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Ryan v. Salisbury

United States District Court, D. Hawaii

May 14, 2019

KATHY RYAN, INDIVIDUALLY, AND IN HER CAPACITY AS TRUSTEE OF THE BRODY FAMILY TRUST; Plaintiff,
v.
CHRISTOPHER S. SALISBURY; C. SALISBURY, LLC; CLARAPHI ADVISORY NETWORK, LLC; NATIONAL ASSET MANAGEMENT, INC.; MICHAEL DIYANNI; LAKE FOREST BANK & TRUST COMPANY, N.A.; WINTRUST LIFE FINANCE; AURORA CAPITAL ALLIANCE; SECURITY LIFE OF DENVER INSURANCE COMPANY; and ALEJANDRO ALBERTO BELLINI, Defendants.

          ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT MICHAEL DIYANNI'S MOTION TO DISMISS

          Alan C. Kay, Sr. United States District Judge.

         For the reasons set forth below, the Court GRANTS IN PART and DENIES IN PART Defendant Michael Diyanni's Motion to Dismiss, ECF No. 52, as follows:

1. As to the First Cause of Action (UDAP), the Motion is DENIED.
2. As to the Second Cause of Action (UDAP- Unsuitability), the Motion is GRANTED.
3. As to the Third Cause of Action (UDAP-Elder Abuse), the Motion is GRANTED.
4. As to the Fifth Cause of Action (Fraudulent Misrepresentation), the Motion is DENIED.
5. As to the Sixth Cause of Action (Breach of Fiduciary Duty), the Motion is DENIED.
6. As to the Seventh Cause of Action (Vicarious Liability/Respondeat Superior), the Motion is GRANTED.
7. As to the Tenth Cause of Action (RICO Violation), the Motion is GRANTED.
8. As to the Eleventh Cause of Action (Conspiracy to Violate RICO), the Motion is GRANTED.
9. As to the Twelfth Cause of Action (Hawai'i RICO), the Motion is GRANTED.

         FACTUAL BACKGROUND

         The Brody Family Trust (“the Trust”) was created on February 9, 1993, with Plaintiff Kathy Ryan (then Kathy Brody) (“Plaintiff”)[1] serving as its trustee. Compl., ECF No. 1 ¶ 23. The Trust was organized under the laws of California. Id. Sometime in 2002 or thereafter, the estate planning company that first established the Trust referred Plaintiff to Defendant Christopher S. Salisbury (“Defendant Salisbury”) for her investment and financial planning needs. Id. ¶ 24.

         Early on in his tenure as Plaintiff's financial advisor, Defendant Salisbury began investing Plaintiff's money and/or that of the Trust into annuities, among other investments. Id. ¶ 25. Defendant Salisbury, together with Defendant C. Salisbury, LLC and Accelerated Estate Planning, LLC (together, “the Salisbury Entities”) caused Plaintiff to surrender certain annuities and move the money to different annuities with the promise that any surrender fees would be offset either by bonus monies or greater earnings of the new product (a process the Complaint calls “churning”). Id. ¶ 26. Defendant Salisbury understood that Plaintiff did not have sophisticated knowledge of investment, financial, and insurance-related matters. Id. ¶ 29. The Salisbury Entities made verbal representations about the products Defendant Salisbury was directing Plaintiff to invest in or purchase, and Defendant Salisbury routinely presented Plaintiff with signature pages, rather than complete documents, which he instructed her to sign but not date. Id. ¶ 30. Defendant Salisbury, a licensed notary, often notarized documents Plaintiff had signed, including those signed outside his presence. Id.

         I. The Annuities

         Among the many annuities involved in Defendant Salisbury's “churning” process were annuities issued by Allianz, at least two of which were surrendered at a sizeable loss. See id. ¶ 31. First, on or about December 29, 2009, Plaintiff was caused to surrender Allianz Flexible Premium Deferred Annuity Policy (Index Benefit bearing policy number XXX 3635, policy date September 1, 2006)-which was then valued at approximately $902, 000-at a loss of approximately $200, 077. Id. ¶ 32. Second, on or about November 21, 2014, following Defendant Salisbury's advice and direction, Plaintiff surrendered an Allianz annuity with a policy number XXX 7754, which was issued on December 18, 2006.

