Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_93-md-00972/USCOURTS-azd-2_93-md-00972-0/pdf.json

Nature of Suit Code: 470
Nature of Suit: Civil (Rico)
Cause of Action: 18:1962 Racketeering (RICO) Act

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

In re Diamond Benefits Life Insurance

Company

_________________________________

Charles R. Cohen, Receiver, and Mark D.

Tharp, Special Deputy Receiver, of

Diamond Benefits Life Insurance

Company, 

Plaintiffs, 

vs.

Adventist Health Systems/West, et al., 

Defendants. 

)

)

)

)

)

)

)

)

)

)

)

)

)

)

)

)

)

MDL 93-0972-PHX-RGS

CIV 89-1473-PHX-RGS

ORDER

Pending before the Court is Defendants' Motion for Summary Judgment re Causation

and Damages (Doc. #1380) and Defendants' Motion to Dismiss or, in the alternative, to

Preclude the Admission of Evidence on the Financial Condition of Diamond Benefits (Doc.

#1737). After considering the arguments raised by the parties in their briefing and in oral

argument, the Court now issues the following ruling.

BACKGROUND

The events that precipitated this lawsuit stem from the actions of Charles Christopher

and Wayne Reeder, officers of a company called Resolute Holdings, Inc., (“Resolute”) that

acquired Diamond Benefits Life Insurance Company ("DBLIC") in June, 1988. Christopher

engineered the purchase of DBLIC to occur simultaneously with a reinsurance agreement

between DBLIC and the Life Assurance Company of Pennsylvania (“LACOP”). Under the

Case 2:93-md-00972-RGS Document 2015 Filed 03/10/06 Page 1 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 2 -

reinsurance agreement, DBLIC would receive several million dollars in exchange for an

agreement to assume the obligation to pay the annuities to LACOP’s policyholders. When

LACOP transferred the funds, however, Christopher and Reeder used them to pay the

purchase price for DBLIC itself and to extinguish liens on properties pledged as collateral

for the reinsurance transaction. DBLIC, through its receiver ("Plaintiffs"), brought several

actions seeking to recover its stolen assets and has since resolved its claims against

Christopher, Reeder, and other culpable parties.

Plaintiffs filed suit against its former parent corporations, Joint Health Ventures and

Adventist Health System/West (collectively "Defendants"). Plaintiffs' Fourth Amended

Complaint asserted several claims against Defendants consisting of fraud, breach of fiduciary

duties, and aiding and abetting fraud and breach of fiduciary duties. The gist of these

allegations is that Defendants acted dishonestly and in bad faith in arranging the sale of

DBLIC; that they, along with Resolute, lied to state regulators to gain approval for the sale

and the reinsurance agreement; and that they ignored indications that would have signaled

Christopher's fraudulent intentions. In addition, Plaintiffs seek to hold Defendants liable,

under theories of conversion and fraudulent conveyance, for the receipt of the portion of

funds diverted by Christopher to pay the purchase price for DBLIC.

On September 11, 2002, the Court granted summary judgment to Defendants on

Plaintiffs' claim that Defendants committed fraud by making misrepresentations in DBLIC's

1987 Annual Statement and in the "Form As" filed with Arizona and California, as well as,

by omission. The Court also granted summary judgment to Defendants on Plaintiffs' claims

of breach of fiduciary duties, aiding and abetting fraud and breach of fiduciary duties,

conversion and fraudulent conveyance finding that facts known to Defendants were not

sufficient to have prompted a further investigation into Resolute and its plans for DBLIC or

to negate their good-faith defense. Plaintiffs subsequently appealed the Court's ruling.

Case 2:93-md-00972-RGS Document 2015 Filed 03/10/06 Page 2 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

 The Ninth Circuit affirmed this Court's grant of summary judgment to Defendants

on Plaintiffs' claim of fraud and also affirmed this Court's grant of summary judgment to

Defendants HomeFed Bank and Continental Illinois National Bank & Trust Co. of Chicago,

which for purposes of simplification have not been addressed in this decision.

