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By Julie Kay
Daily Business Review
03-15-2007

In a defeat for the insurance industry, the 11th U.S. Circuit Court of Appeals has affirmed a lower court ruling barring 17 insurance companies from canceling policies due to a massive fraud investigation into a Fort Lauderdale, Fla., viatical company.

Last week, a three-judge panel sided with Coral Gables attorney Roberto Martinez, the receiver for Mutual Benefits Corp., and upheld a ruling by Southern District of Florida Judge Federico A. Moreno that a lawsuit filed by the insurers should be dismissed because it failed to show specific fraud in each of the 1,700 policies in question.

The insurers, including giants like Indianapolis-based American United Life Insurance, said in their lawsuits they should be able to cancel all policies that were sold by policyholders to Mutual Benefits because several of the policyholders lied on their applications. They cited four people who had lied about their HIV-positive status.

Fort Lauderdale-based Mutual Benefits Corp. was the target of a host of civil lawsuits brought by investors and insurance companies after the company collapsed. The company, according to prosecutors, ran a Ponzi scheme that duped investors out of nearly $1 billion. Several of the top officials of the company have been indicted for securities fraud.

The ruling is a huge victory for the 30,000 investors, who would have lost more than $100 million if the court agreed to allow the policies to be voided.

"This is a great victory for the victim investors," said Curtis Miner, a partner with Coral Gables, Fla.-based Colson Hicks Eidson who argued the winning appeal. "They no longer have this threat of these insurance companies being able to yank the insurance policies in which they invested out from under them. This is also significant for the insurance industry. It's another clear case that they can't seek to have the policies voided after the fact."

Attorneys at Philadelphia-based Drinker Biddle, which represented the 17 insurance companies, declined comment.

But Martinez said he may file a request for attorney fees based on the 11th Circuit's ruling, which chastised the insurers for filing "an extreme example of a shotgun pleading."

"We're reviewing our options," Martinez said.

The insurers' suit was one of many civil suits spawned in the wake of the demise of the $1 billion viatical company. Mutual Benefits sold the life insurance policies of 17,000 sick or elderly people to investors. The concept was that the sick and elderly people would receive money when they needed it, and the investors would profit by collecting the full death benefits down the line.

But Mutual Benefits lied to its investors about the life expectancy of the policyholders, claiming that the clients would die within three years. Then it tapped the investors' money to keep paying premiums on the life insurance policies. More than 30,000 investors were lured into the Ponzi scheme from 1994 to 2004, according to federal prosecutors.

State and federal regulators shut down the company in 2004 and placed it in receivership. Martinez, a former U.S. Attorney in Miami, was appointed receiver. His job is to recover assets from the failed viatical company, handle litigation and determine which investors want to keep the policies and which want to sell them. Martinez said he is halfway through the process and hopes to begin the claims process next year.

The insurers' suit to cancel the policies was filed in federal court in Miami in 2004 by 17 insurers that issued policies that were bought up by Mutual Benefits.

In their 170-page complaint, the insurance consortium asserted 25 claims, ranging from common law conspiracy, aiding and abetting fraud, violations of the federal Racketeer Influenced Corrupt Organizations Act, violations of the Florida Viatical Settlement Act and of a Pennsylvania fraud statute.

The plaintiffs cited charges filed by the Securities and Exchange Commission, a report by a Florida grand jury on viatical fraud, an investigation by the Florida Department of Insurance and guilty pleas entered by former employees of Mutual Benefits.

Martinez moved to dismiss all of the claims except the Pennsylvania claim. He alleged that the plaintiffs failed to state specific causes of action and did not identify how many life insurance policies were purchased through fraud.

Ultimately, the insurers identified only five policies allegedly purchased through fraud.

In 2005, Moreno dismissed the complaint in its entirety. "Based on the allegations, the plaintiffs seem to believe that alleged industrywide problems in the viatical industry provides a basis to support their claims and engage in discovery," Moreno stated. "The plaintiffs also seem to believe that such allegations relieve them of the burden of alleging fraud with specificity. It does not."

On March 7, the 11th Circuit panel, consisting of Judges William Pryor, Peter Fay and William H. Steele, held that the insurers' complaint was "short on the facts -- namely those required to plead fraud under Rule 9b of the Federal Rules of Civil Procedures."

The 62-page ruling, written by Fay, noted that the plaintiffs are all out-of-state companies. But the Florida Viatical Settlement Act does not govern transactions involving out-of-state companies.

In addition, the panel said, incontestability clauses in the life insurance contracts bar carriers from challenging the validity of the contracts on the basis of fraud after the polices have been in effect for two years. The court also concurred with Moreno that the fraud claim "lacked specificity."