Protective v. Dignity

• Court: Court of Appeals for the First Circuit
• Decided: March 25, 1999
• Docket: 98-1752
• Status: Published

Opinion

USCA1 Opinion

                 United States Court of Appeals

                     For the First Circuit


No. 98-1752



                PROTECTIVE LIFE INSURANCE COMPANY,



                       Plaintiff, Appellee,



                                v.



           DIGNITY VIATICAL SETTLEMENT PARTNERS, L.P.,

                   AND DIGNITY PARTNERS, INC.,



                     Defendants, Appellants.


APPEAL FROM THE UNITED STATES DISTRICT COURT



                FOR THE DISTRICT OF MASSACHUSETTS



           [Hon. Robert E. Keeton, U.S. District Judge]


Before



                      Selya, Circuit Judge,

                                

                 Coffin, Senior Circuit Judge,

                                

                   and Boudin, Circuit Judge.


Luke DeGrand, with whom Clark & DeGrand, Wayne S. Hendersonand Wayne S. Henderson, P.C., were on brief, for appellants.

     John A. Shope, with whom John H. Henn and Foley, Hoag & Eliot

LLP were on brief, for appellee.


March 24, 1999


SELYA, Circuit Judge.  Dignity Viatical Settlement

Partners, L.P., and Dignity Partners, Inc. (collectively, Dignity)

appeal from an order denying them prejudgment interest and imposing

sanctions in connection with their quest.  The appellee, Protective

Life Insurance Company (Protective), regards the appeal as

frivolous and suggests appellate sanctions.  We affirm the denial

of prejudgment interest, reverse the sanctions order, and deny

Protective's motion for further sanctions.

I.  BACKGROUND

  A synopsis suffices to set the stage for this appeal. 

Protective issued a life insurance policy in Massachusetts to

Dennis Sullivan, who assigned the policy to Dignity for value. 

Protective subsequently discovered that Sullivan had been diagnosed

with HIV before procuring the policy, but had not disclosed that

known fact in his application.  Consequently, Protective initiated

a declaratory judgment action against Sullivan and Dignity, seeking

to rescind the policy.

  Sullivan died of AIDS during the pendency of the

proceedings and Dignity filed a claim under the policy.  Proving

once again that, in corporate America, the left hand does not

always know what the right hand is doing, Protective mistakenly

honored the claim.  After the bevue surfaced, Protective amended

its complaint to add a count for unjust enrichment.

  At trial, the district court concluded that Sullivan had

perpetrated a fraud and that the incontestability clause upon which

Dignity relied, Mass. Gen. Laws ch. 175,  132(2), did not bar

Protective's suit.  The court therefore rescinded the policy and

awarded Protective restitution (including prejudgment interest). 

Dignity promptly signaled its intention to appeal.

  The parties thereafter agreed that Dignity, in lieu of a

supersedeas bond, would deposit a sum certain (in excess of the

judgment amount) in a joint interest-bearing escrow account.  This

stipulation obligated Dignity to release funds from the account

sufficient to satisfy the judgment (including accrued interest) in

the event that Protective prevailed on appeal.  The balance, if

any, would go to Dignity.  In the event of a reversal, however, the

stipulation obligated Protective to release the entire account to

Dignity.  At the parties' behest, the district court entered the

stipulation as an order and stayed execution of the judgment

pendente lite.

  Dignity prevailed on appeal.  See Protective Life Ins.

Co. v. Sullivan, 89 F.3d 1 (1st Cir. 1996) (certifying questions);

425 Mass. 615, 682 N.E.2d 624 (1997) (answering certified

questions).  By an unpublished order dated November 24, 1997, we

directed the district court to enter a revised judgment consistent

with the resolution of the coverage issue by the Massachusetts

Supreme Judicial Court (SJC) in response to the questions we had

certified.

  On remand, Dignity sought, inter alia, prejudgment

interest from the date of the deposit into the escrow account to

the date of the new judgment.  Protective sharply challenged this

claim, labeling it frivolous.  The district court agreed with

Protective and concluded that presentment of the claim warranted a

$500 sanction.

II.  PREJUDGMENT INTEREST

  Dignity premises its prejudgment interest claim on the

notion that it was wrongfully deprived of the use of its funds

during the period that the escrow account remained open.  Although

the funds earned interest in that account, Dignity contends that

the Massachusetts prejudgment interest statute, Mass. Gen. Laws ch.

231,  6C (section 6C), entitles it to a 12% rate of return

(instead of the lesser rate of return that the funds actually

earned while in the escrow account); and it seeks the difference

between the earned amount and the amount that would have been

earned at the statutory rate.  The litigants agree that, if any

prejudgment interest statute were to apply, it would necessarily be

the Commonwealth's.  See Commercial Union Ins. Co. v. Walbrook Ins.

