Free Response to Motion - District Court of Arizona - Arizona

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ROBERT M. YOUNG, Jr. (CA Bar #063297) WILSON, ELSER, MOSKOWITZ, EDELMAN & DICKER LLP 1055 West Seventh Street, Suite 2700 Los Angeles, California 90017-2503 Telephone: (213) 624-3044 Facsimile: (213) 624-8060 Attorneys for Defendant THE PRUDENTIAL INSURANCE COMPANY OF AMERICA Tom Crowe (AZ Bar #002180) CROWE & SCOTT, P.A. 1100 E. Washington Street, Suite 200 Phoenix, AZ 85034-1090 Telephone: (602) 252-2570 Facsimile: (602) 252-1939 Attorneys for Defendant THE PRUDENTIAL INSURANCE COMPANY OF AMERICA UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA RONALD HERBERT PERRIN and the) ESTATE OF LUCY MILDRED PERRIN) through RONALD HERBERT PERRIN,) Personal Representative, ) ) ) Plaintiff, ) v. ) THE OFFICE OF SERVICEMEMBERS) GROUP LIFE INSURANCE, a subsidiary of) the PRUDENTIAL INSURANCE COMPANY) ) OF AMERICA, a corporation, ) ) Defendant. ) ) _____________________________________) No. CV04-0571-PHX-RGS
DEFENDANT'S RESPONSE TO PLAINTIFFS' MOTION FOR PREJUDGMENT INTEREST

Defendant, The Prudential Insurance Company of America ("Prudential"), sued herein as "The Office of Servicemembers' Group Life Insurance, a subsidiary of the Prudential Insurance Company of America, a corporation," by and through counsel undersigned, submits this response to Plaintiffs' motion for an award of prejudgment interest and requests this Court to deny same. This response is based upon the accompanying memorandum of

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points and authorities and the matters on file and of record herein. DATED this 14th day of November, 2005. CROWE & SCOTT, P.A.

By s/ Tom Crowe Tom Crowe 1100 East Washington, Suite 200 Phoenix, Arizona 85034 Attorneys for Defendant MEMORANDUM OF POINTS AND AUTHORITIES I. FACTUAL AND PROCEDURAL SUMMARY On or about February 21, 2001, Dale E. Perrin ("Perrin") re-enlisted in the U.S. Navy Reserve after prior military service. (Plaintiffs' statement of facts in support of motion for summary judgment at ¶ 7; hereinafter "PSOF at ¶___.") As such, he was automatically insured against death under the Servicemembers' Group Life Insurance Act of 1965 ("SGLIA"), as amended, 38 U.S.C. §§1965-1980. On or about March 1, 2001, Perrin submitted a Servicemembers' Group Life Insurance ("SGLI") Election and Certificate containing his designation of beneficiaries. (PSOF at ¶ 8.) On or about December 8, 2001, Perrin died of natural causes at his home in Goodyear, Arizona. (PSOF at ¶ 30.) On January 4, 2002, the Commanding Officer, Naval and Marine Corps Reserve Center, Phoenix, Arizona ordered a "Command Investigation to Determine the Miliary Status pf YN2 Dale E. Perrin, USNR, as of 8 December 2001."

Command Investigation, Enclosure 1, page 1 (hereinafter, "CI , Enc.__, p. __" or "Bates No. ___").1 On or about March 20, 2002, the Command Investigation was completed and a report

On December 17, 2004, the parties stipulated to the use of the Command Investigation herein. As noted in PSOF, fn. 1, "The Command Investigation . . . is the source of virtually all of the exhibits . . ." in this case. 2

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was submitted. The report is supported by 81 enclosures contained therein. It is also contains 129 "findings of fact," 32 "opinions" and 5 "recommendations." The Command Investigation concluded, in pertinent part, as follows: "YN2 Perrin was a deserter in fact at the time of his death," and "Petty Officer Dale Edward Perrin forfeited entitlement to group life insurance benefits as a result of his desertion." (CI, Bates No. 27; Opinions Nos. 30-31.) On or about April 24, 2002, the Commander, Naval Reserve Force, New Orleans, Louisiana, having reviewed the Command Investigation, concluded, in part, as follows: "Specifically concur with the investigating officer that YN2 Perrin was in a deserter status at the time of his death." (CI, Bates No. 2, Opinion No. 7.) A claim for death benefits under SGLI is required to be submitted on a Claim for Death Benefits Form (SGLV 8283) and mailed to the Office of Servicemembers' Group Life Insurance ("OSGLI"). (CI, Enc. 78, pp. 1,7). Plaintiffs did not submit a claim for SGLI benefits until September, 2003. (PSOF at ¶ 37.) The claim was denied on or about November 10, 2003. (Id.) The complaint herein was filed on March 23, 2004. As noted, the parties stipulated to the Command Investigation as forming the basis for virtually all of the relevant facts and Plaintiffs filed their motion for summary judgment based thereon on March 4, 2005. As the result of congestion in the Court's calendar, the matter was not set for hearing until November 1, 2005, at which time the Court orally issued its findings of fact and conclusions of law and granted Plaintiffs' motion. The Court directed Plaintiffs to submit a proposed form of judgment and, on November 7, 2005, Plaintiffs filed their motion for the award of

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prejudgment interest.
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II.

