Premium of America, LLC v. Sanchez

Opinion by KEHOE, J. In this case, we address a familiar issue—the scope of a party’s liability for financial harm caused by negligent misrepresentations—in an unusual context: the marketing of viatical settlements. As we will explain in greater detail, a viatical settlement is a transaction in which an investor purchases the beneficial rights in an existing life insurance policy on a terminally ill person in return for the policy proceeds upon the insured’s death. The investor also assumes the obligation of paying the policy premiums. Whether to purchase a viatical policy in the first place and, if so, how much to pay for it, depends in no small part upon the life expectancy of the insured.

Some of those who invested in viatical settlement contracts in the 1990’s did so with the expectation that medical science would continue to be ineffective in treating HIV/AIDS and related maladies. They were wrong and their investments became worthless. Premium of America, LLC, (“Premium”), whose members are such investors, filed claims of negligence, negligent misrepresentation, and gross negligence in the Circuit Court for Baltimore County against appellee, William C. Sanchez, M.D., 1 a District of Columbia physician who provided life expectancy estimates for persons suffering from HIV/AIDS in this time period. Premium asserted that Sanchez significantly underestimated the life expectancies of these persons because he did not take into account advances in HIV/AIDS treatment and that his failure to do so was the result of his negligence or gross negligence.

Sanchez filed a motion for summary judgment arguing, among other grounds, that the claims failed as a matter of law because there was no nexus, privity, or any other relationship between him and any investor that established a duty on his part to them. After holding a hearing, ⁹⁶ the circuit court granted the motion because it concluded that Sanchez did not owe a duty to Premium’s members and therefore was not liable to them for any errors in his evaluations. Premium filed a motion to alter or amend the judgment or, in the alternative, a motion for leave to file an amended complaint to add a breach of contract claim against Sanchez. The circuit court denied both motions.

Premium appeals and presents three questions, which we have reworded and combined as follows: 2 I. Did the circuit court err in granting Sanchez’s motion for summary judgment on the basis that Sanchez did not owe a duty to those who invested in the viatical life insurance policies?

II

Did the circuit court abuse its discretion in refusing to grant Premium’s motion for leave to file an amended complaint? We will affirm the circuit court’s judgment. Background “In reviewing the grant of summary judgment, we construe the facts properly before the court and any reasonable inferences that may be drawn from them, in the light most ⁹⁷ favorable to the non-moving party....” Benway v. Md. Port Admin., 191 Md.App. 22, 45-46 , 989 A.2d 1239 (2010) (citing Laing v. Volkswagen of Am., 180 Md.App. 136, 152-53 , 949 A.2d 26 (2008)). We think it useful to begin with some terminology and background information.

In Life Partners, Inc. v. Morrison, 484 F.3d 284, 287 (4th Cir.2007), Judge Paul V. Niemeyer explained that “[a] ‘viaticum’ in ancient Rome was a purse containing money and provisions for a journey. A viatical settlement, by which a dying person is able to acquire provisions for the remainder of his life’s journey by selling his life insurance policy, is thus thought to provide a viaticum. In the language of the industry, the insured is the ‘viator,’ who sells his policy at a discount to a ‘provider’ of the viaticum.” Judge Niemeyer continued: The viatical settlements industry was born in the 1980s in response to the AIDS crisis. In the early years, AIDS was a rapidly fatal disease, and its victims usually died within months of diagnosis.

Many AIDS sufferers were in great need of cash to pay for their care after they had become debilitated. Their life insurance policies were not only expensive to maintain but could, upon liquidation, provide some of the desperately needed cash. Moreover, investors were willing to purchase the life insurance policies of AIDS sufferers. Inasmuch as AIDS sufferers had predictably short life expectancies, their policies were reliable investments.

