Opinion
Civil Action No. 3-01CV1039-N
November 7, 2002
ORDER ON SUMMARY JUDGMENT
Before the Court is the Priority Purchasers and Counter-Plaintiffs' Motion for Summary Judgment ("Summary Judgment Motion") seeking (1) a declaration of superior claim to interests in an interpled life insurance policy, and (2) adjudication of claims for conversion and breach of fiduciary duty against the Interpleader-Plaintiff. For the reasons stated below, the Motion for Summary Judgment is GRANTED in part and DENIED in part.
Factual Background
This action relates to the Interpleader-Defendants' purchase of interests in life insurance policies, later cancelled for fraud and other reasons. First Financial Security ("First Financial"), First American, and Threlkeld Company Insurance Agency ("Threlkeld") solicited the Interpleader-Defendants, other than Threlkeld, to purchase interests in the proceeds of life insurance policies of terminally ill persons called viators, through viatical agreements. After the execution of the viatical agreements, the purchasers were informed of the specific viator policy to which they had been assigned an interest. Upon the viator's death, the Interpleader-Defendants would receive their original purchase amount plus an additional specified sum from the life insurance proceeds. The Interpleader-Plaintiff, Charter Escrow Company Inc. ("Charter"), acted as escrow agent for purposes of facilitating the closing and administration of the viatical agreements.
Unfortunately, many of the life insurance policies that were purchased by the viators were obtained by failure of the viators to fully disclose their health history. Many of the viators who sold their life insurance policies to First Financial and First American were infected with the Acquired Immune Deficiency Syndrome ("AIDS") virus. The viators, however, failed to disclose their illness to the insurance companies at the time of their application. The insurance companies eventually discovered the viators' failure to fully disclose their health history and cancelled all but a few of the policies.
After many of the policies were cancelled, First Financial, pursuant to a provision in its viatical agreement, purchased a $1 million dollar policy to replace some of the cancelled policies ("Replacement Policy" or the "Policy"). When First Financial purchased the Replacement Policy, First Financial made Charter the Policy's owner and beneficiary and gave Charter enough money to hold in escrow to pay the Policy's premiums for a period of time. Subsequent to designating Charter as the Policy's owner and beneficiary, First Financial assigned interests in the Replacement Policy to Jerry and Iris Medlock, Kent Sague, Nancy Sague, Tom and Alice Bell, and Richard and Susan Elliot (the "Priority Purchasers").
"Should the Insurance Policy acquired by participant from First Financial Security pursuant to this agreement be cancelled by the Insurance Company during the period of contestability, due to no fault of the participant, then without cost or expense to Participant, First Financial Security shall replace that cancelled life insurance Policy with one or more additional constestable policies of approximately the same face value." Agreement, ¶ 5.
The Priority Purchasers also raise the issue of additional Replacement Policy assignments ("Secondary Assignments") made by First Financial to Interpleader-Defendants Joe and Vera Fraley, Richard White, Craig and Lisa Liggett, Joe and Mary Wilkinson, and Ann Gilkey. See Summary Judgment Motion at 5. Since (1) these Interpleader-Defendants have not responded to the Summary Judgment Motion, (2) these Secondary Assignments are not properly documented, and (3) the Priority Purchasers do not have personal knowledge of these Assignments, the Secondary Assignments are not recognized in determining the interests of the Interpleader-Defendants in the Replacement Policy.
Charter, as escrow agent, eventually depleted the escrow funds designated to pay the premiums on the Replacement Policy and filed this action on May 31, 2001. On July 13, 2001, the Interpleader-Defendants Jerry and Iris Medlock ("Medlocks") filed an emergency motion asking the Court to compel Charter to continue paying premiums on the Replacement Policy. The Medlocks' Motion was denied on September 6, 2001, and the Priority Purchasers have been paying the premiums on the Replacement Policy since September of 2001.
Charter interpled its obligation to the Interpleader Defendants with respect to the Replacement Policy because Charter wanted the Court to adjudicate the InterpleaderDefendants' rights with respect to the Policy. Charter did not recognize the Priority Purchasers' interests in the Replacement Policy because: (1) Charter did not believe that First Financial had the right to assign ownership interests in the Policy; and (2) Charter did not agree with First Financial's selective assignment of proceeds to the Priority Purchasers rather than a global assignment of the Policy's proceeds to all of the Interpleader-Defendants.
Plaintiff's Interpleader Claim
An interpleader action generally has two stages: (1) the district court determines whether the requirements for a statutory interpleader action have been met by deciding if there is a single res or fund at issue and whether there are adverse claimants to that res or fund; and (2) if the court concludes that the interpleader action was properly brought, the court determines the respective rights of the claimants. Rhoades v. Casey, 196 F.3d 592, 600 (5th Cir. 1999), cert. denied, 531 U.S. 924 (2000). When there are not genuine issues of disputed fact, the second stage may be adjudicated at summary judgment. Id.
