Universal Settlements International, Inc. v. National Viatical, Inc. et al

Filing 383

OPINION ; signed by Judge Robert Holmes Bell (Judge Robert Holmes Bell, kcb)

UNITED STATES DISTRICT COURT F O R THE WESTERN DISTRICT OF MICHIGAN S O U T H E R N DIVISION

U N IV E R S A L SETTLEMENTS INTERNATIONAL, INC., P l a in tif f , F ile No. 1:07-CV-1243 v. H O N . ROBERT HOLMES BELL N A T I O N A L VIATICAL, INC., JAMES TORCHIA, and MARC A. CELELLO, D e f e n d a n ts . / OPINION T h is diversity tort action is currently before the Court on Defendants' motions for s u m m a ry judgment and to determine choice of law (Dkt. Nos. 253, 254, 256, 312). For the re a s o n s that follow, the motions will be denied. I. T h is action is related to Plaintiff Universal Settlements International, Inc.'s ("USI") p u rc h a se of certain assets of Trade Partners, Inc. ("TPI"), from the court-appointed Receiver in Quilling v. Trade Partners, Inc., File No. 1:03-CV-236 (W.D. Mich.). The TPI assets c o n sis te d of a portfolio of approximately 850 life insurance policies. The Receiver hired D e f en d a n t National Viatical, Inc. ("NVI") to manage the TPI portfolio on behalf of the R e c eiv e rs h ip . On or about January 14, 2005, USI agreed to purchase the TPI portfolio from th e Receiver for 26.58% of the total death benefit of each policy as it was transferred to the

b e n e fit of USI. (Dkt. No. 262, Ex. 1, Purchase and Sale Agrmt. at ¶ 2.1.) The policies had p o te n tia l death benefits of approximately $160 million, so the total purchase price of the TPI p o rtf o lio was anticipated to be approximately $43 million. (Id.) USI and the Receiver a g re e d that Marc A. Celello, an attorney licensed in the state of Georgia, would be the escrow a g e n t for any transfer of funds from USI to the Receiver necessary to effect the purchase of th e TPI portfolio. (Purchase and Sale Agrmt. ¶ 2.1; Dkt. No. 313, Ex. A, Escrow Agrmt.) O n May 25, 2005, United States Magistrate Judge Ellen S. Carmody issued a Report a n d Recommendation recommending approval of the sale of the TPI portfolio to USI. (File N o . 1:03-CV-236, Dkt. No. 1017.) This Court entered an order approving the sale on July 1 9 , 2005. (File No. 1:03-CV-236, Dkt. No. 1057.) Prior to January 25, 2007, Antonio "Tony" Duscio, Christopher Halas and Jeffrey P a n o s , were equal shareholders of USI. (Compl. ¶ 40.) Duscio was the president of USI and w a s responsible for arranging for the purchase of the TPI portfolio. USI funded the purchase o f the TPI portfolio in installments. On January 13, 2005, USI wired $5 million to Celello as a deposit so that the Receiver could pay premiums on the policies until they were tran sfe rred to USI, and $15,000 for Celello's fee. These monies were placed in Celello's IO L T A account ending in 9588 ("the '9588 IOLTA account"). On February 17, 2005, USI w ire d $33.5 million to Celello to be used to pay the purchase price. This money was placed in Celello's USI beneficial account ending in 7064 ("the '7064 escrow account").

