Van Den Heuvel v. AI Credit Corp.

Citations: 951 F. Supp. 2d 1064; 2013 U.S. Dist. LEXIS 84649; 2013 WL 3049353Docket: Case No. 12-C-0327

Court: District Court, E.D. Wisconsin; June 17, 2013; Federal District Court

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Chief Judge William C. Griesbach issued a decision granting motions to dismiss in a case initiated by Ronald H. Van Den Heuvel regarding an insurance premium financing scheme. The lawsuit was originally filed pro se in Brown County Circuit Court, Wisconsin, and later removed to federal court based on diversity jurisdiction under 28 U.S.C. 1332(a). Van Den Heuvel, now represented by counsel, amended his complaint to include additional plaintiffs and defendants.

The background details a complex scheme involving Van Den Heuvel's efforts to finance the development of a food service waste recycling process. In 2005, he sought life insurance for the benefit of investors and family members through Defendants Life Legacy Group, LLC (LLG) and licensed producer Libby Grant. They introduced him to a program promoted by A.I. Credit Corporation (AICC) called the 'Capital Maximization Strategy' (CMS), which involved a total of $72 million in life insurance underwritten by Phoenix Life Insurance Company.

The CMS program was marketed as a 'vanishing premium' scheme, suggesting that premium payments would diminish over time as policy values increased. Plaintiffs allege that AICC, LLG, and Grant were aware of the program's high risks and unrealistic market assumptions, designed to compel insured individuals to invest heavily, potentially resulting in substantial financial loss. AICC provided projections indicating that after five years of limited annual premium payments, the policies would become self-sustaining, requiring only interest payments on borrowed funds. However, Plaintiffs argue that the projected growth in policy values was overstated, leading to a reliance on collateral that would diminish as the policies matured.

After ten years, the cash value of the life insurance policies obtained by the Plaintiffs was projected to exceed the premium debt, eliminating the need for non-insurance collateral. In summer 2005, Plaintiffs acquired four life insurance policies from Defendant Phoenix Insurance Company and executed a Master Promissory Note with AICC. Plaintiffs allege that the illustrations and projections provided by AICC, Phoenix, LLG, and Grant were non-compliant with applicable law and misleading, citing several issues: concealment of risks from concentrating insurance with a single insurer, inadequate descriptions of interest crediting rates, lack of disclosure regarding the consequences of missed premium payments, and failure to inform Plaintiffs about increasing collateral requirements after the first year. Additionally, they claim that Phoenix accepted Van Den Heuvel’s insurance applications despite non-compliance with insurance law.

In 2008, following significant financial troubles at AIG, the parent company of AICC and Phoenix, AICC pressured Plaintiffs to replace three of the four policies with ones from Defendant Allianz Life Insurance Company. Plaintiffs contend that this transaction involved further non-compliance and misrepresentations, including failure to disclose the negative impacts on surrender values and undisclosed commissions received for the transaction.

In July 2009, AIG sold AICC’s premium financing portfolio to First Insurance Funding Corp. (FIRST) at a substantial discount. Plaintiffs allege FIRST had an incentive to force a default on their loans to profit quickly from the surrender of their policies. Shortly thereafter, FIRST refused to provide necessary funds for the remaining Phoenix policy premium, resulting in Plaintiffs defaulting on their loan obligations. FIRST is accused of demanding a transfer of the entire insurance portfolio without disclosing the commissions involved or the further decrease in surrender value. Ultimately, FIRST, LLG, and Grant facilitated the transfer of most insurance to Defendants Sun Life, Pacific Life, and John Hancock, while also failing to finance the full year's premium, leaving Plaintiffs to seek alternative financing to prevent the collapse of their insurance program.

Plaintiffs allege that FIRST demanded monthly payments for interest unrelated to the actual amounts accruing and warned of sharply increasing collateral requirements from 2009 to 2012. They claim that after over seven years, the surrender value of their policies had not risen sufficiently to sustain them or fully collateralize their premium loans. Consequently, Plaintiffs report spending over $8.8 million on premium payments, more than $2 million on interest and borrowing costs, and forfeiting collateral valued over $3.5 million. They have raised four causes of action, including misrepresentation and fraud against several defendants, and a claim for disgorgement and declaratory relief against FIRST. Defendants AICC, FIRST, Phoenix, Pacific Life, and Sun Life have moved to dismiss under Rule 12(b)(6), arguing that the Plaintiffs have not stated a valid claim. The legal standard for dismissal under Rule 12(b)(6) requires that allegations must not only be true but must also raise a claim for relief. To meet this standard, the complaint must present sufficient factual matter that is plausible on its face. Additionally, fraud claims must meet the heightened pleading requirements of Rule 9(b), detailing the specifics of the alleged fraud, including the who, what, when, where, and how. Courts will view the allegations favorably to the Plaintiff when considering motions to dismiss and may review certain documents outside the pleadings if they are referenced in the complaint and central to the claims.

