Transamerica Life Insurance Company v. Caramadre et al

Filing 46

OPINION AND ORDER granting in part and denying in part (21) Motion to Dismiss; granting in part and denying in part (22) Motion to Dismiss in case 1:09-cv-00470-S-DLM; granting in part and denying in part (24) Motion to Dismiss; granting in part and denying in part (27) Motion to Dismiss in case 1:09-cv-00472-S-DLM; granting in part and denying in part (26) Motion to Dismiss; granting in part and denying in part (32) Motion to Dismiss; granting in part and denying in part (33) Motion to Dismiss in case 1:09-cv-00471-S-DLM; granting in part and denying in part (21) Motion to Dismiss; granting in part and denying in part (22) Motion to Dismiss in case 1:09-cv-00473-S-DLM; granting in part and denying in part (16) Motion to Dismiss; granting in part and denying in part (17) Motion to Dismiss in case 1:09-cv-00502-S-DLM; granting in part and denying in part (9) Motion to Dismiss; granting in part and denying in part (13) Motion to Dismiss; granting in part and denying in part (15) Motion to Dismiss in case 1:09-cv-00549-S-DLM; granting in part and denying in part (7) Motion to Dismiss; granting in part and denying in part (9) Motion to Dismiss in case 1:09-cv-00564-S-DLM. So Ordered by Judge William E. Smith on 6/2/10. (Jackson, Ryan)

UNITED STATES DISTRICT COURT DISTRICT OF RHODE ISLAND ___________________________________ WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO, Plaintiff, ) ) ) ) ) v. ) ) CONREAL LLC, HARRISON CONDIT, ) FORTUNE FINANCIAL SERVICES, INC., ) and ANTHONY PITOCCO, ) Defendants; ) ___________________________________) ) TRANSAMERICA LIFE INSURANCE ) COMPANY, ) Plaintiff, ) ) v. ) ) JOSEPH CARAMADRE, RAYMOUR ) RADHAKRISHNAN, ESTATE PLANNING ) RESOURCES, INC., ESTELLA RODRIGUES,) EDWARD MAGGIACOMO, JR., LIFEMARK ) SECURITIES CORP., and ) PATRICK GARVEY,) ) Defendants; ) ___________________________________) ) WESTERN RESERVE LIFE ASSURANCE ) CO. OF OHIO, ) Plaintiff, ) ) v. ) ) JOSEPH CARAMADRE, RAYMOUR ) RADHAKRISHNAN, ESTATE PLANNING ) RESOURCES, INC., ADM ASSOCIATES, ) LLC, EDWARD HANRAHAN, THE LEADERS ) GROUP, INC., and CHARLES BUCKMAN, ) Defendants; ) ___________________________________)

C.A. No. 09-470 S

C.A. No. 09-471 S

C.A. No. 09-472 S

WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO, Plaintiff,

) ) ) ) v. ) ) JOSEPH CARAMADRE, RAYMOUR ) RADHAKRISHNAN, ESTATE PLANNING ) RESOURCES, INC., DK LLC, EDWARD ) HANRAHAN, THE LEADERS GROUP, INC., ) and JASON VEVEIROS, ) Defendants; ) ___________________________________) ) WESTERN RESERVE LIFE ASSURANCE ) CO. OF OHIO, ) Plaintiff, ) ) v. ) ) JOSEPH CARAMADRE, RAYMOUR ) RADHAKRISHNAN, ESTATE PLANNING ) RESOURCES, INC., EDWARD HANRAHAN, ) and THE LEADERS GROUP, INC., ) Defendants; ) ___________________________________) ) TRANSAMERICA LIFE INSURANCE ) COMPANY, ) Plaintiff, ) ) v. ) ) LIFEMARK SECURITIES CORP., ) JOSEPH CARAMADRE, RAYMOUR ) RADHAKRISHNAN, ESTATE PLANNING ) RESOURCES, INC., and EDWARD ) MAGGIACOMO, JR., ) Defendants; ) ) ___________________________________)

C.A. No. 09-473 S

C.A. No. 09-502 S

C.A. No. 09-549 S

2

WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO, Plaintiff,

) ) ) ) v. ) ) JOSEPH CARAMADRE, RAYMOUR ) RADHAKRISHNAN, ESTATE PLANNING ) RESOURCES, INC., HARRISON CONDIT, ) and FORTUNE FINANCIAL ) SERVICES, INC., ) Defendants. ) ___________________________________)

C.A. No. 09-564 S

OPINION AND ORDER WILLIAM E. SMITH, United States District Judge. In Company Company these cases, Plaintiffs and Transamerica Reserve claim Life Life they Insurance Assurance have been

("Transamerica") of Ohio

Western Reserve")

("Western

defrauded in an annuity scam.

Plaintiffs allege that Defendants

found a way to use variable annuities as a vehicle for riskless speculation in securities. terminally-ill lives were people used as as The key to the scheme was recruiting annuitants -- the for individuals the whose

measuring

tools

contracts.

Defendants or their clients would buy policies that allowed them to invest the premiums in stocks and bonds. When the annuitants

died, the policies' so-called "death benefits" guaranteed the return of those invested premiums, effectively creating a buffer against losses. The Complaints seek to revoke the outstanding

3

annuities on grounds of fraud, and assert a variety of state law claims for damages. Defendants now move to dismiss all of them.

At bottom, beneath the public outcry about the exploitation of the dying, these disputes pivot on a series of state law questions. The answers to these questions unravel many, but not Accordingly, for the reasons set

all, of Plaintiffs' claims.

forth below, Defendants' motions are granted in part and denied in part. I. Background A. The Overview of the "STAT" scheme and parties genesis that of these cases dub is a scheme for annuity annuity

investments

Plaintiffs

"stranger-initiated

transactions," or STATs. alleged pursuant facts to as Rule true

Because the Court must accept the for purposes of the of Defendants' Rules of motions Civil

12(b)(6)

Federal

Procedure, it here provides an overview of the STATs drawn from the Complaints. Defendant Joseph Caramadre is an attorney who specializes in reading the fine print of insurance and annuity products and finding "loopholes." focused on two The one he discovered in these actions of certain annuities sold by

components

Plaintiffs. premiums

One, the annuities were variable, which means that to obtain the policy could be invested in

paid

4

securities on behalf of the owner.

Two, the annuities allowed This option guaranteed of the annuitant, no

the owner to elect a "death benefit." the return of premiums upon the death

matter what the market value of the policy was at that time. (See, e.g., Am. Compl., C.A. No. 09-471, Doc. No. 9, Oct. 16, 2009 (hereinafter "471 Compl.") ¶¶ 14-17; Am. Compl., C.A. No. 09-472, Doc. No. 8, Oct. 16, 2009 (hereinafter "472 Compl.") ¶¶ 14-17; Am. Compl., C.A. No. 09-473, Doc. No. 8, Oct. 16, 2009 (hereinafter "473 Compl.") ¶¶ 14-17; Compl., C.A. No. 09-502, Doc. No. 1, Oct. 16, 2009 (hereinafter "502 Compl.") ¶¶ 13-16; Compl., C.A. No. 09-549, Doc. No. 1, Nov. 16, 2009 (hereinafter "549 Compl.") ¶¶ 12-15; Compl., C.A. No. 09-564, Doc. No. 1, Nov. 24, 2009 (hereinafter "564 Compl.") ¶¶ 12-15.) Caramadre's features invited insight was that policies with those two The

riskless

securities

speculation.

annuitants would of course die at some point.

If one could

safely bet that would happen quickly, the annuities could be used to turn fast profits. Investors could make aggressive Thus, the key

short-term trades without worrying about losses.

to the strategy was finding terminally ill individuals, with a correspondingly short life expectancy, willing to be annuitants. To find such individuals, Caramadre and his associates,

including Defendant Raymour Radhakrishnan, began publicizing a

5

"Program workers.

for

the

Terminally

Ill"

to

hospice

patients

and

(See 564 Comp. Ex. A.)

