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Amicus Georgia Trial Lawyers Association respectfully submits the following brief to make the point that division 1(c) of the Court of Appeals’ first decision in this case (229 Ga. App. 593) was erroneous on its merits and the Court of Appeals was free to reject it.

STATEMENT OF INTEREST OF AMICUS CURIAE.

The Georgia Trial Lawyers Association is an association comprised of members of the State Bar of Georgia which is committed to the preservation of the jury system. The Association, through its Amicus Curiae Committee, frequently submits briefs in favor of or in opposition to positions taken in the courts on a variety of issues.

ARGUMENT AND CITATION OF AUTHORITY

I. A PLAINTIFF/INSURED IN A FRAUD OR RICO ACTION MAY RECOVER FROM THE DEFENDANT/INSURER FOR ITS CONCEALMENT AND NON-DISCLOSURE OF CRITICAL FACTS.

This brief challenges the logic of division 1(c) of the court of appeals’ first decision in this case. In that division, the court of appeals assumed the existence of a viable RICO claim based on mail and wire fraud by defendant Security Life to sell insurance illegally. Id. at 601, 494 S.E. 2d at 395. It reasoned, however, that the mail and wire fraud violations could not have been the proximate cause of the plaintiff’s damages unless “he relied to his detriment on misrepresentations made in furtherance of that scheme” (quoting Pelletier v. Zweifel, 921 F.2d 1465, 1499-1500 (11th Cir. 1991)). Because the defendant made no affirmative “representations” about the legitimacy of the policy or the trust directly to the plaintiff, the court of appeals concluded that he could not have relied to his detriment on any misrepresentations about those matters. This reasoning effectively immunizes perpetrators of those classes of fraud based on concealment and non-disclosure. Thus, this amicus urges the Court to reject division 1(c) of the Court of Appeals’ original decision and affirm the Court of Appeals’ last decision vacating it.

Falsely marketing an insurance policy as a “major medical group” policy, when in most respects -- especially in pricing -- it is a substandard, individual policy, is fraudulent as a matter of law. O.C.G.A. §§ 33-6-4(b)(1) and 33-6-4(b)(12)(C). The use of mails and wires to market and deliver such policies constitutes mail and wire fraud. See United States v. Sokolow, 91 F.3d 396 (3d Cir. 1996); United States v. Sylvanus, 192 F.2d 96 (7th Cir. 1951); Interagency, Inc. v. Danco Financial Corporation, 203 Ga. App. 418-427, 417 S.E. 2d 46, 54 (1992). Use of the mails and wires to receive premium payments on such policies constitutes mail and wire fraud. See United States v. Maze, 414 U.S. 395 (1974). Each mailing or wiring in transactions with the Clarks was a new and separate predicate racketeering act of mail and wire fraud. United States v. Crockett, 534 F.2d 589, 593 (5th Cir. 1976); United States v. Tony, 598 F.2d 1349 n. 4 (5th Cir. 1979).

This amicus assumes that the scheme as a whole meets the definition of racketeering activity under O.C.G.A. §16-14-3(9), since the Court reversed division 1(a) of the court of appeals’ prior opinion directing a verdict on grounds that it did not. Clark v. Security Life Ins. Co., 270 Ga. 165, 168 (3), 509 S.E. 2d 602, 605 (1998). The transcript apparently shows that some 8,000 Georgians were persuaded to purchase this insurance, believing it was group major medical insurance with lower rates, while in reality it was individual insurance with substandard benefits, with deceptively low rates that would be raised illegally at regular intervals using unlawful renewal rating methods. These Georgians received policies by mail which did not disclose this critical fact and were encouraged to mail or wire their premiums in return.

The issue of concern to this amicus is that all of these Georgians appear to have been targets and victims of an insurance mail and wire fraud scheme. Yet, under the incorrect logic of division 1(c), none of the victimized Georgians could have relied upon the defendant’s false representation that they were getting low cost “major medical group insurance.” This result would be the same regardless of whether the misrepresentation was made (1) by affirmative statements made by the defendants’ agents’ sales presentations using marketing materials mailed to them for use in selling the insurance, or (2) by omitting disclosures of material facts necessary to prevent defendant’s statements from being misleading and deceptive.

