Minnesota Life Insurance Company v. Philpot et al, No. 3:2011cv00812 - Document 101 (S.D. Cal. 2012)

Court Description: ORDER Denying Defendants Scott Pearlman, Stan Pearlman, and Nissim Najjar 42 Motion to Dismiss; Denying Defendants Brooks, Haber, Marketing Partnerships, Inc., Moore, Philpot, Volsteadt, Willis, Yolton, Fletcher, and Almeida 47 67 72 Motions to Dismiss; Granting in part and Denying in part Defendants Capital Funding Associates, Higa, Wira, Lacape, Equote, and Richard J. Wira and Yvette S. Wira as co-trustees of the Wira Family Trust 44 46 Motions to Dismiss; The Court dismisses Pla intiff's claims for declaratory relief and for an accounting against all Defendants; Granting Scott Pearlman, Stan Pearlman, and Nissim Najjar 43 Motion to Strike, and strikes Plaintiff's request for an injunction prohibiting Defendants from perpetrating future wrongful commissions schemes against other insurance companies. All other claims against Defendants remain. No motions for reconsideration shall be permitted. The Defendants shall file an answer by 10/19/2012. Signed by Judge Barry Ted Moskowitz on 9/27/2012. (All non-registered users served via U.S. Mail Service)(rlu)

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Minnesota Life Insurance Company v. Philpot et al Doc. 101 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 MINNESOTA LIFE INSURANCE COMPANY, Case No. 11cv00812 BTM (POR) ORDER RE MOTIONS TO DISMISS 12 Plaintiff, 13 14 15 v. BRIAN MICHAEL PHILPOT, et al., Defendants. 16 Pending before the Court are the motions to dismiss the Amended Complaint filed 17 by Defendants Scott Pearlman, Stan Pearlman, and Nissim Najjar (Doc. 42), Capital Funding 18 Associates (Doc. 44), and Alvin Higa, Richard J. Wira, Rene Lacape, Equote, and Richard 19 J. Wira and Yvette S. Wira as co-trustees of the Wira Family Trust (Doc. 46), the motions 20 to dismiss and to strike filed by Samuel Brooks, Sarah Haber, Marketing Partnerships, Inc., 21 Derrick Allen Moore, Brian Michael Philpot, Daniel Volsteadt, James Kenneth Willis, Michael 22 Yolton, and James Kenneth Willis (Doc. 47), Beverly Ann Fletcher (Doc. 67), and Alex 23 Almeida (Doc. 72), and the motion to strike filed by Defendants Scott Pearlman, Stan 24 Pearlman, and Najjar (Doc. 43). 25 For the reasons set forth herein, the Court DENIES the motion to dismiss filed by 26 Defendants Scott Pearlman, Stan Pearlman, Najjar, and the motions to dismiss and to strike 27 filed by Brooks, Haber, Marketing Partnerships, Inc., Moore, Philpot, Volsteadt, Willis, Yolton, 28 Fletcher, and Almeida. The Court GRANTS IN PART and DENIES IN PART the motions to 1 11cv00812 BTM (POR) Dockets.Justia.com 1 dismiss filed by Defendants Capital Funding Associates, Higa, Wira, Lacape, Equote, and 2 Richard J. Wira and Yvette S. Wira as co-trustees of the Wira Family Trust. The Court 3 GRANTS the motion to strike filed by Scott Pearlman, Stan Pearlman, and Najjar. 4 I. BACKGROUND1 5 6 7 8 This case arises out Plaintiff Minnesota Life Insurance Company’s allegations that Defendants perpetrated so-called “wrongful commission schemes.” 9 Plaintiff (or “Minnesota Life”) is an insurance company that provides, among other 10 products, term and universal life insurance coverage. Plaintiff sells its products through 11 independent agents, most of whom are affiliated with a brokerage general agency. (AC ¶ 12 34.) The relationships between Plaintiff and its independent agents, and between Plaintiff 13 and the brokerage general agencies, are governed by written agreements. (Id. ¶¶ 35-39.) 14 Minnesota Life has appended to the Amended Complaint (“AC”) copies of these written 15 agreements. (Id. Exs. A and B, respectively.) 16 Plaintiff compensates its independent sales agents on a commission basis. (Id. ¶ 40.) 17 For each policy sold, the agents typically receive a commission of 80-125 percent of the total 18 first year premium paid by the policyholder. 19 nonrecoverable by Plaintiff so long as the policyholders do not surrender the underlying 20 policies and those policies do not otherwise lapse within the first year of issuance. (Id. ¶¶ 21 41-42.) (Id. ¶ 41.) These commissions are 22 In addition to the relatively large sales commissions, other costs incurred by Plaintiff 23 upon the sale of new policies include marketing, underwriting, new business processing, 24 premium taxes, and reinsurance. Since Plaintiff must spend a proportionally large amount 25 at the inception of a new policy, an early lapse or surrender of a policy causes Plaintiff 26 significant financial loss. (Id. ¶ 43.) 27 28 1 The facts set forth in this section are taken from the Amended Complaint, and do not represent findings of the Court. 2 11cv00812 BTM (POR) 1 The goal of the alleged wrongful commission schemes is for independent agents and 2 brokerage general agencies to maximize their sales commissions. To that end, the agents 3 and agencies persuade third parties to (a) to purchase life insurance policies; and (b) pay the 4 minimum premiums necessary to keep the policies in effect for one year, such that the 5 commissions paid by Plaintiff become vested. To obtain policies for these third parties, the 6 agents and agencies prepare false life insurance applications on their behalf and send the 7 applications to Minnesota Life using instrumentalities of interstate commerce (wire and mail). 8 (Id. ¶¶ 47, 50.) 9 The agents and agencies induce third parties to participate in these schemes by 10 offering financial incentives, either in the form of “rebates” (a portion of the sales commission 11 that the agent or agency pays to the policyholder) or advances of the insurance premiums 12 due (such that the third parties receive discounted or free short term life insurance in return 13 for their participation). (Id. ¶¶ 46-48.) Where the third parties receive advances on their 14 premiums, the advances are sometimes funded by complicit entities (“funding entities”) that 15 issue high-interest loans to cover the cost of the premiums. 