Sciarretta v. Lincoln Nat'l Life Ins. Co.
| Decision Date | 26 February 2015 |
| Docket Number | No. 13–12559.,13–12559. |
| Parties | Steven A. SCIARRETTA, As Trustee of the Barton Cotton Irrevocable Trust, Plaintiff–Counter Defendant, v. LINCOLN NATIONAL LIFE INSURANCE COMPANY, Defendant–Third Party Plaintiff–Counter Claimant–Appellee, Roberta Cotton, Defendant, Sanford L. Muchnick, Third Party Defendant, Imperial Premium Finance LLC, Non Party–Appellant. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Eric Biderman, Julius A. Rousseau, James M. Westerlind, Arent Fox, LLP, New York, NY, Thomas L. David, Thomas L. David, PA, Coral Gable, FL, for Plaintiff–Counter Defendant.
Charles J. Vinicombe, Michael D. Rafalko, Nolan B. Tully, Nicole C. Wixted, Drinker Biddle & Reath, LLP, Philadelphia, PA, Wendy L. Furman, Pett Furman, PL, Boca Raton, FL, for Defendant–Third Party Plaintiff–Counter Claimant–Appellee.
Mercer K. Clarke, Karen Haynes Curtis, Craig Salner, Clarke Silverglate, PA, Miami, FL, Non Party–Appellant.
Appeal from the United States District Court for the Southern District of Florida. D.C. Docket No. 9:11–cv–80427–DMM.
Before ED CARNES, Chief Judge, and RESTANI,* Judge, and MERRYDAY,** District Judge.
J. Alfred Prufrock saw the moment of his greatness flicker and the eternal footman hold his coat and snicker.1 If there had been an insurance policy on his life like the one that gave rise to this case, Prufrock might have seen beside the footman a grinning speculator rubbing his hands in gleeful anticipation.
We are all, in the long view, born astride the grave. But allowing parties to use life insurance policies to bet on when an unrelated person will drop off into the grave raises public policy concerns, which have led to restrictions on the practice. One of the principal restrictions is the requirement that the purchaser of a policy have an insurable interest in the insured's life. As often happens with regulatory restrictions aimed at thwarting the operation of a market, evasive schemes have arisen to circumvent the insurable interest requirement. Imperial Premium Finance LLC used one of those schemes, which led to a criminal investigation of the company and also to it being subpoenaed in a civil case arising from the scheme.
In response to that subpoena Imperial designated a corporate witness to be deposed, as provided in Rule 30(b)(6) of the Federal Rules of Civil Procedure, and that witness also testified for it at trial. After the trial was completed, the district court imposed a monetary sanction against Imperial based on the court's finding that the company had in bad faith prepared the witness selectively in order to further its interest. This is Imperial's appeal of that sanctions order.
Although Imperial is not a party to this lawsuit, the company's actions led to it. Imperial's primary business involved stranger-originated life insurance (STOLI). A STOLI policy is a speculative investment device that entails gambling on the lives of the elderly. In its purest form, a STOLI transaction works like this: A speculator secures an agreement with a person, who is usually elderly, authorizing the speculator to buy insurance on that person's life. The speculator usually gets the policy in the largest amount available and pays the premiums, hoping to profit in one of two ways. One way is if the insured dies before the premiums paid exceed the death benefit. Under that scenario the sooner the insured dies, the fewer the premium payments that are necessary to obtain the payout, and the greater the return on investment. The other way the speculator can profit is by selling the policy to another speculator for more than the premiums paid up to the point of that sale.
Imperial's business was not a STOLI scheme in its purest form. Instead of buying a policy on a person's life outright, Imperial provided financing for life insurance premiums in the form of a loan whose terms allowed Imperial to foreclose on the policy and become its owner if the borrower defaulted. The typical loan had a term of two years, a relatively high floating interest rate, and “substantial” origination fees, all of which made the borrower more likely to default. For example, the $335,000 loan Imperial made in this case had an interest rate that floated between 11 and 16 percent, and it had origination fees of nearly $112,000—more than a third of the loan principal.
