Contingent Fee Business Litigation Blog

ABC News Interviews Mike Myers on Dead Peasant Insurance

Mike@mmellp.com (Mike Myers) — Mon, 05 Oct 2009 15:52:08 -0600

I was recently interviewed by ABC News on the topic Dead Peasant Insurance. That segment is embedded below:

If this is a topic of interest, be sure to visit our recently launched FAQ collection for more in-depth commentary.

Mike Myers Launches COLI FAQ Website

Mike@mmellp.com (Mike Myers) — Wed, 09 Sep 2009 16:11:33 -0600

Mike Myers of McClanahan Myers Espey is pleased to announce his recently-launched website, Dead Peasant Insurance FAQ (DeadPeasantInsurance.com). The site answers common questions about Corporate Owned Life Insurance (COLI), which is also sometimes called janitor insurance or dead peasants insurance.

The site describes the origins of COLI (including how it came to be known as "dead peasants insurance"), lists which employers are believed to have bought insurance policies on the lives of their employees, and discusses employer disclosure requirements. Myers also invites readers to submit more questions on the topic of COLI.

About Mike Myers: Mike Myers has a national law practice involving class actions and commercial litigation at both the trial and appellate levels. He has been counsel in cases involving eighteen approved class action settlements, including the Wal-Mart and Fina Oil “dead peasant” insurance cases. Mike is frequently used as a media resource on the topics of insurance and annuities. He has appeared in the National Law Journal and on CNN’s Prime News with Erica Hill to discuss life insurance issues and consulted on the documentary film SiCKO.

Legal in-sourcing: the day of the billable hour is over

randy@mmellp.com (Randy McClanahan) — Tue, 25 Aug 2009 10:13:33 -0600

The problem is hourly billing. The solution is legal in-sourcing. But it takes two to tango. The dance partners must consist of a non-traditional lawyer and a courageous corporate chief legal officer.

In “Billable Hour Under Attack, In Recession, Companies Push Law Firms for Flat-Fee Contracts,” by Nathan Koppel and Ashby Jones, the authors report that companies are ditching hourly fees because they provide incentive to rack up bigger fees. I remember when Nathan was on top of things at Texas Lawyer, and he is once again right on point for The Wall Street Journal.

According to a survey by management consultant Altman Weil, Inc., there was a “dramatic vote of no confidence from chief legal officers” to the suggestion that the major firms might be serious about changing their traditional hourly billing paradigm. Daniel J. DiLucchio, Jr., a principal of Altman Weil who has been providing management and consulting services to corporate law departments and law firms for 25 years, predicts that “in-house lawyers will assume greater workloads . . . and chief legal officers will need to become more strategic about triaging work, allocating resources, and, in some cases, tolerating higher levels of risk.”

Triaging legal work! I love that term. That is what legal in-sourcing is all about. In litigation – even “bet the company litigation” -- the key is to get a great trial lawyer to lead the team. Then take as much of the routine work in-house as possible. The lead trial lawyer would not do such work anyway. So why pay his firm millions to do what can be done in-house for thousands? Why must getting “cover” for the CLO be considered risky?

The CLO must have the courage to break from the traditional hourly billing norm. Remember the saying: “No one ever got fired for hiring IBM.” That is part of the problem. A CLO might find “cover” by hiring a well-known national firm and the costs be damned. The firm will likely insist that it do everything, from producing documents, to answering interrogatories, to file maintenance, at its usual and outrageously-high hourly rates. Nonsense. The firm wants to charge hourly rates for such work because it is profitable. More money for the lawyers, less for the client. Most of that can be better done in-house. Outside counsel can direct the show, but the stage hands don’t have to be with their firm.

Big-time litigation has become big business. It does not have to be. General Counsel: Take the routine work on big cases in-house. Engage a seasoned and experienced outside trial lawyer to lead the in-house work force. Pay him creatively, not hourly. If it’s a plaintiff’s case, consider a contingent fee. If it’s a defense case, come up with a retainer or performance bonus that will fix costs to a number that the company can live with. The General Counsel will be a hero to the CEO, who will please the Board, which will make the shareholders happy.

Hourly billing should be a relic of history. This is the internet economy. Let’s act like it!

U.S. appeals court labels STOLI transactions "insurance fraud"

Mike@mmellp.com (Mike Myers) — Tue, 07 Jul 2009 15:49:57 -0600

Liberte Capital Group advertised itself as a “viatical investment company.” Its stated business was to buy existing life insurance policies from terminally-ill or elderly persons with a lump-sum payment and then receive the policy benefits when they died. But in reality, Liberte was a fraud. Its chief executive was convicted of two counts of conspiracy and 155 counts of money laundering for buying life insurance policies from others who, with his assistance and through false statements, acquired the policies after receiving diagnoses of terminal illnesses. The owner of Liberte’s escrow agent was also convicted of multiple counts of fraud and tax violations relating to the transactions and sued for embezzling the company’s assets.

