KUSHNIR et al v. AVIVA LIFE & ANNUITY COMPANY

Filing 50

MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE JAN E. DUBOIS ON 8/21/13. 8/22/13 ENTERED AND COPIES MAILED TO UNREPS, E-MAILED.(rf, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
VLADIMIR KUSHNIR, Individually and as
Trustee of the V-4 Management LLC Defined
Defined Benefit Pension Plan & Trust, and
V-4 MANAGEMENT, LLC,
Plaintiffs,

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v.
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AVIVA LIFE & ANNUITY COMPANY,
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Defendant/Third Party Plaintiff, :
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v.
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JEFFREY CUNNING; ROGER FULLER;
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SCOTT RIDGE; and T.J AGRESTI,
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Third Party Defendants.
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DuBois, J.

CIVIL ACTION
NO. 11-7701

August 21, 2013
MEMORANDUM

I.

INTRODUCTION
Plaintiffs Vladimir Kushnir and V-4 Management, LLC brought suit against defendant

Aviva Life & Annuity Company in connection with a life insurance policy purchased from
defendant. Presently before the Court is defendant’s partial motion to dismiss the Amended
Complaint. For the reasons set forth below, the Court grants in part and denies in part defendant’s
motion.
II.

BACKGROUND
In their Amended Complaint, plaintiffs Vladimir Kushnir and V-4 Management, LLC,

allege, inter alia, that defendant Aviva Life & Annuity Company and certain authorized agents
marketed and sold Kushnir a life insurance policy (“the Policy”) which he used to fund a defined
benefit pension plan established by V-4. This type of benefit plan, created under 26 U.S.C. §
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412(i) 1 of the Internal Revenue Code, generally provides participating employees with certain
retirement and death benefits and “must be funded by assets sufficient to fund those future
benefits,” such as insurance or annuity policies. (Am. Compl. at ¶16.)
Plaintiffs allege that defendant and its agents “consistently represented that the Policy
would require only five out-of-pocket premium payments of $190,119.10 each in years one
through five of the Policy, with the annual premiums in at least each of the next six years . . . being
paid from the Policy’s accumulated cash value or loans against the same.” (Id. at ¶61.) The
Policy was issued on February 3, 2003, and plaintiffs paid annual premiums of $190,118.10 for
five years, from 2003 to 2007. (Id. at ¶80.)
“Defendant claims to have placed the Kushnir Policy on ‘reduced paid up’ . . . status, as of
March 27, 2008, for alleged failure of Kushnir to pay the annual premium due on February 3, 2008
. . . . ” (Id. at ¶89.) Plaintiffs allege that as a consequence of the “reduced paid up status,” the
death benefit under the Policy was reduced by $3.8 million, and the “surrender charges” of the
Policy were increased, which in turn caused the cash surrender value of the Policy to decrease.
(Id. at ¶90.)
In 2007 the IRS initiated an audit concerning “Plaintiffs’ use of the Kushnir Policy to fund
the V-4 Plan.” (Id. at ¶84.) The IRS subsequently determined that “Plaintiffs’ use of the
Kushnir Policy to fund the V-4 Plan was abusive and unlawful, resulting in the denial of tax
exemptions and deductions claimed by Kushnir and V-4 on the $950,75.42 in premium
contributions, and the assessment of excise taxes and other penalties . . . . ” (Id. at ¶85.)

1 Defendant notes that 2006 amendments to the statue renumbered § 412(i) as § 412(e)(3) but left the contents
unchanged. The parties both refer to the subsection as § 412(i) and the Court will do likewise.

