Berry v. Indianapolis Life Ins. Co.
| Decision Date | 19 February 2009 |
| Docket Number | Civil Action No. 3:08-CV-0248-B. |
| Citation | 600 F.Supp.2d 805 |
| Parties | Stephen BERRY, et al., Plaintiffs, v. INDIANAPOLIS LIFE INSURANCE COMPANY, et al., Defendants. |
| Court | U.S. District Court — Northern District of Texas |
Gary Cruciani, Eric D. Madden, Michael P. Fritz, Diamond McCarthy, LLP, Dallas, TX, Steven F. Malouf, David Evans, Jonathan Nockels, Law Offices of Stephen F. Malouf, P.C., Dallas, TX, for Plaintiffs.
James F. Jorden, Jorden Burt, LLP, Washington, DC, Enrique D. Arana, Jorden Burt, LLP, Miami, FL, Jeffrey Tillotson, Edward Jason Dennis, Lynn, Tillotson, Pinker & Cox, LLP, Dallas, TX, J. Michael Vaughan, David M. Skeens, R. Keith Johnston, Walters, Bender, Strobehn & Vaughan, P.C., Kansas City, MO, for Indianapolis Life Ins. Co.
Barry A. Chasnoff, David A. Jones, Akin Gump Strauss Hauer & Feld, LLP, San Antonio, TX, for Hartford Life And Annuity Ins. Co.
James R. Carroll, Kurt WM. Hemr, Skadden, Arps, Slate, Meagher & Flom, LLP, Boston, MA, Michael L. Davis, Skadden, Arps, Slate, Meagher & Flom, LLP, Wilmington, DE, for Pacific Life Ins. Co.
Lee E. Bains, Jr., Stephen C. Jackson, Michael D. Mulvaney, Maynard, Cooper & Gale, P.C., Birmingham, AL, David T. McDowell, Bracewell & Guiliani, Houston, TX, Amy B. Boyea, Bracewell & Guiliani, Dallas, TX, for American General Life Ins. Co.
Having considered Defendant Indianapolis Life Insurance Company's ("Indianapolis Life") Motion to Dismiss and Brief in Support (doc. # 47), Plaintiffs' Consolidated Response, Indianapolis Life's Reply, and all arguments in support and opposition, the Court GRANTS the Motion as set forth herein.
The Court takes its factual account from Plaintiffs' First Amended Complaint filed May 23, 2008. Plaintiffs in this matter are generally individual professionals, such as doctors, dentists, and construction company owners, and companies they operate. (Compl. ¶¶ 5-38). Plaintiffs' claims concern certain defined benefit plans, funded by life insurance policies, ostensibly designed and marketed as plans under Section 412(i) of the Internal Revenue Code. (Compl. ¶ 1). Plaintiffs allege that the plans they set up and funded with life insurance policies were actually tax shelters that Defendants knew or should have known would be scrutinized by the IRS and deemed abusive and illegal. (Compl. ¶¶ 59-60). Plaintiffs further allege that four insurance companies, two consultant companies, one individual consultant, and a law firm conspired to market these plans and to sell the life insurance policies used to fund them by making fraudulent or negligent misrepresentations about the tax benefits of the plans and without disclosing any of the risk that the IRS would deem the plans illegal.1 (Compl. ¶¶ 59, 73-74).
In September 1999, the law firm of Bryan Cave, LLP issued a legal opinion that the life insurance policy issued by Indianapolis Life "more likely than not ... can meet the requirements of section 412(i) of the Code" when used as "the funding vehicle" for the defined benefit plans being developed by the Consultant Defendants. (Compl. ¶ 70). In December 1999, Indianapolis Life received "explicit warnings regarding the tax risks and problems associated with" the use of their life insurance policies in funding defined benefit plans from an expert in the pension industry. (Compl. ¶ 72). In the early 2000's the IRS began to scrutinize certain defined benefit plans under section 412(i), giving speeches warning that the IRS intended to take steps to prevent the misuse of insurance products in 412(i) plans. (Compl. ¶ 195). The IRS focused on insurance policies designed to have low cash surrender values and high premiums for a fixed number of years as well as the sale of those policies at artificially suppressed prices. (Id.). In January 2003, Department of Treasury and IRS officials gave a speech at a conference indicating that the IRS intended to give high priority to examining insurance funded defined benefit plans. (Compl. ¶ 196). Defendant Indianapolis Life provided a summary of that speech on a website for its agents. (Compl. ¶ 197). Indianapolis Life and the other Defendants are also alleged to have known about the IRS' scrutiny and intentions to examine the plans at least as early as December 2002. (Id.).