- 3 -

In a decision dated July 15, 2004, the United States Court of Appeals for the Ninth

Circuit reversed and remanded this action for further proceedings concerning some of

Plaintiffs' claims against Defendants.1

 The Ninth Circuit stated, in pertinent part:

Several of [Plaintiffs'] claims against [Defendants] turn on whether these

parent corporations had sufficient knowledge before transferring [DBLIC] to

Resolute that they should have reasonably suspected that Resolute was

planning to loot [DBLIC] once it acquired control. Such reasonable suspicion

would trigger a fiduciary duty to either refuse to transfer [DBLIC], or at least

to further investigate Resolute. Such reasonable suspicion would also deprive

the parent corporations of the defense to [Plaintiffs'] claims of conversion and

fraudulent conveyance that they took the purchase price in good faith.

***

We ... hold that [Plaintiffs have] shown sufficiently suspicious circumstances

to create genuine issues of material fact as to what [Defendants] knew before

transferring [DBLIC] to Resolute, as to whether these facts should have given

rise to a reasonable suspicion that Resolute would loot [DBLIC], and as to

whether [Defendants] took the purchase price in good faith and thereby

became bona fide holders for value. We therefore REVERSE the grant of

summary judgment on the following claims against [Defendants]: Breach of

Fiduciary Duty; Aiding and Abetting Fraud; Aiding and Abetting Breach of

Fiduciary Duty. We likewise REVERSE the grant of summary judgment on

the following claims against [Defendants]: Conversion; Receipt of Fraudulent

Conveyance. To the extent that our holdings conflict with the district court's

orders denying numerous motions by the parties as moot, those mootnessbased orders are VACATED.

In accordance with the Ninth Circuit's decision, the parties agreed to revive two

motions that were previously filed with the Court – (1) Defendants' Motion for Summary

Judgment re Causation and Damages and (2) Defendants' Motion to Dismiss or, in the

alternative, to Preclude the Admission of Evidence on the Financial Condition of Diamond

Benefits.

Case 2:93-md-00972-RGS Document 2015 Filed 03/10/06 Page 3 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 4 -

DISCUSSION

A. Defendants' Motion for Summary Judgment re Causation and Damages

Defendants move for summary judgment on Counts One (fraud), Two (aiding and

abetting fraud), Three (breach of fiduciary duty), and Four (aiding and abetting breaches of

fiduciary duties) of Plaintiffs' Fourth Amended Complaint. Defendants argue that with

respect to each of these counts, Plaintiffs cannot establish the requisite causation and measure

of damages. The Ninth Circuit affirmed this Court's granting of summary judgment to

Defendants on Plaintiffs' fraud claim finding Defendants "did not make any representations

at all in [DBLIC's] 1987 Annual Statement. The allegedly false statements in the Form As

are either non-actionable statements of intent or opinion, or were withdrawn. Moreover, in

these circumstances, [Defendants] did not have a duty to speak, so it did not commit fraud

by omission." Accordingly, Plaintiffs' fraud claim is no longer a part of this action.

Proof of damages caused by a defendant's conduct is an essential element of a

plaintiff's claim. As the United States Supreme Court has observed, "the plain language of

Rule 56(c) mandates the entry of summary judgment ... against a party who fails to make a

showing sufficient to establish the existence of an element essential to that party's case, and

on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S.

317, 322 (1986).

Defendants, citing Thompson v. Better-Bilt Aluminum Products Co., 832 P.2d 203,

207 (Ariz. 1992), argue that proof of damages requires both proof of but-for causation and

proof that Defendants' actions are the legal cause of Plaintiffs' injuries. Defendants claim

that the factual record simply does not link the alleged wrongs to the amount of damages

claimed. Defendants assert that they are not a guarantor of profitability and cannot be blindly

rendered responsible for each dollar of revenue not obtained or each dollar spent at DBLIC.

