DCD Partners, LLC et al v. Transamerica Life Insurance Company et al

Filing 39

MINUTES OF Motion Hearing held before Judge Christina A. Snyder RE: Defendants' Motion to Dismiss First Amended Complaint 30 . The Court GRANTS without prejudice defendants' motion to dismiss as to plaintiffs' claim for negligent misr epresentation. The court DENIES defendants motion as to all other claims. Plaintiff shall have 14 days to file a second amended complaint addressing the deficiencies identified herein. Failure to do so may result in dismissal with prejudice of plaintiffs' claim for negligent misrepresentation. Defendants. Court Reporter: Laura Elias. (gk)

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Case No.

2:15-cv-03238-CAS(VBKx)

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

Present: The Honorable

Date

‘O’

August 24, 2015

CHRISTINA A. SNYDER

Catherine Jeang
Deputy Clerk

Laura Elias
Court Reporter / Recorder

N/A
Tape No.

Attorneys Present for Plaintiffs:

Attorneys Present for Defendants:

Jack Ternan
Michael Colton

Sylvia Rivera
Dan Marmalefsky

Proceedings:

I.

DEFNDANTS’ MOTION TO DISMISS FIRST AMENDED
COMPLAINT (Filed 07/20/15)[30]

INTRODUCTION

On March 18, 2015, plaintiffs DCD Partners, LLC (“DCD Partners”), Personal
Investment Center, LLC (“PIC LLC”), and Reverend Dr. J. Benjamin Hardwick
(“Reverend Hardwick”), as a trustee of the Personal Involvement Center Trust No. 1
(“PIC Trust”) (collectively, “plaintiffs”) filed the instant suit in the Los Angeles County
Superior Court against defendants Transamerica Life Insurance Company
(“Transamerica”) and Does 1 through 30 (collectively, “defendants”). Dkt. 1. On April
30, 2015, Transamerica filed a notice of removal on the basis of diversity jurisdiction. Id.
On June 19, 2015, plaintiffs filed the operative first amended complaint (“FAC”). Dkt.
22.
The FAC asserts the following claims: (1) breach of contract, in violation of
California law; (2) breach of the covenant of good faith and fair dealing; (3) tortious
breach of the duty of good faith and fair dealing; (4) violation of the California Unfair
Competition Law (“UCL”), Cal. Bus. & Prof. Code § 17200, et seq.; (5) declaratory
judgment; and (6) negligent misrepresentation. Id.
On July 20, 2015, defendants filed a motion to dismiss plaintiffs’ FAC. Dkt. 30.
Plaintiffs opposed the motion on August 5, 2015, Dkt. 34, and defendants replied on
August 17, 2015, Dkt. 37. The Court held a hearing on August 24, 2015. Having
carefully considered the parties arguments the Court finds and concludes as follows.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Case No.

2:15-cv-03238-CAS(VBKx)

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

II.

Date

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August 24, 2015

BACKGROUND1
A.

Issuance of the Transamerica Policies

Plaintiffs are the owners of numerous Transamerica flexible premium universal life
insurance policies. FAC ¶¶ 7-9. In the late 1990s, Reverend Hardwick began
negotiations with Transamerica to establish a program providing charitable life insurance
policies for members of low-income, predominantly African-American church
congregations in Los Angeles, California. Id. ¶ 14. The purpose of this program was to
ensure that the families of participating members would not be burdened with burial
expenses. Id. Prior to issuance of the policies, Transamerica assured Reverend Hardwick
that it would be a violation of Transamerica’s corporate principles to discriminate against
African-Americans by charging them rates higher than those charged to other
policyholders. Id. ¶ 15. Plaintiffs allege that this promise was material to Reverend
Hardwick’s decision to proceed with the Transamerica life insurance program. Id. ¶ 16.

1

On July 20, 2015, the parties filed a stipulation recognizing a “specimen” policy
(the “Specimen Policy”) that is emblematic of the policies at issue in this case. Dkt. 32.
The parties stipulated that this policy could be judicially noticed by the Court solely for
the purposes of adjudicating defendants’ motion to dismiss the FAC. Id.
Furthermore, defendants have requested judicial notice of two life insurance policy
illustrations. Defs.’ RJN. Defendants contend that these documents are expressly
referenced to and relied on in plaintiffs’ claims and therefore may be judicially noticed
under the incorporation by reference doctrine. Id. at 2. Under the incorporation by
reference doctrine, a court may take judicial notice of a document if the complaint
“necessarily relies” on the document. Marder v. Lopez, 450 F.3d 445, 448 (9th Cir.
2006). Plaintiffs allege that Transamerica has previously provided these illustrations to
plaintiffs. FAC ¶ 30. Furthermore, in several of the claims, plaintiffs allege that
Transamerica has engaged in fraudulent activity, including providing plaintiffs these
illustrations, which plaintiffs allege are deceptive. See, e.g. FAC ¶ 69. Accordingly,
defendants request for judicial notice is GRANTED.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

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Case No.

