Court Opinion

ID: 870443
Source: CourtListenerOpinion
Date Created: 2013-05-25 00:42:40.77394+00
Date Added: 2024-06-11T09:06:57.056343
License: Public Domain

United States Court of Appeals
                      For the First Circuit

No. 12-2243

                 PHL VARIABLE INSURANCE COMPANY,

                       Plaintiff, Appellee,

                                v.

               THE P. BOWIE 2008 IRREVOCABLE TRUST,
           by and through its trustee, Louis E. Baldi,

                      Defendant, Appellant.

          APPEAL FROM THE UNITED STATES DISTRICT COURT
                FOR THE DISTRICT OF RHODE ISLAND

       [Hon. John J. McConnell, Jr., U.S. District Judge]

                              Before

                       Lynch, Chief Judge,
                Lipez and Howard, Circuit Judges.

     Jesus E. Cuza Abdala, with whom Ina M. Berlingeri Vincenty and
Holland & Knight LLP were on brief, for appellant.
     Jessica Lynne Wilson, with whom Thomas F. A. Hetherington,
Jarrett E. Ganer, Edison, McDowell & Hetherington LLP, Stephen M.
Prignano, Raymond M. Ripple, and Edwards Wildman Palmer LLP were on
brief, for appellee.

                           May 13, 2013
           LYNCH, Chief Judge.    This is an appeal from a grant of

summary judgment in favor of plaintiff PHL Variable Insurance

Company ("PHL") in its equitable action for rescission of a life

insurance policy and special damages incident to the rescission of

that   policy.   See   PHL   Variable   Ins.   Co.   v.   P.   Bowie   2008

Irrevocable Trust, 889 F. Supp. 2d 275 (D.R.I. 2012). The district

court found that the defendant, The P. Bowie 2008 Irrevocable Trust

("the Trust"), by and through its trustee, Louis E. Baldi, had made

false representations to induce PHL to issue the policy, and that

this fraud caused PHL damages that would not be fully compensated

by rescission alone.    The court allowed PHL to retain the policy

premium paid by the Trust in order to offset PHL's losses and to

return the parties to the status quo ante.

           The Trust argues on appeal that the district court erred,

under Rhode Island law, in allowing PHL to both rescind the policy

and retain the premium.       It also argues that the question of

whether the Trust made fraudulent misrepresentations was legally

irrelevant to the rescission action, and, in any event, that the

Trust did not commit fraud.    The Trust asks this court to reverse

the grant of summary judgment for PHL and to enter judgment for the

Trust.

           The court committed no errors of law, did not err in

finding that the plaintiff was a victim of a fraudulent insurance

                                 -2-
scheme, and appropriately exercised its equity powers. Under Rhode

Island principles of equity, we affirm.

                                           I.

               On   February    28,     2008,    an   insurance     broker,    Richard

Rainone, submitted an application from Peter Bowie to PHL for a

life       insurance   policy     on    Bowie's    life.        Bowie's    application

represented that he was a self-employed real estate investor with

a net worth of $7.5 million and an earned income of $250,000 per

year.      He sought to take out a $5 million policy.               Rainone's letter

accompanying the application stated that, upon a formal offer of a

policy from PHL, the policy would be re-issued into a trust.

               PHL then began its underwriting investigation, which

included       a    third-party     inspection        by   a    vendor,    Examination

Management Services, Inc. ("EMSI").                EMSI contacted Bowie on March

14, 2008.      Bowie told the EMSI inspector that his earned income was

$250,000 per year and that his net worth was $7.35 million.                         He

also stated that a trust would be the beneficiary of the policy.

Based on the available information, PHL offered Bowie a $5 million

policy on April 23, 2008.

               On    April   28,       2008,     Rainone       submitted   a   revised

application that listed the Trust as the owner and sole beneficiary

of the proposed policy.1           Baldi, an attorney, acted for the Trust.

       1
           The named beneficiary of the Trust was Bowie's wife, Elaine
Bowie.

                                           -3-
The second application repeated the same information about Bowie's

employment, net worth, and income.        The application also answered

"no" to all of the following questions:

           Will any of the first year or subsequent
           premiums for the policy be borrowed by the
           proposed owner or proposed insured or by any
           other    individual,   trust,    partnership,
           corporation or similar related entity?