As mentioned above, most states try to prevent STOLI transactions by requiring purchasers of insurance policies to have an insurable interest in the insured's life. See, e.g., Ala.Code § 27–14–3(f) (); Fla. Stat. § 627.404(1) (); Ga.Code § 33–24–3(h) (). But see Tex. Ins.Code § 1103.056 (). Seeking to evade those insurable interest requirements, Imperial drafted its loan agreements to require that during the term of the loan the policy be held in irrevocable trust (with a trustee chosen by Imperial) for the benefit of the insured's relatives. The structure of Imperial's loans made them a sure bet with nothing but upside. If the borrower managed to pay off the loan when it came due, Imperial got its fees and interest, walking away with as much as a two-thirds return on its investment in two years. If the insured died before the loan matured, the arrangement ensured that Imperial could collect out of the policy proceeds the loan principal, the fees, and the interest it was owed. That was usually a substantial sum.
But it often was not as much as the value of the policies themselves, under which the beneficiary stood to collect hundreds of thousands or even millions of dollars upon the death of the insured. The ticket to that jackpot for Imperial was the clause in the loan agreements allowing it to foreclose on the policies in the event of default. In part because of the loans' oppressive terms, most of Imperial's loan customers did default. As a result, Imperial knew from the outset that it stood a better than even chance of not just collecting the interest and fees but obtaining by foreclosure ownership of the policy and the full amount of the policy upon death of the insured. And it would all be done, Imperial thought, without violating the letter of the laws designed to prevent STOLI transactions.
Imperial's carefully designed scheme to get around the insurable interest laws did not keep it out of trouble. Part of its practice was to “assist” prospective insureds in filling out the insurance applications, and that is what led to trouble. Because insurers want to avoid issuing policies that will be used in a STOLI scheme, they typically require applicants to disclose any intent to seek premium financing. Knowing this, perpetrators of STOLI schemes often make what the Florida Department of Insurance describes as “misrepresentation[s], falsification[s], or omission[s] of material facts in the life insurance application.”2 And Imperial was no exception. It eventually admitted that when its employees thought that truthfully disclosing the financing arrangements would harm the chances of having a policy issued, they “facilitated and/or made misrepresentations on applications that the prospective insured was not seeking premium financing.” That fraudulent behavior came to the attention of the United States Attorney for the District of New Hampshire, who in 2011 launched an investigation into Imperial's business. That investigation resulted in an April 2012 non-prosecution agreement with Imperial. In return for not being prosecuted, the company agreed to give up its premium financing business, fire or accept the resignations of the employees responsible for that business, and pay an $8 million fine.
With that background in mind, we turn to the facts of this case that led to Imperial being sanctioned.
In late 2007, Florida resident Barton Cotton met with insurance agent Dennis Felcher because Cotton wanted to buy a multimillion-dollar life insurance policy and finance the premium payments. Felcher referred Cotton to Larry Bryan, who Felcher knew was “doing that kind of work.” Bryan contacted Imperial about financing the premium payments for Cotton. Imperial, of course, was interested. In April 2008, Cotton granted Bryan's company WealthModes the exclusive right to procure, finance, and sell insurance policies on his life.
The next month, Cotton and an irrevocable trust in his name applied to Lincoln National Life Insurance Company for an $8 million life insurance policy. Consistent with Imperial's standard practice and in order to evade Florida's insurable-interest law, the beneficiaries of the trust were Cotton's wife and children. Cotton falsely stated on the insurance application that he was not buying the policy for resale and that he would not use a third party to finance the premium payments.
Lincoln issued Cotton a $5 million policy, which became an asset of the Cotton trust. Bryan advanced the premium payments to the trust until Imperial lent the trust $335,000. The trust used that money to repay Bryan's advance and to continue making the premium payments. As usual, Imperial's premium financing loan had a floating interest rate between 11.5% and 16%, and the loan agreement authorized it to foreclose on Cotton's policy and become its owner if the trust didn't repay the loan by its maturity date. Because of the high interest rate and an “origination fee” of nearly $112,000, after less than two years Imperial's $335,000 loan to the Cotton trust had ballooned to more than $557,000.
In May 2010 the eternal footman came into view—Cotton was diagnosed with esophageal cancer
. Cotton's bad news was good news for Imperial because the value of a...
To continue reading
Request your trial