Opinion ID: 758778
Heading Depth: 2
Heading Rank: 2

Heading: The Principe and The Italian Connection

Text: 14 Having outlined this rather incredible background, we now turn to the facts giving rise to the present case: the total loss of a fourth yacht. 15 In June 1992, DeGeorge contracted for the construction of a 76-foot motor yacht, the Principe di Pictor (Principe ), from Azimut, SpA, an Italian firm, for the purchase price of $1.9 million. While the Principe was still under construction, DeGeorge assigned his end of the construction contract to Continental Pictures Corp. (Continental). Continental was a Panamanian corporation, apparently located in Switzerland. Although Continental allegedly bought DeGeorge's contract for $3.6 million, Continental never paid anyone any money. In fact, after the contract was assigned to Continental, Azimut looked only to DeGeorge for progress payments. DeGeorge continued to make those payments to Azimut with $600,000 of his own money. 16 Continental then sold the Principe to Polaris Pictures Corp. for $3.62 million. Polaris had been formed by DeGeorge, had the same address as DeGeorge's residence and, as the district court found, was completely controlled by him at all relevant times. Polaris had no assets other than some screenplays which the district court found to be of speculative value at best. 17 About two weeks before Continental sold the yacht to Polaris, DeGeorge arranged a stock swap with Tridon, a publicly traded company with no net worth. In this deal, Tridon acquired ownership of Polaris and DeGeorge acquired two million shares of Tridon stock. The stock swap agreement contained a clause which provided that all shares of Polaris stock would revert to DeGeorge if either Tridon or Polaris ever declared bankruptcy or an inability to pay their financial obligations. Because neither company had any significant assets, DeGeorge could, at any time, declare Polaris unable to pay its debts and regain his Polaris stock. 18 As a result of the stock swap, Tridon and not DeGeorge now owned Polaris. The district court found this agreement was entered into for the purpose of distancing DeGeorge, on paper, from Polaris's acquisition of the yacht. 19 Polaris financed its purchase of the yacht through notes issued by Inbanco. Inbanco was formed and controlled by DeGeorge. It was incorporated on the same day that Polaris bought the yacht from Continental. Like Polaris, Inbanco shared a common address with DeGeorge. Inbanco's only asset was apparently a $200,000 cash infusion from DeGeorge's 28-year old nephew. 20 After Polaris bought the yacht from Continental, Polaris allegedly entered into an agreement with Jacob Wizman, supposedly a client of DeGeorge. Wizman agreed to buy a 98% interest in the Principe for $3.62 Million if the yacht could be delivered to him as new in January 1993. Because Wizman did not respond to a subpoena, the district court questioned whether he actually existed. 21 Polaris and Inbanco bought marine insurance on the Principe from Cigna through David Allen of Alliance Marine Risk Managers, Inc. (Alliance), a Cigna agent. The insurance application submitted by Polaris and Inbanco contained no reference to DeGeorge, Continental, Tridon, Wizman or any of the transactions and close ties among them. Cigna issued a policy of insurance naming Polaris as the insured, and naming Inbanco as the loss payee. The total value of the policy if all benefits were paid out was almost $6.5 million. 22 On its maiden voyage, with the insurance in place, the yacht Principe sank off the coast of Italy. DeGeorge and two companions, Paul Ebeling and Gabriel Falco, were on board at the time. Ebeling had also been on board one of DeGeorge's other ill-fated yachts, the Epinicia, which also sank off the coast of Italy. Ebeling, who controlled Tridon during the Tridon/Polaris/DeGeorge stock swap, was now CEO of Polaris. 23 According to Ebeling and DeGeorge, the Principe was intentionally sunk by Sicilian drug runners posing as a trial crew for the Principe and seeking to escape from the Italian coast guard. As the story goes, the Principe was being captained by Andrea Libovich, a Yugoslavian sailor trained in the Russian navy. Ebeling and DeGeorge had met Libovich at a dockside cafe in Naples. They had previously discharged the captain provided by the ship's builder, and decided to give Libovich a shot at the captain's job with a test run on the yacht. 