Insurance Claims and Bad Faith Law Blog

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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If You Reap Rewards, Then You Bear Responsibilities, Too ... Right?

    Under their current payment system, it appears that corporate executives receive large payments regardless of their companies' financial performance.  The idea that achieving balance in the payments received by corporate executives is a desirable goal, is shared by increasing numbers of people, among them, the president of a New York investment firm quoted in Gretchen Morgenson, "Fair Game/Approve This Deal, or Else" p. 1, col. 3 "SundayBusiness" Section (New York Times Nat'l Ed., Sunday, June 15, 2008), available online at www.nytimes.com.  The idea is that corporate executives need to share in the risk, as well as in the reward.  Since they have the opportunity to receive large payments, so the idea goes, they should receive large payments if their corporations perform well financially, but they should pay back some or all of the payments they have received, if their companies do not perform well.

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Federal Regulatory Rules Out for Comment.

     The Office of Thrift Supervision issued proposed rules curbing some "deceptive and unfair practices" on some credit card fees and practices.  See for example Kathy M. Kristof, "Proposed Rules Seek to Bar Some Rate Hikes by Credit Card Firms" (Los Angeles Times Online, Friday, May 2, 2008).  Reportedly, the same rule changes will also be proposed by the Federal Reserve Board and by something called the National Credit Union Administration.

     One of the proposed rules would bar some retroactive interest rate hikes.  One person testified before Congress that she had never made a late payment and had never gone over her limit -- sound familiar to anyone? -- yet her credit card company charged her 24.99% interest because, she testified, the credit card company thought that her credit card balance was  "too high".

     Another proposed rule would impose limits on when a credit card company that mails out its statements late, and then charges a late fee to the consumer because the payment is late  -- how about this sounding familiar to anyone?   Under a newly proposed rule, credit card companies would have not less than 21 days to mail or deliver their statements to their credit card holders before the due date.

     It is reported that there will be a public comment period of 75 days.  It is "anticipated" that the proposed rules will be adopted before 2009.

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Planners With Fiduciary Duties: A Definition Given.

     A fiduciary has recently been described as someone who has to work in their client's best interests.  "That means they have to put your interests ahead of theirs at all times by providing advice on investments that will serve you -- not them -- best."  Alina Tugend, "Pick a Planner Who Can Spell 'Fiduciary'" p. B5, col. 1 (New York Times Nat'l Ed., Saturday, April 26, 2008).

     That is one of the better definitions of "fiduciary" in any situation, not just in the stock market or in the business of recommending investments.

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What Role do Conflicting Contractual Duties Play in Establishing Fiduciary Relationships?

 Employers hire Healthcare Cost Managers, companies which reportedly contract to help employers manage their Health Insurance programs "and get medicines at the best available prices."   Milt Freudenheim, "The Middleman's Markup/Benefits Managers Earn Profits With Exclusive Rights on Specialty Drugs" p.B1, col. 2 (New York Times Nat'l Ed., Sat., April 19, 2008).

    Some of these Drug Benefit Managers also contract with some Drug Manufacturers.  Under those separate contracts, the Healthcare Cost Managers assume the duties of exclusively distributing so-called 'specialty' drugs made by the Manufacturers.  Specialty drugs are not called that just because they are novel, but because they have no generic subsitutes.  An example given in the report is an exclusive contract to distribute an anti-seizure drug prescribed for an epileptic child.
   
    If these separate contracts present conflicting duties for the same corporation, which attempts to assume the role of an employer's Manager of Drug Benefits and, at the same time, to assume the duties of Exclusive Distributor for a Drug Company, which if either of these types of contracts establishes a Fiduciary Relation?

    Absent a Fiduciary Relationship, can there be Fiduciary Duties?

    Finally, what if any benefit is conferred upon the contracting employers who think they are paying good money for someone to manage their drug benefits?

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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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Fiduciary Breach as Cause of Action Alone.

    American International Group has reportedly sued other people for alleged Breach of Fiduciary Duties.  The seven defendants in the case, filed by A.I.G. in the New York State Supreme Court, are all former A.I.G. Officers and Directors including A.I.G.'s former CEO, Maurice R. Greenberg.

    In a twist, it appears that A.I.G. has alleged claims or causes of action only for alleged Breaches of Fiduciary Duties as stand-alone claims, without also alleging any other causes of action of any kind or nature.  "New A.I.G. Jab at Ex-Chief Focuses on Fiduciary Duties" p. C4, col. 4 (Reuters Report published in New York Times Nat'l Ed., Friday, March 28, 2008).

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Adjustable-Rate Mortgages a Fraud?

    The Federal Bureau of Investigation is reportedly investigating 17 corporations to see whether they committed Crimes and Corporate Fraud when these corporations were involved in selling adjustable-rate mortgages.  "The government is investigating whether many of these adjustable-rate mortgages were sold under fraudulent pretenses."  "Justice Dept. is Gathering Data on Mortgage Industry" p. B7, col. 4 "Business Day" Section (Reuters Report published in the New York Times Nat'l Ed., Saturday, March 22, 2008).

    Will the FBI's investigation of possible Criminal Fraud reveal actionable  Breach of Fiduciary Obligations or other Bad Faith or Unfair Dealings?

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Socialized Risk, Private Gain?

    Do Directors and Officers of lending institutions have a Fiduciary Duty to the Shareholders of their Corporation which involves giving money back to the Corporation if they do not do their jobs well?  What about Directors and Officers of Corporations in general, including Corporations that are not lending institutions?

     In an editorial about "financial-industry executives," "bankers," and "financiers" on Good Friday, 2008, the New York Times  observes:

But as a rule, they won't have to return the money they made in the good days when they were making all the crazy bets that eventually took their banks down.

Editorial, "Socialized Compensation" p. A22, col. 1 (New York Times Nat'l Ed., Friday, March 21, 2008).

     Why not?

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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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