On May 28, 2009, the United States Court of Appeals for the Sixth Circuit made the most recent examination of Liberte’s affairs after Liberte’s receiver sued for rescission of three policies and return of the premiums. The Court’s opinion contains the unexpected and remarkable statement that:

The viators’ purchases of the insurance policies with the intent to re-sell them to Liberte immediately constituted insurance fraud, because the viators never intended to insure their own lives.

It would not have been remarkable for the Sixth Circuit to label the policies fraudulently-procured. The false statements in policy applications were legion and well-litigated. The Court’s statement was remarkable because it focused on the insured person’s intent to immediately sell the policy to an investor.

STOLI is an acronym for “stranger-owned life insurance” or “speculator-owned life insurance.” It is a shorthand reference for transactions in which someone buys insurance on his own life only to sell it to a third party, often an unrelated investor, once the policy’s contestability period expires. For those who participate in STOLI transactions, the Court’s opinion is noteworthy. Perhaps inadvertently, perhaps not, the Sixth Circuit’s opinion classifies the basic STOLI transaction as “insurance fraud.”

Court reprimands lawyer for unreasonable contingency fee

Mike@mmellp.com (Mike Myers) — Wed, 01 Jul 2009 14:00:13 -0600

Every person who wants to hire an attorney should know that the amount and method of the attorney’s payment is negotiable. But there are limits to what an attorney can charge.

The American Bar Association’s Model Rules of Professional Conduct state that “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.” State bar associations have adopted this restriction and Indiana’s version of the rule was recently addressed by its Supreme Court.

On June 12, 2009, the Indiana Supreme Court assessed a public reprimand against an attorney for charging an unreasonable fee. The fee agreement at issue called for an hourly rate of $75 per hour plus 50% of the amount recovered. Interestingly, the Indiana Supreme Court did not actually rule that the fee agreement was unreasonable. It instead accepted the parties’ stipulation that making an agreement to charge a client a 50% contingency fee in addition to an hourly fee was a violation of Rule 1.5(a) of the Indiana Rules of Professional Conduct when it assessed the reprimand.

Wal-Mart's "Dead Peasant" suit against insurers escapes the grave a third time

Mike@mmellp.com (Mike Myers) — Thu, 14 May 2009 12:09:52 -0600

Between December 1993 and July 1995, Wal-Mart bought life insurance policies on 350,000 employees and named itself the policies’ beneficiary. Dissatisfied with the return on its investment, Wal-Mart, in 2002, sued the insurers and brokers that sold the policies, including Hartford Life Insurance Company and AIG Life Insurance Company. Three times the Delaware trial court has dismissed Wal-Mart’s case. And three times—most recently on May 12, 2009—the Delaware Supreme Court has reinstated it.

Wal-Mart’s case was first dismissed on statute of limitations grounds by Delaware’s Court of Chancery. The Delaware Supreme Court reversed that dismissal, holding that whether Wal-Mart's suit was time-barred could not be decided on the pleadings. On remand, the Court of Chancery granted the insurers’ renewed motion to dismiss for failure to state a claim. The Supreme Court affirmed the dismissal of Wal-Mart's claims, except for its claim of equitable fraud. Following the second remand, the case was transferred to the Superior Court, where Wal-Mart again amended its complaint to assert only a common-law fraud claim alleging that it was induced to acquire the policies (sometimes called “corporate-owned life insurance,” “COLI,” “dead peasant” or “janitor” insurance) by the insurers’ fraudulent misrepresentation and concealment of the full magnitude of the tax risks associated with certain policy features, which Wal-Mart calls “structural flaws.”

On October 28, 2008, the Superior Court dismissed Wal-Mart’s case a third time on the ground that Wal-Mart's fraud claim was time-barred under the applicable three-year limitations period. It also held that Wal-Mart's claim accrued, at the latest, when Wal-Mart made its final COLI purchase in July 1995, and thus expired three years later. The Superior Court also held that the statute of limitations was not tolled by the "discovery rule" because the record showed that the factual basis of Wal-Mart's fraud claim was knowable and known to Wal-Mart long before September 3, 1999 (three years before the date that Wal-Mart filed this lawsuit).

On May 12, 2009, the Delaware Supreme Court reversed the Superior Court ruling and reinstated Wal-Mart’s case a third time when it held:

This 12th day of May 2009, upon consideration of the briefs of the parties and their contentions at oral argument, it appears to the Court that there are material issues of fact as to whether Appellants' alleged injuries were inherently unknowable and whether Appellants were blamelessly ignorant of Appellees' alleged fraud of understating the tax risks associated with Appellants' Corporate-Owned Life Insurance program. These material issues of fact preclude summary judgment on the Statute of Limitations, 10 Del. C. § 8106, in favor of Appellees.