Defendants also state that Plaintiffs continue to ignore the acts of Christopher and others at

Resolute as an intervening and superseding cause.

In response, Plaintiffs state that Defendants engaged in conduct from December 1987

until the imposition of receivership in December 1988, which was designed to, and did,

Case 2:93-md-00972-RGS Document 2015 Filed 03/10/06 Page 4 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 5 -

disguise the insolvency of DBLIC, thereby forestalling regulatory intervention, and

compounding the liabilities assumed by DBLIC. Plaintiffs assert that as a direct result of

Defendants' efforts in disguising the insolvency, DBLIC suffered damages, including those

associated with being in receivership. Plaintiffs respond to Defendants' arguments with

several illustrations of damages and Defendants' causal connection to those damages as

supported by deposition testimony and related discovery. Among their illustrations,

Plaintiffs contend:

(1) As a direct and consequential result of Defendants' mistreatment and

disregard of the interests of the policyholders of DBLIC, the business spiraled

downward and with it came substantial losses.

(2) Defendants caused DBLIC to assume the business on June 14, 1988,

without any regard as to whether it was a good business decision for DBLIC

and solely because it was desired by Resolute and its principals. Resolute,

Christopher, and Reeder wanted millions in cash and Defendants made it

possible by indiscriminately and irresponsibly taking on liabilities, contrary to

any legitimate business justification for DBLIC, and in the face of clearly

suspicious circumstances that mandated investigation. The result of

Defendants' indiscretion was the assumption of $30 million of liabilities and

the looting of the matching assets.

(3) Defendants had clear knowledge of numerous misrepresentations made in

connection with the Form A submissions to Arizona and California.

Defendants knew that they had received stolen funds in violation of the law.

The abuse and looting of DBLIC would have ceased immediately if

Defendants had acted to expose the misrepresentations, breaches, and illegal

activities.

(4) Defendants' action and inaction are the direct and proximate result of the

losses associated with the third party administrator ("TPA") breaches that are

reflected on the receiver's liquidated balance sheet. When DBLIC was placed

into receivership, the capacity to correct the accounting imbalance was

completely lost and the business incentives for the TPA to conform were also

lost. What was left was an insolvent insurance company besieged by

policyholder claims, record keeping chaos, and new management.

(5) Defendants are the reason for the receivership, and the costs of

receivership would not have occurred if the receiver was not appointed. The

costs of administration and liquidation are costs which erode assets. This is

the position that Defendants placed DBLIC in and they must answer for those

abuses.

(6) Had DBLIC not been looted of the $18 million in cash by Defendants, and those they aided and abetted, and deprived of another $11 million owed to it

by LACOP, DBLIC would now be in the position to pay all of its creditor

claims. The losses are clear. The causal link to Defendants is irrefutable.

Case 2:93-md-00972-RGS Document 2015 Filed 03/10/06 Page 5 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2

 Magistrate Judge Sitver's Order on Motion to Compel stated in pertinent part:

Defendants' motion to compel [1240-1] is granted. The plaintiff/receiver shall

produce the following documents to the defendants.

***

3. RE: SOLVENCY OF COMPANY IN DECEMBER '87 AND JUNE '88:

The receiver shall produce those documents which contain information to

allow a financial expert to analyze the figures. No underlying documents are

needed. The Receiver need not reconstruct the history of each claim.

- 6 -

After citing to numerous illustrations, Plaintiffs argue that if they can articulate a

plausible legal theory for recovery and demonstrate a credible factual basis for the claim of

damages, the matter should go to the Court to determine specific allocations.

The Court finds that Plaintiffs have asserted sufficient facts to create a disputed issue

regarding causation and damages. Accordingly, Defendants' Motion for Summary Judgment

re Causation and Damages will be denied.