2:15-cv-03238-CAS(VBKx)

August 24, 2015

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

On March 9, 2004, Transamerica approved and issued 1,229 policies to PIC Trust
(“Pool 1"). Id. ¶ 18. On November 9, 2004, Transamerica approved and issued 1,171
policies to PIC LLC (“Pool 2") (collectively, “the policies”). Id. In 2009, DCD Partners,
which is apparently unaffiliated with the other plaintiffs, acquired an ownership interest
in the policies. Id. ¶ 29. DCD Partners agreed to pay the policy premium in exchange for
receiving the majority of the death benefits under the policies. Id. ¶¶ 19, 27. Prior to
acquiring this interest, DCD Partners received information regarding the policies from
Transamerica. Id. ¶ 29. In particular, Transamerica represented that it had only increased
the cost of insurance once over the previous thirty years. Id. Plaintiffs allege that DCD
Partners reasonably relied on this representation in acquiring its interest in the policies.
Id.
B.

Terms and Structure of the Policies

Each of the policies is a TransValue flexible premium universal life insurance
policy. See Specimen Policy. Each of the policies is governed by a written contract (“the
Policy”) and provides a total death benefit of $275,000. FAC ¶ 19-20. The benefit is
distributed in three payments: (1) $225,000 to DCD Partners; (2) $35,000 to either PIC
Trust or PIC LLC; and (3) $15,000 to the insured’s beneficiary for funeral and other
expenses. Id. ¶ 19.
Under the Policy, premiums are paid into an Accumulation Value Account (the
“Accumulation Value Account”). Id. ¶ 21. This account earns a minimum interest rate of
4%. Specimen Policy, at 2. Each month, Transamerica deducts a monthly deduction
from this account. FAC ¶ 21. The monthly deduction is calculated using a formula,
which includes three variables: (1) a policy fee fixed at $4.33; (2) a monthly deduction
rate (“MDR”); and (3) a monthly expense charge (“MEC”). Id. ¶ 24. At all times, the
Accumulation Value Account must have a net positive balance or the Policy will lapse.
Id. ¶ 21. Accordingly, while the Policy does not have a set premium, the amount of the
policy premiums corresponds to changes in the two variable rates, the MDR and MEC.
Id. ¶ 23. The higher the MDR and MEC, the greater the premiums required to maintain a
positive balance and avoid a lapse of the Policy. Id.
The Policy establishes maximum permissible rates for the MDR and MEC;
however, it expressly permits Transamerica to use rates lower than the maximum rates.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

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Case No.

2:15-cv-03238-CAS(VBKx)

August 24, 2015

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

Specimen Policy, at 14. The Policy provides that, at the beginning of each month,
Transamerica will determine the MDR based on five risk classifications: the insured’s
gender, the insured’s smoking status, the insured’s class of risk as of the policy date (i.e.
smoker or non-smoker), the number of years the policy has been in force, and the
insured’s attained age. FAC ¶ 25. The Policy also provides that any change in the MDR
and MEC will be “prospective and will be subject to [Transamerica’s] expectations as to
future cost factors.” Id. ¶ 47. Permissible cost factors include, but are not limited to,
mortality, expenses, interest, persistency, and any applicable federal, state, and local
taxes. Id. Transamerica states that it does “not distribute past surplus or recover past
losses by changing the monthly deduction rates.” Id. Finally, the Policy imposes a duty
on Transamerica to disclose certain information to plaintiffs. Id. ¶ 28. Specifically,
Transamerica must send plaintiffs a statement, at least once a year, showing: the face
amount; accumulation value; cash value; loans; partial surrenders; surrender penalty free
withdrawals; Additional Credits; premiums paid; and charges as of the statement date.
Id.
C.

The Instant Dispute

Each month, Transamerica sends DCD Partners a notice stating the amount of
premium payments requested for the policies. Id. ¶ 32. In recent notices, plaintiffs
allege, Transamerica has drastically increased the amount of premiums requested by
increasing the MDR and/or MEC. Id. For example, plaintiffs allege that on February 18,
2014, DCD Partners received a notice increasing the premiums for Pool 1 by 62.5%. Id.
And, in the fall of 2014, plaintiffs allege that DCD Partners received a notice increasing
the premiums on Pool 2 by 64.8%. Id. Plaintiffs contend that, prior to these increases,
projected annual premiums totaled $1,831,589. Id. ¶ 33. As of January 2015, however,
plaintiffs anticipate total annual premiums of $4,318,873, a 135.8% increase. Id.
Plaintiff’s allege that Transamerica increased the cost of premiums because
“Transamerica wants to increase its profitability, shed the Policies on disadvantaged
African-American citizens in Los Angeles, and bring about the lapse of the Policies by
making the premiums cost-prohibitive.” Id. ¶ 41. Plaintiffs allege that these actions
violate the Policy and were committed in bad faith.

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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Case No.

2:15-cv-03238-CAS(VBKx)

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

III.

