American United Life Ins. Co. v. Martinez

• Decision Date: 07 March 2007
• Docket Number: No. 05-14920.,05-14920.
• Citation: 480 F.3d 1043
• Parties: AMERICAN UNITED LIFE INSURANCE CO., Amerus Life Insurance Company, et al., Plaintiffs-Appellants, v. Roberto MARTINEZ, Court-Appointed Receiver, Mutual Benefits Corporation, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

480 F.3d 1043

AMERICAN UNITED LIFE INSURANCE CO., Amerus Life Insurance Company, et al., Plaintiffs-Appellants, v. Roberto MARTINEZ, Court-Appointed Receiver, Mutual Benefits Corporation, et al., Defendants-Appellees.

No. 05-14920.

United States Court of Appeals, Eleventh Circuit.

March 7, 2007.

Susan J. Stauss, Stephen C. Baker, Jason P. Gosselin, John B. Dempsey, Drinker, Biddle & Reath LLP, Philadelphia, PA, Wendy L. Furman, Pett, Furman & Jacobson, PL, Boca Raton, FL, for Plaintiffs-Appellants.

Curtis B. Miner, Colson, Hicks, Eidson, Coral Gables, FL, for Defendants-Appellees.

Appeal from the United States District Court for the Southern District of Florida.

Before PRYOR and FAY, Circuit Judges, and STEELE,^* District Judge.

FAY, Circuit Judge:

The appellants, seventeen insurers that filed an ancillary tort suit in a Securities and Exchange Commission ("SEC") action against a group of viatical settlement companies, challenge the dismissal of their amended complaint. A viatical contract is an agreement to purchase life insurance benefits from a viator, a policyholder who is terminally ill or of advanced age. The original policyholder sells the rights to his policy for a fraction of what the policy would pay upon his death, realizing an immediate return on an otherwise illiquid asset. The insurers alleged that the appellees, three viatical settlement companies and their court-appointed receiver, knowingly purchased and/or serviced life insurance policies from a number of individuals who submitted fraudulent insurance applications. Although the viatical settlement companies ("receivership entities") had acquired the rights to 1700 of the insurers' policies before they entered receivership, the insurers' complaint focused on just five policies. The insurers asserted twenty-five claims, ranging from common law conspiracy, aiding and abetting fraud, violations of the federal Racketeer Influenced and Corrupt Organizations ("RICO") Act, and violations of the Florida Viatical Settlement Act ("FVSA") and of a Pennsylvania insurance fraud statute. The receiver moved to dismiss all of the claims except one, which alleged a violation of Pennsylvania insurance law. The district court granted the motion, but dismissed the complaint in its entirety, giving the insurers leave to file a Second Amended Ancillary Complaint by a certain deadline. The insurers allowed the deadline to pass without amending the complaint further, and filed this appeal. For the reasons stated below, we affirm the dismissal of the entire amended complaint, including the sua sponte dismissal of the claim concerning Pennsylvania insurance law.

BACKGROUND

The district court dismissed the insurers' complaint for being short on the facts, namely, those required to plead fraud under Rule 9(b) of the Federal Rules of Civil Procedure, but we preface this discussion by noting several important facts. The insurers' complaint hinges on a series of statements that four HIV-positive individuals made when they applied for life insurance in the mid 1980's-early 1990's. The individuals all made the same allegedly fraudulent statement on their insurance applications; they said that they had never been diagnosed or treated for AIDS or any other blood or immune system disorder. The insurers do not allege that these particular individuals — Wendell Mullins, Jack Johnson, Gerald Metoyer, and William Buchner—share any association with each other, apart from the fact they ultimately sold their policies to the receivership entities. The insurers have not named these individuals or their estates as additional defendants in this suit. Nor have they joined the investors who ultimately purchased interests in these separate viaticals as parties.

Significantly, none of these individuals resided in Florida, a fact that bars the insurers' claims under the FVSA, which only regulates viatical transactions with in-state viators.¹ Moreover, each of these individuals obtained their insurance policies from different companies at various times over a ten-year period and, in at least two cases, well before the receivership entities came into existence.² One fact that links these separate policies, however, is that they all contain "incontestability" clauses. These clauses grant the insurers a two-year window of opportunity in which to contest a policy. Thereafter, the incontestability clauses prohibit insurers from cancelling or voiding the policy for any reason other than non-payment of premiums.

