Recently, in Sciarretta v. Lincoln Nat'l Life Ins. Co., the Eleventh Circuit Court of Appeals affirmed monetary sanctions against a non-party corporation for the bad faith preparation of its designated corporate witness.
In 2007, Barton Cotton approached his insurance agent about buying a multi-million dollar life insurance policy and financing the premium payments. Cotton was referred to Imperial Premium Finance LLC to finance the premium payments on a $5 million dollar life insurance policy with Lincoln National Life Insurance Company. Imperial's primary business involved stranger-originated life insurance (STOLI). Simply put, STOLI involves the act of facilitating the issuance of a life insurance policy for the benefit of someone who does not have an insurable interest in the life of the person insured. Most states try to prevent these STOLI schemes by requiring the purchaser of the policy to have an insurable interest in the insured's life. At the time of this case, Imperial was under criminal investigation for its STOLI schemes.
In 2010, Cotton died and Lincoln discovered that Imperial had financed the premium payments under a STOLI scheme. Lincoln refused to pay Cotton's death benefit to the trustee of Cotton's trust and the trustee sued Lincoln for the death benefit. Imperial was not a party to the case, but Lincoln sought to depose Imperial during discovery. However, because Imperial was under criminal investigation, the District Court gave permission for Imperial to prepare and use an outside witness to testify as a designated corporate representative.
Imperial retained economist John Norris to serve as its designated corporate representative. Norris was deposed and later testified at trial. During Norris' deposition, he was often unable to answer questions because Imperial had not briefed him on the answers. At trial, Norris also testified with limited knowledge of Imperial and its dealings. The morning after the trial, the District Court expressed concern about Norris and Imperial's conduct and considered sanctions.
After briefing and a hearing on the issue, the District Court found that Norris had "exhibited deliberate ignorance to any inquiry harmful to Imperial's interests while at the same time trying to affirmatively help the Trust and Imperial's counsel at every opportunity" and that "Norris was prepared to answer questions in ways that were helpful to Imperial, but that he lacked knowledge when the questions turned to areas that might cast Imperial in a bad light or otherwise harm it." In other words, Imperial had selectively prepared Norris, in bad faith, and seized on the existence of the criminal investigation to craft a perfect witness: one who was knowledgeable about helpful facts and dumb about harmful ones.
As a result, the District Court issued an order assessing sanctions in the amount of $850,000 against Imperial and Imperial appealed. The Eleventh Circuit decisively affirmed the District Court and held that the District Court's findings were not clearly erroneous and the imposition of sanctions was not an abuse of discretion.
This case should serve as a reminder of counsel's obligations in preparing a corporate representative. When preparing a designated representative, he or she "must testify about information known or reasonably available to the organization." Fed. R. Civ. P. 30(b)(6). This means that preparation of your corporate representative should include information related to "The Good, the Bad and the Ugly."
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