Date

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August 24, 2015

LEGAL STANDARD

A motion pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the legal
sufficiency of the claims asserted in a complaint. Under this Rule, a district court
properly dismisses a claim if “there is a ‘lack of a cognizable legal theory or the absence
of sufficient facts alleged under a cognizable legal theory.’” Conservation Force v.
Salazar, 646 F.3d 1240, 1242 (9th Cir. 2011) (quoting Balisteri v. Pacifica Polic Dep’t,
901 F.2d 696, 699 (9th Cir. 1988)). “While a complaint attacked by a Rule 12(b)(6)
motion to dismiss does not need detailed factual allegations, a plaintiff’s obligation to
provide the ‘grounds’ of his ‘entitlement to relief’ requires more than labels and
conclusions, and a formulaic recitation of the elements of a cause of action will not do.”
Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). “[F]actual allegations must
be enough to raise a right to relief above the speculative level.” Id.
In considering a motion pursuant to Rule 12(b)(6), a court must accept as true all
material allegations in the complaint, as well as all reasonable inferences to be drawn
from them. Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998). The complaint must be
read in the light most favorable to the nonmoving party. Sprewell v. Golden State
Warriors, 266 F.3d 979, 988 (9th Cir. 2001); Parks Sch. of Bus., Inc. v. Symington, 51
F.3d 1480, 1484 (9th Cir. 1995). However, “[w]hile legal conclusions can provide the
framework of a complaint, they must be supported by factual allegations.” Ashcroft v.
Iqbal, 556 U.S. 662, 679 (2009); Moss v. United States Secret Service, 572 F.3d 962, 969
(9th Cir. 2009) (“[F]or a complaint to survive a motion to dismiss, the non-conclusory
‘factual content,’ and reasonable inferences from that content, must be plausibly
suggestive of a claim entitling the plaintiff to relief.” (citing Twombly and Iqbal)).
Ultimately, “[d]etermining whether a complaint states a plausible claim for relief will . . .
be a context-specific task that requires the reviewing court to draw on its judicial
experience and common sense.” Iqbal, 556 U.S. at 679.
Unless a court converts a Rule 12(b)(6) motion into a motion for summary
judgment, a court cannot consider material outside of the complaint (e.g., facts presented
in briefs, affidavits, or discovery materials). In re American Cont’l Corp./Lincoln Sav. &
Loan Sec. Litig., 102 F.3d 1524, 1537 (9th Cir. 1996), rev’d on other grounds sub nom
Lexecon, Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26 (1998). A court
may, however, consider exhibits submitted with or alleged in the complaint and matters
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

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Case No.

2:15-cv-03238-CAS(VBKx)

August 24, 2015

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

that may be judicially noticed pursuant to Federal Rule of Evidence 201. In re Silicon
Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999); Lee v. City of Los Angeles,
250 F.3d 668, 689 (9th Cir. 2001).
As a general rule, leave to amend a complaint which has been dismissed should be
freely granted. Fed. R. Civ. P. 15(a). However, leave to amend may be denied when “the
court determines that the allegation of other facts consistent with the challenged pleading
could not possibly cure the deficiency.” Schreiber Distrib. Co. v. Serv-Well Furniture
Co., 806 F.2d 1393, 1401 (9th Cir. 1986); see Lopez v. Smith, 203 F.3d 1122, 1127 (9th
Cir. 2000).
IV.

ANALYSIS
A.

Breach of Contract

Defendants assert that plaintiffs have failed to state a claim for breach of contract
under California law. To state a claim for breach of contract under California law, a party
must plead the existence of a contract, his or her performance of the contract or excuse
for nonperformance, the defendant's breach, and resulting damage. Vaccarino v. Midland
Nat. Life Ins., Co., 2011 WL 5593883, at *7 (C.D. Cal. Nov. 14, 2011) (citing Wall St.
Network, Ltd. v. N.Y. Times Co., 164 Cal. App. 4th 1171, 1178 (2008)). Plaintiffs allege
that defendants breached the terms of the policy in four ways: (1) impermissibly
increasing the MDR and MEC; (2) charging different rates to policy holders with
identical risk classifications; (3) increasing the MDR for a reason not permitted by the
policy; and (4) failure to comply with disclosure obligations required by the policy. FAC
¶¶ 46-50. The Court will address each of these alleged violations in turn.
1.

Impermissibly Increasing the MDR and MEC

Plaintiffs first argue that defendants violated the policy by increasing the MDR and
MEC. Regarding the MDR, the policy expressly states:
A table of guaranteed maximum monthly deduction rates for the
base policy is shown in the Policy Data. We may use rates lower
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
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Case No.

2:15-cv-03238-CAS(VBKx)

August 24, 2015

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL
than these guaranteed maximum monthly deduction rates. We will
never use higher rates.

Specimen Policy, at 14. The policy contains a nearly identical provision
regarding the MEC. Id. The Policy Data lists the maximum MDR permitted in
each year of the policy and the maximum MEC for all years of the policy. Id. at
2-3.
Plaintiffs argue that this language granted defendants discretion to use
rates lower than the maximum MDR and MEC, but denied them the ability to
increase those rates once they were established. Opp. to Mot. to Dismiss, at 3.
Plaintiffs place great weight on the phrase, “we will never use higher rates.”
They contend that, once defendants elected to initiate the policy with an MDR
and MEC lower than the maximum rates permitted, they were bound by a
promise to “never use higher rates” during the life of the policy. Id.
Plaintiffs’ argument is without merit. The quoted language is
appropriately read as barring defendants only from setting the MDR and MEC
at rates above the maximum rates. Nothing in the Policy prevents defendants
form exercising the discretion to “use rates lower” than the maximum rates, and
to increase those rates, so long as they do not exceed the maximum rates
specified in the Policy Data. Where the terms of the policy are unambiguous,
the Court will not infer a limitation on defendants which is not supported by the
language of the policy. See Croskey et al., Cal. Practice Guide: Insurance
Litigation (The Rutter Group 2015) (“Croskey”) ¶ 4:11 (“‘Clear and explicit’
policy language governs.”) quoting Powerine Oil Co., Inc. v. Supt. Ct., 37 Cal.
4th 377, 390 (2005). Accordingly, insofar as plaintiffs assert that any increase
of the MDR and MEC constitutes a violation of the policy, defendants’ motion
is GRANTED without prejudice.
However, plaintiffs have also alleged that at least one policy was charged
an MDR and/or MEC in excess of the purported maximum rates. In the first
amended complaint, plaintiffs identify Policy no. 46-6149. FAC ¶ 39.
According to the provisions of this policy, the monthly deduction could not
exceed $50.89 during policy year 2012-2013. Id. Nonetheless, plaintiffs allege
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Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

