Lincoln National Life Insurance Company v. Imperial Premium Finance Company, LLC, No. 13-12559 (11th Cir. 2015)Annotate this Case
Imperial Premium Finance LLC was implicated in a life insurance scheme. Imperial’s primary business involved stranger-originated life insurance (STOLI), yet its business was not a STOLI 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 loans whose terms allowed Imperial to foreclose on the policy and become the policy owner if the borrower defaulted. Seeking to evade "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. In late 2007, Florida resident Barton Cotton met with an insurance agent to buy a multimillion-dollar life insurance policy and finance the premium payments. Cotton was ultimately referred to Imperial about financing the premium payments. Cotton and an irrevocable trust in his name applied to Lincoln National Life Insurance Company for an $8 million life insurance policy. 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. Premium payments were advanced to the trust until Imperial lent the trust $335,000. The trust used that money to repay the advance and to continue making the premium payments. Because of the high interest rate and an “origination fee," after less than two years, Imperial’s $335,000 loan to the Cotton trust had ballooned to more than $557,000. Cotton was diagnosed with esophageal cancer. The loan used to finance the policy reached maturity and became due, and Cotton died two months after that. At the time of his death the trust had not paid back Imperial for the loan, but Imperial had not yet foreclosed on it, which left the trust for the benefit of Cotton’s family as the record owner of the policy. After learning of Cotton’s death, Lincoln launched an investigation which turned up the fact that Imperial had financed the purchase of the policy on Cotton’s life under a STOLI scheme. Lincoln refused to pay the death benefit. In April 2011 the Cotton trustee sued Lincoln for the benefit. Lincoln counterclaimed, alleging fraud, negligent misrepresentation, and civil conspiracy. Imperial asked its outside counsel to represent the trust. During discovery, Lincoln sought to depose Imperial under Rule 30(b)(6) of the Federal Rules of Civil Procedure. Because the topics included in Lincoln’s subpoena touched on subjects related to the criminal investigation, Imperial’s managers and employees exercised their individual Fifth Amendment rights and all refused to testify in the Rule 30(b)(6) deposition in the Lincoln case. Imperial's proffered expert witness was unable to answer questions at the deposition or at trial specific to the facts of the Cotton trust case. The jury later returned a verdict in favor of the trust, finding that though Cotton and others conspired to commit an unlawful act, Lincoln had not relied on or been damaged by the misrepresentations, and therefore not injured by the conspiracy. The court notified the parties that it was considering sanctions against Imperial and its proffered expert due to the witness' poor "performance" and lack of preparation at trial. After a hearing, the court assessed sanctions against Imperial. Imperial appealed that sanctions order. Finding that the district court's findings were not clearly erroneous and its imposition of sanctions was not an abuse of discretion, the Eleventh Circuit affirmed the sanctions order.