Hausknecht v. John Hancock Life Ins. Co. of N.Y.
| Docket Number | Civil Action 17-3911 |
| Decision Date | 25 May 2022 |
| Parties | ARIC D. HAUSKNECHT, COMPLETE MEDICAL CARE SERVICES OF NY, PC AND COMPLETE MEDICAL CARE SERVICES OF NY, PC HEALTH AND WELFARE BENEFIT PLAN, Plaintiffs, v. JOHN HANCOCK LIFE INSURANCE COMPANY OF NEW YORK, Defendant. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
This lawsuit is one of many emanating from John Koresko's defalcation of nearly $40 million worth of assets belonging to welfare benefit plans. Plaintiffs Aric D. Hausknecht (“Hausknecht”), Complete Medical Care Services of NY, PC (“CMCS”), and Complete Medical Care Services of New York, PC Health and Welfare Benefit Plan (“CMCS Plan”), are some of Koresko's victims who are seeking to recoup from Defendant John Hancock Life Insurance Company of New York (“John Hancock”) their lost money. Plaintiffs contend that Defendant's involvement in Koresko's scheme violated the Employee Retirement Income Security Act of 1974 (“ERISA”) 29 U.S.C. §§ 1132(a)(2)-(3), and the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1962(c)-(d).
This case, now in its fifth year of litigation, has progressed passed fact and expert discovery. The subject of this Opinion is Defendant's Motion to Exclude the reports and opinions of three of Plaintiffs' experts-Lance Wallach, Burke Christensen, and John Pund-on grounds that they are not qualified, and their opinions are neither relevant nor reliable within the meaning of Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) and its progeny.
For the reasons that follow, Defendant's Daubert Motion shall be granted in part and denied in part.
Some background regarding Koresko's scheme is necessary to set the stage and understand the theories underlying this lawsuit, the expert reports at issue, and the Motion to exclude these reports. But, because this opinion is written primarily for the benefit of the Parties, and much of this story has been told in depth in other opinions [1] only those facts and details necessary to understand the instant Motion are recited here.
Between 2002 to 2013, hundreds of employers decided to enroll in welfare benefit plans managed by Koresko. Koresko advertised that he had developed an arrangement that would allow employers to purchase life insurance policies for their employees and high value life insurance policies for executives (known as “cash value policies” or “ordinary life insurance”) and deduct the premiums for both from their taxes through an exception in the Internal Revenue Code (“Code”).
The Code generally imposes limits on the amount an employee can deduct for contributions to a welfare benefit fund. But multiple-employer welfare benefit plans can sometimes fall under an exception set forth in its Section 419A(f)(6), which exempts “any welfare benefit fund which is part of a 10 or more employer plan” from the restrictions on the deductions of contributions. I.R.C. § 419A(f)(6). Koresko advertised that his arrangement fell within this exception such that: (1) there were no limits on how much an employer could contribute; (2) all the contributions would not be taxed and could be deducted in federal taxes; (3) the contributions would accumulate interest-which would also not be taxed; and, (4) distributions from the policy would receive favorable tax treatment. To use Koresko's own words, the arrangement was “one of the last, best, legal tax shelters available” and offered a way to “accumulate large benefits through tax-free build-up of capital.”
Koresko ran his scheme through a “10 or more employer” multi-employer arrangement. In doing so, he created several entities: The “Regional Employers' Assurance League” (“REAL”), a “loose, unincorporated association of unrelated employers, ”[2] through which he offered to employers his program of employee welfare benefits; two trusts which consolidated and held the assets of the individual employers' welfare benefit plans (the “Trusts”); over the years, three different entities, including an entity created and owned by Koresko, which served as trustees for the Trusts; and, PennMont Benefits, PC (“PennMont”), a corporation wholly owned by him and his brother, which served as the administrator of the multi-employer plan, and of each individual employer's plans. PennMont marketed Koresko's arrangement, recruited participants and administered the individual plans, including the CMCS Plan.