Based on the Supreme Court’s ruling, the case will be returned to the Superior Court where the parties will continue litigation.

STOLI transaction litigation increasing

Mike@mmellp.com (Mike Myers) — Tue, 05 May 2009 11:11:14 -0600

Litigation involving “stranger-owned life insurance” or “STOLI” is on the rise as insurance companies take aggressive legal action to rescind policies that they perceive to be involved in STOLI transactions. These cases may be the beginning of a cottage industry of litigation concerning alleged STOLI arrangements.

In January, a New Jersey federal court ruled that Lincoln National Life Insurance Company could seek rescission of a $3 million policy allegedly used for a STOLI transaction. In February, Hartford Life and Annuity Company announced that it was nearing a settlement of a case in a Texas federal court involving its rescission of a $5,900,000 policy. And on March 31, 2009, a Florida federal court ruled that Axa Equitable Life’s claim to rescind five policies—valued at approximately $73,000,000—would be decided partially in arbitration.

The cases have two characteristics in common. First, the insurers base their claim for policy rescission on alleged misrepresentations in the policy application—usually that the insured person falsely stated that he or she did not intend to sell the policy in a secondary market transaction. Second, the policies involved carry a multi-million dollar death benefit. Based on the vast market for STOLI policy transactions, future cases involving these characteristics appear imminent.

Federal appeals court: ten-year limitations statute applies to Louisiana "dead peasant" case

Mike@mmellp.com (Mike Myers) — Fri, 13 Feb 2009 15:53:46 -0600

On February 11, 2009, the United States Court of Appeals for the Fifth Circuit issued an opinion in the case Richard v. Wal-Mart Stores, Inc. The case was filed by the estate of a former Wal-Mart employee to recover life insurance benefits that Wal-Mart received from its “corporate-owned” policies; sometimes called “dead peasant” policies. The estate sued under a Louisiana statute that allows estates to recover policy benefits when the designated beneficiary (in this case Wal-Mart) did not have an “insurable interest” in the insured person’s life.

The district court held that the suit was subject to a one-year statute of limitations and dismissed it for being filed too late. But the court of appeals reversed, holding that the suit was timely under Louisiana’s ten-year statute of limitations. (Read the court’s opinion).

Federal court rules that STOLI policy may be void for lack of insurable interest

Mike@mmellp.com (Mike Myers) — Thu, 05 Feb 2009 15:37:08 -0600

STOLI is an acronym for “stranger-owned life insurance” or “speculator-owned life insurance.” It is a shorthand reference for transactions in which someone buys insurance on his own life for the purpose of selling it to a third party, often an unrelated investor, once the policy’s contestability period has expired. A recent ruling by a federal court in New Jersey, however, may undermine the security of such investments.

In a STOLI transaction, the insured person typically gets cash for the policy and the investor receives the right to the policy benefits when the insured person dies. Life insurers loathe the transactions because investors are unlikely to let STOLI policies lapse, meaning that insurers will have to pay death benefits on a greater percentage of insurance contracts than they have become accustomed.

On January 27, 2009, the United States District Court for New Jersey became one of the first courts to weigh-in on what may become a recurring topic of litigation—an insurer’s effort to rescind one of its life insurance policies because of the possibility that it would be sold in a secondary market in a STOLI transaction.

In Lincoln National Life Insurance Company v. Calhoun, Lincoln National sued to rescind a $3 million policy on the life of Walter Calhoun. First, the insurer argued that the policy is void because Calhoun intended—at the time he applied for the policy—to sell it to “stranger investors” in the secondary life insurance market, thereby removing the necessary insurable interest. Second, Lincoln National argued that Calhoun made a material misrepresentation in his application by falsely stating that he had not discussed the possible sale or assignment of the policy in a secondary market.

The court held that Lincoln National properly stated a case, noting that a material misrepresentation on the policy application may be reason to void the policy. But more importantly, the court added that Lincoln National’s allegation of no insurable interest could also serve to void the policy. The court held, “Insureds begin to run afoul of the insurable interest requirement, however, when they intend at the time of the policy's issuance, to profit by transferring the policy to a stranger with no insurable interest at the expiration of the contestability period.”

The impact of the court’s insurable interest holding could be enormous. The market for STOLI policies is now estimated to be in the tens of billions of dollars. The court’s ruling that a policy may be void if the insured person intended, at the time of purchase, to transfer the policy to one without an insurable interest may undermine the security of those STOLI investments.

National Law Journal profiles COLI and BOLI suits

Mike@mmellp.com (Mike Myers) — Fri, 30 Jan 2009 20:13:43 -0600

On January 30, 2009, the National Law Journal published an article by Tresa Baldas that profiles current and potential litigation involving corporate owned life insurance and bank owned life insurance policies (read the article). The article describes how a recent ruling from the United States District Court for the Northern District of Oklahoma in the case Havenstrite v. Hartford may expose insurance carriers to liability for administering life insurance policies on people without their consent. The article also addresses the magnitude of the policy benefits from policies of bank owned life insurance and how litigation concerning those policies may be forthcoming.

