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Ryan v. Salisbury

United States District Court, D. Hawaii

October 17, 2019




         This case involves allegations of a fraudulent and unlawful scheme through which Defendant Chris Salisbury (“Defendant Salisbury”) and-to varied extents-the other Defendants caused Plaintiff to sustain financial losses in connection with her investments in several annuities and life insurance policies. For its role, Security Life of Denver Insurance Company (“Security Life”) is alleged to have issued a life insurance policy, which was purchased through a complex “premium financing arrangement” orchestrated by Defendant Salisbury and certain other Defendants.

         The Court previously dismissed Plaintiff's claims against Security Life, after which Plaintiff amended her lawsuit to allege a single cause of action against Security Life under Hawai'i‘s Unfair and Deceptive Acts or Trade Practices Act (“UDAP”), Haw. Rev. Stat. (“HRS”) §§ 480-1 et seq. Now before the Court is Security Life's second Motion for Judgment on the Pleadings (“Motion”), ECF No. 169. For the reasons set forth below, the Court GRANTS Defendant Security Life's Motion insofar as it seeks dismissal of the sole claim against Security Life.


         Plaintiff, proceeding both individually and in her capacity as trustee of the Brody Family Trust, filed a complaint (the “Original Complaint”) on October 23, 2018, ECF No. 1. As against Security Life, Plaintiff asserted seven causes of action, all of which were dismissed without prejudice in this Court's May 14, 2019 Order Granting Defendant Security Life of Denver's Motion for Judgment on the Pleadings (“Order”), ECF No. 146.

         Thereafter, Plaintiff amended her complaint (the “Amended Complaint”), ECF No. 158, to assert a single cause of action against Security Life under UDAP. Am. Compl. ¶¶ 61-79. Security Life filed an answer, ECF No. 160, on July 12, 2019, and then filed the instant Motion on August 13, 2019. Plaintiff filed her Opposition on September 24, ECF No. 185, and Security Life filed its Reply on October 1, ECF No. 186. The Court heard oral arguments on the Motion on October 15, 2019.


         A detailed discussion of the factual allegations in this case may be found in the Court's May 14, 2019 Order dismissing the Original Complaint. Now before the Court is Security Life's second Motion, which seeks dismissal of the Amended Complaint on many of the same grounds. The Amended Complaint contains largely the same factual allegations previously alleged in the Original Complaint, with some additions. The Court will address those additions here, and it otherwise incorporates the factual background set forth in the prior Order to the extent that the facts are likewise alleged in the Amended Complaint.

         I. Overview of Factual Allegations

         The Amended Complaint involves two distinct sets of allegedly unlawful activity. Because Security Life is alleged to have participated in just one, it is helpful to begin by separating the allegations accordingly.

         First, the Amended Complaint alleges that Defendant Salisbury, Plaintiff's financial advisor of many years, orchestrated a “churning scheme” designed to increase his own commissions while Plaintiff sustained significant losses. Am. Compl. ¶¶ 2, 21-39. Plaintiff alleges that Defendant Salisbury invested Plaintiff's money and/or that of The Brody Family Trust[1] into various annuities and then had Plaintiff surrender the annuities and move the money, all with the promise of equal or greater earnings. Id. ¶¶ 21-22. The Amended Complaint includes a non-exhaustive list of at least ten examples of annuity transactions involved in the annuity churning scheme. Id. ¶¶ 28-35. The Amended Complaint expressly does not implicate Security Life in the “annuity scheme.” In fact, it clarifies that Security Life is not responsible for “Salisbury's conduct related to the annuity churning scheme.” See id. ¶ 15 n.3.

         That brings us to the second category of conduct, relevant to Security Life. Separate from the annuity churning, the Amended Complaint alleges wrongdoing in connection with the brokering and sale of a life insurance policy. See Am. Compl. ¶¶ 40-60. Specifically, Defendants allegedly defrauded Plaintiff by encouraging her to purchase “unsuitable” insurance that she did not need and could not afford, through an associated premium financing arrangement with negative financial consequences. See id. ¶¶ 55, 45-47, 59-60.

         Security Life is alleged to have issued a $2.5 million life insurance policy (the “VOYA Policy”) to the Kathy Ryan Irrevocable Trust (the “Ryan Trust”).[2] Am. Compl. ¶¶ 42, 50. The annual scheduled premium was $160, 000, which, according to Plaintiff, was “well over the minimum monthly premium of $3, 072.22 to maintain the policy.” Id. The VOYA Policy was issued with an “excessive death benefit” that was allegedly inconsistent with Plaintiff's net worth and which she could not afford. Id. ¶¶ 45, 71. Security Life-and to some degree the Amended Complaint-attributes the value and structure of the Policy to an apparent misrepresentation in the Application as to Plaintiff's net worth. Id. ¶ 46; see also ECF No. 72-3.

