Insurance Claims and Bad Faith Law Blog

Auction-Rate Bond Sellers, Fiduciary Duties, And the States.

 Auction-Rate Bond Marketers Are Buying The Bonds Back Rather Than Pay Potentially Much Greater Penalties in Proceedings Pursued by State Regulators.   

    One-time sellers of Auction-Rate Bonds are buying them back rather than face paying penalties.  The reason these former salespeople are acting this way is that previously they arguably acted like people who had fiduciary duties but may have breached them, at least according to allegations filed against them by many State regulatory agencies across the United States.

    Regulators of the sellers have launched investigations across the nation.  These local governmental investigations are resulting in settlements by which the sellers reduce their potential penalties exposure in return for protecting the people and local goverments to which they rather aggressively sold these securities.  Allegedly, the once-upon-a-time sellers kept selling Auction-Rate Bonds even after the market dried up for them -- in a niche market.  That means that, allegedly, the sellers knew the conditions of that unique market and most buyers did not.  Interview With Massachusetts Secretary of State William F. Galvin, "Still Sorting Out The Auction-Rate Mess/Galvin's Office Addresses Conflicts" (Boston Globe Online, Sunday, August 31, 2008).

    That would mean, it appears from these allegations, that the marketers occupied a superior position compared to the potential buyers, and that the marketers were acting on behalf of the buyers but instead preferred their own (sellers') interests to those of the people and entities for whom they were supposed to be acting.

    To offer a helpful definition here, adding to past posts about Auction-Rate Bonds and other types of Bonds which drew Bond Insurance Policies, Auction-Rate Bonds "are investment notes or securities or bonds -- financial commitments" which were treated like cash because they could be bought and sold with ease in their heyday.  This "high degree of liquidity" came from "a process of periodic rebidding."  Id.  The rates of Auction-Rate Bonds and Securities were regularly reset at auction, in basic and simple terms.

    Conflicts of interest are at the heart of investigations into the sale and purchase of other securities, such as Mortgages, and the sale and purchase of commodities, such as oil, wheat and cotton.  "There's not adequate supervision," says Secretary Galvin.  "We're all committed to a free market economy.  But a free market only works when it's truly free and it's not rigged."  Id.

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Expert Witnesses Testifying on Reasonable Conduct, Other Financial/Law Issues.

    Do you pay your Expert Witnesses $1,000 an hour?  Summaries in the newspapers of recent studies reflect that Expert Witnesses often charge that much.  Here is a handy link here.  This report uses many of the studies as resources.

    It is interesting that in 1 out of 3 lawsuits, Expert Witnesses testify at Trial in Federal Court about the "reasonableness of a party's actions" and other "business/law/financial" issues, as reported by studies of Federal Civil Trials and surveys of Federal Trial Judges across the nation.  More such issues are likely to be presented as the financial crisis deepens.

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Judge Holds Federal Process Server's Oath Good For Damages, Contempt.

     The current Federal Securities and Exchange Commission awarded a contract to a Process Server corporation to serve an administrative subpoena for a Witness' deposition.  A State Judge in Massachusetts found that the Process Server's Return of Service was false.  A Return of Service is an Affidavit under oath or affirmation that the Process Server served the Witness.

     Officials of the SEC believed the Return of Service to be in Good Faith and valid at the time.  The Witness, of course, did not appear for the SEC deposition.  A body that has the power to issue subpoenas seemingly has the power to pursue contempt proceedings against a Witness that does not appear.  In this case, "SEC officials" instead reportedly "criticized" the Witness to a newspaper reporter for his failure to appear.

     The Witness filed suit against the Process Server for damage to reputation.  The lawyer who defended the Process Server admitted that the Witness "offered to resolve the matter" if only the Process Server would admit to the SEC that it never served the SEC subpoena.  The Process Server did not agree to do that, for whatever reason, which is not entirely clear from a newspaper report about the matter, below.

     The Witness then proved to the Massachusetts State Court Judge hearing his case that the Process Server had not in fact served the SEC subpoena.  The Witness also proved damages to his reputation as a result of these events.  He was awarded $3,300,000.00 for his damages, with interest, and attorney's fees.

     Further, the Process Server's "principal owner and business manager" reportedly failed to appear at the hearing.  The Judge found them in contempt.

