Zarrella v. Pac. Life Ins. Co.

• Decision Date: 10 November 2010
• Docket Number: Case No. 10–60754–CIV.
• Citation: 755 F.Supp.2d 1218
• 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 1218

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.

Nov. 10, 2010.

Ronald Peter Weil, Ronald Weil PA, Miami, FL, for Plaintiffs.Enrique Daniel Arana, Jorden Burt LLP, Miami, FL, for Defendant.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT PACIFIC LIFE INSURANCE COMPANY'S MOTION TO DISMISS THE COMPLAINT

JAMES I. COHN, District Judge.

THIS CAUSE is before the Court upon Defendant Pacific Life Insurance Company's (“Pacific Life's”) Motion to Dismiss the Complaint and Supporting Memorandum of Law [DE 12] (“Motion to Dismiss”), The Court has considered the Motion to Dismiss, Plaintiffs Larry Zarrella and Zarrella Construction, Inc.'s (“Plaintiffs”) Response [DE 18] (“Response”), Pacific Life's Reply [DE 25] (“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. Mr. Zarrella is the “sole officer, shareholder and member of Zarrella Construction, Inc.” 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. 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.” 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. ¶ 20; 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(i) plan. 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.

Id. ¶ 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.” 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 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. Compl. ¶ 33; see also § 412(i)(3). Plaintiffs allege that the audit resulted in substantial and ongoing fees and expenses. Compl. ¶¶ 32–33.

Based on these facts, Plaintiffs filed their putative nationwide class action Complaint asserting the following claims: Breach of Contract (Count I); Equitable Fraud (Count II); Fraud in the Inducement (Count III); Negligent Misrepresentation (Count IV); Common Law Fraud (Count V): Violation of Florida's Deceptive and Unfair Trade Practices Act § 508.201 et seq. (“FDUTPA”) (Count VI); Unjust Enrichment (Count VII); Negligence (VIII); Negligence Per Se (Count IX); Unlawful Business Acts and Practices in Violation of California Business and Professions Code § 17200 et seq. (“California UCL”) (Count X); Fraudulent Business Acts and Practices in Violation of California UCL § 17200 et seq. (Count XI). On July 1, 2010, Pacific Life filed its Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(8).

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 Complaint for failure to state a claim upon which relief can be granted. Pacific Life contends the entire Complaint should be dismissed for lack of particularity, and that even if the Complaint satisfies the particularity requirements, each claim fails as a matter of law.

A. Particularity Requirements

Pacific Life first argues that the entire Complaint should be dismissed for failure to satisfy the particularity requirements of Federal Rule of Civil Procedure 9(b). Failure to satisfy Rule 9(b) cannot result in dismissal of the entire Complaint, however, as Rule 9(b) only applies to claims based on fraud or mistake. See Fed.R.Civ.P. 9(b). Thus, this section of the Court's analysis will only apply to Plaintiffs' fraud-based claims; Equitable Fraud (Count II); Fraud in the Inducement (Count III); Common Law Fraud (Count V); and Fraudulent Business Acts and Practices in Violation of the California UCL (Count XI).

Rule 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).

Pacific Life maintains that the Complaint does not satisfy Rule 9(b)' s particularity requirements because it does not sufficiently identify where Defendants' statements regarding the supposed benefit of the 412(i) plan...