Accordingly, we note at the outset that the FVSA does not govern the viaticals at issue here. They are regulated, if at all, by statutes in the states where the viators reside(d). We also note that incontestability clauses may apply here to bar the insurers' from pursuing their fraud-based claims (request for declaratory judgment, aiding and abetting fraud, conspiracy to commit fraud, and even RICO claims). Given the amount of time that elapsed between issuance of the policies and their conversion into viaticals, which amounts to at least six years in two instances, statutes of limitations may also apply to bar the insurers from pursuing common law fraud and conspiracy claims. Statutes of limitations may also apply to bar the insurers' statutory claims under the Pennsylvania law, and may provide alternative grounds for dismissing the insurers' FVSA claims.

Additionally, only four of the seventeen insurers who joined as plaintiffs in the ancillary action against the receivership entities allege that the receiver played a part in underwriting the challenged policies: Valley Forge Life Insurance Company ("VFL"), Reassure American Life Insurance Company ("Reassure"), American United Life Insurance Company ("AUL"), and Jefferson Pilot Financial Insurance Company ("Jefferson Pilot"). The remaining insurers have not asserted particularized claims against the receivership entities or the receiver.

The impetus behind this complaint occurred on May 3, 2004, when the SEC requested a temporary restraining order ("TRO") against Mutual Benefits Corporation ("MBC"), Viatical Benefits, LLC ("VBLLC") and Viatical Services, Inc. ("VSI"). The SEC asked the court to appoint a receiver to administer the companies' assets while it pursued enforcement proceedings against them for violating federal securities laws. The court issued a TRO on May 4, 2004, which prohibited the three companies from engaging in new business and appointed a receiver, Roberto Martinez, Esquire, to oversee their existing viatical accounts, which included at least 1700 of the insurers' policies.

The SEC alleged that the receivership entities had defrauded investors by misrepresenting the amount of escrow that would be needed to cover future premium payments on the policies, by using erroneous life expectancy profiles in solicitations to investors, and by paying premiums on some policies out of the escrow accounts of others. By this point, MBC, which began purchasing viaticals in 1994, owned interests in over 9,000 separate life insurance policies, and could claim assets, in the form of future death benefits, totalling $1.067 billion.

As news of the SEC action broke, the insurers realized that a large number of their policies might have ended up in the portfolio of viaticals under receivership. The insurers filed an Ancillary Complaint in the SEC action on August 31, 2004, asserting that a substantial proportion of their policies, perhaps as much as 40%, had been procured through fraud. They based this estimate on a finding in a 2000 Florida grand jury report that noted 40%-50% of the viaticals brokered by Florida companies had been procured through fraud.

The insurers asserted seven causes of action, five of which were predicated on allegations of fraud. In their first cause of action, the insurers asked the court for a declaratory judgment that any of the insurers' policies which had been procured through fraud and which were subsequently acquired by the receivership entities were void ab initio. In their second and third causes of action, the insurers asked the court to declare that the receiver be estopped from using incontestability clauses to enforce any fraudulently procured policies. In their fourth and fifth causes of action, the insurers requested indemnification from MBC for any death benefits paid on fraudulently procured policies, and for any future payment obligations. In their sixth cause of action, the insurers alleged damages under the FVSA, Fla. Stat. § 626.991 et seq., which prohibits anyone from entering into a viatical settlement if they know that the policy it addresses was procured through fraud. In their final cause of action, the insurers requested a modification of the receivership order to preclude the receiver from taking any action that would prejudice their rights.

Although the insurers estimated that as many as 40% of their policies may have been procured through fraud, they provided particulars on only three policies for which they had received death claims.³ They alleged that two of the policies were fraudulently procured by a single individual, Wendell Mullins, but failed to plead that the receivership entities helped Mullins submit a fraudulent application for insurance. The other policy that the insurers identified in their ancillary complaint, a policy for Thomas Durkan, did not suffer from fraudulent procurement. Rather, the insurers alleged that a Colombian sales agent of MBC purchased the policy for money-laundering purposes, and that federal agents had seized all of the proceeds traceable to the viatical. Although the insurers allege that they received a death claim for the original policyholder, they did not claim to have paid a death benefit on the policy.

On December 24, 2004, the receiver moved to dismiss the insurers' complaint for failure to allege fraud with specificity, for failure to state a claim, and for failure to join necessary parties (the owners and beneficiaries of...