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Lawsuit alleges that
California firm engages in longstanding scheme
to defraud Seniors out of hundreds of millions
of dollars in life insurance coverage
Predatory Practice Taints All Legitimate
Premium Financing Programs
NEW YORK, March 14 /PRNewswire/ -- A lawsuit
filed late yesterday in the California Superior Court for Orange
County, California, alleges that a California life insurance premium
finance agency has "created a deceptive premium financing program"
that has defrauded seniors out of hundreds of millions of dollars of
life insurance protection.
The lawsuit was filed by Toni Y. Jones, in her
capacity as Investment Trustee for the Harry L. Jenkins Irrevocable
Insurance Trust ("Trust"), along with Mark Ross & Co., Inc., a
leading life insurance broker and XE-R, LLC, a premium financing
agency with business operations in New York.
The suit alleges that Mutual Credit Corporation
("MCC") and Spurling Group, LLC ("Spurling"), both of Irvine,
California, have engaged in a predatory loan scheme at interest
rates so exorbitant that after two years the seniors are forced to
relinquish their policies to MCC to satisfy the outstanding debt.
Also named in the suit are Mutual officers Michael Brown and Anthony
Jacobson, two insurance agents who the plaintiffs allege are behind
the scheme.
"When conducted properly, premium financing can
be a valuable estate planning tool to facilitate the purchase of
life insurance," stated Mark Ross, chairman of Mark Ross & Co.,
Inc., one of the plaintiffs in the case and a nationally-recognized
leader in the life insurance industry.
"However, we believe that MCC's so-called
premium financing program was nothing more than a scheme to entice
seniors into entering premium financing contracts, so that they
would ultimately have to forfeit ownership of their policies which
would then revert back to MCC who would either maintain ownership or
sell them in the secondary market. This practice taints legitimate
premium financing programs which have facilitated the acquisition of
billions of dollars of valuable life insurance coverage."
The lawsuit alleges that MCC's entire program
was "designed and intended to be operated since its inception, and
is being operated in an increasingly egregious fashion, in a
premeditated attempt to defraud policyholders of their insurance
policies. After wresting ownership of these assets from the trusts,
MCC expects to sell the policies on the secondary market at
considerable profits. Plaintiff is informed and believes that MCC
has financed the purchase of approximately $3.5 billion in insurance
coverage through its premium financing and that the program could
result in hundreds of millions of dollars in monetary losses to
seniors."
The lawsuit goes on to allege that "MCC
provides nonrecourse loans to fund the purchase of life insurance
policies.
The security for the loans is the policies themselves. MCC
specifically structures and operates its premium financing program
to create economic disincentives for borrowers to repay the loans.
MCC's intent from the program's inception was to cause the accrual
of exorbitant interest, leaving the borrower with no option but to
relinquish the policy to MCC to discharge the enormous debt. MCC
expects to reap enormous profits through the scheme."
As contained in the lawsuit, the facts of the
case are as follows:
In late 2004 MCC presented its premium
financing program to Harry Jenkins, who was 78 at the time. On
December 23, 2004, Mr. Jenkins created an irrevocable insurance
trust entitled the "Harry L. Jenkins Irrevocable Insurance Trust."
His daughter, Toni Y. Jones, was nominated as the investment trustee
for the Trust. As investment trustee, Ms. Jones has authority to
make all investment and discretionary decisions with respect to the
Trust.
On February 4, 2005, Mr. Jenkins and his wife
signed a Consent and Acknowledgement Agreement in which they
unconditionally and irrevocably consented to the application for and
purchase by the Trust of an insurance policy on Mr. Jenkins's life
through a nonrecourse loan obtained from MCC. The applicable life
policy was issued by Pacific Life Insurance Company with a death
benefit of $10,000,000 (the "Policy"). Defendant Brown acted as a
life insurance agent from Pacific Life with respect to the purchase
of the Policy. On information and belief, he received a commission
on this transaction and shared that commission with defendant
Jacobson. At the same time, Brown and Jacobson represented MCC in
the financing of the loan to purchase the Policy.
On February 11, 2005, David Doten, the
administrative trustee of the Trust, who was introduced to the
transaction by MCC, executed documents evidencing the loan and
Mutual Credit Corporation's security interest in the Policy. Unknown
to the Trust, Mutual Credit Corporation simultaneously assigned all
its rights in the loan and the Policy to Spurling, which had funded
the transaction. Although this assignment to Spurling occurred
simultaneously with the closing of the loan to the Trust, it was not
filed with the insurance companies until months later, thereby
obscuring Spurling's involvement in the transaction.
The initial loan amount was $773,905. This
amount included $500,000 in premiums for the first two years, a five
percent origination fee of $36,895, and a $201,010 payment to the
Trust. The Note had a maturity date of February 10, 2007. Pursuant
to the loan documents, the Trust had the option of repaying the loan
with interest prior to the Note's maturity date. The Note provides
for ten percent interest per annum on the principal amount, plus any
applicable contingent interest.