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U S I made two additional wire transfers to Celello that are at the heart of the parties' d is p u te in this case. On June 13, 2005, USI wired $4.5 million to Celello, and on December 1 3 , 2005, USI wired $2 million to Celello. These wired funds were not placed in the '7064 e sc ro w account. Rather, they were placed in Celello's '9588 IOLTA account. (Dkt. No. 268, E x . 5.) Celello made the following transfers from the '9588 IOLTA account: $1 million to N V I on August 16, 2005, $2.715 million to NVI on August 23, 2005, $1.5 million to the '7 0 6 4 escrow account on December 13, 2005, $1 million to Duscio on December 14, 2005, a n d $795,000 to NVI on December 22, 2005. (Dkt. No. 318, Ex. 4.) USI contends that the to ta l amount of these two wires ($6.5 million) was earmarked for the purchase price of the p o lic ie s, and that it should have been held for the benefit of USI. Defendants, on the other h a n d , contend that of the $6.5 million transferred, $5 million was paid pursuant a policy m an a g e m en t agreement entered into between USI and NVI on July 26, 2005, (the "USI/NVI A g re e m e n t" ). As of the end of January 2007, Halas and Panos acquired all of the stock of USI held b y Duscio and took over as president and secretary of USI. (Am. Comp. ¶¶ 1, 40.) Duscio w a s no longer an officer, director, or shareholder of USI. (Compl. ¶ 40.) Halas and Panos d e te rm in e d that $5 million of USI funds were unaccounted for. They suspected that Duscio, to g e th e r with NVI, James Torchia (NVI's CEO), and Celello, had misappropriated the funds. O n December 12, 2007, USI filed this action against NVI, Torchia, and Celello, a lle g in g claims of (1) conversion, (2) rescission or voiding of agreement, (3) intentional

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in te rf e re n c e with contract, (4) civil conspiracy, (5) breach of fiduciary duty, (6) aiding and ab etting breach of fiduciary duty, (7) aiding and abetting corporate waste, (8) promissory e s to p p e l, (9) negligence, (10) statutory conversion, and (11) fraud. (Dkt. No. 77, Am. C o m p l.) USI has asserted claims against Duscio in a private arbitration in Ontario, Canada. (A m . Compl. ¶ 5.) Defendants NVI and Torchia, joined by Celello, move for summary judgment as to th e nine claims asserted against all of the Defendants 1 o n the basis that there is no evidence to support Plaintiff's fraud/theft/conspiracy claims against Defendants. (Dkt. Nos. 253, 256.) D e f e n d a n t Celello has filed a motion to determine choice of law and he has independently m o v e d for summary judgment as to the claims asserted against him alone.2 (Dkt. Nos. 254, 3 1 2 .) II. D e f e n d a n t Celello has requested the Court to make a determination as to what law will b e applied to USI's claims. A federal court sitting in diversity applies the choice-of-law p ro v is io n s of the forum state. NILAC Int'l Mktg. Group v. Ameritech Servs., Inc., 362 F.3d 3 5 4 , 358 (6th Cir. 2004) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496

NVI and Torchia's motion for summary judgment, which is joined by Celello, seeks s u m m a ry judgment as to Counts I-IV, VI-VII, and X-XII, alleging claims of conversion, re s c is s io n or voiding of agreement, intentional interference with contract, civil conspiracy, aidin g and abetting breach of fiduciary duty, aiding and abetting corporate waste, statutory c o n v e r s io n , and fraud which are asserted against all Defendants. C e le llo seeks summary judgment as to Counts V, VIII, and IX, alleging breach of f id u c ia ry duty, promissory estoppel, and negligence, which are asserted against him alone. 4
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( 1 9 4 1 )). For tort claims, Michigan courts apply the law of the forum unless there is a " ra tio n a l reason" to displace it. Olmstead v. Anderson, 400 N.W.2d 292, 302 (Mich. 1987). In determining whether a rational reason to displace Michigan law exists, we u n d e rta k e a two-step analysis. First, we must determine if any foreign state h a s an interest in having its law applied. If no state has such an interest, the p re su m p tio n that Michigan law will apply cannot be overcome. If a foreign s ta te does have an interest in having its law applied, we must then determine if Michigan's interests mandate that Michigan law be applied, despite the f o r e ig n interests. S u th e rla n d v. Kennington Truck Service, Ltd., 562 N.W.2d 466, 471 (Mich. 1997) (citing O lm s te a d , 400 N.W.2d at 305). "Although this balancing approach most frequently favors u s in g the forum's (Michigan's) law, Michigan courts nonetheless use another state's law w h e re the other state has a significant interest and Michigan has only a minimal interest in th e matter." Hall v. Gen. Motors Corp., 582 N.W.2d 866, 868 (Mich. Ct. App. 1998). For c o n tra c t claims, Michigan courts balance the expectations of the parties to the contract with th e interests of the states involved to determine which state's law to apply. Uhl v. Komatsu F o r k lift Co., Ltd., 512 F.3d 294, 302 (6th Cir. 2008); Chrysler Corp. v. Skyline Indus. Servs., In c ., 528 N.W.2d 698 (Mich. 1995). Defendant Celello asserts that Georgia has an interest in having its law applied b e c au s e all Defendants reside in Georgia, all of the actions took place in Georgia, and a G e o rg ia corporation is involved. Celello further contends that Georgia's interest in having its law applied outweighs Michigan's interest because no injuries occurred in Michigan.

