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Kehoe v. Pollack

Court of Appeals of Texas, Fourteenth District

July 11, 2017

KATHY KEHOE, IN HER CAPACITY AS TRUSTEE OF THE GRIST MILL TRUST WELFARE BENEFIT PLAN, Appellant
v.
JO POLLACK, JO M. POLLACK M.D., P.A., AND PENN MUTUAL LIFE INSURANCE COMPANY, Appellees

         On Appeal from the 189th District Court Harris County, Texas Trial Court Cause No. 2013-57704

          Panel consists of Chief Justice Frost and Justices Brown and Jewell.

          OPINION

          Kem Thompson Frost Chief Justice

         This appeal arises out of a dispute over ownership of a life insurance policy. A covered employee under an employee welfare benefit plan filed suit against an insurance company and others asserting misrepresentation claims and seeking a declaratory judgment. The insurance company responded by filing an interpleader action, in which the covered employee and the trustee of the benefit plan each asserted ownership of the policy. The trial court denied a special appearance and a motion to compel arbitration filed by the trustee. The trial court also granted the covered employee's summary-judgment motion, determining as a matter of law that the employee is the policy owner. The trustee of the employee welfare benefit plan brings this appeal. We conclude that the trial court did not err in denying the trustee's special appearance and motion to compel arbitration, but that the trial court erred in granting the employee's summary-judgment motion. We thus affirm in part, reverse in part, and remand.

         I. Factual and Procedural Background

         Appellee/plaintiff Jo M. Pollack M.D., P.A. (the "Professional Association") adopted, joined, and agreed to participate in the Grist Mill Trust Welfare Benefit Plan (the "Plan"), that, according to its terms, provides death benefits, as well as other welfare benefits to certain specified individuals. Appellee/plaintiff Jo Pollack, a medical doctor, is the sole owner of the Professional Association. Under the Plan, the Professional Association made contributions to the Grist Mill Trust (the "Trust") as trust funds to be held under and in accordance with the terms of the Plan. Pursuant to the Plan, these funds were invested in a Penn Mutual Protection Builder Policy, a life insurance policy with a benefit payable on the death of Dr. Pollack (hereinafter the "Policy"). The Policy states that the owner and beneficiary of the Policy are as provided in the insurance application, and the insurance application provides that the Plan is the owner and beneficiary of the Policy.

         According to Dr. Pollack, she believed that she was investing in a retirement plan, the contributions were tax deductible, and she would have access to the funds in the Policy at any time. She learned otherwise when the Internal Revenue Service ("IRS") audited Dr. Pollack and the Professional Association (collectively, the "Pollack Parties") and assessed interest and penalties on unpaid taxes. During the IRS audit process, the Pollack Parties learned that the Professional Association's contributions to the Plan were not tax deductible.

         Dr. Pollack invested in what the Pollack Parties claimed was a retirement savings plan. According to the Pollack Parties, through the Professional Association's contributions to the Plan, Dr. Pollack could contribute more money into the Plan than she could in a traditional 401k plan, take tax deductions for the contributions, and allow the money to grow tax free. To achieve the favorable tax benefits, all the money would be used to buy a life insurance policy, which would provide a tax-free death benefit and would be overfunded so that it built up a significant cash value that would grow tax free and would be used for Dr. Pollack's retirement or other needs. According to the Pollack Parties, the money Dr. Pollack contributed through the Professional Association would be used for Dr. Pollack's exclusive benefit, would be deposited at JP Morgan Chase Bank, and then paid to a prominent insurance carrier to deposit in the insurance policy that would insure Dr. Pollack's life. The terms of the Plan and other relevant documents differed significantly from Dr. Pollack's alleged understanding of the transactions.

         Contributions to the Plan

         The Professional Association contributed at least $750, 000 into the Plan from 2005 through 2010, of which $95, 000 was used annually to pay premiums for the Policy. Dr. Pollack took tax deductions equal to the amount of the annual contributions.

         IRS Action Against the Pollack Parties

         The IRS audited the Pollack Parties regarding the contributions into the Plan because the Plan had failed to comply with IRS regulations. The IRS held that the transaction was a non-deductible purchase of a life insurance policy and taxed Dr. Pollack on the premiums paid on the Policy and assessed interest and penalties.

         The Pollack Parties' Suit Against Penn Mutual

         In 2013, the Pollack Parties filed this suit against appellee Penn Mutual Life Insurance Company, the insurer under the Policy, and several other defendants, alleging that the defendants had made misrepresentations to induce the Pollack Parties into investing in the Plan. During the course of the litigation, the Pollack Parties nonsuited their claims against all defendants, except one whose special appearance the trial court granted. The Plan document contained a forfeiture provision, which stated that "[a]ny litigation brought against the Plan, or threatened against the Plan either on an individual or a classwide basis will result in the immediate termination from the Plan of the individual Participant(s) or Employer(s) bringing such action or litigation or threatening such action or litigation." So, the Pollack Parties did not sue the Plan or the Plan's trustee.

