The Fifth Circuit Court of Appeals recently reviewed the first case on appeal from MDL No. 1983, a multidistrict litigation proceeding designed to address claims related to employee benefit plans created under §§ 412(i) and 419 of the Internal Revenue Code. At issue was a putative nationwide RICO and common law fraud case alleging the insurer and its agents fraudulently sold § 419 employee benefit plans by misrepresenting the validity and tax consequences of those plans. The district court dismissed the claims on a 12(b)(6) motion finding that no plausible RICO enterprise was pled because the complaint merely alleged that the insurer was selling insurance through agents and similarly concluded that the complaint failed to allege a pattern of racketeering activity or the requisite predicate acts.The district court also dismissed the common law fraud claims holding that the alleged representations regarding the tax laws were simply opinions or predictions about how the IRS would apply the tax laws in the future and not false statements of fact;  and in any event it was unreasonable for an employer to rely upon an insurance company for tax advice. The Fifth Circuit affirmed on all grounds, effectively adopting the opinion of the lower court.

The federal court for the Middle District of Florida recently granted in part and denied in part the defendant insurer’s motion for final summary judgment in a lawsuit relating to the use of life insurance policies to fund defined benefit pension plans under § 412(i) of the Internal Revenue Code. Several years after the plan was established, the IRS audited plaintiffs’ plan and concluded that the plan failed to comply with certain provisions of § 412(i). Plaintiffs alleged that the insurer’s purported agents misrepresented the validity and tax consequences of the plans and failed to disclose the IRS’s public expression of an intent to begin scrutinizing § 412(i) plans fully funded with life insurance and administered as a “tax avoidance scheme.” With respect to plaintiffs’ fraud theory, the court noted that “if the parties deal in an ‘arm’s length’ transaction and if each party possesses an equal opportunity to discover the material information through diligence, neither party owes a duty to disclose.” The court also explained that an opinion or omission about a future event is actionable only if the person expressing the opinion is one having “superior knowledge” of the subject of the statement and the plaintiff can show that the person knew or should have known from facts in his or her possession that the statement was false.

The court further rejected plaintiffs’ notion that the insurer owed a duty to disclose the IRS’s public comments at a pension trade conference as plaintiffs, their accountant, and their tax attorney, each of whom investigated the § 412(i) plan proposal, had an equal opportunity to discover this publicly available information through diligence. The court also explained that the insurer possessed no “superior knowledge” of these public comments because the IRS’s stated intent to scrutinize certain types of § 412(i) plans was publiclyavailable information. Contrary to plaintiffs’ argument that the insurer’s internal discussions, in light of the IRS’s public comments, was evidence of its fraudulent intent, the court held that such internal discussions exhibited “merely a common and responsible reaction by a corporation under the circumstance and evidences neither fraud nor intent to defraud.” The court allowed the fraud claim to proceed only if plaintiffs could identify a positive false statement of existing material fact. The court also dismissed plaintiffs’ negligent misrepresentation claim holding that plaintiffs could not, as a matter of law, demonstrate reasonable reliance upon any alleged representations regarding the validity or tax consequences of the plan, or any other tax advice, in light of the written materials’ myriad disclosures.