(Bloomberg) -- Coventry First LLC lost a bid to dismiss racketeering claims brought by a unit of American International Group Inc. in a dispute over the purchase of life insurance policies.
In the life settlement business, policyholders can get cash up front for their insurance, with the buyer collecting the death benefit when the seller passes away.
Lavastone, a unit of AIG, sued Coventry in September accusing its business partner of buying those policies at prices below what it knew the AIG unit would pay, then inducing Lavastone to pay the inflated prices, costing it more than $150 million.
Coventry, based in Fort Washington, Pennsylvania, countersued, accusing the AIG entity of breaking an agreement to buy policies from it exclusively, and said that its losses may exceed $100 million.
A Manhattan federal judge on Monday denied Coventry’s request that he throw out the bulk of Lavastone’s claims, including those alleging racketeering, fraud and breach of implied good faith, in an abbreviated decision, promising a fuller explanation than his three-page ruling “in due course.”
Breach of Contract
While the judge, Jed S. Rakoff, threw out some of Lavastone’s claims, he also rejected Coventry’s allegations that its former partner was in breach of contract.
The secondary market for U.S. life policies emerged in the 1980s when the AIDS epidemic led some patients to sell their insurance policies to pay for treatment. Lavastone now owns about 5,700 life settlements that are expected to pay out net benefits of $18 billion, according to the complaint.
The Lavastone case was filed in Manhattan federal court. Coventry’s case, filed in a state court there, was later transferred to the federal court, where Rakoff has said it will remain.
“We’re pleased that the court pared back some of AIG’s claims,” Coventry Chief Executive Officer Alan Buerger said in a phone interview. He called it “a preliminary procedural ruling,” adding that Rakoff’s decision doesn’t address the merits of the remaining claims.
“Coventry looks forward to development of the factual record demonstrating that those claims are without merit and are, in fact, contrary to AIG’s express agreement and conduct during the course of the relationship,” Buerger said.
Jennifer Hendricks Sullivan, a spokeswoman for New York- based AIG, said the court allowed the vast majority of Lavastone’s claims to proceed, while dismissing completely Coventry’s “retaliatory and baseless suit.”
“We are pleased to be one step closer to holding the Coventry defendants responsible for their massive, multi-year scheme to defraud Lavastone, its agent banks, and others, out of at least $150 million,” she said in an e-mail. “We look forward to trial.”
The case is Lavastone Capital LLC v. Coventry First LLC, 14-cv-7139, U.S. District Court, Southern District of New York (Manhattan). The counter-suit is Coventry First LLC v. Lavastone Capital LLC, 14-cv-7967, U.S. District Court, Southern District of New York (Manhattan).
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