### In the 

# United States Court of Appeals For the Seventh Circuit

____________________

No s

. 14

- 3664, 14

- 3725
O HIO N ATIONAL L IFE A SSURANCE C ORP ., Plaintiff

- Appellee / Cross

- Appell ant ,

v.

D OUGLAS W. D AVIS , et al

. , Defendant s

- Appell ants , a nd S TEVEN E GBERT , Defen dant / Cross

- Appellee

.

____________________
On a ppeal s from t he United States District Court for the Northern District of Illinois, Eastern Division

. No. 10 C 2386

— Thomas M. Durkin , Judge

.

____________________
A RGUED S EPTEMBER 16 , 2015

— D ECIDED O CTOBER 20 , 2015

____________________

Before B AUER , P OSNER , and E ASTERBROOK , Circuit Judges

. P OSNER , Circuit Judge

. This diversity suit presents cha llenging issues of Illinois insurance law concerning what is called “stranger

- originated life insurance” (STOLI , as th e c ognoscenti call it ). The district court resolved the case at the2 No s

. 14

- 3664, 14

- 3725

summary judgment stage in favor of the plaintiff, the insu rance com pany Ohio National, awarding it damages of $726,000 (we round all figures to the nearest $1000) against all the defendant s but Egbert, whom the court awarded the $91,000 that he had paid the company in premiums . The d efendants (other than Egbert) have appealed the denial of their motion to vacate the summary judgment in favor of Ohio National , and Ohio National has appealed the award to E g bert. A preliminary matter: The d efendants claim to have been prejudiced by Ohio National ’s violation of Local Rule 56.2 of the Northern District of Illinois . The rule requires a party moving for summary judgment against a pro se litigant to inform his opponent of the procedures for complying with Fed. R. Civ. P. 56

. Timms v. Frank , 953 F.2d 281, 28 5

– 8 6 (7th Cir. 1992 ). The defendants argue that the lack of notice pr evented them from mounting an effective defense to Ohio National ’s m o tion for summary judgment

. The district court disagreed , ruling that the defendants had not been prej udiced because they’d eventually been able to submit the ev idence they thought necessary for an effe c tive defense and that evidence had not altered the judge’s bel ief that Ohio N ational was entitled to summary judgment. The judge’s r esponse was proper. The facts are complicated (the briefs occupy 15 0 pages, and the district judge’s commendably thorough two opi nions occupy 50 pages)

. Defendant Mavash Morady, an i nsur ance agent, contracted with Ohio National to sell life i nsurance poli ci es issued by it

. Defendant Douglas Davis, a lawyer formerly licensed in California , approached elderly pe r sons and persuaded them to become the nominal (in aNo s

. 14

- 3664, 14

- 3725 3

sense to be explained) buye rs of the policies , with M a vash Morady as the insurance agent. Davis promised to pa y these persons small amounts of money for obtaining pol i cies , and in exchange for the promise s they filled out applic a tion s for life insurance. A typical such buyer was Cha rles M. Bon aparte , Sr . His application was accepted, the policy was i ssued to him, and the defendants had him place the policy in the Charles M. Bonaparte Sr. Irrevocable Life Insurance Trust (which they created) , designating the trust as the po l icy’s owne r and beneficiary . This was an i rrevocable trust , with Davis as tru s tee

. The defendants paid (in the name of the trust) the premiums on the insurance policy; Bon a parte paid nothing.
Life insurance trusts are nothing new; they are a familiar way of shieldin g the proceeds of a life insurance policy from liability for estate tax

. See Jon J. Gallo, “The Use of Life I nsurance in Estate Planning: A Guide to Planning and Draf ting

— Part I,” 33 Real Property , Probate & Trust J. 685, 7 28

– 29 ( 1999). The wrinkle her e is that the defendants were creating trusts in the names of the insured in order to conceal from Ohio National the fact that they rather than the insured co ntrolled the policy and that they planned to sell it as an i nvestment

. The need for concealment arose from the fact that an insurance policy would be more valuable to an investor the sooner the insured could be expected to die and ther efore the proceeds of the policy realized, but by the same t oken more costly to the insurance company because it would

rece ive fewer pr e miums and have to pay the policy proceeds sooner. In addition, controlling as they did the insurance applications, the defendants could conceal some of the vu lnerabil i ties of the (nominal) insured

— make him appear4 No s

. 14

- 3664, 14

- 3725

more pro s perous, healthier, an d in short likelier to live a long er time than was realistic to expect

