E-Alert Case Updates

Maryland Federal District Court Lacks Subject Matter Jurisdiction to Hear Life Insurance Case Where Plaintiffs Did not Sustain any Injuries Within the Meaning of Article III

Jeffrey Higdon, As Trustee Of The Life Insurance Trust Dated November 1, 1991 v. Lincoln National Insurance Co., et al.
United States District Court for the District of Maryland, Civil Action No. ELH-13-2152 (D. Md. Dec. 8, 2014)
by Jhanelle A. Graham, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.mdd.uscourts.gov/Opinions/Opinions/13-cv-2152%20Higdon_grant..pdf

SUMMARY: The issue before the Maryland federal district court was whether the court had subject matter jurisdiction over a life insurance policy case.  After reviewing the facts, the Honorable Ellen Lipton Hollander concluded that the district court lacked subject matter jurisdiction, and granted in part and denied in part Defendants’ Motion to Dismiss.  Specifically, the court determined that the Germenkos did not sustain any injuries within the meaning of Article III, and, thus, the Court lacked subject matter jurisdiction to hear the case; however, the court denied Defendants’ request to dismiss the case, instead remanding the case to the Circuit Court for Howard County for all further proceedings, pursuant to 28 U.S.C. § 1447(c).

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In Jeffrey Higdon, As Trustee Of The Life Insurance Trust Dated November 1, 1991 v. Lincoln National Insurance Co. et al., Plaintiff Jeffrey F. Higdon, as Trustee of the John J. Germenko Life Insurance Trust Dated November 1, 1991 (the “Trust”), sought to recover the death benefits of $300,000 allegedly payable on a life insurance policy issued to John J. Germenko (the “Policy”) in 1985, which was the corpus of the Trust. Higdon alleged that defendants, Lincoln National Insurance Company (“Lincoln”) and ING Life Insurance and Annuity Company (“ING”) (collectively, “Defendants”) had breached the Policy by refusing to pay the benefits due as a result of Mr. Germenko’s death on June 16, 2010. The issue before the Maryland federal district court was whether the court had subject matter jurisdiction over the case. After reviewing the facts, the Honorable Ellen Lipton Hollander concluded that the district court lacked subject matter jurisdiction, and granted in part and denied in part Defendants’ Motion to Dismiss. Specifically, the court determined that the Germenkos did not sustain any injuries within the meaning of Article III, and, thus, the Court lacked subject matter jurisdiction to hear the case; however, the court denied Defendants’ request to dismiss the case, instead remanding the case to the Circuit Court for Howard County for all further proceedings, pursuant to 28 U.S.C. § 1447(c).

The Germenkos filed their Complaint alleging one count for breach of contract. The contract dispute was centered on whether the Policy was in force when Mr. Germenko died on June 16, 2010. The Germenkos alleged that in January 1985, Mr. Germenko contracted for a “flexible premium adjustable life policy” with “an initial specified amount of $300,000.00.” Further, they asserted that “[a]t all relevant times,” Mr. Germenko “was the owner of the Policy and the Plaintiffs [the Germenkos] are the named beneficiaries of the Policy.” In the Complaint, however, they did not mention the Trust. The Trust Agreement established a series of contingent interests in the Policy funds—for example, Section 2.02, titled “Protection Against Loss of Marital Deduction for Qualifying Property and Distribution of Assets,” directed the Trustee to disburse funds first to “the Grantor’s spouse” and/or her estate, in such amount “as may be necessary” to reduce estate taxes in a specified way. The “Grantor’s spouse” was not specified in the Trust Agreement, but Plaintiff explained that Mr. Germenko’s spouse, at the time of the creation of the Trust and at his death, was Catherine Germenko. Section 2.02 further instructed the Trustee to “pay over and distribute all of the accumulated and unpaid income and remaining principal of the trust estate, after compliance with [Section 2.02] as provided in Section 2.03.” Id. (emphasis added). Specifically, Section 2.03(a) stated:

Upon Grantor’s death, and upon compliance with the provisions of Section 2.02 of this Trust Agreement, the Trustee shall distribute to Grantor’s former wife,[5] such amount as is required under the Property Settlement Agreement Grantor executed with her and which agreement was incorporated in the divorce decree entered in Howard County, Maryland. The Trustee shall allocate all of the remaining accumulated and unpaid net income and remaining principal of this Trust into two equal shares to be administered and distributed in the following manner:

(1) One equal share shall be allocated to the BARBARA J. WRIGHT SHARE to be administered and distributed subject to the provisions of paragraph (b) of this Section 2.03, and

(2) The other equal share shall be allocated to the DEBORAH G. THARP SHARE to be administered and distributed subject to the provisions of paragraph (c) of this Section 2.03.

