Filed: Jul. 15, 2009
Latest Update: Mar. 02, 2020
Summary: RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 File Name: 09a0251p.06 UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT _ X - MICHAEL J. QUILLING, - Plaintiff-Appellee, - - No. 08-2328 v. , > - Defendants, - TRADE PARTNERS, INC., et al., - - FRANK TABER, - Intervenor-Appellant. N Appeal from the United States District Court for the Western District of Michigan at Grand Rapids. No. 03-00236—Robert Holmes Bell, District Judge. Argued: June 17, 2009 Decided and Filed: J
Summary: RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 File Name: 09a0251p.06 UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT _ X - MICHAEL J. QUILLING, - Plaintiff-Appellee, - - No. 08-2328 v. , > - Defendants, - TRADE PARTNERS, INC., et al., - - FRANK TABER, - Intervenor-Appellant. N Appeal from the United States District Court for the Western District of Michigan at Grand Rapids. No. 03-00236—Robert Holmes Bell, District Judge. Argued: June 17, 2009 Decided and Filed: Ju..
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RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 09a0251p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
X
-
MICHAEL J. QUILLING,
-
Plaintiff-Appellee,
-
-
No. 08-2328
v.
,
>
-
Defendants, -
TRADE PARTNERS, INC., et al.,
-
-
FRANK TABER, -
Intervenor-Appellant. N
Appeal from the United States District Court
for the Western District of Michigan at Grand Rapids.
No. 03-00236—Robert Holmes Bell, District Judge.
Argued: June 17, 2009
Decided and Filed: July 15, 2009
*
Before: GILMAN and McKEAGUE, Circuit Judges; GRAHAM, District Judge.
_________________
COUNSEL
ARGUED: Lincoln J. Knauer, HUSCH BLACKWELL SANDERS LLP, Springfield,
Missouri, for Appellant. Bruce S. Kramer, BOROD & KRAMER, P.L.C., Memphis,
Tennessee, for Appellee. ON BRIEF: Lincoln J. Knauer, Jason C. Smith, HUSCH
BLACKWELL SANDERS LLP, Springfield, Missouri, for Appellant. Bruce S. Kramer,
BOROD & KRAMER, P.L.C., Memphis, Tennessee, for Appellee.
_________________
OPINION
_________________
GRAHAM, District Judge. This appeal arises from the district court’s
administration of a receivership estate, the assets of which included nearly 1000
*
The Honorable James L. Graham, United States District Judge for the Southern District of Ohio,
sitting by designation.
1
No. 08-2328 Quilling v. Trade Partners, et al. Page 2
viaticated life insurance policies purchased by Trade Partners, Inc. The district court
authorized the receiver to pool the policies and distribute the proceeds on a pro rata basis
to persons who had acquired an interest in the policies from Trade Partners. Under the
plan of distribution, holders of such an interest were classified as “Class A” claimants.
Intervenor Frank Taber challenges the inclusion of his claim with those of the
Class A claimants in the district court’s plan. Taber argues that his diligence is what
distinguishes him from other Class A claimants. He acquired from Trade Partners the
status of beneficiary of a particular policy known as the WAL-L(3) policy. Taber
contends that his diligence in securing a “vested interest” in the policy proceeds should
give him priority over other Class A claimants and that he should receive the full amount
of his beneficial interest in the WAL-L(3) policy proceeds.
We AFFIRM the district court’s decision to grant Taber a pro rata share in the
distribution plan. Taber’s alleged diligence in securing a beneficial interest is not cause
for him to take priority when the interest that he actually acquired is no better than the
interests acquired by supposedly less-diligent Class A claimants.
I. BACKGROUND
A. Factual Background
Trade Partners, Inc. was a Michigan corporation that purchased viatical
settlement contracts. It used a third-party broker to purchase life insurance policies from
the policy owners before the policies matured. The insureds, or viators, typically had
terminal illnesses or limited life expectancies. This arrangement shifted the burden of
paying premiums to Trade Partners and meant that the viators received immediate cash
payments while they were still living. Trade Partners received the benefit of obtaining
the face amounts of the policies at a discount and with the expectation of relatively short
maturity horizons.
