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Lexington New York Life Insurance Co. v. Terry

United States District Court, E.D. Kentucky, Central Division, Lexington

January 10, 2017




         Tim Terry died in September 2015. Days before his death he changed the beneficiary of his life insurance policy from his wife to his sister. Terry's wife had paid all the policy premiums, but had filed for divorce. His sister housed him during the final month of his life. Both claimed the proceeds.

         In December 2015, New York Life Insurance Company (“NY Life”) filed this action in interpleader, asking the Court to determine the proper beneficiary. See D.E. 13 (Second Amended Complaint). The parties consented to jurisdiction by a Magistrate Judge (D.E. 21), and the case was later assigned to the undersigned.

         On August 22, 2016, Plaintiff NY Life filed a motion to be dismissed from the case with prejudice once the proceeds were deposited with the Court. D.E. 44. The motion also sought to enjoin the other parties from commencing any action against NY Life and for an award of attorneys' fees and expenses. Id.

         On September 20, 2016, Defendant/Cross-Claimant Eva Carole Terry Wuest (“Sister”) moved for summary judgment. D.E. 47. On October 14, 2016, Defendant/Cross-Claimant Jane-Ann Hunsaker Terry (“Wife”) also moved for summary judgment. D.E. 58. All three motions are fully briefed.

         Federal Rule of Civil Procedure 56 requires a court to grant a motion for summary judgment when “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” The Court must assume the truth of the non-moving party's evidence, and draw all inferences in a light most favorable to the non-moving party. Mullins v. Cyranek, 805 F.3d 760, 765 (6th Cir. 2015); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). If there is sufficient evidence for a trier of fact to find for the non-moving party, a genuine dispute of material fact exists and summary judgment may not issue. Mullins, 805 F.3d at 765. “The ultimate question is ‘whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.'” Back v. Nestle USA, Inc., 694 F.3d 571, 575 (6th Cir. 2012) (quoting Anderson, 477 U.S. at 251-52).

         Courts normally conduct interpleader actions in two stages. The first stage involves determining whether interpleader is appropriate and relieving the plaintiff from liability. The second stage adjudicates the claims of the defendant claimants. United States v. High Tech. Prod., Inc., 497 F.3d 637, 641 (6th Cir. 2007). But “bifurcation is not mandatory” and “the entire action may be disposed of at one time.” N.Y. Life Ins. Co. v. Connecticut Dev. Auth., 700 F.2d 91, 95 (2d Cir. 1983); see Confederation Life Ins. & Annuity Co. v. Gallion, No. 5:12-CV-177-DCR, 2013 WL 6061809, at *1 (E.D. Ky. Nov. 18, 2013) (performing both stages in a single order).

         I. Factual Background

         Terry and Wife married in 1988. D.E. 54 at 8. They had two sons who are now in their twenties. D.E. 58-2 at 1. In 2006 Terry left his job due to back pain from degenerative disc disease. D.E. 54 at 17. From that point, the family's sole income derived from Wife's family business and investments. D.E. 58-2 at 1-2. When he left his job, Terry lost his employee-provided life insurance. Id. at 1. That same year, Terry and Wife decided to obtain a $200, 000 whole life insurance policy from NY Life. In her deposition, Wife described how she and Terry agreed that payments for policy premiums would come from their joint checking account and she would be the named beneficiary:

Wife: We discussed getting life insurance, because he no longer was working at Dick's Sporting Goods. So we had a policy drawn up, discussed that I would be the beneficiary. This was done to be set up for our children, who were young at that age, elementary and junior high age. This was something for them. And I would be named beneficiary for them.
. . . .
Q: . . . What was your agreement with Tim Terry?
A: That the life insurance policy would be drawn and I would be the beneficiary. But the policy-in the time-if anything happened to him, this money would be for his children and his children only.
Q: Okay. Anything else in the agreement?
A: And that I would pay for the policy myself out of my income.

D.E. 54 at 18-19.