         The Pollack Parties asked the trial court to order Penn Mutual to recognize Dr. Pollack as the beneficial owner and beneficiary of the Policy or, alternatively, to award Dr. Pollack "an amount equal to the value and benefit of ownership of the [P]olicy."

         Notice of Termination from the Trust

         After the Pollack Parties filed the lawsuit, the Trust advised by letter that it was terminating the Professional Association, and Dr. Pollack as a participant, from the Trust pursuant to the Plan document "for threatening and instigating litigation against the Plan and its affiliates and attorneys as well as numerous other acts committed in bad faith against the Plan."

         Penn Mutual's Counterclaim and Third-Party Petition in Interpleader Against the Pollack Parties and the Plan

         Penn Mutual filed a counterclaim in interpleader against the Pollack Parties and a third-party petition in interpleader against Wayne Bursey, in his Capacity as Trustee of the Grist Mill Trust Welfare Benefit Plan. Penn Mutual claimed that it was an innocent stakeholder because Bursey, Dr. Pollack, and the Professional Association each were claiming to be the sole owner and beneficiary of the Policy. Penn Mutual pled that it was unconditionally tendering the "disputed contractual obligations coming due under the Policy to the Court's registry." Penn Mutual asked that the Pollack Parties and Bursey be required to assert their claims to ownership of the Policy in this case, that the trial court enjoin them from commencing any further action against Penn Mutual based on the Policy, and that the trial court render a declaratory judgment as to which party is the rightful owner of the Policy. The Pollack Parties answered the counterclaim, and Dr. Pollack asserted a claim that she is the Policy's owner and beneficiary.

         Bursey's Special Appearance and Motion to Compel Arbitration

         Bursey filed a special appearance in April 2014, contesting the trial court's personal jurisdiction over him as alleged in Penn Mutual's third-party petition in interpleader. A week later, Bursey filed a motion to compel arbitration and to stay the interpleader action, subject to the special appearance. Bursey based his filings on documents the Professional Association signed. Kathy Kehoe succeeded Bursey as Trustee of the Plan, and the trial court effectively allowed Kathy Kehoe, in her capacity as Trustee of the Plan (hereinafter "Kehoe") to substitute in Bursey's place as third-party defendant. The record does not reflect that Bursey or Kehoe has ever filed an answer to Penn Mutual's third-party petition or that either has ever asserted a claim that Bursey, Kehoe, or the Plan is the owner or beneficiary of the Policy. For ease of reference, we refer to Bursey or Kehoe as the "Trustee." In response to the Pollack Parties' summary-judgment motion, the Trustee asserted that the Plan owns the Policy.

         Penn Mutual's Discharge

         Penn Mutual moved for a discharge, requesting that the trial court (1) require the Pollack Parties and the Trustee to assert their respective claims to ownership of the Policy in the interpleader action in the trial court; (2) enjoin them from commencing or prosecuting any further actions against Penn Mutual on the Policy; (3) grant a declaratory judgment awarding ownership of the Policy to the rightful owner; and (4) release and discharge Penn Mutual from all liability to any party to the action on account of the matters relating to the ownership of the Policy. Penn Mutual's counsel certified that he had conferred with counsel for all parties to the interpleader action and that all parties were unopposed to the relief requested in the motion. Neither the Pollack Parties nor the Trustee responded in opposition to the motion for discharge.

         The trial court granted the motion for discharge and (1) ordered that all claims against Penn Mutual be dismissed with prejudice; (2) discharged Penn Mutual from all liability with respect to the Policy, except for "express contractual obligations contained within the Policy and accruing to the person(s) whom the Court shall adjudge is entitled to ownership of the Policy at issue"; and (3) restrained the Pollack Parties and the Trustee from instituting any action against Penn Mutual for the recovery of the ownership or surrender value of the Policy, or any part thereof.

         Summary Judgment in Favor of the Pollack Parties

         The Pollack Parties filed a motion for partial summary judgment as to the ownership of the funds that Penn Mutual had tendered into the registry of the court, seeking to have the trial court declare Dr. Pollack the beneficial and equitable owner of the Policy's cash surrender value. The trial court granted the Pollack Parties' motion for partial summary judgment, (1) declaring that Dr. Pollack is the rightful owner of the interpleaded funds; (2) ordering Penn Mutual to tender the funds in the Policy to Dr. Pollack; and (3) ordering the clerk of the court to take all steps necessary to ensure compliance with the order.

         Special Appearance and Arbitration Denied

         On the same date and just before granting the Pollack Parties' summary-judgment motion, the trial court signed an order denying the Trustee's special appearance and motion to compel arbitration and an order denying the Trustee's objections to the Pollack Parties' summary-judgment evidence.

         Interlocutory Appeal

         The Trustee timely filed a notice of interlocutory appeal of the order in which the trial court denied the special appearance and denied the motion to compel arbitration. The Trustee further stated that if this court determined that the order granting the Pollack Parties' summary-judgment motion is a final and appealable judgment ...


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