J & M Associates Inc. v. Callahan

Decision Date12 November 2010
Docket NumberCivil Action No. 07–0883–CG–C.
PartiesJ & M ASSOCIATES, INC., Plaintiff,v.Mark C. CALLAHAN, d/b/a Callahan Financial Solutions, et. al., Defendants.
CourtU.S. District Court — Southern District of Alabama

OPINION TEXT STARTS HERE

James G. Curenton, Jr., Fairhope, AL, for J & M Associates, Inc.Stephen C. Jackson, Bonnie Branum Monroe, Lee E. Bains, Jr., Michael D. Mulvaney, Maynard, Cooper, and Gale P.C., Birmingham, AL, Edward A. Hosp, Maynard, Cooper & Gale, Montgomery, AL, Charles Baer, U.S. Attorney's Office, Mobile, AL, for Mark C. Callahan, d/b/a Callahan Financial Solutions, et. al.Lalat Pattanaik, W. Hollywood, CA, pro se.Richard O. Kingrea, C. Britton Bonner, Bonner, Landreau, Kingrea, LLC, Foley, AL, for Lalat Pattanaik d/b/a I.P.S. Private Advisors.

ORDER
CALLIE V.S. GRANADE, District Judge.

On December 21, 2007, J & M Associates Inc. (J & M) brought a lawsuit against Mark C. Callahan d/b/a Callahan Financial Solutions, Lalat Pattanaik d/b/a I.P.S. Private Advisors, Brady Richardson d/b/a Richardson Consultants, J. Michael Mangawang, Fredrick A. Romero, and American General Life Insurance Company (“AIG”) alleging breach of contract, negligence, wantonness, fraud, fraudulent concealment, and civil conspiracy relating to J & M's enrollment in a welfare benefit plan that ultimately led to “huge tax liability and penalties.” (Doc. 1). On April 3, 2010, this court entered default against Brady Richardson d/b/a Richardson Consultants, J. Michael Mangawang, and Fredrick A. Romero for failure to plead or otherwise defend the action. (Doc. 47). On June 15, 2010, Mark Callahan d/b/a Callahan Financial Solutions, Lalat Pattanaik d/b/a I.P.S. Private Advisors, and Brady Richardson d/b/a Richardson Consultants were dismissed with prejudice. (Docs. 148, 153, & 154). This matter is now before the court on AIG's amended motion for summary judgment (Doc. 159), J & M's response (Doc. 170), AIG's reply (Doc. 192), and J & M's supplemental brief (Doc. 197).1

FACTS

AIG “is the world's leading international insurance and financial services organization, with a history of more than 80 years in the two largest of its four principal businesses: General Insurance and Life Insurance.” (Doc. 181–1, p. 3). AIG had previously developed a life insurance policy entitled the Platinum Value Master 5 or “VM5.” (Doc. 178–1, pp. 7–8; Doc. 181–1, p. 7). A VM5 policy is “a whole life insurance product” modified for use in certain financial concepts. (Doc. 171–1, Lalat Dep., p. 9). In other words, a VM5 policy “can be purchased with tax-deferred dollars if you choose to purchase it in your qualified retirement plan” and “may be used to provide valuable life insurance protection while absorbing excess funds.” (Doc. 181–1, p. 7). The VM5 policy was developed, in part, for use in “419 plans.” (Doc. 171–3, Lalat Dep., p. 40). As explained by J & M's expert, a plan under Internal Revenue Code § 419A(f)(6) can consist of a trust with a custodian that operates and administers the plan, and the trust can be a tax exempt Voluntary Employers Benefit Association trust under IRS Code § 509(c)(9). (Doc. 180–2, Bass Dep., p. 36–37). Section 419 specifically provides for contributions to welfare benefit plans. ( Id., pp. 37–38). The welfare benefit plan at issue here is a Voluntary Employers Benefit Association plan for California Building Supply Wholesalers and Contractors League (“VEBA Plan”).

There are seven levels of AIG agents. (Doc. 180–1, Childs Dep., pp. 23–25). Levels 1 through 3 are associated with producer contracts, levels 4 through 6 are for general agent contracts, and level 7 is a master general agent contract, the highest level in the hierarchy.( Id.). A master general agent “is one who recruits [agents] in addition to sell [life insurance], if they so choose.” ( Id., p. 3). A master general agent can market an insurance policy, like the VM5 policy, by use of an AIG appointed agent without seeking further approval from AIG. ( Id., pp. 26–28).

Innovative Private Strategies & Insurance Services, Inc. (“Innovative”) has a master general agent contract with AIG. ( Id., p. 22; Doc. 181–2, p. 1). That contract was signed by Laban Pattanaik (“Laban”). (Doc. 181–2, p. 1). Laban is the 100% owner of Innovative and was himself appointed by AIG as a general agent in 2001 and as a Level 7 master general agent in February 2004. (Doc. 170, Lalat Dep., p. 4; Doc. 181–3). Laban is also a 50% owner of a limited liability company named I.P.S. Private Advisors (“IPS”). (Doc. 171–1, Lalat Dep., p. 3; Doc. 173–1, Lalat Dep., p. 29). Innovative, which did not market VEBA or employee benefit plans, would retain the services of IPS to market VEBA plans. (Doc. 171, Lalat Dep., pp. 7–8). Innovative would “informally” retain Lalat Pattanaik (“Lalat”), who is Laban's brother and an employee of IPS, to “market ... concepts for business owners” like VEBA plans. (Doc. 171–1, Lalat Dep., pp. 5–6). Generally, once a client enrolled in a VEBA plan, the life insurance policy was sold to fund that plan and AIG paid commission to Innovative and/or Laban. ( Id., p. 8). From the AIG commission, Innovative paid Lalat a fee and all marketing expenses. ( Id.).