Trade Partners in turn marketed the policies to individuals “who wishe[d] to buy
a Viatical Settlement Contract as an Investment” and to any “owner of real estate who
[was] willing to exchange his property for a Viatical Settlement Contract.” (Trade
No. 08-2328 Quilling v. Trade Partners, et al. Page 3
Partners marketing materials, ROA 239). Taber fell into the second category. On
October 14, 1999, he entered into a Purchase Agreement with Trade Partners in which
he sold a piece of real estate, the Atrium Inn motel in Branson, Missouri, to Trade
Partners in exchange for a $1 million beneficial interest in viatical settlement contracts
and for $1,004,000 in cash.
The Purchase Agreement did not identify the policy or policies in which Taber
was acquiring an interest. Rather, it described the consideration provided to Taber as
a beneficial interest in “viatical settlement contracts with death benefits of One Million
Dollars ($1,000,000) and with a viator average life expectancy of five (5) years.”
(Purchase Agreement, § 2.1, ROA 514). The Agreement required Trade Partners to
deposit in escrow, in a trust account with the Grand Bank of Grand Rapids, Michigan,
an amount sufficient to pay the annual premiums on the viatical settlements contracts for
five years.
A closing of the property was scheduled for March 9, 2000. Prior to the closing,
Trade Partners sent their standard Agency/Policy Funding Agreement to Taber. Taber
sent a fax to his attorney on March 7, 2000 outlining his objections to the Agency/Policy
Funding Agreement. He questioned the need for the Funding Agreement when the
Purchase Agreement did not contemplate one. Also, he objected to certain items in the
Funding Agreement that he viewed as varying from the signed Purchase Agreement:
appointing Trade Partners as his agent, referring to Taber as an “investor,” and making
TPI Grand Trust (a pass-through entity of Trade Partners created for the purpose of
holding policies, receiving death benefits, and disbursing proceeds) the named record
owner and beneficiary of any death benefits.
On March 9, 2000, Taber and his attorney participated in a conference call with
Trade Partners and its counsel. Through fax, the parties executed an Amendment to the
Purchase Agreement, which stated that the parties had agreed to amend the October 14,
1999 Purchase Agreement as described in a March 9, 2000 letter attached to the
Amendment. The March 9, 2000 letter stated that Taber would acquire a beneficial
interest in the WAL-L(3) life insurance policy. The letter further stated that Taber had
No. 08-2328 Quilling v. Trade Partners, et al. Page 4
been recorded as a unitholder of the Trust and that Trade Partners would change the
beneficiary form with the insurance company to designate Taber as a beneficiary of
slightly more than 34% of the $2.9 million in death benefits.
On the same day, Taber signed an Agency/Policy Funding Agreement appointing
Trade Partners as his agent for the purpose of acquiring a beneficial interest in the death
benefits of a viatical settlement contract. Taber agreed that he was purchasing a
beneficial interest in a designated policy and that he would be a unitholder of the Trust.
The Agreement stated that an entity named the Lundgren Trust was the owner and
beneficiary of the policy, with the right to assign it.
The records of Jefferson Pilot Corporation, the successor of the original issuer
of the policy, show that the Lundgren Trust became record owner and beneficiary of the
WAL-L(3) policy in August 1998. These records also show that ownership was
assigned to TPI Grand Trust on March 27, 2000. On March 31, 2000, Trade Partners
filed a change of beneficiary form in which it listed Taber as a beneficiary with a
34.482759% interest and TPI Grand Trust as a beneficiary with a 65.51725% interest.
On April 13, 2000, Trade Partners informed Taber that it had recorded his beneficial
interest in the WAL-L(3) and provided him a copy of the change of beneficiary form.
An agent for TPI Grand Trust filed another change of beneficiary form on
October 2, 2002 in which TPI Grand Trust was made 100% beneficiary of the policy.
This change occurred without Taber’s knowledge or consent.
B. Procedural History
Michael J. Quilling, in his capacity as receiver for Advanced Financial Services,
Inc., initiated this action in the United States District Court for the Southern District of
Michigan on April 8, 2003. Quilling had been appointed receiver of Advanced Financial
Services in an action styled S.E.C. v. Larry W. Tyler and Advanced Financial Services,
Inc., et al., No. 3-02-CV-282-P, in the United States District Court for the Northern
District of Texas on February 21, 2002.