           Will the owner, now or in the future pay
           premiums funded by an individual and/or entity
           other than the proposed insured?

           Is the policy being purchased in connection
           with any formal or informal program under
           which the proposed owner or proposed insured
           have been advised of the opportunity to
           transfer the policy to a third party within
           five years of its issuance?

           Does the proposed insured or proposed owner
           have any understanding or agreement providing
           for a party, other than the owner, to obtain
           any legal or equitable right, title or
           interest in the policy or entity owning the
           policy?

           Attorney Baldi (on behalf of the Trust), the broker

Rainone, and Bowie all signed the April 28 application.               Baldi

signed   under   an   attestation   stating:   "I   have   reviewed   this

application, and the statements made herein are those of the

proposed insured and all such statements made by the proposed

insured . . . are full, complete, and true to the best knowledge

and belief of the undersigned and have been correctly recorded."

Additionally, all three individuals signed a separate Statement of

Client Intent, which also attested that the premium payments would

                                    -4-
not be borrowed and would be paid from Bowie's current income

and/or his own cash and equivalents.         The Statement represented

that the purpose of the policy was estate planning and that there

was no intent to transfer the policy.

             On May 5, 2008, PHL approved a $5 million policy ("the

Policy") on Bowie's life, pursuant to the April 28 application. On

May 14, 2008, Bowie and Baldi signed a Policy Acceptance Form,

which stated that "[t]he Insured(s) declares that the statements

made in the application remain full, complete, and true as of this

date."     Also on May 14, Baldi wrote a check from his client account

to PHL for the Policy premium, in the amount of $192,000.          On May

15, 2008, PHL paid Rainone a commission of $172,365.

             As it turned out, almost all of the representations made

to   PHL   were   patently   untrue.     Notably,   Bowie,   Rainone,   and

Rainone's business partner, Christopher Vianello, all invoked their

Fifth Amendment privilege not to testify in this case. Nonetheless,

discovery showed the following facts.

             Bowie was not a wealthy real estate investor, but rather

a retired city employee, used car salesman, and blackjack dealer.

He could not afford to pay the Policy premium on his own.        Instead,

the plan to pay the premium had originated with brokers Rainone and

Vianello, who began negotiating with Imperial Premium Finance, LLC2

      2
       This company also appears in the record as Imperial Finance
and Trading and as Imperial Holdings, Inc.

                                   -5-
("Imperial") even before filling out the original February 28

application.    Imperial is a company whose business model consists

of lending money to pay for life insurance policy premiums and,

when borrowers default on those loans, taking possession of the

policies as collateral.3          This arrangement allows Imperial to

attempt to avoid the longstanding legal prohibition on holding a

life insurance policy on a life in which the owner has no insurable

interest.4    See Warnock v. Davis, 104 U.S. 775, 779 (1881).

             Here, the plan was for Imperial to finance the premiums

on Bowie's Policy and, in return, take a security interest in the

Policy.       This   plan   was   directly    contrary   to   the    multiple

representations in the application documents that Bowie himself

would pay the premiums and that there was no plan for any third

party to obtain an interest in the Policy.

             The Trust, by and through Baldi, was the mechanism for

accomplishing this insurance fraud.          Before being deposed in this

lawsuit, Baldi had never met or even spoken to Bowie.               Baldi came

     3
       The 2011 prospectus that Imperial filed with the Securities
and Exchange Commission demonstrates that default and foreclosure
are the overwhelmingly likely outcomes of an Imperial loan. Of its
loans that matured between January and September of 2010, 97% were
not repaid in cash.
     4
       Some states, including Rhode Island, have identified
practices like Imperial's as fraudulent. See R.I. Gen. Laws § 27-
72-2(9)(i)(A)(X), -2(26). While Rhode Island did not enact its
statute against such practices until after the conduct alleged in
this case, the statute is instructive in lending context to the
transactions.

                                     -6-
to be trustee of the Trust at the request of Rainone and Vianello.

When he spoke with Rainone and Vianello about the Policy, Baldi did

not inquire as to the purpose of the Trust, his responsibilities as

trustee, the basis for any of the representations in the April 28

application, what the Policy premiums would be, or how the premiums

would be paid.    Baldi did not see Bowie sign the application.

