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(Article from Insurance Law Alert, March 2015)

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The Eleventh Circuit ruled that a Florida district court did not abuse its discretion by imposing sanctions against a non-party for its bad faith preparation of a trial witness. Sciarretta v. Lincoln Nat’l Life Ins. Co., 2015 WL 795593 (11th Cir. Feb. 26, 2015).

Lincoln National Life Insurance issued a $5 million life insurance policy to Barton Cotton. Upon Cotton’s death, Lincoln discovered that Cotton had used Imperial Premium Finance Company to finance the purchase of the policy in order to market it to speculators under an illegal stranger-originated life insurance scheme. In ensuing litigation, Lincoln sought to depose Imperial, which was not a party to the suit but was under criminal investigation at the time. Imperial sought a stay of its deposition based on Fifth Amendment issues or, alternatively, permission to prepare and use an outside witness to testify as a designated corporate representative. The court allowed use of an outside witness and Imperial hired Norris, an independent economist. During Norris’s deposition and examination at trial, he was unable to answer a significant number questions about Imperial or the transaction at issue. After the jury returned a verdict in favor of the Cotton trust, the court sua sponte raised the issue of sanctions against Imperial and Norris based on Norris’s "blatant [ ] failure to follow the rules for a designated witness." Following a hearing, the court imposed $850,000 in sanctions against Imperial, finding that Norris had "exhibited deliberate ignorance to any inquiry harmful to Imperial’s interests while at the same time trying to affirmatively help the Trust and Imperial’s counsel at every opportunity." The Eleventh Circuit affirmed.

The Eleventh Circuit held that improper and strategic witness preparation was a sufficient basis for sanctions. The court explained that selectively educating a designated witness constitutes bad faith if the witness is "knowledgeable about the helpful facts and dumb about harmful ones." In so ruling, the court deemed it irrelevant that Lincoln did not object to Norris’s testimony, noting that even if Lincoln was arguably estopped from seeking sanctions for failure to raise the issue, such estoppel had no effect on the court’s inherent power to raise and address a sanctions issue. Although the decision sends a clear message about the improper use of a designated witness for strategic purposes, the factual record in this case—namely, that Imperial’s conduct was the "driving force behind the litigation"—may have been a significant factor.