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Massachusetts Mutual Life Insurance Co. v. Hiller

United States District Court, D. South Carolina, Greenville Division

September 29, 2017

Massachusetts Mutual Life Insurance Company, Plaintiff,
v.
Randall S. Hiller and A.E. Pennebaker Co., Inc., Defendants, Randall S. Hiller, Cross-Plaintiff,
v.
A.E. Pennebaker Co., Inc., Cross-Defendant.

          ORDER AND OPINION

         This matter is before the court on competing Motions for Partial Summary Judgment by Cross-Plaintiff Randall S. Hiller ("Hiller") and Cross-Defendant A.E. Pennebaker Co., Inc. ("Pennebaker"). (ECF Nos. 23, 35.) For the following reasons, the court DENIES Pennebaker's Motion for Partial Summary Judgment (ECF No. 23), and DENIES Hiller's Motion for Partial Summary Judgment (ECF No. 35).

         I. JURISDICTION

         The court has jurisdiction over this action pursuant to 28 U.S.C. § 1332. There is complete diversity between Plaintiff Massachusetts Mutual ("MassMutual") and Defendants Pennebaker and Hiller. (ECF No. 1 at 2.) The amount in controversy exceeds $75, 000. (Id.) This court retains jurisdiction over an interpleader insurance case, even if the cross-complaining parties lack subject matter jurisdiction, as long as the original plaintiff and defendants had subject matter jurisdiction. Leimbach v. Allen, 976 F.2d 912, 917 (4th Cir. 1992).[1]

         II. FACTUAL AND PROCEDURAL BACKGROUND

         Pennebaker is a small family-owned corporation. (ECF No. 23-1 at 2.) After several decades of being an independent manufacturer's representative, Mr. A.E. Pennebaker, under his corporate name, Pennebaker, began factoring accounts. (Id.) Factoring is the buying of unpaid invoices at a discount and collecting the sums due under the invoices. (Id.) Therefore, the seller, in need of the payments more quickly than the invoice terms provide, would receive money instantly from Pennebaker for invoices that would not be due for another 30, 60, or 90 days. (Id.)

         In the late 1970s, Mr. A.E. Pennebaker's son, Edward C. Pennebaker, began operating Pennebaker. (ECF No. 23-4 ¶ 11.) One of the factoring customers was Durham Mechanical Contractors, Inc. ("Durham"). (Id¶ 12.) Carla Durham was a principal of Durham. (Id. ¶ 13.) Unbeknownst to Mr. A.E. Penenbaker, Ed Penebaker, or Pennebaker, Durham began having severe financial difficulties. (Id. ¶ 14.)

         Durham began a fraudulent scheme wherein it would present for payment invoices to Pennebaker. (Id. ¶ 15.) These were fraudulent invoices that were on jobs that did not exist, for labor that was not expended, and material that was not used. (Id.) Pennebaker paid many fraudulent invoices until the scheme unraveled and came to light. (Id. ¶ 16.) In an effort to resolve the situation, it was agreed between Pennebaker and Durham that Durham would purchase life insurance policies covering the lives of its three principals, including Carla Durham. (Id. ¶ 17; ECFNo. 23-5.) The policies were purchased from MassMutual. (Id.) For purposes of this action, only the Carla Durham policy is at issue.

         In 1986, MassMutual issued policy number xxxx005, a term life insurance policy insuring the life of Carla Durham. (ECF No. 1 ¶ 10.) According to counsel for MassMutual, the materials relating to this policy were destroyed in the normal course of business in accordance with MassMutual's document retention policies on September 1, 2010, due to its cancellation and the issuance of its replacement as explained below. (ECF No. 23-6.) Therefore, it is unclear who the beneficiary was at the time of the issuance.

         On December 5, 1986, policy number xxxx005 was assigned to Pennebaker. (ECF No. 23-3.) On May 3, 1994, the beneficiary was changed to Hiller. (ECF No. 23-7.) Shortly thereafter, MassMutual's records indicate that Durham attempted to cancel the policy, but in denying this request, MassMutual identified that it had a legal obligation to recognize the rights of the assignee. (ECF No. 23-8.)

         On or about October 15, 1996, Pennebaker submitted to MassMutual an application to convert the term policy number xxxx005 to a whole life insurance policy. (ECF No. 1 ¶ 13; ECF No. 23-9.) On October 18, 1996, in response to the October 15, 1996 application, MassMutual issued policy number xxxx889 ("Policy"), a whole life insurance policy with a face value of $175, 000, insuring the life of Carla Durham. (ECF No. 1 ¶ 14.) The Policy also includes a Life Insurance Supplemental Rider with a value of $175, 000. (Id.) Policy number xxxx889 replaced policy number xxxx005. At the time of issuance, MassMutual's records indicate that the owner of the Policy was the insured, Carla Durham, the assignee of the Policy was Pennebaker, and the primary beneficiary of the Policy was Hiller. (Id. ¶ 15.) Although MassMutual's records are unclear, Pennebaker paid the Policy premiums until at least 2003. (ECF No. 23-9.)

         On January 12, 1990, a Decree of Foreclosure was entered by the Greenville County Master in Equity, ordering that Pennebaker was entitled to have its notes and mortgages foreclosed and the encumbered premises sold, with the proceeds applied toward the judgment. (ECF No. 23-4 ¶ 19.) The Master in Equity entered judgment against Clause F. Durham, Carla Durham, and Clause Anthony Durham in the amount of $ 1, 010, 969.45. (Id. ¶ 20.) After the judgment was entered, no money was realized towards the debt from the sale of the properties because the real estate was already underwater. (Id. ¶ 21.)

         Carla Durham died on April 29, 2015, in Greenville County, South Carolina. (ECF No. 1 ¶ 16.) At the time of Carla Durham's death, the owner of the Policy was Carla Durham, the assignee of the Policy was Pennebaker, and the primary beneficiary of the Policy was Hiller. (Id. ¶ 17-18.)

         On or about February 11, 2016, Hiller submitted a Life Insurance Claim Form to MassMutual requesting the life insurance proceeds due ...


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