STEVEN A. SCIARRETTA, As Trustee of the Barton Cotton Irrevocable Trust, Plaintiff-Counter Defendant,
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
Appeal from the United States District Court for the Southern District of Florida. D.C. Docket No. 9:11-cv-80427-DMM.
For Steven A. Sciarretta, Plaintiff: 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 Lincoln National Life Insurance Company, Defendant - Appellee: 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 Imperial Premium Finance, LLC, Interested Party - Appellant: Mercer K. Clarke, Karen Haynes Curtis, Craig Salner, Clarke Silverglate, PA, Miami, FL.
Before ED CARNES, Chief Judge, and RESTANI,[*] Judge, and MERRYDAY,[**] District Judge.
ED CARNES, Chief Judge:
J. Alfred Prufrock saw the moment of his greatness flicker and the eternal footman hold his coat and snicker. 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) (requiring an insurable interest at the time a policy becomes effective); Fla. Stat. § 627.404(1) (requiring a person purchasing insurance on " the life or body of another individual" to have " an insurable interest in the individual insured" ); Ga. Code § 33-24-3(h) (requiring an insurable interest at the time a policy becomes effective). But see Tex. Ins. Code § 1103.056 (allowing any person, including a corporation, to purchase insurance on any other person's life so long as the insured consents in writing). 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 ...