Cotton, a resident of Florida, told an insurance agent in 2007 that he wanted to buy a multimillion dollar life insurance policy and finance the premium payments. The agent referred Cotton to Bryan, who was "doing that kind of work." Bryan contacted Imperial Premium Finance LLC, which offered financing for stranger-originated life insurance ("STOLI") premiums.
According to the court, "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."
Under this arrangement, Imperial was likely to become the owner of the policy. The court stated, "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."
Cotton and an irrevocable trust in his name applied to Lincoln National for a life insurance policy. Cotton's wife and children were the beneficiaries of the trust. In order to avoid Florida's insurable interest law, Cotton falsely stated on the application that he was not buying the policy for resale and that he would not use a third party to finance the premiums.
Lincoln issued a policy insuring Cotton's life for $5 million. The policy became an asset of the trust. Contrary to the representations in the application for insurance, the trust obtained a $335,000 loan from Imperial to pay the premiums.
Cotton died of cancer in 2010. Lincoln conducted an investigation, which according to the court, "turned up the fact that Imperial had financed the purchase of the policy on Cotton's life in order to market it to speculators under a STOLI scheme." When Lincoln denied the claim, the Cotton trustee sued to recover the death benefit. Lincoln counterclaimed by alleging fraud, negligent misrepresentation, and civil conspiracy, and filed a third-party action against Imperial.
During discovery, Lincoln served a notice to take a Rule 30(b)(6) deposition of Imperial. Because the deposition topics touched on subjects involved in an ongoing criminal investigation of Imperial's business, its employees refused to testify, invoking their Fifth Amendment rights. Imperial then obtained permission from the court to use a non-employee witness to testify on its behalf.
Imperial hired Norris, described as "an independent economist with a history of testifying as an expert witness," to serve as its corporate representative. However, Norris "was often unable to answer questions apparently because Imperial had not briefed him on the answers." At trial, Lincoln called Norris as a witness, but "he was unable to answer about 20 questions due to his lack of knowledge."
The jury found that Cotton made material misrepresentations in his application for insurance, but Lincoln had not relied on the misrepresentations or been damaged by them. As a result, judgment was entered for the trust for the $5 million death benefit and for $850,000 in attorney's fees.
The district court then notified the parties that it was considering sanctions against Imperial and Norris, stating that Imperial "hid behind" Norris, meaning "that it hid facts harmful to it by not briefing Norris on them." After a hearing, the court assessed sanctions of $850,000 against Imperial, explaining that Imperial was "the driving force behind the litigation and its selective preparation of Norris constituted bad faith." The court reasoned that because Imperial had created the issues that led to the litigation, Imperial, and not Lincoln, should bear the cost of the award of attorney's fees.
On appeal, the Eleventh Circuit affirmed, finding that Imperial had acted in bad faith by producing an unprepared witness for the Rule 30(b)(6) deposition. "Preparing a designated corporate witness with only the self-serving half of the story that is the subject of his testimony is not an act of good faith," the court said.
Instead, Imperial "seized on the existence of the criminal investigation as an opportunity to craft a perfect witness for its interests: one who was knowledgeable about helpful facts and dumb about harmful ones." As a result, "[t]he district court did not err, much less clearly err, when it found bad faith in Imperial's calculated preparations that produced the one-way witness that Imperial designated to testify for it."
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