that this policy was charged a monthly deduction of $569.08. Id. Taking
plaintiffs’ allegations as true, the complaint states an express violation of the
policy, at least as to policy no. 46-6149.
Defendants argue that plaintiffs have failed to adequately allege that
additional policies were charged rates in excess of the maximum MDR and
MEC rates. Reply at 10. Specifically, defendants contend that plaintiffs have
identified only a single instance of an MDR or MEC above the maximum rates
whereas the instant litigation involves over 2,000 policies. Id.
Defendants’ argument is unavailing. At the pleading stage, plaintiffs
need only establish that it is “plausible” that additional policies were charged
impermissible rates. See Twombly, 550 U.S., at 547 (a plaintiff needs “only
enough facts to state a claim to relief that plausible on its face.”). The court
may infer from evidence that policy no. 46-6149 was charged a monthly
deduction in excess of the maximum rate, that additional policies were violated
in the same manner. Therefore, to the extent plaintiffs assert that defendants
breached the policy by charging rates in excess of the maximum MDR and
MEC, defendants’ motion is DENIED.
2.

Charging different rates to policy holders with identical
risk classifications

The policy provides that Transamerica will set the MDR based on five
risk classifications: (1) the policy holder’s gender; (2) the policy holder’s
smoking status; (3) the policy holder’s class of risk (i.e. smoker or non-smoker)
as of the policy date; (4) the number of years that the policy has been in force;
and (5) the policy holder’s attained age. Specimen Policy, at 13.
Based on these classifications, plaintiffs argue that the policy requires
defendants to charge the same MDR to all policy holders with the same risk
classifications. FAC ¶ 45. For example, under plaintiffs’ theory, all
Transamerica policy holders who are 21 years old, non-smokers, and have had a
policy in force for five years should be charged the same rate. See Opp. to Mot.
to Dismiss, at 7. Plaintiffs contend that defendants breached the policy by
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
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Case No.

2:15-cv-03238-CAS(VBKx)

August 24, 2015

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

charging plaintiffs’ an MDR greater than other policies with identical risk
classifications. FAC ¶ 45.
Plaintiffs’ argument is not supported by the policy language and is
implausible. While, theoretically, all 21 year old female non-smokers with a
policy in force for five years may have the same risk classifications, plaintiffs
fail to account for variations across Transamerica’s many policy forms.
Plaintiffs cannot contend that defendants are required to charge the same rate to
all policyholders without regard to the type of policy at issue. This would
mean, for example, that a policy holder with term life insurance would be
charged the same rate as a policy holder with whole life insurance simply
because their risk classifications were the same.
Accordingly, to the extent plaintiffs argue that defendants must charge
the same rates to policyholders with identical risk classifications across all of
their policies, they have failed to state a valid theory for breach of contract.
Therefore, to the extent plaintiffs argue that defendants breached the policy by
charging different rates to policyholders with the same risk classifications,
defendants’ motion is GRANTED without prejudice.
3.

Increasing the MDR for a reason not permitted by the
policy

The policy provides that, “[a]ny change in the monthly deduction rate
will be prospective and will be subject to [defendants] expectations as to future
cost factors. Such cost factors may include, but are not limited to: mortality;
expenses; interest; persistency; and any applicable federal, state and local
taxes.” Specimen Policy, at 14. Additionally, plaintiffs allege that the policies
provide that “Transamerica does ‘not distribute past surplus or recover past
losses by changing the monthly deduction rates.” FAC ¶ 47.
Plaintiffs argue that defendants breached the policy by increasing the
MDR based on circumstances other than “cost factors.” Id. Specifically, they
argue that defendants increased the MDR based on profitability and racial
animus. See Id. at ¶¶ 41, 47 (“Transamerica wants to increase its profitability,
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August 24, 2015

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

shed the Policies on disadvantaged African-American Citizens in Los Angeles,
and bring about the lapse of the Policies by making the premiums costprohibitive.”).
Defendants respond that the policy gave Transamerica wide discretion to
increase the MDR in light of changing circumstances affecting these policies.
Mot. to Dismiss at 12. Moreover, defendants argue that plaintiffs have
provided only speculative allegations, without facts demonstrating racial
animus or an improper profit motive. Reply at 9.
Taking plaintiffs allegations that the defendants increased the MDR for
reasons other than cost factors as true, as it must do on a 12(b)(6) motion, the
Court finds that plaintiffs have stated a plausible claim for breach of contract.
As defendants argue, it is conceivable that the cost of insuring a policy holder
might increase sufficiently to justify a change in the MDR. See Mot. to Dismiss
at 13. However, plaintiffs do not merely allege a change in the MDR. Rather,
they allege that, as of January of this year, premium rates had increased by
135.8%. FAC ¶ 33. It is therefore plausible that defendants considered factors
other than the cost of maintaining these policies in effecting such a significant
change.2 Contrary to defendants’ assertions, such allegations “nudge
[plaintiffs’] claims across the line from conceivable to plausible.” Twombly,

2

Defendants also argue that in the 2009 and 2011 policy illustrations, which this
Court has judicially noticed, defendants indicated that there would be a substantial
increase in premiums in policy years 10 and 11. Therefore, to the extent the current
increases appear excessive, defendants contend that these increases were contemplated by
the parties at the inception of the policy. Plaintiffs disagree with this assertion and
contend that, even if an increase was anticipated, an increase of this magnitude was not.
For example, they allege that defendants represented that it had increased rates only once
in the past 30 years. FAC ¶ 29. On a motion to dismiss, the Court must accept all of
plaintiffs assertions as true. Accordingly, while the Court notes that there is a factual
dispute regarding the planned rates for these policies, defendants’ argument is unavailing
at this time.
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Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

550 U.S. at 570. Accordingly, in so far as plaintiffs argue that defendants used
an improper basis to increase the MDR, defendants’ motion is DENIED.
4.

