Cigna Property and Cas. Ins. Co. v. Polaris Pictures Corp.

Decision Date22 October 1998
Docket Number96-56789,Nos. 96-56252,s. 96-56252
Parties, 41 Fed.R.Serv.3d 1359, 98 Cal. Daily Op. Serv. 7920, 98 Daily Journal D.A.R. 11,008 CIGNA PROPERTY AND CASUALTY INSURANCE COMPANY; Cigna Group of Companies; David F. Allen; Alliance Marine Risk Managers, Inc., et al., Plaintiffs-Counter- Defendants-Appellees, v. POLARIS PICTURES CORPORATION; U.S. Inbanco, Ltd., Defendants-Counter- Claimants-Appellants. CIGNA PROPERTY AND CASUALTY INSURANCE COMPANY; Cigna Group of Companies; David F. Allen; Alliance Marine Risk Managers, Inc., Plaintiffs-Appellees, v. POLARIS PICTURES CORPORATION; U.S. Inbanco, Ltd.; Rex K. De George, Defendants-Appellants.
CourtU.S. Court of Appeals — Ninth Circuit

Elliot L. Bien, Bien & Summers, Novato, CA, for defendants-counter-claimants-appellants.

Ellis J. Horvitz, Patricia Lofton, Horvitz & Levy LLP, Encino, CA; Donald J. Sands, Neil S. Lerner, Sands, Norwitz, Forgie, Leonard & Leonard, Los Angeles, CA, for plaintiffs-counter-defendants-appellees.

Appeals from the United States District Court for the Central District of California; J. Spencer Letts, District Judge, Presiding. D.C. No. CV-93-02259-JSL.

Before: FLETCHER, THOMPSON and LEAVY, Circuit Judges.

THOMPSON, Circuit Judge:

Defendants/appellants Polaris Pictures Corp. (Polaris) and U.S. Inbanco Ltd. (Inbanco) appeal from the district court's judgment granting Cigna Property and Casualty Insurance Company (Cigna) rescission of a marine insurance contract on the ground of fraud.

The insurance contract was for insurance on a yacht. The district court found the insurance was obtained with the fraudulent intent to sink the yacht and collect the proceeds. We affirm the district court's rescission judgment, but not on the ground of fraud. The pleadings and uncontroverted evidence at trial support a judgment of rescission on the ground of failure to disclose material facts in the insurance application. We affirm the judgment on this ground.

We also affirm the district court's judgment awarding attorney fees in favor of Cigna, and the court's addition of appellant Rex K. DeGeorge as a judgment debtor.

FACTS
A. Prologue

DeGeorge, a Beverly Hills attorney, has the remarkable experience of having owned several yachts which have been lost at sea. Each vessel was adequately insured against such loss, and except for the yacht that sank in this case, DeGeorge collected the insurance proceeds on every one of them.

1. The Tutania and the Coffee Merchant Bandits

DeGeorge began losing yachts almost three decades ago. He had been the owner of the 43-foot yacht, Tutania. In 1970, he was interested in selling it. When a couple of purported Peruvian coffee merchants showed an interest in the yacht, DeGeorge arranged to take them for an overnight test-run. That night, the coffee merchants drugged him and his companion. DeGeorge and his companion, still feeling ill the next morning, escaped and sailed 35 miles back to shore in the yacht's dinghy while the coffee merchants remained on board the vessel. Five days later, DeGeorge reported the theft to the police. The Tutania and the Peruvian coffee merchant bandits were never seen again.

The Tutania had been insured by the Hartford Insurance Company. After DeGeorge threatened litigation for bad-faith denial of his claim, Hartford paid DeGeorge $43,000, the full policy value.

2. One Moonless Night on The Epinicia

After he lost the Tutania, DeGeorge bought another vessel, this time a 57-foot racing yacht, the Epinicia. Six years after DeGeorge lost the Tutania, he was sailing the Epinicia off the coast of Italy with Paul Ebeling, a business acquaintance. The two men were sailing along on a starless, moonless night when about midnight they suddenly struck "a low-profile, dark object that was not visible."

Fortunately, DeGeorge had recently purchased a new dinghy. He and Ebeling, immediately realizing the danger, jumped into the dinghy and sailed back to the coast while the Epinicia sank in about twenty minutes. DeGeorge had insurance on the yacht and he filed a claim with the insurer, Lloyds of London. Lloyds originally declined to pay the claim, but after DeGeorge threatened litigation, they changed their position and paid him $194,000 for the loss of the yacht.