Examples of Life Insurance Abuse: Man Shoves Boy From a 400 Foot Cliff to Claim Policy Benefits

Mike@mmellp.com (Mike Myers) — Tue, 13 Jan 2009 14:47:38 -0600

I have previously used this forum to describe instances of life insurance abuse and stress the role that human nature plays in those abusive acts. With the regulation of life insurance practices remaining a noteworthy topic, especially in the context of stranger-owned, bank-owned, and corporate-owned life insurance, these abusive acts should be a constant reminder of the potential harm that may result when a person has an incentive to profit from another’s early death.

One especially horrific example of such abuse involves a scheme devised by Francis Marion Black, Jr., who was convicted of murdering twelve-year-old Marvin Noblitt to claim life insurance benefits. Black was sentenced to death. The appeals court that affirmed Black’s conviction held that there was no doubt that he formed, planned, and committed the crime. His acts were inhuman and the evidence from his trial supported the conviction.

Black and his wife Guinevere were married in 1934 and promptly lost their savings through poor stock investments. Black schemed to recapture the losses by adopting a boy, purchasing an insurance policy on the child’s life, and then killing him in a way that appeared accidental. He contacted two insurance companies about policies on the life of a boy he “intended to adopt.” He requested $50,000 in coverage, but was told that he could insure a child for only $5,000.

Black and his wife then moved to San Benito, Texas and began asking about a twelve or thirteen year old boy they could adopt. Black met Marvin Noblitt’s mother, told her that he intended to open an ice cream parlor in San Antonio, and wanted to adopt a boy who would work at the store before and after school. Marvin’s mother refused the adoption. But she allowed Black to take him for six months and said she would reconsider the adoption if Marvin liked the arrangement.

A few days after arriving in San Antonio, Black applied for a $5,000 policy on Marvin from the Acacia Insurance Company, which refused the application. Undeterred, he applied to the Great American Insurance Company for a $5,000 policy. Black lied in the application and stated that he had cared for Marvin since taking him from an orphanage in Oklahoma. Great American issued the policy on May 29, 1938 and named Black as the policy beneficiary.

Within a week, Black and Guinevere packed all of their possessions and began driving to San Antonio with Marvin. They stopped in Alpine, Texas on June 8th. Black went to a local drug store the next morning and asked about post cards of the Grand Canyon, the local mountain scenery and places of interest within a hundred miles of Alpine. The pharmacist did not have the post cards, but suggested that Black visit Alpine’s Chamber of Commerce. He did so and asked about the Limpia, Grand, and Santa Helena Canyons. The Chamber of Commerce gave him information about the scenic beauty of the country and Agua Frio Springs, located at the foot of a 400 foot cliff. Later that day, Black went to Agua Frio Springs.

The Agua Frio Springs were on a private ranch and the ranch’s owner appeared at Black’s trial. He testified that the springs were located at the foot of a cliff, approximately 400 feet high. He also testified that Black, accompanied by his wife and a child, arrived at the ranch on June 9th at about 5 p.m. and asked for permission to look at the springs, the bluff, and the scenery. He granted Black’s request and, in a very short time, saw two people on top of the cliff rolling stones into the canyon. About thirty minutes later, Black went to the ranch house and reported that his little boy had fallen off the cliff and was injured. The rancher drove his truck to the foot of the cliff and brought Marvin’s mangled body back to the ranch house. Marvin’s body was then taken to an undertaker in Alpine.

Black told the undertaker that he had adopted the boy but had not yet gone through all of the legal formalities. He added that he had taken the boy from Oklahoma about a year earlier and that there was no reason to delay the burial because he did not think he could ever find the boy’s mother. Black also said that he did not have much money and asked if the undertaker would help him collect a $5,000 insurance policy on the boy’s life.

After the funeral, Black and Guinevere were arrested and charged with homicide. Black made a written confession in which he admitted the killing. The confession stated that Black went to the top of the cliff with the boy, threw a few rocks, and then shoved the boy off the cliff.

Havenstrite v. Hartford: Court Holds That Employees Insured by COLI Policies Have a Claim Against the Insurer

Mike@mmellp.com (Mike Myers) — Mon, 05 Jan 2009 10:18:29 -0600

On December 31, 2008, the United States District Court for the Northern District of Oklahoma held that employees whose lives were insured by an employer’s secret policies of corporate-owned life insurance possess a claim against the insurer that administered the policies for misusing the employees’ identities and personal information. (Read the Court’s opinion).

