First Circuit holds that in fraud sentencing, sentence is based on amount of fraudulent claim not fraudulent plus legitimate claim

John Alphas owned a wholesale produce distributor.  He routinely obtained insurance for produce shipments.


Starting in March, 2007, Alphas submitted at least ten fraudulent claims to his insurers for lost, stolen or damaged produce.  Some of the claims were partially legitimate and partially fraudulent.


The federal government prosecuted Alphas.  Alphas pleaded guilty.  However, Alphas and the government did not agree on the amount of loss, a necessary step for determining sentencing. 


Alphas argued that the loss figure should exclude legitimate claims embedded in the fraudulent claims. 


The government asserted that the amount should be based on the total amount Alphas claimed, not how much he received.  It argued that the under the terms of the policies the insurer would have voided an entire claim if it had known that any part of it was fraudulent.


In United States v. Alphas, __ F.3d __, 2015 WL 2124771 (1st Cir. 2015), the United States Court of Appeals held that the loss-computation should distinguish between a fraudster who wholly fabricates a non-existent claim and a fraudster who artificially inflates s a legitimate claim.  "A fraudster who has suffered no loss at all but invents a $100,000 claim out of thin air is not the same as a fraudster who has suffered a legitimate $50,000 loss but artificially inflates his claim to $100,000." 


The court noted that the void-for-fraud clause in an insurance policy imposes on the fraudster a penalty for acting corruptly: "if the insurer discovers the fraud, the insured forfeits everything."


But the concept of loss under the criminal sentencing guidelines serves a different purpose.  The guidelines are "designed to ensure that the sentence imposed on the defendant 'reflect[s] the nature and magnitude of the loss caused or intended by [his] crimes.'"  It would make no sense to impose a more severe penalty on a fraudster whose policy has a void-for-fraud clause than on a fraudster whose policy does not contain that clause. 


The court held that, contrary to the government's position, the correct inquiry is what the fraudster reasonably expected to "euchre" (to outwit or cheat, not to play a card game in which jacks are high) out of his victim, not what would have slipped through is fingers had he not been caught.  That amount excludes sums that the fraudster would have been paid absent the fraud. 


The court also held that the restitution amount is the fraudulent amount only, not the legitimate claim, regardless of a void-for-fraud clause. 

Nicholas Ellis, disbarred for insurance fraud, has been reinstated to Massachusetts bar

In In re Nicholas J. Ellis, 45 7 Mass. 413 (2010), the Supreme Judicial Court ruled last month that Nicholas Ellis, who had been disbarred in 1997 for insurance fraud, could be reinstated to the practice of law.

Ellis had been disbarred for knowingly submitting fraudulent medical records to insurance companies. His actions were part of a larger scheme by his personal injury law firm, Ellis & Ellis, to defraud insurance companies.

The SJC has found that Nicholas has been rehabilitated.

The court found that when Nicholas joined Ellis & Ellis he was new to the practice of law. The firm was established by his father and "tightly controlled" by his brother. Nicholas' wrongdoing was minor compared to the wrongdoing of the firm and his brother.

The court weighed Nicholas' wrongdoing against his post-disbarment activities, which included being the at-home parent to his children while his wife worked, attempting to become a teacher (he was unable to obtain employment because of his convictions), coaching youth teams, and charitable work through his church. He also expressed remorse about his wrongdoing.

I have mixed feelings about the ruling. It irks me that Nicholas gets brownie points for staying home with his kids. If he were a woman, would the SJC give him rehabilitation points for doing that, or for coaching a kid's team, or for doing volunteer work with a church? And I'm not too impressed with his studying to be a teacher when no school in its right mind would hire him.

It also bothers me that the SJC states that his new practice areas are sufficiently distinct from his old personal injury practice. One of his new practice areas is social security disability law. Forged medical records work just as well with the government as with insurance companies.

On the other hand, I like the idea of rehabilitation. I applaud the notion that each of us can grow beyond whatever stupid, wrong or unethical ideas we were indoctrinated with by our families, even if that growth comes in middle age.

So I give Nicholas the benefit of the doubt. Welcome back to the practice of law. I hope you prove worthy.

Superior Court allows adjustment of premiums over insured's argument of mistake

In Nat'l Fire & Marine Ins. Co. v. AT Equipment, Inc., 2009 WL 3086233 (Mass. Super.), AT was insured by National. AT's insurance broker filled out and delivered to AT an insurance application when it was time to renew the policy. The broker had filled in gross sales figures from previous years despite a recent substantial increase in gross sales. AT's managers did not read the entire application, but signed it on behalf of AT.

National issued a new policy which gave National the right to audit AT's records and charge additional premiums if the audit determined that such payments were appropriate. An audit revealed that an additional $102,405 was due in premiums. It sued AT for those premiums and moved for summary judgment.

The Superior Court rejected AT's argument that the policy should be reformed (apparently by removing the clause allowing adjustment of premiums) or voided on the grounds of fraud or mistake. It rejected the fraud argument because no facts indicated actual or constructive knowledge of the falsity of the application on the part of National.

It held that the policy could not be reformed on the grounds of mutual mistake because the parties were not mistaken as to the same matters. AT was mistaken about the accuracy of the contents of its application, and National was mistaken about the appropriate premium.

The court held, finally, that the contract could not be reformed on the grounds of unilateral mistake because National had the right to conduct an audit and correct the premium. Therefore AT, the party seeking to void the contract, bore the risk of the mistake.

Appellate Division holds that insured's fraudulent statements regarding lost income void all coverage for loss

In Lee v. Premier Ins. Co., 2009 WL 2438331 (Mass. App. Div.), the Massachusetts Appellate Division (a non-precedent setting court that hears appeals from the District Court)held that an insurer's fraudulent statements about his income voided his coverage not only for lost income but also for medical expenses.

The plaintiff, Lee, allegedly sustained injuries from a rear-end collision while operating a vehicle insured by Premier. Premier denied Lee's PIP claim, on the grounds of non-cooperation. Lee then sued Premier.

The evidence showed that in his PIP application and in an examination under oath Lee more than doubled the average weekly wage that he earned, and that he also exaggerated his annual income in 2003 in his examination under oath and at trial.

The Massachusetts Appellate Division held that in light of Lee's false statements with respect to his income Premier permissibly denied Lee's entire claim, including his claim for medical expenses. The court relied on Gechijian v. Richmond Ins. Co., 298 Mass. 487 (1937), which held:

when it is established . . . that the insured has knowingly made false statements, even in such a matter as value, for the purpose of influencing the adjustment of the loss, public policy demands that the contract be so construed as to discourage such conduct and to give full protection to the insurer.