Zarrella v. Pac. Life Ins. Co.

• Decision Date: 29 March 2011
• Docket Number: Case No. 10–60754–CIV.
• Citation: 755 F.Supp.2d 1231
• Parties: Larry ZARRELLA, an individual, Zarrella Construction, Inc., a Florida Corporation, on Behalf of All Others Similarly Situated, Plaintiffs,v.PACIFIC LIFE INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Southern District of Florida

755 F.Supp.2d 1231

Larry ZARRELLA, an individual, Zarrella Construction, Inc., a Florida Corporation, on Behalf of All Others Similarly Situated, Plaintiffs,

v.PACIFIC LIFE INSURANCE COMPANY, Defendant.

Case No. 10–60754–CIV.

United States District Court, S.D. Florida.

March 29, 2011.

Ronald P. Weil, Esq., Law Offices of Ronald Weil, P.A., Miami, FL, for Plaintiffs.Enrique D. Arana, Esq., Todd M. Fuller, Esq., Michael C. Shue, Esq., Jorden Burt LLP, Miami, FL, for Defendant.

ORDER GRANTING DEFENDANT PACIFIC LIFE INSURANCE COMPANY'S MOTION TO DISMISS PLAINTIFFS' AMENDED CLASS ACTION COMPLAINTJAMES I. COHN, District Judge.

THIS CAUSE is before the Court upon Defendant Pacific Life Insurance Company's (“Pacific Life's”) Motion to Dismiss Plaintiffs' Amended Class Action Complaint [DE 39] (“Motion to Dismiss”). The Court has considered the Motion to Dismiss, Plaintiffs Larry Zarrella and Zarrella Construction, Inc.'s (“Plaintiffs' ”) Corrected Response [DE 50] (“Response”), Pacific Life's Reply [DE 52] (“Reply”), and the record in this case, and is otherwise fully advised in the premises.

I. BACKGROUND

On May 10, 2010, Plaintiffs brought this class action against Pacific Life for a variety of claims relating to life insurance policies that Pacific Life sold to Plaintiffs. Complaint [DE 1]. On November 10, 2010, 755 F.Supp.2d 1218, 2010 WL 4663296 (S.D.Fla.2010), the Court granted in part Pacific Life's first motion to dismiss [DE 27]. Thereafter, on December 13, 2010, Plaintiffs filed their Amended Class Action Complaint [DE 34] (“Amended Complaint”).

According to the Amended Complaint, Mr. Zarrella is the “sole officer, shareholder, and member of Zarrella Construction, Inc.” Am. Compl. ¶ 3. Pacific Life is a national life insurance company that provides insurance products for a variety of purposes, including whole life insurance policies that can be used to fund employee benefits plans, such as 412(i) plans. Am. Compl. ¶ 11.

A 412(i) plan is an employer-sponsored defined benefit plan that provides retirement and death benefits to its participants under § 412(i) of the Internal Revenue Code.¹ 26 U.S.C. § 412(i) (2000) (amended as 26 U.S.C. § 412(e)(3) (2006)). 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. § 412(i)(3). The plan requires careful design and “sophisticated actuarial calculations ... to determine a benefit formula that is consistent with the employer's objectives and budget.” Am. Compl. ¶ 8. 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 purchase and maintain life insurance and/or annuity policies for the plans. Id. ¶ 10: see also 26 U.S.C. § 401(a) (2006); 26 C.F.R. § 1.412(i)–1(b)(2)(i) (2006).

In March 2003, Plaintiffs purchased nine individual policies from Pacific Life for use in Zarrella Construction's 412(1) plan. Am. Compl. ¶ 24. Almost one year later, in February of 2004, the Internal Revenue Service (“IRS”) issued two Revenue Rulings declaring certain policies as illegal and abusive tax shelters. Id. ¶ 20; see also Rev. Rul. 2004–20, 2004–1 C.B. 546; Rev. Rul. 2004–21, 2004–1 C.B. 544. The IRS announced that the following five “markers” identify an abusive 412(i) plan:

• The plan is designed for the cash surrender value to be temporarily depressed, so that it is significantly below the premiums paid;

• After a short period, usually five years, the policy is sold to the employee for the amount of the current cash surrender value during the period the cash surrender value is depressed;

• The policy is structured so that the cash surrender value increases significantly after it is transferred to the employee;

• A “springing” cash value gives employers tax deductions for amounts far exceeding what the employee would have recognized in income; and

• The plan assets consist entirely of life insurance policies that provide death benefits far exceeding the death benefits that can be paid to a participant under the retirement plan.

