Law Firm Seeks Dismissal of Claims in Captive Insurance Suit

Benyamin Avrahami; Orna Avrahami; Feedback Insurance Company, LTD;
BYS Company, ACC; Chandler One, LLC; Junction Development, LLC;
O & E Corporation; White Mountain Equities, L.L.C.;
and White Knight Investment, A.C.C.,
on behalf of themselves and all others similarly situated,
Plaintiff,
v.
Celia Clark; Clark & Gentry, P.L.L.C.;
John Garcia, In His Capacity as Personal Representative
for the Estate of Craig McEntee; McEntee & Associates P.C.;
Neil Hiller; Fennemore Craig, P.C.;
Alan Rosenbach; ACR Solutions Group;
RMS Solutions, Inc.; Heritor Management, LTD;
and Pan American Reinsurance Company, LTD.,
Defendants.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ARIZONA

Matthew L. Lalli (admitted pro hac vice)
Joseph G. Adams (#018210)
Rebecca E. Eckert-Fong (#034767)
SNELL & WILMER L.L.P.
One Arizona Center
400 E. Van Buren, Suite 1900
Phoenix, Arizona 85004-2202
Telephone: 602.382.6000
Facsimile: 602.382.6070
E-Mail: mlalli@swlaw.com
jgadams@swlaw.com
reckert-fong@swlaw.com

Attorneys for Defendants Fennemore Craig, P.C.
and Neil Hiller

MOTION TO DISMISS COUNTS I-V AND VII-XIII FOR FAILURE TO STATE A CLAIM
UPON WHICH RELIEF CAN BE GRANTED ON BEHALF OF DEFENDANTS
 FENNEMORE CRAIG, P.C. AND NEIL HILLER

(Oral Argument Requested)

Plaintiffs Benyamin and Orna Avrahami are successful and sophisticated business people who sought a tax advantage by forming an off-shore, captive insurance company to which they paid premiums they later deducted from their taxes. Notwithstanding sound precedent for similar captive insurance companies, the IRS disallowed the deductions and the U.S. Tax Court subsequently agreed with the IRS. The Avrahamis have filed this Complaint blaming their former lawyers and tax advisors because they now have to pay the taxes they tried unsuccessfully to avoid. What is more, the Avrahamis, acting as putative class representatives, seek to hold their former lawyers and tax advisors liable for a class of unnamed and unknown others who purportedly tried and failed in the same tax strategy.

Two of the defendants — Fennemore Craig, P.C. and Neil Hiller (collectively, “Fennemore Defendants”) — move to dismiss the claims against them under Federal Rules of Civil Procedure 9(b) and 12(b)(6). To recognize something is amiss, the Court need look no further than the massive Complaint. If the Plaintiffs could state a claim against the Fennemore Defendants, it would not take 138 pages and 314 paragraphs to do it.

The majority of the thirteen causes of action should be dismissed because they are grounded in fraud, specifically in a 58-item list — which is repeated at least three times and referenced many more — of alleged fraudulent statements and omissions. But as the Court easily will recognize, none of those 58 allegations identifies the who, what, when, where, how, and why of the alleged fraud as required by Rule 9(b). Instead, those allegations are mostly legal conclusions without particularity about any specific false statements or omissions made by or to anyone in particular at any particular time or place. Moreover, virtually all the allegations in the Complaint, including the 58-item list, violate the rule against group pleading by defining all eleven defendants as “Defendants,” and then asserting that they all did everything collectively. This kind of group pleading does not satisfy Rule 9(b). Accordingly, all fraud-based claims should be dismissed.¹

In addition to Plaintiffs’ failure to plead their fraud-based claims with particularity, their four RICO claims (Counts I-IV) fail because there are no allegations that the Fennemore Defendants operated or controlled a RICO enterprise. To the contrary, there is only one semi-substantive allegation about the Fennemore Defendants — that they gave an oral legal opinion about the captive insurance strategy. Even if that alleged oral legal opinion had been stated with particularity, which it has not, it does not begin to show that the Fennemore Defendants operated or directed any racketeering enterprise. Moreover, there are no allegations of even a second predicate act, let alone sufficient predicate acts to plead a pattern of racketeering activity. Thus, Counts I-IV should be dismissed for these additional reasons.