         Plaintiff alleges that she expressed concerns to Defendant Salisbury about the VOYA Policy's value, but that Defendant Salisbury advised her that the Policy would assist her children with payment of estate taxes after she passed away. Am. Compl. ¶ 45. According to Plaintiff, however, Defendant Salisbury failed to advise her that “very little, if any, of her net worth would be subject to estate taxes.” Id. To finance the VOYA Policy, Defendant Salisbury-with the assistance of Defendants Michael Diyanni, Aurora Capital Alliance (“Aurora Capital”), Claraphi Advisory Network, LLC (“Claraphi”), and Bellini-arranged a “complex financing arrangement” under which Plaintiff was told she would never need to personally make payments on the Policy. Id. ¶¶ 42-43. The Ryan Trust was created instead, and Plaintiff assigned the VOYA Policy and another annuity as collateral for a loan funded by lender First Insurance Funding (now Lake Forest).[3] Id. ¶¶ 3-4, 49, 51-53.

         Plaintiff was later advised that the note was in default. Am. Compl. ¶ 56. Plaintiff contacted VOYA, which advised her that it could not speak to her as she was not the owner of the Policy.[4] Id. ¶ 57. To cure the default, Defendant Salisbury allegedly instructed Plaintiff to wire $37, 000 to First Insurance Funding and Lake Forest to secure the loan and avoid default, which she did. Id. Plaintiff now alleges that this payment was inconsistent with Defendant Salisbury's representation that she would not need to make personal payments on the VOYA Policy. Id. ¶ 59.

         To summarize, the lawsuit alleges three primary allegations against Security Life: (1) that Security Life issued the VOYA Policy, Am. Compl. ¶¶ 42, 50, 76; (2) that Security Life was misled by Defendant Salisbury about Plaintiff's net worth, id. ¶ 46; and (3) that a representative of Security Life told Plaintiff that it could not speak with her about the Policy because Mr. Diyanni-as trustee of the Ryan Trust-was the Policy's owner, not Plaintiff, id. ¶ 57. To support her UDAP theory, Plaintiff asserts that “[l]ike annuities, high dollar or ‘large case' life insurance policies should only be sold to consumers when they are ‘suitable' for the consumer's financial needs, situation, and goals.” Id. ¶ 44; see also id. ¶ 59 (alleging that Plaintiff was harmed by the VOYA Policy and financing agreement because the Policy was “an unsuitable financial product in light of the excessive death benefit and premiums exceeding her ability to pay, which was known to Defendants at the time they initiated and/or approved the transaction”).

         II. Additional Allegations Raised in Amended Complaint

         The annuity churning scheme and the circumstances surrounding the issuance of the VOYA Policy and associated financing arrangement are alleged in the Amended Complaint in largely the same way they were framed in the Original Complaint. The only additional allegations specifically mentioning Security Life are various agency allegations, through which Plaintiff attempts to implicate Security Life for the actions of other individual Defendants. As the Court sees it, the Amended Complaint differs from the Original Complaint in four ways:

         First, the Amended Complaint alleges that the Allianz Annual Fixed Index Annuity #XXX 9437, which Plaintiff assigned as collateral for financing, has been surrendered since the Original Complaint was filed. Am. Compl. ¶ 53. Second, the Amended Complaint is restructured to allege one cause of action under UDAP, which incorporates the allegations of “unsuitability” and “Elder” status that previously made up three separate causes of action in the Original Complaint. Compare Am. Compl. ¶¶ 61-79 (first cause of action), with Orig. Compl. ¶¶ 64-90 (first, second, and third causes of action). Next, more substantively, the Amended Complaint adds two paragraphs attempting to clarify the scheme, associated misrepresentations, and legal theory related to the annuity churning scheme. Am. Compl. ¶¶ 37, 66.[5]

         And finally, most relevant to Security Life, the Amended Complaint adds further allegations as to Security Life's purported liability for the actions of other Defendants. See, e.g., Am. Compl. ¶¶ 10, 16, 39, 64. In the Original Complaint, Plaintiff had broadly alleged that “Security Life of Denver is liable for its own acts and the acts and omissions of Defendants Salisbury, Diyanni, Alejandro Alberto Bellini, and/or its appointed agents who participated in the sale of the policy.” Orig. Compl. ¶ 19; see also id. ¶ 15.