. The defendants needed a real person to be the insure d

— they targeted elderly people because of their diminished life expectancies and African

- American s because the average life

e x pectan cy of an African

- American is shorter than that of other Americans

— whose death would trigger the death benefits. The reason the insured had to be a real person is that p roof of death is necessary to collect life insurance pr oceeds

. Presumably the defendants arranged with the insu r eds to have the family of an insured give the defendants a copy of the death certificate upon his or her death

. B y having a real person buy a policy insuring his life , the defendants were trying to appear to comply with the legal

re quirement , discussed below, that one who buys an insu rance policy must have an interest in the continued life of the insured rather than in his early death. Ohio National pr esumably does some research to make sur e its insureds are real people , although it didn ’ t do enough to discover and protect i t self against what the defendants were doing

. So the defendants had named Bonaparte’s trust the

“ Charles M. Bonaparte Sr. I r revocable Life Insurance Trust ” in order to hide the fact that Bonaparte’s life insurance po l icy was financed by a third party. For to the insurance co mpany it looked like a normal insurance transa c tion

— it’s common for people to create life insurance trusts, with the life

- insurance policy as the trust’s asset b e cause , as we sai d , there are tax benefits. But the d e fendants in this case were creating life

- insurance trusts to hoodwink Ohio N a tional.No s

. 14

- 3664, 14

- 3725 5

Although each trust was the beneficiary of an insurance policy, the trust documents would list either member s of the insured’s family or the insured’s other trusts as the trust b eneficiaries , thereby also making them the beneficiaries of the policy, since the policy was the trust’s asset

. A few weeks or months after the creation of each trust, ho w ever, Davis would have the nominal buyer of the policy ( su ch as Charles Bonaparte) a s sign the beneficial interest in the trust (and therefore in the polic y) to a company owned by another d efendant , Paul Morady, Mavash Morady’s husband

. Paul would make the initial premium payment s to Ohio National but then re sell the beneficial interest in the trust to an inve stor who hoped that the i n sured would die soon, for upon his death the investor would obtain the pr o ceeds of the polic y because he now was its beneficiar y

. Ha v ing acquired the beneficial inter est in the policy the investor would pay the remaining premiums as they came due

. ( D e fendant Steven Egbert was one of the inve s tors ; at the end of this opinion we discuss his special st a tus in the case

. ) Ohio National would not have sold the policies to the persons recruit ed by th e defendants had it known that the premiums would be paid or financed by an unr e lated third party (an investor) in the expectation that the policy would be tran s ferre d to him. The company’s contracts with its agents , such as Mavash Morady, required them to conform to its business

- practice advisories, which contained an “a bsolute prohibition against participation in any type of pr emium f i nancing scheme involving an unrelated third party ”

— an e x act description of the defendants’ stranger

originated lif e insu r ance scheme.6 No s

. 14

- 3664, 14

- 3725

A n insurance policy on a person’s life generally is void if the person did not consent to the issuance of the policy. See Bajwa v. Metropol i tan Life Ins. Co ., 804 N.E.2d 519, 526

– 29 (Ill. 2004). For remember that the beneficiary of a li fe insurance policy has a financial interest in the insured’s dying as soon as po s sible, not only because this minimizes the amount of premiums the beneficiary has to pay, s ee Susan Lorde Ma rtin, “Betting on the Lives of Strangers: Life Settlements, STOLI , and Securitization,” 13 U. Pa. J. Bus iness L aw 173, 173

– 74 (2010) , but also because of the time value of money

— a given amount of money is worth more if received today than if received a year from now , because if r e ceived today it can be invested and as a result it probably will be worth more in a year. So the requirement of consent protects the prospective i n sured ; he is unlikely to consent to someone becoming the beneficiary if he suspects that person of wan ting to shorten his life

. Along with the potenti al for foul play if a person is a llowed to have his life insured by whoever wants to own a policy on his life, courts are concerned with the unseeml iness of gambling on when a person will die . B ecause of both concerns, one can’t take out a life insurance p olicy on a pe rson unless one has an interest, financial or otherwise, in the life of the insured rather than in his early death. Grigsby v. Russell , 222 U.S. 149, 155 (1911) (Holmes, J.).Although the defendants did not attempt to off the insu r eds, they di d target as nominal buyers individuals who they thought would have short life expectancies , and, as we said, made them appear to have better survival prospects than they did . Paul Morady te s tified that he “niched in African

