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Mahan v. Charles W. Chan Insurance Agency, Inc.

California Court of Appeals, First District, Fourth Division

June 2, 2017

FREDERICK MAHAN et al., Plaintiffs and Appellants,
CHARLES W. CHAN INSURANCE AGENCY, INC. et al., Defendants and Respondents.

         Alameda County No. RG15765392 Superior Court Hon. Stephen Kaus Trial Judge.

          Majors & Fox and Frank J. Fox; Law Offices of Mary A. Lehman and Mary A. Lehman for Plaintiffs and Appellants.

          David M. Zeff, Samuel G. Ware, and Sara B. Allman for Defendants and Respondents Charles W. Chan Insurance Agency, Inc., Chung Wing Chan, Jr. and Omar Kaddoura.

          Murphy, Pearson, Bradley & Feeney, John H. Feeney, Adam F. Sloustcher; D'Amato Law Corporation and Adam M. Koss for Defendants and Respondents Cung Thai and American Brokerage Network.

          Streeter, J.

         In this appeal we consider whether two plaintiffs, 86-year-old Frederick Mahan (Fred) and his 79-year-old wife Martha Mahan (Martha)[1] have stated a viable claim under the Elder Abuse and Dependent Adult Civil Protection Act (the Elder Abuse Act or the Act)[2] against Charles W. Chan (Chan), the Charles W. Chan Insurance Agency, Inc. (the Chan Agency), Omar Kaddoura (Kaddoura), Cung Thai (Thai), and the American Brokerage Network (ABN) (collectively the Respondents), all of whom provided life insurance advisory services to them.

         The facts, as alleged, begin in the mid-1990s when, long before any of the Respondents were involved, the Mahans purchased two life insurance policies, naming their children as beneficiaries. Together, these two policies provided death benefits of approximately $1, 000, 000, at an annual premium cost of $14, 000. As part of the Mahans' estate plan, the policies were held by a revocable living trust (the Children's Trust or the Trust), of which their daughter, Maureen Grainger, was trustee. The Mahans made enough money available to the Trust, in advance, so that it would be self-sustaining, with no need for additional cash infusions from them for ongoing premium costs.

         More than two decades later, in 2013, when the events triggering this action began, Fred, then at the end of his career as a lawyer, was suffering from confusion and cognitive decline; Martha, who had turned overall control of the couple's affairs over to Fred under a power of attorney, was in an even more precarious state of health, having been diagnosed in 2012 with Alzheimer's disease. Seizing on this situation, the Respondents allegedly carried out an elaborate scheme that involved arranging the surrender of one of the life insurance policies and the replacement of the other with a policy providing more limited coverage, at massively increased cost. The premiums for the new coverage, spread over the term it was to be in force, amounted to some $800, 000, forcing the Mahans to feed cash into the Trust to sustain it and, in effect, consuming most of their intended $1, 000, 000 gift in transaction costs, including $100, 000 in commissions to the Respondents.

         The Mahans and Maureen (acting for the Trust) sued. Separate demurrers to the first amended complaint (FAC) were filed by Chan, the Chan Agency and Kaddoura (collectively the Chan Defendants) and by Thai and ABN (the Thai Defendants). The focal point of both demurrers was the Mahans' first cause of action, pleaded under the Elder Abuse Act. The thrust of the Respondents' attack was that the Children's Trust owns and has always owned the life insurance policies at issue here, and that all of the commissions paid to the Respondents were paid by or on behalf of the Trust. Whatever money the Mahans paid into the Trust to sustain it, the Respondents argued, was paid voluntarily for the benefit of their children, after the alleged scheme was over. According to the Respondents, the only proper plaintiff is the Children's Trust, which does not have an Elder Abuse Act claim “because [it] is not 65 years old.”

