In re McGuire

• Decision Date: 30 September 2002
• Docket Number: Adversary No. 01-1446 EEB.,Bankruptcy No. 01-22173 EEB.
• Citation: 284 B.R. 481
• Parties: In re Timothy Colin MCGUIRE, Debtor. R.J. Wolf, Plaintiff, v. Timothy Colin McGuire, Defendant.
• Court: U.S. Bankruptcy Court — District of Colorado

284 B.R. 481

In re Timothy Colin MCGUIRE, Debtor R.J. Wolf, Plaintiff, v. Timothy Colin McGuire, Defendant.

Bankruptcy No. 01-22173 EEB.

Adversary No. 01-1446 EEB.

United States Bankruptcy Court, D. Colorado.

September 30, 2002.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Matthew D. Skeen, Georgetown, CO, for Defendant.

ORDER DENYING OBJECTION TO DISCHARGEABILITY

ELIZABETH E. BROWN, Bankruptcy Judge.

THIS MATTER came before the Court on Plaintiff's Complaint, asserting that the debt owed to him in the amount of $35,000 should be declared nondischargeable under 11 U.S.C. § 523(a)(2). It is undisputed that the Defendant made representations which induced the Plaintiff's purchase of an investment and that these representations later proved to be false. The central dispute is whether Defendant had the requisite fraudulent intent. As to the majority of the representations, it is undisputed that Defendant did not know of their falsity at the time he made them. Following a trial, in which only the Plaintiff and Defendant appeared as witnesses, the Court took this matter under advisement to consider whether the degree of Defendant's carelessness in making these statements rose to the level of reckless disregard and, thus, could constitute a basis for finding the necessary element of scienter. As explained more fully below, the Court finds that the Defendant was merely negligent and, thus, is entitled to discharge Plaintiff's claim in his bankruptcy.

I. FACTUAL BACKGROUND

Defendant was an insurance salesman, who conducted his business through his wholly-owned company, American Assets Management Corp., Inc. ("AAM"), an independent retail insurance brokerage. He sold life insurance policies, annuities, interests in "viatical financial settlements," and other products offered by third-party insurance companies and similar industries. After meeting with the Defendant and reviewing promotional materials supplied by AAM, Plaintiff purchased two insurance-related products through AAM, an annuity contract with National Western Life Insurance Company for $15,000 and a viatical financial settlement from American Benefits Services, Inc. ("ABS") for $35,000.

A viatical financial settlement ("viatical") is the sale by assignment of the benefits from a life insurance policy, insuring the life of a terminally ill person. As ghoulish as this investment vehicle sounds, it actually allows a terminally ill person in the later stages of a disease, to obtain additional funds with which to secure either the basic means of support or additional comforts during the insured's final days. Undoubtedly, it is especially attractive to those insureds who have no heirs. Companies who issue a viatical are supposed to employ a physician to certify that the insured is in the later stages of a terminal disease. The purchase price for the assignment is never the full value of the policy, but some discounted amount.

In this case, Plaintiff realized the benefits of the annuity contract he purchased through AAM, but completely lost the funds he invested in the viatical. ABS (not AAM) was operating an elaborate "Ponzi scheme," soliciting investors and paying the earlier investors solely from funds received from the later investors, rather than from the proceeds of any insurance policies.¹ ABS issued certificated assignments to Plaintiff, certifying that it had purchased two life insurance policies with his $35,000 and specifying the details of the alleged policies. In reality, it never bought the policies.

ABS was able to perpetrate its fraud, in part, by selling the viaticals through reputable insurance agencies throughout the country, including Defendant's brokerage, AAM. It is undisputed that neither AAM nor Defendant knew anything about the Ponzi scheme, until it was too late. There was nothing about the compensation structure between ABS and AAM that should have raised red flags for the Defendant. AAM's commission from ABS was always within a range of 6-7 1/2 %, which is the same commission range it earned on the viaticals it sold for other businesses. Defendant's company earned only slightly more than $2,000 from Plaintiff's $35,000 purchase. Over the course of time, AAM sold a total of $1.6 million in viaticals to its various clients, but stopped selling ABS' products when Defendant became aware that one of AAM's other customers was experiencing customer service difficulties with ABS. Defendant caused AAM to stop doing business with ABS as soon as the first problem surfaced, without waiting until the Ponzi scheme came to light.