Section 2.03(b) stated, in relevant part: “The assets allocated to the BARBARA J. WRIGHT SHARE shall be distributed to her and this trust on her behalf shall terminate.”

The Insurers removed the case to the Maryland federal district court on July 25, 2013, stating that the action was “properly removed under 28 U.S.C. § 1441 (removal jurisdiction) because the Court has original jurisdiction over this matter pursuant to 28 U.S.C. § 1332 (diversity jurisdiction).” In support, they argued that: (a) two (2) of the Germenkos were citizens of Florida; (b) the third was a citizen of North Carolina; (c) Lincoln was a citizen of New York and Pennsylvania; (d) ING was a citizen of Connecticut; and (e) the amount in controversy ($300,000) exceeded $75,000. The Germenkos also stated that each of the Germenkos was an “alleged beneficiary” of the Policy. Defendants answered the Complaint on August 1, 2013, and denied that the Germenkos “were the named beneficiaries” of the Policy “at the time of” Mr. Germenko’s death. Defendants subsequently moved to dismiss the Complaint, contending that 1) the Germenkos did not have standing to sue the Insurers at the time they filed the State Complaint; 2) the Court lacked subject matter jurisdiction at the time of removal, due to Plaintiffs’ lack of standing; 3) jurisdictional defects existing at the time of removal could not be cured by post-removal substitution of parties; and 4) this Court lacked subject matter jurisdiction.

Judge Hollander denied the First Motion in a Memorandum Opinion of April 21, 2014, and requested that the parties submit additional briefing related to the standing of trust beneficiaries to bring contract claims. Judge Hollander also granted defendants leave to refile their motion after their additional submissions. The Insurers filed the dispositive motion pursuant to Fed. R. Civ. P. 12(b)(1).

The Maryland district court began its analysis by articulating that in a facial challenge to subject matter jurisdiction, “the facts alleged in the complaint are taken as true, and the motion must be denied if the complaint alleges sufficient facts to invoke subject matter jurisdiction.” Kerns, 585 F.3d at 192; see also Ibarra v. United States, 120 F.3d 472, 474 (4th Cir. 1997). In a factual challenge, on the other hand, “the district court is entitled to decide disputed issues of fact with respect to subject matter jurisdiction.” Kerns, 585 F.3d at 192. In that circumstance, the court “may regard the pleadings as mere evidence on the issue and may consider evidence outside the pleadings without converting the proceeding to one for summary judgment.” Velasco v. Gov't of Indonesia, 370 F.3d 392, 398 (4th Cir. 2004); see also United States ex rel. Vuyyuru v. Jadhav, 555 F.3d 337, 347–48 (4th Cir. 2009) (“Unless ‘the jurisdictional facts are intertwined with the facts central to the merits of the dispute,’ the district court may ... resolve the jurisdictional facts in dispute by considering evidence ... such as affidavits.”) (citation omitted). Further, “[i]t is well established that before a federal court can decide the merits of a claim, the claim must invoke the jurisdiction of the court.” Miller v. Brown, 462 F.3d 312, 316 (4th Cir. 2006).

According to the district court, there was no doubt that Defendants raised a factual challenge to the allegations in the Complaint. In their Motion, they stated: “[The Insurers] moved to dismiss . . . for lack of subject matter jurisdiction because the amended complaint conceded the original plaintiffs were not, in fact, ‘named beneficiaries’ of the policy at the time of Mr. Germenko’s death, and, as such, the original plaintiffs lacked standing to file suit.” Thus, the court determined that the Motion raised a factual challenge to the Complaint.