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P la in t if f USI contends that Michigan has the primary state interest in this case because th e gravamen of USI's claims is that Defendants misappropriated $5 million of the money th a t USI transferred to Celello pursuant to the Purchase and Sale Agreement with the R e c eiv e r, which Sale Agreement was made and to be performed in Michigan and to be c o n s tru e d in accordance with Michigan law. " [ B ] ef o re entangling itself in messy issues of conflict of laws a court ought to satisfy its e lf that there actually is a difference between the relevant laws of the different states." B a r r o n v. Ford Motor Co. of Canada Ltd., 965 F.2d 195, 197 (7th Cir. 1992) (citing Int'l A d m 'r s , Inc. v. Life Ins. Co., 753 F.2d 1373, 1376 n.4 (7th Cir. 1985)); accord Meridia P r o d s . Liab. Litig. v. Abbott Labs., 447 F.3d 861, 865 (6th Cir. 2006)); In re Trade Partners, I n c ., Investors Litig., No. 1846, 2008 WL 2757835, at *5 (W.D. Mich. July 11, 2008). " W h e n the substantive laws of the various states are not in conflict on a particular issue, ju d ic ia l efficiency counsels that the law of the forum may be applied." In re Disaster at D e tr o it Metrop. Airport on Aug. 16, 1987, 750 F. Supp. 793, 796 n.6 (E.D. Mich. 1989). C ele llo has asserted generally that Georgia has an interest in the application of its laws f o r purposes of certainty and predictability of results, but he has not identified any conflicts b e tw e e n the applicable Michigan and Georgia law. USI asserted in its response brief that th e re are no such conflicts, and Celello has not filed a reply challenging this assertion. The C o u rt concludes that there is no rational reason not to apply the law of the forum at this time. T h e Court will accordingly deny Celello's motion to determine choice of law without

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p re ju d ic e to re-raise the issue should it appear that the substance of the relevant state laws d if f e r or conflict. III. D e f e n d a n ts NVI and Torchia, joined by Celello, move for summary judgment as to th e nine claims asserted against all of the Defendants. U n d e r Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is p ro p e r if there is no genuine issue as to any material fact and the moving party is entitled to ju d g m e n t as a matter of law. In evaluating a motion for summary judgment the Court must lo o k beyond the pleadings and assess the proof to determine whether there is a genuine need f o r trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). If D e f e n d a n ts carry their burden of showing there is an absence of evidence to support a claim, P la in tif f must demonstrate by affidavits, depositions, answers to interrogatories, and a d m i s s io n s on file, that there is a genuine issue of material fact for trial. Celotex Corp. v. C a tre tt, 477 U.S. 317, 324-25 (1986). In considering a motion for summary judgment, the Court must construe the evidence a n d draw all reasonable inferences in favor of the nonmoving party. Minges Creek, L.L.C. v . Royal Ins. Co. of Am., 442 F.3d 953, 955-56 (6th Cir. 2006) (citing Matsushita, 475 U.S. at 587). Nevertheless, the mere existence of a scintilla of evidence in support of Plaintiff's p o s itio n is not sufficient to create a genuine issue of material fact. Anderson v. Liberty L o b b y , Inc., 477 U.S. 242, 252 (1986). The proper inquiry is whether the evidence is such

