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Minnesota Life Insurance v. Brian Michael Philpot

September 27, 2012

MINNESOTA LIFE INSURANCE
COMPANY, PLAINTIFF,
v.
BRIAN MICHAEL PHILPOT, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Barry Ted Moskowitz, Chief Judge United States District Court

ORDER RE MOTIONS TO DISMISS

Pending before the Court are the motions to dismiss the Amended Complaint filed by Defendants Scott Pearlman, Stan Pearlman, and Nissim Najjar (Doc. 42), Capital Funding Associates (Doc. 44), and Alvin Higa, Richard J. Wira, Rene Lacape, Equote, and Richard J. Wira and Yvette S. Wira as co-trustees of the Wira Family Trust (Doc. 46), the motions to dismiss and to strike filed by Samuel Brooks, Sarah Haber, Marketing Partnerships, Inc., Derrick Allen Moore, Brian Michael Philpot, Daniel Volsteadt, James Kenneth Willis, Michael Yolton, and James Kenneth Willis (Doc. 47), Beverly Ann Fletcher (Doc. 67), and Alex Almeida (Doc. 72), and the motion to strike filed by Defendants Scott Pearlman, Stan Pearlman, and Najjar (Doc. 43).

For the reasons set forth herein, the Court DENIES the motion to dismiss filed by Defendants Scott Pearlman, Stan Pearlman, Najjar, and the motions to dismiss and to strike filed by Brooks, Haber, Marketing Partnerships, Inc., Moore, Philpot, Volsteadt, Willis, Yolton, Fletcher, and Almeida. The Court GRANTS IN PART and DENIES IN PART the motions to dismiss filed by Defendants Capital Funding Associates, Higa, Wira, Lacape, Equote, and Richard J. Wira and Yvette S. Wira as co-trustees of the Wira Family Trust. The Court GRANTS the motion to strike filed by Scott Pearlman, Stan Pearlman, and Najjar.

I. BACKGROUND*fn1

This case arises out Plaintiff Minnesota Life Insurance Company's allegations that Defendants perpetrated so-called "wrongful commission schemes."

Plaintiff (or "Minnesota Life") is an insurance company that provides, among other products, term and universal life insurance coverage. Plaintiff sells its products through independent agents, most of whom are affiliated with a brokerage general agency. (AC ¶ 34.) The relationships between Plaintiff and its independent agents, and between Plaintiff and the brokerage general agencies, are governed by written agreements. (Id. ¶¶ 35-39.) Minnesota Life has appended to the Amended Complaint ("AC") copies of these written agreements. (Id. Exs. A and B, respectively.)

Plaintiff compensates its independent sales agents on a commission basis. (Id. ¶ 40.) For each policy sold, the agents typically receive a commission of 80-125 percent of the total first year premium paid by the policyholder. (Id. ¶ 41.) These commissions are nonrecoverable by Plaintiff so long as the policyholders do not surrender the underlying policies and those policies do not otherwise lapse within the first year of issuance. (Id. ¶¶ 41-42.)

In addition to the relatively large sales commissions, other costs incurred by Plaintiff upon the sale of new policies include marketing, underwriting, new business processing, premium taxes, and reinsurance. Since Plaintiff must spend a proportionally large amount at the inception of a new policy, an early lapse or surrender of a policy causes Plaintiff significant financial loss. (Id. ¶ 43.)

The goal of the alleged wrongful commission schemes is for independent agents and brokerage general agencies to maximize their sales commissions. To that end, the agents and agencies persuade third parties to (a) to purchase life insurance policies; and (b) pay the minimum premiums necessary to keep the policies in effect for one year, such that the commissions paid by Plaintiff become vested. To obtain policies for these third parties, the agents and agencies prepare false life insurance applications on their behalf and send the applications to Minnesota Life using instrumentalities of interstate commerce (wire and mail). (Id. ¶¶ 47, 50.)

The agents and agencies induce third parties to participate in these schemes by offering financial incentives, either in the form of "rebates" (a portion of the sales commission that the agent or agency pays to the policyholder) or advances of the insurance premiums due (such that the third parties receive discounted or free short term life insurance in return for their participation). (Id. ¶¶ 46-48.) Where the third parties receive advances on their premiums, the advances are sometimes funded by complicit entities ("funding entities") that issue high-interest loans to cover the cost of the premiums.

