PTO P 139. That same month, Sprei and Lieber obtained a group health insurance contract for Local 1214 (the "Local 1214 contract") from Blue Cross and Blue Shield of New Jersey ("New Jersey Blue Cross"). See PTO P 140. In July 1992, New Jersey Blue Cross stopped paying claims under the Local 1214 contract, and shortly thereafter brought an action to rescind the Local 1214 contract. Id. P 141.
After a four-day bench trial concluding May 5, 1994, the Court found the corporate defendants AMBGI, AEGBA, and GNEBG in default for failure to appear at trial represented by counsel in violation of Fed. R. Civ. P. 55(a).
See Shapiro, Bernstein & Co. v. Continental Record Co., 386 F.2d 426, 427 (2d Cir. 1967) ("[A] corporation cannot appear other than by its attorney").
After summations and post-trial briefing, the Court made findings of fact and conclusions of law on the Record. Based upon the evidence at trial, the Court found that in negotiating contract 82079, Empire reasonably relied on Soanes's misleading statements in September 1990 that contract 82079 would cover regular members, i.e., the same class of people that Empire had contracted to cover since 1965. See Sept. 1994 Tr. at 13. The Court further found that Soanes's failure to affirmatively disclose to Empire the true nature of associated membership and the large numbers of associated members that would be recruited from the general public was a half-truth designed and intended to deceive Empire. Id. The Court also concluded that Soanes's concealment of the existence of associated members from two federal agencies further demonstrated that he, Sprei and Lieber had a fraudulent intent to deceive Empire. See Tr. at 92-97; Sept. 1994 Tr. at 12-14.
The Court also held that the evidence demonstrated that the forms supplied to Empire by Soanes fraudulently misrepresented that the claimants under contract 82079 were regular members, when in fact, they were associated members. See Tr. at 37, 154. The Court rejected the claim that, by entering into the May 30, 1991 Stipulation, Empire had waived its right to litigate the issue of coverage for associated members. In addition, because the Court found that associated members were not covered by the terms of contract 82079, plaintiffs' request for the payment of claims filed by associated members thereunder was rejected.
Presently at issue are 1) Empire's third-party claims against Sprei, Lieber, Soanes and Local 906 and the Local 906 Fund based upon RICO, RICO conspiracy, fraud and contract,
and 2) the insured's request for return of premiums.
I. Title 18 U.S.C. § 1962(c)
Section 1962(c) of RICO makes it unlawful "for any person employed by or associated with any enterprise . . . to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity." 18 U.S.C. § 1962(c) (1984). To establish liability under § 1962(c), a plaintiff must show that (1) the enterprise is one affecting interstate or foreign commerce, (2) the defendant "participated in the conduct of the enterprise's affairs," and (3) that he participated "through a pattern of racketeering activity." Aetna Cas. Surety Co. v. P & B Autobody, 43 F.3d 1546, 1558 (1st Cir. 1994).
Under RICO, an enterprise is defined as "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4) (1984). A RICO enterprise can encompass both legitimate and illegitimate entities. See United States v. Turkette, 452 U.S. 576, 590, 69 L. Ed. 2d 246, 101 S. Ct. 2524 (1981).
To establish liability under § 1962(c), a plaintiff must prove a defendant participated in the "operation or management" of a RICO enterprise. See Reves v. Ernst & Young, 507 U.S. 170, 179, 122 L. Ed. 2d 525, 113 S. Ct. 1163 (1993). To establish participation, a plaintiff must show that a defendant played some role in directing the affairs of an enterprise by "'participating, directly or indirectly, in the conduct of such enterprise's affairs.'" Id. (quoting 18 U.S.C. § 1962(c) (1984)). See also United States v. Viola, 35 F.3d 37, 40-41 (2d Cir. 1994) ("Simply aiding and abetting a violation is not sufficient to trigger liability . . . .") (citing Reves, 507 U.S. at 179), cert. denied, 513 U.S. 1198, 131 L. Ed. 2d 148, 115 S. Ct. 1270 (1995).
