Cigna Property & Casualty Insurance v. Polaris Pictures Corp.
Docket: Nos. 96-56252, 96-56789
Court: Court of Appeals for the Ninth Circuit; October 22, 1998; Federal Appellate Court
Defendants Polaris Pictures Corp. and U.S. Inbanco Ltd. appeal a district court ruling that granted Cigna Property and Casualty Insurance Company rescission of a marine insurance contract for a yacht, citing fraud as the reason. However, the appellate court affirms the rescission on the basis of failure to disclose material facts during the insurance application, rather than fraud. The court also upholds the award of attorney fees to Cigna and the inclusion of Rex K. DeGeorge as a judgment debtor.
DeGeorge, an attorney, has a history of losing insured yachts under questionable circumstances. His first yacht, the Tutania, was reported stolen after he and a companion were drugged by individuals posing as buyers. He received $43,000 from Hartford Insurance after threatening litigation for a denied claim. His second yacht, the Epinicia, sank after hitting an unseen object while sailing in Italy, leading to a $194,000 payout from Lloyds of London after a similar threat of litigation. In 1983, while handling a high-stakes lawsuit, DeGeorge's 47-foot yacht sank after a suspicious fishing boat circled it, leading to an escape following explosions on board. He later reported the loss and received $245,000 from Fireman’s Fund.
Cigna asserts that DeGeorge's insured losses extend beyond ocean vessels, detailing a history of claims made against various insurers from 1970 to 1993. Specific claims include: a stolen Rolex watch in Madrid ($1,500), personal items taken in Sydney ($2,000), multiple baggage thefts in Barcelona totaling over $20,000, a missing Jensen-Healy automobile, and several baggage losses while traveling in Europe ($10,000 in 1981, $9,000 in 1990, and $10,000 in 1991). In 1992, DeGeorge reported stolen paintings and personal property valued at $700,000, followed by undisclosed losses resulting from this theft in 1993. Additionally, DeGeorge filed twenty-nine insurance disability claims between 1976 and 1990, including a 1990 claim for $11,000 per month due to a bipolar disorder. Monarch Insurance Company attempted to rescind the policy, alleging misrepresentation by DeGeorge, but ultimately settled for $550,000 after he counterclaimed for breach of contract and other claims.
In June 1992, DeGeorge contracted the construction of a 76-foot yacht, the Principe di Pictor, for $1.9 million from Azimut, SpA, later assigning the contract to Continental Pictures Corp., a Panamanian corporation. Although Continental supposedly bought the contract for $3.6 million, it failed to make any payments, forcing DeGeorge to pay $600,000 of his own funds to Azimut. Continental subsequently sold the yacht to Polaris Pictures Corp., also controlled by DeGeorge, for $3.62 million, with Polaris having no significant assets. Prior to this sale, DeGeorge executed a stock swap with Tridon, a financially insolvent company, allowing him to regain Polaris stock under certain conditions, further indicating his control over the transaction and potential asset manipulation.
Tridon, following a stock swap, became the sole owner of Polaris, distancing DeGeorge from Polaris's acquisition of a yacht. Polaris financed the yacht purchase through notes from Inbanco, a company formed and controlled by DeGeorge on the same day Polaris bought the yacht. Inbanco had minimal assets, primarily a $200,000 cash infusion from DeGeorge's nephew. After the purchase, Polaris allegedly entered an agreement with Jacob Wizman, a supposed client of DeGeorge, to sell a 98% interest in the yacht for $3.62 million, contingent on its delivery in pristine condition. Concerns arose regarding Wizman’s existence due to his failure to respond to a subpoena. Polaris and Inbanco obtained marine insurance from Cigna, omitting any mention of DeGeorge or related parties in their application. Cigna issued a policy valued at nearly $6.5 million to Polaris, naming Inbanco as the loss payee. The yacht, Principe, sank on its maiden voyage with DeGeorge and two others aboard, following a narrative that it was intentionally sunk by crew members posing as trial sailors. These crew members, led by a newly hired captain, drilled holes in the hull after seizing control. The men managed to escape on a skiff as the yacht sank, which was later raised but declared a total loss. Polaris and Inbanco filed insurance claims for the yacht’s loss, but Cigna refused to pay, seeking rescission of the insurance contract based on undisclosed material facts, including DeGeorge’s loss history and the interconnected ownership of the yacht.
Polaris and Inbanco filed counterclaims against Cigna, Allen, and Alliance for breach of contract and breach of the implied covenant of good faith and fair dealing. The district court, led by Judge Tashima, granted summary judgment in favor of Cigna, dismissing all counterclaims. The court reasoned that if Cigna succeeded in its rescission claim, any harm to Polaris and Inbanco stemmed from their failure to act in good faith, as required by the doctrine of uberrimae fidei. Conversely, if Cigna failed in its claim, Polaris and Inbanco would receive all benefits under the policy with no damages incurred. The court also dismissed Cigna’s counterclaim for indemnity from DeGeorge and denied its motion to declare DeGeorge an alter ego of Polaris and Inbanco, stating it was irrelevant since Cigna sought only rescission, not damages.