         In 2010, Terry suffered a motorcycle accident. According to Wife, he became addicted to painkillers. He also drank and was sometimes abusive. D.E. 58-2 at 3-4. In summer 2015, Wife filed for divorce, hiring attorneys Valerie Kershaw and Mindy Seagraves to represent her. Id. at 4. Terry hired Michael Paul Rowland to represent him in the divorce proceedings. D.E. 53 at 9.

         Terry moved out on August 1, 2015. D.E. 54 at 12; D.E. 58-2 at 4. Wife allowed him to take $15, 000 from the joint account to cover his living expenses. Terry also sold some personal items to a jewelry store, without Wife's permission. D.E. 58-2 at 4. Terry opened his own separate bank account. Id.

         The parties agreed to an order in the divorce case that Terry could not enter the family's property or their horse-boarding farm without prior written permission, and that Terry would remain 500 feet away from Wife. D.E. 53 at 109-10. No “Status Quo” order was entered in the divorce case. D.E. 62 at 15. Such an order would almost certainly have required that Terry not change his life insurance beneficiary. D.E. 55 at 4. Instead, Rowland counseled Terry not to “cash it in or cancel anything right now.” D.E. 53 at 25. Rowland could not specifically recall counselling Terry against changing the beneficiary. Id. at 26.

         On August 28, 2015, Terry contacted NY Life insurance agent Andrew Caudill. D.E. 52 at 7. Terry wanted to change the automatically drafted premium payments so that they came from his new bank account, rather than Wife's. Id. at 7-8, 14.

         On September 1, Terry and Caudill met in person. During the meeting, Caudill informed Terry of his various rights, including his right to change the beneficiary. Id. at 9, 44, 49. According to Caudill, it was during that meeting that Terry decided to change the beneficiary from Wife to Sister. Id. at 21. Caudill testified that Terry felt scorned, hurt, and bitter about the impending divorce and how he had even “lost” his children. Id. at 15. But Terry was “lucid” during the meeting and did not appear impaired. Id. at 16. He “very much appeared” to Caudill to be “on top of his game” during phone conversations and the face-to-face meeting. Id. Regarding Sister, Terry told Caudill, “I don't know what I would do without her. She's always been there for me and took me in.” Id. at 20. Terry did not appear to be under pressure from anyone else to make the beneficiary change. Id. at 25-26. Caudill believed that Terry's sense that Wife betrayed him was what motivated him to make the change. Id. at 26.

         On September 5, 2015, Sister arrived home shortly after 11:00 p.m. and found Terry lying lifeless in his bedroom. D.E. 51 at 37. The coroner pronounced him dead after midnight, rendering September 6 his official date of death. D.E. 58-2 at 5. The Certificate of Death listed the manner of death as suicide, the cause of death multiple drug intoxication. D.E. 1-3 (death certificate). Sister believes the overdose was accidental. D.E. 51 at 40.

         Neither Wife nor Sister knew about the beneficiary change until after Terry passed away. D.E. 51 at 29; D.E. 52 at 29; D.E. 58-2 at 5. Sister denies that she suggested the beneficiary change to Terry. D.E. 51 at 29.

         II. NY Life's Motion to Dismiss

         NY Life moves for an order:

(i) permitting the Company to interplead a death benefit of $200, 000, plus applicable claim interest, if any, which became payable to a beneficiary or beneficiaries as a result of the death of Timothy W. Terry; (ii) dismissing the Company from this action with prejudice following the deposit of the death benefits with the Clerk of the Court; (iii) permanently enjoining any of the parties to this action from commencing any other actions or proceedings seeking payment of the death benefits or otherwise in connection with the insurance coverage at issue; and (iv) awarding the Company its attorneys' fees and costs.

D.E. 44 at 1.