In February 2004, the IRS issued a press release, two revenue rulings, and proposed regulations regarding abusive tax shelters "involving specially designed life insurance policies in retirement plans, section `412(i) plans.'" (Compl. ¶ 201). The IRS's proposed regulations, finalized in August 2005, indicated that the issuance of life insurance policies greatly in excess of the permissible death benefit under a 412(i) plan is a "listed transaction" that is an abusive tax shelter. (Compl. ¶¶ 200-201). The IRS stated that a plan holding such policies cannot be a 412(i) plan. (Compl. ¶ 201). In a 2004 revenue ruling, the IRS indicated that funding a 412(i) plan with a different type of insurance policy for highly compensated employees compared with other employees will result in disqualification of the plan. (Compl. ¶ 202). In 2005, the IRS began a nationwide audit directed at 412(i) plans and has commenced or is likely to commence audits of Plaintiffs. (Compl. ¶ 203).
Thirteen of the named Plaintiffs asserting claims against Indianapolis Life allege that they purchased life insurance policies from that company. (Compl. ¶¶ 147-162). Two of the Plaintiffs who allegedly purchased policies from Indianapolis Life are Arizona residents-Stephen Berry and Fader Higher LLC (collectively, "Berry"). (Compl. ¶¶ 5-6). Two of the Plaintiffs who allegedly purchased policies from Indianapolis Life are Utah residents—Dr. Robert P. Young and Rocky Mountain Dermatology, Inc. (collectively "Young"). (Compl. ¶¶ 12-13). Four of the Plaintiffs who allegedly purchased policies from Indianapolis Life are California residents— Tyrone Seils, DP Search, Inc. (collectively "Seils"), Richard Sarmiento, and Richard Sarmiento and Leilani, a Sole Proprietorship (collectively "Sarmiento"). (Compl. ¶¶ 14-15, 31-32). Two of the Plaintiffs who allegedly purchased policies from Indianapolis Life are Texas residents—Dr. Hodan Rabile and Rabile Family Dentistry (collectively "Rabile"). (Compl. ¶¶ 19-20). Three of the Plaintiffs who allegedly purchased policies from Indianapolis Life are Illinois residents—David Hallman, Lynn Hallman, and Accessibility Unlimited, Inc. (collectively "Hallman") (all thirteen Plaintiffs listed by name, collectively "Indianapolis Life Plaintiffs"). (Compl. ¶¶ 28-30). The background of two of the sets of Indianapolis Life Plaintiffs' claims is substantively identical.
In early 2002, Indianapolis Life agent David L. West approached Young regarding establishing a defined benefit plan funded by Indianapolis Life insurance policies in compliance with section 412(i) of the Internal Revenue Code.2 (Compl. ¶ 83). Mr. West discussed the plan with Young throughout 2002, including around January 20, 2002, and recommended that the plan be funded in a particular manner with particular insurance policies.3 (Compl. ¶ 83-84). Mr. West represented that the plan would provide retirement benefits to Dr. Young and Rocky Mountain Dermatology's employees as well as federal income tax deductions for Rocky Mountain Dermatology, which was to pay the premiums on the policies used to fund the plan.4 (Compl. ¶ 85). Mr. West also promised that Young would have large tax-free returns from the plan as he proposed to fund it.5 (Compl. ¶ 87).
Mssrs. West and Flannery also made several identical representations upon which Young and Rabile relied in entering into their respective defined benefit plans including:
1. The life insurance policies were appropriate for use in funding the plan as a qualified 412(i) plan;
2. The life insurance policies provided a permissible death benefit under the plan;
3. The premiums to be paid for the policies qualified as federal income tax deductions; and
4. The plan and the insurance policies used to fund it complied with all federal tax laws and regulations.
(Compl. ¶¶ 86, 102). Relatedly, Indianapolis Life's agents did not disclose (1) the risks of the investment activity, (2) the potentially abusive nature of the program (including operation of the surrender charge), or (3) the IRS' refusal to recognize the purported tax benefits of that type of program. (Compl. ¶¶ 87, 103).
The background of the other four sets of Indianapolis Life Plaintiffs' claims is substantively identical, and largely identical to the facts alleged with respect to Young and Rabile. In September 2000, Indianapolis Life agent Kenneth Hartstein approached Berry regarding establishing a defined benefit plan funded by Indianapolis Life insurance policies in compliance with section 412(i) of the Internal Revenue Code.6 (Compl. ¶ 75). Mr. Hartstein discussed the plan with Berry throughout 2001, including around March 1, 2001 and June 25, 2001, and recommended that the plan be funded in a particular manner with particular insurance policies.7 (Compl ¶ 75-76). Mr. Hartstein represented that the plan would provide retirement benefits to Mr. Berry and Fader Higher's employees as well as federal income tax deductions for Fader Higher, which was to pay the premiums on the policies used to fund the plan.8 (Compl. ¶ 77). Mr. Hartstein also promised that Berry would have large tax-free returns from the plan as he proposed to fund it.9 (Compl. ¶ 79).
The various Indianapolis Life agents who brokered policies for Berry, Hallman, Seils, and Sarmiento made the same specific representations to those Plaintiffs as were made to Young and Rabile. (Compl. ¶¶ 78, 94, 110, 118). However, five additional representations were made to Berry, Hallman, Seils, and Sarmiento, namely:
1. That their defined benefit plans would be "a fully insured qualified plan under Section 412...
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