To enroll in the arrangement Koresko required an employer to execute several agreements the terms of which bestowed enormous power on a Trust's trustee.[3] The trustee purchased policies on the lives of the employees participating in the enrolled employer's plans. And, as relevant here, it had the power to assign any or all rights under the policies and was entitled to “any and all rights associated with owning life insurance policies, ” which it could exercise without the insured's consent. These rights included surrendering the policy, withdrawing policy values, borrowing against the policy, transferring ownership, and changing the beneficiary.
Once enrolled in Koresko's multi-employer plan, employers, including Plaintiff CMCS, paid insurance premiums for these policies to one of the Trusts. Koresko, through PennMont, took out life insurance policies on the lives of the employees who participated in the employer's plans, like Plaintiff Aric D. Hausknecht. In this particular case, the policy issued from “ManuLife” (an entity which was later acquired by Defendant John Hancock) that had a death benefit of $6, 000, 000 (the “Hancock Policy”). In total, Plaintiffs contributed approximately $865, 000 to pay for insurance premiums on the Hancock Policy during their enrollment in Koresko's multi-employer plan.
Over the course of eleven years, Koresko siphoned off much of the value of the life insurance policies by, for example, withdrawing the interest collected on the employer contributions, the benefits paid out upon the death of participants' employees, and the cash value of the policies. He also took out loans exceeding $35 million from the insurance providers using the life insurance policies as collateral while several lawsuits, including one brought by the United States Secretary for the Department of Labor, were pending against him.[4] In this case, Koresko took out a loan in the amount of $405, 892.44 against the Hancock policy, which continues to accrue interest. These loans further devalued the policies.
Adding insult to injury, it turned out that the Section 419A(f)(6) exception-the motivating reason to join Koresko's multi-employer arrangement-did not actually apply to it. The Internal Revenue Service (“IRS”) determined that as a general matter, the Section 419A(f)(6) exception only applies to arrangements which operate as a single welfare benefit plan and that, specifically, Koresko's arrangement did not fit within the exception. Ultimately, the IRS assessed penalties against Koresko and his affiliated entities for operating an unlawful tax shelter under the guise of a Section 419A(f)(6) plan.[5]
Koresko's scheme was eventually uncovered by the Department of Labor, which brought an enforcement action against him and his affiliates. In the aftermath of Koresko's scheme, his victims filed suit against third-party entities, like Defendant John Hancock, whose involvement included issuing the insurance policies, permitting withdrawals or changes to the beneficiary or owner of the policies, and/or issuing loans against the policies' cash values. Plaintiffs allege that these actions constitute violations of ERISA and RICO. They assert that Defendant John Hancock knew of Koresko's multi-employer arrangement and its illegality under the tax laws, and knew that Koresko lacked the authority to make changes to the policies, withdraw funds or take out loans, but nonetheless took actions which furthered Koresko's scheme. Plaintiffs contend that Defendant was motivated to participate in the scheme, despite knowing that it did not comply with the requirements for a Section 419A(f)(6) plan, because of what it stood to gain from the sale of its expensive, high value “ordinary life insurance” or “cash value” life insurance policies. These policies were more profitable for Defendant than other types of life insurance policies but were less attractive to employers due to their higher costs.
Rule 702 of the Federal Rules of Evidence permits a witness “who is qualified as an expert by knowledge, skill, experience, training or education” to provide opinion testimony if “(a) the expert's scientific, technical or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (b) the testimony is based on the sufficient facts or data; (c) the testimony is the product of reliable principles and methods; and (d) the expert has reliably applied the principles and methods to the facts of the case.” Fed.R.Evid. 702. This rule “embodies a trilogy of restrictions on expert testimony: qualification, reliability, and fit.” Schneider ex rel. Estate of Schneider v. Fried, 320 F.3d 396, 404 (3d Cir. 2003).
Qualification requires “that the witness possess specialized expertise.” Id. To be “qualified” to serve as an expert, an expert must possess “specialized knowledge regarding the area of testimony.” Betterbox Commc'ns Ltd. v. BB Techs., Inc., 300 F.3d 325, 327 (3d Cir. 2002) (internal quotation marks and citation omitted). Nevertheless, whether a proposed expert has the requisite specialized expertise is determined through a wide lens. In re Paoli R.R. Yard PCB Litig., 35 F.3d 717, 741 (3d Cir. 1994) (...
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