Liberte Capital Group, LLC v. Capwill

Decision Date05 September 2006
Docket NumberNo. 05-3510.,05-3510.
Citation462 F.3d 543
PartiesLIBERTE CAPITAL GROUP, LLC, et al., Plaintiffs, v. James A. CAPWILL, et al., Defendants, Southwestern Life Insurance Company; Reassure America Life Insurance Company; Valley Forge Life Insurance Company, Appellants, Victor M. Javitch, acting Receiver, Appellee.
CourtU.S. Court of Appeals — Sixth Circuit

John H. Korns, Buchanan Ingersoll P.C., Washington, D.C., for Appellants. William T. Wuliger, Wuliger, Fadel & Beyer, Cleveland, Ohio, for Appellee.


John H. Korns, Buchanan Ingersoll P.C., Washington, D.C., for Appellants. William T. Wuliger, Wuliger, Fadel & Beyer, Cleveland, Ohio, for Appellee.

Before: BATCHELDER, CLAY, and McKEAGUE, Circuit Judges.


CLAY, Circuit Judge.

Appellants Southwestern Life Insurance Co., Reassure America Life Insurance Co., and Valley Forge Life Insurance Co. (collectively, the "Insurers") appeal the April 6, 2005 order of the United States District Court for the Northern District of Ohio, finding the Insurers in contempt of court for violations of previously issued injunctions in the court's Receivership case over the assets of former viatical settlement companies and their trustees. For the following reasons, we AFFIRM the district court's order.

A. Substantive Facts

This case has a long and complicated history. The current dispute arises between three providers of life insurance policies, Southwestern Life Insurance Co., Reassure America Life Insurance Co., and Valley Forge Life Insurance Co. (collectively, the "Insurers"), and the court-appointed Receiver for two viatical settlement companies, Liberte Capital Group ("Liberte") and Alpha Capital Group ("Alpha"). The Insurers are not parties to the underlying litigation.

Both Liberte and Alpha marketed viatical life insurance policies to investors, and both used Viatical Escrow Services ("VES") to provide trustee services in handling monies received from investors to buy policies and to service premium payments over time. Capwill Fund Leasing ("CFL") invested monies obtained by VES in VES's capacity as escrow agent and fiduciary for companies engaged in marketing viatical settlements. VES and CFL were both wholly owned by James A. Capwill. In 1999, Liberte sued James Capwill, VES, and CFL in federal district court, alleging widespread civil RICO violations for the misuse, misappropriation, and dissipation of monies received from investors. A receiver was appointed in the Liberte case for the Liberte funds still held by VES and CFL. When Alpha joined the action as an intervening plaintiff, the district court likewise appointed a receiver over the Alpha funds and Alpha itself. Eventually, the two receiverships were joined under a single Receiver, William Wuliger, the Appellee in the case at bar.

The district court orders which appointed the Liberte and Alpha receivers established identical general injunctions against satellite litigation. The injunctions read:

It is further ORDERED that all creditors, claimants, bodies politic, parties in interest, and all sheriffs, marshals, and other officers, and their respective attorneys, servants, agents, and employees, and all other persons, firms, and corporations be, and they hereby are, jointly and severally, enjoined and stayed from commencing or continuing any action at law or suit or proceeding in equity to foreclose any lien or enforce any claim against VES and/or CFL [and Alpha Capital Group], or their property, or against the Receiver in any court. Said entities are further stayed from executing or issuing or causing the execution or issuance out of any Court of any writ, process, summons, attachment, subpoena, replevin, execution, or other process for the purpose of impounding or taking possession of or interfering with, or enforcing any claim or lien upon, any property owned by or in the possession of the said Receiver, and from doing any act or thing whatsoever to interfere with the Receiver in the discharge of his duties in this proceeding with the exclusive jurisdiction of this Court over said properties and said Receiver.

(J.A. at 277-78, 454.)