            Baldi testified that he did not know where the money for

the May 14, 2008 premium check from his lawyer's account had come

from -- that "somebody" must have deposited it into his account.

In fact, Baldi's bank records show that Vianello had endorsed over

to Baldi a cashier's check payable to Vianello for the entire

$192,000.

            On May 26, 2008 -- twelve days after Baldi and Bowie had

executed the Policy Acceptance Form -- Baldi, on behalf of the

Trust, entered a loan agreement with Imperial.        The agreement

provided that Imperial would loan $189,000 to the Trust, at a

floating interest rate starting at more than 12 percent, for the

express purpose of paying premiums on the Policy.      In addition,

Imperial charged a $19,400 origination fee and a $48,164.83 "lender

protection insurance charge."    The loan was set to mature on July

26, 2010.   In short, the terms of the loan virtually dictated that

it could not be paid back.   The Policy served as collateral in the

event of default.

                                 -7-
            On   June   13,   2008,   Imperial   deposited     $189,050    into

Baldi's account, and on June 17, Baldi wrote a check to Vianello

for $186,550, "to repay for the premium."          Baldi testified that he

wrote this check at Vianello's direction.          He never inquired as to

why he should make out the check to Vianello or whether the Trust

instrument   authorized       Vianello   to   direct   Baldi   to   make   such

payments.

            Baldi never notified PHL that the representations in the

application regarding the identity of the premium payor were no

longer accurate; in fact, he claimed to have no awareness that the

Policy had any restrictions on premium financing.              He also never

notified PHL of the assignment of an interest in the Policy to

Imperial, although the Policy included a requirement for such

notice.

            On August 19, 2008, Baldi, on behalf of the Trust, signed

an amendment to the Trust instrument that appointed an "Independent

Professional Trustee" ("IPT") to serve as co-trustee with Baldi.

Baldi claimed that he could not remember whether it was PHL or

Imperial that had required the appointment of a co-trustee.                 The

amendment provided that in the event of default on the Imperial

loan, the IPT was required to assign the Policy to Imperial.                An

Amended and Restated Trust Agreement, dated October 6, 2008 and

signed by Bowie, Baldi, and the IPT, added a requirement that, if

the Policy were rescinded and the premiums refunded to the Trust

                                      -8-
while any Policy loan was outstanding, the IPT would deliver the

refund to Imperial.5

              On August 20, 2008, Rainone signed an agreement with

Imperial to pay the company a percentage of his commission from the

Bowie Policy, in the amount of $67,025.6               Rainone entered this

agreement despite the fact that he had signed a Producer's Report

for PHL, submitted with the Bowie application, stating that "no

person other than the undersigned shall profit by any commission on

insurance issued on this application."

              Early in 2010, PHL attempted to contact the Trust, Bowie,

and Rainone regarding the information in the application.                   It

received no response; meanwhile, its own investigation indicated

that the information had been falsified.                PHL then filed the

instant suit.

                                     II.

              PHL filed its complaint in the U.S. District Court for

Rhode Island on February 19, 2010, invoking the court's diversity

jurisdiction.      PHL sought a declaratory judgment that the Policy

was   null,    void,   and   rescinded   ab   initio   due   to   the   Trust's

fraudulent misrepresentations.           It also sought to retain the

      5
       Significantly, the Trust's litigation expenses in this
action have been paid with another loan from Imperial.
      6
       The agreement calculated this amount based on 35% of a
"Target Commission" of $191,500, which was more than the commission
that Rainone actually received.

                                     -9-
premium paid by the Trust as an "offset" against the damages it had

suffered in connection with the Policy, including the costs of

"underwriting and issuance of the Policy, payments of commissions

and   fees    in     connection   with       the   issuance    of   the    Policy,

administration and servicing of the Policy, investigation of the

misrepresentations and concealments [alleged in the complaint], and

commencement of this action to enforce its rights."                  PHL stated,

however, that it stood "ready, willing, and able to refund or

otherwise make payment of all or any portion of the premiums paid

for the Policy as directed by the Court in accordance with [PHL]'s

demand for rescission of the Policy."              Accordingly, PHL "fully and

unconditionally tender[ed] the Policy's premiums to the Court's

registry."     Finally, PHL sought costs and attorneys' fees.