Flyers bearing the business

name "Estate Planning Resources," a company allegedly controlled by Caramadre, promised cash payments to dying patients willing to do business or with the company. (See id.) a Once either

Caramadre annuitant

Radhakrishnan and an

identified investor,

both they

terminally-ill for a

candidate

arranged

licensed agent of an annuities broker to provide the annuity application. They then paid the sick patient to sign the

application as the annuitant.

In some instances, Plaintiffs

claim, Caramadre, Radhakrishnan, or the agent actually forged the annuitant's signature. The investor would be designated as

the owner and beneficiary on the application, and would pony up the cost of the policy. Once completed, the insurer accepted the application and issued an annuity in which the owner had no relationship to the annuitant, other than through the alleged STAT itself. (See,

e.g., 472 Compl. ¶¶ 15-18; 473 Compl. ¶¶ 16-19; 502 Compl. ¶¶ 15-18; 549 Compl. ¶¶ 14-17.) Within this broad framework, all

Defendants fit into one of the following categories: · "Sponsors" of the STAT scheme, a term the Court uses to refer to Caramadre and Radhakrishnan, who solicited the transactions, as well as their alleged company Estate

6

Planning Resources ("EPR"). They are named Defendants in each of the actions except 09-470.1 · Annuity brokerage companies, who sell Plaintiffs' annuities. The broker in case numbers 09-470 and 09-564 is Fortune Financial Services, Inc. ("Fortune"); in 09471 and 09-549, it is Lifemark Securities Corporation ("Lifemark"); and in 09-472, 09-473, and 09-502, it is The Leaders Group ("Leaders"). Agents of the brokers: the individuals who are licensed to sell annuities and provided the policies at issue at the request of Caramadre and/or Radhakrishnan. Fortune's agent, named as a Defendant in cases 09-470 and 09-564, is Harrison Condit; Lifemark's agent, named in 09-471 and 09-549, is Edward Maggiacomo; Leaders's agent, named in 09-472, 09-473, and 09-502, is Edward Hanrahan. Owners of annuities in the four actions in which the annuitant is still living, cases 09-470 through 09-473. These are the people or corporations who paid premiums for the policies, and stand to redeem the proceeds because they are also designated as the beneficiaries. In case number 09-470, the owner is Conreal LLC ("Conreal"); in 09-471, it is Estella Rodrigues; in 09472, it is ADM Associates, LLC ("ADM"); and in 09-473, it is DK LLC ("DK"). In the other three cases, the annuitants are deceased, and the owners are not named as Defendants. Annuitants: the terminally ill individuals who serve as measuring lives for the annuities in cases 09-470 through 09-473. In 09-470, the annuitant is Anthony Pitocco; in 09-471, it is Patrick Garvey; in 09-472, it is Charles Buckman; and in 09-473, it is Jason Veveiros.

·

·

·

In that case, Western Reserve claims that the agent of the annuities broker, Harrison Condit of Fortune Financial Services, Inc., put together the deal himself, without Caramadre or Radhakrishnan.
1

7

B.

Claims and defenses

The Complaints assert the following claims for relief: (1) rescission of the policies in which the annuitants are still living, or a declaratory judgment that the annuities are void, because they were procured on the basis of fraud, and because the owners lack an "insurable interest" in the annuitants as required by R.I. Gen. Laws 1956 § 27-4-27 (2010); (2) common law fraud against the sponsors, brokers, agents, and some of the owners, because Defendants submitted the annuity applications without telling Plaintiffs that the investments were STATs; (3) civil liability pursuant to R.I. Gen. Laws § 9-1-2 for criminal insurance fraud under R.I. Gen. Laws § 11-41-29, against the sponsors, brokers, agents, and some of the owners; (4) civil conspiracy against the sponsors, brokers, agents, and some of the owners; (5) breach of contract against the brokers, for violating the brokerage service agreements between Plaintiffs and the brokers; (6) breach of the implied covenant of good faith and fair dealing the against brokers the and brokers; agents, (7) for unjust taking

enrichment

against

commissions from Plaintiffs in connection with the annuities; and (8) negligence against the brokers and agents, for allowing the submission of annuity applications pursuant to the STAT.

8

Defendants move to dismiss the Complaints pursuant to Rule 12(b)(6) for failure to state claims on which relief may be granted. dismissal. arguments In total, Defendants assert dozens of grounds for However, stripped to the essentials, most of their rest on three propositions: (i) the "insurable

interest" requirement does not apply to the annuities; (ii) an "incontestability clause" contained in each of the policies

prevents Plaintiffs from litigating any claims related to the annuity applications; and (iii) Defendants did not make any

material misrepresentations or omissions in connection with the annuity applications. II. Discussion A. The Legal Standard

In reviewing a motion to dismiss, the Court must "accept the well-pleaded facts as true, viewing factual allegations in the light most favorable to the plaintiff." Rederford v. US To meet the

Airways, Inc., 589 F.3d 30, 35 (1st Cir. 2009).

general pleading requirements of Rule 8 of the Federal Rules of Civil Procedure, each Complaint "must contain sufficient factual matter . . . to `state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009)

(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). This means it must present "factual allegations that raise a

9

right

to

relief

above

the

speculative

level."

Simmons

v.

Galvin, 575 F.3d 24, 30 (1st Cir. 2009) (citation and internal quotation marks omitted). In judging whether this standard is

satisfied, the Court may consider not only the Complaints, but "facts extractable from documentation annexed to or incorporated by reference in the [C]omplaint[s] and matters susceptible to judicial notice." Cir. 2005). In addition, Plaintiffs' fraud claims must meet the Jorge v. Rumsfeld, 404 F.3d 556, 559 (1st

heightened pleading requirements of Rule 9(b), which "applies to state law fraud claims asserted in federal court." N. Am.

Catholic Educ. Programming Found., Inc. v. Cardinale, 567 F.3d 8, 13 (1st Cir. 2009). what, where, and when of These claims must "specify the who, the allegedly false or fraudulent

representation."

Alternative Sys. Concepts, Inc. v. Synopsys, Rule 9(b) also requires

Inc., 374 F.3d 23, 29 (1st Cir. 2004).

"identifying the basis for inferring scienter," which refers to the culpable mental state of knowingly or intentionally

committing fraud.

N. Am. Catholic Educ., 567 F.3d at 13; accord

Suna v. Bailey Corp., 107 F.3d 64, 68 (1st Cir. 1997).

10

B.

Claims for rescission and declaratory judgment that the annuities are void ab initio

Plaintiffs contend the annuities are void or voidable on two grounds: one, the owners have no insurable interest in the annuitants, in violation of state law; and two, Plaintiffs were defrauded. Because both arguments fail, the rescission and

declaratory judgment claims must be dismissed. 1. The insurable interest requirement

Section 27-4-27 of Rhode Island's General Laws provides: No person shall procure or cause to be procured any insurance contract upon the life or body of another individual unless the benefits under the contract are payable to the individual insured or his or her personal representatives, or to a person having, at the time when the contract was made, an insurable interest in the individual insured. R.I. Gen. Laws § 27-4-27(a) (2010).2 An "insurable interest"

generally means that the owner of an insurance policy must have either "a substantial interest engendered by love and affection" in the insured, id. § 27-4-27(c)(1), or a "lawful and

substantial economic interest in having the life, health, or bodily safety of the individual . . . continue," id. § 27-4There is no dispute that Rhode Island law governs most of Plaintiffs' claims, including their requests for equitable relief and their tort claims. However, the contract-based claims (breach of contract and breach of the duty of good faith and fair dealing) are an exception. As noted below, the brokerage contracts between Plaintiffs and the brokers expressly designate either New York or Florida law as controlling.
2

11

27(c)(2). interest

From a public policy point of view, the insurable rule guards against creating incentives to shorten

human life.

