Dockery v. Heretick

• Decision Date: 14 May 2019
• Docket Number: CIVIL ACTION NO. 17-4114
• Parties: LARRY G. DOCKERY, on behalf of himself and all others similarly situated, Plaintiffs v. STEPHEN E. HERETICK, et al., Defendants And NEW YORK LIFE INSURANCE COMPANY, et al., Nominal Defendants
• Court: U.S. District Court — Eastern District of Pennsylvania

LARRY G. DOCKERY, on behalf

of himself and all others similarly situated, Plaintiffs v. STEPHEN E. HERETICK, et al., DefendantsAndNEW YORK LIFE INSURANCE COMPANY, et al., Nominal Defendants

CIVIL ACTION NO. 17-4114

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

May 14, 2019

Baylson, J.

MEMORANDUM RE: DEFENDANTS' MOTIONS TO DISMISS

I. Introduction

In this Second Amended Class Action Complaint, Plaintiff Larry G. Dockery alleges the existence of a scheme between an attorney, companies in the business of purchasing payment streams from Structured Settlement Annuities, and additional persons to obtain annuities from unsuspecting and unsophisticated annuitants without meaningful judicial review, as required by state and federal law. (ECF 99, "SAC"). Plaintiff seeks to represent a class of annuitants who sold their annuities to financial institutions in exchange for lump sum cash payments, and, in so doing, received far less than the present value of their annuities. Defendants 321 Henderson Receivables LLC, J.G. Wentworth Originations LLC, Stephen Heretick, and Seneca One Finance, Inc. have filed Motions to Dismiss pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(b)(3), and 12(b)(6). (ECF 78-80, 100-02). For the following reasons, Defendants' Motions to Dismiss are GRANTED IN PART AND DENIED IN PART.

II. Factual Background

For the purposes of these Motions to Dismiss (the "Motions"), the following facts are taken as true from the SAC.

In March, 1988, Plaintiff's left arm was severed in a piece of machinery. (SAC ¶ 30). Plaintiff brought a tort action against the manufacturer of the equipment, which settled for an initial payment of $407,757, plus periodic payments to Plaintiff throughout his life. (Id.). As a result, Plaintiff became the beneficiary of a Structured Settlement Annuity ("SSA") which provided for the following future payments:

• Monthly payments in the original amount of $1,200, increasing annually at a rate of 3%, to be paid through the span of Plaintiff's life but in no event for less than 30 years

• A payment of $15,000 in 1994

• A payment of $30,000 in 1999

• A payment of $45,000 in 2004

• A payment of $60,000 in 2009

• A payment of $75,000 in 2014

• A payment of $90,000 in 2019

• A payment of $105,000 in 2024

• A payment of $120,000 in 2029

• A payment of $135,000 in 2034

(Id. ¶ 32). Plaintiff alleges that several of the above payment streams were improperly purchased by Defendants in Virginia commonwealth court proceedings that did not comport with federal and state law.

Defendants 321 Henderson Receivables LLC ("321 Henderson"), J.G. Wentworth Originations LLC ("Wentworth"), Seneca One Finance ("Seneca"), and Structured Settlement Purchaser John Doe Inc. 1-100, are companies that purchase SSA payment streams (altogether"Purchaser Defendants").¹ (Id. ¶¶ 34-37). Each of the Purchaser Defendants purchased payment streams from SSAs issued to Plaintiff. In connection with such purchases, Purchaser Defendants were each represented by Defendant Heretick, an attorney in Virginia who serves in the Virginia House of Delegates. (Id. ¶¶ 33-36).²

Several "Nominal Defendants" are also the subject of Plaintiff's lawsuit. New York Life Insurance Company ("New York Life") and MetLife Insurance Company ("MetLife") are Nominal Defendants currently making payments on annuities which are the subject of this case. (Id. ¶¶ 39-41).³

Plaintiff further alleges that several persons not named as defendants participated in Heretick's scheme. These persons include attorneys who falsely claimed to have provided independent legal advice to beneficiaries. (SAC ¶¶ 43, 50).

According to the SAC, at the center of the alleged scheme to obtain SSAs was Defendant Stephen E. Heretick, the aforementioned Virginia attorney, who worked with the Purchaser Defendants and others to evade state and federal requirements governing the judicial review of transactions involving SSAs. (Id. ¶¶ 12-16, 42). Specifically, the SAC alleges that SSA annuitants were exploited by Heretick's clients, the Purchaser Defendants, in a process by which:

• The Purchaser Defendants would identify vulnerable SSA beneficiaries through court records and gain their trust so that the beneficiaries would agree to sell their streams of monthly payments on terms that were as low as possible; (Id. ¶¶ 87-89).