Corporate-owned life insurance or “COLI” is insurance held by a company on the lives of its employees, or former employees, with the company named as the policy beneficiary. Because the company designates itself as the policy beneficiary, the insurer pays the policy benefits to the company when a covered employee dies.

The plaintiffs in the case Havenstrite v. Hartford Life Insurance Company alleged that Hartford used their names, Social Security numbers, and other personal information without their consent or knowledge to administer and maintain the secret COLI policies on their lives. They claimed that Hartford violated an Oklahoma statute that provides a recovery against any person who, without consent, uses another’s name in products, merchandise, or goods. They also claimed that Hartford committed a common law invasion of privacy by misappropriating their names and identities when Hartford used that information in its insurance policies and administrative reports.

Hartford asked the Court in the Havenstrite case to dismiss the claims against it by arguing that the plaintiffs’ names did not have any special value. The Court refused Hartford’s request and applied Oklahoma’s law that “one who appropriates to his own use or benefit the name or likeness of another is subject to liability to the other for invasion of his privacy.” The Court concluded that the plaintiffs adequately alleged that Hartford “appropriated to Hartford’s own use and benefit the commercial value of their names and private personal identifiers by receiving premiums, commissions and service and administration fees.”

Between five and six million Americans are covered by a COLI policy, according to an attorney for Hartford. COLI policies are sometimes referred to as"Janitor" or “Dead Peasant” policies. "Dead Peasant insurance" is a phrase used within the insurance industry to describe the deceased employees whose lives were insured by one of the policies.

Houston: Not Yet the Next Marshall

Mike@mmellp.com (Mike Myers) — Mon, 22 Dec 2008 10:50:57 -0600

Patent infringement suit filings have remained relatively steady for the past eight years, according to Stanford Law School’s Intellectual Property Clearinghouse. New patent suits range between 2,300 and 2,800 filings per year. But Marshall, Texas is the venue of choice for a disproportionally high number of those filings. Since January 1, 2008, for example, there have been 295 patent suits filed in the United States District Court for the Eastern District of Texas. And sixty percent of the district’s patent suits are traditionally filed in the district’s Marshall Division.

There are several reasons why plaintiffs’ lawyers prefer Marshall. The sitting judges and their magistrates are considered fair and experienced. Jurors in the division have also demonstrated a deep respect for individual property rights. And there is a perception, although no longer substantiated, that cases reach trial quickly through Marshall’s “rocket docket.”

But another reason why plaintiffs prefer Marshall is the district’s “Rules of Practice for Patent Cases.” Those rules require prompt disclosure of discoverable information and prevent gamesmanship in the discovery process. More importantly, the rules are strictly enforced by the judges and magistrates. Plaintiffs’ lawyers know that they will be able to get the information necessary to support their case; and get it quickly or have an available remedy.

The crush of patent cases filed in Marshall over several years has caused its “rocket docket” to slow. And plaintiffs may search for other venues. One possibility is the United States District Court for the Southern District of Texas (located primarily in Houston, Texas). The venue may become attractive because, effective January 1, 2008, the district adopted its own “Rules of Practice for Patent Cases” that mirror those used in Marshall. Adoption of those rules, however, has not yet lead to a dramatic increase in patent suit filings. Only thirty-two patent cases have been filed in the district during 2008 (compared to twenty-eight last year). Time will tell whether the new rules attract suit filings. Because new suits filed under those rules are just now becoming ripe for the adjudication of discovery disputes, we will soon learn whether judges and magistrates in the Southern District of Texas apply the rules as strictly as the jurists in Marshall. If so, plaintiffs’ lawyers may find Houston a more attractive venue for their patent cases.

BOLI Increases May Reflect Institutions' 2008 Success or Failure

Mike@mmellp.com (Mike Myers) — Thu, 18 Dec 2008 11:17:47 -0600

2008 was a dismal year for some of the country’s largest financial institutions. But it was a relatively good year for others. By coincidence or otherwise, the successes and failures of these institutions appear to be reflected by increases in their reported holdings of bank owned life insurance or BOLI.

An increase in BOLI holdings will generally result from one of three events, or some combination of them. Reported BOLI holdings may increase because the bank bought new policies on its employees. They may also increase when the reporting bank acquires a competitor and, during the process, the competitor’s BOLI policies. Increases may also occur when investment returns raise the cash surrender value of existing policies.