As the Rhode Island Supreme Court said over 100

years ago, "a purely speculative contract on the life of another is . . . objectionable on the grounds of public policy." Cronin v. Vt. Life Ins. Co., 40 A. 497, 497 (R.I. 1898). Defendants correctly contend that the insurable interest requirement does not apply to the contracts at issue in these cases, because they are not "insurance contract[s] upon the life or body of another." R.I. Gen. Laws § 27-4-27(a). The subject See

contracts are annuities, and nothing in the statute supports Plaintiffs' plea to ignore this fact and treat them as insurance policies. Plaintiffs' argument that § 27-4-27(a) should be read to embrace annuities first hits a statutorily-created wall between insurance and annuities in Rhode Island. The General Laws place

the two instruments in separate categories: (a) "Annuities" means all agreements to make periodic payments for a certain period or where the making or continuance of all or some of a series of the payments, or the amount of any payment, depends on the continuance of human life, except payments made in connection with a life insurance policy. .... (c) "Life insurance" means every insurance upon the lives of human beings and every insurance appertaining

12

to that life, including the granting of endowment benefits, additional benefits in the event of death by accident, additional benefits to safeguard the contract from lapse, accelerated payments of part or all of the death benefit . . . . R.I. Gen. Laws § 27-4-0.1 (emphasis added).3 The General Assembly recently reinforced the statutory

distinction between annuities and life insurance by enacting the Life Settlements Act ("LSA"), which takes effect in July, 2010. The LSA prohibits "stranger originated life insurance" or

"STOLI" transactions.

See R.I. Gen. Laws § 27-72-2(9)(i)(A)(X)

(defining STOLIs as "fraudulent life settlement act[s]"); id. § 27-72-14 (prohibiting "fraudulent life settlement acts"). A

STOLI is "a practice or plan to initiate a life insurance policy for the benefit of a third-party investor who, at the time of policy origination, has no insurable interest in the insured." Id. § 27-72-2(26) (emphasis added). Put differently, it is

exactly what Plaintiffs complain of in these cases, except with life insurance policies instead of annuities. But the word

"annuity," which appears dozens of times in Title 27 of the In isolation, the reference to a "death benefit" in subsection (c) could set the reader wondering whether annuities with death benefit features could be "life insurance." But subsection (a) appears to preclude that possibility. It says, paraphrased, that annuities are not life insurance. As discussed below, the Court does not need to decide if a product could be an annuity and life insurance simultaneously. The Court simply finds that the contracts in this case are not life insurance contracts.
3

13

General Laws, is not used once in the LSA.

Had the General

Assembly intended to extend the ban on stranger-owned products to annuities, it could easily have said so in the new law. All

of this helps to smother Plaintiffs' contention that the words "any insurance contract" in § 27-4-27(a) should refer to

annuities.

See id. § 27-4-27(a).

Plaintiffs contend in the alternative that annuities may operate as "`hybrid products,' possessing characteristics of

both insurance products and investment securities."

Lander v.

Hartford Life & Annuity Ins. Co., 251 F.3d 101, 105 (2d Cir. 2001). In this respect, Plaintiffs argue that Rhode Island

courts have labored to look beneath the surface to expose life insurance cloaked under different names. For example, in Sisson

ex rel Nardolillo v. Prata Undertaking Co., 141 A. 76 (R.I. 1928), the court determined that burial contracts offered by an undertaker constituted "insurance." The contracts were multiIf

year agreements providing for pre-paid funeral services.

death occurred before a series of annual payments was completed, the undertaker agreed that he would not levy any additional charge against the decedent's heirs, and would provide the

services.4
4

See id. at 76.

The death benefits in the policies at

Thus, the bargain replicated the tradeoff in a basic life insurance policy: if the owner died early, he won (in a

14

issue here, Plaintiffs insist, must be treated the same way as the contracts in Sisson; they are also, in substance, "insurance contract[s]." R.I. Gen. Laws. § 27-4-27(a).

The proposed analogy to Sisson squirms out of Plaintiffs' grip. The contract in that case was a straightforward agreement

to provide a service, with a provision that if death interceded, the product purchased would still be provided and further costs waived. mortgage Similar contracts are commonplace in modern times for insurance, life insurance, or auto loans. Here,

however, the products at issue are not modern-day analogues to the funeral services contract. The annuities in question are

specific, well-understood financial instruments, and while they also happen to involve monetary exchange connected to the

duration of a life, they are not life insurance.

Again, as

noted, the distinction between annuities and life insurance is significant enough to warrant separate definitions for the two vehicles in Rhode Island statutes. So, even if the Court agreed that hybrid annuity / life insurance policies could breach the statutory language barrier, something required more to than in the narrow holding favor. in Sisson would be the

find

Plaintiffs'

Foreshadowing

financial sense), because he got the entire benefit without having to pay the full cost of the contract. As explained below, that is not the case with the annuities at issue here.

15

statutory

demarcation,

older

decisions

from

the

Rhode

Island

Supreme Court recognized that there is a fundamental difference between life insurance, which requires an insurable interest in order to prevent gambling on human life because it is against public policy, and annuities, which embrace the gamble as a core component of the contract: It is true there is an element of chance and uncertainty in the transaction; but so there is when a man takes a transfer of an annuity, or buys a life estate, or an estate in remainder after a life estate. There is in all these cases a speculation upon the chances of human life. But the transaction has never been held to be void on that account. Clark v. Allen, 11 R.I. 439, 1877 WL 4932, at *4 (R.I. 1877); see Cronin, 40 A. at 497 (stating the same conclusion).5 Simply

because the court in Sisson saw the contract as more closely resembling a life insurance contract does not vitiate the clear statements in Clark and Cronin about the nature of annuities.

Surely, Plaintiffs protest, annuities in the nineteenth century were far simpler than the exotic instruments here. But that is not a reason to assume the Rhode Island Supreme Court, if presented with the question, would find that the insurable interest rule governs the policies at issue. The court could instead choose to maintain the distinction between life insurance and annuities, even while acknowledging the more sophisticated investment aspects of modern annuities. See Nationsbank of N.C., N.A. v. Variable Annuity Life Ins. Co., 513 U.S. 251, 255, 260 (1995) (finding that variable annuities, "though more sophisticated than the standard savings bank deposits of old," are "not insurance" under federal statutes).
5

16

The products at issue here, without question, fit within that core concept. To be more precise, under even Rhode if hybrid law, policies the are

theoretically

possible

Island

present

contracts cannot meet any reasonable definition of what such a policy would have to look like. In the Court's view, in order

for an annuity to qualify as a hybrid policy, at a minimum it would need to have life insurance at its core, as the contracts in Sisson did. That is not the case here. The basic bargain

embodied by the policies in dispute is that, in exchange for premiums, the owners receive a future income stream. (See,

e.g., Mot. to Dismiss by Conreal LLC and Harrison Condit, Ex. A2. at 16, C.A. No. 09-470, options).) Doc. No. 22 (Nov. 13, 2009) merely

(explaining

payment

The

death

benefits

sweeten that deal; they do not define it.

They take away the As

worry that future payments will dwindle if the market sours. a Western Reserve brochure states: "Regardless of

market

performance or how [your funds] are allocated, your legacy is protected [by the death benefit]." (502 Compl. Ex. B at 8.) Of

course, the whole point of the STATs was to capitalize on the death benefits. But that is because Defendants figured out how

to game a flaw in the product, not because the products are life insurance vehicles. The terms of the policies, and Plaintiffs'

17

own marketing materials, present the death benefit not as the core benefit of the product, but rather as an ancillary perk.6 Plaintiffs' arguments might be more persuasive if they had treated the contracts as life insurance by taking steps to guard against the "temptation to shorten life." At oral argument, obligation Plaintiffs to ensure agreed [that] Cronin, 40 A. at 497. "the law makes it

that the

[their]

insurable

interest" Yet,

requirement is met.