No. 08-2328 Quilling v. Trade Partners, et al. Page 5
The complaint alleged that Advanced Financial Services, on behalf of its
investors, had purchased viatical settlement contracts from Trade Partners. The
complaint further alleged that Trade Partners was in financial distress, wasting its assets,
and failing to pay premiums that it was contractually obligated to pay under the
Agency/Policy Funding Agreements. Thus, according to the complaint, the policies in
which Advanced Financial Services and its investors had a beneficial interest were in
danger of lapsing. The complaint asserted claims for breach of contract, breach of
fiduciary duty, and fraud against Trade Partners and requested the appointment of a
receiver.
The district court appointed a receiver for Trade Partners on April 15, 2003. The
court took jurisdiction over all of the “assets, monies, securities, choses in action, and
properties, real and personal, tangible and intangible, of whatever kind and description”
of Trade Partners and appointed Bruce Kramer as the receiver of those assets. (April 15,
2003 Agreed Order Appointing Receiver ¶ 1, ROA 269). The order instructed Trade
Partners and its agents to surrender all receivership assets.
The receiver filed a motion seeking approval to pool the assets of the
receivership estate and use those assets in order to pay premiums that were due. The
receiver alleged that there were approximately 1000 viaticated life insurance policies
that Trade Partners owned, with a face value of death benefits of nearly $250 million and
affecting about 3500 investors. He further alleged that the premium escrow account, in
which Trade Partners should have kept sufficient funds to pay premiums, had been
depleted by Trade Partners. Because the policies were Trade Partners’ primary assets
and because 89 of the policies were in danger of lapsing, the receiver sought authority
to pool the policies and use the proceeds from matured policies in order to pay premiums
and preserve the death benefits.
The district court noticed a hearing for June 18, 2003 to consider the receiver’s
motion. On June 12, 2003, Taber filed a motion to intervene and vacate the appointment
of the receiver as to the WAL-L(3) policy. At the hearing, the receiver testified as to
what his investigation of Trade Partners had found, and counsel for Taber had the
No. 08-2328 Quilling v. Trade Partners, et al. Page 6
opportunity to examine the receiver. Based on the receiver’s testimony and the
documentary evidence, the court described Trade Partners as a Ponzi scheme and
concluded that there was a need to preserve the receivership assets. The court granted
the receiver’s motion for authority to pool assets and use proceeds to pay premiums, but
withheld from the receiver the authority to use proceeds from the WAL-L(3) policy,
leaving for later determination Taber’s claim to $1 million of the proceeds. The court
also expanded the receivership to exercise authority over all of the assets of TPI Grand
Trust and other Trade Partners affiliates.
The receiver then filed a motion concerning 213 policies that named someone
other than, or in addition to, Trade Partners or TPI Grand Trust as a beneficiary. Though
the motion largely concerned policies with irrevocable beneficiary designations – a
status that Taber, as a revocable beneficiary, had not obtained – the WAL-L(3) policy
was included in the list of 213 policies. The receiver’s concern was that the insurance
companies would pay death benefits directly to the named beneficiaries, even though the
court’s April 15, 2003 order placed the policies into the receivership. The court granted
this motion and directed the insurance companies affected to pay any death benefits
directly to the clerk of court.
The receiver filed a first amended proposed plan of distribution, and the court,
after hearing objections, gave final approval to the plan on January 9, 2007. The plan
authorized a pro rata distribution to anyone who had a right to payment against Trade
Partners based on an interest in viatical settlement contracts, “regardless of whether the
holder of the Allowed Claim is designated as an assignee of an interest or as an
irrevocable beneficiary of a particular insurance policy or as having a collateral security
interest or otherwise.” (First Am. Plan of Distribution, § 3.03, district court doc. #1351).
These persons were categorized as Class A claimants. An exception was made for
claimants who could establish that they had an ownership interest in a policy.
