Chau et al v. Aviva Life and Annuity Company
Filing
114
Memorandum Opinion and Order granting 97 Motion for Summary Judgment. Plaintiffs' breach of contract claim and Plaintiffs' Third Amended Complaint are hereby DISMISSED WITH PREJUDICE. The Court will issue its final judgment in a separate order. (Ordered by Judge Jane J Boyle on 12/14/2012) (ctf)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
WING C. CHAU, M.D., et al.,
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§
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Plaintiffs,
v.
AVIVA LIFE AND ANNUITY
COMPANY,
Defendant.
CIVIL ACTION NO. 3:09-CV-2305-B
MEMORANDUM OPINION AND ORDER
Before the Court is Defendant Aviva Life and Annuity Company’s (“Aviva”) Motion for
Summary Judgment filed August 24, 2012 (doc. 97). For the reasons listed below, Aviva’s Motion
is GRANTED. Plaintiffs’ breach of contract claim and Plaintiffs’ Third Amended Complaint are
hereby DISMISSED WITH PREJUDICE.
I.
BACKGROUND1
Plaintiffs2 in this lawsuit are physicians and dentists and their professional corporations, all
1
The background facts are derived from Plaintiffs’ Third Amended Complaint (“TAC”) filed June
20, 2011.
2
Plaintiffs are Wing C. Chau, M.D.; Juliana Chau; Tri-Cities Physical Medicine & Rehabilitation,
PC; Richard E. Ehlers, M.D.; Richard E. Ehlers, M.D., P.C.; Mark T. Chen, D.O.; Mark T. Chen D.O., P.C.;
Craig Feeney, M.D.; Columbia Basin Imaging, P.C.; Henry H. Chou, M.D.; Henry H. Chou, M.D., P.C.;
David R. Brown, D.D.S.; David R. Brown, D.D.S., P.L.L.C; David Russsell Brown, D.D.S., P.C.; William K.
Trzcinksi, M.D.; William K. Trzcinski, M.D., P.S.; Donald G. Dicken, M.D.; Donald G. Dicken, M.D., P.C.;
David L. Dickerman, M.D.; David L. Dickerman, L.L.C.; David L. Dickerman, PLLC; Walter J. Hales, M.D.;
Walter J. Hales, M.D., P.S., Inc.; Patrick R. Harrison, D.D.S.; Patrick R. Harrison, D.D.S., P.C.; Steven J.
Kincaid, M.D.; Steven J. Kincaid, M.D., P.C.; Douglas K. Murdock, D.P.M.; Douglas K. Murdock, D.P.M.,
PS; Charles Sung, M.D.; and Charles Sung, M.D., P.C..
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of whom are citizens of the State of Washington. TAC ¶¶ 1-31. Plaintiffs allege that Indianapolis Life
Insurance Company (“Indianapolis Life”)3 advertised, marketed, and consummated fraudulent
business transactions, resulting in Plaintiffs’ damages. Id. at ¶ 33. In the late 1990s, Indianapolis Life
and Donald Guess allegedly created a “tax-sheltered investment to be offered to high-income
professionals through a welfare benefit trust.” Id. at ¶¶ 36-37. The trust, known as a “§ 419 Plan,”
because it was governed by Internal Revenue Code section 419, was designed to market an
Indianapolis Life insurance policy as an investment, purportedly “promising the investor a valuable
benefit of tax-favored retirement funds from tax-free cash flow where the investor did not contract
or participate in management decisions.” Id. The policy had “artificially high initial surrender charges
which suppressed the cash value of the policy for the initial policy period.” Id. at ¶ 39. The investor
would then purchase the policy at a discount from the trust, shortly before surrender charges were
to be reduced and while the cash value of the policy was low, and then the value would “spring” to
a higher level. Id. The purchaser could then borrow from his policy for tax-free cash flow. Id.
However, Indianapolis Life allegedly knew that the IRS had looked askance at the legality of similar
arrangements and had indicated that these arrangements may be deemed abusive tax shelters, yet
it continued to market its § 419 Plan as a tax-avoidance plan. Id. at ¶¶ 40-41.
In 1998, Aaron Burns (“Burns”), an agent of Indianapolis Life, began marketing and selling
Indianapolis Life policies to fund § 419 Plans in eastern Washington. Id. at ¶ 42. Based on
information he received from Indianapolis Life concerning the tax implications of these policies,
Burns proceeded to meet with the various Plaintiffs from 1998 through 2001 multiple times, and
3
Defendant Aviva is the successor to Indianapolis Life through various business transactions. TAC
¶ 32. The Court refers to Indianapolis Life and Aviva interchangeably.
