Moran v. Svete

• Decision Date: 10 December 2013
• Docket Number: Case No.: 3:05-cv-72
• Parties: H. THOMAS MORAN, II, in his Capacity as Receiver of the Assets of Lifetime Capital, Inc. and Certain Affiliated Persons and Entities, Plaintiff, v. DAVID W. SVETE, Defendant
• Court: U.S. District Court — Southern District of Ohio

H. THOMAS MORAN, II, in his Capacity as Receiver of the Assets of Lifetime Capital,Inc. and Certain Affiliated Persons and Entities, Plaintiff, v. DAVID W. SVETE, Defendant

Case No.: 3:05-cv-72

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF OHIO WESTERN DIVISION AT DAYTON

December 10, 2013

Judge Thomas M. Rose

Magistrate Judge Michael J. Newman

ORDER

This case is before the Court upon receipt of the Status Report filed by Receiver, H. Thomas Moran II ("Receiver"), advising the Court that the bankruptcy case filed by Defendant David W. Svete ("Svete") was closed on October 29, 2013. Doc. 208. Upon notification of Svete's pending bankruptcy case, the Court stayed all proceedings in this case on July 5, 2012. Doc. 193. Following the filing of this most recent Status Report, Receiver moved, on November 26, 2013, to lift the stay. Doc. 209.

I. BACKGROUND FACTS

This civil case arose out of Svete's involvement in viaticals. The background facts are detailed in opinions issued by the Sixth and Eleventh Circuits:

Viaticals are legitimate insurance products in all states, allowing patients ("viators") to sell the right to receive benefits under their life insurance policies for tax-free cash. The sale of viaticals is usually made to a provider company through a broker. The provider company, in turn, typically through a sales agent, finds independent purchasers to invest in the policies. Each purchaser (also referred to as "investor") buys the right to become a beneficiary of the viator's life insurance policy. Thereby, purchasers receive a high return on their investment ifthe viator dies within the time projected by the viatical settlement provider. However, investors risk a reduction of their return or a complete loss if the viator does not die within the time projected because the investor must continue to pay the premiums on the policy as they accrue or the policy will lapse.

Svete became involved with viaticals in 1997 when he incorporated LifeTime Capital, Inc. ("LCI") in Nevada as a provider company. He later incorporated Alexander Chase, d/b/a WSI, for the same purpose, as well as multiple additional businesses offering financial, office, marketing, and viatical services. According to trial testimony, Svete's control of these corporations was secreted, thus misleading investors and providing an avenue to launder money taken by fraud.

United States v. Svete, 521 F.3d 1302, 1305 (11th Cir.) (hereinafter "Svete I"), vacated, reh'g en banc granted, 532 F.3d 1133 (11th Cir. 2008), aff'd in part en banc, 556 F.3d 1157 (11th Cir.), reinstated in part, 565 F.3d 1363 (11th Cir. 2009).

[LifeTime] was sold in 1998 to another company whose principal was allegedly under Svete's control. Over the next several years, Svete formed and controlled a number of other entities associated with LifeTime's viatical investment business, which were allegedly used to disguise Svete's control, mislead investors, and facilitate the diversion of invested funds. For example, one company (Medical Underwriters, Inc.) allegedly misrepresented and even forged the purportedly independent medical evaluation of the viator's life expectancy. Another company, touted as an independent investment servicing company, allegedly underfunded the premium reserve account and facilitated the diversion of funds from that account to Svete. Many investments failed to mature when expected, and additional premium payments were required. Investors also claimed that sales agents made false statements concerning life expectancy, the status of life insurance policies, and the risks associated with the investments. Overall, companies controlled by Svete obtained more than $100 million in investments from over 3,000 investors.

Moran v. Svete, 366 F. App'x 624, 625 (6th Cir. 2010) (hereinafter "Svete IV").

Svete and [his co-defendant] were charged in a superseding indictment with conspiracy to violate the laws of the United States in violation of 18 U.S.C. § 371 (Count One); conspiracy to launder money in violation of 18 U.S.C. § 1956(h) (Count Two); mail fraud in violation of 18 U.S.C. § 1341 (Counts Three through Seven); and substantive violations of interstate transportation of money obtained by fraud in violation of 18 U.S.C. § 2314 (Counts Eight through Ten). The jury convicted Svete and [his co-defendant] of all counts. . . . Svete was sentenced to a term of imprisonment of 60 months as to Count One and 200 months as to Counts Two through Ten, to run concurrently with one another. Svete was also ordered to pay a special monetary assessment of $1,000, restitutionin the amount of $100,722,605.34, a in $21,000,000 forfeiture, and to serve a 3 year period of supervised release.

Svete I, 521 F.3d at 1304-05.