24 Libovich brought along two crewmen to help run the yacht. Although this was originally to be only a short test run, Libovich and his two crewmen each brought along two large, tightly stuffed, black duffle bags. Once the Principe was underway, the test run was extended overnight. During the night, the crew, brandishing guns, forced DeGeorge, Ebeling and Falco into one of the staterooms while Libovich or his crew drilled holes in the hull of the ship. Libovich told DeGeorge he was going to sink the ship. 25 In spite of the water then supposedly pouring into the ship's hull, Libovich spent the next four hours talking on the phone. Finally, at 6:00 a.m., Libovich and his crew, along with their six duffle bags, left the Principe and boarded a speed boat, which whisked them away on a course headed for the Libyan coast. 26 DeGeorge, Ebeling, and Falco were left to perish on the now doomed Principe. Fortunately, the three were able to get into a small skiff and avoid being consumed by sharks infesting the local waters. The men remained in the area, watching as the Principe slowly descended into the sea. 27 The Italian coast guard happened by at about 12:30 p.m. By that time, only the radar unit of the Principe remained above the water. Although the Italians were able to raise the sinking yacht and tow it into port, the ill-fated Principe sank again while at the dock. When it was raised three days later, it was a total loss. 28 Polaris and Inbanco filed claims for the loss of the Principe. Cigna refused to pay the claims and instead sued for rescission of the insurance contract because neither Polaris nor Inbanco had disclosed material facts such as DeGeorge's loss history or the close ties among all the parties involved in the ownership of the Principe. Polaris and Inbanco counterclaimed against Cigna, Allen and Alliance claiming, among other things, breach of contract and breach of the implied covenant of good faith and fair dealing. 29 The district court (Judge Tashima) granted summary judgment in favor of Cigna, dismissing all of the Polaris and Inbanco counterclaims. The court reasoned that if Cigna succeeded on its rescission claim, any alleged harm to Polaris and Inbanco would necessarily be the result of their failure to act in the utmost good faith, as required by the doctrine of uberrimae fidei, 1 And, if Cigna failed in its rescission claim, Polaris and Inbanco will be entitled to receive all benefits due under the policy, and thus, will have suffered no damage. The district court also dismissed Cigna's counterclaim for indemnity from DeGeorge. In addition, the district court denied Cigna's motion to declare DeGeorge an alter ego of Polaris and Inbanco as pointless because Cigna was only seeking to rescind the contract, not recover any damages from the corporate defendants. 30 Another judge of the district court (Judge Letts) subsequently conducted a seven-day bench trial in admiralty on Cigna's rescission claim. Despite the fact that Cigna had not challenged the alleged facts surrounding the sinking of the Principe, the district court granted rescission based on fraud. According to the district court, Polaris and Inbanco had purchased the insurance from Cigna with the intent to sink the Principe. The court also awarded attorney fees to Cigna. The fee award was originally against both Polaris and Inbanco, but was later modified at Cigna's request to include DeGeorge as an alter ego. 31 Polaris, Inbanco and DeGeorge now appeal the district court's rescission judgment; DeGeorge also appeals the award of attorney fees against him personally. We have jurisdiction pursuant to 28 U.S.C. § 1291 and we affirm, although on the ground of failure to disclose material facts in the application for marine insurance, not on the ground of fraud. STANDARDS OF REVIEW 32 We review de novo the district court's grant of summary judgment on the counterclaims. See Covey v. Hollydale Mobilehome Estates, 116 F.3d 830, 834 (9th Cir.1997), amended by 125 F.3d 1281 (9th Cir.1997). 33 We review the district court's findings of fact under the clearly erroneous standard of review. Resner v. Arctic Orion Fisheries, 83 F.3d 271, 273 (9th Cir.1996). The district court's conclusions of law are reviewed de novo. Howard v. Crystal Cruises, Inc., 41 F.3d 527, 529 (9th Cir.1994). 34 In reviewing decisions of the district court, we may affirm on any ground finding support in the record. If the decision below is correct, it must be affirmed, even if the district court relied on the wrong grounds or wrong reasoning. Unigard Sec. Ins. Co. v. Lakewood Eng'g & Mfg. Corp., 982 F.2d 363, 367 (9th Cir.1992) (quoting Jackson v. Southern Cal. Gas Co., 881 F.2d 638, 643 (9th Cir.1989)).