Many of the insurance policies underlying the viatical investments marketed by Liberte and Alpha had been procured through fraud. A parallel government criminal investigation into James Capwill (the VES and CFL principal) estimated at one point that 56 percent of the insurance policies implicated in the Liberte viatical investments had been fraudulently obtained. The Insurers have pursued numerous independent actions to rescind or cancel fraudulently obtained policies. These fraudulent policies were the subject of one of the Insurer's, Southwestern Life's, attempts to intervene in a related case (the "Jamieson" case) and the case at bar.1 Southwestern Life requested leave to intervene when the Liberte receiver at the time sought permission from the court to market insurance policies in the Liberte portfolio that had been designated by the government as fraudulently obtained but were beyond the contestability period. Southwestern Life objected, arguing that to permit the receiver to sell the policies would be to perpetuate a fraud on the issuing insurance companies such as Southwestern Life. In denying the motion, the district court required the receiver to market such policies only with full disclosure to prospective buyers as to potential claims against policy payment. The district court also noted:

Initially, it should be made clear what this Court is not adjudicating at this time; it is not adjudicating the respective rights of any investor, the Receiver, any purchaser of policies from the Receiver, or any insurer regarding any policy, in particular those policies sought to be marketed as to which the Government asserts a defense of fraud on the insurance company may be asserted to avoid payment. Those issues as to specified policies may be the subject of future litigation in this or other courts of competent jurisdiction.


The issue before this Court is the right of the Receiver to market and sell policies asserted to have been fraudulently obtained to sophisticated investors who are given appropriate warning of the defenses which may be asserted by the insurers .... This order does not deprive the insurers of any defenses available against the Receiver or any transferee of the Receiver.

(J.A. at 448-49, Order, April 13, 2001 (emphasis in original).) The district court reiterated the applicability of the above order to the case at bar when the district court denied Southwestern Life's motion to intervene in its April 19, 2004 order in the Alpha receivership case:

Turning to the purpose for which intervention is sought, Southwestern asserts it is `solely on the issues concerning Southwestern Life Insurance policies' and the General Receiver's `attempt[ ] to sell void and canceled policies.' .... However, this Court's Order of April 13, 2001 addressed these concerns . . . .


As Southwestern is not precluded from otherwise bringing actions or asserting defenses relative to its policies, its purpose in this litigation does not strike this Court as necessary.

(J.A. at 549-59 Order, April 19, 2004.) Both sides in the action before this Court agree that the above orders permit the Insurers to file declaratory judgment actions against the Receiver as the real party in interest for allegedly fraudulently obtained policies held in the Receivership portfolio. The parties disagree, however, on where such actions may be filed, whether such actions may include matured policies already paid into the Receivership estate, and whether the above language permits joinder of Alpha and Liberte in actions.

Liberte and Alpha are now defunct corporations, in existence solely for the purpose of distributing the remaining assets to the viatical investors under and pursuant to the Receivership in the case at bar.

B. Procedural History
1. The Delaware Lawsuit

On January 13, 2005, the Insurers filed suit in Delaware Superior Court against Liberte, Alpha, and the Receiver. The complaint requested declaratory relief with respect to the Insurers' obligations on allegedly fraudulently obtained, but not yet matured, policies in the Receivership portfolio. In addition, the complaint requested damages and/or indemnification with respect to matured policies already paid out from the Liberte and Alpha investment pools (the funds for which are held in the Receivership) and which were allegedly procured through fraud. Finally, the Insurers requested a declaratory judgment that they were entitled to a set-off of their damages on fraudulent policies from their obligations to pay on legitimate policies in the Alpha and Liberte portfolios. For all counts the Insurers requested costs and attorneys' fees.

2. The Receiver's Motion for a Finding of Contempt

After being served with the summons for the Delaware action, the Receiver filed a motion with the district court handling the Receivership case, requesting that the court hold that the Delaware action was in violation of the court's previously issued injunctions. In particular, the Receiver alleged that the Delaware state court was an improper forum for actions against the Receiver, that claims for money damages to be paid from Receivership assets were never authorized by the district court, that the joinder of Alpha as a defendant was in direct violation of district court orders, and that the request for set-off was a willful attempt to interfere with the Receiver's obligations to collect legitimate monies owed for distribution to investors.

3. The District Court's Conclusions

After granting the Insurers an opportunity to show cause why the court should not find the Insurers in contempt of prior district court orders, the district court ruled that the Delaware litigation was in violation of its previously issued injunctions...

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