LAW AND ARGUMENT A. Federal statutory scheme. An earlier program of federally sponsored life insurance for members of the armed

services (National Service Life Insurance Act) lapsed at the end of the Korean hostilities when commercial insurance generally became available to service members. As a result
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largely of the Vietnam conflict, Congress enacted the Servicemembers' Group Life Insurance Act of 1965 ("SGLIA") to make low cost life insurance benefits available to all members of the uniformed services, including commissioned officers of the Public Health Service and the National Oceanic and Atmospheric Administration and cadets and midshipmen of the four service academies, as well as members of the Reserve Officer Training Corps. See H.R. Rep. No. 1003, 89th Cong., lst Sess., 7 (1965), U.S. Code Cong. & Admin. News 1965, 3232; Ridgeway v. Ridgeway, 454 U.S. 46 (1981). As Plaintiffs accurately allege in their complaint, Prudential is the insurer of Group Policy #G-3200, ". . . issued to the Secretary of Veterans' Affairs to provide SGLI benefits to members of the United States Armed Forces, their families and dependents pursuant to the Federal statutory scheme to provide life insurance for all service members under 38 U.S.C. § 1965 et seq." (Complaint at ¶ 10.) Plaintiffs further allege accurately that, "This case arises under a federal insurance scheme for Armed Service Members and involves substantial federal law questions." (Id., at ¶ 4.) The SGLIA directs the Secretary of Veterans' Affairs to purchase coverage from one or more qualified commercial insurers instead of offering coverage by the United States itself. See 38 U.S.C. §1966(a). Thus, under the SGLIA, the Government is the policy holder, rather than the insurer. The Administrator [now Secretary] has contracted with petitioner Prudential Insurance Company of America, which now serves as the primary insurer under the SGLIA and which operates, under Veterans' Administration [now Department of Veterans' Affairs] supervision and pursuant to 38 U.S.C. §766(b) [now 38 U.S.C. §1966(b)], the Office of Servicemen's [now Servicemembers'] Group Life Insurance in Newark, N.J. Ridgeway, 454 U.S. at 53. The SGLIA, and the regulations promulgated by the Secretary thereunder, establishes a pervasive and comprehensive federal scheme regarding the providing of life insurance benefits to servicemembers. Among other things, the SGLIA addresses the duration and
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termination of coverage (38 U.S.C. §1968), the means by which coverage will be funded (38 U.S.C. §1969), the designation of beneficiaries (38 U.S.C. §1970), the forfeiture of benefits (38 U.S.C. §1973), an incontestability clause (38 U.S.C. §1979) and other provisions governing the rights and obligations of the parties. Here, specifically, benefits were denied pursuant to 38 U.S.C. §1973, which provides, in pertinent part, that "Any person guilty of . . . desertion . . . shall forfeit all rights to Servicemembers' Group Life Insurance under this chapter." Based upon this comprehensive regulatory scheme, the Supreme Court has held that the SGLIA broadly preempts state law. Ridgeway, 454 U.S. at 60; see also Powell, J., dissenting at 64. B. Reasons why prejudgment interest should not be awarded in this case. There are several matters which cannot reasonably be disputed by either party. First, it is not in dispute that interest on the judgment herein shall be allowed pursuant to 28 U.S.C. §1961; namely, post-judgment. Second, there is no statutory provision in the SGLIA or otherwise which authorizes the award of pre-judgment interest. Third, there is no reported decision anywhere which supports the award of prejudgment interest in connection with the payment of benefits pursuant to the SGLIA. Fourth, and most importantly, the award of interest for any period prior to the "establishment of a valid claim therefor" by the Plaintiffs is precluded by the SGLIA because no benefits are payable until that event has occurred. Title 38, U.S.C. §1970(a) provides, in pertinent part, as follows:

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Any amount of insurance under this subchapter in force on any member or former member on the date of the insured's death shall be paid, upon the establishment of a valid claim therefor, to the person or persons surviving at the date of the insured's death . . . . (Emphasis added.) As noted above, Perrin died on December 8, 2001. Plaintiffs' claim for SGLI benefits was first filed in September, 2003. That claim was denied on November 10, 2003. There is
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no contention on the part of the Plaintiffs that the denial of the claim was untimely and, indeed, any such contention would unsupported. Plaintiffs filed this action on March 23, 2004 and the Court made its oral findings which, for the first time, arguably established a valid claim on November 1, 2005. Plaintiffs' claim for the award of prejudgment interest from the date of Perrin's death is not well taken. Prudential does not dispute Plaintiffs' summary of the cases cited in their memorandum, but only their applicability to this matter. Prudential agrees that the decision as to whether to grant prejudgment interest ordinarily is within the discretion of the court. (Plaintiffs' Memorandum at 2.) Prudential agrees that ordinarily "the decision to award the Prejudgment interest should be based on the equities of the case." (Id.) Prudential agrees that ordinarily, "awards of prejudgment interest are governed by considerations of fairness and are to be awarded when necessary to make the wronged party whole." (Id.) The qualifier "ordinarily" is applied for good cause. It is submitted that there are persuasive reasons why there are no reported cases in which prejudgment interest has been awarded in actions brought pursuant to the SGLIA, including the specific provision in Section 1970(a). That section, requiring the establishment of a valid claim, also negates or, at least, qualifies the contention for which Osterneck v. Ernst & Whinney, 489 U.S. 169 (1989) is cited; namely, the award of interest "from the time the claim accrues." By statutory definition, a claim does not accrue under the SGLIA at the time of death but, rather, when a valid claim has been established.

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The particular facts of this case strongly militate against the award of prejudgment
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interest separate and apart from Section 1970(a). Admittedly, prejudgment interest was awarded, pursuant to the federal common law, in the cases relied upon by Plaintiffs. However, an examination of the kinds of claims asserted in those cases, and the circumstances under which they were made, helps to explain the reason for the result. U.S. Dominotor Inc. v. Factory Ship Robert E. Resoff, 768 F.2d 1099 (9th Cir. 1985), was an
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action for a salvage award resulting from the collision of sea vessels. In Re: Southland + Keystone v. Official PACA Creditors Committee, 132 B.R. 632 (9th Cir. BAP 1991) and In Re Unicom Computer Corp. v. International Business Machines, 21 F.3d 1116 (9th Cir. 1994) are bankruptcy cases, which are subject to special rules and procedures not applicable here.2 Home Savings Bank F.S.B. v. Gillam, 952 F.2d 1152 (9th Cir. 1991) was an action brought by the Resolution Trust Corporation against a former official of a failed savings bank to recover severance benefits. Osterneck v. Ernst & Whinney, 489 U.S. 169 (1989) was an action based upon allegedly fraudulent financial statements. None of these cases involved a federal statute embracing a regulatory scheme even remotely similar to that of SGLIA. Even in those circumstances where the award of prejudgment interest has been approved, a careful analysis is called for before prejudgment interest may be awarded. As the Ninth Circuit has observed, "A district court should be cautious in exercising its discretion to award prejudgment interest, which should not be imposed when its exaction would be inequitable. Blau v. Lehman, 368 U.S. 403, 414, 82 S.Ct. 451, 7 L.Ed.2d 403 (1962); Thomas v. Duralite Co., Inc., 524 F.2d 577, 589 (3rd Cir. 1975)." Coast Trading Co. v. Cudahy Co., 592 F.2d 1074, 1083 (9th Cir. 1979). A careful evaluation of the equities of this case, in the context of the facts presented, leads to the conclusion that the award of prejudgment interest would not only be inequitable but also would operate to undermine the federal statutory scheme put in place to ensure the delivery of low cost life insurance benefits to servicemembers. As noted, the contract on

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which Plaintiffs' claims are based is between the Secretary and Prudential. Thus, Prudential
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has a fiduciary obligation to administer the program consistent with both the statutory and regulatory requirements put in place by Congress and the Secretary. Among those

requirements are those specified in 38 U.S.C. §1973, which provides for forfeiture of benefits

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Indeed, Unicom is an unpublished opinion which is not properly cited. See Ninth Circuit Rule 7

36-3.

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under certain circumstances, including those where desertion has been found to have occurred. In addition, as noted above, Prudential would clearly be acting in derogation of 38 U.S.C. §1970 if it paid a benefit prior to the establishment of a valid claim. Here, the Department of the Navy, not Prudential, following an extensive and thorough investigation, found and concluded that, "YN Perrin was a deserter in fact at the time of his death" and that, "Petty Officer Dale Edward Perrin forfeited entitlement to group life insurance benefits as a result of his desertion." (CI at Bates No. 27). Moreover, those findings and conclusions were specifically upheld and concurred in by the Commander of the Naval Reserve Force. (Id. at Bates No. 2). To be sure, this Court has not agreed with those findings based, in large part, on what the Court referred to as a "lack of clarity" in the record.3 However, it is not reasonable to conclude that at the time it was presented with Plaintiffs' claim Prudential would have fulfilled its obligations to its insured, and complied with the statutory, fiduciary, and regulatory requirements to which it was subject, in the event it had unilaterally elected to pay the SGLI benefits to Plaintiffs notwithstanding the findings of the Department of the Navy. If, indeed, Plaintiffs had suggested that the Department of the Navy in some way breached certain obligations which it may have owed to third parties in connection with its handling of the investigation, such contentions would form the basis for a separate claim not here presented. Here, it would be inequitable in the extreme to impose additional, uninsured, costs on Prudential in the form of prejudgment interest under these circumstances.