16 In other words, the wrongful commission schemes allow the agents, agencies, third 17 parties, and funding entities, working together, to receive a profit on the margin between the 18 commissions they receive and the amount they spend to keep policies in effect for one year-- 19 to the financial detriment of Minnesota Life. The parties perpetrating these schemes act 20 “without any good faith intention . . . that the policies would actually be maintained or that the 21 applicable premiums would be paid, as those policies were designed or as the policies 22 required.” (Id. ¶ 47.) Plaintiff alleges that it has paid a sum of over $4,434,375.25 in 23 commissions to all defendants in this case (including non-moving defendants) for policies 24 submitted pursuant to wrongful commission schemes. (Id. ¶ 59) 25 Plaintiff alleges that the Defendants, all of whom are either sales agents or funding 26 entities, conspired with the other defendants in this action to perpetrate wrongful commission 27 schemes between 2009 and 2011. Specifically, the individual defendants are sales agents. 28 Defendants Capital Funding Associates, Inc., and Richard J. Wira and Yvette S. Wira as co3 11cv00812 BTM (POR) 1 trustees of the Wira Family Trust (the “Wiras”) are alleged funding entities. 2 Plaintiff has alleged ten causes of action: (1) unfair competition in violation of 3 California Business & Professions Code § 17200, et seq.; (2) breach of contract; (3) breach 4 of the covenant of good faith and fair dealing; (4) fraud; (5) negligence; (6) unjust enrichment; 5 (7) violation of 18 U.S.C. § 1962(c) (“civil RICO”) and 1962(d) (“RICO conspiracy”); (8) 6 breach of fiduciary duty; (9) declaratory relief; and (10) accounting. 7 8 9 II. STANDARD 10 11 Under Fed. R. Civ. P. 8(a)(2), the plaintiff is required only to set forth a “short and plain 12 statement” of the claim showing that plaintiff is entitled to relief and giving the defendant fair 13 notice of what the claim is and the grounds upon which it rests. Conley v. Gibson, 355 U.S. 14 41, 47 (1957). A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) should 15 be granted only where a plaintiff’s complaint lacks a “cognizable legal theory” or sufficient 16 facts to support a cognizable legal theory. Balistreri v. Pacifica Police Dept., 901 F.2d 696, 17 699 (9th Cir. 1988). 18 When reviewing a motion to dismiss, the allegations of material fact in plaintiff’s 19 complaint are taken as true and construed in the light most favorable to the plaintiff. See 20 Parks Sch. of Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). Although detailed 21 factual allegations are not required, factual allegations “must be enough to raise a right to 22 relief above the speculative level.” Bell Atlantic v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 23 1965 (2007). 24 requires more than labels and conclusions, and a formulaic recitation of the elements of a 25 cause of action will not do.” Id. “[W]here the well-pleaded facts do not permit the court to 26 infer more than the mere possibility of misconduct, the complaint has alleged--but it has not 27 show[n] that the pleader is entitled to relief.” Ashcroft v. Iqbal, --- U.S. ---, 129 S.Ct. 1937, 28 1950 (2009) (internal quotation marks omitted). “A plaintiff’s obligation to prove the ‘grounds’ of his ‘entitle[ment] to relief’ 4 11cv00812 BTM (POR) 1 III. DISCUSSION 2 3 4 The Court groups the Defendants’ various arguments by the cause of action they address, and addresses each challenged cause of action in turn. 5 6 a. Breach of contract 7 8 A claim for breach of contract under California law requires the plaintiff to establish 9 four elements: (1) the existence of a contract; (2) plaintiff’s performance or excuse for 10 nonperformance of the contract; (3) defendant’s breach of the contract; and (4) damages 11 resulting from defendant’s breach of the contract. Trovk v. Farmers Group, Inc., 171 Cal. 12 App. 4th 1305, 1352 (4th Dist. 2009). Plaintiff asserts its claim for breach of contract against 13 all defendant insurance sales agents and brokerage general agencies. These defendants 14 raise several challenges to Plaintiff’s breach of contract theory. 15 First, Defendants Brooks, Haber, Marketing Partnerships, Inc., Moore, Philpot, 16 Volsteadt, Willis, Yolton, Fletcher, and Almeida claim that their contracts with Plaintiff 17 never went into effect, because they never signed two copies as required by express 18 language on the contract’s signature page. (Doc. 47-1 at 6 (citing AC Ex. B); Doc. 67-1 at 19 6 (same); Doc. 72-1 at 5-6 (same).) They each support this argument with a declaration 20 swearing that they “signed only one copy of the Broker Sales Contract[.]” (Doc. 47-7; Doc. 21 67-2; Doc. 72-2.) The contents of these declarations, however, are not the proper subject 22 of judicial notice, and this argument--relying on facts not contained in the AC or in any 23 documents the AC relies on or attaches--is not properly raised in the context of a Rule 24 12(b)(6) motion. See Arpin v. Santa Clara Valley Transp. Agency, 261 F.3d 912, 925 (9th 25 Cir. 2001) (“[E]vidence outside the complaint . . . should not be considered in ruling on a 26 motion to dismiss.”). 27 Second, Defendants Brooks, Haber, Marketing Partnerships, Inc., Moore, Philpot, 28 Volsteadt, Willis, Yolton, Fletcher, and Almeida, in addition to Defendants Higa, Wira, 5 11cv00812 BTM (POR) 1 Lacape, and Equote and Defendants Scott Pearlman, Stan Pearlman, and Nissim 2 Najjar, claim that the practice of rebating portions of sales commissions to policyholders 3 does not constitute a breach of any agreement with Plaintiff. These defendants claim that 4 the documents Plaintiff uses to show its policy against rebating (including Plaintiff’s Policies 5 and Procedures manual) either were not effective at the time the parties executed the 6 contracts, or were not properly incorporated by reference into the contracts. 