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The Amended Complaint contains five counts: (1) Violation of Pennsylvania’s Unfair
Trade Practices and Consumer Protection Law (“UTPCPL”), (2) Common Law Fraud, (3)
Equitable Rescission/Unjust Enrichment, (4) Breach of Contract, and (5) Bad Faith.
Defendant moves to dismiss plaintiffs’ “fraud-based” claims in Counts I and II of the
Amended Complaint. The gravamen of plaintiffs’ claims in Counts I and II is that defendant
misrepresented both (1) the legality and effectiveness of using the Policy to fund a § 412(i) plan,
and (2) the payment schedule for the Policy. Defendant seeks dismissal only of those fraud-based
claims in Counts I and II which address the legality and effectiveness of the § 412(i) plan.
Defendant also moves to dismiss Count III of the Amended Complaint. 2 The Court addresses
defendant’s arguments in turn.
III.

DISCUSSION
A. Count I- Violation of UTPCPL
Defendant first argues that plaintiff lacks standing to bring a claim under the UTPCPL

because the product at issue was purchased for business purposes. The UTPCPL permits a
private right of action where a plaintiff experiences a loss from certain unlawful business practices,
so long as the “goods or services” at issue are “primarily for personal, family or household
purposes . . . . ” 73 Pa. Stat. Ann. § 201-9.2. “Whether a purchase is primarily for household
purposes and a cause of action under the UTPCPL is available depends on the purpose of the
purchase, not the type of product purchased.” Coleman v. Commonwealth Land Title Ins. Co.,
684 F. Supp. 2d 595, 618 (E.D. Pa. 2010). Defendant argues that the § 412(i) plan at issue was

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Defendant seeks dismissal of those parts of the fraud-based claims in Counts I, II and III, “relating to the § 412(i)
plan.” (Reply at 3.) However, in its motion papers defendant argues that Count III in its entirety is improper as a
matter of law.

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created for Kushnir’s business purposes and, as such, his claims under the UTPCPL should be
dismissed.
In response, plaintiffs state that the product at issue is not the § 412(i) plan, but rather the
Policy that was marketed and sold by defendant and its agents. Plaintiffs allege that the Policy
was in fact purchased by Kushnir “for his individual, personal use and benefit, to be funded by tax
exempt contributions of a portion of his own compensation and purchased out of the V-4 Plan by
him.” (Am. Compl. at ¶56.)
The Court concludes that there is a disputed issue of material fact on this question.
Defendant avers that Kushnir utilized a § 412(i) plan solely for business purposes, while plaintiffs
claim that “the Plan was merely a temporary vessel that Plaintiff Kushnir was to use to deposit an
insurance policy (paid for by him) for five years, at which point it was to come back to him.”
(Resp. at 32.) “It is not the duty of the court, upon a motion to dismiss, to decide the merits where
an issue of material fact is in dispute.” Motorup Corp. v. Galland, Kharasch & Garfinkle, 2001
WL 34368760, at *2 (E.D. Pa. Dec. 4, 2001). Accordingly, defendant’s motion on this ground is
denied.
B. Count II- Common Law Fraud
State courts have described the elements of fraud as: “(1) [a] representation; (2) which is
material to the transaction at hand; (3) made falsely, with knowledge of its falsity or recklessness
as to whether it is true or false; (4) with the intent of misleading another into relying on it; (5)
justifiable reliance on the misrepresentation; and, (6) the resulting injury was proximately caused
by the reliance.” Bortz v. Noon, 556 Pa. 489, 499 (Pa.1999). Defendant argues that plaintiffs’
common law fraud count should be dismissed for two reasons: (1) plaintiffs do not allege a