In other words, the wrongful commission schemes allow the agents, agencies, third parties, and funding entities, working together, to receive a profit on the margin between the commissions they receive and the amount they spend to keep policies in effect for one year--to the financial detriment of Minnesota Life. The parties perpetrating these schemes act "without any good faith intention . . . that the policies would actually be maintained or that the applicable premiums would be paid, as those policies were designed or as the policies required." (Id. ¶ 47.) Plaintiff alleges that it has paid a sum of over $4,434,375.25 in commissions to all defendants in this case (including non-moving defendants) for policies submitted pursuant to wrongful commission schemes. (Id. ¶ 59)

Plaintiff alleges that the Defendants, all of whom are either sales agents or funding entities, conspired with the other defendants in this action to perpetrate wrongful commission schemes between 2009 and 2011. Specifically, the individual defendants are sales agents. Defendants Capital Funding Associates, Inc., and Richard J. Wira and Yvette S. Wira as co- trustees of the Wira Family Trust (the "Wiras") are alleged funding entities.

Plaintiff has alleged ten causes of action: (1) unfair competition in violation of California Business & Professions Code § 17200, et seq.; (2) breach of contract; (3) breach of the covenant of good faith and fair dealing; (4) fraud; (5) negligence; (6) unjust enrichment; (7) violation of 18 U.S.C. § 1962(c) ("civil RICO") and 1962(d) ("RICO conspiracy"); (8) breach of fiduciary duty; (9) declaratory relief; and (10) accounting.

II. STANDARD

Under Fed. R. Civ. P. 8(a)(2), the plaintiff is required only to set forth a "short and plain statement" of the claim showing that plaintiff is entitled to relief and giving the defendant fair notice of what the claim is and the grounds upon which it rests. Conley v. Gibson, 355 U.S. 41, 47 (1957). A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) should be granted only where a plaintiff's complaint lacks a "cognizable legal theory" or sufficient facts to support a cognizable legal theory. Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988).

When reviewing a motion to dismiss, the allegations of material fact in plaintiff's complaint are taken as true and construed in the light most favorable to the plaintiff. See Parks Sch. of Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). Although detailed factual allegations are not required, factual allegations "must be enough to raise a right to relief above the speculative level." Bell Atlantic v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1965 (2007). "A plaintiff's obligation to prove the 'grounds' of his '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." Id. "[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged--but it has not show[n] that the pleader is entitled to relief." Ashcroft v. Iqbal, --- U.S. ---, 129 S.Ct. 1937, 1950 (2009) (internal quotation marks omitted).

III. DISCUSSION

The Court groups the Defendants' various arguments by the cause of action they address, and addresses each challenged cause of action in turn.

a. Breach of contract

A claim for breach of contract under California law requires the plaintiff to establish four elements: (1) the existence of a contract; (2) plaintiff's performance or excuse for nonperformance of the contract; (3) defendant's breach of the contract; and (4) damages resulting from defendant's breach of the contract. Trovk v. Farmers Group, Inc., 171 Cal. App. 4th 1305, 1352 (4th Dist. 2009). Plaintiff asserts its claim for breach of contract against all defendant insurance sales agents and brokerage general agencies. These defendants raise several challenges to Plaintiff's breach of contract theory.

First, Defendants Brooks, Haber, Marketing Partnerships, Inc., Moore, Philpot, Volsteadt, Willis, Yolton, Fletcher, and Almeida claim that their contracts with Plaintiff never went into effect, because they never signed two copies as required by express language on the contract's signature page. (Doc. 47-1 at 6 (citing AC Ex. B); Doc. 67-1 at 6 (same); Doc. 72-1 at 5-6 (same).) They each support this argument with a declaration swearing that they "signed only one copy of the Broker Sales Contract[.]" (Doc. 47-7; Doc. 67-2; Doc. 72-2.) The contents of these declarations, however, are not the proper subject of judicial notice, and this argument--relying on facts not contained in the AC or in any documents the AC relies on or attaches--is not properly raised in the context of a Rule 12(b)(6) motion. See Arpin v. Santa Clara Valley Transp. Agency, 261 F.3d 912, 925 (9th Cir. 2001) ("[E]vidence outside the complaint . . . should not be considered in ruling on a motion to dismiss.").

Second, Defendants Brooks, Haber, Marketing Partnerships, Inc., Moore, Philpot, Volsteadt, Willis, Yolton, Fletcher, and Almeida, in addition to Defendants Higa, Wira, Lacape, and Equote and Defendants Scott Pearlman, Stan Pearlman, and Nissim Najjar, claim that the practice of rebating portions of sales commissions to policyholders does not constitute a breach of any agreement with Plaintiff. These defendants claim that the documents Plaintiff uses to show its policy against rebating (including Plaintiff's Policies and Procedures manual) either were not effective at the time the parties executed the contracts, or were not properly incorporated by reference into the contracts. These defendants note that the only agreements requiring the signatories to abide by Plaintiff's policies and procedures are the agreements with the brokerage general agencies--agreements to which the sales agent Defendants are not a party. However, the breach of contract claim asserts breaches other than, and in addition to, the failure to abide by Plaintiff's policies and procedures. For example, the contracts with the agents require the agents to "[c]onduct business according to the highest principles of honesty, integrity and pride" (AC ΒΆ ...


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