Failure to comply with disclosure obligations required by
the policy

Finally, plaintiffs allege that defendants have breached the policies
disclosure obligations. The policy provides that “[Transamerica] will send
[plaintiffs] a statement at least once a year showing: the face amount;
accumulation value; cash value; loans; partial surrenders; surrender penalty free
withdrawals; Additional Credits; premiums paid; and charges as of the
statement date.” Specimen Policy, at 25.
Plaintiffs allege that defendants failed to: (1) describe how it calculated
the substantial increase in the monthly deductions from the policies; (2) provide
notice of the increase in the MDR or MEC; and (3) failed to provide material
information concerning the policy. FAC ¶¶ 32-34. Additionally, there appears
to be a factual dispute regarding whether defendants did in fact send a yearly
statement containing the disclosures expressly required by the policy. See
Opp. to Mot. to Dismiss at 9-10.
At this juncture, the Court cannot find as a matter of law that failure to
disclose the information plaintiffs allege would not constitute a violation of the
policy. At a minimum, failure to comply with the yearly statements provision
of the Policy would constitute a breach of one of the express terms of the
contract. Moreover, with regard to plaintiffs additional allegations, the policy
language establishes that defendants were obligated to disclose significant
information regarding the policy, which could include the basis for increasing
monthly deductions, notice of increases in the MDR and MEC, and additional
material information. See also Iqbal, 556 U.S. at 678 (“A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to
draw the reasonable inference that the defendant is liable for the misconduct
alleged.”). Moreover, under California law insurers owe “fiduciary-like” duties
to their policyholders, which may include significant disclosure obligations.
See Croskey, at ¶¶ 11:146, 157 (“An insurer may be required to disclose ‘all
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DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

material facts’ relating to an insurance contract that is in existence”).
Accordingly, to the extent plaintiffs claim for breach of contract is premised on
a violation of the policy’s disclosure obligations, defendants’ motion is
DENIED.
B.

Breach of the Implied Covenant of Good Faith and Fair
Dealing

Plaintiffs’ second claim for relief asserts that defendants violated the
implied covenant of good faith and fair dealing by exercising their discretion to
increase the MDR and MEC in bad faith. “Every contract imposes upon each
party a duty of good faith and fair dealing in its performance and its
enforcement.” Carma Developers (Cal.), Inc. v. Marathon Dev. Cal., Inc., 2
Cal. 4th 342, 371-72 (1992). Notwithstanding, the covenant of good faith may
not “prohibit a party from doing that which is expressly permitted by an
agreement.” Id. at 374. However, “where a contract confers on one party a
discretionary power affecting the rights of the other, a duty is imposed to
exercise that discretion in good faith and in accordance with fair dealing.”
McNeary-Calloway v. JP Morgan Chase Bank, N.A., 863 F. Supp. 2d 928, 956
(N.D. Cal. 2012) (quoting Perdue v. Crocker Nat’l Bank, 38 Cal. 3d 913, 923
(1985)).
Defendants argue that the implied covenant does not apply in this
instance. Specifically, they argue that the policy expressly permits defendants
to exercise their discretion in setting the MDR and MEC, provided they do not
violate the policies express limitations (i.e. the maximum permissible rates).
Mot. to Dismiss, at 15-16. Implying the covenant of good faith in this case,
defendants contend, would prohibit them from taking actions expressly
permitted by the policy. Id.
In support of their argument, defendants rely on Baymiller v. Guarantee
Mutual Life Company, 2000 WL 1026565 (C.D. Cal. May 3, 2000). In that
case, policyholders brought a claim for violation of the implied covenant of
good faith against their insurer. Id. at *3. The applicable policy established a
minimum interest rate and provided that the insurer could set higher interest
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-03238-CAS(VBKx)

