Rochow v. Life Ins. Co. of N. Am.

• Decision Date: 23 March 2012
• Docket Number: Case No. 04–73628.
• Citation: 851 F.Supp.2d 1090
• Parties: Patrick ROCHOW, Personal Representative of the Estate of Daniel J. Rochow, Plaintiff, v. LIFE INSURANCE COMPANY OF NORTH AMERICA, Defendant.
• Court: U.S. District Court — Eastern District of Michigan

851 F.Supp.2d 1090

Patrick ROCHOW, Personal Representative of the Estate of Daniel J. Rochow, Plaintiff,

v.LIFE INSURANCE COMPANY OF NORTH AMERICA, Defendant.

Case No. 04–73628.

United States District Court,

E.D. Michigan,

Southern Division.

March 23, 2012.

John J. Cooper, Cooper Law Firm, Troy, MI, for Plaintiffs.

John D. Pirich, Brian T. Quinn, Honigman, Miller, Lansing, MI, for Defendant.

ORDER SETTING METHOD OF ACCOUNTING

ARTHUR J. TARNOW, Senior District Judge.

Before the Court are the competing position statements of Plaintiff and Defendant with regard to the proper method of determining equitable accounting. This accounting is for the purpose of correctly determining the amount of unjust enrichment derived by Defendant from the wrongful withholding of disability benefits to Plaintiff, so that Defendant may disgorge said profits as previously ordered by this Court. For the reasons stated below, the Court finds that Defendant has failed to rebut Plaintiff's method of accounting and has failed to justify various offsets to the amount of profits to be disgorged.

I. Background

This case stems from the wrongful denial of disability benefits for Plaintiff Daniel Rochow (“Rochow”) by Defendant LINA. On June 24, 2005, this Court granted Plaintiff's Motion for Summary Judgment [12], finding that Defendant LINA had acted arbitrarily and capriciously in denying Plaintiff benefits under LINA's long-term disability plan. This Court's order granting summary judgment was affirmed in Rochow v. Life Ins. Co. of N. Am., 482 F.3d 860 (6th Cir.2007). Subsequent to the mandate from the Sixth Circuit Court of Appeals, Plaintiff filed his Motion for an Equitable Accounting [46] on November 10, 2008. Argument was heard on this motion on February 5, 2009, and in an Order [67] issued on June 16, 2009, the Court found that an equitable accounting and disgorgement by Defendant was an appropriate remedy.

On August 23, 2010, Defendant [88] and Plaintiff [89] submitted position statements regarding the method the court should use to calculate the amount of unjust enrichment derived by Defendant from its wrongful withholding of benefits to Plaintiff. Both Defendant [91] and Plaintiff [92] submitted responses. On November 4, 2011, the Court held an evidentiary hearing regarding the parties' positions. Plaintiff [106] and Defendant [105] submitted supplemental briefs on November 18, 2011. On February 3, 2012, the Court heard additional argument regarding the parties' positions on the proper method of equitable accounting.

II. Analysis

Unjust enrichment is the principle that “a fiduciary may not profit by his breach of the duty of loyalty.” Amalgamated Clothing Workers v. Murdock, 861 F.2d 1406, 1411 (9th Cir.1988). In this case, it has already been determined that Defendant owed Plaintiff a duty of loyalty and breached this duty through its arbitrary and capricious denial of disability benefits to Plaintiff. Defendant has, in whole or nearly in whole, already paid to Plaintiff the actual amount of benefits that were wrongfully withheld. Thus, the question before the Court is the amount of financial benefit that Defendant derived from withholding benefits to Plaintiff. As set out in this Court's Order [67] requiring an equitable accounting and disgorgement by Defendant, Defendant is required to remit any profits derived from Plaintiff's wrongfully withheld benefits. The parties have provided extensive briefing on how the Court should arrive at this amount, and have had two opportunities to argue their positions before the Court.

A. Burden of Proof

An equitable suit for accounting is tried in two stages. First, the party seeking accounting must establish that there is a right to an accounting. Am.Jur.2d Accounts and Accounting § 66 (2005). This Court has already found that Plaintiff has a right to an accounting. Once this right has been established, Plaintiff must produce evidence from which the Court can make a “reasonable approximation” of Defendant's unjust enrichment. If a Plaintiff cannot provide a reasonable approximation, the claim of unjust enrichment is merely speculative and disgorgement will not be allowed. However, this “reasonable approximation” is not a high burden. In SEC v. First City Fin. Corp., 890 F.2d 1215, 1231–32 (D.C.Cir.1989), the Court of Appeals for the D.C. Circuit held that a showing of the “actual profits” on tainted transactions presumptively shifted the burden to the defendants to demonstrate why the approximation provided by the plaintiff (the defendant's actual profits) was not a reasonable one. Similarly, in Nickel v. Bank of Am., 290 F.3d 1134 (9th Cir.2002), a bank (later acquired by Bank of America) improperly charged $24,000,000 in fees to various trusts. The Ninth Circuit Court of Appeals found that the district court's focus on the “speculative” nature of the disgorgement in question was incorrect. The court found that focusing on questions of traceability simply insulated the wrongdoer, the bank, and violated a rule of restitution, namely “if you take my money and make money with it, your profit belongs to me.” Id. at 1138. The court also found that if the manner in which the bank had utilized the money was not traceable, there was a presumption that the bank was deriving profit from the funds. Thus, an appropriate remedy was a proportional share of the bank's profits for the period the funds were utilized. Id. at 1139.