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represented, both orally and in writing, that their payments to the trust would be tax-deductible,
their investment earnings would be tax–free, and they would enjoy tax-free cash flow which could
be used for retirement income.4 Id. at ¶¶ 44-59, Pls.’ Resp. Mot. Summ. J. App. 3-5 (Burns Decl.);
and App. 93-95 (Ehlers Decl.). Purportedly relying on these representations, Plaintiffs initiated their
§ 419 trusts and purchased Indianapolis Life insurance policies. TAC at ¶¶ 46-59, 67; Pls.’ Resp.
Mot. Summ. J. App. 94-95. In Plaintiffs’ view, these alleged representations were false and misleading
regarding the nature of the policy benefits and federal tax consequences of the § 419 Plan, leading
to IRS audits of the Plaintiffs, substantial tax penalties and interest, and ultimately damages in excess
of $1,000,000. TAC at ¶¶ 62, 76-77.
II.
PROCEDURAL HISTORY
Plaintiffs’ original complaint was filed on April 22, 2009 in Washington state court, and
Aviva filed its notice of removal on May 29, 2009, removing the case to the United States District
Court for the Eastern District of Washington. Plaintiffs filed their Second Amended Complaint on
September 14, 2009 after the trial court granted Plaintiffs’ Motion to Amend and denied Aviva’s
Motion to Dismiss as moot with leave to refile on September 9, 2009. On December 3, 2009, the
United States Panel on Multidistrict Litigation (“MDL Panel”) ordered the case transferred to the
Northern District of Texas.
4
Burns is not a defendant to this suit, though Plaintiffs make several claims regarding his work as an
Indianapolis Life agent marketing the § 419 plan on behalf of Indianapolis Life. Burns states that he is acting
as an expert witness for Plaintiffs in this case. Pls.’ Resp. Mot. Summ. J. App. 2.
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On May 20, 2011, this Court issued a decision granting in part Aviva’s motion to dismiss.
Mem. Op. & Order May 20, 2011. The Court dismissed the Second Amended Complaint’s (“SAC”)
claims for common law fraud/negligent misrepresentation, Washington securities fraud, breach of
duty of good faith, unjust enrichment, civil conspiracy, and violation of the Washington Consumer
Protection Act without prejudice and denied the motion to the extent it sought dismissal of
Plaintiffs’ breach of contract claim. The Court also gave Plaintiffs leave to amend with instructions
to file, along with the amended complaint, a synopsis explaining how the amendments overcame the
grounds stated for dismissal. On June 20, 2011, Plaintiffs filed their Third Amended Complaint
(“TAC”). On July 25, 2011, the Court found that the Third Amended Complaint did not cure the
deficiencies of the Second Amended Complaint as identified by the Court in its May 20, 2011 order.
In light of the multiple opportunities afforded to Plaintiffs to state a claim, the Court determined that
allowing further amendment would be futile and would cause needless delay and was therefore not
warranted. Accordingly the Court dismissed with prejudice Plaintiffs’ claims for common law
fraud/negligent misrepresentation, Washington securities fraud, breach of duty of good faith, unjust
enrichment, civil conspiracy, and violation of the Washington Consumer Protection Act.
Accordingly, the sole claim remaining against Aviva is Plaintiffs’ breach of contract claim, which
Aviva seeks to dismiss through its Motion for Summary Judgment.
III.
LEGAL STANDARD
A.
Law Applicable in MDL Cases
This action is before the Court as a result of a forum transfer by the MDL Panel. Therefore,
as to matters of state law, the Court is bound to apply the state law of the transferor forum. 15
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Charles Alan Wright, Arthur R. Miller, and Edward H. Cooper, Federal Practice and Procedure
(“Wright & Miller”) § 3866 (3d ed. 2004) at 528-29 (citing In re Air Disaster at Ramstein Air Base,
81 F.3d 570, 576 (5th Cir. 1996) and Menowitz v. Brown, 991 F.2d 36, 40 (2d Cir. 1993)) (other
citations omitted). As to matters of federal law, however, the Court applies the law of the transferee
court. Menowitz, 99 F.2d at 40 (citing In re Korean Air Lines Disaster, 829 F.2d 1171, 1175 (D.C. Cir.