         Plaintiff takes this theory and repeats it several times throughout the Amended Complaint in an apparent attempt to clarify the agency relationship between Security Life and Defendants Salisbury and Bellini. For example, the Amended Complaint references “VOYA's financing disclosure and acknowledgment form, ” ECF No. 72-1 (the “Acknowledgment”), and the VOYA Policy's application (the “Application”), ECF No. 72-3, on which Defendant Salisbury apparently signed as an “agent” or “writing agent.”[6] Am. Compl. ¶ 10 n.1.

         Likewise, the Amended Complaint asserts that Defendant Salisbury acted “under the direction and control of Security Life of Denver” and that Defendant Bellini acted “within the scope of, and in the course of his employment with, or under the direction and control of Security Life Denver and/or Aurora Capital.” Am. Compl. ¶ 16. According to the Amended Complaint, Security life “retained the right to control, direct, and/or manage” these Defendants and “knew of and authorized” Salisbury's and Bellini's positions as “life insurance sales agent[s] with the ability and authority to sell the life insurance policy in question, and to engage in the premium financing arrangement.” Id. ¶¶ 10, 16; see also id. ¶ 39. Accordingly, the Amended Complaint asserts that, “under the doctrines of vicarious liability and respondeat superior, Defendant Security Life of Denver is liable for the wrongful acts committed by those under its control, direction, or management.” Id. ¶¶ 10, 16; see also id. ¶ 39.

         The Amended Complaint also assigns certain actions by Salisbury to Security Life. For example, while Salisbury's conduct of concealing “substantial information” from Plaintiff about the transactions at issue had been alleged in the Original Complaint, Orig. Compl. ¶ 67, the Amended Complaint clarifies that Salisbury was acting “[i]n his capacity as [Plaintiff]'s investment advisor and financial planner and/or as an agent for Security Life of Denver, ” Am. Compl. ¶ 64.

         Other than these few additions, the Amended Complaint is largely identical in substance to the Original Complaint.


         I. Rule 12(c)

         Under Federal Rule of Civil Procedure (“Rule”) 12(c), “[a]fter the pleadings are closed-but early enough not to delay trial-a party may move for judgment on the pleadings.” The pleadings are closed once a complaint and an answer have been filed, assuming that there is no counterclaim or cross-claim. Doe v. United States, 419 F.3d 1058, 1061 (9th Cir. 2005).

         A motion brought under Rule 12(c) is “functionally identical” to one brought pursuant to Rule 12(b), and “the same standard of review applicable to a Rule 12(b) motion applies to its Rule 12(c) analog.” Dworkin v. Hustler Magazine Inc., 867 F.2d 1188, 1192 (9th Cir. 1989); see also Rutenschroer v. Starr Seigle Commc'ns, Inc., 484 F.Supp.2d 1144, 1147-48 (D. Haw. 2006) (“If procedural defects are asserted in a Rule 12(c) motion, the district court will apply the same standards for granting the appropriate relief or denying the motion as it would have employed had the motion been brought prior to the defendant's answer under Rules 12(b)(1), 12(b)(6), [or] 12(b)(7).” (citing 5C Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1367 (3d ed. 2004))).

         Judgment on the pleadings under Rule 12(c) is limited to material included in the pleadings, as well documents attached to the complaint, documents incorporated by reference in the complaint, and matters of judicial notice, unless the Court elects to convert the motion into one for summary judgment.[7] Yakima Valley Mem'l Hosp. v. Dep't of Health, 654 F.3d 919, 925 n.6 (9th Cir. 2011); United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). Rule 12(d) gives the Court “discretion to accept and consider extrinsic materials offered in connection with these motions, and to convert the motion to one for summary judgment when a party has notice that the district court may look beyond the pleadings.” Hamilton Materials, Inc. v. Dow Chem. Corp., 494 F.3d 1203, 1207 (9th Cir. 2007).

         The Court must accept as true the facts as pleaded by the non-movant, and will construe the pleadings in the light most favorable to the nonmoving party. U.S. ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1053 (9th Cir. 2011); Doyle v. Raley's Inc., 158 F.3d 1012, 1014 (9th Cir. 1998). Judgment on the pleadings is properly granted “when, accepting all factual allegations in the complaint as true, there is no issue of material fact in dispute, and the moving party is entitled to judgment as a matter of law.” Chavez v. United States, 683 F.3d 1102, 1108 (9th Cir. 2012) (citation and original alteration omitted).