Here, the evidence at trial established the existence of an enterprise among Sprei, Lieber and the corporate defendants (the "overall enterprise"). In conducting the overall enterprise, those defendants conspired to and did approach a series of insurance companies and made misrepresentations in order to obtain low-cost insurance coverage for members of the public who would not otherwise qualify for such favorable insurance coverage. See Sept. 1994 Tr. at 14-15; Transcript of Record dated January 13, 1995 ("Jan. 1995 Tr.") at 3.
To effectuate this scheme, Sprei and Lieber, acting as full partners in the enterprise, enrolled associated members with Local 1-J and Local 906 for the sole purpose of obtaining group insurance which in the past had been issued only to regular union members. In doing so, Sprei and Lieber treated the two unions' group health insurance contracts as one. As set forth above, Sprei enrolled Local 906 associated members for individual coverage to take advantage of the lower individual rates offered under contract 82079. Although contract 82079 offered family coverage, Sprei enrolled associated members seeking family coverage under Local 1-J's contracts 82074 and 82075 to take advantage of the lower family rates available under those policies.
Sprei, Lieber and the corporate defendants carried out the overall enterprise over a significant period of time by approaching and procuring contracts from numerous insurance companies, soliciting various unions for inclusion in the scheme, recruiting associated members from the general public and administering the insurance contracts. It follows that Empire has established that the racketeering enterprise, composed of Sprei, Lieber and the corporate defendants, posed a specific threat of repetition, extended indefinitely into the future, and formed a part of the ongoing entity's regular way of doing business. See Sept. 1994 Tr. at 14-15, 51.
Moreover, Sprei and Lieber continued to conduct the enterprise after Empire terminated its contracts with Local 1-J and Local 906 in June 1991. See H.J., Inc., et al. v. Northwestern Bell Tel. Co., et al., 492 U.S. 229, 242, 106 L. Ed. 2d 195, 109 S. Ct. 2893 (1989) (affirming that a RICO cause of action requires a showing of continuity). Thus, Sprei convinced CNA, SMA, and New Jersey Blue Cross to cover the associated members. In that endeavor, Sprei forged Empire fact sheets in order to obtain insurance from CNA and SMA. In conducting the overall enterprise, Sprei, Lieber and the corporate defendants also violated the federal statutes prohibiting mail fraud, see 18 U.S.C. §§ 1341 and 1343 (1984), by, inter alia, mailing forged applications to CNA and SMA. See Sept. 1994 Tr. at 51. Thereafter, Sprei continued the enterprise by enrolling the former Local 906 associated members under a New Jersey Blue Cross policy with Local 1214, a newly formed labor union. See Tr. at 279-80. In short, all the requirements of RICO are found to be established, including numerous requisite predicate acts.
However, Empire has failed to prove that Soanes participated in that overall enterprise. Soanes's participation was limited to independently negotiating and procuring contract 82079 from Empire. See Tr. at 272. There is no proof whatsoever that Soanes participated or managed the RICO enterprise referred to above. At best, the evidence establishes that Soanes was deliberately and recklessly indifferent to whether the fraud in which he participated was part of a larger fraud involving Local 1-J and other insurance companies. Indeed, at one point, without Soanes's knowledge, Sprei contacted CNA and SMA, representing to the latter that he was a representative of Local 906. See Tr. at 452, 579.
It follows that while Soanes's acts "might have contributed to the success of the RICO enterprise, he simply did not come within the circle of people who operated or managed the enterprise's affairs." Viola, 35 F.3d at 43. Although the "operation and management" test attaches liability to those down the "ladder of operation" who nonetheless played some operational role, it is clear that Soanes's isolated involvement with the Empire contracts is insufficient to impose upon him liability for the full RICO enterprise. See Reves, 507 U.S. at 184 n.9; Viola, 35 F.3d at 43.
In sum, while Soanes may arguably have aided and abetted the fraudulent activities of the RICO enterprise, that conduct is insufficient to sustain a RICO claim against him.