Plaintiffs also fail to state a claim for breach of contract and breach of the implied duty of good faith and fair dealing against the Fennemore Defendants. Plaintiffs’ breach of contract is premised on the Fennemore Defendants’ alleged negligent performance rather than any non-performance of a specified contractual duty under a specified contract. Moreover, Plaintiffs’ claim for breach of the implied duty of good faith and fair dealing creates additional contractual obligations to which the Fennemore Defendants did not agree. For these reasons, the breach of contract and breach of implied duty of good faith and fair dealing should be dismissed.

Plaintiffs also assert causes of action for rescission (Count IX), aiding and abetting (Count XII), and civil conspiracy (Count XIII), all of which are derivative of the fraud claims and fail because the underlying primary causes of action fail.²

MEMORANDUM OF POINTS AND AUTHORITIES

I. FACTUAL BACKGROUND

A. Overview

Plaintiffs allege thirteen causes of action against a group of eleven Defendants based on the formation and management of captive insurance companies.³ Captive insurance companies are insurance companies that are related to their insured and, if managed properly, allow for the insured to obtain tax deductions for the amount they pay in insurance premiums. See Doc. 1 at ¶¶ 41-44. The gist of Plaintiffs’ claims is that the Defendants allegedly made false representations and manipulated Plaintiffs into creating and maintaining captive insurance companies that would create a tax benefit for Plaintiffs and earn Defendants substantial fees and commission. See e.g. id. at ¶ 26. However, after the formation of Plaintiffs’ captive insurance companies, the IRS determined that Plaintiffs owed back taxes, interest, and penalties from their captive insurance companies. Id.

Plaintiffs also purport to be representative of a Class of similarly situated class members, but they have not identified any such class members, nor have they alleged if or how such class members interacted with any of the eleven defendants, particularly the Fennemore Defendants.

B. Background on the Parties and the Fennemore Defendants

Rather than address allegations against the Defendants individually, the majority of the Complaint uses the generic term “Defendants” to refer to the alleged fraud, statements and/or omissions, action, inaction, knowledge, and/or motivation of any of the eleven Defendants. See generally Doc. 1. The eleven Defendants are a mix between businesses and individuals, and their business expertise varies from the law to accounting. See e.g. Doc. 1 at ¶¶ 49-52. Scattered throughout the Complaint are sporadic, brief references to the Fennemore Defendants. Of the 138 numbered paragraphs, Defendant Hiller is specifically referenced in only 14 of the paragraphs. Defendant Fennemore is specifically referenced in only seven paragraphs.

A close reading of the Complaint shows that each of the Defendants served in different roles and had varying degrees of involvement with Plaintiffs and captive insurance companies. Defendant Neil Hiller is a Phoenix-based lawyer who formerly practiced in the estate planning and tax areas at Defendant Fennemore Craig. Defendants Craig McEntee and McEntee and Associates (collectively, “McEntee Defendants”) were the Plaintiffs’ CPAs for around 25 years. See Doc. 1 at ¶ 49. The McEntee Defendants recommended that Plaintiffs consult with the Fennemore Defendants for their experience in tax law and Defendants Celia Clark and Clark & Gentry, P.L.L.C. (collectively, “Clark Defendants”) for their experience in captive insurance. Id. Plaintiffs retained the Fennemore Defendants to perform some estate-planning services. Id. at ¶ 50. As Plaintiffs readily admit, the Fennemore Defendants did not suggest to Plaintiffs that they consider forming captive insurance companies. Instead, Plaintiffs already had that idea in mind when they approached the Fennemore Defendants. Id. at ¶ 51. Once Plaintiffs informed the Fennemore Defendants that they were interested in forming a captive insurance company, the Fennemore Defendants also suggested Plaintiffs hire Defendant Clark. Id.