Under the court of appeals’ reasoning, the concealment and non-disclosure of critical information about a policy, or any other sort of product, cannot constitute a mail fraud or wire fraud under RICO because the purchaser can never rely to his detriment on material information the seller has withheld from him in order to deceive him. This argument has been repeatedly rejected in other RICO actions and is inconsistent with Georgia’s common law fraud jurisprudence. “[C]oncealment of a material fact, . . . done in a manner to deceive or mislead,” constitutes actionable fraud. O.C.G.A. § 51-6-2.

A. MAIL FRAUD BY CONCEALMENT AND NON-DISCLOSURE OF CRITICAL FACTS IS ACTIONABLE UNDER RICO.

Mail fraud is committed whenever a person devises a scheme or artifice to defraud or to obtain money or property by false pretenses, representations or promises, and causes the mails to be used in its execution. The use of the mails need not be an essential element of the scheme. Pereira v. United States, 347 U.S. 1, 8 (1954); Interagency, Inc. v. Danco Financial Corporation, 203 Ga. App. 418, 427, 417 S.E. 2d 46,55 (1992). It is not necessary that the mailing or wiring be sent to the victim of the fraud. United States v. Johnson, 700 F.2d 163 (5th Cir. 1983). It is not necessary to prove that the defendant himself did any mailing or wiring, so long as it is shown that he acted with knowledge that the use of the mails or wires would follow in the ordinary course of business, or where such use could be reasonably foreseen, even though not actually intended. Bank of America National Trust and Savings Association v. Touche Ross & Co., 782 F.2d 966, 971 (11th Cir. 1986); United States v. Smith, 934 F.2d 272, 274 (11th Cir. 1991). All that is necessary is that the scheme be reasonably calculated to deceive persons of ordinary prudence and comprehension and that the mail or interstate wires be used in its execution. United States v. Brien, 617 F.2d 299, 311 (1st Cir. 1980); Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1415, (3rd Cir.), cert. denied, 501 U.S. 1222 (1991); United States v. Frick, 588 F.2d 531, 536 (5th Cir. 1979); Silverman v. United States, 213 F.2d 405 (5th Cir. 1954); Blachly v. United States, 380 F.2d 665 (5th Cir. 1967).

The Eleventh Circuit has rejected the contention that there must be an affirmative misrepresentation in order to sustain a mail fraud conviction. It explained:

Fraud, for purposes of a mail fraud conviction, may be proved through the defendant's non-action or non-disclosure of material facts intended to create a false and fraudulent representation.

United States v. O’Malley, 707 F.2d 1240, 1247 (11th Cir. 1983). “Under the mail and wire fraud statutes it is just as unlawful to speak 'half truths,' or to omit to state facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading.” United States v. Townley, 665 F.2d 579, 585 (5th Cir.), cert. denied, 456 U.S. 1010 (1982); United States v. O’Malley, 707 F.2d 1240, 1247 (11th Cir. 1983); United States v. Sawyer, 799 F.2d 1494, 1502 (11th Cir. 1986), cert. denied, Leavitt v. United States, 479 U.S. 1069 (1987). Thus, deceitful statements, half-truths, or the knowing concealment and non-disclosure of material facts with intent to create a fraudulent representation are all actionable under the mail and wire fraud statutes and will support a conviction.

This amicus does not urge the opposite error, that a plaintiff need show no reliance on anything done by the defendant or that a plaintiff may recover simply because the defendant deceived someone other than the plaintiff. This amicus urges the correct rule is that there must be some material fact falsely represented to the plaintiff or some material fact deceitfully concealed from the plaintiff, and the mails and wires must have been used to further the scheme to defraud. Where the plaintiff proves he would not have entered into the transaction if the true facts the defendant concealed had been disclosed to him, he has satisfied the RICO proximate cause requirement. Pelletier v. Zweifel, 912 F.2d 1465, 1499-1510 (11th Cir. 1991); Brandenburg v. Seidel, 859 F.2d 1179, 1181 (4th Cir. 1988).

