374 F.3d 917 (10th Cir. 2004), 03-4086, Lifewise Master Funding v. Telebank

Docket Nº:03-4086.
Citation:374 F.3d 917
Party Name:LIFEWISE MASTER FUNDING, a Delaware limited liability company; Lifewise Family Financial Security, a Utah corporation, Plaintiffs-Counter-Defendants-Appellants, v. TELEBANK, now known as E Trade Bank, a federally chartered savings bank, Defendant-Counter-Claimant-Appellee.
Case Date:June 29, 2004
Court:United States Courts of Appeals, Court of Appeals for the Tenth Circuit

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374 F.3d 917 (10th Cir. 2004)

LIFEWISE MASTER FUNDING, a Delaware limited liability company; Lifewise Family Financial Security, a Utah corporation, Plaintiffs-Counter-Defendants-Appellants,


TELEBANK, now known as E Trade Bank, a federally chartered savings bank, Defendant-Counter-Claimant-Appellee.

No. 03-4086.

United States Court of Appeals, Tenth Circuit

June 29, 2004

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[Copyrighted Material Omitted]

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Thomas E. Plank, University of Tennessee College of Law, Knoxville, Tennessee, and Brent V. Manning, (Candice Anderson Vogel, with him on the brief, and Sammi V. Anderson, on the brief, Manning, Curtis, Bradshaw and Bednar, L.L.C., Salt Lake City, UT), for Plaintiffs-Counter-Defendants-Appellants.

Douglas P. Lobel, Arnold & Porter LLP, Washington, DC, Mark A. Glick, Parsons Behle & Latimer, Salt Lake City, UT, Patrick D. Conner, Morgan, Lewis & Bockius, LLP, on the brief, McLean, VA, and Barkley Clark for Defendant-Counter-Claimant-Appellee.

Before EBEL, KELLY, and McCONNELL, Circuit Judges.

PAUL KELLY, JR., Circuit Judge.

Plaintiffs-Appellants LifeWise Master Funding, LLC and LifeWise Family Financial Security, Inc. (collectively "LifeWise") appeal the district court's grant of judgment as a matter of law and summary judgment against them in their breach of contract claim against Defendant-Appellee E*TRADE Bank ("E*TRADE"). The district court held that (1) LifeWise failed to satisfy a condition precedent to E*TRADE's provision of funding under the contract, and (2) LifeWise failed to produce an admissible damages model attributable to its lost profits. We have jurisdiction pursuant to 28 U.S.C. § 1291. For the reasons stated below, we affirm.


A. Factual Background

LifeWise was in the business of lending money to terminally ill patients. The company began business in 1996 by acquiring the assets of a prior viatical company. V Aplt.App. at 2577. Its business plan involved making loans in the form of lines of credit to terminally ill borrowers who pledged their life insurance policies as collateral. When a borrower died, the amounts drawn from the line of credit were deducted from the value of the insurance policy, plus interest and fees.

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Effective December 31, 1998, LifeWise and E*TRADE's predecessor, Telebank, entered into a Funding Agreement that allowed LifeWise to obtain up to $200 million from Telebank over seven years. See I Aplt.App. at 239-88. This arrangement was also known as the "Facility." Under the Facility, Telebank would serve as LifeWise's long-term "takeout lender." This meant that when LifeWise made a loan, it would draw from its own funds or from its short-term lender, Bank One. XII Aplt.App. at 5319-21. Once it originated $1.75 million in loans, LifeWise would make a funding request from Telebank. Id. at 5321-22. LifeWise would sell its loans to a wholly-owned subsidiary, LifeWise Master, 1 which in turn obtained funds from Telebank, V Aplt.App. at 2578, and placed the policies in trust with Bankers Trust Company under a Trust Indenture, XV Aplt.App. at 6544-654. The sale of loans from LifeWise Family to LifeWise Master was governed by a Loan Sale Agreement. II Aplt.App. at 734-58. Later, when a borrower died, Telebank would first be paid in full from the proceeds of the life insurance policy, and then LifeWise would receive its interest and fees. V Aplt.App. at 2578-79.

The Funding Agreement imposed several conditions that the parties were to meet before any funding was required to be provided. Section 4.10 of the Agreement gave Telebank the right to determine whether LifeWise's general business operations were unsatisfactory to it, and if so, the reasons for the dissatisfaction were to be provided to LifeWise in writing in reasonable detail. 2 Additionally, Section 9.8(b) prohibited LifeWise from allowing any liens 3 to be placed on the policies that were placed in trust as collateral for Telebank's advances. 4

During 1999, the first year in which the Facility was in place, the arrangement ran smoothly. In January 2000, Telebank merged with E*TRADE Bank, and concerns were soon raised within E*TRADE about LifeWise's business operations. Various meetings were held in early 2000 between E*TRADE and LifeWise personnel.

On April 28, 2000, E*TRADE sent a letter to LifeWise invoking its right under

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§ 4.10 of the Funding Agreement to delay funding to LifeWise until it became satisfied with the general business operations of LifeWise. XV Aplt.App. at 6667-68. The one-and-a-half page letter addressed E*TRADE's dissatisfaction with LifeWise's low rate of loan production, failed marketing campaign, inability to attract investors, unrestrained spending, and overall losses. After E*TRADE's continued refusal to provide funding, LifeWise filed this lawsuit in June 2000.

