The attention the life settlement community is giving the famous New York Kramer case, arguments for which were recently heard in the highest court in the state, would cause you to think the ruling will have huge repercussions in the life settlement industry. This author, admittedly unaware of the intricacies of the case, wonders whether all the hoopla is due.
Life settlement laws abound. Nearly 45 jurisdictions, including New York state quite recently, enacted comprehensive legislation covering the life settlements and STOLI arenas. The New York law, which seemed to take effect only after the facts of the Kramer case unfolded, covers the legal issues presented in the case. Had the law been in place at the time the Kramer initiated the transactions, the law likely would have prevented them, or at least made them illegal. Arthur Kramer — an attorney himself, ironically — as reported, purchased a $10 million in life insurance policy and put it in trust for his kids. Soon after, Kramer directed the family to sell the beneficial interest of said trusts to Lifemark for $1.9 million.
By the way, this is not a paltry sum, amounting to almost 20 percent of face value. No doubt, the investors were aware of Kramer’s shortened life expectancy, and that is why they were willing to pay such a high percentage. As Kramer passed in 2008, the Kramer family would have been better off keeping the policy, if that indeed was even an option. One might believe, however, given our knowledge of how things are done or at least were done in this field, and what has been reported, that this is a pure case of STOLI — in which all the parties, except perhaps the carrier, had the unified intent of acquiring the policy for pecuniary gain through an investment.
Why all the fuss now? The New York state Legislature and his honor the lame duck Governor Patterson spoke out in their infinite wisdom, and they actually got together to get something done! Why not rely on this newly enacted law for total guidance? I suppose the parties here are entitled to their day in court. The court, as reported, was searching for a victim. Who is the victim in this case? Hard to find.
My first choice for victim is the investment company. A deal was made by the Kramer family, and even if the so-called beneficiaries of the trusts were not aware of the transactions made by the now deceased father, shouldn’t they be held to those agreements? And should they not be held to their own actions of selling away the benefit interest? Here the old adage, “Ignorance of the law — or of the legal repercussions of your own actions — is no excuse,” should be applied.
The father made the deal, and what gives the family the right to undo that deal now? If the father had unclean hands, as it were, such lack of cleanliness ought to be imputed to the rest of the family, should it not?
Furthermore, the insured and original sinner, Arthur Kramer, an attorney, either knew or should have known of the requirement of insurable interest, and this knowledge should have been imputed to the family. Maybe they should all have taken our CE and CPE free course and educated themselves.
On the flip side, the investors were certainly equally aware of the legal requirements of insurable interest. Since I believe that both parties are equally at fault or guilty of wrongdoing, sitting as a judge I would not change the bargained for result.
That begs the question, "What about the carrier?" Should the policy even be honored? I believe that if the insured died outside of contestability, then the carrier is just out of luck. Exceptions for rules of contestability ought not be made and likely will not be made in the state of New York. It also does not appear that this is an issue confronted by the court. Phoenix, the carrier here, is reportedly willing to make payment.
Bottom line: This is a poor precedent and, in that manner, an unimportant decision given the parties in the scenario are both tainted with some form of illicit conduct. The court can rule either way, but let’s look to state statute to govern our behavior, not to case precedent, especially when the facts do not present a good guy–bad guy dichotomy. What we have here is just … gray.