August 24, 2015

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

rates “in the amount and by the method to be determined by the Company” up
to a maximum rate. Id. at *1. The policyholders argued that their insurer
breached the covenant of good faith by exercising its discretion over interest
rates in bad faith. Id. at *3. The court found that the implied covenant did not
apply, because implying an obligation to exercise discretion over interest rates
in good faith would prohibit the insurer from exercising the wide discretion
granted under the policy. Id.
However, in U.S. Bank National Association v. PHL Variable Life
Insurance Company, 2015 WL 3932791 (S.D.N.Y. Jun. 22, 2015), the court
found that the implied covenant of good faith could apply to an insurer’s
exercise of discretion under California law. In that case, the applicable policy
granted the insurer discretion to set “Cost of Insurance” rates. Id. at *2. The
insurer’s discretion was restrained by several limitations, including that rates be
based on permissible factors and that they not exceed maximum permissible
rates. Id. The court found that, because the policy did not grant the insurer
unbounded discretion to set rates, it was not inconsistent with the parties
agreement to imply a covenant of good faith. Id. (“While the policies provide
Phoenix bounded discretion in setting insurance rates, there is no language
suggesting that Phoenix was free to set rates as it please subject only to the
express limitations in the contract.”).
This case is more analogous to U.S. Bank. In Baymiller, because the
policy permitted the insurer to set interest rates “in the amount and by the
method to be determined by the company,” implying the covenant of good faith
would have directly contradicted the policies’ express grant of wide discretion.
In short, the Baymiller policy permitted the insurer to take actions which would
otherwise have been forbidden by the implied covenant. Here, defendants’
discretion over the MDR and MEC is limited by application of “cost factors.”
Accordingly, the policies’ grant of discretion to defendants is not so broad as to
be inconsistent with an obligation of good faith. See U.S. Bank Nat. Assoc.,
2015 WL 3932791, at *2 (“In those cases—where discretion exists without
broad, Baymiller-like language—California courts have consistently implied a
covenant of good faith and fair dealing.”).
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-03238-CAS(VBKx)

August 24, 2015

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

Defendants also contend that, even if the implied covenant does apply to
this case, plaintiffs have failed to plead sufficient facts to support a claim that
the covenant has been breached. Mot. to Dismiss, at 15. Plaintiffs’ claim under
the implied covenant is based on their allegations that defendants applied
improper considerations in adjusting the MDR and MEC. FAC ¶ 57. For the
reasons stated above, the Court finds that plaintiffs’ allegations of significant
increases in the MDR and MEC raise a plausible claim that defendants applied
improper factors in changing these rates. Accordingly, plaintiffs have pled
sufficient facts to state a claim for breach of the implied covenant of good faith
and defendants’ motion is therefore DENIED.
C.

Tortious Breach of the Duty of Good Faith and Fair Dealing

Plaintiffs have also asserted a claim for breach of the implied covenant of
good faith and fair dealing sounding in tort. A breach of the implied covenant
of good faith in an insurance contract can give rise to an action in either
contract or tort. See Archdale v. American Intern. Specialty Lines Ins. Co, 154
Cal. Rptr. 3d 632, 648 (2007) (remedy for breach of the implied covenant
“sounds in both contract and tort.”). However, to bring an action in tort a
plaintiff must allege that benefits due under the policy have been improperly
withheld. See Benavides v. State Farm Gen. Ins. Co., 136 Cal. App. 4th 1241,
1250 (2006) (“[T]he essence of the tort of the implied covenant…is focused on
the prompt payment of benefits under the insurance policy, there is no cause of
action…when no benefits are due.”).
Plaintiffs allege that several benefits due under the policy are presently
being withheld. Specifically, they allege that an increase in policy rates results
in greater monthly deductions from the Accumulation Value Account. Opp. to
Mot. to Dismiss, at 14. Plaintiffs are entitled to receive interest on the value of
the account and the policy contains several provision by which policyholders
may receive cash from the account. Id. Therefore, plaintiffs argue that, by
improperly increasing the MDR and MEC, Transamerica has reduced the
Accumulation Value Account and, accordingly, reduced the value of benefits
plaintiffs are entitled to. Id.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-03238-CAS(VBKx)

August 24, 2015

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

Defendants respond that, even if the policy rates increased, the FAC
admits that DCD Partners has continued to pay premiums at an increased rate.
Reply, at 14. Therefore, defendants contend that, because DCD Partners has
responded to the rate increases by paying higher premiums, plaintiffs have
failed to allege an actual reduction in the Accumulation Value Account. Id.
The Court recognizes that DCD Partners has continued to pay premiums
at a higher rate. Nonetheless, while defendants may contend that DCD
Partners’ increased premiums reduce the likelihood of a diminution in the
Accumulation Value Account, at the motion to dismiss stage the Court must
take plaintiffs assertions as true and plaintiffs need only state a claim that is
“plausible.” Plaintiffs have alleged that there has been a diminution in the
Accumulation Value Account which reduces the potential for plaintiffs to earn
interest and receive cash from the accounts. Furthermore, plaintiffs have
alleged that the monthly deduction from the Accumulation Value account has
more than doubled. Therefore, the Court finds that plaintiffs have stated a
plausible claim that defendants wrongfully denied them a benefit due under the
policy.3
Furthermore, for the reasons stated above, plaintiffs have stated a
plausible claim that defendants exercised their discretion over the MDR and
MEC in bad faith. Accordingly, plaintiffs have sufficiently stated a claim for
tortious breach of the implied covenant of good faith and defendants motion is
DENIED.

3

Defendants also assert that plaintiffs PIC Trust and PIC LLC lack standing to
pursue the claims alleged in the FAC. Defendants argue that because DCD Partners pays
the premiums for the policies, DCD Partners alone has suffered an economic harm. Mot.
to Dismiss, at 24-25. For the reasons stated, the Court finds that plaintiffs have
adequately pled facts showing that the alleged increase in policy rates has resulted in a
harm to PIC Trust and PIC LLC. Accordingly, the Court finds that plaintiffs PIC Trust
and PIC LLC possess standing to pursue the claims alleged in the FAC.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Case No.

2:15-cv-03238-CAS(VBKx)

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL
D.