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misrepresentation of a pre-existing fact, and (2) plaintiffs cannot establish justifiable reliance.
The Court addresses these arguments in turn.
First, defendant states that common-law fraud requires a misrepresentation or omission of
an “existing or pre-existing fact,” and that plaintiffs have alleged only incorrect statements of
opinion relating to future tax consequences of the Policy. (Mot. at 11, 14.) Because plaintiffs
have failed to allege a misrepresentation of an existing fact, defendant argues, plaintiffs’ fraud
claim should be dismissed.
In response, plaintiffs contend, inter alia, that their fraud claims do not concern
“forward-looking” opinions or predictions, but rather allege that defendant and its agents
fraudulently misrepresented the legality and effectiveness of the Policy at the time of the sale. In
the Amended Complaint, plaintiffs allege that prior to the sale of the Policy, defendant marketed
and sold a type of life insurance policy known as “The Executive VIP Policy,” to fund a
“multi-employer welfare benefit plan[] under IRC § 419A . . . . ” (Am. Compl. at ¶19.) Plaintiffs
further claim that in 2000, the IRS categorized the use of policies such as The Executive VIP
Policy in § 419A plans as “‘listed transactions,’ a transaction that is the same as, or substantially
similar to, one that the IRS has determined to be an illegal or ‘abusive’ tax avoidance transaction.”
(Id. at ¶19.)
The Amended Complaint alleges that the type of life insurance sold to Kushnir, a “Vista
PenPro Policy,” was identical to the Executive VIP Policy, and that “419A Plans are similar to
412(i) Plans in their use of insurance and annuity products to fund the payment of future retirement
and death benefits of participating employees.” (Id. at ¶20, 34.) Plaintiffs conclude that the use
of the Vista PenPro policy sold to Kushnir “to fund 412(i) Plans was as abusive as the use of such

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policies to fund 419(A) Plans,” and that the IRS “definitively” declared such § 412(i) plans illegal
in 2004. (Id. at ¶35.)
In sum, plaintiffs aver that defendant and its agents were aware that using the Policy to
fund a § 412(i) plan was abusive at the time of the sale, while defendant rejects this claim and
argues that the IRS rulings pertaining to § 419A plans had no relevance to the products at issue.
(Repl. at 5.) At this stage in the proceedings, the Court is required to accept as true all plausible
factual allegations in the Amended Complaint, such as those facts pertaining to the knowledge of
defendant and its agents. Defendant’s motion on this ground is accordingly denied.
Defendant also argues that plaintiffs’ common law fraud claim should be dismissed on the
ground that plaintiffs cannot establish justifiable reliance on the misrepresentations alleged as they
are only opinions or predictions concerning the future tax treatment of the § 412(i) plan.
Plaintiffs again respond that the Amended Complaint alleges misrepresentations related to the
then-current legality and tax consequences of the Policy. As noted above, the Court must accept
as true all plausible factual allegations in the Amended Complaint.
Defendant separately argues that plaintiffs cannot justifiably rely upon a misrepresentation
of law. The Court rejects this argument. Under Pennsylvania law, a plaintiff may justifiably rely
upon a misrepresentation of the tax consequences of a transaction. See Hughes v.
Consol-Pennsylvania Coal Co., 945 F.2d 594, 614 (3d Cir. 1991). Accordingly, defendant’s
motion on this ground is denied.
C. Count III- Equitable Rescission/Unjust Enrichment
Defendant argues that plaintiffs’ claims for equitable rescission and unjust enrichment in
Count III should be dismissed. First, defendant argues that equitable rescission is not a separate
cause of action, but rather “is a remedy for fraud . . . . ” Fulton Bank, N.A. v. UBS Sec., LLC,

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2011 WL 5386376, at *16 (E.D. Pa. Nov. 7, 2011) (collecting cases). The Court agrees. Thus,
defendant’s motion is granted to the extent that plaintiffs assert a separate cause of action for
equitable recession. This dismissal does not affect plaintiffs’ prayer for relief in the form of
equitable rescission in Counts I and II.
Defendant also argues that plaintiffs’ unjust enrichment count should be dismissed on the
ground that such a claim is precluded by the existence of a written contract. “[T]he doctrine of
unjust enrichment is inapplicable when the relationship between parties is founded upon a written
agreement or express contract . . . . ” Wilson Area Sch. Dist. v. Skepton, 586 Pa. 513, 520 (2006).
Plaintiffs respond that their claim of unjust enrichment is proper at this stage because they are
permitted to plead in the alternative.
“Courts typically allow a plaintiff to plead both a breach-of-contract claim and an
unjust-enrichment claim only where there is some dispute as to whether a valid, enforceable
written contract exists.” Montanez v. HSBC Mortgage Corp. (USA), 876 F. Supp. 2d 504, 516
(E.D. Pa. 2012). In this case, there is no dispute that a valid insurance contract exists and that the
contract forms the basis for certain of plaintiffs’ claims. As such, “plaintiffs may not assert an
unjust-enrichment claim premised on the absence of a contract.” Id. The Court therefore grants
defendant’s motion on this ground.
D. Federal Rule of Civil Procedure 9(b)
Defendant finally argues that the fraud-based claims in the Amended Complaint pertaining
to the legality and effectiveness of the § 412(i) plan should be dismissed for failure to satisfy the
heightened particularity requirement of Fed. R. Civ. P. 9(b). Specifically, defendant contends
that the Amended Complaint fails to identify which persons or entities made the alleged