Starting in or around 2001 or 2002, Lalat had discussions with AIG personnel [o]n an ongoing basis ... and extensively” about the financial concepts he marketed. (Doc. 171–1, Lalat Dep., p. 11). Lalat testified that he has spoken with the following people at AIG: Chuck Clark, Royce Imhoff, who was the president of AIG “for some time”, Dennis Roberts, who is the “chief CMO and then chief distribution officer”; Larry O' Brien, who is [o]ne of the top three executives at [AIG]; David Robinson, who is senior counsel to AIG and later head of advance sales in the Affluent and Corporate Markets Group; Walt Rudecki, who was an attorney “counterpart to David”; and Rod Martin, who was the head of AIG “life insurance worldwide.” ( Id., pp. 11–12; Doc. 172–1, Lalat Dep., p. 25; Doc. 178–1, Robinson Dep., p. 10). Lalat, his brothers, and staff also met regularly with Peter Mordin, who is the National Marketing Director for AIG. (Doc. 172–1, Lalat Dep., p. 17; Doc. 182–1, p. 11), and Lalat testified that Peter Mordin and David Robinson were not only aware of and never objected to Lalat's marketing strategy but also they allowed Lalat to use AIG-generated marketing materials and software in his marketing. (Doc. 173–1, Lalat Dep., p. 6–7, 12, 21–23).

Lalat also testified that AIG would request “plan documents, IRS determination letters, historical audits of the programs [he would be marketing], and then on an ongoing basis from time to time they requested certain things” from Lalat and that AIG provided an advisors guide, which included a section on VEBA plans and which “was probably the most significant marketing piece” Lalat used. (Doc. 171–1, Lalat Dep., pp. 17–18 & 25–26). He also testified that AIG has provided him and Innovative with numerous other marketing publications for VEBA plans. (Doc. 172–1, Lalat Dep., p. 19 & 29–30; Doc. 182–1, p. 19). Moreover, he testified that over a ten year period, AIG was associated with or financed all but one of the VEBA plans or employee welfare benefit plans that Lalat had marketed. (Doc. 173–1, Lalat Dep., p. 19). Lastly, Lalat maintained that AIG never objected to or refused to provide funding if the clients were insurable. ( Id., p. 20).

David Robinson has had several different roles with AIG, serving as “senior counsel, tax attorney and a product tax attorney” before he “went into advanced sales, advanced sales counsel.” (Doc. 178–1, Robinson Dep., pp. 2–3). As an advanced sales counsel, he worked “with some of the marketing and business leaders in developing” and worked “with products and assisting agents who were selling insurance to their clients and sophisticated estate planning, tax plans” like the VM5 plan. ( Id., p. 3). Robinson worked under Royce Imhoff, who was the chief executive officer of the independent distribution, and Dennis Roberts, who was the chief distribution officer of the independent distribution. ( Id., pp. 5–6). In or around August 2002 or 2003, after being promoted to counsel in advanced sales, Mr. Robinson was introduced to Lalat by Peter Mordin because Mordin “was introducing [Mr. Robinson] to various agents and agencies because [he] had recently changed positions within the company.” ( Id., pp. 9–12).2 Mr. Mordin had informed Mr. Robinson that the Pattanaiks' firm, IPS, was “in the insurance business selling insurance to upscale, affluent people.” ( Id., p. 13). Mr. Robinson determined that IPS would benefit AIG because AIG “sold insurance” and [t]hey were going to distribute [AIG's] product” since [t]hey were an agent.” ( Id., p. 14). Mr. Robinson thereafter was in communication with Innovative and Lalat about the products they were marketing and selling including the VEBA plan and the VM5 policy and admitted that AIG benefited from IPS selling AIG products. ( Id., pp. 16–19).

The VEBA product which J & M ultimately became a participant in was administered by a company called Sea Nine Associates, Inc. (“Sea Nine”). (Doc. 173–1, Lalat Dep., p. 11). Kenneth Elliott was an employee of Sea Nine and the administrator of the VEBA plan involving J & M. ( Id.). Mr. Elliott served two roles in regards to the VEBA plans: one as “the servicing producer” and the other as “the writing producer”. For those roles, he received a 15% commission. (Doc. 180–1, Childs Dep., pp. 7–8). Lalat testified that AIG was aware that Ken Elliott was involved in the administration of the VEBA plans and that [t]hey had direct communication from time to time with him.” (Doc. 173–1, Lalat Dep., p. 32). Lalat testified that during the time at issue in this case, he did not market any VEBA plans without Innovative or Ken Elliott “having knowledge of it.” (Doc. 173–1, pp. 18–19).

In or around July 2003, Mr. Robinson learned that “the IRS had promulgated...

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