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In terms of equities, it is submitted that the Court should also consider the framework
22 23 24 25 26 27 28 The Court also acknowledged that the materials presented to it were "conflicting" and that the dispute between the parties was "legitimate." (See Partial Transcript of Motion Hearing at 4, attached hereto as Exhibit "A".) 8
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in which the federal statutory scheme exists. Today, millions of members of the uniformed services are automatically entitled to benefits under the SGLIA. During the course of the 40-

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year history of the SGLIA, tens of millions of persons have been accorded such benefits. Due in part to the large insured base, and the provision for subsidy of the program by the Secretary, the relative cost to servicemembers has remained low, as Congress intended, and has permitted commercial insurers, such as Prudential, to contract with the Secretary for such coverage at similarly low rates. If, among the millions of members of the uniformed services who receive benefits under the SGLIA, Prudential will now incur the additional, and potentially massive, financial liability of being required to pay prejudgment interest on several thousands of claims where a court later determines that coverage existed, after the government had determined otherwise, the fiscal integrity of the federal statutory scheme would be severely compromised. Prudential, and other similarly situated insurers, would likely require significantly higher premiums in order to insure against the additional risks which they would assume arising out of government determinations of eligibility in which they had no part whatsoever. The imposition of prejudgment interest under these circumstances, and in the absence of any precedent to the contrary, would clearly be inequitable. C. The amount of interest sought to be awarded by Plaintiffs is excessive.

Assuming, arguendo, that a court awards prejudgment interest in any case, the parties agree that the applicable rate would be determined by reference to the 1-year constant maturity Treasury yield as set forth in 28 U.S.C. §1961, which pertains to post-judgment interest. In this case, the parties disagree with respect to the time for which interest should

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be paid and the rate thereof.
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Plaintiffs seek the award of prejudgment interest from the date of Perrin's death. Prudential contends that, pursuant to Section 1970(a), no valid claim was established prior to November 1, 2005 at the earliest, and the imposition of interest for any period before that date is not authorized by statute. Rather clearly, no claim was payable at the time of Perrin's death.
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Even if the Court were to conclude­wrongly in Prudential's opinion­that prejudgment interest would accrue from the date on which Plaintiffs' claim was denied (November 10, 2003), Prudential submits that the 1-year constant maturity Treasury yield which would apply would be the rate in effect as of that date.4 Effective November 1, 2003, the 1-year constant maturity Treasury yield in effect was 1.34%. (See Table of interest rates, attached hereto as Exhibit "B.") On November 1, 2004, the 1-year constant maturity Treasury yield was 2.50% (Id.) Thus, even under the broadest of standards, using the above rates, the total interest adjusted on an annual basis, and compounded annually for the two-year period from November 1, 2003 to November 1, 2005 would be approximately $9,683.75, not the $45,628.00 sought by Plaintiffs. If the rationale of prejudgment interest is to "make the injured party whole" (Plaintiffs' memorandum at 3) for the loss of use of proceeds during the period for which they should have been paid using the Treasury rate as a benchmark -- the "opportunity cost"­that party should not profit by being awarded with a return on capital excess of that applicable at the time in question. III. CONCLUSION. For the reasons set forth herein, Prudential respectfully submits that the award of prejudgment interest herein is unprecedented, inequitable and in contravention of federal law. While Prudential has addressed the applicable interest rate for periods prior to the date of this Court's oral determination in the interest of completeness, that exercise is unnecessary

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for the reasons stated.
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In the event that the Court is inclined to award any prejudgment

interest whatsoever, Prudential submits that such interest should accrue from the date on which the claim was arguably first established; which is November 1, 2005.

As noted above, to the extent that Unicom is relied upon by Plaintiffs in support of any other construction, the unpublished opinion cannot be cited or relied upon by this Court as precedent. 10

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DATED this 14th day of November, 2005. CROWE & SCOTT, P.A.

Submitted by ECF on this 14th day of November, 2005. Courtesy copy of the foregoing mailed this 14th day of November, 2005, to:

By s/ Tom Crowe Tom Crowe 1100 East Washington, Suite 200 Phoenix, Arizona 85034 Attorneys for Defendant

Honorable Roger G. Strand Judge of the District Court Sandra Day O'Connor U.S. Courthouse Ste 622 401 W Washington St SPC 57 Phoenix AZ 85003-2156 By s/ Cindy Malyuk

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