     Affirmations and oaths "in Good Faith" are serious business.  When they are found to be made NOT in Good Faith, woe unto them that the finding is about--plus in this case it appears, $3.3 Million and contempt of court charges too.  See Jonathan Saltzman, "Judge:  Firm Lied About Subpoena Delivery" (The Boston Globe Online, Saturday, June 28, 2008).

     No word on whether the current SEC asked for the Taxpayer money back from the Process Server that the SEC paid for the one unserved subpoena that is now known, nor whether it is examining other matters in which it awarded contracts to this same Process Server, nor on whether the same SEC officials "criticized" the Process Server in any way.

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Attorneys at Issue in Bad Faith Cases.

     The past two years have seen two new cases that have shaken Florida Insurance Law.  Neither case has been cited by other Courts -- yet.  This is the time to tell you about them.

     In Barry v. GEICO General Insurance Co., 938 So. 2d 613, 615-17 (Fla. 4th DCA 2006)(subscription required), an Attorney-Expert Witness testified to opinions that GEICO did not act in Bad Faith when it failed to settle the claim in that case, that the injured claimant "made it clear that she was not intending to settle", and that the actions of the Plaintiff and her Counsel "were inconsistent with a willingness to settle."  Here is the official Opinion released by the Florida Appellate Court.  The quoted summary of the Attorney-Expert's testimony appears on page 3 of the attached; see also pp. 5-7:  Download Barry_v. GEICO General Insurance Co. (Fla. 4th DCA Case No. 4D05.206 Opinion Filed Oct. 4, 2006).pdf.

     The U.S. District Court for the Middle District of Florida has expanded Barry's holding.  The District Court denied Plaintiffs' motions "to exclude evidence, argument, and references regarding the motives or conduct" of the claimants' attorney and the attorney's paralegal.  The Federal Court held in yet another Florida Bad Faith failure-to-settle case "that evidence and argument regarding the motives or conduct" of the claimants' attorney and the attorney's paralegal "is relevant and should not be prohibited."  Mendez v. Unitrin Direct Property & Casualty Insurance Co., 2007 WL 2696795 *3-*4 (M.D. Fla. Opinion Filed Sept. 12, 2007)(subscription required).  Here is the Middle District's official Opinion.  Its quoted holding will be found on pages 5-6 of the attached:  Download Mendez_v. Unitrin Direct Property & Casualty Insurance Co. (M.D. Fla. Case No. 8.06.CV.563, Opinion Filed Sept. 12, 2007).pdf.  The Mendez case has an interesting further history.  The case went to Trial which resulted in a Judgment for the Plaintiffs.  Thereafter, the Court's Online Docket shows that the case was settled.  The Federal lawsuit was then dismissed without prejudice in February, 2008.

     As I wrote at the beginning, Barry and Mendez have not been cited by other Courts as yet.  The only case known to include a cite to Barry is Mendez.  No known Court has cited to Mendez -- yet.

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Bankruptcy Court Reprimands Mortgage Lender, But Not in Bad Faith.

    In a 72 page opinion, a Bankruptcy Judge in the United States District Court for the Southern District of Texas has listed many errors by Countrywide Financial Corporation in a borrower's Bankruptcy case, including fees that were allegedly improper or unexplained, a motion to lift a bankruptcy stay that should never have been filed as the Court described it, and negligence.  The Court told Countrywide to reevaluate how it handles the kinds of policies and procedures that were listed in these 72 pages including what the Court itself described as a disregard for professional and ethical obligations.

    However, this misconduct could not be sanctioned as Bad Faith in litigation, said the Court, which felt compelled to apply a standard of "clear and convincing" evidence.  The Court's opinion is so long that it is in two parts, available by linking here:  Download Countrywide_(In_re_Parsley)_decision_(S.D. Tex., Bankr., Opinion Filed 03.05.08).Pages1through40.pdf and here:  Download Countrywide_(In_re_Parsley)_decision_(S.D. Tex., Bankr., Opinion Filed 03.05.08).Pages41to72(end).pdf.

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United States Trustee Sues a Second Time Alleging Litigation Misconduct.