- Americans” and that “ Afr i can

- Am e ricans have ... short-No s

. 14

- 3664, 14

- 3725 7

er life expectancy t han white Americans; therefore, the sale of their ben eficial interest should be more attractive ” to inve s tors. In addition, t he defen dants gave the insurance applic a tions, including health information about the insure ds , to prospective inve s tors (prospective buyers of the beneficial interests in the i n surance policies ) , thus enabling potential investors to calculate the expected value of such an inves tment

. Despite the fact that purchasers of a life insurance policy

as an investment also have a financial stake in the insu r ed ’s early death (the stake is at its maximum if the insured dies before the investor pays his first premium), the law allows

an investor to purchase the beneficial interest in an e x isting policy on th e life of the insured. Hawley v

. Aetna Life Ins. Co ., 125 N.E. 707, 708

– 09 (Ill. 1919). T here are social benefits , thought to exceed the social costs discussed above, to these
tran s actions. The owner of the policy may have a desperate need for money; the p olicy may be his only substantial asset; and if he’s elderly or in very poor health the present value of that asset may be substantial and he may have a pressing i nterest in being able to cash it in by selling the beneficial i nterest . And provided that the procurer of the policy ha s an insurable interest, he can designate as the beneficiary som eone who does not have an insurable interest

. Bajwa v. Metr opolitan Life Ins. Co ., 776 N.E.2d 609, 617 (Ill. App. 2002) , a ffirmed ( as mod i fied on other grounds), 804 N.E.2d 519 (Ill. 2004)

. Under the terms of the policies in this case, the owners alone had the right to ch ange the beneficiarie s. Cf. 4 St e ven Plitt et al., Couch on Insurance § 60:15 (3d ed. rev. 2015) (“ w hen the insured is not the owner of the policy, th e i n-8 No s

. 14

- 3664, 14

- 3725

sured has no power to change the beneficiary as th at power resides in the owner ”). The owners were the i rrevocable life insurance trusts , with Davis manag ing the policies as the
trustee

. Although family members , or other trusts , of the i nsu r eds were li sted as the trust beneficiaries, the beneficial inte r est s were transferred to Paul Morady’s company within a few months of the creation of the trusts, through contracts prepared by Davis and signed by the i n sured s and the trust beneficiaries

. T he insureds merely lent their names to the i nsurance applications, in exchange for modest compensation, and the defendants forthwith transferred control over (effe ctively ownership of) the policies to themselves . The defe n dants, who had no interest in the i n sureds’ li ves (as distinct from their deaths) , initiated, paid for , and controlled the policies from the outset

. W hile “a man who purchased insurance on his own life could validly assign or sell the policy to a person lacking an insurable interest in the i n sured’s l ife, ... ‘ cases in which a person having an interest lends himself to one without any, as a cloak to what is, in its inception , a wager, have no sim ilarity to those where an ho n est contract is sold in good faith’ to a stranger.” PHL Variable Ins. Co. v. Bank of Utah , 780 F.3d 863, 867

– 68 (8th Cir. 2015) (e m phasis in original) , quoting Grigsby v. Russell , supra , 222 U.S. at 156

. Our case is not one in which “ a policy was procured in good faith by the person hi mself to be assigned thereafter,” but instead one “ in which the policy was procured by a person who had no insurable interest in the life of the person i n sured, thus making [it] a wager contract .” Ha w ley v. Aetna Life Ins. Co. , supra , 125 N.E. at 708.No s

. 14

- 3664, 14

- 3725 9

It’s true that PHL ( decided under Minnesota law ) held
t hat a stranger

- owned life insurance policy was not void for lack of an insurable interest . B ut there the resemblance b etween that case and this one ends

. In PHL a man had bought a $5 million insurance policy on his own life with the pr oceeds of a premium

- f inancing loan that he o b tained from a bank with the intention of later selling the policy to an inve stor . He owned the policy for two years , at the end of which period, not having sold it, he surre n dered it to repay the loan . Thus the pu r chase of the polic y was not “a mere cover for taking out insurance in the begi n ning in favor of one without [an] insurable in terest, ” PHL Variable Ins. Co. v. Bank of Utah , s u pra , 780 F.3d at 865

– 66, 869 , quoting Peel v. Reibel , 286 N.W. 345 , 346 ( Minn. 1939) , b e cause the i nsured owned and controlled the policy before attempting to sell it