7 defendants note that the only agreements requiring the signatories to abide by Plaintiff’s 8 policies and procedures are the agreements with the brokerage general agencies-- 9 agreements to which the sales agent Defendants are not a party. However, the breach of 10 contract claim asserts breaches other than, and in addition to, the failure to abide by 11 Plaintiff’s policies and procedures. For example, the contracts with the agents require the 12 agents to “[c]onduct business according to the highest principles of honesty, integrity and 13 pride” (AC ¶ 36), and prohibited them from “[k]nowingly provid[ing] false information on the 14 applicants’ application[s]” and from inducing any policyholder “to lapse or surrender the 15 product” (id. ¶ 38). Consequently, even if the contracts expressly permitted rebating, 16 Plaintiff’s breach of contract claim would survive. These 17 Finally, Defendants Higa, Wira, Lacape, and Equote claim that the AC failed to 18 identify which specific agreements were breached. This argument lacks merit. Plaintiff 19 attached to the AC copies of the agreement allegedly entered into by these defendants, and 20 signature pages signed by them. (Id. ¶ 36, Ex. B.) That Plaintiff may have committed a 21 clerical error by referring to the relevant agreement as a “Brokerage Agreement” in one part 22 of the AC, and as a “Producer Agreement” in another, does not, as these defendants 23 contend, render the breach of contract allegation fatally vague. 24 25 b. Breach of covenant of good faith and fair dealing, breach of fiduciary duty, negligence 26 27 Defendants Brooks, Haber, Marketing Partnerships, Inc., Moore, Philpot, 28 Volsteadt, Willis, Yolton, Fletcher, and Almeida argue that Plaintiff fails to state a claim 6 11cv00812 BTM (POR) 1 for a breach of the implied covenant of good faith and fair dealing because Plaintiff fails to 2 allege the existence of a contract between the parties. These defendants also argue that the 3 absence of a contractual relationship means that they owe Plaintiff no duty (negligence) and 4 no fiduciary duty (breach of fiduciary duty). The Court rejects these arguments for the 5 reasons set forth in the preceding section. 6 Defendants Higa, Wira, Lacape, and Equote argue that their agreements with 7 Plaintiff contain no prohibition against rebating and/or premium financing, and thus Plaintiff’s 8 claim that these practices violate the implied covenant of good faith and fair dealing 9 impermissibly adds terms to those agreements. Defendants Scott Pearlman, Stan 10 Pearlman, and Nissim Najjar also advance this argument, and repeat their argument that 11 rebating and premium financing are legal in California. As stated above, however, the Court 12 is not persuaded at this stage that the operative contracts permitted rebating. Moreover, 13 Plaintiff’s allegations that these defendants induced third parties to pay the minimum 14 permissible premiums on a policy, such that these defendants could collect a commission 15 at the known expense of Plaintiff, constitutes conduct that clearly undermines the purpose 16 of the agency agreements, such that Plaintiff has properly stated a claim for breach of the 17 implied covenant of good faith and fair dealing. 18 Defendants Higa, Wira, Lacape, and Equote also argue that Plaintiff has failed to 19 state a claim for negligence, because there is no duty to refrain from rebating. However, 20 Plaintiff has alleged that these defendants were its agents, and that they therefore “owed a 21 duty to Minnesota Life to act as a reasonable sales agent in the life insurance industry and 22 to not act in a manner contrary to Minnesota Life’s business interests.” (AC ¶ 176.) Any 23 absence of a legal duty to refrain from the specific practice of rebating does not allow these 24 defendants to escape Plaintiff’s negligence claim at this stage. 25 Defendant CFA, the funding entity, challenges Plaintiff’s negligence claim against it 26 on the ground that CFA never entered any relationship with Plaintiff, contractual or otherwise, 27 and therefore owed no duty. The California Supreme Court has held that “[r]ecognition of 28 a duty to manage business affairs so as to prevent purely economic loss to third parties in 7 11cv00812 BTM (POR) 1 their financial transactions is the exception, not the rule, in negligence law.” Quelimane Co. 2 v. Stewart Title Guaranty Co., 19 Cal. 4th 26, 58 (1998). 3 circumstances, California courts will impose such a duty. For example, in Connor v. Great 4 Western Sav. & Loan Assn., 69 Cal. 2d 850 (1968), the court permitted home buyers to 5 maintain a negligence claim against a construction lender defendant that negligently 6 undercapitalized the construction of the buyers’ homes, notwithstanding the fact that the 7 buyer plaintiffs were third parties with respect to the defendant’s contracts with the home 8 builders. The Connor court applied a six factor test: 9 However, under certain The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are [1] the extent to which the transaction was intended to affect the plaintiff, [2] the foreseeability of harm to him, [3] the degree of certainty that the plaintiff suffered injury, [4] the closeness of the connection between the defendant's conduct and the injury suffered, [5] the moral blame attached to the defendant's conduct, and [6] the policy of preventing future harm. 10 11 12 13 14 69 Cal. 2d at 865; see also Quelimane, 19 Cal. 4th at 58 (applying same test). In this case, 15 Plaintiff has alleged that CFA was controlled by Defendant Wira, that CFA knowingly enabled 16 the wrongful commission schemes by financing them through usurious loans, and that it 17 profited as a result. (AC ¶¶ 197, 201, 205, 208, 211, 212.) Under these circumstances, all 18 six factors articulated by the court in Connor weigh in favor of Plaintiff. The Court finds that 19 Plaintiff has alleged sufficient facts to state a claim of negligence against Defendant CFA. 20 21 c. Violation of Unfair Competition Law 22 23 California’s Unfair Competition Law (“UCL”) prohibits individuals and business 24 organizations from engaging in any “unlawful, unfair or fraudulent business act or practice.” 