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D. 412(i) Retirement Plan & 419 Welfare Benefit Plan Abusive Tax-Shelter Litigation
There has been much litigation arising out of insureds‘ and their employers‘ participation in defined benefit pension plans intended to meet the requirements of former Section 412(i) of the Internal Revenue Code (the ―Code‖) and welfare benefit plans intended to meet the requirements of Section 419A(f)(6) of the Code (for multiple employer plans) and Section 419(e) of the Code (for single employer plans). In many cases, life insurance policies were the funding vehicle, in whole or in part, for the 412(i) and 419 plans. From approximately 2002-2007, the IRS issued guidance regarding issues related to 412(i) and 419 plans and, since then, the IRS has focused increased scrutiny on the plans, concluding in many cases that the plans did not comply with the relevant Code sections, disallowing deductions taken by the employers and levying harsh penalties. As a result, insureds and their employers have filed lawsuits under various theories against the plan designers and the insurance companies claiming that they were misled regarding the tax benefits of the plans and the compliance of the plans with the Code.
1. Omni Home Fin., Inc. v. Hartford Life & Annuity Ins. Co., 2008 U.S. Dist. LEXIS 35259, 2008 WL 1925248, *5 (S.D. Cal. Apr. 29, 2008) (“Omni I”); Omni Home Fin., Inc. v. Hartford Life & Annuity Ins. Co., 2008 U.S. Dist. LEXIS 85581, 2008 WL 4616796, **3-4 (S.D. Cal. Aug. 1, 2008)(“Omni II”)
In many of the documents used to construct the 412 or 419 plans, the participant agrees that he is not relying on the insurance company‘s representations regarding the validity of the plan or its tax benefits, and the participant represents that he is relying on his own independent tax advisor in deciding to participate in the plan. For instance, in Omni I, the Southern District of California held that a disclosure statement provided to the Plaintiffs precluded claims for fraud and negligent misrepresentation because the plaintiffs could not establish reasonable reliance as a matter of law. Contrary to the language agreed upon in the disclaimer provision, the plaintiffs alleged that Hartford, among others, misrepresented to them the tax consequences of their contributions to a 412(i) plan. After an IRS audit found that the plaintiffs‘ plans did not comply with several requirements for the qualified plans, the plaintiffs filed suit. Despite the fact that the plaintiffs claimed that they did not read the disclaimers they signed, the Omni court held that the receipt of the disclosure statements by plaintiffs precluded a finding of reasonable reliance, and granted summary judgment in favor of Hartford on the plaintiffs‘ claims.
In Omni II, the plaintiffs‘ motion for reconsideration was denied as the court noted that ―the material disclosures were in short documents easily intelligible to plaintiffs, who were reasonably sophisticated businesspeople‖ and furthermore, that such contracts did not violate public policy, nor were they contracts of adhesion as ―it is objectively unreasonable for a sophisticated contracting party to fail to read short, readily comprehensible documents he or she signs.‖ However, the court in Berry v. Indianapolis Life Insurance Co. (discussed in Section II.D.3., supra) denied the insurers motions for summary judgment based on disclosures similar to the disclosures at issue in Omni I and Omni II. Most notably, the court denied summary judgment for the plaintiffs whose claims were governed by Texas law and Wisconsin law. Thus,
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the success of the ―disclaimer of reliance‖ argument may differ may from court to court and will depend on which state‘s law applies.
2. Berry v. Indianapolis Life Ins. Co., 600 F.Supp. 2d 805 (N.D. Tex. 2009)(“Berry I”); Berry v. Indianapolis Life Ins. Co., 638 F.Supp. 2d 732 (N.D. Tex. 2009)(“Berry II”); Berry v. Indianapolis Life Ins. Co., 2010 WL 3422873 (N.D. Tex. Aug. 26, 2010)(“Berry III”)
In this class action lawsuit, the plaintiffs, a nation-wide class consisting of doctors, dentists, and construction company owners, and the companies they operate, filed suit, alleging that the defendants sold life insurance policies to fund defined benefit plans in compliance with section 412(i) of the Internal Revenue Code, but were later deemed abusive tax-shelters by the IRS. Plaintiffs allege that four insurance companies (Indianapolis Life, Hartford, American General, and Pacific Life) knew or should have known that the plans would be scrutinized and found to be illegal by the IRS. Plaintiffs also allege that many of the defendants, including the four insurance companies, conspired to market these plans and made fraudulent or negligent misrepresentations about the tax benefits of these plans without disclosing any risk that the IRS would find the plans to be illegal. Ultimately, many of these claims were dismissed for failure to state a claim for relief. Because the alleged misrepresentations were made prior to the IRS pronouncements calling into question the tax benefits of various plans, they were either not false when made or predictions and opinion that are not actionable.