No. 08-2328 Quilling v. Trade Partners, et al. Page 7
C. The District Court’s Decision as to Taber’s Claim
On May 24, 2007, Taber applied to have his claim determined. He asserted that
he had a vested interest in $1 million of the WAL-L(3) death benefits and should not be
forced to accept a pro rata distribution with other Class A claimants. After the parties
briefed the merits of Taber’s claim, the magistrate judge conducted an evidentiary
hearing on June 5, 2007 and issued a Report and Recommendation that Taber be denied
special priority to the WAL-L(3) policy death benefits and that he be considered a Class
A claimant in the amount of $1 million and receive a pro rata distribution.
On objections to the Report and Recommendation, the district court likewise
rejected Taber’s claim to a full distribution in its September 16, 2008 Opinion:
Frank Taber objects to the R & R. He contends that his claim should be
paid in full because he has a vested interest in the WAL-3 policy under
Michigan law, and because he, in contrast to the other investors, was
vigilant in protecting his rights.
There is no dispute that Mr. Taber has a vested property interest in the
WAL-3 policy. However, that status does not distinguish him from the
other Class “A” claimants. Mr. Taber himself acknowledges that being
directly registered with the insurance company does not distinguish his
situation because hundreds of other Class “A” claimants were also
“directly registered beneficiaries” or “irrevocable beneficiaries” or
“owners of record” and had vested property interests under state law.
(Dkt. No. 1693, Obj. to R & R 11.)
Mr. Taber nevertheless contends that he is distinguishable from the other
Class “A” claimants with vested property interests because he “acquired
this status by diligence and tough negotiation, not by ordering off the
menu of offerings.” (Id. at 12.) Unlike the other claimants, he insisted
on obtaining a status contrary to the offered company policy. (Id. at 13.)
Unlike the other claimants, he did not simply follow Trade Partners’
“standard business practices.” (Id. at 14.)
Mr. Taber’s attempt to distinguish himself from the other claimants is
unavailing. Notwithstanding Mr. Taber’s asserted “diligence and
vigilance,” he did not obtain any greater protections than the other Class
“A” claimants obtained. He did not obtain an ownership interest or a
security interest in the policy. Instead, he ended up in a position vis-a-vis
the WAL-3 policy that was no different from and no better than the
No. 08-2328 Quilling v. Trade Partners, et al. Page 8
position of many other claimants with vested interests in property owned
by Trade Partners.
This Court previously approved the Receiver’s first amended plan of
distribution which called for a pooling approach and a pro rata
distribution method rather than a tracing approach for the claims in this
case. (Dkt. No. 1523, 1/9/07 Order Approving R & R; Dkt. No. 1501,
12/01/06 R & R; Dkt. No. 1351, First Amended Plan of Distribution.)
The Court approved the pooling approach even for irrevocable
beneficiaries of specific policies such as Mr. Mueller. (Dkt. No. 1533,
1/30/07 Order 2; Dkt. No. 1497, 11/17/06 R & R 4-5.) As noted in a
previous R & R adopted by this Court, “‘equality is equity’ as among
‘equally innocent victims.’” (Dkt. No. 1501, R & R 3 (quoting
Cunningham v. Brown, 265 U.S. 1, 13,
44 S. Ct. 424,
68 L. Ed. 873
(1924)). There is nothing about Mr. Taber’s efforts that makes him more
innocent than the other investors or that would suggest that he should be
entitled to different treatment. Mr. Taber is similarly situated to the other
Class “A” claimants, and it is equitable to treat him in a similar manner.
(Sept. 16, 2008 Opinion, pp. 2-3, ROA 578-79).
II. ANALYSIS
In a receivership proceeding, the district court has “broad powers and wide
discretion” in crafting relief. S.E.C. v. Basic Energy & Affiliated Res., Inc., 273 F.3d
657, 668 (6th Cir. 2001). Thus, a district court’s decision relating to the choice of
distribution plan for the receivership is reviewed for abuse of discretion. Liberte Capital
Group, L.L.C. v. Capwill, 148 F. App’x 426, 433 (6th Cir. 2005) (unpublished) (citing
