Berry v. Indianapolis Life Ins. Co.
| Decision Date | 11 March 2009 |
| Docket Number | Civil Action No. 3:08-CV-0248-B. |
| Parties | Stephen BERRY, et al., Plaintiffs, v. INDIANAPOLIS LIFE INSURANCE COMPANY, et al., Defendants. |
| Court | U.S. District Court — Northern District of Texas |
Stephen F. Malouf, David W. Evans, Jonathan Andrew Nockels, The Law Offices of Stephen F. Malouf PC, Brandon Vernon Lewis, Diamond McCarthy LLP, Dallas, TX, for Plaintiffs.
Jeffrey M. Tillotson, Edward Jason Dennis, Lynn Tillotson & Pinker, Michelle A. Reed, Akin Gump Strauss Hauer & Feld, Thomas A. Culpepper, Roshanak Khosravighasemabadi, Thompson Coe Cousins & Irons, Dallas, TX, David M. Skeens, Michael J. Vaughan, Keith R. Johnston, Walters Bender Strohbehn & Vaughan, Kansas City, MO, Enrique D. Arana, Jorden Burt LLP, Miami, FL, James F. Jorden, Stephen H. Goldberg, Jorden Burt LLP, Washington, DC, David A. Jones, Ashley E. Street, Barry Alan Chasnoff, Jessica Spangler Taylor, Akin Gump Strauss Hauer & Feld, San Antonio, TX, Charles W. Schwartz, Celso M. Gonzalez-Falla, Skadden Arps Slate Meagher & Flom, David T. McDowell, Edison McDowell & Hetherington LLP, Houston, TX, James R. Carroll, Kurt WM Hemr, Skadden Arps Slate Meagher & Flom LLP, Boston, MA, Michelle L. Davis, Skadden Arps Slate Meagher & Flom LLP, Midlothian, TX, Amy B. Boyea, Edison McDowell & Hetherington LLP, Arlington, TX, Lee E. Bains, Lorrie L. Hargrove, Michael D. Mulvaney, Stephen C. Jackson, Maynard Cooper & Gale PC, Birmingham, AL, Robert J D'Anniballe, Jr., Pietragallo Gordon Alfano Bosick & Raspanti LLP, Steubenville, OH, for Defendants.
Before the Court is Defendant American General Life Insurance Company's Motion to Dismiss and Brief in Support (doc. # 40, 42), Plaintiffs' Consolidated Response, and American General's Reply. Having considered the motion, response, reply, pleadings and applicable law, for the reasons set forth below, the Court GRANTS the motion.
The Court takes its factual account from Plaintiffs' First Amended Complaint filed May 23, 2008. (Compl., Doc. # 34).1 Plaintiffs in this matter are professionals, such as doctors, dentists, and construction company owners, and companies they operate. (Compl. ¶¶ 5-38). Their 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). They 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. (Compl. ¶¶ 59, 73-74). The four insurance company defendants are Indianapolis Life Insurance Company ("Indianapolis Life"), Hartford Life and Annuity Insurance Company ("Hartford"), Pacific Life Insurance Company ("Pacific Life"), and American General Life Insurance Company ("American General") (collectively, the "Insurance Defendants"). The consultant companies are Defendants ECI Pension Services, LLC and Economic Concepts, Inc., and the individual consultant is Kenneth Hartstein (collectively, the "Consultant Defendants"). The law firm defendant is Bryan Cave, LLP.
As alleged in Plaintiffs' First Amended Complaint, in September 1999, Bryan Cave, LLP issued a legal opinion that the life insurance policy issued by Indianapolis Life or a "substantially similar policy" "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). Thereafter, American General and the other Insurance Defendants 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).
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). Thereafter, Plaintiffs filed suit.
Of the thirty-four (34) Plaintiffs in the Complaint, only ten (10) who assert claims against American General allege that they purchased life insurance policies from American General. (Compl. ¶¶ 163-194). Seven of the ten Plaintiffs who allegedly purchased policies from American General are California residents-Jamie Hughes, Stanton Greene, Valley Vista Mortgage, Inc. (collectively with Hughes and Greene, "Valley Vista"), Douglas A. DeSalvo, Douglas A. DeSalvo Chiropractic, Inc. (collectively "DeSalvo"), Brian E. Kilcourse, and BEK Consulting LP (collectively "BEK") (Compl. ¶¶ 9-11, 33-36). Three of the ten Plaintiffs who allegedly purchased policies from American General are Colorado residents—David George, Deborah George, and Audio Book Services, Inc. (collectively "ABS"). (Compl. ¶¶ 25-27) (all ten Plaintiffs listed by name, collectively "American General Plaintiffs"). The factual background of all of the American General Plaintiffs' claims is substantively identical.
According to the First Amended Complaint, in December 2002, American General agent John Hohman approached BEK regarding establishing a defined benefit plan funded by American General insurance policies in compliance with section 412(i) of the Internal Revenue Code.2 (Compl. ¶ 187). Mr. Hohman discussed the plan with BEK in late 2002 and early 2003, including around December 16, 2002, December 30, 2002, and May 9, 2003, and recommended that the plan be funded in a particular manner with particular insurance policies.3 (Compl. ¶ 187-88). Mr. Hohman represented that the plan would provide retirement benefits to Mr. Kilcourse and BEK Consulting's employees as well as federal income tax deductions for BEK Consulting, which was to pay the premiums on the policies used to fund the plan.4 (Compl. ¶ 189). Mr. Hohman also promised that BEK would have large tax-free returns from the plan as he proposed to fund it.5 (Compl. ¶ 191).
Mssrs. Hohman, Cunning, Thornhill, Trujillo, Kemper, Jenkins, and Ms. Sanders also made several identical representations upon which BEK, Valley Vista, ABS, and DeSalvo allegedly 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. ¶¶ 166, 174, 182, 190). Mssrs. Trujillo and Kemper also represented to ABS that the Consultant Defendants had "secured a letter opinion of `more likely than not' from the international firm of Bryan Cave LLP with respect to the viability of this arrangement." (Compl. ¶ 174). Relatedly, American General's agents did not disclose (1) the risks of the investment activity, (2) the potentially unlawful nature of the program (including operation of the surrender charge), or (3) the IRS's refusal to recognize the purported tax benefits of that type of program. (Compl. ¶¶ 167, 175, 183, 191).
All of the American General Plaintiffs established defined benefit plans and purchased the policies underlying the plans from American General. (Compl. ¶¶ 168, 176, 184, 191). Each of the American General Plaintiffs who are entities paid premiums on those policies and recorded corresponding federal income tax deductions for those payments. (Compl. ¶¶ 168-169,176-177, 184-185, 104-105, 191-192).
American General Plaintiffs assert claims for conspiracy, common law fraud, negligent misrepresentation, violations of California Business and Professions Code section 17500 for false advertising and fraud, violation of the California Consumer Legal Remedies Act, violations of the Texas Insurance Code and the Texas Deceptive Trade Practices Act, and unjust enrichment against American General.6 American...
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