AICC challenges the plaintiffs’ fraud and misrepresentation claims on several fronts, asserting that the plaintiffs have not met the particularity requirement of Rule 9(b). AICC claims it made no false statements and had no duty to disclose information, arguing that the economic loss doctrine bars the claims. The plaintiffs argue they can fulfill Rule 9(b) by providing a general outline of the fraud circumstances, citing cases that support the notion that the rule's aim is to inform defendants of their alleged misconduct. However, the Seventh Circuit's decision in Ackerman clarifies that the heightened pleading standard is meant to ensure plaintiffs conduct a thorough pre-complaint investigation, requiring them to detail the specifics of the fraud, including the "who, what, when, where, and how." The plaintiffs fail to adequately specify AICC’s fraudulent actions or omissions, lacking details about communications with AICC, the timing, and the nature of the interactions. They also fail to distinguish AICC's role from that of insurance intermediaries and do not clarify what misleading information was directly provided by AICC. The complaint, as it stands, appears to be a generalized accusation without sufficient particulars to substantiate the claims, resembling a fishing expedition during discovery rather than a well-founded legal allegation.

Plaintiffs assert claims of intentional misrepresentation but argue they are not bound by the heightened pleading standards of Rule 9(b). However, the complaint explicitly alleges fraudulent actions, thus categorizing the claims as fraud, which necessitates particularity in pleading to prevent irresponsible accusations of fraud. AICC counters that the fraud claims lack merit, emphasizing that the complaint does not specify any affirmative misrepresentation by AICC nor does it identify any omissions of facts AICC was obligated to disclose. AICC further argues that any alleged misrepresentations or omissions are intertwined with the contractual terms, thereby invoking the economic loss doctrine which bars recovery for purely economic losses in tort. 

Wisconsin law recognizes three misrepresentation torts: intentional, negligent, and strict responsibility. Each requires a false factual representation, belief in its truth, and detrimental reliance. For intentional misrepresentation, plaintiffs must show the defendant acted knowingly or recklessly regarding the truth, intending to defraud. Strict responsibility does not require intent but mandates that the misrepresentation arise from the defendant's knowledge. Negligent misrepresentation requires proof that the defendant owed a duty of care and failed to exercise it. AICC argues that plaintiffs have not identified any false representations, admitting to a lack of affirmative misrepresentations by AICC and instead basing liability on omissions. Generally, there is no obligation to disclose all known facts in an arm's-length transaction, but exceptions exist, particularly when a material fact is solely within one party's knowledge, and the other party is entering the transaction under a mistaken belief that could not be reasonably discovered. The determination of a legal duty to disclose is a question of law.

AICC asserts it had no obligation to disclose risks related to the CMS premium financing program that Plaintiffs allege. It argues that the claims pertain more to the performance of the insurance policies rather than the loans themselves, mischaracterizing Plaintiffs' allegations. Plaintiffs claim AICC provided sales presentations and projections about the insurance policies to persuade them to finance the premiums, linking the insurance policies to the financing arrangement. AICC contends that disclaimers in the Master Promissory Note allocate all investment risks to the Plaintiffs, stating that the borrower must maintain the insurance policy and indemnify AICC for losses. The Notes also clarify that AICC will not offer any advice regarding the loans, and Van Den Heuvel acknowledged he had his own legal counsel. Although Plaintiffs allege AICC's omissions were material and intentional, they have not shown they could not have discovered the information independently. Plaintiffs entered a sophisticated transaction with their own representation, outlined in a detailed contract. AICC argues that it would be unreasonable to impose a broad duty to disclose given that the Plaintiffs were equipped to make their own financial decisions, and they willingly engaged in the agreement despite clear disclaimers. Ultimately, AICC maintains that it is not responsible for the outcomes of the insurance policies or for Plaintiffs' perceived poor investment decision, although it notes that a duty to disclose may exist in some commercial transactions.