II. Title 18 U.S.C. § 1962(d)
Section 1962(d) of RICO makes it unlawful "for any person to conspire to violate any of the provisions of subsections (a), (b), or (c) of this section." 18 U.S.C. § 1962(d) (1984). To establish liability under § 1962(d), a plaintiff must prove a defendant and another "agreed to commit the substantive racketeering offense through agreeing to participate in two predicate acts, . . . and [knew] the general nature of the conspiracy and that the conspiracy extends beyond his individual role." United States v. Rastelli, 870 F.2d 822, 828 (2d Cir. 1989). A plaintiff need not establish that each member of a conspiracy conspired directly with, or even knew, every other member of the conspiracy. See id.; United States v. Friedman, 854 F.2d 535, 562 (2d Cir. 1988). In order to demonstrate a RICO conspirator's knowledge of the RICO conspiracy, it is sufficient for plaintiff to prove "that the defendant know[s] the general nature of the enterprise and know[s] that the enterprise extends beyond his individual role." Rastelli, 870 F.2d at 828. Proof of a single conspiracy requires evidence that the alleged co-conspirators "agreed on a 'common purpose' that sufficed to render their activities 'a single enterprise.'" United States v. Heinemann, 801 F.2d 86, 92 (2d Cir. 1986) (quoting Kotteakos v. United States, 328 U.S. 750, 769, 90 L. Ed. 1557, 66 S. Ct. 1239 (1946)).
As set forth above, Empire has established that a RICO conspiracy existed between Sprei, Lieber and the corporate defendants, all of whom had knowledge of the general nature and extent of the conspiracy. The Court has already held that Sprei and Lieber concocted the RICO scheme together, acting as full partners. See Trial Exh. A P 2. Soanes knew that Sprei signed up associated members under the Local 906 Fund group insurance coverage even though they were not union members. See Tr. at 81. Furthermore, Soanes's knowledge of the illegal nature of the contracts between Local 906 and Empire is demonstrated by the fact that he did not report the associate members to the federal government as Local 906 members but did report them as regular members for insurance purposes. See id. at 103. However, these facts do not establish that Soanes was a member of the broader RICO conspiracy dealing with numerous insurance companies as described above. This is especially true since under the Finder and Administrative Agreements, Soanes had no connection with or financial interest in the affairs of the corporate defendants or of Sprei and Lieber, other than with respect to Local 906. In sum, Sprei, Lieber, and the corporate defendants were free to pursue other financial arrangements, even those that were in competition with Soanes and Local 906.
That being so, a finding that Soanes shared a common purpose with respect to insurance contracts other than contract 82079 is not supported by the evidence.
The Court concludes that Empire has not proven that Soanes was a member of the RICO conspiracy alleged. It follows that since Empire has failed to establish RICO liability with respect to Soanes, its claims that Local 906 and the Local 906 Fund are vicariously liable under RICO must likewise be rejected.
In Empire I, Empire asserts third-party claims for damages against Local 906, the Local 906 Fund and its trustees for fraud and breach of contract in relation to contract 82079. However, these claims must be dismissed because Empire cannot establish damages. It is undisputed that Empire received over $ 3,000,000 in premiums under contract 82079, and paid no benefits on claims filed thereunder. That Empire sustained damages in relation to the contracts with Local 1-J is irrelevant to the question of whether Empire was damaged by any alleged fraud in connection with contract 82079.
III. RETURN OF PREMIUMS
With regard to the contract claims, Empire has waived its claim for rescission and seeks only an adjudication of eligibility of associated members for coverage under the contract. See Sept. 1994 Tr. at 36. The Court has found that, in view of the fraud perpetrated, the associate members' claims are not covered by contract 82079 because Empire never agreed to insure anyone other than regular members of the union.
