Berent v. Kemper Corp., 91-1912

• Decision Date: 31 August 1992
• Docket Number: No. 91-1912,91-1912
• Citation: 973 F.2d 1291
• Parties: RICO Bus.Disp.Guide 8068 David R. BERENT; Robert R. Bonner; Gary F. Jacobs; Janina M. Jacobs; and Joel N. Levine, Plaintiffs-Appellants, v. KEMPER CORPORATION and Federal Kemper Life Assurance Company, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1291

973 F.2d 1291

RICO Bus.Disp.Guide 8068

David R. BERENT; Robert R. Bonner; Gary F. Jacobs; Janina M. Jacobs; and Joel N. Levine, Plaintiffs-Appellants, v. KEMPER CORPORATION and Federal Kemper Life Assurance Company, Defendants-Appellees.

No. 91-1912.

United States Court of Appeals Sixth Circuit.

Argued March 24, 1992.

Decided Aug. 31, 1992.

Charles J. Porter (argued and briefed), Hardig & McConnell, Bloomfield Hills, Mich., James S. Thorburn, Birmingham, Mich., Leonard Lemberg, Richard G. Partrich, Lemberg & Partrich, Southfield, Mich., for plaintiffs-appellants.

Susan Artinian, Dykema & Gossett, Detroit, Mich., Donald E. Egan (argued and briefed), Paul R. Garry, Mary E. Hennessy, Katten, Muchin & Zavis, Chicago, Ill., for defendants-appellees.

Before: NELSON and BOGGS, Circuit Judges; and WELLFORD, Senior Circuit Judge.

DAVID A. NELSON, Circuit Judge.

This is a civil RICO case in which the plaintiffs allege a pattern of fraud in the sale of hundreds of millions of dollars worth of single-premium whole life insurance policies. The defendants are said to have paid interest to the purchasers at inflated rates during the first policy year, while planning to pay at lower rates later. The district court entered summary judgment for the defendants, 780 F.Supp. 431. Finding no error, we shall affirm the judgment.

I

Federal Kemper Life Assurance Company, a wholly owned subsidiary of Kemper Corporation, (collectively, "Kemper") offers a variety of insurance products through a network of independent agents. This suit concerns two such products, "RL-3" and "RL-3SP" single-premium whole life insurance policies.

Since 1984 Kemper has sold literally thousands of RL-3 and RL-3SP policies. Apparently it continues to sell them. The plaintiffs, who seek to represent a class of similarly situated purchasers, bought policies of this type between July of 1984 and February of 1986.

The contracts at issue are insurance policies that have a prominent investment feature. Customers pay a single lump-sum on purchase. The lump-sum payment is greater than the first premium would be if the customer were taking out a policy with premiums payable periodically. The difference between the lump-sum payment and the insurance cost for the first year is used to create a "cash accumulation fund" on which the policyholder earns interest. Every year Kemper deducts from the policyholder's account the cost of insurance for that year. When the policyholder dies, a multiple of the cash accumulation fund is paid out as a death benefit. Kemper's sales brochures explain the policy this way:

"With a single premium of $5,000 or more, you purchase a completely paid up life insurance policy. You never pay another cent. But that's not the end; it is just a beginning. After we deduct the cost to insure your life, the balance of your single premium begins immediately to earn the current interest rate. That balance and accumulated interest is your cash accumulation fund.

Out of your cash accumulation each succeeding year, we will again subtract your cost of insurance; you don't have to worry about billing notices and payment checks. Each year, your cash accumulation account continues to grow."

At the beginning of each policy year, Kemper decides what that year's "current interest rate" will be for cash accumulation funds. Kemper guarantees that the rate will be at least 4 percent (4.5 percent for the RL-3 policy) and that the year's insurance cost will never be as great as the interest earned for that year; a policyholder's cash accumulation fund can never decrease therefore, although there may be years in which it does not grow by much.