         Again acting on Defendant Salisbury's advice and direction, Plaintiff also surrendered four Phoenix Personal Income Annuities. On or about October 19, 2017, Plaintiff surrendered two such annuities. One, number XXX 5109, was issued with a single premium of $24, 795.55 on December 9, 2014, and its surrender cost Plaintiff approximately $3, 790.04 in surrender charges, id. ¶ 34a; the other, number XXX 5355, was issued with a single premium of $24, 800.42 on December 11, 2014, and its surrender cost Plaintiff approximately $3, 939.86 in surrender charges, id. ¶ 34b. On or about November 7, 2017, Plaintiff surrendered Phoenix Personal Income Annuity number XXX 8769, which had been issued with a single premium of $700, 000 on May 4, 2015, and incurred approximately $110, 220.74 in surrender charges. Id. ¶ 34d. And on or about November 8, 2017, Plaintiff incurred approximately $25, 983.85 in surrender charges by surrendering Phoenix Personal Income Annuity XXX 4609, which was issued on December 18, 2014 with a single premium of $160, 319.48. Id. ¶ 34c. As to these four annuities, Plaintiff lost approximately $143, 931.49. Id. ¶ 34.

         Again following Defendant Salisbury's advice and direction, Plaintiff purchased and invested in the Fidelity Premium Deferred Fixed Index Annuity, AdvanceMark Ultra 14, number XXX 5051, which was issued on February 8, 2015. Id. ¶ 35. As of the most recent annual statement, it had an account value of approximately $453, 282.52. Id. Plaintiff surrendered it in or around October 2017, and the surrender charge was $52, 382.80. Id.

         Similarly, Defendant Salisbury allowed an American National annuity, number XXX 0431, to run just over a year before he caused Plaintiff to surrender it in or around April 2015. Id. ¶ 36. The surrender of this annuity, which had been issued on March 14, 2014 with an initial premium payment of $737, 450.85, incurred approximately $61, 028 in surrender charges. Id.

         Plaintiff was also issued a ForeThought Single Premium Deferred Annuity Contract number XXX 8001 on February 11, 2009, with an initial premium payment of $166, 949.80. Id. ¶ 37. At Defendant Salisbury's direction, Plaintiff made several withdrawals from this annuity while it was in force. Id. At the time of surrender on or about November 17, 2014, the annuity was valued at $146, 486.39, and the surrender fee was $7, 324.32. Id. ¶ 37.

         And on November 26, 2007, Plaintiff was issued a North American Company Individual Flexible Premium Deferred Annuity, number XXX 2105, with an initial premium payment of $276, 745.13. Id. ¶ 38. Plaintiff paid an additional premium of $598, 595.71 on or about April 27, 2012. Id. On or about January 29, 2014, the annuity was surrendered at a net loss of $88, 205.94. Id.

         These transactions-which Plaintiff alleges are a representative list of Defendant Salisbury's “churning” activities rather than an exhaustive one, see id. ¶ 39-cost Plaintiff approximately $576, 207.28 in surrender charges, id. With respect to each transaction, and over the course of them all, Defendant Salisbury told Plaintiff that the surrenders were in her best interest and explained that any surrender charge incurred was worth incurring to better position the funds in the replacement annuity. Id. ¶ 40.

         II. The Insurance Policies

         Acting on Defendant Salisbury's advice, Plaintiff obtained a Lincoln Benefit Flexible Premium Variable Life Insurance Policy on October 6, 2004. Id. ¶ 44. This policy carried a death benefit of $5, 066, 782, and its planned annual payment was $279, 731. Id. In or around 2008, Defendant Salisbury reduced the death benefit to $500, 000, and the policy was surrendered on October 7, 2013. Id.

         Again acting on Defendant Salisbury's advice, Plaintiff procured a one million dollar Flexible Premium Universal Life Insurance Policy from Columbus Life Insurance Company. See id. ¶ 43. The policy had an effective date of May 20, 2004, and the planned premiums were $16, 881.12 annually. Id. This policy was cancelled in or around April 2016 and replaced with a $2, 500, 000 VOYA IUL-Global Choice Policy (“the VOYA Policy” or “the Policy”) issued by Defendant Security Life of Denver (“Defendant SLD”) and subject to a financing arrangement conceived of and carried out by Defendants Salisbury, Claraphi Advisory Network, LLC (“Defendant Claraphi”), Michael Diyanni (“Defendant Diyanni”), Aurora Capital Alliance (“Defendant ACA”), Lake Forest Bank & Trust Company, N.A. (“Defendant Lake Forest”), Wintrust Life Finance (“Defendant Wintrust”), and Alejandro Alberto Bellini (“Defendant Bellini”). Id. ¶ 45. Defendant Bellini was the writing agent of the VOYA Policy and participated in selling the Policy to Plaintiff. Id. ¶ 20.

