Address v. Millstone

KRAUSER, C.J. Robert Millstone, together with one of his employees, 1 brought an action in the Circuit Court for Montgomery County against his insurance broker, Marvin A. Address and Marvin A. Address & Associates, Inc. (collectively “Address”), alleging negligence, breach of contract, negligent misrepresentation, intentional misrepresentation, and constructive fraud in the sale, by Address, of numerous life insurance policies to them. Millstone later added, as plaintiffs, his two adult daughters, who were either beneficiaries or owners of one or more of the policies in question. When a jury entered judgment in favor of Millstone on the breach of contract claim and awarded him $958,807.50 in damages, Address and his company noted this appeal, 2 presenting three issues for our review: I. Whether Millstone had standing to pursue his breach of contract claim against Address.

II

Whether there was sufficient evidence to submit Millstone’s breach of implied contract claim to the jury. ⁶⁶ III. Whether the jury’s finding of contributory negligence on Millstone’s negligence claims also barred recovery on his breach of contract claim. Because we conclude that Millstone had neither standing to bring suit as to insurance policies which he, himself, did not own nor adduced sufficient evidence, at trial, that Address had breached any contract he purportedly had with Millstone, we shall reverse the judgment entered below, remand the case with instructions to enter judgment in favor of appellants, and forego addressing appellants’ third issue, as it is rendered moot by the foregoing rulings. Background The dispute in the instant case arises from a long-term business relationship between Robert Millstone, the CEO of Atlantic Recycling Group and a principal in Montgomery Scrap Corporation, 3 and Marvin Address, an insurance broker and President of Marvin A. Address & Associates, Inc. Early in their relationship, Millstone, with the assistance of Address, purchased a series of term life insurance policies.

A term life insurance policy provides for the payment of a death benefit to one or more designated beneficiaries, in return for the payment of a fixed, periodic premium, if the insured dies during the term of the policy. This type of policy is sometimes described as “pure” insurance, because its price is determined by the amount required to pay for the death benefit, on average (the “cost of insurance”), and it does not accrue any additional “cash value” but, rather, at the expiration of a specified term, the policy terminates without value. Moreover, because the cost of insurance increases with age, renewal of a term policy entails substantially higher premiums than those charged for the expiring term policy. See Am.

Elec. Power, Inc. v. United States, 136 F.Supp.2d 762, 766 ⁶⁷ (S.D.Ohio 2001); Fairbanks v. Farmers New World Life Ins. Co., 197 Cal.App.4th 544, 547 , 128 Cal.Rptr.3d 888 (2011). Eventually, Millstone became interested in purchasing whole life insurance policies, because such policies, unlike term insurance policies, accumulate, over time, a “cash value” which may be redeemed or borrowed against by the policy owner. 4 See, e.g., Dow Chem.

Co. v. United States, 250 F.Supp.2d 748, 754 (2003), rev’d on other grounds, 435 F.3d 594 (6th Cir.2006); Gai don v. Guardian Life Ins. Co. of Am., 94 N.Y.2d 330, 342 , 704 N.Y.S.2d 177 , 725 N.E.2d 598 (1999). Moreover, a whole life policy usually provides more favorable terms for a potential borrower than a typical bank loan, since, by borrowing against the policies, an insured retains the option to defer paying back a policy loan or not paying it at all. After communicating his objectives to Address, which were to protect his family and to be able to borrow money against his insurance policies, Millstone, from 1986 through 1999, directed Address to purchase eight whole life policies from the Phoenix Life Insurance Company (the “Phoenix whole life policies”).

Of those eight policies, which had a combined death benefit of $7,773,728, 5 Millstone retained ownership of seven and transferred ownership of the remaining one to his daughters. The seven Phoenix whole life policies owned by Millstone designated either his daughters, his wife, or both, as the beneficiaries, while the policy owned by his daughters named only them as beneficiaries. As was anticipated, Millstone borrowed money against the seven insurance policies he owned, as the need arose in his business dealings. As he put it, he pursued a strategy of ⁶⁸ using whole life insurance policies as a means of “forced savings” and furthermore developed a formula for estimating the amount of life insurance he should have in effect at any-given time, as a proportion of the value of his business.