Co., 41 F.3d 764, 774 (1st Cir. 1994) (Commercial Union II).  The

fundamental question, then, regards whether section 6C implicates

this set of circumstances.  Like the lower court, we conclude that

it does not.

  The parties do not dispute the relevant facts, instead

presenting the question to us as one of statutory interpretation. 

Such questions engender de novo review.  See Strickland v.

Commissioner, Me. Dep't of Human Servs., 96 F.3d 542, 545 (1st Cir.

1996).  The language of the statute provides the starting point. 

See Inmates of Suffolk County Jail v. Rouse, 129 F.3d 649, 653 (1st

Cir. 1997), cert. denied, 118 S. Ct. 2366 (1998).  In this case, we

end where we begin.  See United States v. Charles George Trucking

Co., 823 F.2d 685, 688 (1st Cir. 1987) (explaining that when

unambiguous statutory text points in a discernible direction and

such an interpretation achieves a plausible result, a court need

not consult extra-textual aids).

  In pertinent part, section 6C provides:

  In all actions based on contractual

  obligations, upon a verdict, finding or order

  for judgment for pecuniary damages, interest

  shall be added by the clerk of the court to

  the amount of damages, at the contract rate,

  if established, or at the rate of twelve

  percent per annum from the date of the breach

  or demand.



Mass. Gen. Laws ch. 231,  6C.  Thus, for a claim to come within

the compass of the statute, a breach of a contractual obligation

must occur and that breach ultimately must ripen into a judgment

for pecuniary damages.  See Perkins Sch. for the Blind v. Rate

Setting Comm'n, 383 Mass. 825, 835, 423 N.E.2d 765, 772 (1981);

Henley-Lundgren Co. v. Commonwealth, 27 Mass. App. Ct. 1195, 1196,

543 N.E.2d 698, 699 (1989).  Dignity identifies neither a breach by

Protective nor a judgment in its favor for pecuniary damages, and

thus fails to bring its claim within section 6C.

  Of course, had Protective refused to pay Dignity's claim

pending resolution of the declaratory judgment action, it would

have done so in breach of the life insurance policy (as matters

turned out)   but the exact opposite occurred.  When Dignity

submitted its claim after Sullivan's demise, Protective promptly

honored it.  That it continued to press an action for a judicial

declaration of its rights and for restitution did not place it in

breach.

  Dignity attempts to circumvent this obstacle in a number

of ways.  First, it points out that the SJC has described section

6C's design as one to "compensate a damaged party for the loss of

use or unlawful detention of money."  Perkins Sch., 383 Mass. at

835, 423 N.E.2d at 772.  Since its deposit of funds into the joint

escrow account deprived it of the judgment amount's full time

value, Dignity reasons, it should be remunerated at the statutory

interest rate to recompense that deprivation.

  This argument will not wash.  Section 6C's language

unequivocally predicates prejudgment interest on a contractual

breach that results in a judgment for pecuniary damages.  Here,

moreover, faithfulness to the statutory text works no fatuity. 

After all, the joint escrow arrangement was the product of

Dignity's own business decision, not the type of involuntary

deprivation contemplated by the prejudgment interest statute (and,

interpretively, by the SJC).  Similarly, any adventitious

obligation imposed on Dignity to cede a measure of control over the

escrowed sum resulted not from a wrongful withholding of the money

by Protective but from a plan Dignity itself had hatched.  In other

words, the restrictions placed on Dignity's funds came at Dignity's

election, motivated no doubt by a desire to avoid the cost of a

supersedeas bond.  Furthermore, Dignity stood to gain if the rate

paid by the depository bank happened, over time, to exceed that set

by the Massachusetts legislature.  That the opposite occurred does

not affect the reality of events.  After all, section 6C was not

meant to provide ex post protection for poor investment decisions.

     Taking an alternative tack, Dignity notes that section 6C

affords prejudgment  interest as an accouterment to a "finding . .

. for pecuniary damages."  Mass. Gen. Laws ch. 231,  6C.  It

asseverates that, by asking for prejudgment interest, it sought a

"finding" from the trial court that it had sustained "pecuniary

damages" related to the wrongful detention of those escrowed funds. 

This asseveration puts the cart before the horse.  One must secure

a judgment or finding for pecuniary damages arising out of a breach

before an entitlement to prejudgment interest can attach.