1987)) (other citations omitted). Therefore, as this case was originally filed in Washington state
court (prior to removal and transfer), the Court applies Washington state substantive law as to
matters of state law. On the other hand, because pleading requirements are purely matters of federal
law, the Court looks to the law of this Court and this Circuit for the controlling Federal Rules of
Civil Procedure standards. See, e.g., Prudential Ins. Co. of Am. v. Clark Consulting, Inc., 548 F. Supp.
2d 619, 623 (N.D. Ill. 2008) (explaining that, as an initial matter, pleading requirements in federal
courts are governed by the federal rules and not by state law).
B.
Summary Judgment
Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is appropriate
when the pleadings and record evidence show that no genuine issue of material fact exists and that,
as a matter of law, the movant is entitled to judgment. Hart v. Hairston, 343 F.3d 762, 764 (5th Cir.
2003). In a motion for summary judgment, the burden is on the movant to prove that no genuine
issue of material fact exists. Provident Life & Accident Ins. Co. v. Goel, 274 F.3d 984, 991 (5th Cir.
2001). To determine whether a genuine issue exists for trial, the court must view all of the evidence
in the light most favorable to the non-movant, and the evidence must be sufficient such that a
reasonable jury could return a verdict for the non-movant. Chaplin v. NationsCredit Corp., 307 F.3d
368, 371-72 (5th Cir. 2002).
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IV.
ANALYSIS
Plaintiffs’ breach of contract claim alleges that Aviva “entered into contracts with the Xelan
Welfare Benefit Trust and the Plaintiffs as third-party beneficiaries and as assigns of the Xelan
Welfare Benefit Trust’s rights regarding the performance of [Aviva] policies, which were to fund the
Xelan Welfare Benefit Trust plans with tax deductible payments leading to substantial taxadvantaged retirement savings,” and Aviva failed to fulfill its contractual obligations. TAC ¶ 81-82.
See also TAC ¶ 37 (Aviva insurance policy “was designed, advertised, marketed and sold as an
‘investment contract’ promising the investor a valuable benefit of tax-favored retirement funds from
tax-free cash flow”). Aviva argues that its insurance policies issued to Plaintiffs in fact made no such
contractual promise, and “the policies do not promise any ‘tax-favored’ or ‘tax-free’ cash flow or
identify any other tax benefits that Plaintiffs allege they were entitled to receive by purchasing the
policies.” Def.’s Br. Supp. Mot. Summ. J. 2. Further, Aviva argues that the insurance policies issued
to Plaintiffs “are the fully integrated agreement between the parties.” Id. at 4 (citing Martin Decl.,
Mot. Summ. J. Ex. 1).
In opposition to Aviva’s Motion for Summary Judgment, Plaintiffs argue that Aviva’s
characterization of its insurance policies “ignores the other promises it made as part of its larger
program to market and sell tax-free investments,” Aviva “marketed and sold tax-free investments
that included the insurance policy as the means to achieve the tax-free result, [and] neither the
investment nor the policy met the promises” made by Aviva, and “[s]uch failure to perform as
promised is a breach of contract.” Pls.’ Resp. Mot. Summ. J. 1-2. Plaintiffs also argue that the
insurance policies they purchased were not the entire agreement between them and Aviva, despite
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the policies’ integration clauses, as shown by extrinsic evidence.
This Court previously denied Aviva’s Motion to Dismiss to the extent that it sought dismissal
of Plaintiffs’ breach of contract claims based on Federal Rule of Civil Procedure 12(b)(6).5 Mem. Op.
May 20, 2011 at 15. The Court explained:
A breach of contract is actionable only if the contract imposes a duty, the duty is
breached, and the breach proximately causes damage to the claimant. Plaintiffs allege
that Indianapolis Life and its agent Aaron Burns made oral representations that the
insurance policies would provide substantial tax savings or tax-free earnings and that
they were suitable for § 419 Plans. Further, Plaintiffs allege that the promised tax
benefits were false, resulting in“substantial tax penalties and interest” after the IRS
audited the Plaintiffs. Such allegations, accepted as true, state a claim for breach of
contract under Washington state law.
Id. at 14-15 (citations omitted). At the time the Court made this determination, on a motion to
dismiss, the Court expressed no opinion as to whether any oral representations or any written
representations not contained in the insurance policies could form part of any contract between
Aviva and the Plaintiffs. On Aviva’s Motion for Summary Judgment, however, the Court now looks
to the parties’ evidence in determining what obligations and promises were made by the parties.