In the Kaloti case, the Wisconsin Supreme Court determined that the plaintiff, a secondary supplier, sufficiently alleged that the defendants had a duty to disclose information, allowing the complaint to proceed past the motion to dismiss. The defendants, who had sold products to the plaintiff, began selling directly to large-market stores, which the plaintiff traditionally supplied. The court highlighted the established business relationship, indicating it was reasonable for the plaintiff to expect disclosure about the defendants' new selling strategy.

In contrast, the current plaintiffs failed to demonstrate that AICC had a duty to disclose information or that undisclosed facts were solely within AICC's knowledge. The plaintiffs' claims were vague and lacked clarity regarding the alleged misrepresentation. The plaintiffs included an individual and various corporate entities, with one plaintiff, Ronald Van den Heuvel, actively pursuing a complex investment scheme involving over $70 million in life insurance. The plaintiffs did not provide a legal or policy justification for imposing a broad disclosure duty on AICC, especially since many withheld facts were discoverable through investigation.

Additionally, the plaintiffs made claims that contradicted the explicit terms of their contract with AICC. They alleged that AICC failed to disclose the consequences of not paying premiums, which included forfeiture of their investment and loss of collateral. However, the contract clearly stated that obligations would accelerate upon default. The plaintiffs also alleged that AICC misrepresented crediting rates in illustrations, asserting they were significantly higher than likely actual rates and that these rates were not guaranteed. However, the Notes outlined AICC's rights in the event of default and the potential consequences, which undermined the plaintiffs' allegations.

Projections are inherently based on assumptions and are estimates rather than guarantees. Plaintiffs fail to demonstrate how potentially overly optimistic projections by AICC amount to actionable misrepresentation or explain the liability arising from AICC's lack of alternative projections. There are no allegations suggesting that AICC manipulated or concealed risks in its projections. The plaintiffs' grievances primarily relate to the repercussions of not paying premiums and reliance on assumed credit rates, which were foreseeable given their lending agreement. They erroneously believe AICC should have guaranteed their program's success, a claim unsupported by the contract or law. Consequently, without credible allegations warranting a duty to disclose, AICC cannot be held liable for misrepresentation, leading to the granting of AICC's motion to dismiss.

Regarding Count IV: Fraud and Misrepresentation, plaintiffs assert that the insurance defendants (Phoenix, Sun Life, and Pacific Life) had a duty to ensure the suitability of insurance policies and compliance with Wisconsin regulations. They allege these insurers were aware that the information provided by AICC and its associates did not meet required standards, including failing to disclose critical financial implications and undisclosed benefits received by agents. The insurers have moved to dismiss, arguing that the allegations do not sufficiently articulate the circumstances of fraud as mandated by Rule 9(b). The complaint lacks clarity, often grouping the defendants together without specifying individual roles, particularly regarding Phoenix's involvement, which appears to precede the alleged misconduct. Plaintiffs do not clearly differentiate which defendants were involved in what aspects of the alleged scheme, leading to a vague and inconsistent complaint about the supposed misleading nature of the insurance illustrations and projections.

The complaint alleges that the insurers received or had access to marketing materials from LLG and Grant related to their solicitation of insurance, and that they knowingly allowed AICC, LLG, and Grant to use CMS projections for this purpose. However, the plaintiffs fail to specify how or why the insurers became involved with these entities or had access to all marketing materials. The complaint lacks clarity regarding the damages sustained due to misrepresentations by AICC and does not convincingly establish that the insurers made any relevant representations to the plaintiffs about investment risks or their experience. 

The plaintiffs generically accuse multiple insurers of misrepresentation, despite limited contact between them and the plaintiffs over different timelines. They mention communication with Phoenix as early as 2003, with Allianz becoming involved by 2009, while Sun Life and Pacific Life had no known contact until after 2009. The plaintiffs seek recovery from Sun Life and Pacific Life for misrepresentations allegedly made as far back as 2003 or 2005, despite these insurers only issuing policies in 2010. They do not clarify the role Sun Life and Pacific Life played in the premium financing scheme initiated in 2005 or provide details on the surrender and replacement of policies between insurers in 2009. Overall, the complaint is vague about key events' timing and lacks specifics regarding sales presentations and the parties involved, suggesting that there was only one relevant presentation in 2005.

