Life Ins. Co. of Georgia v. Smith

• Decision Date: 17 July 1998
• Citation: 719 So.2d 797
• Parties: LIFE INSURANCE COMPANY OF GEORGIA v. Janelle S. SMITH. LIFE INSURANCE COMPANY OF GEORGIA v. Christina SMITH. LIFE INSURANCE COMPANY OF GEORGIA v. Sheryl VANCHE. LIFE INSURANCE COMPANY OF GEORGIA v. Priscilla DUFFEE. LIFE INSURANCE COMPANY OF GEORGIA v. Sharen L. GREEN. Garry R. WINSETT v. Janelle S. SMITH. Garry R. WINSETT v. Christina SMITH. Garry R. WINSETT v. Sheryl VANCHE. Garry R. WINSETT v. Priscilla DUFFEE. Garry R. WINSETT v. Sharen L. GREEN. 1951773 to 1951777 and 1951795 to 1951799.
• Court: Alabama Supreme Court

Page 797

719 So.2d 797

LIFE INSURANCE COMPANY OF GEORGIA v. Janelle S. SMITH.

LIFE INSURANCE COMPANY OF GEORGIA v. Christina SMITH.

LIFE INSURANCE COMPANY OF GEORGIA v. Sheryl VANCHE.

LIFE INSURANCE COMPANY OF GEORGIA v. Priscilla DUFFEE.

LIFE INSURANCE COMPANY OF GEORGIA v. Sharen L. GREEN.

Garry R. WINSETT v. Janelle S. SMITH.

Garry R. WINSETT v. Christina SMITH.

Garry R. WINSETT v. Sheryl VANCHE.

Garry R. WINSETT v. Priscilla DUFFEE.

Garry R. WINSETT v. Sharen L. GREEN.

1951773 to 1951777 and 1951795 to 1951799.

Supreme Court of Alabama.

July 17, 1998.

Paul A. Howell, Jr., of Pursley, Howell, Lowery & Meeks, Atlanta, GA; and I. David Cherniak and W. Alexander Gray, Jr., of Johnstone, Adams, Bailey, Gordon & Harris, Mobile (withdrew April 7, 1997), and Benjamen T. Rowe and Rebecca D. Parks, Mobile (substituted as counsel April 4, 1997), for appellants Life Insurance Co. of Georgia.

Edward A. Dean and P. Vincent Gaddy of Armbrecht, Jackson, DeMouy, Crowe, Holmes & Reeves, L.L.C., Mobile, for appellant Garry R. Winsett.

Bryan G. Duhe and Eaton G. Barnard of Duhe & Barnard, P.C., Mobile; and Thomas H. Benton, Jr., of McFadden, Lyon & Rouse, L.L.C., Mobile, for appellees.

PER CURIAM.

Life Insurance Company of Georgia and Garry R. Winsett appeal from judgments entered on jury verdicts in five actions commenced by separate plaintiffs, arising out of the sale of insurance policies to those plaintiffs. We reverse and remand.

These consolidated actions arose out of the following general facts: In April 1991, Liberty Church (the "Church") in Fairhope was operating Bay Christian Academy (the "Academy"). The Academy taught children of the ages of kindergarten through middle school. Janelle Smith and Christina Smith, mother and daughter, respectively; Sheryl Vanche; Priscilla Duffee; and Sharen Green (the "plaintiffs") were employees of the Academy.

At that time, Garry Winsett was an agent for Life Insurance Company of Georgia ("Life of Georgia"). With the assistance of Church officials, Winsett conducted a series of meetings with the plaintiffs to discuss establishing a "cafeteria plan," as recognized and defined by Internal Revenue Code ("I.R.C.") § 125 and regulations of the Internal Revenue Service (the "IRS"). During these meetings, the plaintiffs allege, Winsett represented to them that Life of Georgia would enroll them in a plan allowed by IRS regulations whereby a portion of their salary--before the assessment of income and Social Security taxes--would be used to establish and fund for each of them a "savings plan" or a "retirement program." According to Winsett, pre-tax dollars deducted from each plaintiff's regular biweekly paycheck would fund these savings or retirement plans. Winsett also represented that the plans would not actually cost the plaintiffs anything because the money they paid into them would be money that, but for the operation of the plan in compliance with § 125 would be paid in taxes. Some, or all, of the plaintiffs concluded from Winsett's representations that they would have savings or retirement "accounts" and that they would be able to withdraw money from these accounts any time it was needed for a permissible purpose.

At the conclusion of this series of meetings, Winsett sold each of the plaintiffs a universal life insurance policy, which Life of Georgia technically entitles "Supermatic Flex Life" or "SuperFlex." Thus, rather than funding a pure savings or retirement account, the pre-tax dollars deducted from the plaintiffs' paychecks were paid to Life of Georgia for life insurance policies that after a time would build a cash value. Whether, or under what conditions, the plaintiffs ever physically received life insurance policies was a matter of dispute at trial. However, beginning in May 1991, all the plaintiffs paid the cost of the insurance premiums to Life of Georgia through payroll deductions.