S.E.C. v. Credit Bancorp, Ltd.,
290 F.3d 80, 87 (2d Cir. 2002)).
Conceding the district court’s broad powers in distributing receivership assets,
Taber claims that he is “not challenging the District Court’s ‘pooling’ plan for
management and pro-rated distribution as to assets and claims properly part of the
receivership.” Rather, he characterizes his appeal as a challenge to the inclusion of the
WAL-L(3) policy proceeds in the receivership estate. He argues that the policy proceeds
“should not be part of the receivership’s pool of assets at all” and states: “What Taber
asks is that the Court except his vested interest in Policy WAL-L(3) from the District
Court’s plan of distribution.” With the issue on appeal so framed, Taber contends that
the standard of review should be de novo and for support cites F.T.C. v. Assail, Inc., 410
No. 08-2328 Quilling v. Trade Partners, et al. Page 9
F.3d 256, 262 (5th Cir. 2005) (holding that a district court’s determination of what assets
are included in the receivership estate is “reviewed on an overall abuse of discretion
standard, under which we review underlying factual findings for clear error and issues
of law de novo”).
While Taber purports to challenge the inclusion of the WAL-L(3) policy
proceeds in the receivership estate, the arguments he makes and the undisputed facts of
the case belie his characterization of the nature of the appeal. Taber does not advance
any arguments that he owned the WAL-L(3) policy, and the record confirms that he did
not. Both the Purchase Agreement, as modified on March 9, 2000, and the
Agency/Policy Funding Agreement gave Taber only a beneficial interest in the policy.
The later agreement expressly named the Lundgren Trust as the owner. The insurance
company’s records reflect that TPI Grand Trust then became the policy owner and that
Taber was never listed as an owner, only a beneficiary.
Thus, TPI Grand Trust owned the WAL-L(3) policy when the district court put
the assets of Trade Partners and TPI Grand Trust into receivership. The court
established a general receivership, taking jurisdiction over all of Trade Partners’ and TPI
Grand Trust’s assets. See Liberte Capital, 148 F. App’x at 433 n.3 (defining a general
receivership). Although Taber repeatedly emphasizes that he had a “vested interest” in
the policy, he is not saying that the policy matured before the receivership was formed,
such that he was entitled to immediate payment of his share of the WAL-L(3) death
benefits. What Taber means by “vested interest” is, to use his own words, “a right to be
paid.” But his contractual right to payment in no way removes the policy from the
receivership estate. Rather, it gives him a claim against the receivership. In Liberte
Capital, the appellants similarly argued for de novo review of the inclusion of their
contractual claim to death benefits in the district court’s distribution plan. The Court
rejected their attempt to alter the standard or review: “Contractual claims
notwithstanding, the insurance policies Liberte purchased were made part of an equitable
receivership subject to the court’s discretion.” Liberte Capital, 148 F. App’x at 433.
No. 08-2328 Quilling v. Trade Partners, et al. Page 10
In sum, Taber has stated no grounds for excluding the WAL-L(3) policy proceeds
from the receivership estate. The diligence argument that he makes on appeal concerns
his priority in relation to other claimants who also acquired an interest in Trade Partners’
viatical settlement contracts. This argument is one for better treatment within the plan
of distribution, not for exclusion from it. Accordingly, we review the district court’s
treatment of Taber’s claim for abuse of discretion.
Taber’s argument on appeal is one that he has consistently raised since the
district court’s initial hearing to consider the receiver’s request to pool and use the assets
of the receivership. He argues that his diligence makes him different from the other
victims of Trade Partners. He emphasizes that he did not accept Trade Partners’
proposed arrangement at face value, but negotiated his status as a beneficiary in the
WAL-L(3) policy. The district court’s September 16, 2008 Opinion aptly states why this
argument is of no avail.
In arguing that a court should look at how diligent a claimant was in obtaining
an interest in the assets of an entity that ultimately falls into a receivership, Taber relies
on two treatises: Clark on Receivers (3d ed. 1959) and J. Pomeroy’s Equity
Jurisprudence (5th ed. 1941). His reliance is misplaced. Though both authorities speak
of diligence, they do so in terms of the interest actually obtained, not in quantifying the
effort exerted to acquire the interest. For instance, Clark states that there are
“exceptional cases wherein a creditor by his diligence obtains something in the nature
of a lien or equitable lien on certain specific property of his debtor.” 3 Clark on
Receivers § 667.4 (3d ed. 1959). Pomeroy similarly notes, “‘Equity . . . imputes no
particular merit to diligence unless the advantage thereby acquired amounts to a lien, or
some vested right or interest, which neither equity or law will allow to be disturbed.’”