             On March 15, 2011, during discovery, the Trust sent a

letter to PHL stating that the Trust "agree[d] to rescind the

Policy" and "confirm[ing] the rescission of said Policy."                      The

Trust asserted that this agreement made the complaint moot and

demanded immediate return of the premiums, as purportedly required

by Rhode Island law.       The parties continued with discovery, and in

June and July 2011, the parties filed cross-motions for summary

judgment.

             After    argument    on   the    motions,   the   court      issued   a

Memorandum and Order on September 5, 2012, granting PHL's motion

                                       -10-
and denying the Trust's motion.7      PHL Variable, 889 F. Supp. 2d at

284.       The court interpreted the Trust's letter of March 15, 2011,

as an agreement on the issue of rescission, id. at 278, and it

"declare[d] that the Policy is rescinded,"        id. at 279.    The court

thus found that "the sole issue for the Court's consideration is

whether [PHL] is required by law to return the premiums or if the

Court, sitting in equity, may allow [PHL] to either retain the

premiums or award [PHL] special damages in the form of retention of

some or all of those premiums to offset the loss it alleges that it

suffered."       Id. at 278.

               The court noted that rescission is an equitable remedy

that seeks to "restore the parties . . . to the status quo -- that

is, to the respective positions they were in before [the contract

was formed], as if no contract existed."         Id. at 279.     The court

recognized that the general rule under Rhode Island law is that "an

insurance company which has been induced to issue a policy through

the fraud of the insured may, within a reasonable time after the

discovery of the fraud and during the lifetime of the insured,

return the consideration and rescind the contract."             Id. at 280

(quoting Wells v. Great E. Cas. Co., 100 A. 395, 397 (R.I. 1917))

(internal quotation mark omitted).          Importantly, the court also

explained that Rhode Island law is clear that there are exceptions

       7
       The order also disposed         of   certain   other   motions   not
relevant to this appeal.

                                   -11-
to this principle, id., particularly considering that a court

sitting in equity has discretion to fashion relief that "tak[es]

into       account   special    circumstances     like   a   defendant's    soiled

hands," id. at 281 (quoting Borden v. Paul Revere Life Ins. Co.,

935 F.2d 370, 377 (1st Cir. 1991)).

               The court went on to find that the Trust had engaged in

fraudulent conduct.            Id. at 281-83.     While the court recognized

that PHL had not pled an independent fraud cause of action, it

determined that the fraud issue was pertinent to the question of

the appropriate remedy and analyzed the record evidence in light of

the elements of common law fraud.               Id. at 281.       The court found

that Baldi, on behalf of the Trust, became aware shortly after

signing the Policy documents that the statements in those documents

regarding the premium payor were false, and furthermore that

Baldi's conduct        before     he   actually   became     so   aware   showed a

reckless disregard for the truth.              Id. at 282.    It also found that

Baldi's dealings with Imperial, Vianello, and PHL showed that Baldi

intended PHL to continue relying on the false representations.8

Id.

       8
       We need not decide whether PHL's underwriting process
demonstrated sufficient diligence, though the district court found
it did. PHL Variable, 889 F. Supp. 2d at 282-83. PHL did take
some steps, and even if it could have taken more, it is clear that
the district court's assessment of the equities and of the Trust's
soiled hands is correct on the undisputed facts.

                                        -12-
           The court held that this evidence, in sum, proved that

the trust had unclean hands in the contract transaction.      Id. at

283.   It concluded that the law would not "allow [the Trust] to

commit an intentional and calculated fraud upon [PHL] and walk away

unscathed while the innocent party bears the financial burden of

the fraud."   Id. at 281.

           The court thus ordered that PHL was entitled to retain

the $192,000 premium payment as special damages.     Id. at 284.   We

describe later the components of those damages. The court rejected

the Trust's argument that such an outcome violated Rhode Island's

election of remedies doctrine. Id. at 283-84; see LaFazia v. Howe,

575 A.2d 182, 184 (R.I. 1990).    It emphasized that the ability to

award special damages is part of an equity court's discretion to

fashion relief that restores the status quo.    PHL Variable, 889 F.

Supp. 2d at 284.

           Final judgment entered on September 17, 2012, and the

Trust filed this timely appeal.

                                 III.