Id. A. The Purchase of Viatical Policies on Behalf of Premium’s Members This case arises out of the actions of several affiliated companies, including Beneficial Assurance, Ltd. and Premium Escrow Services, Inc. (collectively, “Beneficial”). Beneficial was an agent for investors who were seeking to purchase viatical policies, that is, to become “providers.” While the specifics varied from case to case, Beneficial sought out potential investors and identified each investor’s financial goals and the amounts he or she was willing to invest. Beneficial ⁹⁸ entered into written agreements with each investor by which the investor authorized Beneficial to purchase viatical policies on his or her behalf.

These contracts included a disclaimer as to the reliability of estimates of viators’ life expectancies. 3 The investor placed funds into an escrow account administered by Beneficial to cover the purchase price of the policy and the life insurance premiums that would come due between the date of purchase and the date of the insured’s death. The funds reserved for premium payments were usually calculated based on the viator’s life expectancy—as determined by a third-party physician—plus one year. Viatical policies were often sold at auction and, as part of the auction process, Beneficial obtained the viator’s medical records. Beneficial submitted the medical records to a third-party physician who would review the information and provide a life expectancy estimation for the viator.

Based in part upon the life expectancy evaluation, Beneficial would match a viatical policy to one or more investors and would bid on it. If ⁹⁹ Beneficial was successful, at closing, the viator assigned the beneficial interest in the policy to an escrow agent, which, while purportedly independent, was actually under Beneficial’s control. The escrow agent held the policy for the investor and disbursed funds as needed to pay policy premiums. After closing, Beneficial sent a package of closing documents to the purchasers whose funds were used in the settlement.

The package usually included information about the insurance policy, the financial rating of the insurer, an assignment, documentation as to the transfer of the beneficial interest in the policy to the escrow agent, and a copy of the report from the physician who had reviewed the viator’s medical records and provided an estimate of the viator’s life expectancy to Beneficial. 4 B. The Collapse of Beneficial and the Formation of Premium Almost from its inception, the viatical settlement industry was permeated with fraud, bad faith and sharp practice. The primary victims were viators, who were gravely ill and typically in desperate need of money. See Life Partners, 484 F.3d at 287-88 . As a result, many states enacted legislation providing some measure of protection to viators.

Id. 5 The degree to which these regulations affected Beneficial’s operation is unclear but there is no question that some of Beneficial’s business practices regarding its relations with investors were improper. 6 Moreover, because of advances in HIV/AIDS ¹⁰⁰ treatments, many viators were outliving the life expectancy assumptions used by Beneficial to value viatical policies. Because investors only set aside enough money in escrow to cover premium payments for the life expectancy of the viator plus one year, Beneficial did not have sufficient funds in escrow to continue to pay the insurance policy until the viator’s death. In such cases, the premium payments went unpaid and the viatical policies lapsed. For these reasons, Beneficial went into bankruptcy in 2002.

As part of the bankruptcy proceedings, the bankruptcy court confirmed a reorganization plan under which Premium was established as a limited liability company. The members of Premium are the investors who purchased viatical policies through Beneficial. The members assigned their interests in the policies to Premium as well as any claims that a member might have against any third party, such as Sanchez, retained by Beneficial in connection with the marketing, sale, and administration of the viatical policies. C. Dr. Sanchez A board-certified pediatrician, Sanchez opened a family medicine practice in Washington, D.C., after his discharge from the Army in 1977.

As the AIDS epidemic took hold in the 1980’s, Sanchez provided medical care to a number of patients suffering from the disease. He co-authored four articles during that decade regarding HIV/AIDS which were published in respected medical journals such as The Lancet and The New England Journal of Medicine. Additionally, he participated in ten clinical studies of experimental AIDS medications in the 1980’s and 1990’s. Initially, Sanchez provided life expectancy assessments for his own HIV/AIDS patients as they sought to sell their life insurance policies to providers.

This brought him to Benefi ¹⁰¹ cial’s attention and, eventually, Beneficial requested Sanchez to provide it with life expectancy evaluations for non-patients. Between 1996 and 1999, Sanchez provided 154 such assessments to Beneficial, which paid him $200 for each life expectancy evaluation. Premium contends that Beneficial relied on Sanchez’s life expectancy projections in deciding whether, and at what price, to purchase viatical policies on behalf of its investors. Premium maintains that, if Sanchez had refused to provide a life expectancy projection or had provided a projection of greater than five years for a particular viator, Beneficial would not have purchased that viator’s policy.