During the years that Address served as Millstone’s insurance broker, Address was, in the words of Millstone, “always suggesting that [Millstone] engage in estate planning.” To that end, Address, in 2001, urged Millstone to put his insurance in an irrevocable life insurance trust (an “ILIT”) for estate planning purposes. Such a plan required Millstone to periodically transfer funds to the ILIT. A notice would then be sent to the beneficiaries, informing them of the opportunity to withdraw some or all of those funds but with the tacit understanding that they would not, so that the funds would be deemed to constitute a “completed gift” to the ILIT. Once the gift was completed, the funds belonged to the ILIT, not to Millstone, and would then be used by the ILIT to pay life insurance premiums when they became due.

This procedure ensured that the life insurance policies and the death benefits payable under them would be excluded, under Internal Revenue Service rules, from Millstone’s gross estate upon his death, thereby resulting in a lower estate tax. Millstone claimed that he told Address that he had no objection to the plan, as long as he could continue to borrow money against the policies. Address, on the other hand, denies this, pointing out that the retention of such a right would have been inconsistent with the irrevocable trust. For to permit the “settlor,” that is, the person who establishes the trust—in this instance, Millstone—to borrow against the trust’s life insurance policies, now owned by the ILIT, would have the effect of invalidating the trust, thereby extinguishing the tax benefits it offers.

In any event, Millstone directed Address to work with Millstone’s attorney, Ron Lyons, to create the ILIT. In the spring of 2001, Address called Lyons to discuss the creation of the ILIT. “[A]gree[ing],” as Lyons put it, “that an ILIT was an appropriate vehicle to put the insurance in,” Lyons drafted ⁶⁹ the documents establishing the trust, naming himself and Millstone’s wife as trustees. Sometime later, in May of 2001, Lyons, Millstone, Mrs. Millstone, and Address met in Lyons’s law office, where they executed the documents establishing the insurance trust. To accomplish the necessary separation between the settlor, that is, Millstone, and the trust corpus, Lyons testified that, “more often than not,” an insured will place a new insurance policy in the ILIT, rather than transferring an existing policy.

The “principal reason” for doing so, he said, is the “three-year look back,” which is also known as the “contemplation of death” rule. He explained: If you move an existing policy into the irrevocable insurance trust and you die within ... three years of [the formation of the trust], ... the proceeds of that policy will still be included in the decedent’s gross estate. If you put a new policy in and die within those three years, it’s not included in the gross estate. To obtain the benefits of that rule, after the ILIT was created in 2001, seven of the eight Phoenix whole life policies, that is, the seven owned by Millstone, were “surrendered,” and a new life insurance policy, issued by the Security Connecticut Life Insurance Company (the “Security Connecticut universal life policy”), was purchased by the ILIT, using funds given to it by Millstone.

When a whole life policy is “surrendered,” the contract of insurance is terminated, and the insurer pays the owner of the policy the accumulated cash value, after accounting for any outstanding policy loan balance. 6 Address testified that he advised Millstone, in 2001, that seven Phoenix whole life ⁷⁰ policies were being surrendered and that the “cash value would ... come back to him.” Millstone received, as he acknowledged at trial, the cash surrender value of the policies, in the form of seven checks, one for each surrendered policy, which totaled $275,121.25, after deducting Millstone’s outstanding policy loan balances of $614,215.97. 7 Five of the seven checks he received had the words “SURRENDER OF POLICY” printed on them. As to the two checks which were not imprinted with the words “SURRENDER OF POLICY,” other circumstances made it obvious that they too were “surrender” checks and not, as Millstone contended, policy loans. The amounts of those two checks were $48,202.67 and $33,560.23, respectively. These amounts were roughly ten to thirty times as large as premium refund checks and, unlike the policy loans, which were typically made in even amounts, such as $10,000, $25,000, or $100,000, and which were always disbursed by checks imprinted with the words “For Loan on Policy,” the unmarked surrender checks were not so marked and were not in even amounts.

