Captive Insurance & 419 Plans Litigation: December 2013

Captive Insurance & 419 Plans Litigation: December 2013

Chau v. Aviva Life and Annuity, No. 3:09-cv-2305-B, 2011 WL 1990446 (N.D. Tex. May 20, 2011)

Doctors and dentists alleged that Indianapolis Life Insurance Company advertised, marketed, and consummated fraudulent business transactions, resulting in damages. Plaintiffs originally filed their complaint in April of 2009 in Washington state court and after Aviva removed the case to federal district court, the MDL Panel ordered the case transferred to the Northern District of Texas. Prior to the case being transferred, Plaintiffs filed their second amended complaint and subsequently, Aviva filed its motion to dismiss Plaintiff‘s second amended complaint on February 5, 2010. Plaintiffs allege that the insurer knew that the IRS had looked askance at the legality of similar tax-shelter arrangements (welfare benefit trusts) and indicated that these arrangements may be deemed abusive tax shelters, yet continued to market its § 419 Plan as a tax-avoidance plan.

Plaintiffs‘ motion for a suggestion of remand to the Judicial Panel of Multidistrict Litigation was filed on March 3, 2011 and was subsequently denied by the district court.

17

However, the court noted that plaintiffs may motion again, should there be further developments in the case. Aviva‘s motion to dismiss the second amended complaint was granted in part and denied in part on May 20, 2011. In its motion, Aviva claimed that Plaintiffs‘ common law fraud/negligent misrepresentation claim did not meet the heightened pleading requirements of Rule 9(b), in addition to failing to state a claim, and the court agreed. However, on the breach of contract claim, the court found that under the applicable law governing the contract, plaintiff‘s claim was not due to be dismissed. The court elaborated on its reasoning, noting that allegations concerning oral representations made about the policies, specifically, their ability to obtain substantial tax savings with the 419 Plan. Plaintiffs asserted in their second amended complaint that those representations were false and resulted in ―substantial tax penalties and interest‖ due to an IRS audit. Thus, the court found that