Premium asserts that Sanchez significantly underestimated the life expectancies of many of the viators. 7 Had the case proceeded to trial, Premium would have presented expert testimony that, because of by then widely-publicized advances in the treatment of HIV/AIDS, Sanchez should have realized that “the life expectancy of HIV-infected patients could not [have been] accurately projected” and that he should have stopped making them. The expert was prepared to testify that Sanchez was negligent in continuing to make the evaluations. Additionally, Premium would have presented other expert testimony to the effect that Sanchez’s failure to make accurate life expectancy evaluations resulted in between $7 million and $9 million in damages to Premium’s members. For his part, Sanchez testified in his deposition that, while he knew that his life expectancy projections were being used for the purpose of purchasing life insurance policies by Beneficial, it never informed him that, in fact, it was acting as an agent for individual investors.

Moreover, he maintained that he was not aware that Beneficial had engaged him on behalf of others. Beneficial presented no evidence to contradict this testimony. The record is undisputed that Sanchez’s evaluations were made for Beneficial and Beneficial, not the inves ¹⁰² tors, selected the specific viatical policies for each investor. Finally, individual investors became aware of Sanchez’s evaluations only after Beneficial had purchased the viatical policies on their behalf.

D. Proceedings in the Circuit Court On February 6, 2007, Premium filed an action against Sanchez in the Circuit Court for Baltimore County alleging claims of negligence, negligent misrepresentation, and gross negligence. In its complaint, Premium alleged that Sanchez negligently provided inaccurate life expectancy evaluations to Premium’s members (those who invested in viatical policies). Sanchez filed an answer denying or, in the alternative, defending against these accusations. After the close of discovery, Sanchez filed a motion to dismiss or, in the alternative, a motion for summary judgment.

Among other contentions, Sanchez asserted that the negligence claims failed as a matter of law because the undisputed facts showed that he owed no duty—of the sort that would give rise to liability for negligence in a case such as this—to the individuals for whom Beneficial purchased viatical policies. Premium filed an opposition to Sanchez’s motion for súmmary judgment. Of relevance to the present appeal, Premium argued that Sanchez owed the investors a duty to provide accurate life expectancies, that Sanchez breached that duty by offering life expectancy projections at a time when it was unreasonable to do so, and that the investors were harmed when the viators outlived Sanchez’s projections by many years, rendering the investors’ investments all but worthless. According to Premium, the facts of the case demonstrated that there was an “intimate nexus” between Sanchez and the investors, which was all that was necessary to prove that Sanchez owed a duty to the investors.

Premium set forth two bases on which, it alleged, the circuit court could find that there was such an “intimate nexus” between the parties. Premium first contended that to prove the presence of an “intimate nexus,” it need only prove that there was contractual ¹⁰³ privity between the parties. Premium maintained that Sanchez had contractual privity with the investors by virtue of the investors’ agency relationship with Beneficial. Premium explains that, because of this agency relationship, Sanchez is as liable to the investors as if the investors themselves had made the contract with him, regardless of whether he was aware that Beneficial was acting as an agent on their behalf.

In the alternative, Premium argued that Sanchez’s tort duty to its members was established under Section 552 of the Restatement (Second) of Torts because the investors were the limited group of persons for whose benefit and guidance Sanchez intended to supply the life expectancy evaluations. After a hearing, the circuit court granted the motion for summary judgment in an opinion rendered from the bench. In addressing Premium’s first claim—that it had established “intimate nexus” via contractual privity—the circuit court first expressed doubt that merely establishing any type of contractual privity automatically, as a matter of law, established an “intimate nexus.” Even if any contractual privity could establish an “intimate nexus,” the court continued, no such contractual privity existed between Premium and Sanchez. As the court observed, “at the point Sanchez is asked to write a report, Beneficial doesn’t even know what policies it may buy and it doesn’t know which investors’ money it will use to purchase that policy.” Furthermore, the court noted, in addition to the fact that Sanchez was unaware of the investors, the investors, in turn, were unaware of Sanchez because, while they received a summary of Sanchez’s report after the policy was purchased, they did not receive Sanchez’s actual report before the time of purchase.