25 Cal. Bus. & Prof. Code § 17200. Pursuant to the UCL, any “person who has suffered injury 26 in fact and has lost money or property as a result of . . . unfair competition” may bring a civil 27 action, and may seek relief in the form of injunctive relief, “restor[ation of] any money or 28 property . . . which may have been acquired by means of . . . unfair competition,” and civil 8 11cv00812 BTM (POR) 1 penalties. Id. §§ 17203, 17204, 17206. The UCL’s “coverage is sweeping, embracing 2 anything that can properly be called a business practice and that at the same time is 3 forbidden by law.” Cel-Tech Commc’ns, Inc. v. L.A. Cellular Tel. Co., 20 Cal. 4th 163, 180 4 (1999) (internal quotations and citation omitted). 5 The parties’ briefs in all five motions to dismiss discuss at considerable length the 6 issue of whether California law prohibits rebating in the life insurance industry. Specifically, 7 Defendants contend that Proposition 103, adopted by California voters in 1988, fully repealed 8 California Insurance Code § 750, and that prior to its repeal, § 750 was the only provision of 9 law barring rebating in the life insurance industry in California. Consequently, Defendants 10 argue, there no longer remains any provision of law in California prohibiting the practice of 11 rebating. Plaintiffs argue that Proposition 103 does not apply to the life insurance industry, 12 and therefore rebating in the life insurance industry remains illegal, notwithstanding the 13 repeal of § 750. No California state court has weighed in on this issue, and other courts have 14 reached conflicting results. Compare North American Co. For Life and Health Ins. v. Philpot, 15 et al., 08cv00270, slip op. at 4-5 (S.D. Cal. Feb. 17, 2009) (order denying motions to dismiss 16 and for a more definite statement) (holding, based on California cases stating in broad terms 17 that Proposition 103 does not apply to life insurance, that permissibility of rebating in life 18 insurance industry is “speculative at best”); with In re Prudential Insurance Co. of America, 19 CDI No. UPA 0053-AP et al. (Cal. Dep’t of Ins. Sept. 8, 1994) (Doc. 44-2, Ex. 4) (finding that 20 Proposition 103 “remove[d] [§ 750’s] statutory proscription against rebating” in all industries 21 except “those for which a separate prohibition remains in tact”). 22 The Court declines to offer an opinion on this issue, because regardless of whether 23 rebating life insurance commissions to policyholders is legal, Plaintiff has stated a claim 24 against all defendants under the UCL. The purpose of the UCL is “to foster and encourage 25 competition, by prohibiting unfair, dishonest, deceptive, destructive, fraudulent and 26 discriminatory practices by which fair and honest competition is destroyed or prevented.” Id. 27 § 17001. The UCL “does more than just borrow” violations of other laws, since it also 28 prohibits business acts and practices that are unfair or unlawful, and therefore “a practice is 9 11cv00812 BTM (POR) 1 prohibited as ‘unfair’ or ‘deceptive’ even if not ‘unlawful’ and vice versa.” Cel-Tech, 20 Cal. 2 4th at 180 (citation and quotation marks omitted). The Court finds that the wrongful 3 commissions scheme, as alleged, is both unfair and fraudulent, even if not outright unlawful. 4 “In permitting the restraining of all ‘unfair’ business practices, [the UCL] undeniably 5 establishes only a wide standard to guide courts of equity; . . . given the creative nature of 6 the scheming mind, the Legislature evidently concluded that a less inclusive standard would 7 not be adequate.” Id. The determination of whether a practice is unfair “involves an 8 examination of [that practice’s] impact on its alleged victim, balanced against the reasons, 9 justifications and motives of the alleged wrongdoer.” Motors, Inc. v. Times Mirror Co., 102 10 Cal. App. 3d 735, 740 (2d Dist. 1980). Plaintiff has alleged a business practice that causes 11 a substantial injury, and is motivated purely out of a desire for maximizing commissions 12 (rather than, for example, an effort to secure the best insurance coverage for policyholders). 13 Moreover, Plaintiff has specifically alleged that the “cost of insurance for those products 14 utilized by the Wrongful Commission Schemes are shifted to those honest policyholders who 15 pay sufficient premiums to maintain their policies in force and[] who intend to keep their 16 policies in force, as those products have been designed by . . . Minnesota Life.” (AC ¶ 28.) 17 Plaintiff has alleged in detail a practice that has no legitimate business motivation, that 18 causes substantial direct injury to insurance companies such as itself, and that adversely 19 affects other consumers in the life insurance market. Thus, Plaintiff has stated a claim under 20 the UCL. 21 The alleged wrongful commission schemes are also fraudulent within the meaning of 22 the UCL. As explained by the Court in Morgan v. AT & T Wireless Services, Inc., 177 Cal. 23 App. 4th 1235 (2d Dist. 2009): 24 25 26 A UCL claim based on the fraudulent prong can be based on representations that deceive because they are untrue, but also those which may be accurate on some level, but will nonetheless tend to mislead or deceive. A perfectly true statement couched in such a manner that it is likely to mislead or deceive the consumer, such as by failure to disclose other relevant information, is actionable under the UCL. 27 28 177 Cal. App. 4th at 1255 (citation, quotation marks, and