Once a reasonable approximation has been provided, the accounting process proceeds to the second stage. The burden at this stage switches to the party “in control of the books” who has “[t]he burden of proving the correctness of an account.” Am.Jur.2d, Accounts and Accounting § 66 (2005). Defendant has the burden of proving the correctness of its accounting and methodology of disgorgement because “every reasonable doubt is resolved in favor of the party wronged.” George E. Palmer, The Law of Restitution § 2.14, 180 (1978).

Defendant argues that “a plaintiff seeking disgorgement of profits is not entitled to defendant's general profits where it is possible to identify which of the defendant's profits flowed from the wrongdoing.” Def.'s Br. at 5. ¹ While true, it is Defendant's burden to demonstrate which profits flowed from its wrongdoing; it is not the burden of the Plaintiff. See Nickel, 290 F.3d at 1138 (“the problem of showing where the money went is the tortfeasor's problem”). Defendant has failed to do that here.

In similar cases, courts have required violators to return “all profits” that derive from the tainted activity. See SEC v. First City Fin. Corp., 890 F.2d at 1232 (requiring defendant to return all profits derived from tainted trades when defendant could not provide precise measure of profits derived from illegal trading). Similarly, analyzing a Louisiana law, the Fifth Circuit has ruled that “the burden is on [a fiduciary] to demonstrate that application of the usual rule [of complete disgorgement of profit] will produce a real injustice.” McDonald v. O'Meara, 473 F.2d 799, 805–06 (5th Cir.1973). In Leigh v. Engle, 727 F.2d 113 (7th Cir.1984), the court placed the burden of accounting on the defendant, an ERISA fiduciary. The court, finding that there would be little reason to require restitution under ERISA's remedial provision, 29 U.S.C. § 1109(a), if “beneficiaries confronted an insurmountable obstacle in proving the extent of a fiduciary's profits,” and placed “the burden of proof on the defendants here to ensure that the disgorgement remedy is effective.” Leigh, 727 F.2d at 139;see also Connelly Mgmt. Emp. Welfare Benefit Plan v. N. Am. Indemnity, N.V., 2008 WL 1336085 (S.D.Ind. Apr. 8, 2008) (“the burden shifts to the defendants to show that commingled trust assets are not ‘profits' subject to ... disgorgement ...”) (citing Leigh, 727 F.2d at 138–139).

Reasonable Approximation

Defendant contends that Plaintiff has failed to present a “reasonable approximation” of the unjust enrichment because Plaintiff has not shown a “casual connection between LINA's withholding of benefits and a measurable increase in LINA's profit.” Def.'s Br. at 3. Defendant compares the situation to one described in Taylor v. Meirick, 712 F.2d 1112, 1122 (7th Cir.1983), wherein the Seventh Circuit Court of Appeals stated that “[i]f General Motors were to steal your copyright and put it in a sales brochure, you could not just put a copy of General Motors' corporate income tax return in the record and rest your case for an award of infringers' profits.” The comparison to Taylor is inapposite. In Taylor, the plaintiff failed in any way to attempt to determine what portion of the defendant's sales were derived from the use of plaintiff's product, and instead simply created a percentage of the defendant's profits that the plaintiff claimed entitlement to. That is not the case here. Here, the amount of wrongfully withheld funds are already known.

At the hearing held on November 4, 2011, Plaintiff set forth a reasonable approximation of the unjust enrichment gained by Defendant through the withholding of benefits to Plaintiff. Plaintiff did so by calculating the amount of wrongfully-withheld principal, $910,629.24, which includes base interest on the principal, and then assumed that this figure, gradually accumulated over time by Defendant, was part of Defendant's general equity and used for all corporate purposes. Plaintiff then calculated Defendant's of profit rate during this period, compared the percentage gain to the amount of principal owed to Plaintiff, and arrived at an approximation of $2.1 million dollars of unjust enrichment on the part of Defendant.

Based on general principles of accounting, the burden then shifts to Defendant to provide some reason why this approximation is not reasonable.

Defendant's “Investment Account” Defense

Defendant's theory regarding why Plaintiff's approximation is not reasonable is that the money owed to Plaintiff was confined to an ...