FINDINGS OF FACT AND CONCLUSIONS OF LAW
RONALD B. LEIGHTON, District Judge.
FINDINGS OF FACT
1. Phil Sigel and Brad Barros set out to attract tax-weary, wealthy individuals. Their vehicle of choice was an insurance company. An off-shore insurance company shrouded in secrecy. So secret that the insureds had to travel outside the country to read the insurance policy. Not surprisingly, they attracted some 150 to 200 rich folks who operated closely-held companies. One such individual, Cesar Scolari, was yearning for freedom from confiscatory taxes. He ran a multi-million dollar logistics company with low overhead. The two sides were a match made in heaven, or in Saint Lucia.
Sigel and Barros formed Bancroft. They didn't know much about insurance so they outsourced the underwriting function, actuarial responsibility, claims handling, accounting function, due diligence inquiries, and routine paperwork chores. They also outsourced much of the investment operation. One of Bancroft's primary investment vehicles was to make commercial loans back to the various participants who gave their money to Bancroft in the first place. Not coincidentally, Bancroft would loan back 70% of the premium dollars that had been committed for "coverages." Bancroft would outsource responsibility for securing the loans and perfecting the security to the borrower. Perhaps not surprisingly, the perfection of the security was, on occasion, "forgotten." The insuring end of the business similarly went lacking. Scolari was asked how much he wanted to pay in premium dollars. In 2006 he responded: $2.6 million, and in 2007, $5 million. In return, Scolari received a tax deduction for the full premium, and insurance coverage that he and his company didn't need. He also received a promise that, if his claims were low and the investments were successful, he would receive a refund of his premium dollars after five years.
After considering volumes of facts and arguments in the run up to trial, this Court observed on August 23, 2013 that "Bancroft's Premium Lite' insurance program is, at best, a scheme, and at worst, a scam." During the crucible of trial the Court realized the self-evident truth that fraud permeated the entire transaction, and that both parties were fully committed to the scheme. Public policy will not be served by enforcing the agreements. The parties stand in pari delicto . The Court will not degrade itself by shifting the loss between parties to an illegal contract.
2. A fool and his money soon part.
B. Background Facts Regarding the Parties.
3. Bancroft Life & Casualty ICC, Ltd. is a licensed insurance company domiciled in the nation of Saint Lucia.
4. Cesar Scolari has been a Washington resident since 2007. Before that, he lived in California.
C. Bancroft's Corporate History, Administrators, and Managers.
5. Bancroft was first formed as Bancroft Property & Casualty, Ltd. in the British Virgin Islands on May 1, 2003.
6. In 2005, the entitiy's name was formally changed to Bancroft Life & Casualty, Ltd.
7. In February 2006, Bancroft re-domiciled from the British Virgin Islands to Saint Lucia. Bancroft has existed under the laws of Saint Lucia since that time..
8. Bancroft formally changed its name to Bancroft Life & Casualty ICC, Ltd. in 2008.
9. Under Saint Lucia law, the process of re-domiciling did not terminate Bancroft's corporate existence in the British Virgin Islands and create a new corporate existence in Saint Lucia, but rather continued the entity's same corporate existence based on the laws of the new domicile jurisdiction.
10. Bancroft re-domiciled upon the advice of its then-outside regulatory counsel, G. Thomas Roberts that doing so would be advantageous because of legislation then planned in Saint Lucia that would allow Bancroft to offer "incorporated cells"-a new form of insurance structure whereby new insurance companies could be established under the umbrella of Bancroft's insurance license.
11. Bancroft Trust has always owned all of Bancroft's shares.
12. Philip Sigel has always been the trustee of the Bancroft Trust.
13. Bradley Barros has never held more than a 50 percent beneficial interest in the Bancroft Trust.
14. Sigel and Barros have been directors of Bancroft since 2003. Nicholas John, a Saint Lucia attorney, was added as a third Bancroft director when Bancroft re-domiciled to Saint Lucia in 2006. John remains a Bancroft director.
