Opinion ID: 2974265
Heading Depth: 3
Heading Rank: 2

Heading: The Litigation Exception

Text: The parties agree that the district court’s memoranda and orders issued in response to Southwestern Life’s motions to intervene established an exception to the previously issued injunctions. The relevant orders stated: Initially, it should be made clear what this Court is not adjudicating at this time; it is not adjudicating the respective rights of any investor, the Receiver, any purchaser No. 05-3510 Liberte Capital Group, et al. v. Capwill, et al. Page 9 of policies from the Receiver, or any insurer regarding any policy, in particular those policies sought to be marketed as to which the Government asserts a defense of fraud on the insurance company may be asserted to avoid payment. Those issues as to specified policies may be the subject of future litigation in this or other courts of competent jurisdiction. .... The issue before this Court is the right of the Receiver to market and sell policies asserted to have been fraudulently obtained to sophisticated investors who are given appropriate warning of the defenses which may be asserted by the insurers . . . . This order does not deprive the insurers of any defenses available against the Receiver or any transferee of the Receiver. .... [T]he Receiver shall be permitted to accept death benefits on any mature policy, providing he has not received a prior notice of rescission or cancellation from any insurance company and that said policy has not been the subject of a prior order of any court of competent jurisdiction declaring such policy to be void due to fraud on the insurer. (J.A. at 448-49, Order, April 13, 2001 (emphasis in original).) The district court reiterated the above order when the district court denied Southwestern Life’s motion to intervene in the Alpha receivership case: Turning to the purpose for which intervention is sought, Southwestern asserts it is ‘solely on the issues concerning Southwestern Life Insurance policies’ and the General Receiver’s ‘attempt[] to sell void and canceled policies’ . . . . However, this Court’s Order of April 13, 2001 addressed these concerns . . . . .... As Southwestern is not precluded from otherwise bringing actions or asserting defenses relative to its policies, its purpose in this litigation does not strike this Court as necessary. (J.A. at 549-50.) a. The litigation exception does not authorize suit against Alpha To begin, the litigation exception as created by the above language does not authorize suits against Alpha. Because the prior general injunction specifically precluded suits against Alpha, court action was required to remove that part of the injunction. The above language only removes limitations on suits with respect to the Receiver. No mention is made of Alpha or the entities in Receivership. The Insurers argue that the language in the second order, “[a]s Southwestern is not precluded from otherwise bringing actions or asserting defenses relative to its policies,” evidences a general permission for suit in relation to the policies against all relevant parties. (Pet’r Br. 24.) However, the 2004 order only reiterated the April 13, 2001 order, which specifically stated that “t]his order does not deprive the insurers of any defenses available against the Receiver or any transferee of the Receiver.” (J.A. at 549-50 (emphasis added).) The 2004 order did not purport to create new rights of the parties with respect to the policies or permission to sue. Therefore, the litigation exception “clearly” and “unambiguously” permits suit only against the Receiver and never abrogated the prior injunction on suits against Alpha. No. 05-3510 Liberte Capital Group, et al. v. Capwill, et al. Page 10 b. The litigation exception does not authorize suits asserting claims to monies already held in the Receivership estate Because the general injunction clearly and unambiguously operated to preclude any and all suits against the Receiver, the claims in the Delaware litigation which requested damages to be paid from the Receivership estate must have been authorized by the April 13, 2001 order granting the litigation exception, if at all. We find that the April 13, 2001 litigation exception does not authorize suits for claims against money assets held in the Receivership estate, which includes claims for offsets related to matured policies already paid to the Receivership. All claims requesting damages from the Receivership estate or an off-set from monies due to the Receivership estate were therefore clearly and unambiguously barred by the general injunction. The litigation exception was created in orders revolving around the question of whether the Receiver could sell policies which may have been fraudulently obtained. By definition, such sales could only involve non-matured policies. The above language was further issued in the context of denying Southwestern Life’s motions to intervene in order to represent the insurer’s interests with respect to such sales. An interpretation of the litigation exception as permitting suits only with respect to non-matured policies is the only logical interpretation available to the parties. In argument to this Court, the Insurers attempt to expand the scope of the litigation permitted by the April 13, 2001 order by obfuscating the relationship between the April 13, 2001 language and the general injunctions already in place against any and all litigation. Because the general injunctions continued in existence, the only litigation permissible without leave of the Receivership court was litigation specifically so authorized. The Insurers attempt to cast the question as whether the April 13, 2001 order can be construed as specifically limiting litigation on policies to litigation on non-matured policies and then only against the Receiver. In light of the continuing general injunction, however, the proper inquiry is whether litigation on matured policies was ever specifically authorized, and we find that the clear and unambiguous answer to that question is no. The question before this Court is whether the district court abused its discretion in finding that its orders “clearly” and “unambiguously” permitted suits only on non-matured policies. Grace, 72 F.3d at 1241. Against the backdrop of the general, universal injunctions against suits already in place, the posture of the