Moreover, the amounts of the two unmarked surrender checks were included in a letter issued by Phoenix, dated June 19, 2001, which included all seven policies surrendered by Millstone, as well as their cash values. But although all seven checks, either directly or under the circumstances, indicated that they were for a surrendered policy, and although Millstone sent a letter to Address instructing him to “cancel any future drafts against” the policies, and furthermore signed a document entitled “Request for Termination or Release of Policy/Account Value,” which listed all seven policy numbers and directed Phoenix to “[terminate entire policy” and “[p]ay all proceeds in cash,” Millstone testified that, when the Phoenix whole life policies were surrendered in 2001, he was not aware that the policies were being surrendered and that, at that time, he believed the money was a loan to him. He further insisted that he never ⁷¹ personally reviewed the application for the Security Connecticut universal life policy, which replaced the Phoenix whole life policies, or the accompanying “Notice Regarding Replacement,” though he did sign those documents. In any event, as of the end of June 2001, only one of the eight Phoenix whole life policies, the one owned by Millstone’s daughters and having a death benefit of $2,500,000, remained in effect.

Address testified that, in choosing a life insurance policy to be included in an insurance trust, the “preferable policy is one that has a high death benefit and [the] lowest cash value ... possible, since the trust normally states you cannot borrow the cash value,” as otherwise, the estate tax shelter would not be available. Accordingly, Address chose for the ILIT the Security Connecticut universal life policy, which had a low premium, a high death benefit, and minimal cash value. Moreover, as Address pointed out, the combined cost of the premiums for that universal life policy and the one Phoenix whole life policy that remained was “considerably” less than the premiums that Millstone had been paying. Like whole life insurance, but unlike term insurance, universal life insurance is intended to provide coverage throughout the lifetime of the insured, and, because its “[p]remium payments in the initial years” of the policy “similarly exceed insurance and administrative costs,” like whole life, universal life insurance is a form of “cash value” insurance.

Daniel R. Fischel and Robert S. Stillman, The Law and Economics of Vanishing Premium Life Insurance, 22 Del. J. Corp. L. 1 , 6 (1997). Address stated that he reviewed illustrations of the Security Connecticut universal life policy with both Millstone and his attorney, Ron Lyons, before it was purchased. In fact, Millstone acknowledged signing a “numeric summary” of the policy, which illustrated the projected cash surrender value of the policy at the conclusion of four different time periods based on three different interest rates.

The lowest interest rate, which was the only rate that was “guaranteed,” resulted in a cash surrender value of “$0” at the end of each period. ⁷² During the time period from 1999 to 2002, Millstone’s business was experiencing cash flow problems. While the Phoenix whole life policies were still in effect, Millstone had borrowed against them, but after they were surrendered by him, he could no longer use those policies for that purpose. To alleviate his cash flow problems, Address proposed that the Security Connecticut universal life policy be surrendered and replaced by a new policy, offered by Phoenix, having the same death benefit but which offered a special feature, called “premium financing.” Premium financing permits the insured (or the entity paying the premiums on behalf of the insured, such as a trust) to borrow the funds necessary to pay the life insurance premiums from a finance company, typically selected by the insurance company. Under the terms of the new policy, Millstone could obtain a ten-year, “interest-only” loan from the finance company and execute a personal guarantee: Millstone’s out-of-pocket expense, for the first ten years, would be $8,000 annually, a tiny fraction of the premiums he had been paying, but, at the end of the ten-year term, he would have to pay the entire accrued principal, $2.5 million, which was ten times the annual premium of $250,000.