15. From June 2003 through February 2006, Bancroft's local insurance manager in the British Virgin Islands was Belmont Insurance Management, Ltd. ("Belmont").
16. In approximately 2004, Bancroft hired Intercontinental Management, Limited, d/b/a Intercontinental Captive Management Company, Limited ("ICMC"), a company located in Greensburg, Pennsylvania, to act as the third-party administrator of Bancroft's group insurance program. ICMC was partly owned by Tom Roberts and Nigel Bailey. Roberts was ICMC's president.
17. Following Bancroft's re-domicile to Saint Lucia, International Captive Consultants, Limited ("ICC") acted as Bancroft's insurance manager from 2006 until 2009. ICC was owned and operated by Nigel Bailey.
18. Bancroft retained Tom Roberts and John Patton and their law firm, Roberts & Patton, who served as counsel from approximately 2004 until approximately September 2009.
19. From the fourth quarter of 2009 until the present, Bancroft's insurance manager and third-party administrator has been CBIZ MHM, LLC. CBIZ has a place of business in Bethesda, Maryland. CBIZ has been approved as Bancroft's insurance manager by the Saint Lucia Ministry of Finance.
D. Bancroft's Group Master Policy.
20. Bancroft offers insurance coverage through its "Premium Lite" group insurance program.
21. To be eligible to participate in the Premium Lite insurance program, each Certificate Holder must first be a member of Association Benefits Group, Inc. ("ABG").
22. ABG is incorporated in Delaware and is a subsidiary of Captive Educational Services, LLC. The owner of Captive Educational Services, LLC, is Bradley Barros. ABG is a fee-based membership association that sponsors the Premium Lite group casualty insurance program under Bancroft's Group Master Policy. One of the benefits offered to ABG's member companies is access to Bancroft's Premium Lite program.
23. Bancroft refers to each participant in the Premium Lite insurance program as a "Certificate Holder."
24. Each participant in the Premium Lite insurance program receives annual certificates of insurance that describe the specific coverages placed by Bancroft.
25. Each of the certificates of insurance provides that it "confirms that the Certificate Holder named below has Business Income and Risk insurance coverage under a Group Policy. The Group Policy sets forth the terms and conditions of the insurance provided."
26. Bancroft's business risk policy, or Group Master Policy, was first executed by Belmont on Bancroft's behalf and issued in the British Virgin Islands in 2003.
27. Pursuant to a written services agreement with ABG, Chesterfield Services, Inc. acted as the first special purpose policy holder/named insured under the Group Master Policy.
28. Bancroft representatives caused the Group Master Policy to be delivered to Chesterfield in the BVI. Certificate Holders were informed that if they wanted to read the Master Policy they would have to go to BVI, (and later, to Saint Lucia), to read the policy.
29. The Group Master Policy was amended on several occasions. The parties hotly dispute the existence of actual signed copies of many of the Amended Group Master Policies. This dispute need not be resolved, as the authenticity of the document is not germane to the Court's resolution of this case.
30. In 2010, the special purpose policy holder and named insured was changed to Sempre Fidelis.
31. The shares of Sempre Fidelis are held in trust for the benefit of a Saint Lucia resident, Rhikkie Alexander. Sempre Fidelis is controlled and funded by Bancroft. Rhikkie Alexander was a client of Nicholas John. John is a Bancroft Director, the incorporator of Sempre Fidelis, and its original managing agent and registered agent. Moreover, Bancroft compensates Rhikkie Alexander for serving as nominal owner of Sempre Fidelis.
32. All versions of the Group Master Policy since Bancroft moved to Saint Lucia have provided that "the law of St. Lucia, West Indies shall be the choice of law for all legal, equitable or administrative purposes and proceedings" and that insurance-based litigation must be brought in the courts of Saint Lucia.