Taxes are deferred on the interest earned, which is what makes such policies attractive to many people. (A penalty is incurred if the policy is terminated, which reduces the attractiveness.) The rate at which the cash accumulation fund grows depends, obviously, on the rate of interest paid and the cost charged for insurance. Kemper's RL-3 sales brochure explains it thus:

"Both the cost of insurance and the current interest rate affect your cash accumulation and death benefit. The cost of insurance is fairly predictable; expenses can be tracked and so can mortality experience which, by the way, continues to be very positive. Interest rates are less predictable, especially in an inflationary economy. The interest rates we apply to your policy reflect our own earning experience; that's why it's important with an interest-sensitive policy like RL-3 to know that the company issuing the policy is well-managed, financially sound, and has a solid reputation for prudent financial decisions. We promise you that we will keep our current interest rate competitive with prevailing interest rates throughout the economy.... If the interest rate goes down and the cost of insurance goes up, your cash accumulation slows accordingly; at worst, your death benefit will remain level...." ¹

The plaintiffs contend that the statement "[t]he interest rates we apply to your policy reflect our own earning experience" would cause a reasonable person to believe that there is a fixed relationship between the annual yield on Kemper's own investments and the per annum rates at which it pays interest on cash accumulation funds.

During the period when the plaintiffs bought their policies, Kemper paid interest on new policies at rates of 11.5 or 12 percent per year. The plaintiffs contend that these introductory rates were higher than the returns Kemper was earning on its assets. From 1984 to 1986, Kemper's average investment yield on its own assets is said to have been between 10.62 percent and 11.25 percent per year.

At the beginning of 1987 Kemper announced that as of March 1 of that year it would pay interest of 7 percent on existing policies and 8.25 percent for the first year of new policies issued after that date. Kemper had nonetheless enjoyed a higher average return on its assets in 1986 than it had in 1985. The plaintiffs contend that Kemper engaged in a "bait and switch" fraud, selling single-premium policies by promising high first-year interest rates and then lowering the rates paid in subsequent years notwithstanding increases in its own investment yield.

The plaintiffs filed a complaint in federal court alleging securities fraud, civil RICO violations premised on a pattern of securities fraud, civil RICO violations premised on a pattern of mail and wire fraud, and Michigan common law fraud. Each defendant filed a motion to dismiss under Rule 12(b)(6), Fed.R.Civ.P. The plaintiffs then moved for leave to amend their complaint. Apparently unaware of the motion for leave to amend, the district court granted the motions to dismiss. Later, however, the court granted a motion for post-judgment relief and permitted the plaintiffs to amend their complaint.

The plaintiffs filed an amended complaint in which they attempted to cure some of the defects in the original pleading. Again the defendants moved to dismiss. The district court (Rosen, J., to whom the case had been reassigned) considered various exhibits submitted by the parties and treated the motions to dismiss as motions for summary judgment. The court found that the insurance policies were exempt from the anti-fraud provisions of the federal securities laws and that the complaint failed to plead mail and wire fraud with sufficient particularity. The court also found that as a matter of law the language in the sales brochure informing readers that interest paid on the policies "reflect[s] our own earning experience" was not a misrepresentation. Summary judgment was entered in favor of the defendants on all federal claims, and the pendent common law fraud claim was dismissed without prejudice.

The plaintiffs have perfected a timely appeal. Abandoning their securities fraud claim and the RICO claims predicated thereon, they contend that the district court erred in dismissing those of the RICO claims that were based on mail and wire fraud.

II

The plaintiffs argue as an initial matter that the district court committed reversible error by relying on the vacated opinion and order dismissing the original complaint. The argument is unavailing. Although the district court did quote from the vacated entry, it did so to adopt the first judge's analysis insofar as the earlier opinion was thought to be correct and insofar as the amendments to the complaint did not render the analysis inapplicable. There is no indication that Judge Rosen relied on the earlier opinion as authority. His use of the opinion does not, of itself, require reversal.

The plaintiffs' RICO claims are based on alleged violations of 18 U.S.C. §§ 1962(a) and (c). These sections provide in pertinent part as follows:

"(a) It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity ... to use or invest, directly or indirectly, any part of such income ... in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in ... interstate or foreign commerce.

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(c) It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of...