Posts Tagged ‘People v. Fremont General Corp.’

“Trust Mill” Shut Down, But State Pays Parent Company

SEPTEMBER 17, 2001 VOLUME 9, NUMBER 12

Fremont Life Insurance Company did a profitable business selling seniors living trusts. They used the usual pitch: avoid probate and the legal system, save on taxes and simplify your estate plan. Oh, and while we’re helping you plan your estate we think you should buy an annuity from our insurance company.

The State of California sued to stop Fremont Life and its parent company, Fremont General Corporation, from engaging in its deceptive business practices. The State alleged that agents of both Fremont Life and its parent practiced law without a license, and misled purchasers selling them insurance products without disclosing that there were substantial surrender charges.

California’s Attorney General argued that Fremont Life and Fremont General together operated an abusive “trust mill.” The practice is widespread throughout the country: seniors are lured to seminars about how to avoid probate and end up buying inappropriate and expensive annuities.

Fremont General acknowledged that it might lose the litigation, and offered to pay the State $2 million to avoid trial. The California Attorney General declined the offer and proceeded with the case. The State ultimately won a $2.5 million judgment against Fremont Life, along with an order that it return money to its annuity purchasers. The State’s claim against the parent company, however, failed; it did not show that Fremont General Corporation was really just another name for Fremont Life, or that Fremont General employees were involved in a conspiracy with Fremont Life agents.

Because the $2 million offer of judgment was more than the State recovered, court procedural rules permitted Fremont General to seek its court costs from the State. The reasoning behind the rules: when a plaintiff refuses what turns out to have been a reasonable offer of settlement the defendant should not be penalized by having to pay for unnecessary litigation. The effect in the Fremont General case was dramatic.

Court costs and expert witness fees incurred by Fremont General in its successful defense totaled over $880,000. The State of California was ordered to pay that amount, despite the fact that it had prevailed in its lawsuit against Fremont Life. The State appealed.

In its appeal the State argued that it would be against public policy to make the government pay for an action in which it sought to enforce rules against the unauthorized practice of law. The State also insisted that it could not have accepted the offer of settlement in any event, since it would not have known how much of the money should be repaid to the customers it alleged had been defrauded. Both arguments were rejected. People v. Fremont General Corp., June 14, 2001.

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