alterations omitted). Plaintiff has 10 11cv00812 BTM (POR) 1 alleged that Defendants deliberately took advantage of Plaintiff’s assumption of a relatively 2 low lapse rate for certain insurance products, and that Plaintiff issued the relevant policies 3 as a result of misleading applications prepared by various Defendants. Under these 4 circumstances, Plaintiff has stated a claim for a fraudulent business practice under the UCL. 5 Defendants Higa, Wira, Lacape, Equote, Richard J. Wira and Yvette S. Wira as 6 co-trustees of the Wira Family Trust (the “Wiras”), as well as Defendant Capital 7 Funding Associates, Inc. (“CFA”) and Defendants Scott Pearlman, Stan Pearlman, and 8 Nissim Najjar, argue that disgorgement of profits is not a permissible remedy under the 9 UCL. Plaintiff seeks “[a]n order requiring Defendants to disgorge all of their ill-gotten 10 commissions, and all of the profits and gains they have reaped.” (AC ¶ 71 (emphasis 11 added).) The UCL permits only “restor[ation of] any money or property . . . which may have 12 been acquired by means of . . . unfair competition.” Cal. Bus. & Prof. Code § 17203. This 13 remedy is characterized more appropriately as restitution rather than disgorgement. The 14 moving defendants argue that disgorgement of all commissions “without offsetting the 15 premiums received by the Plaintiff . . . would result in a windfall[,]” and thus would not be 16 restitutionary. 17 “norestitutionary disgorgement” under the UCL. See Korea Supply Co. V. Lockheed Martin 18 Corp., 29 Cal. 4 th 1134, 1146-48 (2003). However, the use of the term “disgorgement” is 19 not fatal to Plaintiff’s UCL claim. Whether and to what extent disgorgement of commissions 20 is an appropriate remedy under the UCL can be raised at a later stage. (Doc. 42-2 at 13.) Defendants are correct that Plaintiff cannot seek 21 The Wiras and CFA--the funding entity defendants--argue that premium financing is 22 perfectly legal and is an accepted practice in the insurance industry. However, the alleged 23 financing is not typical “premium financing,” as Plaintiff alleges that the policyholders 24 themselves were never required to pay back the loans made by the funding entities. 25 Moreover, even to the extent that the financing arrangement itself was legal, Plaintiff has 26 alleged that the funding entities knowingly played a role in an overall practice that, as 27 explained above, was both unfair and fraudulent. 28 11 11cv00812 BTM (POR) 1 d. Fraud 2 3 The elements of a claim for fraud under California law are: (1) a misrepresentation (or 4 a failure to disclose by one who has a fiduciary duty to another), (2) of a material fact, (3) 5 scienter, (4) reliance, and (5) damages. Alliance Mortgage Co. v. Rothwell, 10 Cal. 4th 1226, 6 1239 (1995). 7 Plaintiff has alleged the submission of “fraudulent applications” for life insurance 8 policies in which the sales agent Defendants affirmatively misrepresented to Plaintiff that the 9 applications were complete and that they “includ[ed] all of the material circumstances 10 surrounding the submission of such applications.” (AC ¶ 169.) Plaintiff has alleged that 11 Defendants and the prospective policyholders intended to allow the policies to lapse after 12 making the minimum payment necessary to collect commissions, and that this plan is a 13 “material circumstance surrounding the submission of the applications.” Plaintiff has also 14 provided policy numbers for specific, allegedly fraudulent applications submitted by each 15 sales agent Defendant. 16 policies on the basis of the misrepresentations in the applications, and that it suffered 17 damages. (Id. ¶ 59.) Plaintiff has alleged fraud with sufficient particularity against the sales 18 agent Defendants. (Id. ¶¶ 152-168.) Finally, Plaintiff has alleged that it issued the 19 None of the objections raised by the sales agent Defendants against the fraud claim 20 withstand scrutiny. Defendants Brooks, Haber, Marketing Partnerships, Inc., Moore, 21 Philpot, Volsteadt, Willis, Yolton, Fletcher, and Almeida all assert that neither the 22 intention of third parties to allow the policies to lapse nor the wrongful commission scheme 23 itself is a “fact” capable of being misrepresented. The misrepresented “fact,” however, is the 24 statement that the allegedly fraudulent applications contained all material circumstances 25 relevant to issuing the policy. Defendants Higa, Wira, Lacape, and Equote claim that 26 “Plaintiff failed to allege that there was a specific question in an insurance application that 27 required the disclosure” of the scheme, but again, this is demonstrably false. (AC ¶ 169.) 28 Defendants Scott Pearlman, Stan Pearlman, and Nissim Najjar argue that Plaintiffs have 12 11cv00812 BTM (POR) 1 failed to show “a duty to disclose that [these defendants] intended to finance premiums and 2 rebate commission to their clients.” This argument does not confront the substance of 3 Plaintiff’s fraud allegations, as Plaintiff’s allegations of fraud are not limited to the mere failure 4 to disclose the practices of rebating and premium financing. 5 Defendant CFA argues that it cannot be liable for fraud because “plaintiff does not 6 assert that any . . . contractual ‘duty to disclose’ applied to CFA.” (Doc. 44-1 at 10.) 7 However, Plaintiff has alleged that CFA was owned and controlled by Defendant Wira at the 8 times relevant to the alleged fraud (AC ¶ 9), that CFA participated in wrongful commission 9 schemes by serving as the “primary funding entity” for the other defendants’ fraudulent 10 activity (id.), that CFA’s funding activities “enabled and facilitated the success of the 11 Schemes” (id.), and that CFA acted knowingly and willingly (id. ¶ 151). These allegations are 12 sufficient to state a claim for fraud against Defendant CFA under an aiding and abetting 13 theory, notwithstanding the absence of any direct relationship between CFA and Plaintiff. 