Under federal law, a victim of mail fraud may rely upon the false pretense created by the defendant that a contract is of greater value than it really is. It is sufficient if the plaintiff proves the defendant induced him to part with his money by leading him to believe that he was receiving something superior to or worth more than what he was sold:

We concur in the view of the government. The court, we think, construed the statute, and misapprehended its import. Mere puffing, indeed, might not be within its meaning (of this, however, no opinion need be expressed); that is, the mere exaggeration of the qualities which the article has; but when a proposed seller goes beyond that, assigns to the article qualities which it does not possess, does not simply magnify in opinion the advantages which it has, but invents advantages and falsely asserts their existence, he transcends the limits of 'puffing' and engages in false representations and pretenses. An article alone is not necessarily the inducement and compensation for its purchase. It is in the use to which it may be put, the purpose it may serve; and there is deception and fraud when the article is not of the character or kind represented and hence does not serve the purpose. And when the pretenses or representations or promises which execute the deception and fraud are false, they become the scheme or artifice which the statute denounces.

United States v. New South Farm & Home Co., 241 U.S. 64 (1916).

The court of appeals acknowledged that the evidence shows that the defendant did not tell the plaintiffs the whole truth about the policy and the trust and that the plaintiffs would not have bought the policy if the true facts had been disclosed. This evidence supports the jury’s verdict finding the plaintiffs relied on the defendant’s representations and non-disclosures of material facts. Pelletier v. Zweifel, 912 F.2d at 506-07. Since a verdict for the defendant was not demanded on the issue of proximate cause, the verdict for the plaintiff should not be disturbed on appeal, and division 1(c) was properly vacated. O.C.G.A. § 9-11-50(a).

B. UNDER GEORGIA COMMON LAW, NON-DISCLOSURES AND CONCEALMENTS INTENDED TO DECEIVE CONSTITUTE ACTIONABLE FRAUD IF THE PLAINTIFF RELIES ON THEM.

The federal law cited above is consistent with Georgia law of fraud and deceit that authorizes a recovery for deceptive concealment and non-disclosure of critical facts about products or contracts. O.C.G.A. § 51-6-2.

Georgia courts have consistently construed the phrase “false representations” broadly to mean not only assertions of fact made by written or spoken words but also constructive or implied assertions of fact made by conduct, tokens, signs, symbols, concealment of part of the truth, and even by total and misleading silence. Ricks v. State, 8 Ga. App. 449, 453-55, 69 S.E.2d 576, 578, (1910); Sapp v. ABC Credit, 243 Ga. 151, 157, 253 S.E.2d 82-83 (1979); Wood v. Cincinnati Safe & Lock Co., 96 Ga. 120, 123, 22 S.E. 909, 910 (1895); King v. Towns, 102 Ga. App. 895, 900, 118 S.E.2d 121, 126 (1960). Hence, the courts have recognized that fraud does not require proof of an affirmative misrepresentation. Parks v. Multimedia Technologies, Inc., 239 Ga. App. 282, 290-91, 520 S.E.2d 517, 525-26 (1999); See Southern v. Floyd, 89 Ga. App. 602, 80 S.E.2d 490 (1954); Davis v. Hopkins, 50 Ga. App. 654, 179 S.E.2d 490 (1934). Logically, in such cases, fraud does not require proof of reliance upon a specific affirmative misrepresentation.

The law treats concealment or non-disclosure of a material fact as an affirmative representation that the material fact does not exist. Restatement (Second) of Torts §§ 550 and 551. A “misrepresentation” is “not only words spoken or written but also any other conduct that amounts to an assertion not in accordance with the truth. Thus words or conduct asserting the existence of a fact constitute a misrepresentation if the fact does not exist.” Restatement (Second) of Torts § 525, comment b. Furthermore, fraudulent misrepresentations include half-truths as well as outright false statements:

[A] representation stating the truth so far as it goes but which the maker knows or believes to be materially misleading because of his failure to state additional or qualifying matter is a fraudulent misrepresentation.

Restatement (Second) of Torts § 529.