           We review a grant of summary judgment de novo, "drawing

all reasonable inferences in favor of the non-moving party while

ignoring   'conclusory   allegations,   improbable   inferences,   and

unsupported speculation.'" Sutliffe v. Epping Sch. Dist., 584 F.3d

314, 325 (1st Cir. 2009) (quoting Sullivan v. City of Springfield,

561 F.3d 7, 14 (1st Cir. 2009)).        We may affirm on any basis

                                 -13-
apparent in the record.     Id.     On an appeal from cross-motions for

summary judgment, the standard is the same; we view each motion

separately and draw all reasonable inferences in favor of the

respective    non-moving   party.     See   OneBeacon   Am. Ins.   Co.   v.

Commercial Union Assurance Co. of Can., 684 F.3d 237, 241 (1st Cir.

2012).

          The Trust makes two general classes of arguments on

appeal.   The first concerns alleged errors of Rhode Island law in

the district court's decision to allow PHL to retain the premiums;

the second concerns alleged errors in the finding that the Trust

engaged in fraudulent conduct.9       We take each in turn.

A.        Rhode Island Law on Retention of Premiums

          The Trust's first argument centers on what the Trust

characterizes as Rhode Island's "tender back rule."         According to

the Trust, a party who seeks rescission of a contract -- even when

that contract was procured by fraud which imposes losses -- is

always required to return the entire consideration received under

the contract to the other party, under all circumstances.

          This argument is based on an erroneous reading of Rhode

Island law.    The cases primarily relied upon by the Trust do not

stand for such a broad and inflexible proposition. Rather, a court

sitting in equity under Rhode Island law has the power to make

     9
       The Trust does not contest that part of the Memorandum and
Order declaring the Policy rescinded.

                                    -14-
whole a party who seeks rescission of a contract procured by fraud,

and that is exactly what the district court did.

            In Wells v. Great Eastern Casualty Co., 100 A. 395, a

beneficiary of an insurance policy sued the insurer for policy

benefits, and one of the insurer's defenses was that it had

rescinded the contract before the death of the insured, based on

the insured's fraudulent misrepresentations.           Id. at 395-96.      At

the time of the suit, the insurer had already returned the policy

premiums.    Id. at 396.        It was in this context that the Rhode

Island Supreme Court stated that "upon the discovery of the false

and fraudulent nature of a material statement contained in [an

insurance] application . . . , the [insurer is] entitled to return

the premiums paid and rescind the contract of insurance" -- in

other words, it found that the insurer's actions were a valid

defense to a suit on the policy.         Id.   The court did not hold that

the insurer's actions were the only way to effect rescission.

            Similarly, in Pelletier v. Phoenix Mutual Life Insurance

Co., 141 A. 79 (R.I. 1928), the Rhode Island Supreme Court stated

that an insured's release of a claim under an insurance policy "is

a bar to an action on [the released] claim," including when the

release was allegedly procured by fraud, so long as the release "is

not rescinded or avoided by a return or offer to return the money

or other valuable consideration given for it."           Id. at 80.     This

conclusion   was   based   on    the    commonsense   recognition   that    a

                                       -15-
plaintiff "cannot affirm the release as valid and operative so far

as it is for his benefit, and disaffirm that part which is

beneficial to the releasee."         Id.    While Pelletier's holding

recognizes that an "offer to return" consideration is generally

part of seeking rescission, it does not establish an ironclad rule.

          Here, PHL at no time attempted to "affirm [the Policy] as

valid," id., and in fact, in its complaint, PHL stated that it

stood "ready, willing, and able to refund or otherwise make payment

of all or any portion of the premiums paid for the Policy as

directed by the Court."      PHL "fully and unconditionally tender[ed]

the Policy's premiums to the Court's registry."              Thus, to the

extent that Pelletier endorses a "tender back" requirement, PHL

undoubtedly fulfilled it.

          The Trust's implication that PHL, during the pendency of

its lawsuit for rescission, had to hand over the premiums to the

Trust (the party that PHL alleged had conspired to defraud it in

the first place), rather than to the court, is not supported by any

cited authority.   In fact, at least one Rhode Island case suggests

the opposite. Cf. Cruickshank v. Griswold, 104 A.2d 551, 552 (R.I.