Date

‘O’

August 24, 2015

Negligent Misrepresentation

Plaintiffs allege a claim for negligent misrepresentation against
defendants. To establish a claim for negligent misrepresentation, a plaintiff
must plead “(1) a misrepresentation of a past or existing fact, (2) without
reasonable grounds for believing it to be true, (3) with intent to induce another’s
reliance on the fact misrepresented, (4) ignorance of the truth and justifiable
reliance thereon by the party to whom the misrepresentation was directed, and
(5) damages.” Fox v. Pollack, 181 Cal. App. 3d 954, 962 (1986).
In support of their claim, plaintiffs allege that Transamerica represented
to Reverend Hardwick that it would violate Transamerica’s corporate principles
to discriminate against African-American policy holders. FAC ¶ 15. Plaintiffs
contend that this representation was false, and that in fact defendants singled
out the predominantly African-American policy holders in this case for rate
increases. Id. ¶ 41.
Defendants first argue that the representations plaintiffs identify are
extraneous to the Policy. Mot. to Dismiss, at 22. Therefore, they argue that
plaintiffs cannot premise their claim on statements or documents outside the
Policy, which is a fully integrated agreement. Id. A policy issued by an insurer
is “deemed to constitute the entire contract between the parties and nothing
shall be incorporated therein by reference…unless the same are endorsed upon
or attached to the policy.” Cal. Ins. Code. § 10113. As such, extrinsic evidence
may generally not be admitted to contradict the terms of an insurance policy.
See Blos v. Bankers Life Co., 133 Cal. App. 2d 147, 152 (1955) (“neither
[party] should be permitted to show preliminary negotiations to defeat [the
policy’s] operation”). However, plaintiffs do not seek to introduce evidence
extrinsic to the policy in order to contradict its terms. Rather, they seek to
establish that defendants representations induced plaintiffs to enter an
agreement with defendants. See FAC ¶ 41. Accordingly, the general rule
regarding extrinsic evidence does not apply to plaintiffs claim for negligent
misrepresentation. See also Dias v. Nationwide Life Ins. Co., 700 F. Supp. 2d
1204, 1217-18 (E.D. Cal. Mar. 19, 2010) (finding evidence of an insurer’s prior
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-03238-CAS(VBKx)

August 24, 2015

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

representation was admissible to establish fraud, even if the relevant insurance
policy was fully integrated).4
Defendants next argue that the FAC fails to identify an actual
misrepresentation of material fact. Mot. to Dismiss, at 22. Specifically, they
argue that plaintiffs’ claims of racial discrimination are not supported by
sufficient factual allegations. Reply at 20. However, the policyholders in this
case are predominantly African-American. FAC ¶ 14. Moreover, plaintiffs
allege that Transamerica admitted that the policies constituted “nearly all” of
the “class” that experience a rate increase. Id. ¶ 37. Thus, plaintiffs have
alleged that despite representing that they would not discriminate against
African-Americans, Transamerica initiated a substantial rate increase,
seemingly limited to a predominantly African-American group of policy
holders. Such allegations are sufficiently specific to state a “plausible” claim
that defendants misrepresented their corporate policies.
Finally, defendants argue that, even if plaintiffs have identified a
misrepresentation of a material fact, they have failed to plead any facts that
defendants lacked a reasonable grounds to believe the challenged statements.

4

At the hearing, defendants argued that, because plaintiffs are alleging a theory of
negligent misrepresentation based on fraud in the inducement of the Policy, they may
only rely on a fraud exception to the general rule against extrinsic evidence if they are
seeking to rescind the policy. However, when a party claims that their has been fraud in
the inducement of a contract, his remedy is not limited solely to rescission of the contract;
rather, they may elect between either rescission or affirming the contract and seeking
damages. See 4 Witkin, Cal. Proc. 5th, Plead § 417 (“[Defendants] alleged facts showing
fraud in the inducement, which would have justified rescission or damages”) citing
MacIsaac v. Pozzo, 26 Cal. 2d 809 (1945); see also Hershey Entertainment & Resorts Co.
v. Interactive Rides, Inc., 2005 WL 3320843, *6 n.15 (M.D. Penn. Dec. 7, 2005) (finding
that plaintiff who alleged fraud in the inducement could seek “damages, not rescission of
the contract.”). Accordingly, even though plaintiffs are not seeking rescission of the
Policy, they may still rely on the fraud exception to introduce extrinsic evidence showing
that defendants made misrepresentations which induced plaintiffs to enter the contract.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-03238-CAS(VBKx)

August 24, 2015

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

Mot. to Dismiss, at 22. In the FAC, plaintiffs’ state only that “Transamerica’s
acts and omissions were and are unreasonable and without proper cause.” FAC
¶ 64. These conclusory allegations are insufficient to support a claim that
defendants lacked a reasonable grounds to believe the truth of the challenged
statement.5
Accordingly, while plaintiffs have sufficiently pled that defendants made
a misstatement of material fact, the FAC fails to adequately allege all of the
element required to state a claim for negligent misrepresentation. Therefore,
defendants motion is GRANTED without prejudice.
E.