Following this, Judge Letts conducted a seven-day bench trial regarding Cigna's rescission claim, ultimately granting rescission based on findings of fraud. The court concluded that Polaris and Inbanco intended to sink the Principe when purchasing insurance from Cigna. Cigna was awarded attorney fees, initially against both Polaris and Inbanco but later modified to include DeGeorge as an alter ego.
Polaris, Inbanco, and DeGeorge appealed the rescission judgment, with DeGeorge also appealing the attorney fees awarded against him personally. The appellate court affirmed the district court's decision, focusing on the failure to disclose material facts in the marine insurance application rather than the fraud claim. The standard of review included de novo for summary judgment and conclusions of law, and clearly erroneous for findings of fact. The appellate court emphasized that it could affirm the district court's decision on any supported ground, even if it was based on different reasoning. Polaris argued the district court erred in dismissing its counterclaims; however, the court correctly ruled that if Cigna prevailed on rescission, Polaris’s claims would fail, and if Cigna did not prevail, Polaris would suffer no damages.
Polaris contends that its counterclaims for damages warranted a jury trial, asserting that there were shared legal and factual issues with Cigna’s rescission claim. Polaris argues that the district court's dismissal of its counterclaims prior to trial, while proceeding with a bench trial on Cigna's rescission claim, violated its Seventh Amendment right to a jury trial. However, the court had discretion to conduct a bench trial on the equitable rescission claim first, as supported by precedent (Dollar Systems, Inc. v. Avcar Leasing Systems, Inc., 890 F.2d 165, 170). The bench trial resulted in a judgment favoring Cigna, affirming the preclusion of Polaris's counterclaims for damages.
Polaris also claims that Cigna was judicially estopped from asserting the Principe was intentionally scuttled because Cigna did not dispute DeGeorge’s account of the sinking. This argument is dismissed as judicial estoppel is inapplicable; Cigna did not change its position or rely on an intentional scuttling theory during the trial. The court, rather than Cigna, raised the scuttling issue, concluding that DeGeorge's account was so implausible it cast doubt on whether the boat was deliberately scuttled.
Lastly, Polaris argues that the district court incorrectly rescinded the insurance contract based on fraud not relied upon by Cigna. The court identified fraud stemming from the concealment of facts by Polaris and Inbanco regarding their intentions when purchasing insurance, which was to precipitate an event to collect on the policy, rather than for legitimate insurance purposes. Cigna’s complaint highlighted the concealment of material facts, including DeGeorge's interests and previous claims, justifying the rescission of the insurance policy.
Cigna successfully demonstrated at trial that Polaris concealed material information during the marine insurance application process, a fact that Polaris did not dispute. The district court's judgment to rescind the insurance contract was based on this concealment rather than fraud. An applicant for marine insurance is obligated to disclose all material facts, regardless of whether the insurer inquires. Cigna's right to rescind the contract is supported by both intentional misrepresentation and nondisclosure of material facts. Polaris failed to inform Cigna about DeGeorge’s ownership interest in the Principe and his loss history, both of which were material to the insurance risk. Instead of disputing these omissions, Polaris and Inbanco claimed that Cigna was at fault for issuing coverage without addressing application deficiencies, a position lacking legal support and contrary to established obligations. They also alleged bias from the district court, but the court allowed responses to its concerns and no evidence of bias was found. Lastly, Polaris argued against including DeGeorge as a non-party judgment debtor, citing a prior ruling that denied declaring him an alter ego. The court clarified that a prejudgment order does not carry preclusive effect, retaining discretion to change its decisions before the final judgment. Judge Tashima had not definitively ruled on DeGeorge's status as an alter ego, and the prior ruling was deemed irrelevant to the trial's proceeding.
Cigna was awarded attorney fees after trial, leading the district court to reconsider the alter ego issue regarding DeGeorge, ultimately finding him to be the alter ego of the corporate defendants and adding him as a non-party judgment debtor. Polaris argued that Cigna's motion to include DeGeorge as a judgment debtor was untimely under Federal Rule of Civil Procedure 59(e), which requires motions to alter or amend judgments to be filed within 10 days. The court rejected this argument, clarifying that the motion did not affect the case's merits and was appropriate under Federal Rule of Civil Procedure 69(a), which allows judgment creditors to employ state procedural methods. California law permits adding alter ego judgment debtors within a reasonable timeframe, and Cigna's motion filed approximately seven and a half months post-judgment was deemed not an abuse of discretion.
Cigna's right to rescind the marine insurance contract was affirmed due to Polaris and Inbanco's failure to disclose critical information about DeGeorge, violating the doctrine of uberrimae fidei, which mandates full disclosure of material facts in marine insurance. The court concluded that there was sufficient evidence to support DeGeorge's status as the alter ego of Polaris and Inbanco, and the judgment amendment was justified. The court also noted that Polaris did not dispute the attorney fee award, which was based on findings of fraud and bad faith during litigation, not solely on the fraud claim. The ruling was affirmed, with references to both California insurance law and federal admiralty law supporting the principle of uberrimae fidei.
