Arent Fox Wins Sanctions After AAUG Insurance Company Violates Injunction Order - Insurance News | InsuranceNewsNet

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October 18, 2012 Newswires
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Arent Fox Wins Sanctions After AAUG Insurance Company Violates Injunction Order

PR Newswire Association LLC

NEW YORK, Oct. 18, 2012 /PRNewswire/ -- In a stunning rebuke of an insurance company, a federal judge in Florida has awarded sanctions against insurer AAUG Insurance Company, Ltd. for violating a preliminary injunction order that froze the company's assets and required the insurer to pay a forensic accountant to inspect its books and records in an effort to locate millions of dollars in premiums paid under the insurance program. 

Arent Fox LLPobtained the sanctions on behalf of International Schools Services, Inc., one of 43 international schools that purchased group medical, dental, vision and life insurance from AAUG in 2008 and '09 to cover the benefits packages of its teachers and other employees. Despite receiving millions of dollars in premiums, AAUG abruptly stopped paying ISS' insurance claims in 2010 and, instead, issued hundreds of claims payment checks totaling nearly $100,000 that were dishonored for insufficient funds.

Former AAUG President Gregor Gregory admitted in open court that he knowingly signed and issued hundreds of health insurance claims payment checks for insured certificate holders (including teachers working in Third World countries) and medical service providers that were dishonored for insufficient funds, Mr. Gregor now faces possible imprisonment if he and AAUG fail to comply with the Sanction Order, which requires the company to pay the forensic accountant's fees and expenses within 14 days.  

"This case illustrates an appalling disregard by a global insurance company towards its policyholders – a disregard that continued even after the company and its principal were found in contempt for contemptuous conduct that included numerous secret transfers of funds in violation of the preliminary injunction order," said Arent Fox Insurance partner Elliott Kroll, who leads the representation of ISS. 

"AAUG first failed in its fundamental obligation to pay the healthcare claims of its policyholders, but added insult to injury by repeatedly ignoring a federal court's order that froze all of its assets and accounts and required it to pay a forensic accountant retained by our client to inspect its books and records to trace the millions of dollars in premiums that were paid by our client and other international schools under the insurance program."  Also working with ISS were Arent Fox Litigation partner Michael Cryan and Litigation senior associate James Westerlind.

ISS brought suit in early November 2010 against AAUG, a captive insurance company domiciled in the British Virgin Islands, and its principal, Mr. Gregory, then president and a director of the company who has been responsible for its daily operations.  In its original verified complaint filed in US District Court for the Southern District of Florida, Arent Fox accused Mr. Gregory and AAUG of fraud, civil conspiracy and breach of contract.

Following a temporary restraining order entered upon an ex parte application, signed on November 3, 2010, Arent Fox subsequently won a preliminary injunction against AAUG that, among other things, froze all of the company's financial accounts and other assets and required the insurer to pay for forensic accountants retained by ISS to inspect the company's books and records.  The forensic investigation was necessary to trace millions of dollars in premiums paid to AAUG by ISS and other international schools under the insurance program.  Defendants appealed the injunction order, and denial of reconsideration thereof, to the 11th Circuit.

Shortly after the injunction was entered, Arent Fox learned that AAUG had allowed hundreds of thousands of dollars to be transferred from an undisclosed account.  AAUG also failed to pay ISS's forensic accountant bills and otherwise ignored efforts to make it comply with the injunction, at which point Arent Fox and ISS moved to hold defendants in contempt.

Following an evidentiary hearing, the court held defendants in contempt or violating the preliminary injunction, but reserved ruling on sanctions pending AAUG's appeals.  After the appeals were dismissed by the 11th Circuit, the district court granted ISS' motion to lift the preliminary injunction in early 2012, stating that the Preliminary Injunction Order was "set aside."

Arent Fox then formally moved for sanctions against defendants based on the Contempt Order. Defendants opposed, principally arguing that by "setting aside" the preliminary injunction, the district court had vacated the same (consistent with the definition of "set aside" in Black's Law Dictionary). The district court, however, agreed with ISS that it never intended to vacate the preliminary injunction when it granted ISS' motion to lift the same. The district court explained that defendants' court filings illustrated that defendants understood that ISS' motion to "lift" the preliminary injunction was not a motion to "vacate" the same. Therefore, the Preliminary Injunction Order was valid and binding at the time the defendants had violated it, and the Court could sanction defendants at this juncture even though the preliminary injunction had been lifted. 

In an Order issued on October 17, U.S. District Judge Cecilia M. Altonaga reviewed in detail the numerous efforts made by Arent Fox to persuade defendants to comply with the Preliminary Injunction Order, which were ignored by defendants.

Judge Altonga recognized that sanctions for civil contempt are limited to: (1) compensating the other party; and (2) remediating the violation committed. Since the injunction has been lifted, remediation (i.e., sanctions that were tailored to cause the contemnor to comply with the prior order) was not an option. The only civil sanctions available would be those that compensated ISS for defendants' conduct.

Accordingly, Judge Altonaga awarded ISS reasonable attorneys' fees incurred in connection with the contempt and sanctions motions (which will be determined at the conclusion of the lawsuit), and further ordered defendants to pay to ISS the amount of fees and expenses that ISS paid to its forensic accountant for work performed in connection with the Preliminary Injunction Order.

Defendants have been ordered to make payment within 14 days of receiving an invoice from ISS.  The  Court implicitly warned defendants that failure to comply with the Sanctions Order has serious repercussions:

Defendants are surely aware of the serious nature of violating a court order – parties may be imprisoned for such behavior. See, e.g., Commodity Futures Trading Comm'n v. Wellington Precious Metals, Inc., 950 F.2d 1525, 1531 (11th Cir. 1992) (affirming district court's imprisonment of a party found to be in civil contempt for violating a court order).  The Court fully expects Defendants will demonstrate absolute and timely adherence to the Court's dictates.

10/17/12 Order at 16.  The Court reserved jurisdiction to impose further sanctions for non-compliance with the October 17th Order.

Mr. Kroll represents clients in all major facets of the insurance industry spanning the life and nonlife areas including property and casualty, aviation/space, accident, and health. In addition, he has in-depth experience with premium financing, captives, financial and structured reinsurance transactions, and regulatory representation.

About Arent Fox

Arent Fox LLP (www.arentfox.com), with offices in Los Angeles, Washington, DC, and New York, is a recognized leader in areas including automotive, sports, white collar, intellectual property, real estate, telecommunications, health care, international trade, bankruptcy, and complex litigation. With more than 350 lawyers nationwide, Arent Fox has extensive experience in corporate securities, financial restructuring, government relations, labor and employment, finance, tax, corporate compliance, and the global business market. The firm represents Fortune 500 companies, government agencies, trade associations, foreign governments and other entities.

From:

Allan Ripp 212-262-7477 arippnyc@aol.com

Nathan Carlile 202-715-8504 carlile.nathan@arentfox.com

SOURCE Arent Fox

Wordcount:  1208

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