14 See Fiol v. Doellstedt, 50 Cal. App. 4th 1318, 1325-26 (2d Dist. 1996) (“Liability may . . . be 15 imposed on one who aids and abets the commission of an intentional tort if the person (a) 16 knows the other’s conduct constitutes a breach of duty and gives substantial assistance or 17 encouragement to the other to so act or (b) gives substantial assistance to the other in 18 accomplishing a tortious result and the person’s own conduct, separately considered, 19 constitutes a breach of duty to the third person.”). Accordingly, the Court denies Defendant 20 CFA’s motion to dismiss the fraud claim. 21 22 23 24 25 e. Civil RICO 26 27 A claim for a violation of 18 U.S.C. § 1962(c) requires (1) conduct (2) of an enterprise 28 (3) through a pattern (4) of racketeering activity. Sedima, S.P.R.L. v. Imrex Co., Inc., 473 13 11cv00812 BTM (POR) 1 U.S. 479, 496 (1985). “Any recoverable damages occurring by reason of a violation of § 2 1962(c) will flow from the commission of the predicate acts.” Id. at 497. The predicate acts 3 of racketeering alleged in this case are mail and wire fraud. (AC ¶¶ 47, 198.) 4 Defendants Brooks, Haber, Marketing Partnerships, Inc., Moore, Philpot, 5 Volsteadt, Willis, Yolton, Fletcher, and Almeida raise two general objections to Plaintiff’s 6 § 1962(c) (“civil RICO”) claim. First, along with Defendants Higa, Wira, Lacape, and 7 Equote, they essentially echo their objections to the fraud claim and assert that Plaintiff has 8 not alleged mail and wire fraud with the requisite specificity, and therefore Plaintiff has failed 9 to establish the “predicate act” element of its civil RICO claim. However, Plaintiff lists dozens 10 of specific, allegedly fraudulent policies that Plaintiff claims were sent through channels of 11 interstate commerce, “through mail and/or over the wires.” (Id. ¶ 210.) 12 Second, they argue that Plaintiff has not alleged a sufficient causal connection 13 between the predicate acts and the damages incurred. This argument is nonsensical: 14 Plaintiff alleges mail and wire fraud as the predicate acts, and alleges that the Defendants 15 defrauded it directly, to its detriment. These Defendants also claim that “there is no 16 proximate cause because it is impossible to calculate the percentage of the alleged bonuses, 17 commissions and underwriting costs that would be attributable to the alleged ‘sham’ policies, 18 as opposed to those deriving from legitimate policies.” (See Doc. 47-1 at 18.) This argument 19 has nothing to do with proximate cause, and relates only to whether Plaintiff will be able to 20 prove its damages. 21 policyholders allowed their policies to lapse for legitimate reasons, they can attempt to 22 establish that defense by presenting evidence at another stage in these proceedings. To the extent these Defendants believe that certain relevant 23 Defendants Scott Pearlman, Stan Pearlman, and Nissim Najjar also raise two 24 objections: First, they argue that Plaintiff has failed to establish the “conduct” element of its 25 civil RICO claim because the “the conduct it complains of is legitimate lawful activity.” (Doc. 26 42-2 at 18.) The Court rejects this argument for the reasons set forth in the preceding 27 sections. 28 // 14 11cv00812 BTM (POR) 1 Second, they argue that Plaintiff has failed to establish the “enterprise” element 2 because it has not alleged an “‘ascertainable structure’ separate and apart from the alleged 3 pattern of racketeering.” (Id. at 19 (citing NSI Tech. Serv. Corp. v. Nat’l. Aeronautics and 4 Space, No. Civ. 95-20559, 1995 WL 761266, at *3 (N.D. Cal. Dec. 15, 1995)).) However, 5 the legal authority relied on by these defendants is no longer good law in the Ninth Circuit. 6 See Odom v. Microsoft Corp., 486 F.3d 541, 551 (9th Cir. 2007) (en banc) (“We . . . hold that 7 an associated-in-fact enterprise under RICO does not require any particular organizational 8 structure, separate or otherwise.”). Also, Plaintiff has specifically alleged that these three 9 defendants were employed by Stan Pearlman d/b/a Terrace Insurance Services and 10 regularly executed wrongful commission schemes under funding routinely provided by 11 Defendant CFA. (AC ¶¶ 3, 204-213.) The AC sufficiently pleads the “enterprise” element 12 against Defendants Scott Pearlman, Stan Pearlman, and Nissim Najjar. 13 Defendant CFA raises two arguments against the civil RICO claim that are based on 14 its position as a funding entity for the schemes, rather than as a sales agent or brokerage 15 agency. First, CFA argues that the mere act of providing funding to the entity is not the type 16 of participation sufficient to trigger liability under § 1962(c), because “one is not liable under 17 that provision unless one has participated in the operation or management of the enterprise 18 itself.” (Doc. 44-1 at 13 (quoting Reves v. Ernst & Young, 507 U.S. 170, 183 (1993)).) 19 Second, and relatedly, CFA argues that there is no liability under § 1962(c) for “aiding and 20 abetting” an enterprise. The Wiras similarly argue that they played no direct role in the mail 21 and wire fraud, and that the alleged secret loans cannot form the predicate act necessary to 22 establish RICO liability. 23 These arguments, however, misapprehend the standard for “participation” in a RICO 24 conspiracy. In Salinas v. United States, 522 U.S. 52 (1997), the Supreme Court held that 25 § 1962(c) applied to a sheriff’s deputy that “knew about and agreed to facilitate a scheme” 26 whereby the sheriff accepted bribes, even though the deputy himself never committed any 27 predicate acts of bribery. 28 conspirators have a plan which calls for some conspirators to perpetrate the crime and others 522 U.S. at 63-65. 