33. The various versions of the Group Master Policy all provide that Bancroft "may assess premiums at any time" if any Certificate Holder's the remaining reserves are inadequate, "as determined by the actuaries for the Company in their sole discretion." The various versions of the Group Master Policy also allow Bancroft to cancel (1) coverage and (2) the right to payment of any premium return benefit, if any such assessment is unpaid after 30 days.
34. The original Group Master Policy provides that "[t]he rights and benefits under the Policy or any Certificates of Insurance are not assignable." However, the 2010 Version of the Group Master Policy provides that "[n]o assignment of interest under this Policy or any Certificate of Insurance may be made by any Insured [defined to include Certificate Holders] without the express written consent of [Bancroft]."
E. Overview of Bancroft's Premium Lite Group Insurance Program.
35. The Group Master Policy is an insurance contract between Bancroft and the named insured/special purpose policy holder. Bancroft denies that it sells separate insurance policies in the United States.
36. When a United States-based business applies for and obtains coverage under the Group Master Policy, the Certificate Holder is sent a certificate of insurance evidencing the Certificate Holder's coverage under the Group Master Policy.
37. Premiums paid by Certificate Holders go into Bancroft's pooled general reserves, and are not maintained in separate accounts.
38. Bancroft pays claims out of the pooled general reserves.
39. One of the unique features of Bancroft's group insurance program is that, five years after a premium payment is made, a Certificate Holder may be eligible for the return of a portion of the total premium paid, depending on a variety of factors, including the investment performance of the pool, the claims history of the pool, and the claims history of the particular Certificate Holder.
40. In the event that a Certificate Holder qualifies for such a premium return benefit, the amount refunded is calculated as: (1) total premiums paid by the Certificate Holder, (2) plus the Certificate Holder's pro rata share of all investment gains realized by the reserve pool, less (3) the Certificate Holder's pro rata share of all investment losses realized by the reserve pool, less (4) 1.6 percent annual management fees, less (5) the Certificate Holder's pro rata share of all claims paid out of the reserve pool, less (6) the Certificate Holder's pro rata share of general and administrative expenses, less (7) any claims paid to that particular Certificate Holder.
41. No premium return benefit is available to a Certificate Holder who terminates coverage in the first three years after a premium payment is made. If a Certificate Holder terminates after three years, but before the five year mark, Bancroft imposes a surrender charge of nine percent of the premiums paid.
42. Bancroft's Group Master Policy allows Bancroft to make retrospective premium assessments of up to 60 percent of the total premium paid by the affected Certificate Holder. If a Certificate Holder fails to pay such an assessment, Bancroft can cancel coverage, and all other benefits payable under the Group Master Policy-including the premium return benefit.
F. Bancroft's Commercial Loan Program.
43. Bancroft frequently loaned out a portion of premium dollars paid in by Certificate Holders and third parties. Certificate Holders and their affiliates were permitted to borrow up to 70% of their premium payment. Bancroft was supposed to require all loans to be secured by a recorded security interest, and to require that the collateral pledged have a minimum value of 140 percent of the loan amount. All loans were to be memorialized by promissory notes. Interest payments were made to the pool and the proceeds allocated on a pro rata basis to the allocable share of the reserves corresponding to each Certificate Holder. Interest payments made by Certificate Holder borrowers are not allocated solely to that Certificate Holder's allocable share of the pooled reserves.
G. Staffworks, Inc. Applies for Insurance Coverage, is Underwritten by ICMC, and Makes its First Premium Payment.
44. In 2005, Cesar Scolari resided in California and was the sole owner and president of a multi-million dollar business headquartered in Southern California called Staffworks, Inc.
45. By 2004, Staffworks was paying heavy taxes (including California State income tax) and Scolari tasked his CPA, William Fries, to find a tax advantaged investment opportunity or some tax sheltered program in order to reduce Staffworks and Scolari's tax burden.
46. By 2005, Staffworks was one of the largest logistics companies in the United States, with approximately 1, 000 employees, and it had over $25 million dollars in annual revenue.
47. Fries told Scolari about a seminar he wanted to attend in Orange County regarding Offshore Captive Insurance Companies, and ...