B. Defendants' Motion to Dismiss or, in the alternative, to Preclude the Admission

of Evidence on the Financial Condition of Diamond Benefits

On September 27, 1999, Defendants filed a Motion to Dismiss, or in the alternative,

to Preclude the Admission of Evidence on the Financial Condition of Diamond Benefits. In

their Motion, Defendants state that in anticipation of the designation and depositions of

expert witnesses back in 1997-1998, they sought the production of documents in Plaintiffs'

possession concerning the operation and financial condition of DBLIC, both before and after

its sale. Defendants contend that this information relates to a variety of issues raised by

Plaintiffs, including the solvency of DBLIC on the date of the alleged fraudulent

conveyances and the amount of damages resulting from the alleged conduct. Defendants

assert that despite their explicit requests and Magistrate Judge Sitver's Order on Motion to

Compel2

, little useful information was produced by Plaintiffs.

Specifically, Defendants complain that after the service of all defense expert reports,

Plaintiffs finally produced DBLIC's general ledger for 1988, an alleged essential piece of

information previously withheld. Following Plaintiffs' production of the general ledger and

Case 2:93-md-00972-RGS Document 2015 Filed 03/10/06 Page 6 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 7 -

after all defense experts had been deposed, Plaintiffs then produced over 2,500 pages of

detailed financial information – consisting of journal entries supporting the general ledger

– which Defendants assert had never been made available. 

Defendants argue for dismissal of this case pursuant to Rule 37 of the Federal Rules

of Civil Procedure and the Court's inherent powers contending that there is simply no

sanction short of dismissal that will fully mitigate the prejudice they have suffered. In the

alternative, Defendants argue that if the Court elects not to impose the sanction of dismissal,

it should nevertheless impose the lesser sanction of precluding the evidence withheld and any

opinions or testimony derived from that evidence.

In response, Plaintiffs contend that they have consistently provided Defendants, both

voluntarily and upon request, with all potentially or conceivably relevant documents on a

timely basis. Plaintiffs state that even though documents related to DBLIC would amount

to over 4 million pages of material, and even though most of those documents are general

business records of DBLIC, Plaintiffs have, nonetheless, made a large number of those

documents available for copying or inspection. 

In addition, Plaintiffs have also produced specific portions of the books and records

of DBLIC upon request or when it became apparent that certain documents were, in fact,

relevant to this case. Plaintiffs assert that this procedure for disclosing documents was not

designed to prejudice Defendants or to prevent them from obtaining what they believe to be

relevant material. Instead, the procedure provided a practical solution to what could have

been a highly inefficient and costly document production of irrelevant material. Plaintiffs

state that up until the filing of Defendants' Rule 37 Motion to Dismiss, Defendants have not

objected to the manner in which documents were provided to them or the completeness of

those productions.

Plaintiffs also state that they complied with Magistrate Judge Sitver's Order on

Defendants' Motion to Compel, by producing information that included a list of documents

– all of which had been previously produced – that were specifically relied upon in

calculating DBLIC's insolvency. Plaintiffs further contend that the 1988 general ledger was

Case 2:93-md-00972-RGS Document 2015 Filed 03/10/06 Page 7 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 8 -

first requested by Defendants during the March 4, 1999 deposition of Mark D. Tharp. After

producing boxes of additional documents responsive to Defendants' requests, Plaintiffs

informed Defendants that they were unable to locate the 1988 general ledger. Two months

later, Plaintiffs located the 1988 general ledger covering the months of July through

December and produced copies of it to Defendants. This production occurred well before

Defendants' expert witnesses were deposed and before their expert reports were due.

Plaintiffs state that less than a month later, they located the 1988 general ledger covering the

months of January through June and produced copies of it to Defendants. This production

occurred before any defense expert was deposed.

Plaintiffs allege that the 90 days it took to produce the full 1988 general ledger was

not due to any evil scheme, but was instead the product of the unintentional misplacement

of the records. As Mr. Tharp explained in his deposition, the general ledger had gotten lost

in the process of moving the books and records of DBLIC from the former Special Deputy

Receiver Lawrence Warfield's office to Mr. Tharp's office during 1998. Plaintiffs claim that

they were never informed at any point prior to July of 1999 that the lack of the 1988 general

ledger was a problem for Defendants' expert witnesses. Once it became apparent that

Defendants' expert witnesses were placing an emphasis on the general ledger, Plaintiffs state

that they then elected to voluntarily produce additional documentation underlying the general

ledger – the journal entries.