         Wife and Sister are comfortable with NY Life being dismissed once it deposits the insurance proceeds with the Court. D.E. 45 at 2; D.E. 46 at 2. In an interpleader action, absent “bad faith on the part of the stakeholder or the possibility that the stakeholder is independently liable, discharge should be readily granted.” Sun Life Assur. Co. of Canada v. Thomas, 735 F.Supp. 730, 733 (W.D. Mich. 1990) (citing N.Y. Life Ins. Co. v. Connecticut Dev. Auth., 700 F.2d 91, 96 (2d Cir. 1983)). Thus, once the amount to be deposited is calculated and actually deposited, discharge will be appropriate.

         The parties agree that the principal amount of the death benefit is $205, 119.39. D.E. 49 at 2; D.E. 60 at 1.

         A. Interest Rate

         NY Life asserts that the applicable interest rate is 3.5%, but Wife and Sister take issue with this figure. The question of the interest rate first emerged in Wife's response brief, which assumed a rate of 8%. D.E. 46 at 7. NY Life replied that, “Pursuant to the Policy, the Company sets the interest rate that will be applied to the Policy, if any. As of September 12, 2016, the interest rate for the Policy was 3.5%, which rate could fluctuate depending on when the Policy Death Benefit is deposited with the Court's Registry.” D.E. 48 at 1 n.1.

         Wife argues that the interest rate should be calculated according to Ky. Rev. Stat. Ann. § 360.010 (LexisNexis 2008), which states that “[t]he legal rate of interest is eight percent (8%) per annum.” D.E. 46 at 4. That statute also provides that parties may contractually agree to a different rate and “any party or parties who may assume or guarantee any such contract or obligation, shall be bound for such rate of interest as is expressed in any such contract.” Ky. Rev. Stat. Ann. § 360.010. NY Life argues that § 360.010 applies only to negotiated bank loans. D.E. 49 at 3; D.E. 59 at 2. This is not correct. “Absent a contractually agreed upon rate, the appropriate rate of interest is governed by [KRS § 360.010].” Reliable Mech., Inc. v. Naylor Indus. Servs., Inc., 125 S.W.3d 856, 857 (Ky. Ct. App. 2003). Although one subsection of the statute applies to negotiated bank loans, Kentucky generally applies the 8% rate in other contexts.

         The question then is whether the policy sets an interest rate that displaces the default 8% rate established by statute. See Stratton v. Portfolio Recovery Assocs., LLC, 770 F.3d 443, 447 (6th Cir. 2014), as amended (Dec. 11, 2014) (quoting Reliable Mech., 125 S.W.3d at 857); Concrete Materials Corp. v. C.J. Mahan Const. Co., 110 F.3d 63 (6th Cir. 1997) (applying a contractual interest rate of 2% rather than the rate set by § 360.010); Forcht Bank, NA v. Gribbins, No. 2014-CA-592-MR, 2015 WL 4039612, at *4 (Ky. Ct. App. July 2, 2015) (“[W]hen no agreement exists as to the appropriate rate of interest, KRS 360.010 provides that the legal rate of interest is eight percent.”); D.E. 60 at 2-3.

         NY Life argues that the policy establishes that the prejudgment interest rate would be set by the company, and that the company's current rate is 3.5%. D.E. 59 at 2. Imposing 8% interest, the company argues, would be unduly punitive and would create an unfair windfall for the beneficiary. Id. at 2-3.

         In this case, the contract controls the interest rate. The policy makes no explicit reference to a 3.5% interest rate. See D.E. 50-1 (policy documents). However, section 1.1 states that NY Life

will pay the life insurance proceeds to the beneficiary promptly when we have proof that the Insured died on or after the Effective Date of this policy, subject to all of this policy's provisions. We will pay the life insurance proceeds in accordance with the policy proceeds option chosen. These proceeds bear interest compounded each year from the Insured's death to the date of payment. We set the interest rate each year. This rate will not be less than the rate required by law.