(Hr'g Tr. 58:24-59:4, Mar. 15, 2010.)

the annuity applications do not pose any questions about the relationship between the annuitant and either the owner or the beneficiary. (See, e.g., 471 Compl. Ex. D. at 1-2; 502 Compl. Thus, as Plaintiffs acknowledge, the argument

Ex. C at 1-2.)

that the death benefits are life insurance could land them in a precarious importantly, position their outside application these lawsuits. suggest But that more this

procedures

argument is a newly-minted reaction to Defendants' scheme, as opposed to a long-held belief about the nature of the contracts.

In contrast, in Sisson, the life insurance feature was built into the central purpose of the policy. Specifically, the value of the contract in that case was a function of when the measuring life ended. Here, no matter when the annuitant dies, the death benefit guarantees the return of premiums, but not more than what the owner paid for the policy. Any gains derive from market increases -- not, as in Sisson, from the owner's death before he can complete the payments.
6

18

In short, there is no basis in this case to stretch the Rhode Island insurable interest rule to include the contracts at issue here. Doing so would not only torture the language of §

27-4-27(a), ignore the statutory division between annuities and life insurance, Court and has break not new ground it that also the would Rhode Island any

Supreme

touched;

trample

possible construction of the hybrid concept that is consistent with Rhode Island law. Sitting in diversity jurisdiction, this

Court could not take that step, even if it wanted to (which it does not). See Luc v. Wyndham Mgmt. Corp., 496 F.3d 85, 88 (1st

Cir. 2007) (explaining that courts sitting in diversity should "not create new rules" of state law "or significantly expand existing rules"). interest annuities. 2. The incontestability clauses Accordingly, the Court finds the insurable creates no grounds to nullify the

requirement

Defendants rely on clauses contained in the annuities that state, Date." "This policy shall be incontestable from the Policy

(See, e.g., Mot. to Dismiss of Conreal LLC and Harrison

Condit, Ex. A2 at 4, C.A. No. 09-470, Doc. No. 22, Nov. 13, 2009.) In Rhode Island, incontestability clauses prevent

19

insurers from rescinding policies even on grounds of fraud.7

See

Murray v. State Mut. Life Ins. Co., 48 A. 800, 800 (R.I. 1901) (rejecting insurer's argument that "fraud vitiates all

contracts" and enforcing incontestability clause in the policy issued by the defendant); see also Prudential Ins. Co. of Am. v. Tanenbaum, 167 A. 147, 150 bar . . (R.I. defenses . to 1933) "to (explaining any action at on that law the

incontestability which might be

clauses brought

enforce

liability

policies"). and

Hence, if the incontestability clauses are valid Plaintiffs may not justify canceling the

enforceable,

annuities, or having them declared void, by claiming they were defrauded. Grasping this problem, Plaintiffs ask the Court to erase the incontestability clauses from the contracts.

Incontestability clauses that take effect immediately violate public policy, Plaintiffs say, because they tempt fraud.

Plaintiffs cite decisions from other states that have found as much.
7

See, e.g., Reagan v. Union Mut. Life Ins. Co., 76 N.E.

With respect to incontestability clauses and several other issues discussed below, the parties (and the Court) recognize that Rhode Island law dealing with insurance provides a useful body of authority. Both Plaintiffs and Defendants cite cases and statutes governing insurance policies as persuasive authority. Thus, the conclusion that the annuities are not life insurance for purposes of § 27-4-27(a) does not require ignoring insurance law where relevant to the analysis of these issues.

20

217, 218 (Mass. 1905) ("If we treat [an incontestable clause that takes effect on the policy date] as intended to include fraud . . . we are of opinion that this part of the provision is against the policy of our law, and therefore void."); Welch v. Union Cent. an Life Ins. Co., 78 N.W. 853, 854-55 (Iowa 1899)

(finding

immediate

incontestability

provision

ineffective

against fraud claim). While the Rhode Island Supreme Court has not spoken

directly to this issue, no reasonable reading of that court's decisions, or Rhode Island statutory law, supports Plaintiffs' contention. In this state, incontestability provisions are "for Columbian Nat'l Life Ins. Co. v. Accordingly,

the benefit of the insured."

Indus. Trust Co., 166 A. 809, 812 (R.I. 1933).

section 27-4-6.2(a) of the General Laws requires all policies to contain either two-year contestability periods or terms that the Rhode Island Department of Business Regulation ("DBR") considers "more favorable to policyholders." 6.2(a). See R.I. Gen. Laws § 27-4-

From the consumer's perspective, a "more favorable"

period during which the insurer could challenge the policy based on fraud or other grounds would be shorter, rather than longer. See R.I. Gen. Laws § 27-4-6.2(a). Thus, it is reasonable to

conclude that the DBR may authorize shorter lengths of time than the two-year default. In fact, other provisions of the General

21

Laws

allow

the

agency §

to

review

policies for

on

a

case-by-case of policy

basis. forms).

See

id.

27-4-24

(providing

filing

This suggests that parties themselves may "stipulate

for a shorter period of limitation than that provided by law" -- subject to DBR approval -- because it is more favorable to the insured. Murray, 48 A. at 800. As Murray demonstrates, this

was acceptable before the passage of § 27-4-6.2(a). Similarly, omitting the challenge period altogether would clearly be "more favorable" to the insured than the two-year default period. Both the statutory and decisional law discussed

above support the conclusion that parties can agree on their own to do just that. At a minimum, there is no basis to assume the

opposite: that the law contains an unstated public policy ban on making contracts incontestable from the date of issue. For these reasons, the Court cannot strike the

incontestability clauses from the annuities, and these clauses therefore serve to deflect claims to rescind the annuities or have them declared void because of fraud. C. Fraud and derivative claims 1. The Claims against the policy owners clauses also effectively knock out

incontestability

Plaintiffs' claims for fraud, conspiracy, and civil liability for crimes and offenses against the policy owners, who are the

22

beneficiaries of the policies, in cases 09-472 and 09-473. a fraud defense to the validity of a policy is barred

"If by

incontestability, then a separate fraud action alleging the same grounds is also barred." 17 Lee R. Russ and Thomas F. Segalla, Each of Plaintiffs' same to underlying cover their

Couch on Insurance § 240:65 (3d ed. 2009). fraud-based allegations. obligations tort claims relies upon seek

the

Since under

Plaintiffs

damages

the

policies,

allowing

these

fraud-based

claims to proceed against the owners would essentially permit an end-run around the incontestability clauses. Each of the claims See Am.

against the policy owners must therefore be dismissed.

United Life Ins. Co. v. Martinez, 480 F.3d 1043, 1048 (11th Cir. 2007) (noting that incontestability clauses "may apply . . . to bar . . . fraud-based claims (request for declaratory judgment, aiding and abetting fraud, conspiracy to commit fraud, and even RICO claims)"); Maslin v. Columbian Nat'l Life Ins. Co., 3 F. Supp. 368, 369 (S.D.N.Y. 1932) ("[I]n so far as the defendant relies upon an alleged conspiracy between one of its agents and Samuel Maslin [to commit fraud] . . . , there is no defense to the policies. The fraud, abhorrent as it is if the facts pleaded are true, has no legal significance once the period set by the incontestability clause has expired.").

23

An argument could be made that the incontestability clauses are special to insurance contracts, and should not be extended to the owners of annuities who are part and parcel, Plaintiffs say, of a fraudulent scheme. because annuities the such owners as This argument would suggest that ones not, in as this a of case are really be

the

investments, allowed to

should the

policy

matter,

slink

beneath

cloak

incontestability.

