People v. Coventry First LLC, 2007 NY Slip Op 33089(U) (N.Y. Sup. Ct. 9/28/2007)
| Decision Date | 28 September 2007 |
| Docket Number | 0404620/2006.,Motion Seq. No. 001. |
| Citation | 2007 NY Slip Op 33089 |
| Parties | THE PEOPLE OF THE STATE OF NEW YORK by ELIOT SPITZER, Attorney General of THE STATE OF NEW YORK, Plaintiff, v. COVENTRY FIRST LLC, MONTGOMERY CAPITAL, INC., THE COVENTRY GROUP, INC., and REID S. BUERGER, Defendants. |
| Court | New York Supreme Court |
The motions with sequence numbers 001 and 003 are consolidated for joint disposition.
Introduction — This lawsuit concerns the "life settlements" industry, in which owners of variable life insurance policies sell them to third parties for immediate cash. The purchasers then "securitize" the policies by selling them in groups to third-party investors, who pay the premiums as they come due and eventually receive the proceeds of the policies when the insureds die. The Attorney General of the State of New York brought this action on behalf of the people of the State of New York (the "State" or "plaintiff") against defendant Coventry First LLC ("Coventry First"), which purchases life insurance policies from individuals throughout the country for resale to investors. Along with Coventry First, the State sues Coventry First's Executive Vice President, defendant Reid Buerger, Coventry First's parent corporation, defendant Montgomery Capital, Inc. ("Montgomery Capital"), and a Coventry First affiliate, defendant The Coventry Group, Inc. ("Coventry Group").
The complaint alleges that defendants, in concert with brokers acting as intermediaries, uses bid-rigging and other anti-competitive schemes to deprive policy holders of a fair marketplace in which to sell. In addition, the State alleges defendants and the brokers deliberately mislead sellers into believing that buyers are competing freely for their life settlements and that as a result sellers are receiving the best possible prices. Suing as parens patriae, the State asserts statutory claims against all defendants for fraudulent business practices under Executive Law § 63(12) (the "Executive Law"), for anti-competitive behavior under General Business Law § 340 et seq. (the "Donnelly Act"), and for securities violations under General Business Law § 352 et seq. (the "Martin Act"). Plaintiff also asserts common law claims for fraud, unjust enrichment, and inducing the brokers to breach their alleged fiduciary duty to policy sellers. The relief sought by the State includes an order (1) restraining defendants from further misconduct, (2) directing them to disgorge all gains and pay restitution and damages, (3) granting rescission rights to all parties who sold policies to Coventry First from 2001 to the present, and (4) awarding punitive damages, treble damages and plaintiff's costs and attorney's fees.
Claims — The State alleges the following in the complaint: Coventry First, a Delaware corporation headquartered in Pennsylvania, competes nationwide with other businesses to purchase life settlements through an auction-style bidding process. Sellers often employ the services of one or more brokers who specialize in marketing life settlements; according to the State, these brokers are fiduciaries of the sellers and act their agents to obtain the best prices for them.
The complaint alleges that Coventry First engages in two basic schemes that Buerger oversees and directs. First, they allegedly rig the bidding process by secretly paying brokers to refrain from soliciting bids from Coventry First's competitors and refrain from relaying competing bids to the sellers. Also, until 2005, Coventry First allegedly paid brokers to provide it with the "right of last bid" on life settlements and to refrain from seeking better bids from other buyers.
To illustrate the alleged bid-rigging scheme, the complaint sets out nine transactions in detail. These transactions will be referred to as the "Bid-rigging Examples." As discussed further below, only two of the nine Bid-rigging Examples involved sellers or brokers who reside in New York.
The State alleges a second scheme in which Coventry First motivates brokers to act against the sellers' interests by submitting "gross offers" directly to the brokers. These offers are lump sum payments, from which the brokers draw their compensation before passing the remainder on to the sellers as the life settlement purchase prices. According to the State, although the brokers solicit gross offers, the brokers and Coventry First usually only disclose the net purchase prices to the sellers, and do not reveal the gross offer amounts and the amounts the brokers keep for themselves. This gross payment system allegedly motivates brokers to profit at the sellers' expense, and also encourages them "to advise their clients to sell their life insurance policies when, in fact, such sales may be against the client's financial interests." To further this scheme, plaintiff alleges, Coventry First refuses to disclose a broker's compensation to the seller unless required under state law, and has at times provided sellers with false documents indicating that their brokers received less than their actual compensation. Plaintiff outlines about five additional transactions involving gross offers to demonstrate how Coventry First employs them.