     Next, Dignity contends that First Circuit precedent

brings its claim within section 6C.  To support this contention,

Dignity strives to equate the case at hand with Equitable Life

Assur. Soc'y v. Porter-Englehart, 867 F.2d 79 (1st Cir. 1989), and

Commercial Union II.  Neither case is a fair congener.

     Dignity maintains that Porter-Englehart stands for the

proposition that depositing funds with a third party does not

absolve the obligation to pay statutory prejudgment interest.  In

a limited sense, the case does stand for that proposition, but its

teachings are  inapposite here.  In  Porter-Englehart, an insurer

filed an interpleader action encompassing all the proceeds of a

life insurance policy even though a particular beneficiary's right

to a portion of those proceeds was unchallenged.  See id. at 89. 

Under those circumstances, we held that by unilaterally depositing

the uncontested funds into the court registry, the insurer breached

its clear duty to the beneficiary.  See id. at 89-90.  We therefore

awarded the beneficiary prejudgment interest on those funds at the

statutory rate for the period of the detention.  See id. at 90. 

That scenario places Porter-Englehart at a remove from this case

(where the parties hotly disputed entitlement to all the insurance

proceeds and Dignity thereafter made the escrow deposit pursuant to

a bilateral agreement).

     Dignity's embrace of Commercial Union II is equally

unrequited.  In that case, Walbrook refused to indemnify Commercial

Union for a claim that both had insured, so the latter commenced a

declaratory judgment action.  The trial court denied

indemnification.  We reversed and ordered entry of judgment for

Commercial Union.  See Commercial Union Ins. Co. v. Walbrook Ins.

Co., 7 F.3d 1047, 1053 (1st Cir. 1993) (Commercial Union I).  On

remand, the district court awarded Commercial Union prejudgment

interest pursuant to section 6C.  We affirmed, reasoning that

although the action was for declaratory relief, the Massachusetts

statute applied because the substantive theory underlying the case

was contractual and the judgment presaged an award of pecuniary

damages.  See Commercial Union II, 41 F.3d at 775.

     As Dignity points out, this case, like the Commercial

Union litigation, began as a declaratory judgment action to resolve

a coverage controversy and ended with an order that affected the

disposition of disputed funds.  But the attempted analogy breaks

down in the face of critical differentiating features.  Commercial

Union I determined that Walbrook's failure to indemnify constituted

a breach of its contractual obligations.  That judgment resulted in

an award of pecuniary damages in the amount of the failed

indemnification.  Because the defendant's breach wrongfully

deprived Commercial Union of the use of funds to which it was

entitled, section 6C applied.  Here, by contrast, our reversal of

the trial court's coverage determination in no way suggested that

Protective had breached its contractual obligations, nor did it

result in a money judgment.  These factors   the absence of a

breach and the non-existence of a judgment for pecuniary damages  

divest Commercial Union II of controlling weight for purposes of

this case.

     We will not paint the lily.  Dignity's remaining

arguments on this subject are insubstantial and require no

discussion.  Suffice it to say that the district court did not err

in denying Dignity's motion for prejudgment interest.

III.  SANCTIONS

     We now shift to the sanctions ruling.  Although the lower

court did not specify the source of the authority upon which it

drew in imposing sanctions, the nature and language of its order

evince an intention to invoke Fed. R. Civ. P. 11.  We analyze the

sanction on that basis.

     We review rulings imposing (or refusing to impose) Rule

11 sanctions for abuse of discretion.  See Navarro-Ayala v. Nunez,

968 F.2d 1421, 1425 (1st Cir. 1992).  Because such determinations

are almost always context-sensitive, our review is deferential  

but not reflexively acquiescent.  See United States v. One 1987 BMW

325, 985 F.2d 655, 657 (1st Cir. 1993). 

     In this case, a series of pertinaciously pursued

arguments resulted in a sanctions order which the district court

supported by several findings.  Dignity suggests that many of these

findings cannot survive scrutiny.  Having carefully reviewed the

record, we are constrained to agree.

     In its motion for prejudgment interest, Dignity

characterized the deposit of funds into the joint escrow account as

one made "pursuant to order of [the district] court."  The trial

judge took umbrage, and branded the statement "unpardonably

misleading if not an outright misrepresentation."  But,

technically, the record confirms the statement.  Although the idea

for the deposit did not originate with the judge, he signed the

stipulation, approved its contents, and converted it into an order

of court that obligated Dignity to establish the joint escrow

account and deposit into it funds sufficient to satisfy the looming

judgment. 