The district court articulated that under 28 U.S.C. § 1441(a), a defendant may remove “any civil action brought in a State court of which the district courts of the United States have original jurisdiction, … to the district court of the United States for the district and division embracing the place where such action is pending.” Under 28 U.S.C. § 1447(c), if “at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded” to the State court. See also Roach v. W. Va. Regional Jail & Corr. Facility Auth., 74 F.3d 46, 49 (4th Cir. 1996). Accordingly, on removal, as in any other case, it must be shown not only that the district court has subject matter jurisdiction under one of the categories enumerated in Article III § 2, but also that that there exists a “case or controversy” within the meaning of the same section. More specifically, the case or controversy limitation “requires the litigant to prove that he has suffered a concrete and particularized injury that is fairly traceable to the challenged conduct, and is likely to be redressed by a favorable judicial decision.” Hollingsworth, 133 S. Ct. at 2662 (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)). “In other words, for a federal court to have authority under the Constitution to settle a dispute, the party before it must seek a remedy for a personal and tangible harm.” Hollingsworth, 133 S. Ct. at 2662.

Here, the district court found that Maryland law created and defined the Germenkos’ asserted contract right. Neither side asserted that the law of another state applied; to the contrary, both sides relied upon Maryland law for their arguments. Thus, under Maryland law, “[t]here can be no doubt that … the original named beneficiary” to an insurance policy “has standing as a third party beneficiary to sue for breach of contract.” Milbourne v. Conseco Servs., LLC, 181 F. Supp. 2d 466, 468 (D. Md. 2002). Under the facts of the case, it was undisputed that Mr. Germenko intended Higdon, as Trustee of the Trust, to be the named beneficiary, and that Mr. Germenko effectively executed the change in named beneficiary from the Germenkos to Higdon. With respect to the the contract claim, the analysis should be focused on whether the Policy was in effect at the time of Mr. Germenko’s death—i.e., whether any benefits were owed at all, not on the payee(s) of the benefits.

The district court found that Mr. Germenko’s choice to name Higdon, as Trustee of the Trust was more than a mere name-swap. By naming Higdon, rather than the Germenkos, Mr. Germenko expanded the number of persons to whom the benefits of the Policy would eventually flow, and prioritized the order of payment, turning the Geremenkos’ interests into contingent interests. According to the Trust Agreement, each of the originally named plaintiffs were eligible to receive some of the benefits of the Policy, but the benefits they might receive were conditioned on the prior satisfaction of payments to “the Grantor’s spouse” from the same fund. According to Plaintiff, “the Grantor’s spouse” at the time of the creation of the Trust and at Mr. Germenko’s death was a woman named Catherine Germenko, who was not one (1) of the original plaintiffs. In light of the fact that Mr. Germenko unambiguously intended to name Higdon, Trustee of the Trust, as beneficiary of the Policy, and that this change effectively made the Germenkos contingent beneficiaries to the Policy funds, Judge Hollander could not determine that Mr. Germenko intended to recognize the Germenkos as the “primary parties in interest” to the life insurance contract. Rather, when Mr. Germenko named the Trust as beneficiary to the Policy, the Germenkos became incidental beneficiaries to the Policy. Accordingly, Judge Hollander concluded that the Germenkos did not have standing as intended beneficiaries when they filed suit in State court, or when the case was removed to the district court.

Finally, even assuming that Maryland common law would recognize an exception as stated in § 107 of the Restatement to the general rule that only a trustee has standing to bring actions at law on behalf of a trust, there was no evidence that Catherine Germenko had disclaimed her interest in the funds at issue in a legally effective manner. Rather, per the Trust Agreement, the Germenkos’ interests were contingent on the fulfillment of certain conditions precedent related to Catherine Germenko’s Trust interest. Because it appeared that Catherine Germenko had neither claimed nor disclaimed that interest, the district court found that the Germenkos could not possibly be entitled to immediate disbursement of Trust funds. Accordingly, the Maryland district court concluded that when the case was filed, and when it was removed, the Germenkos did not have standing as Trust beneficiaries.

For these reasons, the Maryland district court granted Defendants’ Motion, in part. Judge Hollander opined that the Complaint and related submissions indicated that the Germenkos did not sustain an injury within the meaning of Article III, and, thus, the district court lacked subject matter jurisdiction to hear the case. Nonetheless, to the extent Defendants sought dismissal; the district court denied the request. Rather, pursuant to 28 U.S.C. § 1447(c), Judge Hollander remanded the case to the Circuit Court for Howard County for all further proceedings.