In view of that finding, Local 906, the Local 906 Fund and the individual insured plaintiffs seek return of the premiums paid under contract 82079. Plaintiffs argue that because Empire collected $ 3,014,670.78 in premiums on contract 82079 and paid no claims filed thereunder, principles of insurance law, contract law and equity require the return of those premiums. Plaintiffs contend that Empire must return all of the premiums paid, or at a minimum, the approximately $ 1,000,000 in premiums paid by the Local 906 Fund to Empire after May 30, 1991, the date Empire and the Fund entered into the May 30, 1991 Stipulation in which Empire agreed to reinstate contract 82079 in full force and effect. See PTO PP 1-9 at 4-7; id., Undisputed Facts P 50.2; Trial Exh. 16. Empire contends that it need not return any premiums paid on contract 82079 because the individual insureds are bound by the fraudulent acts of their agents, Local 906 and Soanes.
Under New York law, a broker who procures an insurance policy on behalf of an insured is the agent of the insured, not the insurer. See Salzano v. Marine Ins. Co., 173 A.D. 275, 159 N.Y.S. 277, 281 (App. Div. 1916); 16 Appleman, Insurance Law and Practice § 8728 (1981). Any fraud or misrepresentation by the broker is therefore binding on the insured. See Hayat Carpet Cleaning Co. v. Northern Assurance Co. Ltd. of London, 69 F.2d 805, 805 (2d Cir. 1934); Amalgamated Mut. Cas. Co. v. Schultz, 27 Misc. 2d 208, 207 N.Y.S.2d 890, 892 (Sup. Ct. 1960). Indeed, an insured is responsible for the insurance-related misrepresentations made by his broker to the insurer, even if the broker had no authority to make those misrepresentations. See Schultz, 207 N.Y.S.2d at 892.
Moreover, under New York law, an insurer may rescind the insurance contract if the insured made misrepresentations which were material to the risk insured, see Guzman v. American Life Ins. Co., 156 A.D.2d 332, 548 N.Y.S.2d 284, 285 (App. Div. 1989); Kulikowski v. Roslyn Sav. Bank, 121 A.D.2d 603, 503 N.Y.S.2d 863, 864 (App. Div.), appeal dismissed, 69 N.Y.2d 705, 512 N.Y.S.2d 364, 504 N.E.2d 691 (1986), notwithstanding the fact that the misrepresentations were unintentional. See Eastern Dist. Piece Dye Works v. Travelers' Ins. Co., 234 N.Y. 441, 449-50, 138 N.E. 401 (1923); Kulikowski, 503 N.Y.S.2d at 864; Barrett v. State Mutual Life Assur. Co. of America, 58 A.D.2d 320, 396 N.Y.S.2d 848, 851 (App. Div. 1977), aff'd, 44 N.Y.2d 872, 407 N.Y.S.2d 478, 378 N.E.2d 1047 (1978); Fernandez v. Windsor Life Ins. Co. of America, 83 Misc. 2d 301, 372 N.Y.S.2d 357, 361 (Sup. Ct. 1975), aff'd, 52 A.D.2d 589, 382 N.Y.S.2d 120 (App. Div. 1976). However, it is also well established that an insurer who rescinds the contract must return a prorated portion of the unearned premiums. See Tisdell v. New Hampshire Ins. Co., 155 N.Y. 163, 165, 49 N.E. 664 (1898); Van Valkenburgh v. Lenox Fire Ins.Co., 51 N.Y. 465, 468 (1873); Durnin v. Aetna Life Ins. Co., 228 A.D. 428, 240 N.Y.S. 463, 466 (App. Div. 1930); C.A. Smith Lumber Co. v. Colonial Assurance Co., 172 A.D. 149, 158 N.Y.S. 198, 199 (App. Div. 1916).
In the instant case, Empire specifically chose not to rescind the contract and stipulated that the contract was "in full force and effect."
Trial Exh. 16. Instead it entered into a Stipulation that, fairly read, permitted Empire to retain the premiums already collected, as well as an additional $ 1,000,000 in premiums paid thereafter, pending a judicial determination as to whether or not it would be obliged to pay claims under contract 82079. See id.