On appeal, a panel of the Eleventh Circuit vacated the four mail fraud convictions because the jury instruction conflicted with prior Eleventh Circuit precedent. Svete I, 521 F.3d at 1318. On rehearing en banc, the Eleventh Circuit overruled the prior precedent and remanded to the panel for further consideration. United States v. Svete, 556 F.3d 1157, 1170 (11th Cir. 2009) (en banc) (hereinafter "Svete II"). The panel then affirmed Svete's four mail fraud convictions and reinstated its affirmance of his other convictions. United States v. Svete, 565 F.3d 1363, 1364 (11th Cir. 2009) (per curiam) (hereinafter "Svete III"). Svete is currently an inmate at Terminal Island, a federal correctional institution in San Pedro, California.

II. PROCEDURAL HISTORY

H. Thayne Davis, a LifeTime investor, filed suit in this Court against both LifeTime and Svete for fraud and breach of contract. Davis v. LifeTime Capital, Inc., No. 3:04-cv-59 (S.D. Ohio filed Feb. 19, 2004). In Davis, the court found the need to create a LifeTime Receivership was "both necessary and appropriate in order to prevent waste and dissipation of the assets of Defendant [LifeTime] to the detriment of investors, including the receivership estate of LifeTime." Id. at doc. 6, PageID 55. Consequently, H. Thomas Moran II was appointed as Receiver for LifeTime and was expressly authorized to:

take any and all action as the Receiver may deem necessary or prudent for the preservation, maintenance, and administration of the LifeTime Portfolio comprised of viatical and life settlement policies and beneficial interests therein[;]

[and]

to institute, defend, compromise or adjust such actions or proceedings in state or federal courts now pending and hereafter instituted as may, in his discretion, be advisable or proper for the protection of the Receivership Assets or proceedstherefrom, and to institute, prosecute, compromise or adjust such actions or proceedings in state or federal court as may, in his judgment, be necessary or proper for the collection, preservation, and maintenance of the Receivership Assets.

Id. at doc. 6, PageID 57, 59.

The Court also provided protections for Receiver by setting the standard of care and instituting an indemnification provision. Specifically, the Order stated:

The Receiver and his agents are entitled to rely on all outstanding rules of law and court orders and shall not be liable to anyone for their own good faith compliance with any order, rule, law, judgment or decree. In no event shall the Receiver or his agents be liable to anyone for their good faith compliance with their duties and responsibilities as Receiver or agent for Receiver, nor shall the Receiver or his agents be liable to anyone for any actions taken or omitted by them except upon a finding by this Court that they acted or failed to act as a result of malfeasance, bad faith, gross negligence, or in reckless disregard of their duties. The Receiver and his agents shall be indemnified and held harmless out of the Receivership Assets for all costs and expenses, including reasonable attorney fees, incurred as a result of such actions.

Id. at PageID 60.

Receiver filed this action against Svete in his individual capacity in February 2005.¹ Doc. 1. Receiver asserts sixteen claims for relief: fraud; breach of fiduciary duty; civil conspiracy; misrepresentation; breach of contract; fraudulent transfer; unjust enrichment; alter ego; constructive trust; corrupt activities in violation of state law (Ohio Rev. Code § 2923.34); federal Racketeering Influenced and Corrupt Organization (RICO) Act claims (18 U.S.C. § 1962(a)-(d)); and violations of the Sarbanes-Oxley Act of 2002 (Pub. L. No. 107-204, 116 Stat. 745).

In a motion to dismiss the complaint and enforce arbitration filed in September 2006, Svete argued that all of Receiver's claims must be resolved through arbitration because therelevant contracts all contain arbitration clauses. Doc. 21. Magistrate Judge Sharon L. Ovington, to whom this case was then assigned,² recommended that Svete's motion be denied on the basis that Receiver sought to hold Svete liable in his personal capacity, whereas the contracts containing the arbitration clauses were executed by Svete in his capacity as an owner or officer of LifeTime. Doc. 30 at PageID 242-43. Svete objected to the Report and Recommendation, filed a motion to reconsider, and another motion to stay and compel arbitration. Docs. 31, 32, 34. In two separate Orders, Judge Rose adopted the Report and Recommendation in its entirety and denied Svete's motion to compel. Docs. 35, 36. Svete again moved for reconsideration and filed several objections. Docs. 38, 39, 42, 45, 47. Judge Rose denied all of Svete's motions in an Order issued on March 28, 2007. Doc. 51. This Order held that "[s]ince Svete seeks to enforce an arbitration clause in a contract that is the result of fraud or coercion, arbitration will not be compelled." Id. at PageID 449. Svete appealed to the Sixth Circuit. Docs. 53, 54, 55.

On February 24, 2010, the Sixth Circuit reversed this Court and remanded for further proceedings. Svete IV, 366 F. App'x at 631-32. The Sixth Circuit, relying on cases interpreting the Federal Arbitration Act, held that this Court erred in refusing to compel...