Motions — In separate motions, Coventry First and Buerger (the "Movants") apply for orders (1) dismissing the complaint for failure to state a claim and (2) compelling the State to arbitrate certain claims and staying this action pending arbitration.1 In One motion (# 003), the Movants seek dismissal on the grounds that (1) the State lacks the authority to pursue most if not all of the claims because the alleged wrongdoing and injuries lack a sufficient connection to New York, (2) plaintiff bases its claims on a purported duty to disclose brokers' compensation that does not exist under New York law, (3) plaintiff fails to make out a common law fraud claim because it does not allege that the policy sellers suffered any out-of-pocket injury, (4) none of the parties to the transactions had any fiduciary obligations to the sellers, and (5) and plaintiff fails to state any claim under the Donnelly and Martin Acts or for equitable relief.
In another motion (# 001), the Movants seek an order compelling the State to arbitrate any claims connected with policy sellers who had executed sales agreements with Coventry First that required the parties to resolve their disputes through arbitration.
Extent of the State's authority — In seeking dismissal, the Movants first point out that they are not New York residents and that, in the case of seven of the nine Bid-rigging Examples, (1) the policy sellers and brokers reside outside New York and (2) none of the alleged wrongdoing or injuries occurred in New York. The exceptions include one Bid-rigging Example in which both the policy seller and his broker, AllSettled, reside in New York, and another in which AliSettled's misconduct in New York allegedly injured a seller that resides outside New York. The other seven transactions lack any direct connection with New York.
The parens patraie doctrine enables the State to seek damages, restitution and civil penalties on behalf of New York residents that are harmed by wrongful acts occurring within and outside this State, see People v. Concert Connection, Ltd., 211 A.D.2d 310, 315-16 (2d Dept. 1995), and on behalf of non-residents of the State that have been harmed by wrongful acts in New York, see People ex rel. Spitzer v. Telehublink Corp., 301 A.D.2d 1006, 1009-10 (3d Dept. 2003). However, the State's authority under the Executive Law does not extend to redressing injury to out-of-state residents that resulted from wrongdoing outside New York, because the citizens of New York lack any direct interest in the matter. See Exec. Law § 63(1) () Likewise, the State's authority to sue under the Martin Act is limited since the statute only regulates securities transactions occurring "within or from" New York. GBL § 352(1); see also Lehman Bros. Comm. Corp. v. Minmetals Intl. Non-Ferrous Metals Trading Co., 179 F.Supp.2d 159, 164 (S.D.N.Y. 2001). The Donnelly Act applies to restraints on business "in this state." GBL § 340; cf. Goshen v. Mut. Life Ins. Co., 98 N.Y.2d 314, 326 (2002) () Finally, the State lacks authority to prosecute the common law claims insofar as they are based only upon claims of wrongdoing outside New York by out-of-state residents.
In opposition, plaintiff submits an affidavit stating that 298 of 3,469 life settlement purchases by Coventry First between 2001 and March 2006 involved New York sellers. Plaintiff also asserts in his opposition brief that "many of the [the challenged transactions] were effectuated" through AllSettled, the New York broker. This additional submission further demonstrates that, insofar as New York sellers or brokers or misconduct in New York is involved, the State has stated sufficient grounds to sue on behalf of citizens. However, the claims are partially dismissed insofar as they pertain to life settlement transactions that have no identified connection with New York brokers, New York sellers, or alleged misconduct in New York.
Duty to disclose — The Movants next contend that all of the State's claims fail because they are "premised entirely" on defendants' breach of a purported obligation to disclose to the sellers the details of the brokers' compensation. However, defendants argue, New York law does not affirmatively require life settlement buyers to disclose what they paid the sellers' brokers as compensation.
Defendants mis-characterize the thrust of the State's allegations. Plaintiff acknowledges that defendants had no statutory duty to disclose the broker payments, but...
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