In Berry I, the court dismissed plaintiffs‘ fraud theory holding that there was no apparent reason why the alleged misrepresentations were false when they were made in 2001 and 2002. The rational behind the court‘s ruling was that the IRS had not made any definitive statement about the legality of the 412(i) plan at the time the plaintiffs enrolled in the plan and purchased life insurance policies to fund the plan. The court noted that the plaintiffs could not use the rulings and rulemakings by the IRS in 2004 and 2005 ―to retroactively demonstrate that representations made by [the insurer‘s] alleged agents in 2001-02 were false when made.‖ Moreover, the court held that, as a matter of law, representations regarding the validity and likely tax treatment of the plaintiffs‘ 412(i) plans were ―forward looking‖ statements or ―opinions‖ as to how the IRS would treat 412(i) plans after plaintiffs funded them with insurance policies. The court found that it was ―inherently unreasonable for any person to rely on a prediction of future IRS enactment, enforcement, or non-enforcement of the law by someone unaffiliated with the federal government.‖ The court concluded that, ―[a]s a matter of law, any representation or prediction by any alleged [insurance company] agent as to how the IRS would treat the 412(i) plans, and the funding thereof, in the future is either an unactionable opinion or was unjustifiably relied upon.‖
Subsequently, the Northern District of Texas allowed the plaintiffs an opportunity to re-plead, and it then reaffirmed its prior ruling and dismissed the Berry plaintiffs‘ fraud-based claims with prejudice. The claims against the other insurance company defendants in Berry have been dismissed for the same reasons but the court has not yet decided whether the plaintiffs will be allowed to re-plead. As of November 2010, the third amended complaint was filed, to which Pacific Life filed a reply. Hartford and Pacific Life filed responses to the synopsis of the third amended complaint.
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3. Zarrella v. Pacific Life Insurance Company, No. 10-60754-CIV, 755 F.Supp.2d 1231 (S.D. Fla. 2011)
In March of 2003, Plaintiffs purchased nine individual policies from Pacific Life for use in Zarrella Construction‘s 412(i) plan. It was not until February of 2004 when the IRS issued a declaration, naming such policies as abusive tax-shelters. Plaintiffs contend that Pacific Life ―marketed and expressly touted the Policies by highlighting these ‗special‘ benefits and/or incentives that – they knew or should have known – violated the IRS Code and presented substantial tax risks to Plaintiffs.‖ On May 10, 2010, Plaintiffs brought a class action against Pacific Life. Following Pacific Life‘s first motion to dismiss being partially granted, Plaintiffs filed their Amended Class Action Complaint in December of 2010. The Plaintiffs asserted the following claims: breach of contract, equitable fraud, negligence, and a violation of California Business and Professions Code § 17200, et seq. Plaintiff‘s alleged that there was a breach of contract ―because the Policies when used to fund 412(i), did not and could not satisfy the requirements of Section 412(i). The court countered by explaining that ―in the written contract, Pacific Life specifically did not guarantee any future tax or legal consequences.‖ Additionally, the court noted that Plaintiff‘s negligence claim failed because they failed to allege the existence of a legal duty.‖
Similarly, the court dismissed the class action fraud allegations against Pacific Life because the plaintiffs failed to explain why the defendants‘ alleged statements were false when made in 2003. The court also noted that fraud must be based on material facts, not a promise or prediction of future events and that the insurance company‘s alleged representations were just ―statements of opinion regarding future events.‖ Thus, once again, Pacific Life‘s 12(b)(6) motion was granted and the amended complaint was dismissed without prejudice on all counts. Accordingly, a second amended complaint was filed by Plaintiff‘s on April 12, 2011. The court has set the trial date for October 24, 2011 and the parties‘ response and reply to Pacific Life‘s motion to dismiss the second amended complaint are before the court.