Plaintiffs do not make this argument, no doubt because they argue in the first instance that the products here are contracts for insurance (an argument the Court has rejected). The

position has some obvious appeal, but cannot overcome the fact that the incontestability clauses appear in the contracts, and state no fraud exception. Cf. First Interstate Bank of Billings

v. United States, 61 F.3d 876, 877-78 (Fed. Cir. 1995) (allowing claim for fraud despite incontestability clause in a loan

guarantee agreement, because the clause stated the guarantee was incontestable "except for fraud" under certain circumstances). And while the annuities are not life insurance, the two are cousins, and the familial similarity makes the insurance

authority cited above quite persuasive.

In fact, the only case

the Court has found to confront the question of why annuities contain incontestability clauses, Newton v. N.Y. Life Ins. Co., 325 F.2d 498 (9th Cir. 1963), supports this view. The answer,

24

the court in Newton found, is that the clauses were designed to "reassure prospective policy holders" that the annuity would not be "disputed by the insurer many years after the contract had been issued." Id. at 502 (citation omitted).

Thus, according to Newton, the policy rationale underlying incontestability annuities. holder, not clauses is the same for both insurance and

In either case, the provision protects the policy the insurer.8 See id. This strengthens the

conclusion that incontestability clauses in annuities have the same effect as those contained in insurance contracts and, based on the holdings discussed above, must shield the owners from any fraud-based claims. 2. Defendants cover of the Fraud claims against the sponsors, agents, and brokers initially seek blanket clauses. which could immunity But beneath unlike not the

incontestability Cloak,"

Harry only

Potter's

"Invisibility

conceal

The court in Newton stated that incontestability clauses in annuities are "for the benefit of the annuitant," but it is reasonable to assume it did not contemplate the possibility that the owner would be different from the annuitant. Newton v. N.Y. Life Ins. Co., 325 F.2d 498, 502 (9th Cir. 1963) (citation omitted). The thrust of the court's holding was that incontestability clauses benefit the consumer as opposed to the insurer, in either annuities or insurance policies. See id.
8

25

Harry,

but

anyone

who

wore

it,9

"[t]he

benefits

of

an

incontestable clause can be availed of only by an insured or his or her beneficiary, and cannot be invoked by a stranger to the contract." 17 Russ & Segalla, supra, § 240:10. The clauses

thus have no effect on the fraud claims against the sponsors, agents, and brokers, each of which are discussed below.

Defendants have cited no persuasive authority in which a court has extended the coverage of an incontestability clause to

anyone but the insured or the owner of a policy, and the Court has found none. Defendants, in the alternative, assert various other

grounds on which the fraud claims should be dismissed; all of these argument fail to carry the day. a. Defendants "who" and Rule 9(b) requirements Plaintiffs the alleged for failing to specify in the

fault of

"what"

fraudulent

scheme

their

Complaints, as required by Rule 9(b). F.3d at 29.

Alternative Sys., 374

This argument fails, because the Complaints do

satisfy the heightened pleading requirements for fraud.

Moreover, as Dumbledore observed: "[T]he true magic of [the Invisibility Cloak], of course, is that it can be used to protect and shield others as well as its owner." J.K. Rowling, Harry Potter and the Deathly Hallows 716 (Scholastic 2007).
9

26

"To establish a prima facie case of common law fraud in Rhode Island the plaintiff must prove that the defendant made a false representation intending thereby to induce plaintiff to rely thereon, and that the plaintiff justifiably relied thereon to his or her damage." 2003) (internal attack Zaino v. Zaino, 818 A.2d 630, 638 (R.I. marks and for citation lumping all omitted). of them

quotation the

Defendants

Complaints

together when describing the alleged "false representations" and omissions. Federal See 2 Jeffrey A. Parness & Jerry E. Smith, Moore's § 9.03[1][f] (2010) ("If a claim involves

Practice

multiple defending parties, a claimant may usually not group all claimed wrongdoers together in a single set of allegations."). The Complaint in case number 09-549 provides a characteristic example: Caramadre, Radhakrishnan, Estate Planning Resources, [and] Maggiacomo . . . acted in concert to submit the applications identified herein, containing intentionally omitted . . . information concerning the respective annuitants' health conditions, the limited life expectancies of the annuitants, the payments to the annuitants, and the absence of a relationship between the annuitants and the owners and beneficiaries of the annuities with Maggiacomo . . . . (549 Compl. ¶ 119.) Reading the Complaints in full, the fact that they state Defendants "acted in concert" is not a fatal flaw. 549 Compl. ¶ 119.) (See, e.g.,

The Complaints assert that the STAT scheme

27

is a way to fleece the insurers for death benefits by hiding the annuitants' imminent demise. Together, the Counts for fraud and

civil conspiracy (see, e.g., 549 Compl. Counts I, V), along with the factual allegations supporting those Counts, go into enough detail about the alleged conspiracy, and each Defendant's role, to explain the origin of the alleged duty to tell Plaintiffs about the STATs.10 a civil As in a criminal conspiracy, participants in need not know everything their co-

conspiracy

conspirators know, or participate in every wrongful act, to be found liable for the ultimate fraud. See Miller v. Holzmann,

563 F. Supp. 2d 54, 80 n.13 (D.D.C. 2008) (discussing liability under the False Claims Act, and stating "once [a] conspiracy has been formed, all its members are liable for injuries caused by acts pursuant to or in furtherance of the conspiracy. A

For instance, Caramadre "orchestrated" the STAT scheme, and brought in investors. (See, e.g., 472 Compl. ¶¶ 14-17; 502 Compl. ¶¶ 14-17; 549 Compl. ¶¶ 13-16; 564 Compl. ¶¶ 13-16.) Estate Planning Resources is allegedly Caramadre's business, which he used in connection with the flyers advertising "Program[s] for the Terminally Ill." (See, e.g., 472 Compl. ¶ 18; 502 Compl. ¶ 18; 549 Compl. ¶ 17; 564 Compl. ¶ 17.) The Complaints state that Radhakrishnan either "identified" terminally ill annuitants (see, e.g., 472 Compl. ¶ 24; 502 Compl. ¶ 24), or "recruited" them (see, e.g., 549 Compl. ¶ 22; 564 Compl. ¶ 22). The agents, allegedly acting in an agency capacity on behalf of the brokers, then furnished the annuity applications, which they "would sign and submit" to Plaintiffs. (See, e.g., 472 Compl. ¶ 26; 502 Compl. ¶ 26; 549 Compl. ¶¶ 25, 42, 59; 564 Compl. ¶¶ 25, 42, 57.)
10

28

conspirator need not participate actively in or benefit from the wrongful action in order to be found liable . . . .") (quoting Halberstam (discussing v. Welch, 705 F.2d 472, 481 civil (D.C. and Cir. 1983)

similarities

between

criminal

conspiracies)).

Accordingly, at this point in the litigation,

it does not matter that Plaintiffs cannot recite, for instance, who filled out which portions of the applications, or who mailed them. See Airport Boulevard Apartments, Ltd. v. NE 40 Partners,

Ltd. (In re NE 40 Partners, Ltd.), 411 B.R. 352, 366 (Bankr. S.D. Tex. 2009) ("Rule 9(b) does not work to penalize a

plaintiff merely because he was not privy to, and, therefore, cannot plead the details of, the inner workings of a group of defendants who allegedly acted in concert to defraud him.")

(citation omitted); accord Deere & Co. v. Zahm, 837 F. Supp. 346, 350 (D. Kan. 1993) (finding a complaint for fraud and civil conspiracy sufficiently pleaded). The point is that the

applications were misleading, and all Defendants allegedly knew how the scheme operated and each played a specified role in it; therefore, it is alleged, each should have spoken up, and

committed fraud by not doing so. In addition, with respect to the agents, Plaintiffs go a step further. They claim that, by signing the annuity

applications, the agents affirmed they were "the agent[s] who

29

sold the [a]nnuit[ies]," but that this was false.