Lyons, as trustee, was concerned that the arrangement was too risky, and he advised Millstone against it. Heeding that advice, Millstone declined Address’s proposal to purchase for the ILIT the new Phoenix life insurance policy, permitting an interest-only loan. Instead, in December 2002, the Security Connecticut universal life policy that was in the ILIT was replaced with a universal life policy from Phoenix (the “Phoenix universal life policy”), with the same death benefit, $7,500,000, and a premium that was guaranteed to remain fixed at a specified level for a longer period of time than that provided by the Security Connecticut universal life policy. The net result was a reduction in total premiums from $116,000 to $105,000 per annum, but the projected cash surrender value, after ten years, was reduced from $1,047,000 to $542,000.

The Phoenix universal ⁷³ life policy was owned, as was the Security Connecticut universal life policy it replaced, by the ILIT, not Millstone. The application for that policy was executed by Millstone, as the insured, and Lyons, as the trustee of the ILIT. At some point thereafter, Millstone discussed with Lyons the prospect of borrowing money against the policy in the ILIT but was told by both Lyons and Address that, because of the terms of the trust agreement, he could not do so. Millstone then instructed Lyons that the ILIT be dissolved.

Although it is unclear from the record precisely when that conversation took place, it appears that it was before March 17, 2004. That is because, on that March date, Lyons sent Millstone a copy of a statement reflecting the accumulated cash value of the Phoenix universal life policy that was then in the ILIT, and Millstone, believing that the ILIT had already been dissolved, called Address and expressed his unhappiness that it had not. Address responded, according to Millstone, that “it’s an error” and that he would “take care of it.” Then, in May 2004, in conjunction with the dissolution of the ILIT, ownership of the Phoenix universal life policy was transferred from the ILIT to Millstone’s daughters. In 2005, Address and Millstone agreed that a universal life insurance policy should be purchased, with funds provided by Millstone, from the Hartford Life Insurance Company (the “Hartford universal life policy”).

Coinciding with that purchase, both the Phoenix universal life policy, with a $7,500,000 death benefit, and the Phoenix whole life policy owned by Millstone’s daughters (and which remained in place after the other seven Phoenix whole life policies had been surrendered in 2001), with a $2,500,000 death benefit, were themselves surrendered. The Hartford universal life policy, which was also owned by Millstone’s daughters, had a death benefit of $10,000,000 and a lower premium than the surrendered policies. 8 ⁷⁴ By 2007, business conditions had improved, and, in a departure from his previous practice, Millstone decided to take out a policy loan for his personal use. As he was, at that time, interested in purchasing a piece of real estate in New York, he called Address to inquire as to the accumulated cash value of the Hartford universal life policy, in the hope of paying some or all of the purchase price of the property with the loan proceeds. When Address told him that he could only get about $50,000, Millstone called his accountant and asked him to “start an investigation and find out why there’s no money in” that policy.

He then arranged to have the Hartford universal life policy cancelled and ceased any further business dealings with either Address or his insurance brokerage. On August 26, 2008, Millstone and David Caffee, 9 an employee of Millstone’s company, Montgomery Scrap Corporation, filed this action against Address and his brokerage, Marvin A. Address & Associates, Inc., alleging negligence, breach of contract, negligent misrepresentation, intentional misrepresentation, and constructive fraud relating to the purchase and surrender of the life insurance policies. The damages requested were purportedly engendered by a “loss of cash value of the policies, adverse tax consequences, and loss of premiums paid.” In response, Address raised, among other defenses, that Millstone had “failed to join an indispensable party or parties,” that he “lack[ed] standing to bring th[e] lawsuit,” that he had been contributorily negligent, and that the claims were barred by the three-year statute of limitations because Millstone was aware of the conduct at issue when he received the March 17, 2004 letter from Lyons about the cash value in the ILIT. That led to the filing of an amended complaint, adding Millstone’s daughters as plaintiffs. ⁷⁵ A jury trial was held in November 2009.