B. Procedural Background

During pretrial proceedings, LifeWise submitted a total of four damages models to the district court. The first model was based on the written report of Mr. Merrill Norman, LifeWise's damages expert. I Aplt.App. at 309-63. Upon E*TRADE's motion in limine, V Aplt.App. at 2100-454, the district court excluded the testimony of Mr. Norman on the basis of Federal Rules of Evidence 403 and 702, and the rule set forth in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993), and Kumho Tire Co. v. Carmichael, 526 U.S. 137, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999). VIII Aplt.App. at 3530-43. LifeWise then presented its second damages model, based on the testimony of Mr. Mark Livingston, its Chief Executive Officer. Id. at 3567-97, 3695-727. This too immediately met with a challenge from E*TRADE, and the district court concluded that this second submission was also inadmissible under Rule 702, Daubert/Kumho, and New York law's reasonable certainty standard, see Schonfeld v. Hilliard, 62 F.Supp.2d 1062, 1071-72 (S.D.N.Y.1999), rev'd in part, 218 F.3d 164 (2d Cir. 2000). VIII Aplt.App. at 3841-47. At the district court's invitation, LifeWise submitted a third damages model, id. at 3735-840, 3848-924, which was met by E*TRADE's Motion for Summary Judgment for lack of damages, IX Aplt.App. at 3925-4132. Although the district court denied E*TRADE's motion, it rejected LifeWise's damages model, which was based on regression analysis, pursuant to Rule 702. XIII Aplt.App. at 5970-79. The district court gave LifeWise one final chance to produce an acceptable damages model. Id. at 6025-27.

LifeWise's fourth and final damages model was submitted to the district court on September 13, 2002. X Aplt.App. at 4501-647. As could be expected, E*TRADE once again moved for summary judgment on damages. XI Aplt.App. at 4898-5118. The district court took E*TRADE's motion under advisement and also ordered that the trial be bifurcated. XIV Aplt.App. at 6222-48.

Trial was held December 2-20, 2002, and focused primarily on LifeWise's main claim, that E*TRADE denied funding in bad faith for pretextual reasons unrelated to LifeWise's poor business operations. The jury rejected this claim, finding that E*TRADE's denial was not in bad faith, and LifeWise does not challenge this finding on appeal. XIII Aplt.App. at 5592-93. The jury also found, however, that E*TRADE's letter to LifeWise explaining its dissatisfaction with LifeWise's business was not sufficiently detailed. Id.

After the jury verdict as to liability, E*TRADE filed a motion for judgment as a matter of law, arguing that it had no obligation to provide funding to LifeWise because LifeWise violated § 9.8 of the Funding Agreement by placing liens on E*TRADE's collateral. XII Aplt.App. at 5294-402.

On March 5, 2003, the district court granted both of E*TRADE's pending motions. XIII Aplt.App. 5594-666. On the motion for judgment as a matter of law, the district court ruled that LifeWise violated Section 9.8 of the Funding Agreement

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by placing liens on the collateral that secured repayment of E*TRADE's funding advances.

On the summary judgment motion regarding damages, the district court held that LifeWise's September 13, 2002, damages model was unduly speculative under New York Law, unreliable and not helpful under Rule 702, and unduly prejudicial under Rule 403. The district court also held that LifeWise CEO Mark Livingston, its only designated expert, was not qualified under Rule 702 to testify to the September 13, 2002, damages model.

The district court entered judgment for E*TRADE on March 24, 2003. This appeal followed.


A. The Liens Issue

In early 1999, LifeWise asked its Chairman Michael Salzhauer for financial assistance. On April 1, 1999, LifeWise obtained a $5 million loan from Benjamin Partners ("BP"), a Salzhauer family partnership, by executing a Security Agreement, XV Aplt.App. at 6716-37, and a Note Purchase Agreement, id. at 6690-715. 5 In the Security Agreement, LifeWise Family granted BP a security interest in "all assets" 6 of LifeWise, including LifeWise's interests in the policies held by Bankers Trust that secured E*TRADE's advances. XII Aplt.App. at 5351. LifeWise does not dispute that liens were placed on the policies. XV Aplt.App. at 6736. On December 31, 2000, another Salzhauer family entity, Combined Partnership, was substituted as the secured party in the Security Agreement. 7 XII Aplt.App. at 5396-97.

E*TRADE did not discover the liens on the policies until after this lawsuit was filed, during the deposition of LifeWise's Chief Financial Officer, Mr. Syver Norderhaug. XV Aplt.App. at 6788-94. Three weeks later, on April 1, 2001, LifeWise and Combined Partnership executed an Acknowledgment and Confirmation. Id. at 6736-37. The document acknowledged that "LifeWise granted Combined Partnership a security interest in ... LifeWise's rights under certain Life Insurance Policies," but that "Combined Partnership wishes to disclaim any and all right, title or interest in the Life...

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