(See, e.g.,

472 Compl. ¶ 43; 502 Compl. ¶ 44; 549 Compl. ¶ 122; 564 Compl. ¶ 77.) This allegation is sufficiently specific when read in

conjunction with the applications themselves, which are attached to the Complaints as exhibits. agents, each application the on form Above the signature line for declares of the that the agent for has the as

investigated consumer,

appropriateness that basis

investment the

and

has

certified

policy

reasonable for the consumer's needs. C at 10.)

(See, e.g., 472 Compl. Ex.

But, in fact, according to the Complaints, the agents

did no such thing, and had they performed any investigation, could never have so certified. In the aggregate, all the allegations discussed above serve the goals of Rule 9(b) to "provide a defendant with fair notice" of the claim and discourage baseless actions. Corp., 107 F.3d 64, 68 (1st Cir. 1997). b. Defendants Materiality attack the more fundamental question of Suna v. Bailey

next

whether any of the alleged omissions and misrepresentations was material. requirement, Yet, even without any extant insurable a interest of

Plaintiffs

nevertheless

allege

series

omissions that, if proven, could be found material by a jury.

30

i. The insurers' duty of inquiry Defendants' first strategy is to emphasize the absence of any questions about the owner's relationship to the annuitant, or the annuitant's Anything health status, did on not Plaintiffs' ask about application cannot be

forms.

Plaintiffs

material, according to Defendants.

This, they say, is because

the insured "has no duty [to disclose information] where the application makes no specific inquiries." supra, § 84:2. It is true that the general rule "appears to assume that the insured or applicant does not have reason to know of the information's materiality apart from whether the insurer makes an inquiry. Such knowledge, combined with knowledge that the insurer is ignorant of the information, generally would impose a duty to disclose." 6 Russ & Segalla, supra, § 84:2. The 6 Russ & Segalla,

general rule, however, is not without exception.

As at least

one decision in this District has recognized, many state courts allow claims for "[f]raudulent concealment . . . even without inquiry concerning the concealed material facts by the insurer." Putnam Res. v. Pateman, 757 F. Supp. 157, 162 n.1 (D.R.I. 1991); see Lighton v. Madison-Onondaga Mut. Fire Ins. Co., 106 A.D.2d 892, 892-93 (N.Y. App. Div. 1984) (allowing a claim for

fraudulent concealment based on omitting the fact that fires had

31

occurred

in

the

plaintiffs'

basement

several

months

before

applying for insurance, even though "plaintiffs were asked no question with relation to prior fires"); Sun Ins. Co. of N.Y. v. Hercules Sec. Unlimited, Inc., 195 A.D.2d 24, 30 (N.Y. App. Div. 1993) (affirming judgment on claim for fraudulent concealment even though "the insured ha[d] not been asked" about the

concealed fact that the insured planned to steal the insured assets); see also Harrison State Bank v. U.S. Fid. & Guar. Co., 22 P.2d 1061, 1064 (Mont. 1933) (stating that "any concealment of a material fact known to a party, increasing the ordinary risk, would be deemed . . . fraudulent," and explaining that the applicant for bank insurance knew of a planned robbery that law enforcement criminals). While the Rhode Island Supreme Court has not addressed the issue directly, it has, as Defendants concede, recognized fraud claims based on concealment. See Guilbeault v. R.J. Reynolds intended to allow in an attempt to catch the

Tobacco Co., 84 F. Supp. 2d 263, 269 (D.R.I. 2000) (citing Home Loan & Inv. Ass'n. v. Paterra, 255 A.2d 165, 168 (R.I. 1969). That recognition, insurance combined fraud with the decisions hid cited above the

finding

where

applicants

information

insurer did not request, indicates that the Rhode Island Supreme Court would recognize a very narrow exception to the general

32

rule that the insurance company must ask about facts to make them material. The exception, in its most limited form, can be

simply stated as follows: if the non-disclosure is such that it amounts to fraud, then it surely must be material.11 That is,

the rule that assumes (for the benefit of the insured) that insurers must ask in order for the information to be material cannot be used to facilitate or promote common law fraud. This

would doubtless violate public policy, because it would cause a policy-based rule designed to protect insured parties to swallow the general rule of law that forbids fraud. The Court therefore

rejects the argument that any information Plaintiffs did not demand on the annuity applications is immaterial as a matter of law.12 The exception cannot, however, be so narrow as to require Defendants to be convicted of the crime of fraud for their omissions to be considered material. Yet, at this time, the Court need not define the precise contours of the exception that a jury might eventually have to consider. For now, it is sufficient to conclude that the lack of inquiry on Plaintiffs' part does not preclude materiality.
11

Defendants argue that Testa v. Norfolk & Dedham Mut. Fire Ins. Co., 764 A.2d 119, 121 (R.I. 2001) confirms their position that the insurer must ask about a fact to make it material. They over-read the case. In rejecting an insurer's fraud claim, the court in Testa noted that no "inquiry was made" of the insured about an allegedly concealed fact. Testa, 764 A.2d at 121. Yet, the defendant's policy had been transferred from one carrier to another without any requirement to re-apply for coverage. The court stressed that the original representations made to the transferor "did not constitute an application" to
12

33

ii. Alleged omissions and misrepresentations Rhode Island courts allow actions for fraudulent

concealment in circumstances where the defendant bears "a duty to speak." Home Loan, 255 A.2d at 168. Whether or not the duty

arises -- in other words, whether a fact is material, such that it must be disclosed -- depends on the "circumstances of [the] case." divulge Id. at 168. facts that, The duty generally obligates a party to if withheld, render other affirmative

representations misleading.

See Nisenzon v. Sadowski, 689 A.2d

1037, 1046 (R.I. 1997) (finding a letter from an attorney that "not only . . . fail[ed] to disclose [the attorney's] ownership" of disputed property, but also "affirmatively sought to induce" the recipients to take no action against his client, supported a fraud claim). Under this standard, Plaintiffs' fraud claims clear the

hurdle of Defendants' motions to dismiss. of any insurable concealed interest a requirement,

True, in the absence the holds theory no that

Defendants

statutory

violation

water.13

the plaintiff-transferee. Id. Thus, unlike in this case, it was questionable whether the defendant made any representations at all to the plaintiff (instead of only to the transferor). Plaintiffs also allege that the payments to the annuitants violate the anti-kickback rules established by R.I. Gen. Laws § 27-8-7 (2010). However, as with the insurable interest provision in § 27-4-27, the anti-kickback statute is not written
13

34

Yet, there are more than enough fragments of allegedly withheld information threshold. that remain to meet or exceed the materiality

Specifically, Plaintiffs assert that Defendants hid:

(i) the recruitment of annuitants who faced imminent death (see, e.g., 471 Compl. ¶¶ 24-25; 472 Compl. ¶ 23; 564 Compl. ¶¶ 22, 39, 56); (ii) in some cases, the annuitants' ignorance of the terms of the policies (see, e.g., Am. Compl., C.A. no. 09-470, Doc. No. 9, Oct. 16, 2009 (hereinafter "470 Compl.") ¶ 21; 471 Compl. ¶ 39; 473 Compl. ¶ 56); (iii) the payments to some

annuitants to sign the applications (see, e.g., 472 Compl. ¶ 44; 471 Compl. ¶ 39; 502 Compl. ¶ 45); (iv) in some cases, the forgery e.g., or possible Compl. ¶ forgery 21-24; of 564 annuitants' Compl. ¶ signatures and (iv) (see, with

470

24);

respect to the agents, the fact that they were not the agents who sold the policies, in contradiction of representations on the applications that they brokered the annuity sales and deemed them appropriate (see, e.g., 472 Compl. ¶ 43; 502 Compl. ¶ 44; 564 Compl. ¶ 77). to govern annuities. By its terms, it only prohibits payments in connection with "contract[s] for insurance" of various types, not annuities. R.I. Gen. Laws § 27-8-7. In the Court's view, this language does not include annuities, particularly in light of the consistent statutory distinction between annuities and insurance in Rhode Island, discussed above. Nevertheless, as explained in this section, the fact that the payments to the annuitants could not have violated § 27-8-7 does not spoil Plaintiffs' fraud claims.