4. Chau v. Aviva Life and Annuity, No. 3:09-cv-2305-B, 2011 WL 1990446 (N.D. Tex. May 20, 2011)
Doctors and dentists alleged that Indianapolis Life Insurance Company advertised, marketed, and consummated fraudulent business transactions, resulting in damages. Plaintiffs originally filed their complaint in April of 2009 in Washington state court and after Aviva removed the case to federal district court, the MDL Panel ordered the case transferred to the Northern District of Texas. Prior to the case being transferred, Plaintiffs filed their second amended complaint and subsequently, Aviva filed its motion to dismiss Plaintiff‘s second amended complaint on February 5, 2010. Plaintiffs allege that the insurer knew that the IRS had looked askance at the legality of similar tax-shelter arrangements (welfare benefit trusts) and indicated that these arrangements may be deemed abusive tax shelters, yet continued to market its § 419 Plan as a tax-avoidance plan.
Plaintiffs‘ motion for a suggestion of remand to the Judicial Panel of Multidistrict Litigation was filed on March 3, 2011 and was subsequently denied by the district court.
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However, the court noted that plaintiffs may motion again, should there be further developments in the case. Aviva‘s motion to dismiss the second amended complaint was granted in part and denied in part on May 20, 2011. In its motion, Aviva claimed that Plaintiffs‘ common law fraud/negligent misrepresentation claim did not meet the heightened pleading requirements of Rule 9(b), in addition to failing to state a claim, and the court agreed. However, on the breach of contract claim, the court found that under the applicable law governing the contract, plaintiff‘s claim was not due to be dismissed. The court elaborated on its reasoning, noting that allegations concerning oral representations made about the policies, specifically, their ability to obtain substantial tax savings with the 419 Plan. Plaintiffs asserted in their second amended complaint that those representations were false and resulted in ―substantial tax penalties and interest‖ due to an IRS audit. Thus, the court found that such allegations, accepted as true, state a claim for a breach of contract under Washington state law.
D. 412(i) Retirement Plan & 419 Welfare Benefit Plan Abusive Tax-Shelter Litigation
There has been much litigation arising out of insureds‘ and their employers‘ participation in defined benefit pension plans intended to meet the requirements of former Section 412(i) of the Internal Revenue Code (the ―Code‖) and welfare benefit plans intended to meet the requirements of Section 419A(f)(6) of the Code (for multiple employer plans) and Section 419(e) of the Code (for single employer plans). In many cases, life insurance policies were the funding vehicle, in whole or in part, for the 412(i) and 419 plans. From approximately 2002-2007, the IRS issued guidance regarding issues related to 412(i) and 419 plans and, since then, the IRS has focused increased scrutiny on the plans, concluding in many cases that the plans did not comply with the relevant Code sections, disallowing deductions taken by the employers and levying harsh penalties. As a result, insureds and their employers have filed lawsuits under various theories against the plan designers and the insurance companies claiming that they were misled regarding the tax benefits of the plans and the compliance of the plans with the Code.
1. Omni Home Fin., Inc. v. Hartford Life & Annuity Ins. Co., 2008 U.S. Dist. LEXIS 35259, 2008 WL 1925248, *5 (S.D. Cal. Apr. 29, 2008) (“Omni I”); Omni Home Fin., Inc. v. Hartford Life & Annuity Ins. Co., 2008 U.S. Dist. LEXIS 85581, 2008 WL 4616796, **3-4 (S.D. Cal. Aug. 1, 2008)(“Omni II”)
In many of the documents used to construct the 412 or 419 plans, the participant agrees that he is not relying on the insurance company‘s representations regarding the validity of the plan or its tax benefits, and the participant represents that he is relying on his own independent tax advisor in deciding to participate in the plan. For instance, in Omni I, the Southern District of California held that a disclosure statement provided to the Plaintiffs precluded claims for fraud and negligent misrepresentation because the plaintiffs could not establish reasonable reliance as a matter of law. Contrary to the language agreed upon in the disclaimer provision, the plaintiffs alleged that Hartford, among others, misrepresented to them the tax consequences of their contributions to a 412(i) plan. After an IRS audit found that the plaintiffs‘ plans did not comply with several requirements for the qualified plans, the plaintiffs filed suit. Despite the fact that the plaintiffs claimed that they did not read the disclaimers they signed, the Omni court held that the receipt of the disclosure statements by plaintiffs precluded a finding of reasonable reliance, and granted summary judgment in favor of Hartford on the plaintiffs‘ claims.