Under Washington law, to prevail on a breach of contract claim, a party must prove “(1) the
existence of an enforceable contract, (2) the parties’ obligations under the contract, (3) violation of
the contract, and (4) damages proximately caused by the breach.” Major v. Hodgson, No. 64858-6-I,
2010 WL 1746554, at *5 (Wash. Ct. App. May 3, 2010) (citation omitted). Aviva argues that the
principal contractual promise of the policies at issue is to provide a guaranteed death benefit in
exchange for annual premium payments, and such policies do not promise any tax advantages or
5
The Court also denied the Motion to Dismiss to the extent it sought dismissal of the breach of
contract claim based on Federal Rule of Civil Procedure 9(b), based on the Court’s determination that
applying Rule 9(b) to a breach of contract claim is generally inappropriate.
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other tax benefits alleged by Plaintiffs. The Court agrees that the policies themselves do not promise
any tax benefits. Indeed, the policies explain that “Indianapolis Life Insurance Company promises
to pay the Death benefit to the beneficiary upon receipt at our Home Office of due proof of death
of the Insured, subject to the terms and conditions of this policy.” Def.’s Br. Supp. Mot. 7 (citing
Mot. App. 5, 38, 65, 98, 124, 158, 188, 220, 254, 284, 326, 362, 393, 424). Further, the policies
contain an integration clause stating that “[t]his policy and the application . . . make up the entire
contract.” Mot. 8 n.5 (citing Mot. App. 11, 44, 71, 130, 164, 194, 226, 260, 290, 332, 368, 399,
430). Assuming there are no valid contractual promises made outside of the insurance policies at
issue, Plaintiffs fail to point to any term of the contracts between the parties which have been
breached by Aviva.
Plaintiffs, however, argue that they are entitled to introduce evidence of promises outside of
the insurance policies, in the form of Indianapolis Life marketing information, a declaration from
Indianapolis Life’s former agent Burns regarding promises of tax benefits, and other documents. In
their view, such evidence creates, at a minimum, a fact issue as to whether there were contractual
obligations between the parties outside of the insurance policies, specifically the alleged promised tax
benefits. Aviva, however, argues that any such evidence is barred by the parol evidence rule, the
policies’ integration clause, and Washington state law regarding insurance contracts.
At first glance, Washington law appears more permissive of extrinsic evidence in the context
of breach of contract claims than many other states. The Washington Supreme Court explained in
Berg v. Hudesman, 801 P.2d 222 (Wash. 1990), that “extrinsic evidence is admissible as to the entire
circumstances under which the contract was made, as an in ascertaining the parties’ intent.” The
court explained that it was adopting the Restatement (Second) of Contracts § 212, 214(c)(1981),
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which states that “[a] question of interpretation of an integrated agreement is to be determined by
the trier of fact if it depends on the credibility of extrinsic evidence or on a choice among reasonable
inferences to be drawn from extrinsic evidence.” Id. at 229. The court further explained that
The parol evidence rule only applies to a writing intended by the parties as an
“integration” of their agreement; i.e., a writing intended as a final expression of the
terms of the agreement. Where a contract is only partially integrated, i.e., the writing
is a final expression of those terms which it contains but not a complete expression
of all terms agreed upon, the terms not included in the writing may be proved by
extrinsic evidence provided that the additional terms are not inconsistent with the
written terms.
Id. at 230 (citation omitted).
However, since the Berg decision, the Washington Supreme Court clarified when extrinsic
evidence may be used in contract interpretation in Hearst Communications, Inc. v. Seattle Times Co.,
115 P.3d 262 (Wash. 2005). The Hearst court first noted the confusion over the implications of Berg,
explaining “[i]nitially Berg was viewed by some as authorizing unrestricted use of extrinsic evidence
in contract analysis, thus creating unpredictability in contract interpretation. Id. at 266 (citation
omitted). The Hearst court explained that:
Since Berg, we have explained that surrounding circumstances and other extrinsic
evidence are to be used to determine the meaning of specific words and terms used and
not to show an intention independent of the instrument or to vary, contradict or
modify the written word. Our holding in Berg may have been misunderstood as it
implicates the admission of parol and extrinsic evidence. We take this opportunity
to acknowledge that Washington continues to follow the objective manifestation
theory of contracts. Under this approach, we attempt to determine the parties’
intention by focusing on the objective manifestations of the agreement, rather than
on the unexpressed subjective intent of the parties. We impute an intention
corresponding to the reasonable meaning of the words used. Thus, when interpreting
contracts, the subjective intent of the parties is generally irrelevant if the intent can
be determined from the actual words used. We generally give words in a contract
their ordinary, usual, and popular meaning unless the entirety of the agreement
clearly demonstrates a contrary intent. We do not interpret what was intended to be
written but what was written.