The Complaint contains little detail about the specific roles played by the Fennemore Defendants. Within the 43 paragraphs in the section titled “Allegations Relating to RICO and Arizona RICO,” there is a sole paragraph dedicated specifically to the Fennemore Defendants’ conduct. Id. at ¶¶ 158-200. That single paragraph alleges that the Fennemore Defendants “convince[d] the Avrahamis to enter into the Captive Insurance Strategies.” Id. at ¶ 174(c). However, this is at odds with earlier allegations in the Complaint which state the Plaintiffs “informed Hiller that they were considering forming a captive insurance company.” Id. at ¶ 51. The single paragraph further alleges that the Fennemore Defendants were “instrumental in referring the Avrahamis to Clark,” however, earlier in the Complaint, Plaintiffs acknowledged the McEntee Defendants had recommended the Clark Defendants for their expertise in captive insurance. Compare id. at ¶ 174(c) with ¶¶ 49 and 174(b). In that lone paragraph, Plaintiffs allege the Fennemore Defendants gave a “legal ‘stamp of approval’ . . . in the form of [an] oral legal opinion” but allege no additional facts regarding the content of the opinion, when the alleged oral opinion was made, to whom it was made, what it was, or if it was false. Id. at ¶ 174(c). Even more, the Complaint, in three difference places, includes a 58-item list of purported fraud and misconduct. In none of the 58 individual items are the Fennemore Defendants personally referenced, nor are any specific statements, omissions, or falsities identified with particularity. Id. at ¶¶ 199, 257, and 297.

Finally, within Plaintiffs’ Count X claims for breach of contract, Plaintiffs do not reference the Fennemore Defendants once. Id. at ¶¶ 286-295. Rather, Plaintiffs rely heavily on the Clark Defendants’ actions and alleged violation of obligations. Id. Plaintiffs also did not allege that the Fennemore Defendants owed or breached any of the nine contractual provisions listed within the breach of contract claim. Id.

C. Causes of action

The unverified Complaint, which Plaintiffs have not served on the Arizona Attorney General, alleges thirteen causes of action against the Fennemore Defendants, including, violation of federal and Arizona RICO (Counts I-IV); breach of fiduciary duty and disgorgement as a result of the breach of fiduciary duty (Counts V and VIII); negligent misrepresentation (Count VII); fraud, rescission due to fraud, aiding and abetting fraud, and civil conspiracy to commit fraud (Counts IX, XI-XIII); and breach of contract and the implied duty of good faith and fair dealing (Count X). As established below, each of these claims alleged against the Fennemore Defendants are legally defective and, thus, fail to state a claim upon which relief can be granted.

II. LEGAL STANDARD

A party may move to dismiss a complaint for “failure to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). To survive a motion to dismiss, the “[f]actual allegations must be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555. “The plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “[T]he court [is not] required to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). Thus, a complaint should be dismissed where there is a “lack of a cognizable legal theory” or “the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990).

Additionally, Plaintiffs must meet the heightened pleading requirements under Rule 9(b) of the Federal Rules of Civil Procedure. Rule 9(b) requires a plaintiff to “state with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). Where the conduct in the complaint is “grounded in fraud,” the heightened pleading standard applies. See Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-04 (9th Cir. 2003) (where plaintiffs allege “a unified course of fraudulent conduct and rely entirely on that course of conduct” then “the claim is said to be ‘grounded in fraud’ or to ‘sound in fraud,’ and the pleading of that claim as a whole must satisfy the particularity requirement of Rule 9(b)”). Rule 9(b) requires pleading “the who, what, when, where and how” of the misconduct which requires a plaintiff to “set forth more than the neutral facts necessary to identify the transaction. The plaintiff must set forth what is false or misleading about a statement, and why it is false.” Id. at 1106 (citing Decker v. GlenFed, Inc. (In re GlenFed, Inc. Sec. Litig.), 42 F.3d 1541, 1548 (9th Cir.1994)); Gould v. M & I Marshall & Isley Bank, 860 F. Supp. 2d 985, 988 (D. Ariz. 2012) (finding fraud was not plead with particularity where “the second amended complaint never identifies who made them, when they were made, where they were made, or how they were made.”).