parties when the litigation exception was issued and the language of the litigation exception itself combine to make it clear and unambiguous that the Court was granting the Insurers leave to defend against payment, or bring suit to declare demand for payment unenforceable, on the basis of fraud with respect to individual, non-matured insurance policies. Numerous aspects of the April 13, 2001 order indicate that the district court was overruling its prior injunction only to the extent that the Insurers had a valid defense against payment on a fraudulently obtained policy. The order specifically referenced that the defense of fraud “may be asserted to avoid payment.” Moreover, the court’s order authorized litigation over disputes regarding the validity of policies and the Insurers’ obligations to pay on those policies, not the right of the Receiver to retain funds already paid out and resting within the Receivership estate. The April 13, 2001 order further indicated that matured policies were noncontestable assets of the Receivership by stating that the Receiver could accept payment “on any mature policy, providing he has not received a prior notice of rescission or cancellation from any insurance company and that said policy has not been the subject of a prior order of any court of competent jurisdiction declaring such policy to be void due to fraud on the insurer.” No. 05-3510 Liberte Capital Group, et al. v. Capwill, et al. Page 11 c. Due process concerns about the scope of the injunction are not properly before this Court Due process concerns about the scope of the injunction are not properly before this Court. The general injunctions issued in 1999 and 2001. The orders setting forth the litigation exception were issued in 2001 and 2004. Those orders are not on appeal before this Court. The Insurers argue that because they are now being found in contempt of those prior orders, this Court has the authority to review the scope of those orders insofar as they define acceptable grounds for findings the Insurers in contempt. Yet one of the Insurers, Southwestern Life, was party (as a prospective intervening plaintiff) to the proceedings in which the litigation exception was issued. Had Southwestern Life taken issue with the implications of the April 13, 2001 order for its legal rights, Southwestern could have moved this Court to intervene at that time. Moreover, the other two Insurers in the case at bar are owned by the same parent company as Southwestern Life. All three Insurers are owned by parent company Swiss Re, and all three Insurers shared counsel in the Delaware lawsuit. In addition, the Insurers did not argue issues of due process to the court below, despite the fact that the Receiver argued in briefs to the district court that its prior orders were necessarily construed as permitting suit only on non-matured policies. This Court will not entertain arguments raised for the first time on appeal. United States v. Hayes, 218 F.3d 363, 366 (6th Cir. 1998). Due process concerns with respect to the Insurers rights under the disputed policies may also be raised with the Receivership court through a direct request to that court. The finding of contempt below was premised on the Insurers’ violation of a general injunction against actions taken without leave of the district court overseeing the Receivership. Nothing precludes the Insurers from requesting leave of the district court to dispute the monies held on matured, but fraudulently obtained, policies and raising the attendant due process concerns in that request. D. The District Court Did Not Abuse Its Discretion in Finding the Insurers in Contempt and in Limiting Future Suits Under the Litigation Exception to Ohio Forums The Insurers’ Delaware lawsuit both named Alpha Capital Group as a defendant and sought money damages from the assets of the Receivership estate. Such claims exceeded the scope of the litigation exception granted by the Receivership court. See supra. The Insurers do not argue that they were not on notice of the prior orders. They only argue that the district court’s interpretation of its prior orders is unreasonable. As discussed above, the district court’s interpretation of its own prior orders is both supported by the record and represents the only logical construction of those orders. Because the Delaware lawsuit both named Alpha as a defendant and included claims for damages against the Receivership estate, the district court found that the suit exceeded that which the court had authorized. The district court further found that the inclusion of Alpha as a defendant was for the sole purpose of defeating diversity jurisdiction and therefore removal to federal court. (Alpha was organized under the state of Delaware.) The district court reasoned that because Alpha retained no assets or interests outside of the Receivership, no independent reason for Alpha’s inclusion remained. Contrary to the Insurers’ characterization, the district court did not find that its prior orders limited litigation to Ohio forums. Therefore, the choice of a Delaware forum was not a basis for the district court’s finding of contempt. Rather, in fashioning the remedy for the Insurers’ contempt, the district court ordered the Delaware suit dismissed, but granted the Insurers leave to “file suit against the Receiver in a federal or state court in Ohio to litigate their financial obligations regarding any non-matured policies within the Receivership estate . . . .” (J.A. at 269.) The district court has inherent authority to fashion the remedy for contumacious conduct. See generally Chambers v. NASCO, 501 U.S. 32, 45 (1991). The restriction on future suits by the Insurers under No. 05-3510 Liberte Capital Group, et al. v. Capwill, et al. Page 12 the litigation exception to Ohio forums is well within the inherent powers of the district court sitting in equity. See id. (finding courts possessed inherent power to order dismissal of a suit for contumacious conduct). Because the Delaware suit violated prior district court orders, and in light of the district court’s factual conclusion that the inclusion of Alpha was solely for the improper purpose of defeating diversity, the district court did not abuse its discretion in finding the Insurers in contempt of its prior orders and in restricting future suits under the litigation exception to Ohio forums. III.