Defendant educated himself regarding viaticals through his attendance of a seminar on viaticals, his inquiry with the state as to any licensing requirements, a meeting with the attorneys of another company that sold viaticals, Mutual Benefits Company, and by reviewing literature prepared by one of the largest administrators of IRAs, Pensco Financial Services, Inc. Based on this training, there was nothing in ABS' promotional materials regarding its viaticals that sounded too good to be true. Unfortunately, Defendant did not investigate ABS, did not demand proof that ABS had actually purchased the subject insurance policies, and did not obtain a copy of the requisite physician's report. Defendant assumed that ABS was doing everything it was supposed to do.

Defendant became involved with ABS, when he was approached by the principal of another company, SunCoast Financial Services, Inc., who was promoting ABS' viatical product. SunCoast provided sales literature and product brochures to Defendant. Defendant studied the sales literature, spoke with SunCoast's representatives, obtained a copy of SunCoast's insurance license, and contacted the Florida State Department of Insurance regarding SunCoast to ensure that it was "in good standing." Defendant requested a history and financial statements on both SunCoast and ABS. He did not receive this information as to either company. Nevertheless, Defendant signed a written agency agreement with SunCoast. Defendant testified that he considered himself an agent of ABS, because he agreed to sell products of ABS, as a sub-agent of SunCoast. He did not have a written agency agreement directly with ABS.

AAM utilized the ABS promotional materials, specifically a brochure and a sample newspaper advertisement. He created a customized brochure for AAM by retyping the ABS sales literature verbatim, merely substituting AAM's name for ABS, so that customers would know to contact him to purchase this product. The customized brochure did not reference ABS as the principal offering the viatical investment. The advertisement stated:

ARE YOU TIRED OF LOW CD RATES?

9.86% per year GUARANTEED

* High Yield

*Completely Insured up to $300,000

* Fixed Return

* No Market Risk

* 3-Year Growth 42%

* Short Term

* Monthly Income Plan Available

* No Hidden Costs

* Principal Liquid

* Great for IRA Rollovers.

Call Today! American Assets Management Corp., Inc., 9025 Kenyon Ave., Suite 305, Denver, CO 80237, (303) 889-5959, Toll Free, (800) 644-1454

Plaintiff responded to this advertisement, by requesting a meeting with Defendant. At the meeting, Defendant explained that he represented various companies. He discussed several products, other than ABS' viatical, including a viatical product offered by another company. Defendant assured Plaintiff at this meeting that neither AAM nor any entity with whom it did business had ever been investigated by a governmental agency. Once Plaintiff narrowed down his investment options, he asked Defendant questions about the products and president of ABS and asked for investor references. Defendant gave Plaintiff telephone numbers for representatives of ABS, but indicated that he could not provide actual investor references.

At a subsequent meeting, Plaintiff met with Defendant to execute the necessary documents to purchase the annuity and the ABS viatical. With respect to the ABS viatical, Plaintiff executed a Participation Agreement, two Letters of Instruction to Trust, two Disbursement Letters of Instruction, and a Suitability Application. Each of these documents were bound into a booklet, with perforated pages, so that the forms could be removed for processing. The booklet was entitled, "Participation Disclosure: Viaticated Insurance Benefits" and contained the name and corporate logo of ABS (not AAM) on the cover.

The introductory paragraph of the Participation Agreement states as follows: "This agreement made this 19th day of October, 1998, by and between the parties, described as AMERICAN BENEFITS SERVICES, INC., and ... R.J. Wolf ...." The Disbursement Letters of Instruction and the Letters of Instruction to Trust require a trust number and the name of the insurance company issuing the policy. Defendant did not supplement these documents with this information, but left them for ABS to complete. In fact, Defendant acted only as a broker of this transaction and had no involvement in acquiring suitable policies. Thus, he had no access to information with which to complete these forms. Defendant forwarded the documents which had been executed by Plaintiff, and ABS sent certificates of Irrevocable Absolute Assignment of Viaticated Insurance Benefits ("Certificates") to Plaintiff. Each Certificate reflects the trust number and the name of the company that issued the policy. One Certificate purported to transfer an 8.284% interest in a $300,000 policy issued by Aetna and the other purported to transfer an 8.284 % interest in a $300,000 policy issued by New York Life.

The representations contained in the brochure may be categorized into three groups. The first were those that touted the security and liquidity of this investment (the "investment representations"). The second type involved representations that "our company" will purchase the policies, obtain physician's certificates and otherwise handle the acquisition of suitable policies for sale (the ...