         Defendant Salisbury advised Plaintiff that the VOYA Policy would fund itself-that she would never have to make premium payments on it due to the design of the premium financing arrangement orchestrated by Defendants Salisbury, Claraphi, Diyanni, ACA, Lake Forest, Wintrust, and Bellini. Id. ¶ 46. Plaintiff expressed concern to Defendant Salisbury about the value of the VOYA Policy, but Defendant Salisbury told Plaintiff that the Policy was designed to assist her children in paying taxes after Plaintiff's decease. Id. ¶ 48. But Defendant Salisbury did not inform Plaintiff at the time the Policy was purchased that very little, if any, of her net worth would be subject to estate taxes. Id. Defendant Salisbury misrepresented Plaintiff's net worth on the application for the VOYA Policy. Id. ¶ 49.

         Plaintiff did not need the VOYA Policy's life insurance, and in any case she lacked the liquid assets to properly fund it. Id. ¶ 50. Despite knowing this, Defendants Salisbury, Claraphi, Diyanni, ACA, Lake Forest, Wintrust, and Bellini induced Plaintiff to enter into transactions they knew would be to her detriment. Id.

         A trust agreement was created on March 26, 2016, by Defendant Diyanni, an attorney chosen by Defendant Salisbury whom Plaintiff had never met. Id. ¶ 51. Defendant Diyanni handles some tax matters, but specializes primarily in personal injury and DUI/DWI cases. Id. Defendant Diyanni was hired by Defendant ACA to draft “an Irrevocable Trust that would meet both the standards for the financial institution and life insurance carrier.” Id. ¶ 52. Defendant Diyanni, and The Law Office of Michael Diyanni, would serve as Trustee of the Kathy Ryan Irrevocable Trust. Id.

         Defendant SLD issued the VOYA Policy on April 5, 2016. Id. ¶ 53. The annual scheduled premium was $160, 000, and the minimum monthly premium to maintain the policy was $3, 072.22. Id. Defendant ACA arranged for First Insurance Funding (now Defendant Lake Forest; hereafter “Defendant Lake Forest”) and/or Wintrust to finance the VOYA premiums. Id. ¶ 18. On April 12, 2016, Defendant Lake Forest issued its proposal of a $172, 000 initial loan amount, which included a $12, 000 broker's fee that was paid to Defendant Diyanni. Id. ¶ 54. Plaintiff alleges that this $12, 000 fee is substantially in excess of the commissions normally paid to brokers, agents, or attorneys for similar services. Id.

         Defendant Diyanni then assigned the VOYA Policy as collateral to Defendant Lake Forest. Id. ¶ 55. Plaintiff was also required to assign an annuity, Allianz Annual Fixed Index Annuity number XXX 9437, as collateral. Id. ¶ 56. Defendants Diyanni and Salisbury told Plaintiff that the assignment would be released after seven years. Id. But this assignment was fraudulently procured by Defendants Diyanni and Salisbury, as it is dated and notarized in Orange County, California, on a date when Plaintiff was not on the mainland and could not have signed the document. Id. ¶ 57.

         Plaintiff alleges that, during and after the sale of the Policy, Defendant Diyanni as Trustee of the Kathy Ryan Irrevocable Trust (the “ILIT”) failed to perform his fiduciary duties to determine the appropriateness of replacing the Columbus Life policy or the suitability of the VOYA Policy. See id. ¶ 58. Plaintiff further alleges that Defendant Diyanni did not properly assess the negative consequences of the premium financing arrangement, the selection and assignment of collateral, and/or the funding of premiums outside of the premium financing arrangement. Id. “In short, ” Plaintiff alleges, “the VOYA [P]olicy should have never been purchased.” Id.

         A year later, Plaintiff and Defendant Diyanni were advised that the Note issued by Defendant Lake Forest was in default for failure to make the interest payment of $8, 642.25, and to make the premium payment of $163, 500, as well as to provide the requested collateral. Id. ¶ 59. Plaintiff contacted VOYA, a representative of which told her that the company could only speak with Defendant Diyanni because he was the “owner” of the Policy. Id. ¶ 60. When Plaintiff contacted Defendant Salisbury, he told her that Defendant Lake Forest was mistaken, but he later reversed course and instructed Plaintiff to wire $37, 000 to Defendant Lake Forest in order to secure the loan. See id. Plaintiff did so, but never received a receipt for the transaction. Id.

