Opinion ID: 2995762
Heading Depth: 2
Heading Rank: 1

Heading: The Life Investors and Continental Policies

Text: As we just noted, the district court concluded that David was entitled to have a constructive trust imposed upon the proceeds of the Life Investors and Continental policies. In so ruling, it found that he had successfully proven the elements of fraud, constructive fraud, and promissory estoppel, and that on the equities his claim to the proceeds was superior to Linda’s. Linda counters that the district court, among other things, failed to assess the evidence under the proper legal standards, under which she claims she should have prevailed. The doctrine of constructive trust pits fundamental principles of property against equally fundamental principles of equity. Then-Judge Cardozo recognized the tension when he noted that “[a] constructive trust is the formula through which the conscience of equity finds expression.” Beatty v. Guggenheim Exploration Co., 122 N.E. 378, 386 (1919), quoted in A.W. Scott and W.F. Fratcher, The Law of Trusts, § 462 (1989). But the right to dispose of one’s propNo. 00-3910 7 erty is also firmly ensconced in our legal traditions, and so it is only “[w]hen property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, [that] equity converts him to a trustee.” Id. Illinois decisively favors the “property” side of the balance and recognizes a strong presumption that the named beneficiary of a life insurance policy is entitled to its proceeds. Travelers Ins. Co. v. Daniels, 667 F.2d 572, 573 (7th Cir. 1981). The presumption is not, however, irrebuttable: it can be overcome on equitable grounds if the contesting party can show that she was deprived of the proceeds by (1) fraud or constructive fraud, (2) breach of a fiduciary duty, or (3) duress, coercion, or mistake. Suttles v. Vogel, 533 N.E.2d 901, 904-05 (Ill. 1988); Smithberg v. Ill. Mun. Ret. Fund, 735 N.E.2d 560, 565-66 (Ill. 2000). The district court referred to this line of cases and properly focused on the three theories of fraud, constructive fraud, and promissory estoppel. The problem with its analysis arose at the next stage, when it considered the proper burdens of proof. The burden of proof on the issue whether a constructive trust should be imposed in this kind of case is a matter of state, not federal law. See, e.g., Shapiro v. Rubens, 166 F.2d 659, 666 (7th Cir. 1948) (applying Indiana’s “clear and convincing evidence” burden of proof); Ohio v. Four Seasons Nursing Centers of America, Inc., 465 F.2d 25 (10th Cir. 1972) (applying Oklahoma’s “clear and convincing evidence” burden of proof). Illinois courts have stressed that a party seeking to do so bears a heavy burden of proof. “The grounds for imposing a constructive trust must be so clear, convincing, strong, and unequivocal as to lead to but one conclusion.” Suttles, 533 N.E.2d at 905; Schultz v. Schultz, 696 N.E.2d 1169, 1173 (Ill. App. Ct. 1998). Each element of the wrongdoing giving rise to the constructive trust must be established by clear and convincing evidence. Rapp v. Bowers, 348 N.E.2d 529, 533 (Ill. App. Ct. 8 No. 00-3910 1976); see also Martin v. Heinhold Commodities, Inc., 643 N.E.2d 734 (Ill. 1992) (fiduciary relationship must be established by clear and convincing evidence). To be “clear and convincing,” the evidence presented must “leave[ ] no reasonable doubt in the mind of the trier of fact as to the truth of the proposition in question.” Parker v. Sullivan, 891 F.2d 185, 188 (7th Cir. 1989), citing Estate of Ragen, 398 N.E.2d 198, 203 (Ill. App. Ct. 1979). This heightened evidentiary burden exists to implement Illinois’s substantive law emphasizing the “paramount” right of property owners while they are alive to dispose of their belongings (including the proceeds of life insurance policies) as they see fit, even if their decisions impair a marital partner’s future interest in the property. Wood v. Wood, 672 N.E.2d 385, 388-89 (Ill. App. Ct. 1996) (title holder may dispose of home even if it might be considered marital property or spouse represented that it would be marital property); Schultz, 696 N.E.2d at 1173 (unless wife’s rights vested, husband was free to change beneficiary on life insurance “on his own whim if he reserved the right to do so.”). Applied too liberally, the device of a constructive trust could undermine these rules of private property rights. It is our obligation, sitting in diversity, to respect the balance Illinois has established. The task is especially delicate in a case like this one, where the party whose disposition of the property has been challenged is dead and thus cannot counter the surviving party’s version of the relevant events. See Parham v. Hughes, 441 U.S. 347, 365 n. 9 (1979). With few exceptions, therefore, see, e.g., Ziarko v. Ziarko, 318 N.E.2d 1 (Ill. App. Ct. 1974), parties that succeed in imposing a constructive trust on life insurance proceeds have powerful evidence such as a written agreement to show how the property was intended to be distributed. See Lincoln Nat’l Ins. Co. v. Watson, 390 N.E.2d 506 (Ill. App. Ct. 1979) (agreement to maintain life insurNo. 00-3910 9 ance in marital settlement agreement creates equitable right); Perkins v. Stuemke, 585 N.E.2d 1125 (Ill. App. Ct. 1992) (judicial decree ordering maintenance of life insurance creates equitable right); Smithberg, 735 N.E.2d at 566-67 (marital settlement agreement created vested contingent right in survivor benefit). Illinois has made this policy explicit for the case of prenuptial agreements regarding the disposition of life insurance policies: they must be in writing if they are to be enforceable. See, e.g., Illinois Uniform Premarital Agreement Act, 750 ILCS 10/3; Mina Lee v. Central Nat’l Bank & Trust Co., 308 N.E.2d 605 (Ill. 1974) (written document of oral prenuptial agreement sufficient to take agreement out of Statute of Frauds). Nothing in the district court’s opinion indicates that it evaluated David’s evidence under the required “clear and convincing” evidentiary standard. Had it done so, we conclude, the verdict in his favor could not have been sustained. To qualify for a constructive trust, David needed to establish fraud or constructive fraud, or to make out a valid claim of promissory estoppel. The