Accordingly, the circuit court concluded, Premium had not proven the existence of contractual privity between the parties. The circuit court next addressed Premium’s claim that it had established the presence of a tort duty through § 552 of the Restatement (Second) of Torts. The circuit court explained that, to establish a duty under § 552, Premium had to demonstrate that Sanchez had intended for his information to ¹⁰⁴ be supplied to the investors or had known that Beneficial intended to supply his information to investors. The court concluded that the undisputed facts showed that Sanchez had not known what use Beneficial intended to make of the evaluations he supplied to it and had not known that his evaluations would be supplied by Beneficial to any other person.

Therefore, § 552 did not establish a duty on Sanchez’s part to the investors. Premium filed a motion to alter or amend this judgment or, in the alternative, for leave to file an amended complaint to assert a breach of contract claim against Sanchez. In furtherance of its motion to alter or amend, Premium reiterated its previous contentions as to privity and Restatement (Second) of Torts § 552. In the alternative, Premium argued, if the court found that privity existed but that there was no intimate nexus between the parties, the circuit court should grant Premium leave to amend its complaint to add a breach of contract claim.

Premium contended that because its original complaint “already contains allegations establishing the existence of a contract and a breach of contract by [Sanchez], the First Amended Complaint simply adds ‘Count 3,’ reciting as a formality the elements of a breach of contract as they apply to [Premium’s] allegations, and demands a judgment for damages for Defendants’ breach.” The circuit court denied Premium’s motion in a written memorandum and order, which elaborated upon its bench opinion. As to Premium’s request that the circuit alter or amend the judgment, the circuit court stated that, to impose a tort duty, a contractual relationship alone does not establish an intimate nexus. Instead, the contractual relationship must also be accompanied by reliance, a risk of loss, and knowledge, by the defendant, of both the reliance and the risk. Here, however, “the facts are undisputed that [Sanchez] had no knowledge of the investors or the class of persons who have assigned their rights to [Premium], or the purpose for which [Sanchez’s] report would be used by Beneficial.” In fact, ¹⁰⁵ Sanchez “had no knowledge that Beneficial was acting for investors or that Beneficial intended to use [Sanchez’s] evaluations for the benefit of investors.” Most importantly, “there was no evidence presented that [Sanchez] knew of Beneficial’s reliance for the purpose of investing other people’s money in the life insurance polices, and no evidence that [Sanchez] knew the risk of loss that is claimed by [Premium] in this case.” Furthermore, there “was no contract between [Sanchez] and the eventual investors that subsequently assigned their interests to [Premium].” As to Premium’s argument that the “intimate nexus” requirement was satisfied by § 552 of the Restatement (Second) of Torts, the circuit court determined that Sanchez is not liable to Premium because Sanchez: had no knowledge of the class of persons who constitute the investors and who have assigned their interests to [Premium], and [Sanchez] did not intend to supply his reports to the class that [Premium] represents, and [Sanchez] had no knowledge of [Premium’s] reliance on the evaluations for the purpose of selling interests in the life insurance policies.

The circuit court stated that, even if the Restatement (Second) of Agency established “contractual privity” between a third party and an undisclosed principal, as Premium alleged, “under the facts of this case it is not sufficient to establish an intimate nexus between” Premium and Sanchez under Maryland law. “The Plaintiffs theory would greatly increase [Sanchez’s] potential liability to a class of persons unknown to [Sanchez] and for a risk unknown to [Sanchez].” With regard to Premium’s request for leave to file an amended complaint, the circuit court noted that Sanchez provided the evaluations at issue between 1996 and 1999. The circuit court noted that, at the time it was considering this motion, February, 2011, six years had elapsed from the time that the case had first been filed as an adversary claim in the Bankruptcy Court, and almost four years had elapsed since the case was filed in the circuit court. The court denied the ¹⁰⁶ request for leave to file an amended complaint on the grounds that the action was barred by the statute of limitations. ANALYSIS I. Summary Judgment Premium presents two primary arguments as to why the circuit court erred in concluding that Sanchez did not owe a tort duty to Beneficial’s investors.