3. A 47-Footer Goes Down

In 1983, DeGeorge was handling a law suit on behalf of a client. The suit involved a business deal potentially worth billions. According to DeGeorge, the parties opposing the suit had decided to pursue a rather unorthodox litigation strategy, i.e., they attempted to kill him. These parties had previously suggested they might in fact nail DeGeorge's kneecaps to the floor. Although DeGeorge didn't lose his kneecaps, an attempt was made that year to kill him while he and his wife were sailing off the California coast near Los Angeles. This time, DeGeorge lost a 47-foot yacht insured for $245,000.

According to DeGeorge, a suspicious looking fishing boat circled the yacht. A little later, he and his wife were relaxing in the state room when explosions began to rock the boat. When the explosions stopped, DeGeorge and his wife jumped in a dinghy and escaped the vessel, which sank in shark-infested waters in about half an hour. DeGeorge and his wife returned to Marina del Rey in the dinghy. They did not report the incident to any authorities, but four days later reported the loss to the vessel's insurer, Fireman's Fund. Fireman's Fund eventually paid DeGeorge $245,000, the full amount of the policy.

4. Other Claims

According to Cigna, DeGeorge's insured losses have not been confined to ocean vessels. Cigna provided the district court with a list of claims DeGeorge made against various insurers between 1970 and 1993. These alleged claims include the following:

                Year  Claim                                                    Amount
                1970  Rolex watch stolen from unattended vehicle in Madrid     $  1,500
                      Personal items and jewelry taken from an unattended      $  2,000
                        taxi cab in Sydney, Australia
                1971  Baggage stolen from unattended vehicle in Barcelona,     more than
                        (several identical claims against different combined     $20,000
                        insurers)                                                combined
                1974  Missing Jensen"Healy automobile                          unknown
                1981  Baggage lost by airline                                  $ 10,000
                1990  Baggage lost while traveling in Europe                   $  9,000
                1991  Baggage lost while traveling in Europe                   $ 10,000
                1992  Paintings and personal property stolen from home         $700,000
                1993  other losses resulting from 1992 theft                   undisclosed
                                                                                 settlement
                                                                                 with second
                                                                                 insurer
                

DeGeorge's bad luck extended beyond the loss of mere personal property. He also filed twenty-nine insurance disability claims between 1976 and 1990. In a 1990 claim, DeGeorge sought $11,000 per month because of a "bipolar personality disorder." The insurer, Monarch Insurance Company (Monarch), sought to rescind the insurance contract alleging DeGeorge had misrepresented and concealed material information in the application. However, after DeGeorge filed a counterclaim asserting breach of contract, bad faith, negligence, fraud, and negligent infliction of emotional distress, Monarch settled the claim for $550,000.

B. The Principe and The Italian Connection

Having outlined this rather incredible background, we now turn to the facts giving rise to the present case: the total loss of a fourth yacht.

In June 1992, DeGeorge contracted for the construction of a 76-foot motor yacht, the Principe di Pictor (Principe ), from Azimut, SpA, an Italian firm, for the purchase price of $1.9 million. While the Principe was still under construction, DeGeorge assigned his end of the construction contract to Continental Pictures Corp. (Continental). Continental was a Panamanian corporation, apparently located in Switzerland. Although Continental allegedly bought DeGeorge's contract for $3.6 million, Continental never paid anyone any money. In fact, after the contract was assigned to Continental, Azimut looked only to DeGeorge for progress payments. DeGeorge Continental then sold the Principe to Polaris Pictures Corp. for $3.62 million. Polaris had been formed by DeGeorge, had the same address as DeGeorge's residence and, as the district court found, was "completely controlled by him at all relevant times." Polaris had no assets other than some screenplays which the district court found to be of speculative value at best.

continued to make those payments to Azimut with $600,000 of his own money.

About two weeks before Continental sold the yacht to Polaris, DeGeorge arranged a stock swap with Tridon, a publicly traded company with no net worth. In this deal, Tridon acquired ownership of Polaris and DeGeorge acquired two million shares of Tridon stock. The stock swap agreement contained a clause which provided that all shares of Polaris stock would revert to DeGeorge if either Tridon or Polaris ever declared bankruptcy or an inability to pay their financial obligations. Because neither company had any significant assets, DeGeorge could, at any time, declare Polaris unable to pay its debts and regain his Polaris stock.

As a result of the stock swap, Tridon and not DeGeorge now owned Polaris. The district court found this agreement was entered into for the purpose of distancing DeGeorge, on paper, from Polaris's acquisition of the yacht.

Polaris financed its purchase of the yacht through notes issued by Inbanco. Inbanco was formed and controlled by DeGeorge. It was incorporated on the same day that Polaris bought the yacht from Continental. Like Polaris, Inbanco shared a common address...

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