1954) ("[A] bill in equity to obtain a rescission is not like an

action at law brought on the footing of a rescission previously

completed;   rather,   the    foundation   of   the   bill   is   that   the

rescission is not complete and that the plaintiff asks the aid of

the court to make it so.").

                                   -16-
             Moreover, the Trust's argument that the "tender back"

requirement flatly prohibited the court from using the Policy

premium to offset PHL's consequential damages runs contrary to

other settled rules of Rhode Island law.         The Rhode Island courts

have held that a trial court sitting in equity has "discretion to

determine the appropriateness of, and to formulate, equitable

relief," and that this discretion "should be guided by 'basic

principles of equity and justice.'"             Ruggieri v. City of E.

Providence, 593 A.2d 55, 57 (R.I. 1991) (quoting City of E.

Providence v. R.I. Hosp. Trust Nat'l Bank, 505 A.2d 1143, 1146

(R.I. 1986)).

             One of these basic principles is that contract rescission

"seeks to create a situation the same as if no contract ever had

existed," Dooley v. Stillson, 128 A. 217, 218 (R.I. 1925), an

endeavor that may include allowing a party to recover costs it

would not have incurred but for the formation of the contract, see

Lummus Co. v. Commw. Oil Ref. Co., 280 F.2d 915, 927 (1st Cir.

1960) (describing "[t]he purpose of an action for rescission" as

"to permit     the   defrauded   party   to   obtain restitution   of   the

benefits conferred by him," including "such special damages as are

necessary to make [the defrauded party] whole"); Tarpinian v.

Daily, No. 95-0104, 1997 WL 838150, at *3-4 (R.I. Super. Ct. Aug.

15, 1997).    Another such principle is that parties should not gain

advantage from their own fraud.          See Silva v. Merritt Chapman &

                                   -17-
Scott Corp., 156 A. 512, 514 (R.I. 1931).           And yet another is that

"a court of equity, when its jurisdiction has been invoked for any

equitable purpose, will proceed to determine any other equities

existing between the parties which are connected with the main

subject of the suit [and] grant all relief necessary to an entire

adjustment of the litigated matters, provided they are authorized

by the pleadings."      Sparne v. Altshuler, 90 A.2d 919, 923 (R.I.

1952).

           Taken together, these equitable principles provide ample

support for the district court's decision to make PHL whole by

allowing it to retain the premium.                PHL paid a commission to

Rainone of $172,365 that it would not have paid but for the

misrepresentations      that   led   it   to   issue   the   Policy.10     Mere

rescission of the contract would not have compensated PHL for this

expense. While PHL apparently did not provide a precise accounting

of the other costs it incurred with respect to the Policy, see PHL

Variable, 889 F. Supp. 2d at 277 n.1, it was reasonable for the

district   court   to   conclude     that   the    costs   alleged   in   PHL's

complaint -- including underwriting, administration, and servicing

of the Policy, as well as investigation into the misrepresentations

     10
       The Trust's argument that PHL could not recover this amount
as damages against the Trust is discussed below.

                                     -18-
in the application -- justified awarding PHL the remaining $19,635

from the premium, particularly in light of the Trust's fraud.11

            The district court, following Rhode Island law, was

warranted in refusing to reward the Trust for its "unclean hands."

See, e.g., Cullen v. Tarini, 15 A.3d 968, 975, 979 (R.I. 2011)

(affirming lower court's finding that, in equitable suit regarding

real property, defendants had come to court with unclean hands and

this could have been a basis for rejecting their affirmative

defenses).      The   court   could     reasonably     view   the   record   as

demonstrating that the Trust did not pay the premium from its own

funds; indeed, it had no funds.         The payment was funded by the loan

from Imperial meant to perpetrate the fraud.            If PHL were ordered

to refund all or part of the premium to the Trust, the Trust would

be enriched with money that it never had in the first place.              That

is,   the   Trust   would   not   be   placed   back   in   its   pre-contract

position, but in a better position, while PHL would be worse off

than it would have been had the contract never existed.                      Or,

whether or not the Trust would be put in a better position,12 as

      11
       The district court denied PHL's motion for attorneys' fees,
PHL Variable, 889 F. Supp. 2d at 284, and as such we interpret the
court's award of special damages to include expenses incurred by
PHL other than amounts paid to its attorneys in this action.
      12
       It is worth noting that, under the terms of the Amended and
Restated Trust Agreement, the Trust would be obligated to turn over
any premium refund to Imperial. If it did so, the refund would
result in an inequitable windfall to Imperial rather than to the
Trust itself. Imperial has already received a kickback of $67,025
from Rainone's commission, and the entire refunded premium would be