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th a t a reasonable jury could return a verdict for Plaintiff. Id.; see generally Street v. J.C. B r a d fo r d & Co., 886 F.2d 1472, 1476-80 (6th Cir. 1989). D e f e n d a n ts move for summary judgment on the basis that there is no evidence to su pport Plaintiff's fraud/theft/conspiracy claims against them. Defendants contend that there is no genuine dispute that USI paid NVI $5 million in 2005 pursuant to a bona fide a g re e m e n t for the management of USI's recently purchased TPI viatical policies, as an a d v a n c e payment for management services for the life of the policies. According to D e f en d a n ts , USI willingly paid NVI for management services USI desperately needed and N V I subsequently provided. Defendants contend that USI cannot undo a legitimate contract entered into under the former management simply because the new management thinks it was a bad deal. USI responds that it is not trying to undo a lawful corporate act. Instead, USI c o n ten d s that the USI/NVI Agreement is a fraudulent sham by which NVI, Torchia, Celello a n d Duscio are unlawfully receiving a benefit from USI for no consideration or inadequate c o n sid e ra tio n , and that the USI/NVI Agreement was created to justify the theft of $5 million f ro m USI. (Am. Comp. ¶ 51.) USI contends that the $6.5 million wired to Celello on June 1 6 , 2005, and December 13, 2005, was earmarked for payment of the TPI policies, and that, b ec au se the TPI policies have been paid for, this money should have been returned to USI. U S I contends that Defendants' motion for summary judgment should be denied because there

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is an issue of fact as to the legitimacy of the USI/NVI contract and because discovery is in c o m p l e te . T h e foundation of Defendants' motion for summary judgment is their contention that th e re is no question of fact that the July 26, 2005, USI/NVI Agreement was a bona fide a g re e m e n t for portfolio management services, executed by Duscio on behalf of USI while h e had authority to bind USI. There is no dispute that in July 2005, Duscio, as president of USI, had apparent and ac tual authority to bind USI to legitimate contracts with third parties to manage USI's p o lic ie s. Nevertheless, as noted in the Magistrate Judge's September 4, 2008, Report and R e c o m m e n d a tio n , "[u]nder either Michigan or Georgia law, a principal is not bound by the te rm s of a fraudulent agreement entered into by an agent for that principal." (Dkt. No. 137, R & R 6 (citing cases).) In addition, Defendants have not presented an original copy of the U S I /N V I Agreement. To prove the content of a writing, the Federal Rules of Evidence g e n e ra lly require the original writing, Fed. R. Evid. 1002, but "[a] duplicate is admissible to th e same extent as an original unless (1) a genuine question is raised as to the authenticity of th e original or (2) in the circumstances it would be unfair to admit the duplicate in lieu of the o rig in a l." Fed. R. Evid. 1003. Thus, the question of the legitimacy of the USI/NVI A g re e m e n t ­ whether it is authentic and whether it was entered into for a fraudulent purpose, ­ is central to determining both Duscio's authority to enter into the agreement, and the a d m is s ib ility of a duplicate of the copy of the USI/NVI Agreement.

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T h e July 26, 2005, USI/NVI Agreement purports to be a written contract which o b lig a t e d USI to pay NVI $5 million in advance for insurance policy management services. In support of their contention that this is a legitimate contract, Defendants have presented d e c la ra tio n s from Tony Duscio and James Torchia, the signatories to the USI/NVI A g re e m e n t, and Marc Celello, the drafter of the USI/NVI Agreement. Duscio, former p re sid e n t of USI, states in his declaration that he executed the USI/NVI Agreement on behalf o f USI after USI determined that the TPI portfolio could not be effectively managed in house o r by an accounting firm. (Dkt. No. 253, Ex. 5, Duscio Decl. ¶¶ 14-20.) Torchia, CEO of N V I, states in his declaration that after the Magistrate Judge recommended approval of the sa le of the TPI portfolio, but before the district court approved the sale, Torchia entered into n e g o tia tio n s with Duscio regarding management of the TPI portfolio. They agreed that NVI w o u ld manage the TPI portfolio at its usual and customary rate of $50 per policy per month, b u t that the fee would have to be paid up front for the estimated ten-year service life of the p o rtf o lio . (Dkt. No. 253, Ex. 8, Torchia Decl. ¶¶ 14, 15, 19, 20.) Torchia signed the original o f the USI/NVI Agreement and sent it to Duscio. Duscio signed it, sent Torchia a photocopy, a n d kept the original. (Id. at ¶ 23.) Celello states in his declaration that he drafted the U S I /N V I Agreement to document the management agreement negotiated between the p rin c ip a ls of NVI and USI, and that after he drafted the USI/NVI Agreement, the hard drive o n the laptop he used to draft the agreement crashed, was unable to be repaired, and was d is p o s e d of. (Dkt. No. 253, Ex. 4, Celello Decl. ¶¶ 9, 10.)

