After a lengthy court battle, Lincoln National Life Insurance Co. will be permitted to keep $33 million in life insurance premiums it collected from an Oklahoma State University athletic fund program that eventually went bust.
A March 9 decision by Judge Jorge A. Solis in the U.S. District Court for the Northern District of Texas in Dallas ends two years of bitter litigation. The dust-up pitted OSU's Cowboy Athletics Inc. and billionaire T. Boone Pickens against Lincoln National and insurance agents James Glenn Turner Jr., John Ridings Lee and Larry Keith Anders.
The case goes back to 2005, when representatives from the Cowboy Athletics nonprofit charity, Mr. Pickens and the three agents developed a program called The Gift of a Lifetime. The program was intended to raise funds for the athletic department at OSU, which is located in Stillwater.
The Gift of a Lifetime program purported to create as much as $350 million in a future income stream through the purchase of life insurance policies on 27 OSU alumni donors 65 to 85.
An annual $16 million premium payment for the policies was to be covered by a premium finance loan. That loan then would be repaid using the death benefits from the policies, and any excess would go toward building the fund's income stream.
Trouble started in 2007, however, when the coverage on the 27 individuals kicked in. Mr. Lee allegedly faxed the policy delivery receipts to J. Mike Holder, president of Cowboy Athletics, confirming that the athletic fund had received the policies.
Mr. Holder signed and returned the receipts but never read them, according to the court order.
The fund then paid about $16 million in premiums in 2007 and again in 2008.
In January 2009, university president Burns Hargis asked an alumnus in the insurance industry to analyze the policies, according to the court order. After several requests to the brokers, Cowboy Athletics received the policies March 24, 2009, and then asked April 3 to cancel the coverage under the 10-day free-look provision. It requested that the total paid in premiums — $33.3 million — be returned, according to the court order.
In their suit, Cowboy Athletics and Mr. Pickens claimed that OSU had paid inflated costs for coverage on the lives of the 27 donors and that the insurance agents had failed to deliver the physical policies in a timely manner. Lincoln, meanwhile, argued that its policies were valid and that the insurer was entitled to the premiums.
Mr. Solis found that even though Mr. Lee still held the policies and Mr. Holder signed off on the delivery receipts without having physical possession of the contracts, both the charity and Lincoln treated the policies as being valid from the time that they were issued in 2007 because the fund paid the premiums, and Lincoln issued annual policy statements.
The judge noted that Mr. Holder had admitted that the fund “could have obtained the policies at any time but simply chose not to until 2009.”
The judge allowed Lincoln to keep the premium payments Cowboy Athletics made in 2007 and 2008.
The court dismissed a slate of claims made by Cowboy Athletics, including a claim of negligent misrepresentation against the agents and Lincoln. The athletics fund claimed that it was a victim of fraud and that the brokers misrepresented information on the policies' net return.
The judge found otherwise.
“Contrary to Cowboy's assertion, however, there is evidence that the program was created by Mr. Pickens, Cowboy and the brokers,” Mr. Solis wrote, noting that there was proof indicating the officials at the athletics fund had done some analysis on their own.
The judge noted that Cowboy Athletics contracted for a due-diligence report that contained recommendations on life expectancy rates and premium-financing issues.
Mr. Solis also stated that while Cowboy Athletics knew that there would be difficulties in obtaining premium financing, the brokers had notified the athletic fund that it took a risk in following through with the charitable-life-insurance program.
Executives at the athletics fund decided to proceed anyway, according to the order.
The judgment will require Cowboy Athletics to cover costs incurred by Lincoln and by the other defendants in the case.
WARNED ABOUT RISKS
“We are obviously pleased with the court's ruling. We have maintained from the beginning that Mr. Turner not only did nothing wrong but repeatedly warned Cowboy Athletics about the very risks they later complained about in the lawsuit,” said Clinton Howie, an attorney at Stacy & Conder LLP who represented Mr. Turner in the case.
“Our clients are elated by the court's opinion,” said William A. Brewer III, partner at Bickel & Brewer, counsel for Mr. Anders and his firm, Summit Alliance Financial. “It validates their belief that plaintiffs' claims lacked merit.”
Attorney Joel W. Reese, representing Mr. Lee, said he is “very pleased” with the outcome of the suit, and noted that the result in this case will likely bar a related case in state court in Oklahoma from going forward.
Officials at OSU had a different reaction.
“We are surprised and disappointed with the judge's ruling,” said spokesman Gary Shutt. “We are reviewing the opinion and assessing our options, including a possible appeal.”
A call to attorney Timothy J. Morris, who is representing Mr. Pickens and Cowboy Athletics, wasn't returned.
Calls to Lincoln National representatives Ayele Ajavon and Laurel O'Brien weren't returned.
Cowboy Athletics, which also runs a golf course and dining facilities for OSU, recorded an operating loss of $2.6 million in 2010.
dmercado@investmentnews.com