Because Rule 9(b) requires pleading the who, what, when, where, and how, Rule 9(b) prohibits the use of group pleading — the practice of attributing fraud to Defendants as a collective group rather than individually. See Swartz v. KPMG LLP, 476 F.3d 756, 764-65 (9th Cir. 2007) (“Rule 9(b) does not allow a complaint to merely lump multiple defendants together but ‘require[s] plaintiffs to differentiate their allegations when suing more than one defendant . . . and inform each defendant separately of the allegations surrounding his alleged participation in the fraud.’”) (citing Haskin v. R.J. Reynolds Tobacco Co., 995 F. Supp. 1437, 1439 (M.D.Fla.1998)); Riehle v. Bank of Am., N.A., No. CV-13-00251-PHX-NVW, 2013 WL 1694442, at *2 (D. Ariz. Apr. 18, 2013) (“A plaintiff may not collectively accuse multiple defendants of committing misdeeds through the expedience of the title ‘Defendants.’ Such group pleading is not allowed.”); Diversified Funding Grp. LLC v. Hendon, No. AP 16-127-SHG, 2018 WL 2938579, at *4 (D. Ariz. June 12, 2018) (dismissing RICO claims where group pleading was used). Rule 9(b) requires “the circumstances consisting the alleged fraud be specific enough to give defendants notice of the particular misconduct . . . so that they can defend against the charge and not just deny that they have done anything wrong.” Vess, 317 F.3d at 1106. (internal quotations and citation omitted).

III. ARGUMENT

A. Plaintiffs’ Complaint is grounded in fraud and must be pleaded with particularity

As the premise for most of their claims, Plaintiffs itemize 58 alleged “fraudulent statements and omissions” they claim “Defendants,” collectively, made. See Doc. 1 ¶ 190. These 58 points form the alleged factual basis of Plaintiffs’ causes of action for RICO (Counts I-IV), breach of fiduciary duty (Count V), negligent misrepresentation (Count VII), disgorgement (Count VIII), rescission (Count IX), fraud (Count XI), aiding and abetting fraud (Count XII), and civil conspiracy for fraud (Count XIII). Each of these causes of action is “grounded in fraud,” and therefore, Rule 9(b)’s heightened particularity standard must be applied to the Complaint in its entirety. See Vess, 317 F.3d at 1106. Plaintiffs have not alleged fraud with the requisite particularity for two primary reasons.

First, the 58 itemized “fraudulent statements and omissions” are not particularized allegations and do not satisfy Rule 9(b). Rather, the 58 points are merely conclusions and arguments, not allegations that identify what statements or omissions were made, by whom, when, where, and how. As just a few examples, Plaintiffs allege that “Defendants’ fraudulent statements and omissions include . . . (1) [o]rchestrating the design, development, implementation, operation, and management of the Captive Insurance Strategies.” Doc. 1 ¶ 190; see also id. at ¶¶ 257, 297. This is not even a statement or omission, and certainly not one that alleges misrepresentations of material facts by an identified person at an identified time or place. “(3) [a]dvising and recommending that Plaintiffs and members of the Class to [sic] engage in illegal and abusive tax shelters, the Captive Insurance Strategies.” Id. at ¶ 190; see also id. at ¶¶ 257, 297. This also fails to identify the who, where, when, or how of the alleged statement. It also presumes, incorrectly, that captive insurance strategies are illegal. “(8) [f]ailing to advise Plaintiffs and members of the Class that various common law doctrines, including the economic substance, business purpose, step transaction, and sham transaction doctrines, would disallow the tax benefits of the Captive Insurance Strategies.” Id. at ¶ 190; see also id. at ¶¶ 257, 297. Again, this alleged omission is without any context of who, when, where, or how, and it presumes that Defendants could or should have known that captive insurance strategies that have been used for decades would disallow the Avrahamis’ deductions in this case.

The list goes on and on, but nowhere in the 58-item list do Plaintiffs satisfy the particularity requirements of Rule 9(b). Rather, Plaintiffs make 58 arguments about what they would like to uncover if allowed past this motion to dismiss and into endless discovery. But Rule 9(b) is designed specifically to prevent that.