    The United States Trustee has sued Countrywide a second time for alleged misconduct in Bankruptcy cases and related foreclosure litigation.  "Countrywide is Sued Again By U.S. Overseer" p.C3, col. 6 (Reuters Report Published in New York Times Nat'l Ed., Wed., March 5, 2008) 

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United States Trustee Files "Bad Faith" in Bankruptcy Complaint.

    The United States Trustee took an unusual step.  The office filed a lawsuit on its own, accusing a lender of Bad Faith in Bankruptcy litigation.  Reportedly, the United States Trustee has sought instead to intervene in Bankruptcy litigation in the past.

    The lender in question is Countrywide Home Loans.  Countrywide is presently involved in many foreclosure and Bankruptcy proceedings across the nation.  The United State Trustee's complaint contains these allegations concerning Countrywide's behavior in one particular Bankruptcy case, in pertinent part:

     "By accepting the plan payments to which it knew it was not entitled, and failing to promptly return such payments, Countrywide has acted in bad faith in the conduct of litigation before the Court in this case that the rules are not up to the task of adequately sanctioning."

[Emphasis added.]

    The relief requested?  An Injunction and Restraining Order prohibiting Countrywide "from engaging in bad faith and abusive practices".  [Emphasis added.]  Gretchen Morgenson, "U.S. Seeks Sanctions Against Lender/Countrywide Sued Over its Practices" p. B3, col. 4 "Business Day" Section (New York Times Nat'l Ed., Saturday, March 1, 2008).

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UPDATE: California Arbitrator Awards Attorney's Fees Too.

    A previous post in this space addressed an Arbitration Award in a California Arbitration.  The Arbitration of the Insurance issues apparently including Good Faith and Fair Dealing or not, was demanded by the Health Insurance Company, Health Net Inc.  The agreed Arbitrator is a retired California Judge.  The California Arbitration resulted in an Award of over $9.4 Million, $8.4 Million of which was a Punitive Damages assessment against Health Net.  See the post here, on February 23, 2008.

    On February 28, 2008, a follow up newspaper report published in the Los Angeles Times Online seems to call into question what remedies or options, if any, Health Net and its Attorneys may have to appeal or even question the Arbitration Award:  Lisa Girion, "Penalty Cuts Insurer Profit/Health Net Lowers Its Earnings After a Judge Awards $9.4 Million to a Cancer Patient Whose Policy Was Canceled" (Los Angeles Times Online, Thursday, Feb. 28, 2008).

    As the linked newspaper report's headline reflects, Health Net is filing documents with the Securities and Exchange Commission reflecting that the Arbitration Award has lowered its reportable net income for 4Q 2007, from $123.4 Million to $116.9 Million.

    The newspaper also reports that the California Arbitrator has awarded the Policyholder her Attorney's Fees, in an amount to be determined.

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Other Bad Faith: Discovery (Not in New York Federal Case).

     Bad Faith in discovery can lead to striking a pleading or entering a default judgment as a sanction.  Kenneth_v. Nationwide Mut. Fire Insurance Co. (W.D.N.Y. Case No. 03CV521F, Opinion Filed Nov. 13, 2007).pdf at page 26 of the linked official report from the Court's public web site; also available by subscription as 2007 WL 3533887 at page *13.  "Nevertheless, the severe sanction of dismissal of a lawsuit under Rule 37 should be imposed only under extreme circumstances, [citation omitted], and not unless the failure to comply with a pretrial production order results from willfulness, bad faith, or fault of the sanctioned party, [citation again omitted].  Open and unequivocal defiance of court ordered discovery is, notwithstanding, sufficient to support a finding of bad faith or willful misconduct supporting the severe sanction of dismissal of a pleading."  Id. at 27; 2007 WL 3533887 at *13.

     In this recent decision, the Federal Court found that the record did not warrant "the extreme sanction of dismissing the Complaint".  Id. at 28; 2007 WL 353887 at *14.  The Federal Court went on, however, to address the Defendant Insurance Company's particularized Motion to Compel specifically further directed to 8 Interrogatories and granted the Motion as to 7 of the 8 Interrogatories.

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Pennsylvania Mistakes And First-Party Bad Faith: A link!

     This morning there is a new post on Insurance Claims Issues.  Check it out here.

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