleged STOLI scheme and to secure a higher face value for the policy ( Id. at ¶¶ 55, 80-81, 103; D.I. 8, ex. 1 at Application p. 8, ¶ 6). Thus, plaintiff has clearly identified the Trust as a party in the fraud and has alleged sufficient circumstances to put the Trustee on notice of the particular instances of fraud at issue.

As noted supra, the prima facie elements of common law fraud and misrepresentation under Delaware law are: "(1) a false representation, usually one of fact, made by the defendant; (2) the defendant's `knowledge or belief that the representation was false, or was made with reckless indifference to the truth; (3) an intent to induce the plaintiff to act or to refrain from acting; (4) the plaintiff's action or inaction taken in justifiable reliance upon the representation; and (5) damage to the plaintiff as the result of such reliance." Stephenson v. Capano Development, Inc., 462 A.2d 1069, 1074 (Del. 1983). Plaintiff has adequately pled elements four and five, as discussed supra. The first element, false representation, is sufficient y pled by all the alleged misrepresentations in the Application (pertaining to Wisner's income, net worth, participation in a secondary market scheme, and purpose for the policy), which the Trustee signed and declared was true. The second element, the Trustee's knowledge that the representation was false, is plausibly inferred from the alleged facts that the STOLI scheme called for the establishment of the Trust, the investor-funded premiums were paid from the Trust, and the Trust was used to purposefully conceal the true nature of the Wisner Policy. Together, when viewed in the light most favorable for the non-moving party, these allegations reflect possible informed participation by the Trustee in the purported fraud and misrepresentations. The final element, an intent to induce the plaintiff to act, is adequately pled by the facts relating to the Trustee's desire to induce plaintiff to issue a high face value policy based on the misrepresentations. Therefore, the Trustee is on notice of the precise misconduct that the fraud and misrepresentation claims charge, and plaintiff has met the Rule 9(b) heightened pleading standard.

The Trustee urges the court to dismiss plaintiff's fraud and misrepresentation claims by asserting the claims are time-barred. The statute of limitations for fraud and negligent misrepresentation in Delaware is three years. 10 Del. C. § 8106 (2010). The statute of limitations "is calculated from the time of the wrongful act even if plaintiff is ignorant of the cause of action," which means the statute of limitations for the present case expired on September 12, 2009, three years after the allegedly fraudulent Application was submitted to plaintiff. See Krahmer v. Christie's Inc., 911 A.2d 399, 407 (Del. Ch. 2006). The present action was not filed until November 20, 2009. Thus, plaintiffs fraud and misrepresentation claims would be barred unless the statute of limitations period was tolled.

Delaware law allows the statute of limitations to be tolled "[w]here the defendant has acted to affirmatively conceal the wrong." EBS Litig. LLC v. Barclays Global Investors, N.A., 304 F.3d 302, 305 (3d Cir. 2002). Under the fraudulent concealment doctrine of tolling, a plaintiff must show that a defendant "knowingly acted to prevent plaintiff from learning facts or otherwise made misrepresentations intended to put [] plaintiff off the trail of inquiry." Krahmer, 911 A.2d at 407 (quoting State ex rel. Brady v. Pettinaro Enters., 870 A.2d 513, 531 (Del. Ch. 2005)) (internal quotations omitted). Fraudulent inducement thus requires a showing that the Trustee affirmatively acted to conceal the fraud in question. Id. The statute of limitations would then be tolled only until plaintiff discovers or, exercising reasonable diligence, could have discovered its injury. Id.; see also EBS Litig., 304 F.3d at 305 (calculating tolling the same way under Delaware law). Without tolling, plaintiffs present action would be a little over two months late. However, the court finds that plaintiff sufficiently alleges facts that, if proven, would toll the statute of limitations.