Whether or not a partial disclosure of facts is a fraudulent misrepresentation depends upon whether the person making the statement knows or believes that the undisclosed facts might affect the recipient’s conduct in the transaction at hand. It is immaterial that the defendant believes that the undisclosed facts would not affect the value of the bargain which he is offering. The recipient is entitled to know the undisclosed facts and to form his own opinion of their effect.

Id., comment b

A plaintiff may recover in fraud where the defendant fails to disclose a reason for the plaintiff not to rely upon the defendant’s assertions. See Smith v. Ross, 255 Ga. 193, 336 S.E.2d 39 (1985) (broker failed to disclose to purchaser that he was married to seller, leading purchaser to rely upon broker’s false statements about payments to be assumed under first and second mortgages); Southern Cellular Telecom, Inc. v. Banks, 208 Ga. App. 286, 287-88, 431 S.E.2d 115, 118-19 (1993) (president of company failed to disclose to employee that he had arranged to sell employee’s interest in company to third party at 18 times net earnings when he persuaded her to sign agreement giving company right to buy back her interest at 1.5 times net earnings).

A purchaser may likewise rely upon the general description of an article or service in the absence of needful disclosures that would give a complete, truthful impression. Preiser v. Jim Letts Oldsmobile, Inc., 160 Ga. App. 658, 661, 228 S.E.2d 219, 222 (1981) (sale of Oldsmobile without disclosing that it had Chevrolet engine; manufacturer’s efforts to publicize this fact before sale do not demonstrate as matter of law that purchaser was lacking in diligence or could discover concealment); Rivers v. BMW of North America, Inc., 214 Ga. App. 880, 883-84, 449 S.E.2d 337, 340-41 (1994) (sale of car as “new” without disclosing prior significant damage or use); Woodall v. Orkin Exterminating Co., 175 Ga. App. 83, 85, 332 S.E.2d 173, 175 (1985) (home owner could rely upon appearance that exterminator was treating entire house in absence of disclosure of more limited treatment).

Sufficient reliance has been found in “passive concealment” cases where the purchaser did not know of, and in the exercise of ordinary care would not have discovered, latent building construction defects. Worthey v. Holmes, 249 Ga. 104, 105, 287 S.E.2d 9, 10 (1982). In such cases:

[W]hen the defects in the property were of such a nature that the buyer could not discover them through the exercise of due diligence, the burden was on the seller to disclose the seriousness of the problems of which he was aware, provided that the seller knew the buyer was acting under a misapprehension as to facts which would be important to the buyer in making his decision. Though [buyer] did not discover the concealed defects in the [property], that does not demonstrate that he was not properly diligent; it means that the burden was on the [seller] to tell him about the [property’s] hidden defects.

Holman v. Ruesken, 246 Ga. 557, 558, 272 S. E.2d 292, 293-94 (1980) (seller liable for telling his maintenance man not to disclose whole truth about condition of property).

The failure to disclose facts necessary to make statements not misleading, in light of circumstances under which they were made, is fraud, and it is for the jury to say whether or not the plaintiff reasonably relied on the non-existence of those material facts. Akins v. Couch, 271 Ga. 276, 278, 518 S.E.2d 674, 676 (1999) (jury question as to whether plaintiff relied on fraudulent non-disclosures). As this Court has held:

The evidence introduced by the buyer at trial made out a jury question on each element of fraud and by its verdict the jury resolves each of those questions in favor of the buyer. Consequently, this case cannot be resolved favorably to the seller as a matter of law.

Brown v. Techdata Corp., 238 Ga. 622, 625, 234 S.E.2d 787, 790-91 (1977).

For these reasons, this Court should reject the argument of division 1(c) of the court of appeals’ original decision that summarily denied the plaintiff’s fraud claims upon a showing that he was not aware of certain misrepresentations made to third parties.