Federal courts have the authority to sanction litigants for discovery abuses both under

the Federal Rules of Civil Procedure and pursuant to the court's inherent power to prevent

abuse of the judicial process. See Chambers v. NASCO, Inc., 501 U.S. 32, 45-46 (1991); In

re Matter of Yagman, 796 F.2d 1165, 1187 (9th Cir. 1986). Specifically, where a party fails

to comply with a discovery order, Rule 37 of the Federal Rule of Civil Procedure authorizes

the court to impose a range of sanctions, including, taking facts as established, precluding

evidence, and dismissing the action or entering default judgment. See Fed.R.Civ.P. 37(b)(2).

Pursuant to Rule 37, the standard for sanctionable misconduct is generally one of

objective reasonableness. See Marquis v. Chrysler Corp., 577 F.2d 624, 642 (9th Cir. 1978).

Case 2:93-md-00972-RGS Document 2015 Filed 03/10/06 Page 8 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 9 -

In contrast, a showing of bad faith is required to impose sanctions under the Court's inherent

power. See Chambers, 501 U.S. at 50; Zambrano v. City of Tustin, 885 F.2d 1473, 1478 (9th

Cir. 1989). Furthermore, "when there is bad-faith conduct in the course of litigation that

could be adequately sanctioned under the Rules, the court ordinarily should rely on the Rules

rather than [its] inherent power." Chambers, 501 U.S. at 50. In either case, the decision to

impose sanctions lies within the sound discretion of the district court. See Lasar v. Ford

Motor Co., 399 F.3d 1101, 1109 (9th Cir. 2005)(reviewing sanctions imposed under the

court's inherent power); Payne v. Exxon Corp., 121 F.3d 503, 510 (9th Cir. 1997)(upholding

sanctions imposed under the Federal Rules of Civil Procedure).

As an initial matter, it should be noted that among the sanctions a court may elect to

impose in applying Rule 37, preclusion of evidence is among the most severe; indeed, under

certain circumstances, the imposition of preclusive sanctions may be tantamount to dismissal

of a plaintiff's claims or entry of default judgment against a defendant. See United States v.

Sumitomo Marine & Fire Ins. Co., Ltd., 617 F.2d 1365, 1369 (9th Cir. 1980). Under those

circumstances, mere negligent conduct is insufficient to impose the severe penalty of

exclusionary sanctions, and a showing of bad faith is required. See id.

The purported violations of Rule 37 that Defendants have identified in the instant

motion fall far short of meeting this standard. In fact, even if the Court were to assume that

a showing of bad faith is not required to impose the type of sanctions that Defendants seek,

there can be no doubt that Plaintiffs made a reasonable effort to respond to Magistrate Judge

Sitver's Order to compel, producing responsive documents and supplementing those

disclosures when they were requested to do so by Defendants. 

Accordingly, the Court will deny Defendants' Motion to Dismiss or, in the alternative,

to Preclude the Admission of Evidence on the Financial Condition of Diamond Benefits

pursuant to Rule 37 of the Federal Rule of Civil Procedure.

CONCLUSION

IT IS ORDERED that Defendants' Motion for Summary Judgment re Causation and

Damages (Doc. #1380) is DENIED;

Case 2:93-md-00972-RGS Document 2015 Filed 03/10/06 Page 9 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 10 -

IT IS FURTHER ORDERED that Defendants' Motion to Dismiss or, in the

alternative, to Preclude the Admission of Evidence on the Financial Condition of Diamond

Benefits (Doc. #1737) is DENIED.

DATED this 10th day of March, 2006.

Case 2:93-md-00972-RGS Document 2015 Filed 03/10/06 Page 10 of 10