At trial, Millstone claimed that he suffered damages of $1,467,031.43. He maintained that those damages were due to a loss of principal resulting from the premature surrender of the 1996, 1997, and 1999 Phoenix whole life policies; the loss of principal resulting from the cancellation of the 2005 Hartford universal life policy; premiums paid from 2001 through 2009; and 5% interest. At the close of Millstone’s case, Address moved for, and the circuit court granted, judgment in his favor on the counts alleging intentional misrepresentation and constructive fraud. He also moved to dismiss the counts alleging negligence and negligent misrepresentation, asserting that Millstone lacked standing to pursue those claims because the trust, and not Millstone, suffered damages, if there were any, from the transactions at issue.

The circuit court declined to dismiss those counts. The jury found that Address was negligent and made negligent misrepresentations with respect to the transactions at issue but that Millstone was contributorily negligent. Consequently, judgment was entered in .favor of Address on those two counts. The jury also found that Address breached an express or implied contract with Millstone and awarded Millstone $958,807.50 in damages.

No verdict was rendered as to the claims of Millstone’s daughters, and, thereafter, the parties filed a stipulation dismissing the daughters’ claims. Address then noted this appeal. Discussion I. Address contends that the circuit court erred in “finding that Millstone had standing to pursue breach of contract claims against [him],” pointing out that, after the surrender of the Phoenix whole life policies, in 2001, “Millstone was never the owner of any of the policies that were procured by Address.” Rather, the policies at issue either belonged to the trust established in 2001 (the ILIT), at the direction of Mill ⁷⁶ stone’s attorney, Ron Lyons, or to Millstone’s daughters, to whom the trust corpus was conveyed, in 2004, after Millstone directed that the trust be dissolved. Millstone responds that Address “mischaracterizfes]” his theory of damages and that, in any event, the issue is not preserved for appeal because Address first raised his “standing” issue in a motion for judgment and, furthermore, did not object to either the testimony of Millstone’s damages expert or to the jury instructions.

He further maintains that his “claims were not based on the policies he purchased for the trust, but on the advice he directly received from” Address, as well as “the policies he was advised to sell and the commissions [Address] received as the result of such sales.” At the outset, we find Millstone’s non-preservation argument wanting. Address, in his answer to the complaint, included among his defenses that Millstone “lack[ed] standing to bring this lawsuit,” that he did “not have the capacity to sue in this case,” and that he did “not have the authority to sue in a representative capacity.” Then, in his motions for judgment—both of which were denied 10 —Address raised those same issues “with respect to all counts,” asserting that, once Millstone conveyed assets to the ILIT so that it could then purchase life insurance policies, he no longer retained any interest in those assets and, consequently, did not suffer any damages. Under Maryland Rule 8-131(a), an appellate court will “ordinarily” not decide an issue “unless it plainly appears by the record to have been raised in or decided by the trial court.” Plainly, this rule was satisfied, and the “standing” issue is preserved for appellate review. As the standing issue was preserved, we shall now address it.

Our analysis begins by noting that Section 1.04 of the trust agreement, which, as noted earlier, was drafted by Millstone’s counsel and executed in 2001, states that “[t]he ⁷⁷ Settlor,” that is, Millstone, “retains no interest, vested or contingent, in the property of the [TJrust.” And, in “no event shall any property transferred to this Trust revert to the Settlor or to the Settlor’s estate.” Thus, according to its express terms, the trust agreement divests Millstone of any interest in the trust. As explained by the author of a leading treatise on this subject, “[ajfter a settlor has completed the creation of a trust, the settlor is not,” with limited exceptions that are not applicable here, 11 “in any legal relationship with the beneficiaries or the trustee, and has no rights, liabilities or powers with regard to the trust administration.” Amy Morris Hess, The Law of Trusts and Trustees, § 42 at 445 (3d ed.2007) (hereafter “Bogert on Trusts”). Hence, in establishing an irrevocable life insurance trust (or, indeed, any irrevocable trust), “the settlor must permanently give up control of the gift property.” Id., § 234 at 57. Although no Maryland appellate cases address this precise issue, our holding is consistent with existing Maryland case-law.

For example, in Krauch v. Krauch, 179 Md. 423, 425-26 , 20 A.2d 719 (1941), a dispute over ownership of a leasehold interest in real property, which had previously been owned by the deceased mother of two