The investment trustee determined that she
wanted to maintain ownership of the Policy by refinancing the MCC
loan through XE-R. In order to value the contingent interest for the
purposes of making repayment, the Trust followed the procedures set
forth in the Note. The Trust obtained bids on the Policy from two
licensed settlement providers: Financial Life Services offered
$700,000, and Secondary Life Capital offered $609,000. The Trust
also obtained an independent third-party valuation of the Policy
from the Independent Valuator specified in the loan document
indicating a value of $850,000 for the Policy.
Pursuant to the procedures provided in the
Note, the Policy thus has a "fair market value" of less than the
principal loan amount plus ten percent fixed interest per annum.
Because the "fair market value" is less than the principal plus
fixed interest, the Contingent Interest owing under the Note is
zero.
On February 8, 2007, two days prior to the
Note's maturity date, the Trust exercised its right to repay the
full amount due under the Note. The Trust tendered to MCC a check
for $891,032, which represented the principal plus interest at ten
percent per annum and a contingent interest of zero. XE-R provided
the funds for the payment. In consideration for valuation and other
services, the Trust agreed to appoint Mark Ross & Co., Inc., as the
broker of record in the event that the Trust later decided to sell
the Policy on the secondary market through a life settlement.
Pursuant to the MCC loan documents, MCC was
obligated to release the collateral assignment of the Policy, to
return the Note marked as paid in full, and return any other
documents as required by the Note and other loan documents. MCC
refused to release the collateral assignment and return the Note,
and instead returned the check.
After learning that the Trust intended to
refinance its loan through XE-R, on February 8, 2007, MCC wrote a
letter to the Independent Valuator regarding the valuation of
insurance policies in the MCC program. MCC did not notify the Trust
that it was sending this letter to the Independent Valuator.
The Loan Documents do not contain any terms
suggesting that the valuation should be determined through the
"highest price" procedure that MCC described in this letter. MCC
derived this language after the fact from California's eminent
domain statute, which is not germane to the interpretation of
promissory note related to an insurance contract. Nonetheless, MCC
threatened to sue the Independent Valuator if it would not agree to
follow MCC's false guidelines. MCC's previous communications with
Independent Valuator about the valuation process, its February 8,
2007 letter, and its threat to sue the Independent Valuator were
designed unfairly to rig the valuation process in favor of MCC in
contravention to the valuation procedures provided in the Note.
MCC wrote a letter to the Trust on February 22,
2007. MCC indicated that it refused to accept the Trust's February
8, 2007 payment, in part, on the ground that the principal amount
increased by $65,500 due to the "payment of additional premiums as
allowed in the Collateral Pledge Agreement." MCC first sent notice
of this alleged premium payment on February 8, 2007, two days before
the maturity date. This notice was not received by the investment
trustee until after the Trust had already tendered the total amount
due under the Note.
MCC asserted that the $65,500 premium payment
was due and owing in order to prevent the policy from going into a
grace period prior to the loan maturity date. This contention was
false; the premium payment was not due and owing and there was no
need to make the payment to prevent the Policy from entering a grace
period prior to the loan maturity date. On information and belief,
MCC knew that the premium payment was not due and owing before the
maturity date and made the additional premium payment in order to
increase the amount due and manufacture an alleged default on behalf
of the Trust.
MCC also indicated in its February 22 letter
that it would not accept the Independent Valuator independent
valuation that Policy had a value of approximately $850,000. Despite
the fact that Independent Valuator's valuation resulted in a
Contingent Interest of zero, MCC asserted that the total amount due
under the Note was $1,956,515, which included $737,906 for the
original principal loan amount, $65,500 for the additional alleged
premium payment, $153,109 in accrued fixed interest, and contingent
interest of $1,000,000. In other words, the sum MCC demanded
included a combined fixed and contingent interest for a two year
loan of over 150 percent of the original loan amount.
The Trust responded by letter dated February
28, 2007. Without acknowledging that the additional $65,500 premium
payment was properly added to the amount due, the Trust agreed to
include that additional amount in the funds paid in satisfaction of
the loan. The Trust indicated that it had no obligation to include
any contingent interest. The Trust obtained a separate loan from XE-R
to repay the MCC loan.
By wire transfer that same day, XE-R, on
behalf of the Trust, re-tendered a payment to MCC in the amount of
$956,532, which comprised the $891,032 the Trust previously tendered
plus the additional $65,500 amount. This payment was made in full
satisfaction of the Trust's obligations under the Note.
MCC accepted this wire transfer and has not
returned the funds to the Trust. MCC nevertheless has not released
the collateral assignment of the Policy nor returned the Note marked
as paid in full, as required by the loan documents.
MCC had no intention of accepting a contingent
interest of zero, even if no contingent interest was owed under the
Note. MCC designed a predatory premium financing scheme that
includes exorbitant rates of interest. These high interest rates are
specifically designed to prevent borrower-trusts from attempting to
repay the loans before the maturity date and maintain ownership of
the policies.
When the Jenkins Trust tendered the full payment of
the loan pursuant to the valuation procedures in MCC's own
contracts, MCC wrongfully refused to accept the payment and
attempted to interfere with and rig the valuation process so that it
could claim an artificially high contingent interest. MCC's
intention was to make it impossible for the Trust to maintain
ownership of the Policy. The Trust has fully performed its
obligations under the loan documents and is entitled to a release of
the collateral assignment of the Policy and a return of the Note
marked paid in full.
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