Over the preceding four quarters, BOLI holdings of Bank of America, Citibank, Wachovia, Washington Mutual, and Wells Fargo have been:

Dec. 07 Mar. 08 June 08 Sept. 08 % increase

BOA 14.3B 14.5B 16.5B 17.1B 19.5

Citi 3.9B 4.03B 4.05B 4.1B 5

Wachovia 14.6B 14.4B 14.5B 14.6B 0

WaMu 4.9B 5.028B 5.072B no report 3.4

Wells Fargo 4.9B 5.15B 5.19B 5.36B 9.38

While the relationship between BOLI increases and institutional success may be coincidence, a correlation exists nevertheless. Bank of America, with its 19.5% increase in BOLI holdings, recently reported third quarter 2008 net income of $1.18 billion, or $0.15 per share, a figure far lower than a year ago but significant in relation to other 2008 returns in the industry. Bank of America also received approval for the $50 billion acquisition of Merrill Lynch. Wells Fargo likewise achieved solid growth in loans and deposits during 2008 and is on track to complete its acquisition of Wachovia by year’s end. This success correlates to Wells Fargo’s 9.38% increase in BOLI holdings over the last year.

Wachovia, Citibank and Washington Mutual did not fare as well in 2008. Citibank required bailout money from the federal government and has cut tens of thousands of jobs during the year. Wachovia and Washington Mutual were acquired by competitors while on the brink of collapse. These failures correlate to the relatively pedestrian increases in their BOLI holdings. But perhaps the most interesting question is why their BOLI holdings increased at all (Wachovia’s did not). It seems unlikely that these institutions invested their cash in additional policies. The reported increases may therefore be attributable to investment gains which, at these percentages, are similar to the returns available from treasury bills or similar investments.

Examples of Insurance Abuse: Father Poisons Son With Halloween Candy

Mike@mmellp.com (Mike Myers) — Thu, 30 Oct 2008 10:53:58 -0600

Near this time every year, I am reminded of this story. And it demonstrates why insurance regulators and policy makers who are currently analyzing regulations on life settlements and “stranger owned life insurance” should consider the impact of human nature on those insurance transactions. Insurance products are frequently abused by profiteers and life insurance policies pose a significant risk in the hands of the unscrupulous. There is no better example of this abuse than Ronald Clark O’Bryan.

Ronald Clark O’Bryan had serious personal financial problems. He earned $150 per week, was eight months behind on his car payments and had total debts up to $100,000. In January of 1974, over his wife’s objection, he took out $10,000 life insurance policies on both of his two children. Later that year, over the objection of his life insurance agent, he bought additional $20,000 life insurance policies on his son and daughter. By mid-October, both of his children were covered by several life insurance policies but O’Bryan had virtually no coverage on himself. It was also at this time that O’Bryan told a creditor that he expected to receive a large sum of money before the end of the year and extended his debt obligations into 1975.

In August of 1974, O’Bryan, who worked as an optometrist, asked his manager for cyanide to clean gold glass frames—an unusual request considering that cyanide had not been used in the industry for over twenty years. He also talked about the commercial uses of cyanide with his co-workers, as well as what dosages of the chemical would be deadly. After his request for the cyanide was denied, O’Bryan asked a friend (and employee of Arco Chemical Company) where he could buy cyanide and, “out of curiosity,” what doses would be fatal to humans. He finally asked how one could detect the presence of chemicals in a dead body.

Two weeks before Halloween, O’Bryan bought costumes for his children and appeared excited about taking them “trick or treating” even though he had never been excited about it before. A week later, he invited a friend’s family to dinner on Halloween night and suggested that the children from both families “trick or treat” together.

On Halloween, the families met for dinner as planned and then went “trick or treating.” The group approached a house, only to find no one home. The children ran to the next home, but O’Bryan remained behind in the darkness for about thirty seconds. He quickly caught up with the group holding “giant pixy styx” and exclaimed that the "rich neighbors" were handing out expensive candy.

When they returned home, O’Bryan’s son Timothy asked for one of the pixy styx. He took two gulps of the powder, complained that it tasted bad and began vomiting. He went into convulsions and was taken to the hospital where he died within an hour. Fluids taken from his stomach contained 16 milligrams of cyanide. The level of cyanide in his blood was .4 milligrams. A fatal human dose of cyanide is a blood level between .2 and .3 milligrams.

On November 1st, O’Bryan met with the funeral director and learned that a separate death certificate was required to make a claim under each policy on Timothy’s life. He ordered six death certificates. He also described how he intended to use the insurance policy benefits and said the didn't see how the police could “pin” the death on anyone.

O’Bryan was mistaken. The police did, in fact, pin Timothy’s death on him. O’Bryan was tried, convicted, and sentenced to death. He was executed by lethal injection on March 31, 1984.

The story of Ronald Clark O’Bryan is horrific. It is almost impossible to comprehend how a person could murder his or her own child for life insurance proceeds. But examples of life insurance abuse, often equally horrific, are legion. And such examples speak volumes about how basic human nature, when presented with profiteering opportunities through life insurance, can produce unimaginable results.

Will Chase And Wells Fargo Benefit From The Deaths Of WaMu And Wachovia's Former Employees?

