The opinion of the court was delivered by: Hon. Jeffrey T. Miller United States District Judge
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS THE CONSOLIDATED AND AMENDED CLASS ACTION COMPLAINT
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.
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.
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.
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).
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[.]
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 (1999). McCarran-Ferguson was Congress's response to United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 553 (1944), which held that an insurance company doing business across state lines engaged in interstate commerce. Prior to SouthEastern Underwriters, the Supreme Court "had consistently held that the business of insurance was not commerce." Humana, 525 U.S. at 306 (citing Paul v. Virginia, 8 Wall. 168, 183 (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. Reliance Group Holdings, 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 United Labor Life Ins. Co. v. Piereno, 454 U.S. 119, 129 (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, the Ninth Circuit impliedly rejected Plaintiffs' interpretation of Thacker when it found that fraud in the form of overcharging for premiums on actual policies was "the business of insurance." See Merchants Home, 50 F.3d at 1490 (rejecting proposition that a practice forbidden by law is per se not the business of insurance because "[t]his interpretation of the rule would read the McCarran-Ferguson Act out of existence. Any practice which violated any federal statute would, by definition, not be the 'business of insurance,' resulting in all federal statutes applying to the business of insurance with their 'full rigor.' See [NAACP v. American Family Mut. Ins. Co., 978 F.2d 287 (7th Cir. 1992)]."). Nor is the court persuaded by Plaintiffs' argument that Indeed, this is not a case about the selling and issuance of life insurance to which McCarran-Ferguson would readily apply . . . . If anything, the deferred annuities at issue are complex financial instruments more akin to unregistered securities -- not insurance . . . . Moreover, plaintiffs seek relief from the fraudulent stratagems used by NWL to target and sell improper deferred annuities to seniors.
Oppo. at 15. First, Plaintiffs' argument that the deferred annuities here are not insurance but securities is too far-sweeping. Second, Merchants Home found that the fraudulent stratagems used in that case were "the business of insurance" so long as the three factors-- whether the practice transfers risk, whether the practice is integral to policy relationship, and whether the practice is limited to insurance industry--are satisfied. Merchants Home, 50 F.3d at 1490.
In sum, the court finds that the conduct alleged here amounts to "the business of insurance" for purposes of McCarran-Ferguson. The next issue is whether applying RICO would invalidate, impair, or supersede California's insurance laws.
2. Impairment of State Law
The test for whether application of a federal law would impair state law for purposes of McCarran-Ferguson is as follows:
When federal law does not directly conflict with state regulation, and when application of the federal law would not frustrate any declared state policy or interfere with a State's administrative regime, the McCarran-Ferguson Act does not preclude its application.
Humana, 525 U.S. at 310 (emphasis added). Thus, this court must ascertain California's "declared state policy" and whether applying RICO here would frustrate or interfere with that policy. In Humana, the Supreme Court reasoned that because the Nevada insurance statutes authorize a private right of action for violations of various unfair insurance practices, "we see no frustration of state policy in the RICO litigation at issue here. RICO's private right of action and treble damages provision appears to complement Nevada's statutory and common-law claims for relief." Id. at 313.
Therefore, the Court concluded, McCarran-Ferguson presented no bar to plaintiff's RICO claim. Id. at 314.
The parties dispute the applicability of Humana to this case because Humana did not address whether allowing a RICO claim would impair state policy when the state does not expressly provide a statutory private right of action to enforce its insurance code. Such is the situation in California, and Defendant contends that the absence of such a cause of action under the insurance code means that Plaintiffs' RICO claims fail pursuant to Humana. Courts are divided on whether this "statutory cause of action" distinction is material to the Humana impairment analysis. Compare LaBarre v. Credit Acceptance Corp., 175 F.3d 640, 643 (8th Cir. 1999) (distinction material) with American Chiropractic Ass'n, Inc. v. Trigon Healthcare, Inc., 367 F.3d 212, 232 (4th Cir. 2004) ...