C. THE PUBLIC POLICY OF THIS STATE AS EXPRESSED BY THE GENERAL ASSEMBLY IN THE RICO STATUTE MUST BE VINDICATED.

There is no more important public issue in modern society than access to adequate health care. Health insurance is a necessity, not a luxury. Price competition in the insurance industry is fierce, leaving claims payments as the only variable insurers can manipulate to increase their profits. Far too often, health insurers maximize their profits by using pretextual rescissions or denials to avoid claims they should pay, particularly when those claims reveal that significant other claims will be forthcoming. Many times the amount in controversy is not significant enough to justify litigation economically because attorneys’ fees and litigation expenses can easily exceed the amount of the claim itself. Consumers are left with an inadequate remedy or no remedy at all. Insurance companies know this fact and often force insureds to choose between accepting a pretextual denial of benefits or engaging in expensive and protracted litigation they cannot afford. These insurance companies knowingly and willfully “play the odds” that most insureds will choose not to retain a lawyer and incur the expense of a lawsuit. Most of the time, insurers win this bet.

Insurance fraud is a two-way street. It is wrong for insureds to misrepresent or fail to disclose material facts in their applications for insurance or claims submissions. But it is equally wrong for an insurance company to defraud its insureds using false pretenses to rescind coverage or deny legitimate claims. When insurance companies use the mails and interstate wires to deny consumers’ health insurance benefits dishonestly, they commit mail and wire fraud, and violate RICO. O.C.G.A. §16-14-3(9)(xxix); 18 U.S.C. §§ 1341, 1343, and 1961; Humana, Inc. v. Forsyth, 525 U.S. 299 (1999). RICO’s treble damage remedy and litigation cost shifting provisions level the playing field to give injured insurance consumers a meaningful remedy and provide a strong disincentive against dishonest rescission and claims practices.

RICO furthers public policy by providing the recovery the General Assembly determined is the deterrent necessary to eradicate racketeering activity such as mail and wire fraud and prevent it from infecting and undermining the legitimate economy. Dee v. Sweet, 268 Ga. 346, 349, 489 S.E.2d 823, 825 (1997). This Court held that an insurance fraud scheme can be prosecuted as a RICO case if the scheme, as a whole, meets the definition of racketeering activity. Clark v. Security Life Ins. Co., 270 Ga. 165, 167, 509 S.E.2d 602, 604 (1998). But for RICO to be a meaningful deterrent to insurance mail and wire fraud schemes, plaintiffs who prove their case must be allowed to recover RICO damages when juries award them. Otherwise, this Court’s holding in this case that insurance fraud schemes meeting the definition of racketeering activity can be prosecuted as RICO claims is just hollow dictum, and RICO remains an empty threat.

Here, according to the court of appeals’ opinions, the evidence shows that the plaintiffs acted responsibly by securing for themselves what the defendant deceitfully led them to believe was lawful group major medical insurance protection at a reasonable price. Acting in reasonable reliance on the defendant’s agent’s representations that he had delivered to them a valid group major medical insurance certificate issued pursuant to the insureds’ truthful application, the plaintiffs allowed their existing health insurance to lapse. The defendant admitted its agent engaged in an insurance fraud scheme and committed numerous racketeering acts, including several forgeries and numerous mail and wire fraud and theft violations, and that his racketeering activity proximately caused the plaintiffs’ harm. This Court held the defendant recklessly tolerated these acts and, therefore, is vicariously liable for them under RICO. Id. There was some evidence from which the jury could reasonably conclude that the defendant engaged in an insurance fraud scheme which as a whole met the definition of racketeering activity under O.C.G.A. §16-14-3(9), and the plaintiffs suffered harm as a proximate result of racketeering acts committed by the defendant or its agent. In order to vindicate the public policy expressed by the RICO statute, the plaintiff should recover in cases like this.

CONCLUSION

The public believes, as it should, that once the jury speaks, its verdict should be upheld unless it is clearly erroneous. O.C.G.A. § 9-12-4. According to the evidence recited in the appellate opinions, this verdict is not clearly erroneous. As this Court said in reversing the court of appeals’ first opinion in this case, second-guessing the jury “is an inappropriate role for an appellate court.” Id. at 167, n 7, 509 S.E.2d at 604. For the foregoing reasons, the judgments of the court of appeals and the trial court should be affirmed.

Respectfully submitted, this ___ day of April, 2000.

GEORGIA TRIAL LAWYERS ASSOCIATION, INC. as Amicus Curiae

Billy Ned Jones, President
Charles M. Cork, III
Charles A. Mathis, Jr.
Joel O. Wooten