Brakke v. Econ. Concepts, Inc., G045846

• Court: California Court of Appeals
• Writing for the Court: RYLAARSDAM
• Citation: 213 Cal.App.4th 761,153 Cal.Rptr.3d 1
• Parties: James G. BRAKKE, Individually and as Trustee, etc., et al., Plaintiffs and Appellants, v. ECONOMIC CONCEPTS, INC. , Defendant and Respondent.
• Docket Number: G045846
• Decision Date: 15 January 2013

?213 Cal.App.4th 761
153 Cal.Rptr.3d 1

James G. BRAKKE, Individually and as Trustee, etc., et al., Plaintiffs and Appellants,
v.
ECONOMIC CONCEPTS, INC. , Defendant and Respondent.

G045846

Court of Appeal, Fourth District, Division 3, California.

Filed January 15, 2013

Affirmed.

See 5 Witkin, Summary of Cal. Law (10th ed. 2005) Torts, § 773.

Appeal from a judgment of the Superior Court of Orange County, Gregory H. Lewis, Judge. Application to appear as counsel pro hac vice. Motion to strike portions of Appellants' Opening Brief. Judgment affirmed. Application granted. Motion denied. (Super. Ct. No. 30–2009–00315313)

Crandall, Wade & Lowe, James L. Crandall and Geoffrey T. Hill, Irvine, for Plaintiffs and Appellants.
Peitragallo Gordon Alfano Bosick & Raspanti, Robert D'Anniballe, Jr.; Lewis Brisbois Bisgaard & Smith, Lisa Willhelm Cooney and Ruben Tarango, San Diego, for Defendant and Respondent.
RYLAARSDAM, J.
OPINION

[213 Cal.App.4th 764]

Plaintiffs James G. Brakke, Matthew F. Schafnitz, Kevin McWilliams, and Charles R. Fosdick are the principals of Dealer Management Group, Inc., a subchapter S corporation. Brakke also served as the trustee of the firm's defined benefit pension plan. Plaintiffs sued defendants American General Life Insurance Company (American General), Economic Concepts, Inc. (ECI), and three other parties. The first amended complaint alleged the defendants persuaded plaintiffs to establish the pension plan by representing contributions to the plan were tax deductible under the Internal Revenue Code. Subsequently, the Internal Revenue Service (IRS) determined the pension plan failed to qualify for favorable tax treatment, resulting in plaintiffs paying back taxes and penalties.

The amended complaint contained causes of action for fraud, negligent misrepresentation, breach of fiduciary duty, negligence, and a violation of California's unfair competition law. American General filed a demurrer in which ECI joined. The trial court sustained the demurrer without leave to amend and dismissed the action as to these parties.

Plaintiffs appealed, but later settled with American General and dismissed the appeal as to it. Arguing they can “allege that the IRS has long criticized many of the ... features that characterized th[eir pension p]lan” and “at the very least, [d]efendants had to have had serious concerns about whether contributions to the [p]lan would be tax deductible,” plaintiffs contend the trial court erred by declining to grant leave to amend the complaint as to ECI. We conclude the trial court properly ruled on the demurrer and affirm the judgment.

Robert J. D'Anniballe, Jr., applied to appear as counsel pro hac vice for ECI. We granted his application. ECI moves to strike material from plaintiffs'

[213 Cal.App.4th 765]

opening brief. This motion is denied. When an appellate brief contains references to matters not supported by the record on appeal, we can simply ignore these references rather than strike them. (Cal. Rules of Court, rule 8.204(e)(2)(C); Connecticut Indemnity Co. v. Superior Court (2000) 23 Cal.4th 807, 813, fn. 2, 98 Cal.Rptr.2d 221, 3 P.3d 868.)

FACTS AND PROCEDURAL BACKGROUND

According to the amended complaint and its attached exhibits, ECI markets and administers pension plans, including plans designed to comply with former section 412(i) of the Internal Revenue Code (former 26 U.S.C. § 412(i), now 26 U.S.C. § 412(e)(3); hereinafter 412(i) plan). In late 2002, ECI's managing agent, Ken Hartstein, contacted plaintiffs about establishing a defined benefit pension plan for Dealer Management Group, Inc. Attached to the amended complaint as exhibit A and incorporated by reference were ECI's 412(i) defined benefit plan marketing materials received by plaintiffs.