First, it contends that Sanchez was in privity of contract with the investors because Beneficial was acting as an agent for undisclosed principals, namely the investors, when it asked Sanchez to provide life expectancy evaluations for would-be viators. Because the parties were in privity, continues Premium, Sanchez owed a duty as a matter of law to the investors. 8 Second, Premium argues that the Restatement (Second) Torts § 552 imposes a tort duty on Sanchez: Maryland courts have adopted Section 552 as one equivalent of contractual privity and thus another means of satisfying the intimate nexus test. Swinson v. Lords Landing, 360 Md. 462, 477-78 [ 758 A.2d 1008 ] (2000). To satisfy the elements of Section 552, it is not necessary that the defendant know the identities of the specific parties who relied on the information provided.

Rather, it is suffi ¹⁰⁷ dent that the plaintiff be within the dass of persons for whose benefit the duty was created. The duty extends even to a large class of potential plaintiffs as long as the class is limited to the identifiable categories of persons who may be expected to rely upon the information provided. (Quotation marks and some citations omitted.) Ultimately, these contentions are not persuasive. Sanchez contracted only with Beneficial, not the investors.

To hold that Sanchez owed a duty to the investors, whose very existence and roles in the transactions were unknown to him at the time he made his evaluations, would subvert the purposes of the limitations on the scope of tort duty applicable in cases in which only economic harm could result from a breach of duty. Application of the standards set out in Restatement (Second) of Torts § 552 does not change this result. We will begin our analysis with a brief summary of the pertinent legal principles. The elements of the tort of negligent misrepresentation are: (1) the defendant, owing a duty of care to the plaintiff, negligently asserts a false statement; (2) the defendant intends that his statement will be acted upon by the plaintiff; (3) the defendant has knowledge that the plaintiff will probably rely on the statement, which, if erroneous, will cause loss or injury; (4) the plaintiff, justifiably, takes action in reliance on the statement; and (5) the plaintiff suffers damage proximately caused by the defendant’s negligence.

Walpert v. Katz, 361 Md. 645, 656-57 , 762 A.2d 582 (2000) (internal quotation marks removed). “In Maryland, in order to establish a cause of action for negligence, a plaintiff must prove: a duty owed to the plaintiff or to a class of which the plaintiff is a part; a breach ¹⁰⁸ of that duty; a causal relationship between the breach and the harm; and damages suffered.” Id. at 655 , 762 A.2d 582 (citing, among other authorities, Jacques v. First Nat’l Bank, 307 Md. 527, 531 , 515 A.2d 756 (1986)). “Negligent misrepresentation is one variety of a negligence action.” Walpert, 361 Md. at 655-56 , 762 A.2d 582 . In the law of negligence, the term “duty,” or “tort duty,” Jacques, 307 Md. at 533-34 , 515 A.2d 756 , is shorthand for “ ‘an obligation, to which the law will give recognition and effect, to conform to a particular standard of conduct toward another.’ ” Gourdine v. Crews, 405 Md. 722, 745, 955 A.2d 769 (2008) (quoting W. Page Prosser et al., Prosser and Keeton on the Law op Torts § 53 at 356 (5th ed.1984)). In other words, “the determination of whether a duty exists represents a policy question of whether the specific plaintiff is entitled to protection from the acts of the defendant.” Gourdine, 405 Md. at 745 , 955 A.2d 769 (citing, among other authorities, Pendleton v. State, 398 Md. 447, 461 , 921 A.2d 196 (2007) and Rosenblatt v. Exxon, 335 Md. 58, 77 , 642 A.2d 180 (1994)). “Duty is a foundational element in a claim of negligence because, as we have said, ‘negligence is a breach of a duty owed to one, and absent that duty, there can be no negligence.’” Barclay v. Briscoe, 427 Md. 270, 293 , 47 A.3d 560 (2012) (quoting Ashburn v. Anne Arundel County, 306 Md. 617, 627 , 510 A.2d 1078 (1986)). As a result, “when analyzing a negligence action it is customary to begin with whether a legally cognizable duty exists.” Pendleton v. State, 398 Md. 447, 461 , 921 A.2d 196 (2007).