record shows that he did none of these things. To establish his claim for fraud, David had to prove by clear and convincing evidence that Brenda assured him that he was (and would remain, to some unspecified degree) the named beneficiary of her policies even after she knew that he was not. Siegel v. Levy Org. Dev. Co., 607 N.E.2d 194, 198 (Ill. 1992) (setting out elements of common law fraud). To prevail on his constructive fraud claim, David had to prove by clear and convincing evidence that Brenda promised to provide for him through life insurance and that this promise, together with the trust he placed in her as his wife, imposed upon her a fiduciary duty to disclose any changes in her beneficiary designations. See In re Estate of Neprozatis, 378 N.E.2d 1345 (Ill. App. Ct. 1978) (constructive fraud results from act, statement, or omission that constitutes a breach of legal or equitable duty). Finally, his promissory estoppel 10 No. 00-3910 theory required him to establish (again under the demanding standard of proof) the existence of Brenda’s alleged unambiguous promise. See Cullen Distributing, Inc. v. Petty, 517 N.E.2d 733, 737 (Ill. App. Ct. 1987). Other than his own testimony about Brenda’s statements to him, David presented no direct evidence in support of any of these essential elements of his claim. The evidence is devoid of any writings suggesting the existence of the alleged oral agreement, either before or after Brenda began changing her beneficiary designations. Furthermore, not a single witness other than David mentioned an agreement or promise that David and Brenda had made to name one another as beneficiaries on their respective life insurance policies. Somewhat to the contrary, both David’s mother and his close friend and insurance agent admitted that neither David nor Brenda ever mentioned such an agreement. The only support the district court identified for a finding that the agreement existed beyond David’s testimony was (1) Brenda’s statements to friends and relatives that the children would be taken care of in the event of her death, and (2) the couple’s pattern of beneficiary designations starting just before the marriage in 1994. We find the latter two circumstances to be unhelpful at best: the “pattern” the court mentioned lasted just over two years and shifted during that time period, and the statement about providing for the children does not give any detail about who would be caring for the children or how this would be accomplished, and is consistent with a beneficiary designation of someone other than David. This leaves David’s testimony. While the admissibility of the testimony does not seem to be disputed, and is in any event controlled by the Federal Rules of Evidence, the weight to which the evidence was entitled is in part a function of the substantive law of Illinois. See Milam v. State Farm Mut. Auto. Ins. Co., 972 F.2d 166, 170 (7th Cir. 1992) (“where a state in furtherance of its substantive policy No. 00-3910 11 makes it more difficult to prove a particular type of statelaw claim, the rule by which it does this . . . will be given effect in a diversity suit as an expression of state substantive policy.”). The Illinois Supreme Court has long warned that testimony from interested parties regarding what a deceased individual has said is “subject to great abuse and will be carefully scrutinized when considered with the other evidence in the case.” Monninger v. Koob, 91 N.E.2d 411, 415 (Ill. 1950). The facts of Monninger are instructive here. There, the plaintiffs claimed that an oral agreement between spouses who had later died entitled the plaintiffs to certain assets that had been left to the defendants in the wife’s will. In order to prevail, the plaintiffs had to demonstrate the existence of the alleged oral agreement by “clear and satisfactory” evidence. Id. at 414. The Illinois Supreme Court upheld the dismissal of the plaintiffs’ complaint, emphasizing that the only evidence of the agreement was the testimony of interested parties regarding the statements of the nowdead husband and wife. Id. at 414-15. The court discounted the testimony even though in those suits (unlike our case) there were several non-party witnesses, including the attorney who helped the couple draft their wills, who gave consistent and often detailed descriptions of the terms of the alleged agreement. Id. See also Harper v. Kennedy, 153 N.E.2d 801 (Ill. 1958) (testimony of interested family members insufficient to establish agreement even where supported by written document that could be read as consistent with alleged agreement). The testimony here fell far short even of the records that the Illinois Supreme Court found insufficient in Monninger and Harper. David had not a single corroborating witness. His testimony at trial about the terms of the alleged agreement and its persistence throughout the marriage was general, conclusory, and, when it came to specifics, inconsistent. About the terms of the agreement, he could say 12 No. 00-3910 only that Brenda and he “were to provide for each other through the purchase and maintenance of life insurance.” Beyond that he simply asserted that each of the beneficiary designations up until the late summer of 1996 was in furtherance of the agreement. Asked whether the agreement called for him to be the “sole” beneficiary of his wife’s policies, David’s sworn answers changed from no to yes and back to no over the course of the proceedings. On the subject of whether Brenda confirmed the agreement in any way during the marriage, either before or after her alleged breach, David could say only that he and Brenda had “discussed . . . plans regarding life insurance . . . when our children were born, [and] when the premiums were due.” Later he added that they sometimes confirmed their agreement “when [they] were out having fun or at home having fun.” When asked to give specific examples of those statements, David offered only that in December of 1997 he had asked whether everything was okay with the insurance and she said it was. In our view, given the strength of the substantive preference Illinois has for enforcing written beneficiary designations only, this evidence was insufficient as a matter of law to justify overriding the written policies.