The main point of contention in this regard is whether plaintiff sufficiently pled facts pointing to the Trustee's affirmative concealment after the issuance of the Wisner Policy. In Smith v. Mattia, Civ. No. 4498-VCN, 2010 WL 412030, at *5 (Del. Ch. Feb. 1, 2010), the Delaware Court of Chancery, on a motion to dismiss, found that defendant home buyers had pled sufficient facts against plaintiff construction company to toll the statute of limitations on grounds of fraudulent concealment. The home buyers in Smith alleged that the construction company fraudulently induced them to approve draws upon a construction loan for which the funding never went toward the construction of their house. Id. The court found that this fact alone, if proven, was sufficient to toll the start time of the statute of limitations. Id. Similarly, plaintiff in the present case has alleged that it received premiums on the Wisner Policy which were not from the purported source. If plaintiff's allegation that the Wisner Policy premiums were financed or funded by stranger investors is true, then it may be inferred that the payment of the premiums through the Trust was one method of concealing the alleged STOLI nature of the policy. (D.I. 1 at ¶¶ 54, 60-61) This inference is plausible, given that the Trustee declared that "[t]he premiums are not being advanced, loaned or financed by a third party" in the Amendment. (D.I. 8, ex. 2) The transactions in question were completed between October 12, 2006 and April 18, 2008; the statute of limitations would be tolled until April 18, 2008.

Moreover, the Trustee cannot use the statute of limitations as a shield in light of the fraud allegations. The fraudulent concealment doctrine for tolling rests on the premise "that defendants should not be permitted to use a limitations period as a shield when they have engaged in fraudulent acts that have denied plaintiffs the opportunity to timely discover the alleged wrongs." Litman v. Prudential-Bache Properties, Inc., Civ. No. 12137, 1994 WL 30529, at *3 (Del. Ch. Jan. 14, 1994). Thus, it would be inappropriate for the court at this time to dismiss plaintiffs fraud and misrepresentations claims as time barred.

Finally, the Trustee contends that plaintiff's action for negligent misrepresentation should be dismissed because the nature of the alleged misrepresentation requires proof of an intentional or knowing act. Contrary to this contention, however, a negligent misrepresentation does not require a knowing or intentional state of mind. Instead, it only requires: "(1) a pecuniary duty to provide accurate information; (2) the supplying of false information; (3) failure to exercise reasonable care in obtaining or communicating the information; and (4) a pecuniary loss caused by justifiable reliance upon the false information." Grunstein v. Silva, Civ. No. 3932-VCN, 2009 WL 4698541, at *14 (Del. Ch. Dec. 8, 2009); see also Outdoor Techs., Inc. v. Allfirst Fin., Inc., Civ. No. 99C-09-151-JRS, 2001 WL 541472, at *5 (Del. Super. Apr. 12, 2001); Student Fin. Corp. v. Royal Indem. Co., 2004 WL 609329, at *3. Plaintiff has adequately pled that the Trustee: (1) signed the Application and Amendment as the proposed owner of the Trust (D.I. 1 at ¶ 52; D.I. 8, ex. 2); (2) supplied false financial and other information on both the Application and Amendment ( Id. at ¶ 94); (3) failed to exercise reasonable care in communicating the relevant information ( Id. at ¶ 96); and (4) induced plaintiff to reasonably rely on the alleged misrepresentations and issue the Wisner Policy at a high face value, which it otherwise might not have done ( Id. at ¶¶ 55, 59, 98). Given the language of the Application's agreement and acknowledgement clause ("All statements and answers in this application are correctly recorded, and are full, complete and true"), there is no need for plaintiff, in its negligent mispresentation claim, to prove that the Trustee knew the representations were false. Thus, plaintiff has adequately pled its action for negligent misrepresentation.

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

In the event the Wisner Policy is rescinded for being voidable or void ab initio, plaintiff seeks to retain some or all of the premiums it obtained from the policy. Plaintiff asserts that Delaware law does not require an insurer to return premiums paid thereon in order to have a policy declared void, while the Trustee asserts that an election of remedies prevents an insurer from both rescinding a policy and retaining the premiums.