35

This

last

point

bears

a

further

comment:

Plaintiffs'

pleadings focus in part on the agents as the source of what could be considered either omissions or affirmative

misrepresentations.

Each annuity contains a signature section

for the agent with the following text printed immediately above it: I HAVE MADE REASONABLE EFFORTS TO OBTAIN INFORMATION CONCERNING THE CONSUMER'S FINANCIAL STATUS, TAX STATUS, INVESTMENT OBJECTIVES AND SUCH OTHER INFORMATION USED OR CONSIDERED TO BE REASONABLE IN MAKING THE ANNUITY RECOMMENDATION AND FIND THE ANNUITY BEING APPLIED FOR APPROPRIATE FOR HIS/HER NEEDS. (564 Compl. Ex. G at 10.) Plaintiffs, however, contend the

agents did not have "any substantive involvement in selling the annuities," but were merely go-betweens for the sponsors. sponsors needed these particular annuity applications, The which

could only be sold by licensed brokers, for their pre-arranged investors. (Id.) A jury could reasonably find that those

facts, if proven, were material, because shrouding them rendered the statements printed above misleading.14

The agents try to duck the effect of those statements by uncorking, in the middle of their fraud argument, the issue of whether they owed any duty to Plaintiffs as a matter of agency law. That issue could be relevant for negligence claims, see Gen. Acc. Ins. Co. of Am. v. Am. Nat'l Fireproofing, Inc., 716 A.2d 751, 756-57 (R.I. 1998) (finding that insurance brokers owed duties both to the insurer and the insured), but for fraud, the relevant duty is the duty to disclose, which turns only on
14

36

Simply

put,

according

to

Plaintiffs,

Defendants

collectively did not tell them they were conspiring to exploit a loophole in Plaintiffs' annuity products. As explained above,

Plaintiffs' theory in this case is that each of the parties understood the nature of the fraudulent scheme, and each had his or her part to play and played it. Thus, much like a criminal See

enterprise, the fraud was the product of a group effort. Miller, 563 F. Supp. 2d at 81. Under these

circumstances,

evidence substantiating the allegations would be sufficient to create a jury question as to whether the information Defendants withheld was material. Cf. Affleck v. Potomac Ins. Co., 140 A.

469, 470 (R.I. 1928) (explaining that "[s]ometimes questions of materiality are for the jury," although the court may find

misrepresentations on an insurance application to be material as a matter of law); Smith v. Beaumier, 703 A.2d 1104, 1107 (R.I. 1997) (finding sufficient evidence in the record from which a jury could reasonably have concluded that the defendant "made material misrepresentations"); In re Cabletron Sys., Inc., 311 F.3d 11, 36 (1st Cir. 2002) (reversing dismissal of fraud claims and noting that materiality would "present a question of fact for a jury"). the materiality of the omissions identified above. arises independently from any agency relationship. It thus

37

c. Defendants

Scienter submit that, even accepting Plaintiffs'

allegations as true, they cannot prove the scienter element of fraud: that Defendants "inten[ded]" to deceive Plaintiffs.

Zaino, 818 A.2d at 638. again rests on their

The sponsors' argument on this point objection that none of the alleged

omissions was material.

They do not dispute that the Complaints

all allege they knowingly withheld the facts discussed above. Rather, they assert it was not inappropriate to stay silent about those facts, because the facts were immaterial as a matter of law. For the reasons discussed at length above, this

argument must be rejected. The agents and brokers, for their part, argue that the Complaints fail to allege they knowingly concealed information or lied. The agents fasten on the fact that Plaintiffs say they

had no "substantive involvement" in selling the policies (see, e.g., 564 Compl. ¶ 77), and that, in some cases, the annuitants "had never met" the agents before signing the applications (see, e.g., 472 Compl. ¶ 34). the agents "knew the . However, the Complaints declare that . . omissions in the applications"

described above were "misleading."

(See, e.g., 472 Compl. ¶ 54; Plus,

502 Compl. ¶ 47; 549 Compl. ¶ 125; 564 Compl. ¶ 80.)

Plaintiffs allege that it was the sponsors, not the agents, who

38

identified the buyers, and who solicited the annuitants to sign the applications. See supra n.10. At a minimum, these facts,

if proven, would make it unlikely that the agents had actually brokered the sales; this, in turn, would provide a "basis for inferring" that each agent knew it was misleading to proclaim on the application that he had made the annuity recommendation and found the investment appropriate. F.3d at 13. Because the Complaints properly allege scienter on the part of the agents, the brokers cannot escape liability by pleading ignorance. They may be vicariously liable for fraud if N. Am. Catholic Educ., 567

Plaintiffs prove the allegations that the agents acted in an agency capacity for the brokers when delivering the

applications.

See In re Atl. Fin. Mgmt., Inc., 784 F.2d 29, 32

(1st Cir. 1986) (explaining the basis for vicarious liability for fraud).15 Defendants also argue Plaintiffs cannot prove the justifiable reliance element of fraud. They argue big insurance companies are too sophisticated to justifiably rely on the absence of information they did not ask for. However, as noted, the insurers' lack of inquiry does not rule out fraud. Furthermore, sophistication does not preclude reliance. See Kenda Corp. v. Pot O'Gold Money Leagues, Inc., 329 F.3d 216, 227 (1st Cir. 2003) (rejecting an argument that the principal of a corporation was "sophisticated" and therefore could not have reasonably relied on misrepresentations by a potential business partner).
15

39

3.

Claims for conspiracy, civil liability crimes, and unjust enrichment against sponsors, agents, and brokers to Defendants, cannot the conspiracy each and

for the

According enrichment Plaintiffs' "specific

unjust from

claims

prevail,

because A

springs

deficient intent to

fraud do

claims. something

conspiracy or

requires

illegal

tortious."

Guilbeault, 84 F. Supp. 2d at 268. circumstances that make it

Unjust enrichment requires for a defendant to

"inequitable

retain [a] benefit" gained from a plaintiff, Bouchard v. Price, 694 A.2d 670, 673 (R.I. 1997) (internal citation omitted), such that "the enrichment to the defendant [is] unjust," R&B Elec. Co. v. Amco Constr. Co., 471 A.2d 1351, 1356 (R.I. 1984). There

are no cognizable allegations that Defendants have done anything wrongful or tortious, they insist, because Plaintiffs have

failed to plead fraud adequately.

However, since the fraud

claims against the sponsors, agents and brokers may proceed for the reasons already discussed, the conspiracy and unjust

enrichment Counts may follow against those parties. Plaintiffs' offenses, similar on the claims other one for civil trip liability over their on a for crimes and

hand,

statutory insurable which

barrier interest claims "any

to

the The

that

obstructs fraud

argument. depend only

insurance

statute in

the with

criminalizes

deceit

connection

40

application for the issuance of an insurance policy."

R.I. Gen.