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Hearst, 115 P.3d at 267 (citations omitted). See also Craig Wireless Sys. Ltd. v. Clearwire Legacy LLC,
No. C10-1269Z, 2011 WL 4011415, *6 (W.D. Wash. Sept. 9, 2011) (quoting Hearst).
Here, the extrinsic evidence sought to be introduced by Plaintiffs does not aid the Court in
determining the meaning of specific words and terms used. Rather, the documents allegedly
indicating promises of tax benefits made by Indianapolis Life would instead tend to show an intention
independent of the insurance policies at issue.6 See Hearst, 115 P.3d at 267. See also Elliott Bay
Seafoods, Inc. v. Port of Seattle, 98 P.3d 491, 494 (Wash. Ct. App. 2004) (“Berg held that extrinsic
evidence may be admitted to give meaning to the words used in the contract, not to create a new
contract term.”); Seattle-First Nat’l Bank v. Crystal & Gold, Ltd., No. 37016-2-I, 1997 WL 206788,
*3 (Wash. Ct. App. Apr. 28, 1997) (“[Extrinsic] evidence is admissible even where the written
contract is not ambiguous. But [the Berg court] carefully noted that parol evidence may not be used
to create obligations that have no basis in the written instrument.”). The policies at issue make no
mention of any tax benefits or tax deductions, including the tax benefits alleged by Plaintiffs. Instead,
as shown by the clear terms of the policies, the objective intent of the parties was to provide a
guaranteed death benefit in exchange for annual premium payments. Here, Plaintiffs seek to insert
additional obligations into the insurance contracts at issue, which is an impermissible use of extrinsic
evidence. See Oliver v. Flow In’t Corp., 155 P.3d 140, 143 (Wash. Ct. App. 2006) (extrinsic evidence
is relevant only to determine the meaning of specific words and terms used and not to show an
intention independent of the instrument or to vary, contradict, or modify the written contract,
6
Further, such promises would also contradict the terms of the contract's integration clause. However,
even assuming there was no integration clause, the alleged promises of tax benefits are essentially new
contract terms inconsistent with the terms of the insurance policies, and therefore Plaintiffs’ extrinsic
evidence showing such purported obligations are inadmissible.
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including by “insert[ing] new obligations”) (citations omitted). Permitting the use of Plaintiffs’
proposed extrinsic evidence here “would amount to a rewriting of the insurance certificate,” which
is contrary to “the duty of the court to declare the meaning of what is written, and not what was
intended to be written,” and would “emasculate the parties’ written expression of mutual intent.”
See Seattle-First, 1997 WL 206788, at *3-4 (quoting US Credit Life Ins. Co. v. Williams, 919 P.2d 594
(Wash. 1996)). Given that the Court’s examination of the insurance policies at issue reveals solely
a promise of payment of a guaranteed death payment in exchange for annual premium payments,
with no promises of tax benefits, and given that Plaintiffs’ proposed extrinsic evidence would not aid
the Court in determining the meaning of specific words and terms used, but would instead attempt
to insert additional obligations into the parties’ agreements, the Court holds that there is no dispute
of material fact as to whether Aviva breached any terms of the contracts at issue.7 Accordingly,
Plaintiffs cannot prevail on their breach of contract claim, and the breach of contract claim is
DISMISSED WITH PREJUDICE.8
V.
CONCLUSION
For the reasons listed above, Aviva’s Motion for Summary Judgment is GRANTED.
Plaintiffs’ breach of contract claim is hereby DISMISSED WITH PREJUDICE. As the Court has
7
The Court expresses no opinion as to whether Plaintiffs’ proposed extrinsic evidence would be
admissible to prove any of the other claims asserted by Plaintiffs in the Third Amended Complaint, as all of
Plaintiffs’ claims, with the exception of the breach of contract claim, were previously dismissed with prejudice
by the Court for failure to meet the applicable pleading standards.
8
The Court reaches this determination without expressing an opinion on the validity of the
integration clause present in insurance policies at issue. The Court notes, however, that the integration clause
tends to provide even more support for Aviva’s contention that the only contractual promise it made to
Plaintiffs was a guaranteed death benefit in exchange for annual premium payments.
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now dismissed with prejudice all of Plaintiffs’ claims, the Third Amended Complaint is hereby
DISMISSED WITH PREJUDICE. The Court will issue its final judgment in a separate order.
SO ORDERED.
DATED: December 14, 2012.
_________________________________
JANE J. BOYLE
UNITED STATES DISTRICT JUDGE
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