Charter complied fully with the statutory requirements for interpleader. Charter has interpled its obligation with respect to the Replacement Policy which qualifies as a single res under 28 U.S.C. § 1335, and Charter posted a sufficient bond to ensure its compliance with this Order regarding the ownership of the Replacement Policy. See Order on Jurisdiction, 10/28/02. Further, the claims of the Interpleader-Defendants with respect to the potential ownership of the Replacement Policy are sufficiently adverse to satisfy the jurisdictional requirements of statutory interpleader. Therefore, this interpleader action was properly brought.
The Replacement Policy is owned, in part, by the Priority Purchasers. The assignments to the Priority Purchasers are valid transfers of interest in the Replacement Policy. First Financial purchased the Replacement Policy pursuant to its contractual duties and assigned interests in the Policy's proceeds to the Priority Purchasers. First Financial's assignments appear to be valid and have not been contested by the Interpleader-Defendant.
Charter did not represent the Interpleader-Defendants or First Financial in the viatical transactions. Charter is simply an escrow company and played no part in the procurement of the insurance policies, either for or from viators, or the sale of interest in these policies to the Interpleader-Defendants, other than to serve as an escrow agent. Affidavit of David L. Gamer at 7. Charter's sole duty with regard to the escrow transactions relating to this lawsuit was to receive and disburse funds and to assist in obtaining the necessary documents to effectuate the transfer of the insurance policies. Id. Other than its duties to First Financial or First American, Charter neither had nor has any other duties relating to this lawsuit. Id. Therefore, Charter's beliefs and opinions regarding First Financial's transfer of interests in the Replacement Policy are of no consequence to the Policy's disposition. First Financial purchased the Replacement Policy according to the terms of its viatical agreement, and as purchaser, assigned interests in the Policy to the Priority Purchasers.
The proceeds of the Replacement Policy, therefore, should be distributed in accordance with the Reassignment Agreements executed by First Financial. The Priority Purchasers are also entitled to an additional interest in the Replacement Policy equal to the amount of Policy premiums the Priority Purchasers have paid or will pay until the Policy matures. Therefore, the Policy shall be placed in trust until it matures. Upon maturation, the Policy's proceeds should be divided amongst the Priority Purchasers in accordance with the amounts assigned in the Reassignment Agreements and the amount of premiums paid toward the Policy by each Priority Purchaser. Any proceeds remaining should be distributed equally amongst the Interpleader-Defendants that entered into Viatical Agreements with First Financial. The Summary Judgment Motion therefore is GRANTED with respect to the Priority Purchasers' claim of superior right to the Replacement Policy.
First Financial assigned the Priority Purchasers interests in the Replacement Policy in the following amounts: $264,472.47 to Jerry and Iris Medlock, $16,800.00 to Tom and Alice Bell, $19,853.03 to Richard and Susan Elliot, $26,237.35 to Kent Sague, and $151,278.00 to Nancy Sague.
Defendants' Counterclaims for Conversion and Breach of Fiduciary Duty
The remainder of the Summary Judgment Motion is DENIED, because genuine issues of material fact remain as to the Counter-Defendants' claims against Charter for conversion and breach of fiduciary duty. Since the Plaintiffs federal interpleader claim has been adjudicated on summary judgment, only the Interpleader-Defendants' state law counterclaims remain for trial. District courts may decline to exercise supplemental jurisdiction over state law claims when the claims substantially predominate over the claim over which the district court has original jurisdiction. 28 U.S.C. § 1367(c) (2002). The Court, therefore, declines to exercise supplemental jurisdiction over the Defendants' remaining state law counterclaims.
A court obtains power to hear a state law claim under pendent or supplemental jurisdiction if 1) the federal issues are substantial, even if subsequently decided adverse to the party claiming it; and 2) the state and federal claims derive from a common nucleus of operative fact. Gibbs v. United Mine Workers, 383 U.S. 715, 725 (1966). The Supreme Court has noted that in "the usual case in which all federal-law claims are eliminated before trial, the balance of factors . . . will point toward declining to exercise jurisdiction over the remaining state-law claims." Carnegie-Mellon University v. Cohill, 484 U.S. 343, 350 n. 7 (1988).
In exercising its discretion to retain a state law claim, the district court should consider judicial economy, convenience, fairness, federalism, and comity. Id. The general rule in the Fifth Circuit requires dismissal of state law claims once the claims arising under federal jurisdiction are dismissed. Engstrom v. First National Bank of Eagle Lake, 47 F.3d 1459, 1465 (5th Cir. 1995). Exceptions to the general rule only arise under circumstances where significant judicial resources have been expended. See, e.g., In Re Carter, 618 F.2d 1093 (5th Cir. 1980) (finding trial court abused its discretion when dismissing state law claim after completed jury trials in both state and federal court).
In light of the foregoing principles, the Court finds that the balance of factors weigh in favor of the Court declining to exercise its jurisdiction. The adjudication of the Plaintiffs interpleader claim by summary judgment leaves the case dominated by the Interpleader-Defendants' state law counterclaims for breach of fiduciary duty and conversion. This Court, therefore, declines to exercise jurisdiction over the remaining state law claims.