In Omni II, the plaintiffs‘ motion for reconsideration was denied as the court noted that ―the material disclosures were in short documents easily intelligible to plaintiffs, who were reasonably sophisticated businesspeople‖ and furthermore, that such contracts did not violate public policy, nor were they contracts of adhesion as ―it is objectively unreasonable for a sophisticated contracting party to fail to read short, readily comprehensible documents he or she signs.‖ However, the court in Berry v. Indianapolis Life Insurance Co. (discussed in Section II.D.3., supra) denied the insurers motions for summary judgment based on disclosures similar to the disclosures at issue in Omni I and Omni II. Most notably, the court denied summary judgment for the plaintiffs whose claims were governed by Texas law and Wisconsin law. Thus,
15
the success of the ―disclaimer of reliance‖ argument may differ may from court to court and will depend on which state‘s law applies.
2. Berry v. Indianapolis Life Ins. Co., 600 F.Supp. 2d 805 (N.D. Tex. 2009)(“Berry I”); Berry v. Indianapolis Life Ins. Co., 638 F.Supp. 2d 732 (N.D. Tex. 2009)(“Berry II”); Berry v. Indianapolis Life Ins. Co., 2010 WL 3422873 (N.D. Tex. Aug. 26, 2010)(“Berry III”)
In this class action lawsuit, the plaintiffs, a nation-wide class consisting of doctors, dentists, and construction company owners, and the companies they operate, filed suit, alleging that the defendants sold life insurance policies to fund defined benefit plans in compliance with section 412(i) of the Internal Revenue Code, but were later deemed abusive tax-shelters by the IRS. Plaintiffs allege that four insurance companies (Indianapolis Life, Hartford, American General, and Pacific Life) knew or should have known that the plans would be scrutinized and found to be illegal by the IRS. Plaintiffs also allege that many of the defendants, including the four insurance companies, conspired to market these plans and made fraudulent or negligent misrepresentations about the tax benefits of these plans without disclosing any risk that the IRS would find the plans to be illegal. Ultimately, many of these claims were dismissed for failure to state a claim for relief. Because the alleged misrepresentations were made prior to the IRS pronouncements calling into question the tax benefits of various plans, they were either not false when made or predictions and opinion that are not actionable.
In Berry I, the court dismissed plaintiffs‘ fraud theory holding that there was no apparent reason why the alleged misrepresentations were false when they were made in 2001 and 2002. The rational behind the court‘s ruling was that the IRS had not made any definitive statement about the legality of the 412(i) plan at the time the plaintiffs enrolled in the plan and purchased life insurance policies to fund the plan. The court noted that the plaintiffs could not use the rulings and rulemakings by the IRS in 2004 and 2005 ―to retroactively demonstrate that representations made by [the insurer‘s] alleged agents in 2001-02 were false when made.‖ Moreover, the court held that, as a matter of law, representations regarding the validity and likely tax treatment of the plaintiffs‘ 412(i) plans were ―forward looking‖ statements or ―opinions‖ as to how the IRS would treat 412(i) plans after plaintiffs funded them with insurance policies. The court found that it was ―inherently unreasonable for any person to rely on a prediction of future IRS enactment, enforcement, or non-enforcement of the law by someone unaffiliated with the federal government.‖ The court concluded that, ―[a]s a matter of law, any representation or prediction by any alleged [insurance company] agent as to how the IRS would treat the 412(i) plans, and the funding thereof, in the future is either an unactionable opinion or was unjustifiably relied upon.‖
Subsequently, the Northern District of Texas allowed the plaintiffs an opportunity to re-plead, and it then reaffirmed its prior ruling and dismissed the Berry plaintiffs‘ fraud-based claims with prejudice. The claims against the other insurance company defendants in Berry have been dismissed for the same reasons but the court has not yet decided whether the plaintiffs will be allowed to re-plead. As of November 2010, the third amended complaint was filed, to which Pacific Life filed a reply. Hartford and Pacific Life filed responses to the synopsis of the third amended complaint.