Plaintiffs' allegations fail to meet the specificity requirements of Rule 9(b), as they do not adequately detail the date, place, method, speaker, or recipient of the alleged fraudulent misrepresentations, leaving defendants guessing about their purported roles. In cases involving multiple defendants, each must be informed of the specific actions constituting their involvement in the fraud. The complaints' general allegations against the insurers regarding their relationship with AICC, LLG, and Grant are insufficient to establish liability, as there is no evidence to suggest that LLG and Grant were agents of the insurers or had authority to act on their behalf. The complaint indicates that LLG and Grant were acting as brokers for the Plaintiffs, not the insurers. Consequently, the claims against the insurers fail because the actions of LLG and Grant do not establish agency or liability. Additionally, insurers typically owe limited duties to insured parties and are not required to advise on coverage unless a special relationship or statutory obligation exists. Such special circumstances must exceed a standard insurer-insured relationship.

A duty to advise may arise in certain circumstances for insurance agents, including when an insured compensates an agent for advice, has a longstanding relationship with the agent, or relies on an agent who presents themselves as a skilled expert. Creating an affirmative duty to advise could shift responsibility from the insured, disrupt market competition, and expose insurers to liability for not advising clients on all insurance options. Plaintiffs reference Wisconsin statutes and regulations to support their claims that insurers should have disclosed complete information about their policies, arguing that these regulations reflect industry customs that necessitate disclosure. However, despite not needing to plead legal theories, the Plaintiffs must still meet relevant pleading standards, and their vague references to laws do not substantiate their claims. The court requires a clear legal basis for the action and will not create arguments for the plaintiffs or accept unsubstantiated claims as true. Additionally, regarding Phoenix, Plaintiffs assert that the company was involved in misleading premium financing proposals, but Phoenix contends that the illustrations provided were clear and should not be considered in a motion to dismiss.

A court's review in a Rule 12(b)(6) motion to dismiss typically focuses on the complaint's allegations, but it may consider documents referenced in the complaint that are central to the plaintiff's claims. If such documents are not attached to the complaint, the defendant can introduce them. The court can independently examine these documents if their authenticity is undisputed, rather than solely relying on the plaintiff's interpretations. In this case, the illustrations referenced in the complaint underpin the plaintiffs' fraud claims against Phoenix. Although the plaintiffs question the authenticity of these illustrations because they are addressed to "Valued Client," the presence of Ronald Van Den Heuvel’s signature and identifying information diminishes this argument. The illustrations were authenticated as business records through an affidavit submitted by Phoenix.

The illustrations provide projected values of the policies, including surrender and death benefits, based on various non-guaranteed elements. The plaintiffs' claims that the illustrations failed to disclose the impact of investment yield shortfalls are negated by the language in the illustrations, which Van Den Heuvel signed, acknowledging the non-guaranteed nature of the projections. The disclaimers are prominently placed on the first page of each illustration and clarify that actual results may vary, and that the values may not reflect actual tax or accounting consequences. Consequently, the allegations against Phoenix, Sun Life, and Pacific Life do not suffice to state a claim for relief, making it unnecessary to evaluate Phoenix's additional defenses related to the statute of limitations or the economic loss doctrine.

Count III of the legal document addresses the Plaintiffs' claim against FIRST, which is based on contract law. The Plaintiffs seek a declaration that FIRST improperly declared their loan in default, unlawfully took possession of the collateral, and sought to collect on a deficiency. They also aim to recover proceeds from the surrender of insurance policies and foreclosure on their collateral, arguing that if AICC's alleged misconduct invalidates foreclosure on their interests, FIRST should also be barred from similar actions and must return any gains derived from such actions. However, this argument is deemed illogical, as the Plaintiffs fail to provide a rationale linking AICC's alleged fraud to FIRST's contractual rights. They have not pursued rescission of the contract and lack grounds for such relief. Additionally, the Plaintiffs have not established a claim against AICC, undermining their claim against FIRST.

The Master Promissory Note clearly delineates the rights and obligations of both parties, superseding previous notes and explicitly granting FIRST the authority to declare a default and foreclose on collateral. Notably, the Master Note states that FIRST is not responsible for extending amounts due, including insurance premiums, and clarifies that FIRST is not involved in the insurance transactions related to the loan. The Borrower, Van Den Heuvel, acknowledged that the Master Note was a loan, separate from any insurance policy. Furthermore, the Borrower is responsible for fulfilling all financial obligations under the loan documents, regardless of any future disputes regarding the insurance policy.

As FIRST did not wrongfully retain any profits, the Plaintiffs are not entitled to disgorgement as an equitable remedy. Consequently, all claims against FIRST and the other defendants (AICC, Phoenix, Sun Life, and Pacific Life) are dismissed, with the dismissal being without prejudice except for FIRST. The Court will schedule further proceedings for the remaining parties.