If failure to use due care causes only a risk of economic loss, “ ‘courts have generally required an intimate nexus between the parties as a condition to the imposition of tort liability. This intimate nexus is satisfied by contractual privity or its equivalent.’” Walpert, 361 Md. at 658 , 762 A.2d 582 (quoting Jacques, 307 Md. at 534-35 , 515 A.2d 756 ). The term “intimate nexus” derives from Judge Cardozo’s landmark opinion in Ultramares Corp. v. Touche, 255 N.Y. 170, 182 , 174 N.E. 441 (1931), wherein he used a variation of ¹⁰⁹ the phrase to characterize the kinds of relationships that, in addition to actual contractual privity, establish tort duty when the only possible damages are economic. In Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536 , 551, 493 N.Y.S.2d 435 , 483 N.E.2d 110 (1985), the New York Court of Appeals, after reviewing Ultramares and other cases, concluded that, in the context of a claim for negligent misrepresentation by an accountant, an “intimate nexus” exists when: (1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants’ understanding of that party or parties’ reliance.

The Credit Alliance test was adopted by our Court of Appeals in the context of accountants’ liability in Walpert, 361 Md. at 680-81 , 762 A.2d 582 . While Credit Alliance and Walpert dealt with accountants’ liability, the analysis set out in the two decisions is a useful approach in the present case because this case also involves statements based on professional knowledge and expertise when those statements are made to assist others in financial matters. In all of this, it is important to remember that the requirement of tort duty functions to limit a defendant’s possible liability: [T]he rationale underlying the requirement of privity or its equivalent as a condition of liability for negligent conduct, including negligent misrepresentations, resulting in economic damages [is] to avoid “liability in an indeterminate amount for an indeterminate time to an indeterminate class.” Stated differently, the reason for the requirement is to limit the defendant’s risk to an actually foreseeable extent, thus permitting a defendant to control the risk to which the defendant is exposed. Walpert, 361 Md. at 671 , 762 A.2d 582 (quoting Ultramares, 255 N.Y. at 179 , 174 N.E. 441 ); see also Barclay, 427 Md. at ¹¹⁰ 293 , 47 A.3d 560 (“ ‘[D]uty is not sacrosanct in itself, but is only an expression of the sum total of those considerations of policy which lead the law to say that the plaintiff is entitled to protection.’ ” (quoting Prosser and Keeton on the Law of Torts § 53 at 358 (internal quotation marks omitted))); Weisman v. Connors, 312 Md. 428 , 447 n. 3, 540 A.2d 783 (1988) (In the context of negligent misrepresentation claims, “[t]he attempt to circumscribe the potentially limitless range of economic harm ... has been the raison d’etre for the requirement of duty.”).

A Beneficial as an Agent for Undisclosed Principal(s) Premium’s members were not in privity with Sanchez in the traditional sense of the term. In Lovell Land v. SHA 408 Md. 242, 261 , 969 A.2d 284 (2009), the Court of Appeals explained: “In order to recover it is essential that the beneficiary shall be the real promisee; i.e., that the promise shall be made to him in fact, though not in form. It is not enough that the contract may operate to his benefit. It must clearly appear that the parties intend to recognize him as the primary party in interest and as privy to the promise.” (quoting Mackubin v. Curtiss-Wright Corp., 190 Md. 52, 58 , 57 A.2d 318 (1948) (emphasis added in Lovell Land)).

The undisputed evidence before the circuit court was that Sanchez was unaware that Beneficial was acting on behalf of anyone other than itself