     The district judge also took issue with Dignity's

description of the account as beyond its sole control, finding that

nothing of record in the case indicated that the account was

jointly held or that the depository bank had been informed of

Protective's interest in the funds.  This criticism, too, appears

unwarranted.  In the first place, the stipulation approved by the

court reflected that the account was to be jointly held.  In the

second place, Dignity attached to its prejudgment interest motion

a set of bank statements that showed the account in the care of the

attorneys for Protective.

     The court also condemned Dignity's citation of

authorities, particularly Porter-Englehart and Commercial Union II. 

While we agree that Dignity attempted to squeeze too much from

these cases, see supra Part II, Rule 11 does not restrict counsel

to citing cases directly on point.  See, e.g., FDIC v. Calhoun, 34

F.3d 1291, 1298 (5th Cir. 1994) (reversing sanctions order when the

attempted analogy to a line of cases failed to persuade but

nonetheless constituted a good-faith argument to extend the law);

Thompson v. Duke, 940 F.2d 192, 196-97 (7th Cir. 1991) (reversing

sanctions order when party could argue plausibly, though

unsuccessfully, that his claim was distinguishable from other cases

or could mount a good-faith argument for modification of existing

case law).  Dignity's use of these precedents, though aggressive,

did not justify the imposition of Rule 11 sanctions.

     The district judge's comments on Dignity's use of

Commercial Union II illustrate the point.  The judge based his

sanctions order, in part, on Dignity's claim that Commercial Union

II "held that prejudgment interest is mandated by [section 6C] in

declaratory judgment actions such as this one where the underlying

theory is contractual."  Although the use of the verb "mandated"

was obvious hyperbole, the superficial symmetry between Commercial

Union II and the instant case   both suits sought and obtained

declaratory relief on contractual obligations and both were

reversed on appeal   makes the opinion relevant as a building block

for an argument to extend section 6C's reach.

     What most incensed the court was its concern that Dignity

was seeking to double dip by trying to garner duplicative interest. 

The court termed this course of conduct "astonishing."  If the

district court's assessment of the situation were factual, we would

agree.  Cf. Fratus v. Republic Western Ins. Co., 147 F.3d 25, 31

n.7 (1st Cir. 1998) (denying duplicative interest as inconsistent

with the fundamental purpose of prejudgment interest).  Here,

however, the court's concern was unfounded.  Dignity made it

explicit in its motion that it proposed to credit the interest that

had accumulated in the joint escrow account against any prejudgment

interest award that it received.  Indeed, the dollar amount that

Dignity sought as prejudgment interest ($20,216) accurately

reflected this offset.

     We have noted before that an abuse of discretion may

occur when a court erroneously attaches significant weight to one

or more factors in the decisional calculus.  See Ruiz-Troche v.

Pepsi Cola of P.R. Bottling Co., 161 F.3d 77, 86 (1st Cir. 1998);

Anderson v. Beatrice Foods Co., 900 F.2d 388, 394 (1st Cir. 1990). 

So it is here:  because the district court wedded its sanctions

order to a series of clearly erroneous factual findings, the order

constituted an abuse of discretion.

     We add an excursus of sorts.  We are mindful that this

bitterly-fought litigation took many twists and turns, and that

counsel on both sides tended to push the envelope in search of a

winning theory.  We can understand the district court's frustration

at the give-no-quarter tactics employed by Dignity's lawyers, and

we fully agree that Dignity's claim for prejudgment interest could

not be sustained.  See supra Part II.  But though that claim lacked

merit, it was not so plainly unmeritorious as to warrant the

imposition of sanctions.  The mere fact that a claim ultimately

proves unavailing, without more, cannot support the imposition of

Rule 11 sanctions.  See Kale v. Combined Ins. Co., 861 F.2d 746,

758-59 (1st Cir. 1988); cf. Additive Controls & Measurement Sys.,

Inc. v. Flowdata, Inc., 96 F.3d 1390, 1398 (Fed. Cir. 1996) ("In

virtually every case, an appellate court finds one party's

arguments and authorities unpersuasive, but that is not remotely

sufficient to make the losing party's conduct sanctionable.").

IV.  CONCLUSION

     We need go no further.  Because Dignity identified

neither a contractual breach nor a judgment for pecuniary damages

to which prejudgment interest might attach, the district court

correctly held that section 6C does not authorize an award of

prejudgment interest in the circumstances of this case.  Withal,

the district court's reliance on unsupportable findings in

sanctioning Dignity for bringing the claim constituted an abuse of

discretion, requiring us to reverse the order for sanctions. 

Dignity's presentation of its prejudgment interest claim was an

aggressive step, but it fell within the wide perimeters of

permissible argumentation.  If every failed legal argument were

sanctionable, sanctions would be the rule rather than the

exception.



Affirmed in part and reversed in part.  No costs.