                                       -19-
between the Trust and PHL it was entirely equitable to impose the

costs of the fraud on the former.   See Randall v. Loftsgaarden, 478

U.S. 647, 663 (1986) ("[I]t is more appropriate to give the

defrauded party the benefit even of windfalls than to let the

fraudulent party keep them." (quoting Janigan v. Taylor, 344 F.2d

781, 786 (1st Cir. 1965)) (internal quotation marks omitted)). The

flexibility of equity is designed to avoid unjust results.

           Next, the Trust argues that the district court's decision

violated Rhode Island's election of remedies rule.      Under Rhode

Island law, a party who asserts that a contract was procured by

fraud can choose either to seek rescission of the contract or to

affirm the contract and sue for damages.   See LaFazia, 575 A.2d at

184. The Trust asserts that the district court's order, which both

granted rescission and awarded damages, ran afoul of this rule. In

its view, once PHL obtained rescission, it was barred from seeking

any damages.

           Again, the Trust misstates the law.      The election of

remedies rule simply does not apply in this case.   PHL did not seek

damages on the Policy: that is, it did not affirm the contract and

then file an action on that contract, seeking contractually based

damages.   Instead, PHL elected its equitable remedy of rescission,

more than the original principal amount of its loan to the Trust
($189,000). Imperial would thus realize a profit of up to $70,025
on the fraudulent transaction, while PHL would be worse off than it
began.

                                -20-
and, consistent with the purposes of rescission, sought only such

damages as would return it to the position it would have been in

had it never entered the contract.         Cf. FUD's, Inc. v. State, 727

A.2d   692,    696-97   (R.I.   1999)   (citing   Justice   Story    for    the

proposition that money damages are available in cases at equity

when they are "incidental" to the equitable relief sought (quoting

2 Commentaries on Equity Jurisprudence § 794, at 1-2 & n.1 (12th

ed. 1877))); R.I. Dairy Queen, Inc. v. Burke, 187 A.2d 521, 526

(R.I. 1963) (same). The damages that the district court awarded in

this case were for expenses incidental to the rescinded contract,

and reimbursement for those expenses was necessary to craft an

equitable remedy that would make PHL whole.

              Finally, the Trust argues that the district court's

decision was contrary to Rhode Island law holding that a party who

has an adequate remedy at law cannot seek relief in equity.                 See

Kocon v. Cordeiro, 200 A.2d 708, 710 (R.I. 1964).                   The Trust

alleges that PHL had an adequate remedy at law because it could

have sued Rainone to recover the commission it paid him.             However,

Rhode Island law also provides that, in order to defeat equity

jurisdiction, the remedy at law must be "as certain, prompt,

complete and efficient as can be granted by a chancellor."                 Id.

The evidence does not support a conclusion that any alleged remedy

at law would meet this standard.

                                    -21-
          First, PHL was clearly entitled to invoke the court's

equity jurisdiction by seeking rescission of the Policy: no award

of damages against any party involved in procuring the Policy would

have adequately compensated PHL for the prospect of having to pay

a death benefit of $5 million.     Once PHL was properly before the

court on its claim for rescission, the court had authority to

"proceed to determine any other equities existing between the

parties which are connected with the main subject of the suit,"

Sparne, 90 A.2d at 923 -- including the special damages associated

with the Trust's role in the fraud.

          Further, the Trust has not put forth any evidence to show

that PHL's supposed remedy at law against Rainone is at all

"certain" or "complete." PHL has alleged that Rainone is judgment-

proof, and the Trust has not argued to the contrary.      See Thew

Shovel Co. v. McCormick, 166 A. 354, 355 (R.I. 1933) (holding that

claim against insolvent estate would be "neither a complete nor an

adequate remedy" at law). Additionally, if the Trust believed that

Rainone – or Bowie, or Vianello, or Imperial -- was the party

liable to PHL for the company's losses, the Trust could have

impleaded any one or more of those parties in this action.