Mike@mmellp.com (Mike Myers) — Wed, 29 Oct 2008 14:25:39 -0600

Washington Mutual and Wachovia have two things in common. First, they were spectacular business failures. Second, they were two of the nation’s largest holders of “bank owned life insurance” or “BOLI” policies. The combination of these two facts creates interesting issues concerning the legality of the BOLI policies and who may benefit from the deaths of the banks’ former employees.

Bank owned life insurance generally refers to policies that a bank purchases on the lives of its employees. But unlike traditional forms of life insurance, the bank designates itself as the policy beneficiary—meaning that the bank is entitled to the policy benefits when the insured employee dies. BOLI policies also remain in force even if the insured person no longer works for the bank. The policies are therefore similar to those often referred to as “dead peasant” or “janitor” insurance.

Washington Mutual and Wachovia had enormous appetites for BOLI policies. As of June 30, 2008, Washington Mutual reported to the Office of Thrift Supervision that it maintained $5.072 billion in BOLI holdings. Wachovia likewise reported a staggering $14.575 billion of BOLI holdings. Notably, those amounts are reported in cash surrender value, meaning that the policies’ benefit amounts are likely substantially higher.

Washington Mutual’s assets were acquired by JP Morgan Chase in September and Wachovia was acquired by Wells Fargo earlier this month. These transactions create interesting questions concerning the validity of the policies on the lives of the former employees and who may profit from their deaths.

Assuming that the Washington Mutual and Wachovia employees consented to the BOLI policies on their lives (a big assumption indeed), Washington Mutual and Wachovia may have had the insurable interest necessary to support the BOLI policies. But what about JP Morgan Chase and Wells Fargo? WaMu and Wachovia employees, especially former employees who left long before the collapse, probably never imagined that Chase and Wells Fargo might one day benefit from their deaths. Thus, two issues surface. First, who will receive the BOLI policy benefits when WaMu and Wachovia’s former employees die? Second, if Chase and Wells Fargo are the expected beneficiaries of those policies, do they have the insurable interest necessary to ensure the policies’ validity?

For more information on this topic, please contact any of the firm's partners at mmellp.com.

Life Settlements, STOLI Pose Potential Insurable Interest Problems

Mike@mmellp.com (Mike Myers) — Tue, 28 Oct 2008 10:38:10 -0600

Virtually every jurisdiction in the United States recognizes a person’s right to insure his or her own life and name another as the policy beneficiary, either through an assignment or express designation. The designated beneficiary or assignee is thereafter deemed to have an insurable interest in the insured person’s life by virtue of that designation or assignment.

In the context of life or viatical settlements, the requirement of an insurable interest is typically satisfied when the insured person assigns the policy to the purchaser. The insured person in a “stranger owned life insurance” or “STOLI” transaction may likewise satisfy the insurable interest requirement through designation or assignment. Thus, it is arguable that the beneficiary in both life settlement and STOLI transactions have an insurable interest in the insured person’s life because of the assignment—an act taken by the insured person himself.

One matter absent from the current debate over life settlement and STOLI transactions, however, involves the maintenance of an insurable interest after a secondary transfer of the policy. Most contracts may be transferred time and time again. But life insurance policies are not like most contracts because the requirement of an insurable interest is a fundamental. It is therefore likely that the second (or third, or fourth) assignee of the life insurance contract will not have an insurable interest in the insured person’s life—the insured person did not assign the policy to the subsequent owner or name it as the policy beneficiary. And in many jurisdictions, the absence of an insurable interest renders the policy void as a wagering contract that violates public policy.

To learn more about this topic, please contact any of the firm's partners at mmellp.com.

"No Win No Fee": What Does It Mean?

Mike@mmellp.com (Mike Myers) — Fri, 24 Oct 2008 11:21:18 -0600

“No Win No Fee” is a general reference to a contingent-fee agreement. A contingent-fee agreement is a contract between an attorney and client that describes how the attorney is to be paid for his or her work. Under a pure contingent-fee agreement, the attorney receives a fee only when the contingency is met—usually when the client recovers money from the opponent. Thus, “no win no fee” is an apt description. Without a recovery for the client, no fee is owed to the attorney. It may also be referred to as a "success fee."

Except when prohibited by law (such as in criminal defense or some family law cases), contingent-fee agreements can be used in a variety of situations. It is important for the client to understand that, like most contracts, the terms of a contingent-fee agreement are negotiable. Negotiable terms may include the work the attorney is expected to do, the attorney’s percentage of the recovery, who will advance the case expenses, how those expenses will be subtracted from the recovery, and how any non-cash recovery will be valued. Because these terms are negotiable, the client who is shopping for legal services may want to have a disinterested attorney review the proposed contract to ensure that it meets the client’s needs.

For more information this topic, please contact any of the firm’s partners at mmellp.com.