         Embracing this line of argument, the trial court sustained both demurrers, ruling that the Mahans had not alleged any “depriv[ation]” of “property” owned by them within the meaning of section 15610.30. The court also sustained the demurrers as to the Mahans' remaining causes of action, the second (for negligence), third (for breach of fiduciary duty), fourth (for fraud) and fifth (for violation of Business and Professions Code section 17200), applying in substance the same reasoning-the FAC failed to allege that the Mahans rather than the Children's Trust, suffered harm. Since neither of the demurrers attacked the Trust's right to pursue the second, third, fourth and fifth causes of action, the court's ruling left those claims intact, with the Trust remaining as the sole plaintiff in the action. The court invited the Mahans to amend to allege harm to themselves directly, but they elected to stand on the allegations of the FAC, as originally stated. Judgment was then entered dismissing the Mahans' claims with prejudice, and this appeal followed.

         We now reverse and remand.

         I. BACKGROUND

         We review a trial court's ruling on demurrer de novo (California Apartment Assn. v. City of Fremont (2002) 97 Cal.App.4th 693, 699), giving “the complaint a reasonable interpretation, reading it as a whole and viewing its parts in context. [Citations.] We deem to be true all material facts properly pled. [Citation.] We must also accept as true those facts that may be implied or inferred from those expressly alleged.' ” (Balikov v. Southern Cal. Gas Co. (2001) 94 Cal.App.4th 816, 819; see Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167, 170.) The primary issue here is whether the Mahans have stated legally cognizable harm to themselves. Accepting the allegations in the FAC to be true, as we must at this stage-whether those allegations can be proved is another matter-we conclude that they have done so.

         The 49-page FAC, to be sure, is not particularly reader-friendly. It begins with some 35 pages of dense background narrative, set forth in 87 numbered paragraphs, bereft of subheadings or clear organizing principles. These undifferentiated background allegations are then incorporated, wholesale, into each cause of action. Because of the FAC's meandering style, the trial court observed it is difficult to discern the materiality of its many allegations, and as a result, if the Mahans chose to amend, the court ordered them to file something more focused and concise. We sympathize with that reaction, having waded through the document ourselves, but in the end we believe the Mahans' core allegations are set forth in reasonably coherent fashion.[3] Beyond the capsule summary provided above, we set forth the relevant highlights, as follows.

         A. Background: The Children's Trust

         In the mid-1990s the Mahans “paid an estate planning attorney to create an estate plan” in which the Children's Trust was a critical component. The Trust “was created to hold the insurance policies in the approximate amount of $1 million for the children's future benefit, until after both of the Mahans had passed away. In implementing their estate plan, the Mahans... made the... Children's Trust sustainable, i.e. they made enough cash available within the... Trust to pay the annual premiums for many years to come. This gave the Mahans peace of mind knowing that there would be $1 million for their children upon their passing.” For tax reasons, all assets held by the Trust had to be, and are, indisputably owned by Maureen as the trustee and a beneficiary of the Trust.[4]

         B. The Alleged Scheme

         1. The Parties' First Meetings (January-March 2013)

         Sometime in January or February 2013, the Chan Defendants assisted Fred in finding casualty and earthquake insurance for the Mahans' home, and in doing so “succeeded in winning Fred's trust and confidence [by] convincing him of their insurance expertise and that they had the Mahans' best interests at heart.” After finishing this project, the Chan Defendants, with the assistance of the Thai Defendants, “turned their focus to the Mahans' existing life insurance [policies], offering to review and, if appropriate, fine tune the life insurance component of the Mahans' estate plan.” Early in their dealings with Fred, the Respondents “discovered” the Mahans' respective cognitive issues and proceeded to exploit the situation and betray their trust, driven by “an avaricious pursuit of a six-figure life insurance commission.”[5]

         The Respondents also learned that the Children's Trust held two second-to-die joint life policies which the Mahans “had purchased many years earlier and which had accumulated substantial cash value.”[6] One policy, from Reassure America (the Reassure America Policy), providing death benefits of $600, 000, had a planned annual premium of $6, 000; the other was from Sun Life of Canada (the Sun Life Policy), providing a death benefit of $540, 000, with an annual planned premium of $8, 000. Maureen, a beneficiary of both policies, owned the Reassure America Policy; the Trust owned the Sun Life Policy. The linchpin of the Respondents' scheme was the false representation to Fred that “he could use the cash value in the existing policies to get substantial additional coverage while keeping the annual premium costs at $14, 000.”