Laws § 11-41-29(b)(1); see R.I. Gen. Laws § 9-1-2 (providing civil liability for victims of crimes). The words "insurance

policy" are even less susceptible to the interpretation that they include annuities than the words "insurance contract" in § 27-4-27(a). Again, given the statutory division between

insurance and annuities in Rhode Island law, the Court declines to transpose the rules for insurance policies onto annuities. Defendants may have defrauded Plaintiffs, and thereby violated some other part of the state criminal code; but § 11-41-29
16

cannot serve as a basis for civil liability in these cases.
16

In their opposition to Defendants' motions, Plaintiffs coin two new theories as to why the contracts are void: forgery and fraud in the factum. The latter occurs when someone is "tricked into signing an instrument without knowledge of its true nature or contents." Vasapolli v. Rostoff, 39 F.3d 27, 35 (1st Cir. 1994). It renders a contract "void and not merely voidable." R.I. Depositors Econ. Protection Corp. v. Bowen Court Assoc., 763 A.2d 1005, 1009 (R.I. 2001). Forgery may have the same result, if for no other reason than that it is one instance in which fraud in the factum may occur. See Giannone v. Ayne Inst., 290 F. Supp. 2d 553, 563 (E.D. Pa. 2003). The twist here is that, if either claim were successful, this could rope the owners back into the lawsuits in cases 09-472 and 09473: they could no longer rely on the incontestability clauses, which never would have come into effect. However, none of the Complaints articulates any separate claims for relief based on forgery or fraud in the factum -- which, as species of fraud, are subject to Rule 9(b). Instead, the only reasonable reading of the Complaints is that they plead garden-variety claims of fraud in the inducement: concealing the annuitants' ignorance of the policies, and the possible forgery of their signatures, allegedly induced Plaintiffs to issue the annuities. See R.I.

41

D.

Contract claims 1. Breach of contract

A necessary consequence of the Court's preservation of the fraud claims against the agents is that the breach of contract claims against the brokers also cannot be dismissed. Plaintiffs

entered agreements with each of the brokers setting conditions for selling their insurance and annuity products. If proven,

the fraud could create liability under at least two contract provisions cited in the Complaints. First, Western Reserve

alleges that its agreements obligate the brokers to indemnify Western Reserve for "fraudulent . . . acts" of the brokers' "employees products. 61; 473 . . . or agents" when selling Western Reserve

(564 Compl. ¶ 88; see 470 Compl. ¶ 46; 472 Compl. ¶ Compl. ¶ 64; 502 Compl. Reserve's agents ¶ 54.) contracts in selling Second, require both the

Transamerica's brokers to

and

Western

"supervise"

their

Plaintiffs' If the

products.

(471 Compl. ¶ 62; see 549 Compl. ¶ 132.)

Depositors Econ. Prot. Corp. v. Duguay, 715 A.2d 1278, 1280 (R.I. 1998) (distinguishing fraud in the inducement from fraud in the factum). The Court's decision here is without prejudice to any motion for leave to amend the Complaints to add fraud in the factum or rescission on grounds of forgery as separate causes of action. The Court takes no position at this time on the merits of such a motion, or on the question of whether such claims would in fact allow re-joining the owners to these cases by effectively negating the incontestability clause defense. This issue, if it arises, would need to be fully briefed and argued.

42

agents engaged in fraud, this may allow Plaintiffs to establish that the brokers failed to supervise the agents.17 The brokers make no headway with objections to Plaintiffs' lack of specificity in pleading breach of contract, or failure to attach the relevant contracts to the Complaints. Plaintiffs

have satisfied the relaxed pleading standards of Rule 8, which apply to claims for breach of contract. See 5 Charles Alan

Wright and Arthur R. Miller, Federal Practice & Procedure § 1235 (3d ed. 2010) ("In pleading the existence of an express written contract, the plaintiff, at her election, may set it forth

verbatim in the complaint, attach a copy as an exhibit, or plead it according to its legal effect."). Leaders also falls short in asserting, for the first time in its reply memoranda, that the Complaints in cases 09-473 and 09-502 rely on an outdated agreement. Arguments "raised for the Weaver's

first time in reply briefs are procedurally barred."

Cove Energy, LLC v. R.I. Coastal Res. Mgmt. Council, 589 F.3d 458, 474 n.14 (1st Cir. 2009). Regardless, the Complaints say

the agreement remains valid, and Western Reserve stated at oral argument that it stands by that assertion.
17

Whatever the facts

Given that the breach of contract claims must be allowed to go forward on the basis of the indemnification for fraud and supervision clauses, the Court need not decide whether any other provisions might ultimately create liability.

43

may eventually reveal about the status of the contract, the Court must accept Western Reserve's allegations as true for

purposes of Defendants' motions. 2. Breach of the duty of good faith and fair dealing

The Transamerica contracts include an express choice-of-law clause designating New York law as governing the terms of the agreement. (See Pl.'s Obj. to Mot. to Dismiss Ex. A at 3, ¶ New York

11(a), C.A. No. 09-549, Doc. No. 17 (Feb. 1, 2010).) law thus controls Transamerica's contract claims. v. Lincoln Benefit Life Co., 852 A.2d 474, 481

See DeCesare (R.I. 2004)

("[C]hoice-of-law provisions are enforceable if the intention of the parties to stipulate to the jurisdiction is made clear by express language . . . ."); see also Baker v. St. Paul Travelers Ins. Co., 595 F.3d 391, 392 (1st Cir. 2010) ("Because this court is sitting in diversity, we apply the choice of law rules of the forum state . . . ."). New York law "does not recognize a

separate cause of action for breach of the implied covenant of good faith and fair dealing when a breach of contract claim, based upon the same facts, is also pled." Harris v. Provident Thus,

Life & Accident Ins. Co., 310 F.3d 73, 81 (2d Cir. 2002). Transamerica can only rely on its contract claims. Florida law governs the Western Reserve contracts,

also

pursuant to an express choice-of-law clause.

(See Pl.'s Obj. to

44

Mot. to Dismiss Ex. A ¶ 15, C.A. No. 09-472, Doc. No. 37 (Feb. 1, 2010).) duty of Florida law requires claims based on the implied faith and fair dealing to piggyback on the

good

violation of a specific contractual provision. Corp. v. Weaver, 169 F.3d 1310, 1318

See Burger King Cir. 1999)

(11th

(explaining that under Florida law, an "action for breach of the implied covenant cannot be maintained . . . in the absence of breach of an express term of the underlying contract"). Since

Western Reserve has viable claims for the breach of express contractual terms, as a matter of law it may proceed with its claims for violation of the implied covenant of good faith. See

Nautica Int'l, Inc. v. Intermarine USA, L.P., 5 F. Supp. 2d 1333, 1340-41 (S.D. Fla. 1998) ("That action constituted an

express breach of a term of an agreement between [plaintiff and defendant], and, therefore, plaintiff, as a matter law, may

bring a claim for breach of implied covenant of good faith."). E. Negligence

Finally, Rhode Island law forbids Plaintiffs' negligence claims, because they do not assert any physical or emotional damages. parties The economic loss doctrine in this state prohibits who "have contracted to protect against potential

economic liability" from recovering "purely economic damages" in tort claims. Franklin Grove Corp. v. Drexel, 936 A.2d 1272,

45

1275

(R.I.

2007)

(quotation

marks

and

citation

omitted).

Plaintiffs are correct that the Rhode Island Supreme Court has not applied the economic loss rule to service contracts, such as the broker agreements at issue. However, in this case, the

rationales for the rule apply, and the exception to it does not. Some courts have recognized that the economic loss doctrine preserves the distinction between tort and contract law, allows sophisticated contract, and parties enables freedom the to allocate best economic risk to by

party

positioned

assess

economic risk to allocate it.

See Ins. Co. of N. Am. v. Cease Here, as a general

Elec. Inc., 688 N.W.2d 462, 470 (Wis. 2004).

matter, permitting the contract claims and not the negligence claims to move forward is consistent with these ends. This

result enforces the allocations of risk Plaintiffs bargained for in the agreements. Indeed, Western Reserve's contracts

allegedly create an express remedy for negligence on the part of the agents, which requires the brokers to indemnify Western

Reserve for any resulting losses. In addition, there is no

(See,