The amended complaint alleged Hartstein touted ECI's expertise in developing pension plans, purportedly telling plaintiffs its “412(i) [p]lan was legal and complied with the tax code,” and “annual contributions to their ... [p]lan [in the form of policy premium payments] would be tax deductible.” ECI's marketing materials declared ECI “has secured a letter opinion of ‘more likely than not’ from” a named law firm, and “[a]ll participating employers in the ... [p]lan will receive an individual IRS letter opinion approving the plan.”

Alleging that they relied on Hartstein's representations and similar statements made by agents of the other named defendants, plaintiffs created their defined benefit pension plan trust in 2003. Attached to the amended complaint as exhibit B and incorporated into it by reference is a 2010 agreement between the pension plan and the IRS. According to the agreement, plaintiffs' plan was “designed to be a fully insured plan under ... section 412(i),” and it “received a favorable determination letter dated August 21, 2003 with respect to the language in the [p]lan.” Plaintiffs funded the plan by purchasing a life insurance policy from American General, paid the premiums for the policy, deducted these payments on tax returns in 2004 and 2005, and paid administrative fees to ECI and another defendant.

In 2006, the IRS audited plaintiffs' 412(i) plan. Citing a 2004 revenue ruling, the IRS concluded the plan failed to comply with certain requirements of former section 412(i) and disallowed the 2004 and 2005 deductions. As a result, plaintiffs incurred damages, including costs related to the IRS audit and payment of back taxes and penalties.

[213 Cal.App.4th 766]

Plaintiffs sued ECI and others alleging the statements by Hartstein and other agents were false and defendants “knew them not to be true or had no reasonable ground for believing them to be true.” American General's demurrer, in which ECI joined, argued in part “[p]laintiffs' claims ... fail as a matter of law because they are based on unactionable future predictions of tax law upon which [p]laintiffs could not have justifiably relied.”

The trial court sustained the demurrer without leave to amend and dismissed the action as to these defendants. Citing federal district court decisions dismissing similar lawsuits, the court's minute order explained: “All of the causes of action are based on defendants' alleged misrepresentations made in 2002 and 2003 concerning the tax consequences of the ... [p]lan,” and “[i]t was not until 2004 that the IRS issued [r]evenue [r]ulings and [p]roposed [r]egulations under which the [p]lan was declared unlawful.... Plaintiffs have not shown how they can amend to show that the representations made by the defendants were misrepresentations, or how, even if the representations could be considered ... representations of fact and not mere future predictions, plaintiffs could have reasonably relied on them.”

DISCUSSION

When reviewing a judgment of dismissal based on the sustaining of a demurrer without leave to amend, an appellate court first exercises its independent judgment to determine “whether the complaint states a cause of action as a matter of law. [Citation.]” ( McMahon v. Craig (2009) 176 Cal.App.4th 1502, 1508–1509, 97 Cal.Rptr.3d 555.) “ ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.’ [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.]” ( Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.) If an appellate court concludes the complaint fails to state a cause of action, it must decide “whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff. [Citation.]” ( Ibid. )

While not expressly acknowledged, plaintiffs apparently agree that all of the amended complaint's causes of action are premised on the representations allegedly made by Hartstein for ECI and by the agents of the other

[213 Cal.App.4th 767]

named defendants. Both parties also recognize, “ ‘[t]he necessary elements of fraud are: (1) misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to defraud (i.e., to induce reliance); (4) justifiable reliance; and (5) resulting damage.’ [Citations.]” ( Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1239, 44 Cal.Rptr.2d 352, 900 P.2d 601, fn. omitted.) “ ‘[F]alse representations made recklessly and without regard for their truth in order to induce action by another are the equivalent of misrepresentations knowingly and intentionally uttered.’ [Citation.]” ( Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 974, 64 Cal.Rptr.2d 843, 938 P.2d 903.) The elements at issue here are whether defendant made actionable misrepresentations concerning the favorable tax consequences of the 412(i) plan and, if so, whether plaintiffs reasonably relied on these representations.

This lawsuit arose from the failure of plaintiffs' pension plan to qualify for favorable tax treatment. A 412(i) plan is “an employer-sponsored defined benefit plan that provides retirement and death benefits to its participants.... To qualify as an insurance contract plan under § 412(i), the plan must meet certain requirements listed in the statute, including that the defined benefits provided by the plan must be equal to the benefits provided under each insurance contract at normal retirement age. [Citation.] The plan requires careful design and ‘sophisticated actuarial calculations ... to determine a benefit formula that is consistent with the employer's objectives and budget.’ [Citation.] To create such a plan, an employer establishes a trust to hold the plan's assets, and the trust uses tax-deductible employer contributions to...