         Once the Respondents convinced Fred of their ability to obtain more coverage without any increase in premium cost, they embarked on a course of conduct in which they manipulated the Trust by dealing almost exclusively with Fred, cutting Maureen out of the loop, and relying on their ability to get Maureen to “sign off” on transactional steps presented to her as having her father's approval. The Respondents knew of “Maureen's reliance upon her father's guidance” and exploited that trust and deference. They “went out of their way to accelerate and pressure Maureen's actions and limit her access to information, often providing her with only signature pages or blank forms to sign, and always having Fred Mahan sign first in order to signal his approval and recommendation.”

         2. The First Wave of Life Insurance Applications (March-June 2013)

         In March 2013, the Respondents “prepar[ed] and submit[ted] applications for life insurance on [both Mahans] to both Life Insurance Company of the Southwest... and Lincoln Benefit Life Insurance Company.” Both applications were “either presented... in a way which deprived the Mahans of a meaningful opportunity to review them, or... simply [given to]... the Mahans [to] sign... before they were filled out.” [7] “Had Fred been given a chance to review the Southwest and Lincoln Benefit applications before they were submitted, he... would have discovered that, instead of ‘leveraging' the cash value in the Reassure America Policy and the Sun Life Policy, as Chan and Kaddoura and represented, Defendants were actually planning on replacing both policies.”

         In this first wave of applications, the Respondents went to great lengths to conceal the ownership of the life insurance they were seeking, which allowed them to obscure the fact they were planning a replacement of coverage, not simply the purchase of additional coverage. In five applications submitted in May and July 2013, the Respondents “concealed either one existing policy or the other, ” listing the Mahans, not Maureen, as the owners. All of the applications the Respondents submitted between March and May 2013 were eventually denied, with each of the insurers citing Martha's cognitive disorder and “abnormal lab[]” results for Fred as the reason for the denial.

         In June 2013, having failed in their first series of attempts to arrange replacement coverage for both existing policies, the Respondents took a different tack. By that point, it was clear to them that Martha was uninsurable due to her Alzheimer's disease diagnosis, so they decided to apply for a new policy insuring only Fred. This change in course would later turn out to have significant consequences. Among other things, it created the prospect of a sharp escalation in cost, for in seeking single-life coverage the “the premiums on a... policy insuring only Fred Mahan would be higher than the premiums on a joint-life policy insuring both of the Mahans.” It also fundamentally undermined any pretense that “additional” insurance could be obtained without additional premium cost. The Respondents pressed ahead anyway. Motivated by their own self-interest and “determined to earn a six-figure commission, ” the Respondents “proceeded to prepare and submit more life insurance applications.”

         3. The Purchase of the Transamerica Policy (July-August 2013)

         Because obtaining term insurance of any kind, given Fred's age-then 82-was going to be enormously expensive, the Respondents developed a strategy to leave the Sun Life Policy in place, while arranging to have the Trust borrow against its cash surrender value. By raising cash through a loan against the Sun Life Policy, the Trust could then pay the high initial payment that would be required to place the insurance. For a purchase of term life insurance structured in this way, the Respondents submitted two applications in July 2013, one to Transamerica, and one to American General. At that point, they still had not yet discussed anything about what they were doing with Maureen. And as they had done with the prior, unsuccessful applications, the Respondents had Fred sign blank or incomplete applications before Respondents themselves completed and submitted them.