Legal In-sourcing: The answer to the "Value Challenge."

randy@mmellp.com (Randy McClanahan) — Mon, 06 Oct 2008 11:02:45 -0600

I'm not a member of the Association of Corporate Counsel because I'm not an in-house counsel. I am an advocate for affordable litigation, however, and I was delighted to learn from my friend Steve Matthews about the ACC and its "Value Challenge." The challenge states:

“ACC believes that many traditional law firm business models and many of the approaches to lawyer training and cost management are not aligned with what corporate clients want and need: value-driven, high-quality legal services that deliver solutions for a reasonable cost and develop lawyers as counselors (not just content-providers), advocates (not just process-doers) and professional partners.”

I totally agree.

My firm advocates a litigation staffing model that answers the Value Challenge head on. In our website, we propose a solution that helps a company reduce the cost of litigation by bringing as much work in-house as possible. We call it “in-sourcing.” Forbes Magazine recently ran an advertorial about it.

The idea is that even in complicated cases, what the client really needs is the right trial lawyer in the courtroom. Much of the work that causes litigation to be so expensive, such as discovery, document review and production, and motion practice, can be handled in-house, by the client's own employees.

In traditional hourly billing, everything is done by outside counsel and their staffs at very expensive rates. Starting salaries for baby lawyers are now as high as $180,000. Why should a corporate client pay hundreds of dollars per hour for the “education” of such lawyers at tasks that can be done better and cheaper by corporate employees? The incentive should be efficiency, not opportunities for more hours and higher billings. Outside counsel often charge millions of dollars to handle a single case. Is that really necessary? Certainly you need the right trial lawyer in the courtroom and to supervise your in-house staff on the case. But you don’t need all the extra baggage that usually comes with the services of a top-tier trial lawyer.

Unfortunately, we are not yet past the days of scorched-earth discovery and litigation tactics. Some litigants, encouraged by their hourly-compensated lawyers, refuse to play by society’s rules and get caught. A litigant and its outside counsel were recently sanctioned $4.3 million for “abuse of advocacy” in a patent case. Earlier this year that same litigant and a different firm were assessed $10 million for “misbehavior” in disregarding claims construction. The Value Challenge sets a higher standard.

So let's look at the Challenge again. What do corporate clients want and need?

“Value-driven, high-quality legal services that deliver solutions for a reasonable cost and develop lawyers as counselors (not just content-providers), advocates (not just process-doers) and professional partners.”

That’s what “Legal In-sourcing” does. Just hire what you need. Do everything you can in-house. Get a high-quality, top tier trial lawyer. Let him or her lead your in-house team one case at a time. Use his partners and staff only as necessary. Nurture talent and develop experience in-house. Use in-house staff to locate and produce documents, review documents produced by your opponent and make coding entries into trial software programs. Conduct legal research in-house. Write initial drafts of the motions, responses and briefs in-house. Take the routine depositions in-house. Use the trial lawyer and his staff only as necessary. We know that most cases get resolved before trial. Most of the labor-intensive work that is done before trial can be done in-house.

The lead trial lawyer must, of course, remain involved at all times, but as a supervisor, not as a provider of the labor pool. This makes him and his firm true “professional partners” with the in-house staff on a case by case basis.

What does all this get the corporate litigant? Value-driven, high-quality legal services that deliver solutions for a reasonable cost, and develop in-house lawyers as counselors, advocates and professional partners.

At our firm, we call it “Legal In-sourcing.” It answers the “Value Challenge” perfectly!

Breath-taking Indeed--$180,000 Starting Salaries For Baby Lawyers

randy@mmellp.com (Randy McClanahan) — Fri, 03 Oct 2008 11:09:25 -0600

How many litigants are willing, even if able, to pay high hourly rates so that big firms can pay “breath-taking” starting salaries to baby lawyers? According to the American Bar Association Journal, first-year law associates are being paid starting salaries as high as $180,000 per year. “As Economy Stalls, So Do Salaries … But Not Associate Hours,” ABAJournal.com, September 29, 2008. And as those lawyers mature, their rates go up, not down. Guess who pays for that! Clients do.

Perhaps that is why the average cost of a patent infringement lawsuit in Texas was $2,637,179 in 2005. “Report of the Economic Survey,” American Intellectual Property Law Association 2005, at p. I-109. The little guy can’t afford to play in that league. Indeed, even some larger corporate litigants are saying “enough” to continually escalating costs of litigation.

As a former chairman of the Court Costs and Delay committee of the State Bar of Texas, I have been concerned about controlling the high cost of litigation for more than two decades. That is why our firm handles patent and other complicated commercial litigation on contingency fee. The little guy has access to the legal system. The big guy keeps its costs down. The law firm, not the client, bears the cost of paying the lawyer salaries. In the event of a “breath-taking” result, the client and lawyer share in the recovery. Law firms may choose to pay breath-taking salaries if they wish, but it should not be at their clients’ expense.