Am. Compl. ¶ 22, Plaintiffs contend not only that their policies were characterized by all five of these markers, but also that Pacific Life “marketed and expressly touted the Policies by highlighting these ‘special’ benefits and/or incentives that—they knew or should have known—violated the IRS Code and presented substantial tax risks to Plaintiffs.” Id. ¶ 26.

In 2005, the IRS began a nationwide audit campaign directed at abusive 412(i) plans. Id. ¶ 32. As part of the audit, the IRS selected Plaintiffs' retirement plan for examination for the year ending on December 31, 2003. Id. On September 7, 2007, the IRS informed Plaintiffs that their plans failed § 412(i)(3), the requirement that the benefits provided by the plan must be equal to the benefits provided under each insurance contract at normal retirement age. Id. ¶ 33; see also § 412(i)(3). Plaintiffs allege that the audit resulted in substantial and ongoing fees and expenses. Am. Compl. ¶¶ 32–33.

Based on these facts, Plaintiffs' Amended Complaint asserts the following claims: Breach of Contract (Count I); Equitable Fraud (Count II); Negligence (III); and Unlawful Business Acts and Practices in Violation of California Business and Professions Code § 17200 et seq. (“California UCL”) (Count IV). On January 2, 2011, Pacific Life filed its Motion to Dismiss the Amended Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6).

II. LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), a motion to dismiss lies for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). In order to state a claim, Federal Rule of Civil Procedure 8(a)(2) requires “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the ‘grounds' of [its] ‘entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.’ ” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 545, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (citations omitted). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, –––U.S. ––––, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955).

At this stage in the litigation, the Court must consider the factual allegations in the Complaint as true, and accept all reasonable inferences therefrom. Jackson v. Okaloosa Cnty., Fla., 21 F.3d 1531, 1534 (11th Cir.1994). Nevertheless, the Court may grant a motion to dismiss when, “on the basis of a dispositive issue of law, no construction of the factual allegations will support the cause of action.” Marshall Cnty. Bd. of Educ. v. Marshall Cnty. Gas Dist., 992 F.2d 1171, 1174 (11th Cir.1993).

III. ANALYSIS

Pacific Life moves to dismiss the Amended Complaint for failure to state a claim upon which relief can be granted. Pacific Life contends that the fraud-based claims (Counts II and IV) should be dismissed for lack of particularity, and that even if the Amended Complaint satisfies the particularity requirements, each claim fails as a matter of law.

A. Particularity Requirements

(Counts II and IV)

Federal Rule of Civil Procedure 9(b) requires that a party alleging fraud or mistake “must state with particularity the circumstances constituting the fraud or mistake.” Fed.R.Civ.P. 9(b). Under Eleventh Circuit precedent, “Rule 9(b) is satisfied if the complaint sets forth (1) precisely what statements were made in what documents or oral representations or what omissions were made, ... (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) [it], ... (3) the content of such statements and the manner in which they misled the plaintiff, and (4) what the defendants obtained as a consequence of the fraud.” Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194, 1202 (11th Cir.2001) (internal quotations and citations omitted). Allegations of date, time, or place satisfy the particularity requirement of Rule 9(b), but alternative means are also available to satisfy the rule. Durham v. Bus. Mgmt. Assocs., 847 F.2d 1505, 1512 (11th Cir.1988); see also Colonial Penn Ins. Co. v. Value Rent–A–Car, Inc., 814 F.Supp. 1084 (S.D.Fla.1992) (finding particularity satisfied when plaintiffs provided general time frame, described scheme in detail, and included specific allegations about related correspondence). The purpose of this heightened pleading requirement is to give the defendant fair notice of the claims brought against it, to protect the defendant from harm to its reputation, and to prevent plaintiffs from filing baseless claims and then attempting to discover unknown wrongs. See Holguin v. Celebrity Cruises, Inc., Nos. 10–20215–CIV, 10–20545–CIV, 10–20546–CIV, 2010 WL 1837808, at *2 (S.D.Fla. May 4, 2010).

In the November 11th Order, the Court explained:

The Complaint fails to identify the time and place of the alleged statements regarding the insurance policies, who made those statements, and what information Pacific Life had or could have had in its possession to indicate that the statements were false when made. Plaintiffs in this case, like the plaintiffs in Berry v. Indianapolis Life Insurance Co., 600 F.Supp.2d 805 (N.D.Tex.2009) (“ Berry I ”), where the court granted dismissal for lack of particularity, “appear to be attempting to use the ultimate rulings and rule making by the IRS in 2004 ..., which they allege resulted in the illegality...