         Despite having been advised by Defendant Salisbury that she should never have to personally pay premiums on the VOYA Policy and that the policy would fund itself, Plaintiff was advised by Defendant ACT, in or around March 2018, that the action items on her life insurance premium finance arrangement included an outstanding interest payment of $24, 545.82 and a signed, dated Guarantors Acknowledgment and Certification Additional Collateral of $60, 639.55. Id. ¶ 61.

         Those defendants who initiated and/or approved the purchase of the VOYA Policy and the associated premium financing arrangements-i.e., Defendants Salisbury, Claraphi, Diyanni, ACA, Lake Forest, Wintrust, SLD, and Bellini, see id. ¶ 45, 53-knew at the time they did so that the VOYA Policy was an unsuitable financial product for Plaintiff in light of the excessive death benefit and the fact that its premiums exceeded her ability to pay. Id. ¶ 62; but see id. ¶ 72.c (alleging that “Defendant Salisbury misrepresent[ed Plaintiff]'s net worth on the application for the VOYA life insurance policy”). Plaintiff alleges that the sale of the policy and premium financing arrangement were part of a fraudulent and deceptive scheme carried out by all defendants working in concert with one another. Id. ¶ 25.

         PROCEDURAL BACKGROUND

         Plaintiff, proceeding both individually and in her capacity as trustee of the Brody Family Trust, filed her Complaint on October 23, 2018. Compl. Therein, she asserted twelve causes of action:

1. Violation of the Unfair and Deceptive Acts or Trade Practices Act (“UDAP”), Hawai'i Revised Statutes (“HRS”) §§ 480-1 et seq., as to all defendants. Compl. ¶¶ 64-78.
2. UDAP, Violation of HRS § 480-2 (“Suitability”) as to all defendants. Compl. ¶¶ 79-82.
3. UDAP, “Elder Abuse”, as to all defendants. Id. ¶¶ 83-90.
4. Fraudulent suppression as to the Salisbury Defendants and Defendants NAM and Claraphi. Id. ¶¶ 91-97.
5. Fraudulent misrepresentation as to the Salisbury Defendants and Defendants NAM, Claraphi, and Diyanni. Id. ¶¶ 98-103.
6. Breach of fiduciary duty as to the Salisbury Defendants and Defendants NAM, Claraphi, and Diyanni. Id. ¶¶ 104- 13.
7. Vicarious liability/respondeat superior as to the Salisbury Defendants and Defendants NAM, Claraphi, Diyanni, ACA, Lake Forest, Wintrust, SLD, and Bellini. Id. ¶¶ 114-18.
8. Violation of the Hawai'i Securities Act (HRS §§ 485A-502, 485A-509) as to the Salisbury Defendants, Defendant NAM, and Defendant Claraphi. Compl. ¶¶ 119-22.
9. Controlling Person Liability, under HRS § 485A-509(g), as to Defendants NAM and Claraphi. Compl. ¶¶ 123-26.
10. Violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1962(c), as to all defendants. Compl. ¶¶ 127-51.
11. Violation of RICO, 18 U.S.C. § 1962(d), as to all defendants. Compl. ¶¶ 152-59.
12. Violation of HRS § 842-2(3), as to all defendants. Compl. ¶¶ 160-71.

         On December 31, 2018, Defendant Diyanni, proceeding pro se, filed a succinct, three-page motion to dismiss (“Motion”), without a separate memorandum in support, citing Federal Rules of Civil Procedure (“Rules”) 12(b)(1), 12(b)(6), and 9(b). ECF No. 52. Plaintiff filed an Opposition on March 25, 2019. See ECF No. 107. Defendant Diyanni filed no Reply. Statements of no position as to the Motion were filed by the ACA Defendants, ECF No. 105, and Defendant NAM, ECF No. 102.

         The Court scheduled the Motion for hearing on April 15, 2019. ECF No. 62. Defendant Diyanni did not appear at the hearing. ECF No. 118. The Court, upon reaching Defendant Diyanni by telephone, instructed him to file an explanation for his absence. ECF No. 119. To date, no such filing has been received.

         On April 29, 2019, the Court issued a minute order offering both Plaintiff and Defendant Diyanni the opportunity to argue on Defendant Diyanni's Motion at the hearing scheduled for April 30, 2019 regarding three other motions in this matter. ECF No. 123. The Court attempted repeatedly to reach Defendant Diyanni by telephone to inform him of the minute order's contents and inquire if he wished to appear by telephone, but ...


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