Second, the 58-item list and the entire complaint fail to satisfy Rule 9(b) because they are premised on impermissible group pleading. For example, none of the 58 items identify the Fennemore Defendants or anyone else, but merely rely on the introductory assertion that “Defendants’ fraudulent statements and omissions include but are not limited to the following. . . .” Id. at ¶ 190. Similarly, Plaintiffs use group pleading as the basis for their underlying wire fraud and scheme or artifice to defraud rather than attributing specific fraud or acts to individual Defendants. See e.g. id. at ¶ 165 (“Defendants sought out . . .”); ¶ 175 (“Defendants intended to commit . . .”); ¶ 178 (“Defendants and Other Participants acted at all time . . .”); ¶ 190 (“Defendants’ fraudulent statements and omissions . . .”). This is exactly the type of group pleading prohibited under Rule 9(b) and is especially inappropriate where the eleven Defendants have widely varying business types, ranging from a law firm specializing in captive insurance to actuarial services, and varying degrees of involvement in the alleged fraud. See Swartz, 476 F.3d at 764-65. Plaintiffs pleaded no factual allegations stating the time, place, or specific content of the wire fraud or scheme or artifice to defraud attributable to any particular defendant. See In re Arizona Theranos, Inc., Litig., 256 F. Supp. 3d 1009, 1025 (D. Ariz. 2017) (“Each defendant must be in a position to defend its particular conduct and as currently pled, plaintiffs’ fraud by affirmative misrepresentation claims inadequately delineate the conduct attributed to each defendant”).

In sum, almost the entirety of Plaintiffs’ Complaint is premised on group pleading. Of the 138 numbered paragraphs in the Complaint, Defendant Hiller is personally referenced in only 14 of the paragraphs. Defendant Fennemore is mentioned even less frequently, with approximately seven references. Because Plaintiffs have failed to allege factual allegations individually against the Fennemore Defendants, instead treating all eleven Defendants as a group, Plaintiffs have failed to allege with particularity the “who,” and Plaintiffs’ Complaint should be dismissed.

B. Plaintiffs’ RICO claims (Counts I-IV) should be dismissed

Plaintiffs allege a violation of the federal RICO statute (18 U.S.C. § 1962(c)) (Count I), conspiracy to violate the federal RICO statute (18 U.S.C. § 1962(d)) (Count II), a violation of the Arizona RICO statute (A.R.S. §13-2312) (Count III), and conspiracy to violate the Arizona RICO statute (A.R.S. §13-2312) (Count IV). Federal interpretation guides the interpretation of Arizona state RICO claims. See Rosier v. First Fin. Capital Corp., 889 P.2d 11, 13-15 (Ariz. Ct. App. 1994). To recover on a RICO claim, Plaintiffs must allege: (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. See Sanford v. MemberWorks, Inc., 625 F.3d 550, 557 (9th Cir. 2010). Plaintiffs’ RICO claims should be dismissed because they have not been plead with particularity and lack sufficient facts to establish conduct, a pattern, and racketeering activity.

1. Plaintiffs fail to plead RICO claims with particularity

As explained above, Plaintiffs’ RICO claims are grounded in fraud, namely alleged wire fraud (18 U.S.C § 1343) and an alleged scheme or artifice to defraud (18 U.S.C. § 1346) (Doc. 1 at ¶ 221), and therefore must be pleaded with particularity. Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986) (“We have interpreted Rule 9(b) to mean that the pleader must state the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentation.”) (dismissing RICO claims based on mail and wire fraud where allegations fail to sufficiently plead use of mail or telephones).

As an initial matter, 18 U.S.C. § 1346 (scheme or artifice to defraud) is not included in federal RICO’s definition of “racketeering activity,” so to the extent Plaintiffs’ federal RICO claims are based on a violation of 18 U.S.C. § 1346 rather than 18 U.S.C. § 1343, the federal RICO claims should be dismissed. See 18 U.S.C. § 1961(1). Additionally, Plaintiffs have failed to plead any predicate act(s) of wire fraud with particularity, including any predicate act(s) specific to the Fennemore Defendants. The Complaint has an entire section, titled “Allegations Relating to RICO and Arizona RICO.” See Doc. 1 at ¶¶ 158-200. This section contains 43 paragraphs addressing Plaintiffs’ RICO claims. These RICO portions of the Complaint rely almost exclusively on allegations attributed to all “Defendants.” Id. Of the approximate 43 paragraphs dedicated to Plaintiffs’ RICO claims, only one paragraph is directed at the Fennemore Defendants’ conduct. Id. at ¶ 174. Instead, Plaintiffs use group pleading. See e.g. id. at ¶ 165 (“Defendants sought out . . . ”); ¶ 175 (“Defendants intended to commit . . .”); ¶ 178 (“Defendants and Other Participants acted at all time . . .”); ¶ 190 (“Defendants’ fraudulent statements and omissions . . .”). As explained above, this type of group pleading is impermissible.