• Heretick would file petitions seeking judicial approval of the SSA payments in Portsmouth Circuit Court, where he had been granted permission to submit his petitionsin batches and where he knew that the petitions would not be carefully scrutinized for misrepresentations, errors, or other defaults; (Id. ¶ 98)

• The petitions would include representations by interested persons, paid on a contingent basis by the Purchaser Defendants, who purported to provide independent legal and financial advice to the SSA beneficiaries even though they did not do so; (Id. ¶ 42-50)

• Heretick and the Purchaser Defendants prevented the SSA beneficiaries from obtaining independent legal or professional advice, which was their right, by telling the beneficiaries that the transaction would not occur if they did not waive their right to counsel or by providing a financial adviser who was not, in fact, independent; and (Id. ¶¶ 100-101, 110, 112, 114)

• Heretick then filed petitions and represented to the court, in the absence of an appearance by the SSA beneficiaries, that each beneficiary had been advised by the Purchaser Defendants to seek independent professional advice and that each beneficiary had either received such advice or knowingly waived such advice in writing. (Id. ¶ 101).

According to the SAC, Defendants would also bring SSA beneficiaries to Virginia from outside the Commonwealth and then arrange for them to execute papers falsely stating that they resided in Virginia so that their petitions could be filed in Portsmouth County. (Id. ¶ 124). The scheme allegedly took place between 2000 and 2016, during which time Heretick filed approximately 375 petitions per year. (Id. ¶¶ 91, 93). Defendants also took steps to prevent their scheme from becoming public, such as sealing cases, preventing the seller's names from appearing on the court docket (instead using only their initials), preventing sellers from retaining counsel or from obtaining independent financial advice, and urging sellers not to appear in court proceedings. (Id. ¶¶ 147-150).

A. Alleged Issues Regarding State Law

Virginia law requires judicial approval for the transfer of SSA payment streams. Specifically Virginia Code § 59.1-476 requires findings that:

a. The transfer is in the best interest of the payee, taking into account the welfare and support of the payee's dependents;b. The payee has been advised in writing by the transferee to seek independent professional advice regarding the transfer and has either received such advice or knowingly waived in writing the opportunity to seek and receive such advice; and

c. The transfer does not contravene any applicable statute or order of any court or other government authority

(Id. ¶ 54).

Plaintiff claims that Defendants fraudulently circumvented the above state law requirements designed to protect SSA beneficiaries by inducing the beneficiaries into selling annuity payment streams on terms on which no rational, well-informed, or well-advised person would sell, and with terms that would never be approved of by any court that engaged in any meaningful review of the transaction or in any proceeding in which the beneficiary was represented by counsel. (Id. ¶¶ 66-69).

Among the allegations in the SAC regarding evasion of state law requirements are that: (1) Plaintiff and the putative class members were advised the SSA transfer would not take place if Plaintiff sought independent professional advice, and (2) numerous "anomalies" in the petitions filed by Heretick would have put a careful reviewer on notice that the transactions were not in the best interest of the beneficiaries. (Id. ¶¶ 114, 145).

B. Alleged Issues Involving Federal Law

Federal law, codified at 26 U.S.C. § 5891, also requires SSA approval consistent with Virginia state law, or else a 40% tax on the sale of the payment stream is imposed. (Id. ¶ 57). Under the regime established by 26 U.S.C. §5891, to avoid the 40% tax penalty, SSA payment transfers must be approved by a court of the state in which the seller of the income stream (e.g., Plaintiff) is domiciled. (Id. ¶ 63). Plaintiff in this case claims in his SAC that the domicile requirement of 26 U.S.C. §5891 was fraudulently circumvented as part of the alleged scheme.Specifically, Plaintiff alleges that Defendants violated federal law by inducing many SSA beneficiaries to falsely state that they were domiciled in Virginia. (Id. ¶ 66).

Among the allegations in the SAC regarding evasion of federal domiciliary requirements are that: (1) evidence presented to the Virginia court of a beneficiary's domicile was often recently created (such as driver's licenses or leases); and (2) the law in Virginia was changed to require SSA transfers only in the county of the beneficiary's residence after a Washington Post article in 2015 revealed the "flawed system." (Id. ¶¶ 128, 136).

III. Procedural Background

A. Original Class Action Complaint

Plaintiff first filed this putative class action on September 14, 2017. (ECF 1). The original Complaint alleged a scheme between Heretick, the Purchaser Defendants,⁴ and "complicit judges" sitting on the Circuit Court of Portsmouth County, Virginia. The Complaint also named several insurance companies making payments on the annuities as "Nominal Defendants." The Complaint was comprised of the following ten counts:

Counts I through V of the Complaint alleged violations of RICO, 18 U.S.C. § 1962(c), by SSILP, Seneca, Wentworth, 321 Henderson, and Heretick.

Count VI alleged conspiracy to violate RICO, 18 U.S.C. § 1962(d) against Defendants.

Count VII alleged unjust enrichment against all Defendants.

Count VIII alleged violation...