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misrepresentations, the dates and locations of those misrepresentations, and how those
misrepresentations were false.
“Rule 9(b) requires plaintiffs to plead with particularity the circumstances of the alleged
fraud in order to place the defendants on notice of the precise misconduct with which they are
charged, and to safeguard defendants against spurious charges of immoral and fraudulent
behavior.” Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir.
1984). “Although the requirement that a party state the circumstances constituting fraud may be
fulfilled by alleging the date, place, and time of the fraudulent behavior, the plaintiff is free to use
alternative means to inject precision and substantiation into its allegations.” Ford Motor Credit
Co. v. Chiorazzo, 529 F. Supp. 2d 535, 538-39 (D.N.J. 2008).
Plaintiffs state that they have pled their fraud claims with sufficient particularity, noting,
inter alia, that the Amended Complaint identifies “the Defendant’s agents who dealt with Plaintiffs
and the location of their meetings (Philadelphia) . . . . ” (Resp. at 34.) However, critical factual
allegations pertaining to the § 412(i) plan are absent from the Amended Complaint. Plaintiffs fail
to specify which of defendant’s agents, or whether defendant itself, represented that “the PenPro
product was a safe, lawful and effective product,” and when such representations were made.
(Am. Compl. at ¶128.) Further, the Amended Complaint fails to describe any circumstances
surrounding the alleged misrepresentation by defendant and its agents concerning the tax
consequences of using the Policy to fund the § 412(i) plan at issue.
Plaintiffs also argue that the particularity requirement of Rule 9(b) should be relaxed
because “factual information is peculiarly within the defendant’s knowledge or control.” In re
Rockefeller Ctr. Properties, Inc. Sec. Litig., 311 F.3d 198, 216 (3d Cir. 2002). However, the
particularity requirement is relaxed only where plaintiffs allege facts explaining why such

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information is within the defendant’s control, and plaintiffs have not done so in this case. See
F.D.I.C. v. Bathgate, 27 F.3d 850, 876 (3d Cir. 1994).
The Court concludes that the Amended Complaint does not place defendant “on notice of
the precise misconduct with which they are charged,” and thus fails to satisfy the particularity
requirement of Fed. R. Civ. P. 9(b). Seville, 742 F.2d at 791. Defendant’s motion is accordingly
granted pursuant to Fed. R. Civ. P. 9(b) as to those parts of Counts I and II of the Amended
Complaint which address the legality and effectiveness of the use of the Policy to fund the § 412(i)
plan. This dismissal is without prejudice to plaintiffs’ right to file a second amended complaint
consistent with this Memorandum as to those parts of Counts I and II on or before September 4,
2013 if warranted by the facts.
IV.

CONCLUSION
For the foregoing reasons, defendant’s motion is granted in part and denied in part. Those

parts of Counts I and II of the Amended Complaint which address the legality and effectiveness of
the use of the Policy to fund the § 412(i) plan are dismissed without prejudice to plaintiffs’ right to
file a second amended complaint consistent with this Memorandum as to those parts of the
Amended Complaint on or before September 4, 2013 if warranted by the facts. Count III of the
Amended Complaint is dismissed with prejudice. Those parts of Counts I and II which address
the payment schedule for the Policy, and Counts IV and V remain in the case. An appropriate
order follows.

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