It has now been determined, however, that Empire has no liability for any such claims. Nevertheless, Empire argues that, under New York law, where an insured or its agent makes a misrepresentation, the insured is not entitled to a return of premiums. While it is true that New York cases have held that a determination that a certain risk is not covered by an insurance policy does not entitle the insured to a return of a portion of the premium, see Foster Wheeler Corp. v. Home Ins. Co., 72 A.D.2d 693, 421 N.Y.S.2d 363, 364 (App. Div. 1979), here Empire does not claim that contract 82079 does not cover a particular risk. Rather, Empire has claimed, and the Court has found, that contract 82079 does not cover the insured at all, and that therefore no risk of insurance was ever assumed by Empire.
Empire cites no case that would support its proposition that it need not return the premiums where, as here, no risk of insurance ever attached, the insureds did not themselves participate in the fraud, and the insurer continued to accept premium payments after it knew or should have known of the fraudulent activity of the insured's agent.
Indeed, there is case authority in New York holding that an insurance company is not entitled to accept premiums and at the same time repudiate the insurance contract after it has acquired knowledge of the fraud. See Flannigan v. Prudential Ins. Co. of America, 20 Misc. 539, 46 N.Y.S. 687, 688 (Albany County Ct. 1897) (holding, in dictum, that if at the time the policy was issued the insurer knew of insured's fraud and continued to accept premiums, insurer would be estopped from asserting fraud as a defense to coverage, and payment on claims would be required). See also Palmer v. Metropolitan Life Ins. Co., 21 A.D. 287, 47 N.Y.S. 347, 348 (4th Dep't 1897) (noting, in dictum, that an insurer aware of the fraud would be estopped from asserting the falsity of a statement on an insurance application as a defense).
In this case the conclusion is inescapable that Empire knew or should have known of the fraud when it continued to accept premiums under contract 82079 after the May 30, 1991 Stipulation was executed. Indeed, based upon the evidence elicited at trial, the Court could reasonably infer that Empire knew or should have known about the fraud as early as February or March 1991.
An internal office memorandum from Empire Vice President Richard Dunn ("Dunn") written in August 1990, two and a half months prior to the effective date of contract 82079, reveals that Empire had knowledge of the growing practice of enrolling associate members into unions for the purpose of seeking discount health benefits. See Trial Exh. 5. Moreover, in December 1990, the New York State Insurance Department (the "Department") wrote to Empire after the Department received an inquiry concerning the associate membership program of Local 1-J. See Trial Exh. 6. In response, Empire Vice-President and Associate General Counsel Jerrold I. Ehrlich informed the Department by letter dated January 8, 1991 that Empire was currently rewriting its underwriting manual so as to clarify its intentions that associate members are not eligible for coverage. See Trial Exh. 7. In addition, in or about January 1991, the Department notified Empire that members of the public were being offered coverage under an Empire policy as associated members of Local 1-J. See Trial Exh. 6. Thereafter, a series of correspondence ensued between Dunn and Sprei in relation thereto. See Trial Exhs. 8, BL, BM.
Moreover, Empire became suspicious of the fraud when enrollment under contract 82079 began to increase rapidly. See Trial Exh. 8 at 1. Thereafter, in February 1991, Dunn informed Soanes by letter that Empire intended to increase the premium rate. See Trial Exhs. 9, 19 at 38-39. Thus, on February 13, 1991, Dunn wrote a letter to Soanes as Administrator of the Local 906 Fund, stating that Empire was increasing rates on both contracts 80542 and 82079 due to the dramatic rise in enrollment. See Trial Exh. 9; PTO, Undisputed Facts P 43. In March 1991, counsel for Local 906 and Empire corresponded back and forth by letter about the rate increases, see Trial Exh. 9, and on April 9, 1991, Empire rescinded its rate increase. See Trial Exh. 13.
Furthermore, on April 24, 1991, Sherry Winston of The Kooper Group, an insurance brokerage firm, sent Empire a carbon copy of a letter she had sent to Sprei, asking, inter alia :
Has Empire Blue Cross/Blue Shield, in fact agreed in writing to continue coverage under the "Local 906" plan, for associate member [sic] currently insured under "Local 1-J."
Has Empire Blue Cross/Blue Shield agreed in writing to continue coverage under the "Local 906" plan for all corporations not to be underwritten under the new CNA plan.