In addition to improper group pleading, Plaintiffs fail to identify even one predicate act with any particularity. Plaintiffs instead allege a conclusion that there are “numerous predicate acts of wire and/or mail fraud in addition to other fraudulent acts.” Id. at ¶ 181. But Plaintiffs fail to identify any specific instance of wire or mail fraud against the Fennemore Defendants or anyone else, and in so doing fail to state the required “time, place, and specific content” of the underlying fraud. Plaintiffs itemize a list of 58 allegedly fraudulent statements or omissions, but they consist of broad and general assertions of things spoken or unspoken, but fail to identify any specific communications. See id. at ¶ 190. Indeed, not a single one of the 58 items contains any identifiable statement or representation made by any Defendant, how the statement or representation was false, or when the statement was made. These 58 items fail to identify any particular wrongful conduct.

Even more, the closest Plaintiffs come to factual allegations in the RICO section against the Fennemore Defendants is a sole paragraph that identifies the Fennemore Defendants by name. This allegation is not pleaded with particularity either. Despite using the Fennemore Defendants’ names, the lone paragraph does not identify the particulars or specific content of the alleged fraud; rather, it states there was a “legal ‘stamp of approval’ . . . in the form of [an] oral legal opinion.” Doc. 1 at ¶ 174(c). Plaintiffs have not stated the content of the alleged oral legal opinion, how the oral opinion was false, or when or to whom the oral opinion was made. This does not allow the Fennemore Defendants to identify any wrongful conduct to which they may be in a position to defend. See In re Arizona Theranos, Inc., Litig., 256 F. Supp. at 1025. Because Plaintiffs’ RICO allegations fail to plead any factual allegations with particularity, the RICO claims (Counts I-IV) should be dismissed.

2. Plaintiffs fail to allege facts sufficient to show the Fennemore Defendants directed the enterprise’s affairs

Plaintiffs’ RICO claims also should be dismissed because they fail to allege facts sufficient to show the Fennemore Defendants directed the enterprise’s affairs. Section 1962(c) requires a defendant “to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs.” 18 U.S.C. § 1962(c). This means that a defendant “must have some part in directing those affairs.” Reves v. Ernst & Young, 507 U.S. 170, 179 (1993). A defendant must “participate in the operation or management of the enterprise.” Id. at 185 (emphasis added); see also Walter v. Drayson, 538 F.3d 1244, 1248-1249 (9th Cir. 2008) (dismissing RICO claim against an attorney and her firm where there was no indication she was directing the enterprise); Baumer v. Pachl, 8 F.3d 1341, 1344 (9th Cir. 1993) (finding attorney was not involved in the affairs of the enterprise when he had limited role in providing legal services and that “[w]hether [the attorney] rendered his services well or poorly, properly or improperly, is irrelevant to the Reves test.”).

Here, Plaintiffs allege no facts sufficient to show the Fennemore Defendants directed any of the enterprise’s affairs. Plaintiffs RICO allegations against the Fennemore Defendants rest on a single alleged “oral legal opinion,” the content of which is not identified. See Doc. 1 at ¶ 174(c). One oral legal opinion — even assuming it constituted a legal opinion — is insufficient to show direction, operation, or management of an enterprise. It simply is performing standard legal services, which does not rise to the level directing an enterprise. See Walter, 538 F.3d at 1249 (“Simply performing services for the enterprise does not rise to the level of direction”). Further, as discussed, the majority of the RICO allegations rely on group pleading, and thus, there are no factual allegations specifically identifying conduct by any Defendant directing the enterprise’s affairs. In fact, paragraph 174 merely states each participant “played an important role in the success” and does not reference any direction or management of the enterprise by anyone. Because Plaintiffs do not plead that the Fennemore Defendants directed any enterprise, the RICO claims (Counts I-IV) should be dismissed.