Unfair Competition Law

To state a claim for unfair competition pursuant to Cal. Bus. & Prof.
Code §§ 17200 et seq., a plaintiff must allege an “unlawful, unfair, or
fraudulent business act or practice.” Cal. Bus. & Prof. Code § 17200.
“Because [the UCL] is written in the disjunctive, it establishes three varieties of
unfair competition—acts or practices which are unlawful, or unfair, or
fraudulent.” Boschma v. Home Loan Ctr., Inc., 198 Cal. App. 4th 230, 252
(Cal. Ct. App. 2011) (internal quotation marks and citation omitted).
Defendants argue that plaintiffs have failed to state a cliam for relief as to all
three prongs of the UCL.
Plaintiffs have adequately alleged a claim under the “unlawful” prong. A
claim under the “unlawful” prong can be predicated on any business practice
“forbidden by law, be it civil or criminal, federal, state, or municipal, statutory,
regulatory, or court made.” Agarwal v. Pomona Valley Med. Grp. Inc., 476
F.3d 665, 674 (9th Cir. 2007). Here, plaintiffs UCL claim is predicated on
defendants alleged tortious breach of the covenant of good faith and negligent

5

The Court notes as well that plaintiffs have stated in their opposition: “[t]o the
extent that the Court believes that Plaintiffs’ allegations are insufficient, Plaintiffs will
plead additional facts.” Opp. to Mot. to Dismiss, at 21-22. Accordingly, the Court grants
defendants motion without prejudice so that plaintiffs may plead these additional facts.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-03238-CAS(VBKx)

August 24, 2015

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

misrepresentation. See Opp. to Mot. to Dismiss, at 16. Because the Court finds
that plaintiffs have adequately alleged a claim for tortious breach of the
covenant of good faith the Court also finds that plaintiffs have stated a claim
under the “unlawful” prong of the UCL.
Furthermore, plaintiffs have adequately alleged a claim under the
“unfair” prong of the UCL. To state a claim under the “unfair” prong, a
plaintiff must prove that a “business practice . . . violates established public
policy” or is “immoral, unethical, oppressive or unscrupulous and causes injury
to consumers which outweighs its benefits.” Eisen v. Porsche Cars North
America, Inc., 2012 WL 841019, *5 (C.D. Cal. Feb. 22, 2012) citing McKell v.
Washington Mut., Inc., 142 Cal. App. 4th 1457, 1473 (2006). Here, plaintiffs
allege that defendants violated the “unfair” prong by, among other things,
excessively raising policy rates on the basis of either racial animus or improper
profit motivations. FAC ¶ 41. As stated above, the Court finds that these
allegations are sufficient to state a claim that Transamerica exercised its
discretion over the MDR and MEC in bad faith. At the motion to dismiss stage,
these are sufficient allegations of a business practice that is “immoral, unethical,
oppressive, or unscrupulous, and causes injury to consumers which outweighs
its benefits.” See Eisen, 2012 WL 841019, *5. Accordingly, plaintiff has
adequately alleged a claim under the “unfair” prong.
Accordingly, because the Court finds that plaintiffs have sufficiently
alleged claims under the “unlawful” and “unfair” prongs of the UCL,
defendants’ motion is denied.
F.

Declaratory Judgment

Plaintiffs’ final claim is for declaratory judgment as to their ongoing
rights under the policy. Defendants argue that this claim should be dismissed
because it is duplicative of plaintiffs’ other causes of action. Mot. to Dismiss, at
23.
“The availability of other adequate remedies may make declaratory relief
‘inappropriate.’” StreamCast Networks, Inc. v. IBIS LLC., 2006 WL 5720345,
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-03238-CAS(VBKx)

August 24, 2015

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

at *4 (C.D. Cal. May 2, 2006). However, “[t]he existence of another adequate
remedy does not preclude a judgment for declaratory relief in cases where it is
appropriate.” Fed. R. Civ. Proc. 57. Moreover, declaratory relief is proper,
“where a breach of contract claim will not settle all of the contractual issues
concerning which plaintiff seeks declaratory relief.” StreamCast Networks,
Inc., 2006 WL 5720345, at *4.
Defendants argue that plaintiffs’ claim for declaratory relief is
unnecessary because it seeks the same relief plaintiffs request under their claims
for breach of contract and the UCL. Mot. to Dismiss, at 24. The Court
disagrees. In plaintiffs’ other claims they request damages and an injunction
precluding defendants from using the existing MDR and MEC rates. FAC ¶¶
52, 57, 64, 69-70. In plaintiffs’ claim for declaratory relief, however, they seek
a declaration of the parties respective rights and obligations under the Policy.
FAC ¶ 76. This is a distinct remedy from the injunction requested in plaintiffs
other claims. Moreover, to the extent such a declaration of rights may give rise
to injunctive relief which overlaps with plaintiffs’ other requests for relief,
plaintiffs will be required to make an election of remedies if they prevail on
both claims. Accordingly, plaintiffs request for injunctive relief is not
duplicative of their other claims and defendants motion to dismiss is DENIED.
V.

CONCLUSION

In accordance with the foregoing, the Court GRANTS without prejudice
defendants’ motion to dismiss as to plaintiffs’ claim for negligent
misrepresentation. The court DENIES defendants motion as to all other claims.
Plaintiff shall have 14 days to file a second amended complaint
addressing the deficiencies identified herein. Failure to do so may result in
dismissal with prejudice of plaintiffs’ claim for negligent misrepresentation.

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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-03238-CAS(VBKx)

August 24, 2015

Title

DCD PARTNERS, LLC., ET AL V. TRANSAMERICA LIFE
INSURANCE COMPANY, ET AL

Defendants shall thereafter have 30 days to file a response to plaintiffs amended
complaint.
IT IS SO ORDERED.
00
Initials of Preparer

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:

12

CMJ

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