. T he i nsureds ’ family members in the present case retained benef icial interests in t he policies only briefly and n ever co n trolled the trusts . The insureds were the defendants’ puppets and the policies were bets by strangers on the insureds’ longe v ity

. Consistent with the authorities cited above, the common law of Illinois, which fu r nishes the rule of decision in this case, has for at least a century and a half prohibited the pu rchase of an insurance policy by a person who has no interest in the survival of the insured

. See Guardian Mutual Life Ins. Co. v. Hogan , 80 Ill. 35 , 44

– 46 (1875)

. Arrang e ments like the defendants’ STOLI scheme are now prohi b ited by statute as well, see 215 ILCS 159/50 (a), 159/5, though these provisions, enacted in 2009, were not yet in effect when the policies cha llenged in this case were i s sued.10 No s

. 14

- 3664, 14

- 3725

The district court found that Mavash Morady’s conduct constituted fraud and a breach of her contract with Ohio N ational and awarded the insurance company as damages the $120,000 that she had received as commissions as an insu rance agent for the co m pany

. She admitted knowing that the premiums on the di s puted policies would be paid by her husband, who had no interest in the conti nued life of the i nsured s and planned to sell the policies to investors

. Such premium

- financing a r rangements were forbidden by her contract with Ohio National because as we pointed out ea r lier the defendants’ scheme hurt the company

. Mavash M o rady argues t hat she wasn’t responsible for the false stat ements on the applic a tions for the insurance policies

— rather, one of her employees commun i cated with the insureds and completed the forms. Yet her signature a p pears on the forms, which mor e over include informati on that she knew

was false

— for example , statements that she knew the i nsured persons . She knew none of them

. Mavash Morady was only one defendant , and the da mages awarded Ohio National were not limited to her fraud ulent conduct, but were based more broadly on the tort of civil conspiracy, which is committed “when two or more people combine to accomplish, through concerted action, e i ther an unlawful act or a lawful act in an unlawful manner.” Multiut Corp. v. Draiman , 834 N.E.2d 43, 51 (Ill. App. 2005) ; see also Adcock v. Brakegate, Ltd. , 645 N.E.2d 888, 894 ( Ill. 1994)

. The defendants conspired to violate Illinois’ common law prohibition against insurance contracts procured by pe r sons who don’t have an insurable interest . The defendants a r gue that they didn’ t know that such contracts are illegal . That is hard to believe but in any event ignorance of the law is noNo s

. 14

- 3664, 14

- 3725 11

d e fense (with some exceptions, none applicable to this case however).
Ohio National was the target of the conspiracy. The d efendants conceal ed the f act that the y, rather than the insu r ed s , controlled the insurance policies from the outset by lis t ing the irrevocable trusts as the owners , and that theywould use their control to transfer income from the insurance co m pany to themselves and their investor s by accelerating the receipt of insurance proceeds by their choice of the insu r eds and by false representations of the insureds’ life expectancy

. The net loss that the scheme ended up causing Ohio N a tional (b e yond the commissions paid to Mavash Morady ) co nsisted of the more than $605,000 that the company i n curred in litigation expenses to void the pol i cies in order to thwart efforts by the investors to collect policy proceeds upon the death of the insured s (persons to whom Ohio N a tional would never have so ld policies at normal premiums had it known in whose hands the ownership of the policies would end up) . The total death benefits specified in the ill e gal pol i cies amounted to $2.8 million , and Ohio National faced the prospect of being sued for those benefi ts when the persons insured by the policies died. By voiding the policies the insurance co m pany accelerated its defense against the claims that the investors were bound to make when the i nsureds died.
Of course generally the victor i ous party to a lawsuit c an’t charge his litigation expenses to the loser. But that is not what Ohio National is doing. It is seeking reimbursement of
t he expenses it ha s incurred in this litigation in order to avoid future lit i gation over the death benefits in the policies that i t was fraudulently induced to issue . “[W ] here the12 No s

. 14

- 3664, 14

- 3725

wrongful acts of a defendant in v olve the plaintiff in litig ation with third parties or place him in such relation with others as to make it ne cessary to incur expense to protect his interest, the plai n tiff can then reco v er damages against such wrongdoer, measured by the reasona b le e xpense s of such li t igation, incl uding attorney fees.” Ritter v. Ritter , 46 N.E.2d 41, 44 ( Ill. 1943) ; see also National Wre ck ing Co. v. Coleman , 48 7 N.E.2d 1164, 1166 (Ill. App. 1 985) ; Sorenson v. Fio Rito , 4 13 N.E.2d 47, 5 1

