In re Nat. Western Life Ins. Deferred Annuities

Decision Date07 December 2006
Docket NumberNo. 05CV1018JM(LSP).,05CV1018JM(LSP).
PartiesIn re NATIONAL WESTERN LIFE INSURANCE DEFERRED ANNUITIES LITIGATION
CourtU.S. District Court — Southern District of California

Andrew S. Friedman, Elaine Ryan, Bonnett Fairbourn Friedman and Balint, Phoenix, AZ, Stephen Richard Basser, Barrack. Rodos and Bacine, John J. Stoia, Jr., Lerach Coughlin Stoia Geller Rudman and Robbins, San Diego, CA, for Plaintiffs.

Larry Mark Golub, Barger and Wolen, Peter H. Mason, Robert W. Fischer, Jr., Fulbright & Jaworski, Los Angeles, CA, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART DEFEDANT'S MOTION TO DISMISS THE CONSOLIDATED AND AMENDED CLASS ACTION COMPLAINT

MILLER, District Judge.

This putative class action arises out of an alleged scheme to defraud senior citizens into purchasing deferred annuities that are inappropriate for them. The Consolidated and Amended Class Action Complaint ("CAC") asserts the following nine claims: (1) violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq.; (2) financial elder abuse in violation of the California Welfare & Institutions Code; (3) violations of sections 17200 and (4) 17500 of the California Business & Professions Code; (5) breach of fiduciary duty; (6) aiding and abetting breach of fiduciary duty; (7) fraudulent concealment; (8) breach of the duty of good faith and fair dealing; and (9) unjust enrichment and imposition of constructive trust. Defendant National Western Life Insurance Company ("NWL") now moves pursuant to Rule 12(b)(6) to dismiss the RICO, breach of fiduciary duty, and breach of the duty of good faith and fair dealing claims. After considering the parties' papers and oral arguments, the court hereby GRANTS IN PART and DENIES IN PART the motion for the reasons set forth below.

I. BACKGROUND

For purposes of, this motion, the court accepts the well-pled allegations of the CAC as true. Experimental Eng'g, Inc. v. United Technologies Corp., 614 F.2d 1244, 1245 (9th. Cir.1980). At issue is the purchase and sale of deferred annuities to senior citizens. The CAC alleges that:

An annuity is a contract between an annuity owner (or "annuitant") and an insurance company pursuant to which the annuity owner makes an upfront lump-sum payment or a series of payments to the insurance company. The insurance company, in turn, agrees to make payments to the annuity owner over a period of time. With a standard or "immediate" annuity, the annuitant has a right to a stream of income via payments from the insurance company that is, usually guaranteed to last for as long as the annuitant is alive . . . . With a deferred annuity, the annuitant forgoes payment until some point in the future . . . Thus, deferred annuities are very different from immediate annuities and provide a long-term investment vehicle, not an up front income stream.

CAC ¶¶ 17-18.

Moving defendant, NWL, is a Colorado corporation headquartered in Texas. NWL sells deferred annuities on a national basis through a network of sales agent organizations and individual sales agents, including defendants Centre Point Advisors, Inc. ("Centre Point") and Advanced Business Strategies Institute ("ABSI"). Both Centre Point and ABSI have defaulted in this action, and only NWL brings the present motion.

The named plaintiffs are Warren Petry of El Cajon, California; Mr. and Mrs. Peter and Mary Glenane of Vista, California; Mary Sweeney of San Diego County, California; and George Miller of Kingston, Pennsylvania (collectively "Plaintiffs"). Each of the Plaintiffs is at least 68 years old. With the exception of plaintiff Miller, Plaintiffs purchased NWL annuities wholly in California. Plaintiff Miller purchased his NWL annuity in Pennsylvania.

Plaintiffs allege that Defendants have engaged in a scheme to defraud Plaintiffs and other seniors into purchasing deferred annuities that were not appropriate for them. These annuities are inappropriate for Plaintiffs because they would not mature until well after the annuitants' expected life span. Therefore, Plaintiffs will either never receive any payments from their annuity policies, or be forced to access the annuity principal prematurely and incur, substantial surrender charges as a result. Defendants also fail to adequately disclose material information on the risks associated with deferred annuities so that Plaintiffs may make an informed buying decision. Finally, NWL fraudulently manipulates the terms of the annuities after purchase in order to erode Plaintiffs' returns on them.