         “When Defendants steered [the Mahans and the Trust] into funding the initial premium on the Transamerica Policy by borrowing against the Sun Life Policy, they failed to disclose... the fact that there would be an additional cost for the loan [because]... an annual payment of the loan interest [would have to be made] or that unpaid interest would be deducted from the cash value and reduce the death benefit. A loan against the Sun Life Policy would [be] a short-term loan because it would reduce the net cash surrender value to under $235, 000.00 within a year. Defendants had the Sun Life Policy Statement of Value and knew, but did not disclose, that borrowing funds from that policy without additional funding would jeopardize the policy by putting it in danger of lapsing.”

         In seeking to place this new coverage, the Respondents' gamesmanship concerning policy ownership continued. The Notice Regarding Replacement accompanying the Transamerica application stated that Fred was “the ‘Contract Owner' for the Sun Life Policy when, in fact, [the Respondents] knew the policy was owned by the [Children's Trust].” On both the Transamerica application and on the American General application, the Respondents “pretend[ed] to replace the Sun Life Policy when in fact they were going to replace the Reassure America Policy and borrow against the Sun Life Policy.” There was also no indication in either application that Martha was one of the insureds. Had the Respondents identified Martha as an insured or listed Reassure America as the policy being replaced, “they would have jeopardized their scheme” by triggering a deeper inquiry by the insurance companies into what was going on.

         The Transamerica application, which is attached as an exhibit to the FAC, was given to Fred in blank, with an “X” encircled next to several places on it where he was expected to sign. “Only after Fred Mahan signed those forms did Defendants complete and submit them to Transamerica.” Among the documents submitted with the Transamerica application were forms entitled “Absolute Assignment to Effect Internal Revenue Code Section 1035 Exchange and Rollover, ” and a “Notice Regarding Replacement [:] Replacing Your Life Insurance or Annuity[].” These forms were left blank. In submitting the application, the Respondents, as life insurance experts, “knew that replacing the joint-life Sun Life Policy (or the joint-life Reassure America Policy) with the single-life Transamerica Policy did not qualify as an IRS Section 1035 Tax-Free Exchange, thereby exposing the cash surrender value of the Reassure America [P]olicy to income taxes.”[8] “Notwithstanding their knowledge that they were purporting to surrender a joint-life policy for a single-life policy, Defendants prepared, presented and had Fred Mahan sign... a Transamerica illustration which still assumed a legally impossible 1035 [E]xchange.”

         Ultimately, the Transamerica application was successful, resulting in the issuance of a new term life policy (the Transamerica Policy) in September 2013 covering Fred, providing death benefits of $1, 174, 100 for an initial payment of $251, 303.63[9] and an annual premium thereafter of $101, 500, terminating on Fred's 91st birthday. When the Transamerica Policy issued, so focused were the Respondents on making sure that they were paid the $100, 000 commission they were due that they “failed to deliver” the policy as issued and neglected to pass along crucial pricing information from Transamerica. In issuing the coverage, it turned out, Transamerica indicated that, to defray the high initial payment-which Respondents had already arranged to fund by the surrender of the Reassure America Policy-Fred had the option of paying a lower upfront premium and paying a higher interest rate. The availability of this option showed it was unnecessary to surrender the Reassure America Policy, but neither Fred nor Maureen was advised of it.

         Summing up the workings of this alleged scheme up to its culmination upon issuance of the Transamerica Policy, the FAC alleges that the “Defendants completed the sale of the Transamerica [P]olicy through a parade of... wrongful acts, errors and omissions [, ]... includ[ing], ... forging signatures, failing to provide [the Mahans and the Trust]... complete copies of the documents they had signed, concealing (or otherwise negligently failing to disclose) the true... economics of the Transamerica transaction, concealing (or otherwise negligently failing to disclose) the tax consequences of surrendering the Reassure America Policy, concealing (or otherwise negligently failing to disclose) material facts about the loan being taken against the Sun Life ...

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