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3. Zarrella v. Pacific Life Insurance Company, No. 10-60754-CIV, 755 F.Supp.2d 1231 (S.D. Fla. 2011)
In March of 2003, Plaintiffs purchased nine individual policies from Pacific Life for use in Zarrella Construction‘s 412(i) plan. It was not until February of 2004 when the IRS issued a declaration, naming such policies as abusive tax-shelters. Plaintiffs contend that Pacific Life ―marketed and expressly touted the Policies by highlighting these ‗special‘ benefits and/or incentives that – they knew or should have known – violated the IRS Code and presented substantial tax risks to Plaintiffs.‖ On May 10, 2010, Plaintiffs brought a class action against Pacific Life. Following Pacific Life‘s first motion to dismiss being partially granted, Plaintiffs filed their Amended Class Action Complaint in December of 2010. The Plaintiffs asserted the following claims: breach of contract, equitable fraud, negligence, and a violation of California Business and Professions Code § 17200, et seq. Plaintiff‘s alleged that there was a breach of contract ―because the Policies when used to fund 412(i), did not and could not satisfy the requirements of Section 412(i). The court countered by explaining that ―in the written contract, Pacific Life specifically did not guarantee any future tax or legal consequences.‖ Additionally, the court noted that Plaintiff‘s negligence claim failed because they failed to allege the existence of a legal duty.‖
Similarly, the court dismissed the class action fraud allegations against Pacific Life because the plaintiffs failed to explain why the defendants‘ alleged statements were false when made in 2003. The court also noted that fraud must be based on material facts, not a promise or prediction of future events and that the insurance company‘s alleged representations were just ―statements of opinion regarding future events.‖ Thus, once again, Pacific Life‘s 12(b)(6) motion was granted and the amended complaint was dismissed without prejudice on all counts. Accordingly, a second amended complaint was filed by Plaintiff‘s on April 12, 2011. The court has set the trial date for October 24, 2011 and the parties‘ response and reply to Pacific Life‘s motion to dismiss the second amended complaint are before the court.
4. Chau v. Aviva Life and Annuity, No. 3:09-cv-2305-B, 2011 WL 1990446 (N.D. Tex. May 20, 2011)
Doctors and dentists alleged that Indianapolis Life Insurance Company advertised, marketed, and consummated fraudulent business transactions, resulting in damages. Plaintiffs originally filed their complaint in April of 2009 in Washington state court and after Aviva removed the case to federal district court, the MDL Panel ordered the case transferred to the Northern District of Texas. Prior to the case being transferred, Plaintiffs filed their second amended complaint and subsequently, Aviva filed its motion to dismiss Plaintiff‘s second amended complaint on February 5, 2010. Plaintiffs allege that the insurer knew that the IRS had looked askance at the legality of similar tax-shelter arrangements (welfare benefit trusts) and indicated that these arrangements may be deemed abusive tax shelters, yet continued to market its § 419 Plan as a tax-avoidance plan.
Plaintiffs‘ motion for a suggestion of remand to the Judicial Panel of Multidistrict Litigation was filed on March 3, 2011 and was subsequently denied by the district court.
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However, the court noted that plaintiffs may motion again, should there be further developments in the case. Aviva‘s motion to dismiss the second amended complaint was granted in part and denied in part on May 20, 2011. In its motion, Aviva claimed that Plaintiffs‘ common law fraud/negligent misrepresentation claim did not meet the heightened pleading requirements of Rule 9(b), in addition to failing to state a claim, and the court agreed. However, on the breach of contract claim, the court found that under the applicable law governing the contract, plaintiff‘s claim was not due to be dismissed. The court elaborated on its reasoning, noting that allegations concerning oral representations made about the policies, specifically, their ability to obtain substantial tax savings with the 419 Plan. Plaintiffs asserted in their second amended complaint that those representations were false and resulted in ―substantial tax penalties and interest‖ due to an IRS audit. Thus, the court found that such allegations, accepted as true, state a claim for a breach of contract under Washington state law.