J. Pomeroy, 2 Equity Jurisprudence § 410 n. 19 (5th ed. 1941) (quoting In re Lord &
Polk Chem. Co., 44 A. 775, 778 (Del. Ch. 1895)).
No. 08-2328 Quilling v. Trade Partners, et al. Page 11
Both treatises agree that diligence should be considered only if it secures a
materially better interest (like a lien) than that of other claimants.1 The focus is on the
nature of the interest obtained, not on the degree of diligence spent to acquire it. Rather
than support Taber’s claim to priority, the treatises underscore that Taber’s purported
diligence got him no better of an interest than the interests of some of the other Class A
claimants. Taber bargained to be a revocable beneficiary. Unlike some of the other
claimants, Taber did not obtain a judgment lien, an ownership interest, or even status as
an irrevocable beneficiary. In other words, Taber got a lesser interest than did other
supposedly less-diligent Class A claimants.
Taber makes much of Pomeroy’s use of the term “vested interest.” Pomeroy’s
use, however, concerned situations where a vested interest put a claimant or creditor at
an “advantage” over others. Taber’s vested interest is a contractual right to a portion of
the death benefits of a policy. This does not make him unique among the claimants or
give him an advantage. Each of the Class A claimants exchanged valuable
consideration, either cash or real estate, for an interest in Trade Partners’ viatical
settlement contracts. All of them have a contractual right against Trade Partners to be
paid. That Taber tied his beneficial interest to a particular policy does not distinguish
him because, by the district court and receiver’s count, at least 200 other claimants
achieved the same thing and additionally gained status as irrevocable beneficiaries. And
though Taber claims to have been a tough negotiator, he did not acquire an ownership
interest, a security interest, or a lien – interests that may have given the district court, in
its wide discretion, reason to treat his claim differently from others.
Finally, Taber attempts to separate himself by arguing that the funds used to pay
premiums on the WAL-L(3) policy were not commingled with the funds used to pay
other policy premiums. Courts have supported a pro rata distribution where “the funds
of the defrauded victims were commingled,” Credit Bancorp, 290 F.3d at 88-89 (citing
1
By this we do not mean to say that a district court, when it distributes the assets of a
receivership, must give preference to a diligent claimant who obtained a materially better interest than
other claimants did. This opinion does not alter a district court’s wide discretion in crafting relief in
receivership proceedings.
No. 08-2328 Quilling v. Trade Partners, et al. Page 12
cases), and Taber argues that the absence of commingling here should result in his
receiving a full distribution. But to reach that result we would have to find as clearly
erroneous the magistrate judge’s determination that TPI paid the premiums for the
WAL-L(3) policy out of its general escrow funds. Taber points to no evidence
contradicting the magistrate judge’s determination, and indeed the evidence of record
supports a finding that payments for the WAL-L(3) premiums came from the same
escrow account at Grand Bank that Trade Partners commonly used to pay the premiums
of the viaticated policies it owned.
Ultimately, the district court has wide discretion in distributing receivership
assets. Taber has failed to demonstrate that the court abused its discretion in rejecting
his claim for superior treatment in the distribution plan. The district court’s approach
of pooling the receivership assets and distributing them on a pro rata basis is well-
supported, particularly where, as here, Taber was similarly situated to other Class A
claimants in his relationship to the defrauders. See Basic Energy, 273 F.3d at 668 (citing
Cunningham v. Brown,
265 U.S. 1, 13 (1924)); Liberte Capital, 148 F. App’x at 436;
Credit
Bancorp, 290 F.3d at 88-89; S.E.C. v. Forex Asset Mgmt. LLC,
242 F.3d 325, 331
(5th Cir. 2001); S.E.C. v. Elliott,
953 F.2d 1560, 1569-70 (11th Cir. 1992), rev’d in part
on other grounds,
998 F.2d 922 (11th Cir. 1993).
III. CONCLUSION
For the reasons stated above, we AFFIRM the judgment of the district court.