         Although Rule 12(c) does not expressly address partial judgment on the pleadings, leave to amend, or dismissal, courts regularly “apply Rule 12(c) to individual causes of action.” Strigliabotti v. Franklin Res., Inc., 398 F.Supp.2d 1094, 1097 (N.D. Cal. 2005) (citation omitted). Courts also have discretion to grant a Rule 12(c) motion with leave to amend, or to dismiss causes of action instead of entering judgment. Moran v. Peralta Cmty. Coll. Dist., 825 F.Supp. 891, 893 (N.D. Cal. 1993)); see also Goens v. Adams & Assocs., Inc., No. 2:16-CV- 00960-TLN-KJN, 2017 WL 3981429, at *2 (E.D. Cal. Sept. 11, 2017) (citing Carmen v. San Francisco Unified Sch. Dist., 982 F.Supp. 1396, 1401 (N.D. Cal. 1997)).

         II. Subject-Matter Jurisdiction

         A motion for judgment on the pleadings that asserts the absence of subject-matter jurisdiction is assessed in the same manner as a motion brought under Rule 12(b)(1). See Rutenschroer, 484 F.Supp.2d at 1147-48. A challenge to a court's subject-matter jurisdiction may be either “facial” or “factual.” Wolfe v. Strankman, 392 F.3d 358, 362 (9th Cir. 2004).

         In a facial attack, “the challenger asserts that the allegations contained in a complaint are insufficient on their face to invoke federal jurisdiction.” Id. (quoting Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004)). When opposing a facial attack on subject-matter jurisdiction, the nonmoving party is not required to provide evidence outside the pleadings. Wolfe, 392 F.3d at 362; see also Doe v. Holy See, 557 F.3d 1066, 1073 (9th Cir. 2009) (treating defendant's challenge to subject-matter jurisdiction as facial because defendant “introduced no evidence contesting any of the allegations” of the complaint). In deciding a facial Rule 12(b)(1) motion, the court must assume the allegations in the complaint are true and draw all reasonable inferences in the plaintiff's favor. Wolfe, 392 F.3d at 362 (citations omitted).

         By contrast, in a factual attack, “the challenger disputes the truth of the allegations that, by themselves, would otherwise invoke federal jurisdiction.” Id. (quoting Safe Air, 373 F.3d at 1039). The moving party may bring a factual challenge to the court's subject-matter jurisdiction by submitting affidavits or any other evidence properly before the court. The nonmoving party must then “present affidavits or any other evidence necessary to satisfy its burden of establishing that the court, in fact, possesses subject-matter jurisdiction.” Colwell v. Dep't of Health & Human Servs., 558 F.3d 1112, 1121 (9th Cir. 2009) (citation omitted). In these circumstances, the court may look beyond the complaint without having to convert the motion into one for summary judgment. U.S. ex rel. Meyer v. Horizon Health Corp., 565 F.3d 1195, 1200 n.2 (9th Cir. 2009), overruled on other grounds as stated in U.S. ex. Rel. Hartpence v. Kinetic Concepts, Inc., 792 F.3d 1121, 1128 n.6 (9th Cir. 2015). When deciding a factual challenge to the court's subject-matter jurisdiction, the court “need not presume the truthfulness of the plaintiffs' allegations.” Id.

         III. Failure to State a Claim

         Rule 12(h)(2)(B) permits a defendant to use Rule 12(c) as a vehicle to contend that a complaint fails to state a claim upon which relief can be granted. See Fed.R.Civ.P. 12(h)(2)(B). When Rule 12(c) is used to raise the defense of failure to state a claim upon which relief can be granted, analysis under Rule 12(c) is substantially identical to analysis under Rule 12(b)(6). McGlinchy v. Shell Chemical Co., 845 F.2d 802, 810 (9th Cir. 1988). The Court must therefore assess whether the complaint “contain[s] sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see also Harris v. Cty. of Orange, 682 F.3d 1126, 1131 (9th Cir. 2012) (Iqbal applies to Rule 12(c) motions because Rule 12(b)(6) and Rule 12(c) motions are functionally equivalent). Mere conclusory statements in a complaint or “formulaic recitation[s] of the elements of a cause of action” are not sufficient. Twombly, 550 U.S. at 555. Thus, the Court discounts conclusory statements, which are not entitled to a ...

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