15 The Salinas Court reasoned that “[i]f 11cv00812 BTM (POR) 1 to provide support, the supporters are as guilty as the perpetrators.” Id. at 64. Following 2 Salinas, the Ninth Circuit confirmed that Reves’ “operation or management” test is no longer 3 good law, and that § 1962(c) applies to anyone who “knowingly agree[d] to facilitate a 4 scheme which includes the operation or management of a RICO enterprise.” United States 5 v. Fernandez, 388 F.3d 1199, 1230 (9th Cir. 2004). 6 Plaintiff has alleged that CFA and the Wiras “conspired with and aided and abetted” 7 the other defendants by knowingly providing essential economic support for the wrongful 8 commission schemes--a scheme involving multiple alleged predicate acts of mail and wire 9 fraud--and that CFA and the Wiras profited therefrom. (AC ¶ 208.) Under these alleged 10 facts alone, Plaintiff has properly pled its civil RICO claim against CFA and the Wiras. The 11 Court notes, however, that Plaintiff has also alleged that the loans made by CFA and the 12 Wiras were usurious, and that the loans themselves are also predicate acts. (AC ¶ 211-212.) 13 CFA and the Wiras do not address this allegation. 14 15 f. Unjust Enrichment 16 17 Defendants Higa, Wira, Lacape, and Equote, in addition to Defendants Scott 18 Pearlman, Stan Pearlman, and Nissim Najjar, assert that there is no separate claim for 19 unjust enrichment in California. While this is true on a semantic level, “[u]njust enrichment 20 is synonymous with restitution[,]” and “under the law of restitution, an individual is required 21 to make restitution if he or she is unjustly enriched.” Durell v. Sharp Healtcare, 183 Cal. App. 22 4th 1350, 1370 (4th Dist. 2010). 23 Regardless of whether Plaintiff titles this claim “Unjust Enrichment” or “Restitution,” 24 Plaintiff has stated a claim under California law. Restitution does not require a predicate 25 illegal act, and Plaintiff’s claims, if true, suffice to establish entitlement to restitution, since 26 Plaintiff has alleged that Defendants enriched themselves under circumstances that were 27 clearly unjust. See McBride v. Boughton, 123 Cal. App. 4th 379, 389 (1st Dist. 2004) (“The 28 person receiving the benefit is required to make restitution . . . if the circumstances are such 16 11cv00812 BTM (POR) 1 that, as between the two individuals, it is unjust for the person to retain it.”). 2 The Wiras assert merely that the facts alleged in the AC fail to support a claim for 3 unjust enrichment. However, as stated above, Plaintiff has alleged that the Wiras knowingly 4 participated in a scheme with Plaintiff’s agents to defraud Plaintiff, and profited from their 5 participation in that scheme. The Court finds that Plaintiff has stated a claim for unjust 6 enrichment against the Wiras. 7 8 g. Declaratory relief 9 10 Defendants Higa, Wira, Lacape, and Equote, in addition to Defendants Scott 11 Pearlman, Stan Pearlman, and Nissim Najjar, assert that the claim for declaratory relief 12 is moot, because Plaintiff terminated its business relationship with all Defendants in 2011. 13 The Court dismisses the claim for declaratory relief on other grounds; namely, that it is 14 redundant of Plaintiff’s other claims. 15 “Declaratory relief may be unnecessary where an adequate remedy exists under some 16 other cause of action.” Concorde Equity II, LLC v. Miller, 732 F. Supp. 2d 990, 1002 (N.D. 17 Cal. 2010). 18 declaratory relief is therefore unnecessary and redundant. Id. at 1003. Plaintiff’s declaratory 19 relief claim seeks “a declaration . . . that Defendants are liable for the damages suffered by 20 Minnesota Life due to their Wrongful Commission Schemes[.]” (AC ¶ 222.) Since Plaintiff’s 21 entitlement to this relief will be resolved during the course of litigating its damages claims, 22 the Court dismisses Plaintiff’s claim for declaratory relief as unnecessary and redundant. 23 See Chan v. Chancelor, No. 09cv1839, 2011 WL 5914263, at *6 (N.D. Cal. Nov. 28, 2011) 24 (“All of the issues in the declaratory judgment claim will be resolved by the substantive 25 action, so the declaratory judgment serves no useful purpose.”). When claims for declaratory relief are duplicative of other claims, then 26 27 h. Accounting 28 17 11cv00812 BTM (POR) 1 Defendants CFA, the Wiras, Higa, Wira, Lacape, and Equote challenge this claim 2 in particular. The Wiras, Higa, Wira, Lacape, and Equote merely assert that Plaintiff cannot 3 maintain a claim against them for an accounting because “none of the other purported 4 causes of action . . . state a viable claim against defendants[.]” (Doc. 46-1 at 18.) Similarly, 5 Defendants Scott Pearlman, Stan Pearlman, and Nissim Najjar argue for dismissal of this 6 claim on the ground that “[w]hen a defendant owes no money to the plaintiff and did not 7 deprive it of any monies, as a matter of law, an accounting cause of action must be 8 dismissed.” (Doc. 42-2 at 20.) The Court rejects these arguments for the reasons set forth 9 in the preceding sections. CFA further claims that it has no relationship with Plaintiff, such 10 as can support a claim for an accounting. See Teselle v. McLoughlin, 173 Cal. App. 4th 156, 11 179 (3d Dist. 2009) (“A cause of action for an accounting requires a showing that a 12 relationship exists between the plaintiff and defendant that requires an accounting.”) The 13 Court finds it unnecessary to determine whether CFA and Plaintiff are sufficiently related to 14 justify an accounting, since the claim for accounting fails on a separate ground: Plaintiff has 15 already calculated the amount it paid in wrongful commissions. 