– 5 2 (Ill. App. 1980) ; cf. Nalivaika v. Murphy , 458 N.E.2d 995 , 997 ( Ill. App. 1983) ; Fednav Intern a tional Ltd.

v. Continental Ins. Co. , 624 F.3d 834 , 840 (7th Cir. 2010) ; R estatement (Second) of Torts § 914 (2) ( 1979)

. It’s true that Ohio National hasn’t been forced into litig ation with those other parties, and that under Illinois law “where an action based on the same wrongful act has been prosecuted by the plaintiff against the defendant to a su ccessful issue, h e can not in a subsequent action recover, as da m ages, his costs and expenses in the former action.” Ritter v. Ritter , supra , 46 N.E.2d at 44

. But the exception carved by Ritter in the passage we quoted earlier covers this case. The defendants’ misconduct p laced Ohio National in the p o sition of potentially having to litigate with the purchasers of the insurance policies upon the death of the insureds , and the expenses it incurred in the present suit to avoid such litig ation by voiding the policies were in li eu of the future litig ation that it would otherwi s e have had to en gage in at co nsiderable expense. It paid in advance , as it were , the e x penses “in litigation with third parties ... necessary to

... protect [its] inte r est,” to quote from the Ritter opinion.
S o Ohio National gets its attorney ’ s fees but also gets to keep the premiums paid by the defe n dants (except Egbert,No s

. 14

- 3664, 14

- 3725 13

as we’ll discuss) on the voided policies and as a result ends up with more money than if these contracts had never e x isted. The amount the de fendants paid is in dispute. The d efendants say they paid $438,000 in premiums on the di s puted policies ; Ohio National says they paid $105,000 ; but

w hatever the amount, the company is entitled to retain the pr e miums along with the attorney ’ s fees

. B eing to blame for the illegal contracts the defendants have no right to recoup the premiums they paid to obtain them; allowing recou pment would, by reducing the cost, increase the likelihood of unlawful a c tivity.
One issue remains to be discussed. Steven Egbert, a d efendant but not one of the conspirator s , had purchased the beneficial interest in one of the stranger

- originated life i nsurance policies as an investment , and to preserve his ben eficial interest until the death of the insured (that is, to pr event the i nsurance policy from lapsing) had paid the r equired prem i ums, amounting to $91,000, to Ohio National. He filed a cross

- motion for summary judgment asking the district court to declare the policy valid or in the alternative
to order the i n surance company to return his premiums . T he district judge complied with the latter request

. The prem iums were being held by the district court in escrow, and so the judge simply ordered the premiums sought by Egbert distributed to him from the escrow. The company asks us t o reverse the judge’s order , arg uing that Egbert knew or should have known that he had bought an interest in a void contract. Generally when a n i llegal contract is void ed , the pa r ties “ will be left where they have placed themselves with no recovery of the money paid for illegal services.” Gamboa v. Alvarado , 941 N.E.2d 1012,14 No s

. 14

- 3664, 14

- 3725

1017 ( Ill. App. 2011) , quoting Ransburg v. Haase , 586 N.E.2d 1295, 1298 (Ill. App. 1992) . But there is an exception for the case in which the party that made the payments is not to blam e for the i l legality. Id. There is no evidence that Egbert knew the polic y was void and , as we’ve said , the assignment of an insurance policy to an i n vestor is not itself unlawful

. Had he known it was void he would not have paid the pr emiums. They were int ended to compensate the co m pany for having to pay the death benefit to the policy’s ben e ficiary (Egbert) when the insured died. S ince the policy was void from the outset through no fault of his , the prem i ums were not an offset against the proceeds to the p olicy’s ben e ficiary, because there would be no proceeds

. Retention of the pr emiums would thus have been a windfall for Ohio Na tional to which it had no entitlement. See Seaback v. Me t ropolitan Life Ins. Co. , 113 N.E. 862, 864 ( Ill. 1916) (“ when a po l icy of insurance never attaches and no risk is assumed, the insured may r e cover back the premiums unless he has been guilty of fraud or the contract is ill egal, and he is in pari delicto ”). E gbert paid substantial prem i ums and got nothing in return. He caused no harm , as he was not involved in the conspi r acy . The company would be unjustly enriched if a l lowed to keep his $91,000. The entire judgment of the district court is therefore
A FFIRMED

.