D.E. 50-1 at 12 (emphasis added). Section 6.1 also concerns the payment of policy proceeds. It states that “[a]ny life insurance proceeds paid in one sum will bear interest compounded each year from the Insured's death to the date of payment. This rate will not be less than required by law.” D.E. 50-1 at 18. These appear to be the operative provisions, and the parties do not point to any other provision as controlling.[1]

         Wife argues that these provisions incorporate § 360.010, and that 8% is therefore the rate “required by law” that NY Life must meet or exceed. D.E. 60 at 3. Wife further argues that any ambiguity on this point should be construed against NY Life, as drafter of the policy. Id. at 4.

         However, the policy is not ambiguous. Section 1.1 states that policy proceeds will be paid along with compound interest, the rate of which will be set by the company each year. D.E. 50-1 at 12. The Court finds that, for purposes of KRS § 360.010, there was a binding written agreement between the parties allowing NY Life to set a non-statutory rate of interest, even though the contract recognized that the rate would fluctuate. It is only in the “absen[ce]” of “a contractually agreed upon rate” that KRS § 360.010 mandates the application of 8% interest. Reliable Mech., 125 S.W.3d at 857.

         Further, contrary to Wife's argument, NY Life's current rate of 3.5% is not “less than the rate required by law, ” as forbidden by sections 1.1 and 6.1 of the policy. The parties do not point to any Kentucky law requiring life insurance policies or any other contracts to include a minimum interest rate. Accordingly, the policy language agreed to by the parties controls: “We set the interest rate each year.” D.E. 50-1 at 12. NY Life should deposit the policy proceeds with the Court, along with annual compound interest at the rate which is set by the company as of the date of this order. However, because NY Life's assertion that the most recent rate is 3.5% is not supported by any evidence in the record, further proceedings for the Court to find the applicable rate are necessary and are explained below.

         B. Permanent Injunction

         Wife opposes NY Life's request for a permanent injunction barring Defendants from pursuing any additional litigation against NY Life regarding the policy. D.E. 46 at 2-3. However, such an injunction is entirely appropriate in this case.

         “Interpleader is a procedural device which entitles a person holding money or property, concededly belonging at least in part to another, to join in a single suit two or more persons asserting mutually exclusive claims to the fund.” White v. Fed. Deposit Ins. Corp., 19 F.3d 249, 251 (5th Cir. 1994). Interpleader actions are remedial in nature, so the governing rules and statutes are to be liberally construed. State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 533 (1967). There are two approaches to interpleader in federal courts, commonly referred to as “rule interpleader” and “statutory interpleader.” Rule interpleader is brought pursuant to Federal Rule of Civil Procedure 22, while statutory interpleader is brought pursuant to the Federal Interpleader Act, codified at 28 U.S.C. §§ 1335, 1397, 2361. The primary distinction between the two types of interpleader is that “unlike the interpleader statute which grants district courts original jurisdiction, the interpleader rule is merely a procedural device and does not grant this Court subject matter jurisdiction.” Sun Life Assur. Co. of Canada v. Thomas, 735 F.Supp. 730, 732 (W.D. Mich. 1990) (citing Bell & Beckwith v. United States, 766 F.2d 910, 914 (6th Cir. 1985)). Accordingly, “[i]n an action brought pursuant to the interpleader rule, either federal question jurisdiction or diversity jurisdiction must be established.” Id.

         Here, diversity jurisdiction is pleaded and unchallenged. See D.E. 13 at 2. The parties agree that this interpleader action is brought under Rule 22. See D.E. 44 at 4; D.E. 46 at 2-3. Statutory interpleader would not be available here because the Defendants are not diverse-they are both citizens of Kentucky. See 28 U.S.C. § 1335(a)(1).

         When the Court decides that interpleader is available, “it may issue an order discharging the stakeholder, if the stakeholder is disinterested, enjoining the parties from prosecuting any other proceeding related to the same subject matter, and directing the claimants to interplead.” United States v. High Tech. Prod., Inc., 497 F.3d 637, 641 (6th Cir. 2007) (quoting 7 Fed. Prac. & Proc. Civ. § 1714 (3d ed.)). “The primary test for determining the propriety of interpleading the adverse claimants and discharging the stakeholder is whether the stakeholder legitimately fears ...

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