16 “An action for accounting is not available where the plaintiff alleges the right to recover 17 a sum certain or a sum that can be made certain by calculation.” Id. Plaintiff specifically 18 alleges that “Minnesota Life has paid over $4,434,375.25 in commissions to Defendants for 19 the policies submitted pursuant to the Wrongful Commissions Schemes[.]” (AC ¶ 59.) The 20 other categories of damages sought by Plaintiff, including civil penalties and punitive and 21 compensatory damages for losses incurred as a result of lapsing policies, do not require an 22 accounting. Civil penalties are easily calculable, any punitive damages award would not be 23 tied to the details of the defendants’ financial records, and only Plaintiff is in a position to 24 estimate damages incurred by lapsing policies. Accordingly, the Court dismisses without 25 prejudice Plaintiff’s claim for an accounting. See Robinson v. Bank of America, 12cv00494, 26 2012 WL 1932842, at *10 (N.D. Cal. May 29, 2012) (dismissing claim for accounting without 27 prejudice because “plaintiff has clearly identified the specific amount he believes he is owed 28 by defendants”). 18 11cv00812 BTM (POR) 1 I. Rule 12(f) relief 2 3 Defendants Brooks, Haber, Marketing Partnerships, Inc., Moore, Philpot, 4 Volsteadt, Willis, Yolton, Fletcher, and Almeida request that the Court strike certain terms 5 in the AC. Specifically, they request that the Court order Plaintiff to remove the word 6 “wrongful,” the phrase “wrongful commission scheme,” allegations concerning “secret loans,” 7 and allegations concerning the subjective state of mind of third party policyholders. The 8 Court finds none of these words, terms, or allegations sufficiently “redundant, immaterial, 9 impertinent, or scandalous” to justify striking them from the Complaint. See Fed. R. Civ. P. 10 12(f). 11 Defendants Scott Pearlman, Stan Pearlman, and Nissim Najjar move to strike 12 Plaintiff’s request for an injunction, pursuant to Plaintiff’s UCL cause of action prohibiting 13 them from perpetrating future wrongful commissions schemes against other insurance 14 companies. (See AC ¶ 72.) These defendants argue that “defendants’ relationships with 15 other insurers does ‘not pertain’ to the issues in this case.” 16 Whittlestone, Inc. v. Handi-Craft Co., 618 F.3d 974 (9th Cir. 2010)).) They further contend 17 that “Plaintiff has not, and cannot, establish that it has or will suffer any ‘injury-in-fact’ as a 18 result of defendants’ sales activities on behalf of others.” (Id. at 3 (citing Lujan v. Defenders 19 of Wildlife, 504 U.S. 555, 560-61 (1992)).) Plaintiff responds that wrongful commission 20 schemes perpetrated against other life insurance providers affect Plaintiff because “the 21 resulting lost commissions and lapsing policies affect the ability of the life insurance industry 22 (as well as Minnesota Life) to price, fund and maintain their life insurance products.” (Doc. 23 50 at 5.) (Doc. 43-2 at 2 (citing 24 Although a motion to strike is an unusual posture in which to raise a standing 25 challenge, the Court grants Defendants Scott Pearlman, Stan Pearlman, and Nissim Najjar’s 26 motion to strike. To establish standing under the UCL, a plaintiff must “(1) establish a loss 27 or deprivation of money or property sufficient to qualify as an injury in fact, i.e., economic 28 injury, and (2) show that the economic injury was the result of, i.e., caused by, the unfair 19 11cv00812 BTM (POR) 1 business practice.” Kwikset Corp. v. Superior Court, 51 Cal. 4th 310, 322 (2011) (emphasis 2 in original). Plaintiff has not alleged in the AC that an interference with its ability to price life 3 insurance products causes Plaintiff any sort of injury, financial or otherwise; rather, in the AC, 4 Minnesota Life frames this interference as an injury to consumers: 5 The cost of insurance for those products utilized by the Wrongful Commission Schemes are shifted to those honest policyholders who pay sufficient premiums to maintain their policies in force and, who intend to keep their policies in force, as those products have been designed by insurance companies, such as Minnesota Life. In addition, the Wrongful Commission Schemes deprive honest consumers of fairly priced life insurance products by transferring the expenses associated with underwriting and issuing such products thereby causing honest consumers to pay a higher price for the product than they would have if the Wrongful Commission Schemes had not occurred. 6 7 8 9 10 11 (AC ¶ 28.) Plaintiff’s allegations regarding alleged wrongful commission schemes 12 perpetrated against other insurance companies are not pertinent to its UCL claim, and the 13 Court STRIKES for lack of standing Plaintiff’s request for an injunction prohibiting Defendants 14 from perpetrating future wrongful commissions schemes against other insurance companies. 15 // 16 // 17 // 18 // 19 // 20 // 21 // 22 // 23 // 24 // 25 // 26 // 27 // 28 20 11cv00812 BTM (POR) 1 IV. CONCLUSION 2 3 For the reasons set forth above, the Court hereby ORDERS the following: 4 The Court DENIES the motion to dismiss filed by Defendants Scott Pearlman, Stan 5 Pearlman, and Najjar (Doc. 42) and the motions to dismiss and to strike filed by Defendants 6 Brooks, Haber, Marketing Partnerships, Inc., Moore, Philpot, Volsteadt, Willis, Yolton, 7 Fletcher, and Almeida (Docs. 47, 67, and 72). 8 The Court GRANTS IN PART and DENIES IN PART the motions to dismiss filed by 9 Defendants Capital Funding Associates, Higa, Wira, Lacape, Equote, and Richard J. Wira 10 and Yvette S. Wira as co-trustees of the Wira Family Trust (Docs. 44 and 46). The Court 11 dismisses Plaintiff’s claims for declaratory relief and for an accounting against all Defendants. 12 The Court GRANTS the motion to strike filed by Scott Pearlman, Stan Pearlman, and 13 Nissim Najjar (Doc. 43), and strikes Plaintiff’s request for an injunction prohibiting Defendants 14 from perpetrating future wrongful commissions schemes against other insurance companies. 15 All other claims against Defendants remain. No motions for reconsideration shall be 16 permitted. The Defendants shall file an answer by October 19, 2012. 17 18 19 IT IS SO ORDERED. 20 DATED: September 27, 2012 21 22 BARRY TED MOSKOWITZ, Chief Judge United States District Court 23 24 25 26 27 28 21 11cv00812 BTM (POR)

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