The court agrees with the Trustee on this issue. This court has previously held that rescission of benefit increases on a life insurance policy requires the insurer to refund premiums. Oglesby v. Penn Mut. Life Ins. Co., 877 F. Supp. 872, 890 (D. Del. 1994). Other Delaware courts have also held that rescission is an equity claim that requires all parties to be returned to the status quo. See Strassburger v. Early, 752 A.2d 557, 578 (Del. Ch. 2000) (returning the parties "to the position they occupied before the challenged transaction"); see also Sannini v. Casscells, 401 A.2d 927, 927

(Del. 1979) (finding that election of remedies in equity precludes inconsistent judgments). Plaintiff cites Delaware cases purportedly supporting its position that it can retain premiums on a rescinded policy, but a closer inspection reveals that those courts allowed damages to be awarded, not premiums to be retained. See Creative Research Manufacturing, Civ. No. 1211-A, 2007 WL 286735, at *10 (Del. Ch. Jan. 30, 2007) (awarding "operating costs and out-of-pocket expenses" incurred by plaintiff in equitable rescission action); Martin Newark Dealership, Inc. v. Grube, Civ. No. 97-11-064, 1998 WL 1557485, at *4 (Del. Ct. Com. PI. Dec. 22, 1998) (allowing a plaintiff to be awarded "money or other property of which it has been deprived."). "The payment . . . [of] premiums is the consideration for which the insurer agrees to assume the risk specified in the policy." Couch on Insurance § 69:2 (3d ed. 1996). If an insurance company could retain premiums while also obtaining rescission of a policy, it would have the undesirable effect of incentivizing insurance companies to bring rescission suits as late as possible, as they continue to collect premiums at no actual risk.

Therefore, although plaintiff may properly seek damages for expenses incurred as a result of the Trustee's alleged conduct, the court dismisses plaintiffs claim seeking retainment of premiums in light of the fact that it also seeks to rescind the Wisner Policy. In an equitable action such as this, plaintiff may not have it both ways.

Absent a relevant federal statute, state rules generally determine the award of attorney fees in diversity cases. See Montgomery Ward Co., Inc. v. Pac. Indem. Co., 557 F.2d 51, 56-57 (3d Cir. 1977). Delaware follows the American rule where, absent a statute or contract to the contrary, "prevailing litigants are responsible for the payment of their own attorney fees." Goodrich v. E.F. Hutton Group, Inc., 681 A.2d 1039, 1043-44 (Del. 1996). "In the ordinary adversary litigation the losing party is not assessed the counsel fees of his opponent unless the action was fraudulent." Wilmington Trust Co. v. Coulter, 208 A.2d 677 (Del. Ch. 1965); see also Gans v. MDR Liquidating Corp., Civ. No. 9630, 1998 WL 294006, at *3 (Del. Ch. May 22, 1998) (listing "fraud, bad faith, or other outrageous conduct from which the claim arose" as a special basis for which a court may award attorney fees); Tandycrafts, Inc. v. Initio Partners, 562 A.2d 1162, 1164 (Del. 1989) ("Under the `equity' exception a litigant may secure an award of counsel fees upon a showing of bad faith by an opposing party.") (citing Division of Child Support Enforcement v. Smallwood, 526 A.2d 1353, 1356-57 (Del. 1987)).

The decision to award attorney fees under a special circumstance such as fraud or bad faith is a discretionary one left to the court. See Gans, 1998 WL 294006 at *3. As such, the court will only make this determination after all the facts have been determined through discovery and will not strike plaintiff's request for attorney fees at this stage of the proceedings.

In Delaware, "[p]unitive damages are only awarded in situations of `willful and outrageous' conduct that flows from `evil motive or reckless indifference to the rights of others.'" Segovia v. Equities First Holdings, LLC, C.A. No. 06C09-149-JRS, 2008 WL 2251218, at *24 (Del. Super. May 30, 2008) (citation omitted); see also Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1076-77 (Del. 1983) (awarding punitive damages is proper only "[i]f the fraud is gross, oppressive, or aggravated, or where it involves breach of trust or confidence. . . ."). Like the award of attorney fees, the court cannot determine whether the Trustee's actions constitute "willful and outrageous" conduct or "gross fraud" at this point in the litigation; therefore, the motion to strike plaintiff's request for punitive damages is denied.

For the aforementioned reasons, the court grants in part and denies in part the Trustee's motion to dismiss or, in the alternative, to strike certain allegations. Plaintiff has sufficiently pled grounds for declaratory judgment and facts for fraud, misrepresentation, and negligent misrepresentation. The court grants the Trustee's motion to strike plaintiff's claim to retain premiums on the Wisner Policy in the event of rescission. An appropriate order shall issue.

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

IT IS ORDERED that the Trustee's motion to dismiss or, in the alternative, to strike certain allegations (D.I. 7) is granted in part and denied in part.