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Defendants have also offered the declarations of three USI employees who indicated th a t it was well known within USI that USI had hired NVI to manage and track the TPI p o rtf o lio . (Dkt. No. 253, Exs. 6, 7, 9, Ruxton Decl. ¶¶ 4-5, Toffolo Decl. ¶¶ 5-8, Waddell D ec l. ¶ 7.) Finally, Defendants have offered the testimony of Bruce Kramer, the Receiver, a n d Michael Quilling, special counsel to the Receiver, to the effect that after investigation, th e y determined that there were no unauthorized disbursements from the escrow account, that th e $5 million payment from USI to NVI did not harm the Receivership estate, and that " th e re was no harm, no foul to anybody about his transaction." (Dkt. No. 313, Ex. 2, Kramer D ep . 202-03; Dkt. No. 42, Prelim. Inj. Hr'g Tr. 2/28/2008, at 86-88, 142-43.) In response to Defendants' motion, USI has presented evidence that it contends raises iss u e s of fact regarding the asserted legitimacy of the USI/NVI Agreement. Plaintiff asserts th a t it is implausible that the parties would not have made duplicate originals of the A g re e m e n t, that they would have used the services of only one lawyer to draft the Agreement w ith o u t a waiver of conflict, that the lawyer would not have had a backup system for his c o m p u te r, and that there are no contemporaneous documents tending to authenticate the A g re e m e n t. In addition to raising questions regarding evidence that does not exists, USI has p re se n te d evidence that the contemporaneous documents that do exist tend to undermine the e x is te n c e of a management agreement. Upon examination of USI's financial books and rec o rd s from January 2005 on, USI's CFO found no reference or entry of any sort

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d o c u m e n tin g any contract for any services with NVI. (Dkt. No. 268, Ex. 6, Khan Decl. ¶ 5.) R athe r, USI's bookkeeping entries for the June 16, 2005, and December 13, 2005, wire tra n sf e rs , are "Memo: Partners Portfolio" and "policy purchase." (Dkt. No. 268, Exs. 8, 9; K h a n Decl. ¶ 7.) The November 2006 audit of USI's financial statements for the year ended A p ril 30, 2006, does not mention the USI/NVI Agreement because Duscio did not reveal the e x is te n c e of an agreement with NVI to USI's accountant, Joseph Pillo. (Dkt. No. 268, Ex. 7 , Pillo Decl. ¶ 8.) USI also contends that Defendants' asserted chronology of events is contradicted by o th e r evidence. First, and foremost, the June 13, 2005, transfer of $4.5 million to NVI was m a d e before the Court approved the sale of the TPI portfolio contract, and before the U S I/N V I Agreement was entered into. There is also evidence that contradicts Duscio's d e c la ra tio n that he began discussions with NVI about managing the portfolio when he le a rn e d that Haynes & Moore LLC ("H&M") was not going to be able to handle management o f the portfolio. James A. Threlkeld, a member of H&M, states in his declaration that prior to his August 24, 2005, letter to USI, H&M "had not told USI or Duscio that it was c o n sid e rin g or intended to withdraw as Trustee and resign as Escrow Agent for USI." (Dkt. N o . 268, Ex. 4, Threlkeld Decl. ¶ 10.) USI contends that Defendants' representations regarding the funding of the m a n a g em e n t fee are nonsensical. According to USI, if the transfers were for a management co n trac t to be paid in advance, there was no reason to make payment through Celello. There