Sometime thereafter, the Smiths noticed that their paychecks had a deduction listed under the heading "INS." They asked Winsett to explain the meaning of the INS designation and asked whether they were purchasing life insurance. They say Winsett denied that they were purchasing life insurance. In June 1992, Vanche asked Winsett for a withdrawal of $300 from her "savings account" in order to buy a train ticket to visit her mother in Iowa; she says Winsett told her that regulations prevented her from withdrawing money from the account for several years.

Approximately a year after Green began to have paycheck deductions to Life of Georgia, she received in the mail a notice indicating that her life insurance policy had a zero cash value. In August 1992, Green requested that Life of Georgia refund the money she had paid it, but her requests were denied. The four other plaintiffs also requested refunds from Life of Georgia, and their requests were also denied.

Green filed a complaint against Winsett and Life of Georgia in August 1992, within two years of the alleged misrepresentations. On September 9, 1993, more than two years after the alleged misrepresentations, Vanche, Janelle Smith, Christina Smith, and Duffee filed similar complaints against Winsett and Life of Georgia. Each of the five plaintiffs alleged that Winsett had misrepresented or suppressed the fact that "she was purchasing a life insurance policy" instead of a "retirement plan," and that, in reliance upon the misrepresentations or suppressions, she had "contributed funds, to what she believed was a retirement plan." Each further alleged that Winsett had "intentionally deceived [her] by representing that [he was] selling a tax-free retirement program when in fact [he was] selling insurance." The complaints were all subsequently amended to include claims that Life of Georgia was "guilty of negligently and/or recklessly hiring, training and supervising ... Garry Winsett."

The actions were consolidated for trial and were tried in February 1996. The jury returned general verdicts against Winsett and Life of Georgia, awarding each plaintiff $0 in compensatory damages and $200,000 in punitive damages. Winsett and Life of Georgia appeal from the five judgments entered by the trial court on those verdicts.

Winsett and Life of Georgia contend (1) that the verdicts awarding punitive damages, but $0 compensatory damages, are invalid as a matter of law; (2) that the fraud and negligence claims of four of the five plaintiffs--Vanche, Janelle Smith, Christina Smith, and Duffee--filed more than two years after May 1991, are barred by the statute of limitations; (3) that the trial court erroneously admitted evidence of fraudulent acts by Winsett other than those of which these plaintiffs complain; and (4) that the verdicts were "grossly excessive" and, therefore, violated constitutional due process provisions. Although the defendants challenged the sufficiency of the evidence supporting the plaintiffs' claims, by way of motions for summary judgment and motions for judgment as a matter of law, ¹ the trial court denied those motions and, on appeal, the defendants have not challenged the sufficiency of the evidence supporting the judgments.

I. The Status of the Claim Based on the Plaintiffs' Potential Tax Liability

In their fraud claims the plaintiffs sought compensatory damages, including damages for mental anguish, based on a claim that they had incurred a potential income tax liability; they also claimed compensatory damages based on the fact that they purchased universal life policies when they thought they were purchasing retirement plans. As for the claims based on the alleged potential tax liability, it is uncontroverted that under the I.R.C. a § 125 cafeteria plan may not be used to purchase a benefit that defers the receipt of compensation or that accumulates cash value. I.R.C. § 125(d)(2)(A). Thus, because the Life of Georgia life insurance policies paid for by the plaintiffs through pre-tax payroll deductions accumulated a cash value, the cafeteria plans established for the plaintiffs by Winsett and Life of Georgia were invalid. Accordingly, when the plaintiffs filed federal tax returns for the 1991 and 1992 tax years, they incurred the potential for a tax liability to the IRS should that agency one day attempt to collect additional taxes for those years.

The merit of the plaintiffs' claims based on their potential tax liability was a major issue in the trial court. In its motion for a summary judgment, Life of Georgia argued that an action for damages based on a tax liability does not accrue until the IRS makes a tax assessment, and Life of Georgia contended that no assessment had been made. Before trial, Life of Georgia filed a motion in limine, seeking to exclude the plaintiffs' evidence of an alleged tax liability. However, before trial, Life of Georgia established a trust for the benefit of persons for whom it had established invalid cafeteria plans, in order to guarantee payment of any tax liability those persons might suffer as a result of the invalidity of the plans. The trial court denied Life of Georgia's motion in limine, and during trial it admitted evidence of the plaintiffs' alleged tax liability, on the basis that it was relevant to the plaintiffs' claims for damages for mental anguish. During trial, Life of Georgia argued that because it had established the trust the plaintiffs had suffered no damage.

In System Dynamics Int'l, Inc. v. Boykin, 683 So.2d 419, 421 (Ala.1996), this Court held that in the context of a potential tax liability there is no "completed wrong" until the IRS assesses the taxpayer for taxes and penalties. However, in Jackson v. Secor Bank, 646 So.2d 1377 (Ala.1994), this Court had held that the plaintiff's claim based on potential tax liability accrued when the tax return was filed, under the circumstances of that case. Because the defendants have not raised on appeal the issue of the sufficiency of the evidence to support the plaintiffs' claim arising from the invalidity of...