II. STANDARD OF REVIEW

Rule 12(b)(6) of the Federal Rules of Civil Procedure allows a court to dismiss a complaint for failure to state a claim upon which relief can be granted. Such a dismissal can be based on either the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. See Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988). In applying this standard, the court must treat all factual allegations as true and construe the complaint in the light most favorable to the plaintiff. Experimental Eng'g, 614 F.2d at 1245; see Concha v. London, 62 F.3d 1493, 1500 (9th Cir.1995).

III. RICO

Congress enacted RICO with the specific intent to "thwart the organized criminal invasion and acquisition of legitimate business enterprises and property." Oscar v. University Students Co-operative Ass'n, 965 F.2d 783, 786 (9th Cir.1992). To that end, § 1964(c) provides in relevant part that

Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including reasonable attorney's fee[.]

18 U.S.C. § 1964(c).

The substantive provision of RICO, § 1962, describes the prohibited activities. Plaintiffs here have alleged four RICO claims arising under § 1962(a)-(d), predicating their claims on violations of the federal mail and wire fraud statutes. Defendant argues that the McCarran-Ferguson Act precludes this court from applying RICO in this case. Defendant further argues that even if McCarran-Ferguson does not preclude application of RICO, the CAC fails to adequately allege the elements of a RICO claim. The court now addresses each argument in turn.

A. The McCarran-Ferguson Act

McCarran-Ferguson provides in relevant part,

No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance.

15 U.S.C. § 1012(b). Congress passed McCarran-Ferguson to ensure that federal law would not automatically preempt state insurance laws unless the federal law specifically related to the business of insurance. Humana Inc. v. Forsyth, 525 U.S. 299, 306, 119 S.Ct. 710, 142 L.Ed.2d 753 (1999). McCarran-Ferguson was Congress's response to United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 553, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944), which held that an insurance company doing business across state lines engaged in interstate commerce. Prior to South-Eastern Underwriters, the Supreme Court "had consistently held that the business of insurance was not commerce." Humana, 525 U.S. at 306, 119 S.Ct. 710 (citing Paul v. Virginia, 8 Wall. 168, 183, 19 L.Ed. 357 (1869)).

Thus, McCarran-Ferguson will preclude application of federal law if (1) the federal law does not specifically relate to the business of insurance, (2) defendant's challenged acts constitute "the business of insurance", (3) California has enacted a law or laws regulating defendant's challenged acts, and (4) California law would be invalidated, impaired, or superseded by allowing the California plaintiffs' RICO claims. § 1012(b); Merchants Home Delivery Serv.,Inc. v. Frank B. Hall & Co., Inc., 50 F.3d 1486, 1489 (9th Cir.1995). The parties only dispute whether factors (2) and (4) preclude application of RICO here.

1. "The Business of Insurance"

Plaintiffs contend that the alleged scheme is not the "business of insurance" but rather the "business of fraud." Defendant responds that the Ninth Circuit's decision in Merchants Home, supra, undermines Plaintiffs' contention.

Whether a practice constitutes "the business of insurance" for purposes of McCarran-Ferguson depends, on whether the practice has the effect of transferring or spreading the policyholders' risks; whether the practice is an integral part of the policy relationship between the insurer and the insured; and whether the practice is limited to entities within the insurance industry. Merchants Home, 50 F.3d at 1490 (citing Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129, 102 S.Ct. 3002, 73 L.Ed.2d 647 (1982)).

Applying these factors here, the court finds that the conduct alleged constitutes the business of insurance. The CAC alleges that agents of NWL failed to disclose material information regarding the terms of the annuities to senior citizens so that they may understand the true risks and costs of these products. CAC ¶ 4. This practice has the effect of spreading the policyholder's risk; it just does so on unfavorable terms. Therefore the first factor is satisfied. The fraudulent scheme is an integral part of the policy relationship because it involves the sales practices between the insurer and insured and the terms of the resulting policy. Furthermore, since the selling of annuities is limited to the insurance industry, the third factor is met. Id. ¶ 17.

Relying on Thacker v. New York Life Ins. Co., 796 F.Supp. 1338, 1342 (E.D.Cal. 1992), Plaintiffs argue that. National Western's alleged pattern of fraud does not constitute "the business of insurance" but the "business of fraud." Oppo. at 14-15. In Merchants Home,...

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