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w a s also no reason to make the transfer in two payments, or to combine the transfer of money f o r the management contract together with the transfer of $1.5 million that was eventually tra n sf e rre d from Celello's '9588 IOLTA Account to the '7064 escrow account to be used to p a y policy premiums and to pay other fees related to the purchase of the TPI portfolio. (See D k t. No. 322, Ex. 3, Celello Decl. ¶ 7.) USI contends that the fee arrangement in the USI/NVI Agreement was d isp ro p o rtio n a te to the services to be rendered. NVI had been managing the TPI portfolio a t $25 per policy per month. Even if $50 per policy was NVI's going rate, payment in a d v a n ce for 850 policies for ten years does not take into consideration the likelihood that f e w e r than 850 policies would be transferred, that few of them would last ten years, and the in te re s t alone on the $5 million fee was twice the fee NVI had been paid by the Receiver. USI has also presented evidence that it contends contradicts Defendants' assertion that N V I managed the TPI portfolio pursuant to the July 2005 USI/NVI Agreement. In an O c to b e r 2005, email, Torchia, on behalf of NVI, rejected USI's request that NVI obtain m e d ica l records and life expectancies on the TPI policies. (Dkt. No. 318, Ex. 31.) Torchia s ta te d that the task of obtaining this information should be done by USI, not by NVI, and that N V I was already busy chasing down changes for USI and the Receiver, "which by the way w a s not our job to do but we are doing it as a courtesy to you." (Id.) He suggested that USI g e t the medical records itself, or "get the guys who are going to service this to do it." (Id.)

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In November 2005, USI was billed by Centurion Policy Services LLC for policy-tracking serv ices. (Dkt. No. 318, Ex. 27.) In response to Defendant Celello's contention that the Receiver's investigation e sta b lis h e s that Celello did not divert any USI funds to NVI, USI points out that the Receiver d id not investigate the basis for USI's $5 million payment to NVI, nor did he investigate w h e th e r NVI was in fact managing the TPI portfolio for USI. (Kramer Dep. 202.) The R e c e iv e r merely concluded that the $5 million payment had no effect on the Receivership e sta te . (Kramer Dep. 203-04.) Although Quilling accepted Torchia's explanation for the $5 m illio n payment to NVI (02/28/2008 Prelim. Inj. Hr'g Tr. 82-84), it is evident that Quilling d id not undertake a thorough investigation into the validity of the USI/NVI Agreement, as h is primary concern was whether $5 million had been taken from the escrow account. (Id. at 86, 88, 89.) Finally, USI notes that at the time it responded to Defendants' summary judgment m o tio n s, discovery was not yet complete. According to the Rule 56(f) declaration of USI's a tto rn e y, Robert Franzinger, depositions of virtually all of the key witnesses are yet to be c o m p le te d , including depositions of NVI's former vice president, Michael Sullivan, who had m a d e statements that the $5 million payment from USI to NVI constituted a kickback or b ro k e r's commission, depositions of NVI employees who would be knowledgeable about the c laim e d destruction of the hard drive of Celello's laptop computer, depositions of individuals w h o would likely refute Defendants' claim that NVI was primarily responsible for

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m a n a g em e n t of the TPI portfolio, and depositions of the individuals who have given d ec laratio n s. (Dkt. No. 318, Ex. 32, Franzinger Decl.) Defendants have offered very little by way of explanation in response to Plaintiff's e v id e n c e regarding the discrepancies surrounding the purported USI/NVI management a g re e m e n t. Upon consideration of all of the evidence and arguments, the Court is satisfied th a t USI has presented sufficient evidence to raise material issues of fact as to the legitimacy of the USI/NVI Agreement. Accordingly, Defendants' motion for summary judgment, which re s ts on the legitimacy of the USI/NVI Agreement, will be denied. IV. D e f en d a n t Celello seeks summary judgment on the claims against him because he c o n te n d s that there is no dispute that he properly disbursed all of the funds from the '7064 e sc ro w account in accordance with the requirements of the Escrow Agreement entered into p u rs u a n t to the Purchase and Sale Agreement between USI and the Receiver, and that he p ro p e rly disbursed the funds from his '9588 IOLTA account pursuant to the USI/NVI A g re e m e n t. USI is not challenging Celello's distribution of funds from the '7064 escrow account. T h e issue in this case concerns the deposit of $5 million into Celello's '9588 IOLTA account a n d the disbursement of those funds. Accordingly, Defendant Celello's contention that he p ro p e r l y disbursed money from his '9588 IOLTA account rests on the validity of the U S I/N V I Agreement. Because, as identified in Part III above, there are issues of fact as to

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th e validity of the USI/NVI Agreement, Celello's motion for summary judgment must s im ila rly be denied. An order consistent with this opinion will be entered.

Dated: June 4, 2010

/s/ Robert Holmes Bell ROBERT HOLMES BELL UNITED STATES DISTRICT JUDGE

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