B.        Fraud

          The Trust first argues that the issue of fraud was

entirely irrelevant once the Trust agreed to rescission, since, on

the Trust's view, return of the premium should have been automatic

                                 -22-
upon rescission regardless of other circumstances.                     Given our

determination that the Trust misconstrues Rhode Island rescission

law, we likewise reject this argument.

              The    Trust   then   argues      that   the   uncontested   record

evidence was        insufficient    to    find    that   the Trust   engaged   in

fraudulent conduct. The Trust's argument fails. We need not find,

as the district court did, that the Trust's conduct met the

elements of common law fraud, see PHL Variable, 889 F. Supp. 2d at

281-83, since PHL did not plead a claim of fraud.                      Rather, we

conclude that the uncontested evidence showed that there was a

conspiracy, of which the Trust was an integral part, to deceive PHL

into issuing a policy based on false pretenses, and that this

evidence of the Trust's unclean hands justified the equitable award

of special damages to PHL.

              The Trust asserts that the only representation Baldi made

to PHL on behalf of the Trust was that the statements in the April

28 application were those of the proposed insured and that the

statements were true to Baldi's "best knowledge and belief." Since

Baldi   did    not    know   when   he   signed    the   application    that   the

statements were false, the Trust argues, he could not have made a

fraudulent misrepresentation.

              This argument is disingenuous at best.               First, as he

admitted at his deposition, Baldi had never met or spoken to Peter

Bowie at the time he signed the application, and Baldi did not see

                                         -23-
Bowie sign the application.            He thus had no basis for believing

that the statements made in the application were in fact those of

the proposed insured, as he attested with his signature.                     Baldi

also admitted that he made no inquiries as to the source or truth

of the representations in the application, so he could not have had

any     "knowledge    or     belief"    as     to   whether     or     not   those

representations were "full, complete, and true."                 See Transitron

Elec. Corp. v. Hughes Aircraft Co., 649 F.2d 871, 875 n.6 (1st Cir.

1981)    (noting     that    "[o]rdinary       fraud      embraces   a    material

misrepresentation in which the maker has no basis for belief, as

well as that which he knows to be false" (emphasis added)).

Finally, no later than May 26, 2008, when he signed the loan

agreement with Imperial, Baldi knew that Bowie was not the one

paying the    Policy       premiums,   as    both   the    application    and    the

Statement of Client Intent had attested. Yet Baldi made no attempt

to correct this known misrepresentation.               Instead, he participated

in the scheme to have Imperial secretly take an interest in the

Policy, while keeping himself as uninformed as possible about the

transactions.

            The Trust also argues that PHL relied only on the earlier

February 28 application, not signed by the Trust, in conducting its

underwriting, and thus that any representations made by the Trust

were irrelevant to PHL's damages.             While it is true that PHL began

its   underwriting     on    the   earlier      application,     the     April   28

                                       -24-
application repeated all of the same statements on which PHL had

based its underwriting -- including Bowie's career, income, and net

worth.    By signing that application on behalf of the Trust, Baldi

averred that all of that information was true to the best of his

knowledge.      The Policy Acceptance Form, which Bowie also signed on

behalf    of     the   Trust,   specifically    recognizes    the    April    28

application as the operative one for the Policy: the form states

that "[t]here is no coverage under application #OL4250.1 dated

02/29/2008."       Further, in addition to the April 28 application,

Baldi    signed    the   Statement   of    Client   Intent   and    the   Policy

Acceptance Form; the former document included additional assurances

that Bowie would pay the premiums, and the latter confirmed that

the representations in the application continued to be true.

               The Trust's argument attempts to avoid the conclusion,

inescapable from the record evidence, that Baldi, Bowie, Rainone,

and Imperial were part of a common fraudulent scheme that sought to

obtain for Imperial a life insurance contract that Imperial could

not have purchased on its own.            The misrepresentations by all of

these parties, working in concert, led PHL to issue a policy on

false pretenses and to incur costs associated with that policy.

               Given these findings, there was no error in the district

court's weighing of equities that led it to conclude that PHL was

entitled to retain the Policy premium as special damages.                 See PHL

Variable, 889 F. Supp. 2d at 282-83.

                                     -25-
                               IV.

          The district court's grant of summary judgment in favor

of PHL, including its order allowing PHL to retain the Policy

premium, is affirmed.

                              -26-