3. Plaintiffs fail to allege facts sufficient to show the Fennemore Defendants were involved in a pattern of racketeering activity

Section 1961(5) defines pattern as requiring “at least two acts of racketeering activity, one of which occurred after the effective date of this chapter and the last of which occurred within ten years (excluding any period of imprisonment) after the commission of a prior act of racketeering activity.” 18 U.S.C. § 1961(5); H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 239 (1989) (“RICO’s legislative history reveals Congress’ intent that to prove a pattern of racketeering activity a plaintiff or prosecutor must show that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity”); Steam Press Holdings, Inc. v. Hawaii Teamsters, Allied Workers Union, Local 996, 302 F.3d 998, 1011 (9th Cir. 2002) (“In order to show a pattern, a complainant must demonstrate that the alleged predicate acts were both related and continuous. In turn, to satisfy the continuity requirement, [a complainant] must prove either a series of related predicates extending over a substantial period of time, i.e., closed-ended continuity, or past conduct that by its nature projects into the future with a threat of repetition, i.e. open-ended continuity.”) (citing Howard v. Am. Online Inc., 208 F.3d 741, 750 (9th Cir. 2000)).

The Complaint is devoid of any predicate acts other than the wire fraud allegedly perpetrated against the Avrahamis in connection with their captive insurance program. Although Plaintiffs claim there is an entire class of captive insurance victims, they fail to identify any others to whom any of the Defendants directed any predicate acts. Without at least “two acts of racketeering activity,” the RICO claims cannot stand against any defendant.

More particularly with respect to the Fennemore Defendants, as discussed above, Plaintiffs have identified only one “legal ‘stamp of approval’ . . . in the form of [an] oral legal opinion” to the Avrahamis. Doc. at ¶ 174(c). Thus, there are no allegations that the Fennemore Defendants participated in at least two predicate acts. Even more, the allegations that the Fennemore Defendants violated RICO by referring the Avrahamis to Clark are contradicted by allegations elsewhere in the Complaint. The sole RICO paragraph alleges the Fennemore Defendants “convince[d] the Avrahamis to enter into the Captive Insurance Strategies,” however, earlier in the Complaint, Plaintiffs allege the “Avrahamis informed Hiller that they were considering forming a captive insurance company.” Compare id. at ¶ 174(c) with ¶ 51. Thus, it was Plaintiffs, not the Fennemore Defendants, who proposed captive insurance. Further, the paragraph states the Fennemore Defendants “were instrumental in referring the Avrahamis to Clark[,]” however, in the immediately preceding paragraph, Plaintiffs admit the McEntee Defendants, not the Fennemore Defendants, recommended Plaintiffs consult the Clark Defendants for their expertise in captive insurance. See id. at ¶ 174(b-c). Thus, Plaintiffs have failed to allege sufficient predicate acts, so the RICO claims (Counts I-IV) must be dismissed.

4. Plaintiffs’ conspiracy to violate RICO claims (Counts II and IV) must be dismissed because no primary RICO violation is pleaded

Conspiracy to violate RICO is a derivative claim; Section 1962(d) (RICO conspiracy statute) states that “[i]t shall be unlawful for any person to conspire to violate any of the provisions of” sections 1962(a), (b), or (c). See 18 U.S.C. § 1962(d). In order to adequately plead a RICO conspiracy claim, a plaintiff must adequately plead a substantive violation of RICO. Carpenter v. Thrifty Auto Sales, No. EDCV09-02233 DMG, 2010 WL 11595928, at *4-5 (C.D. Cal. July 30, 2010). Accordingly, failure to plead an underlying RICO claim requires dismissal of the conspiracy claims. Id. at *5 (“As Plaintiff fails to plead any facts sufficient to state a claim under sections 1962(a), (b), or (c) . . . Plaintiff also fails to state a claim under 1962(d).”). As discussed above, the Complaint fails to state a claim for primary liability of RICO, and therefore, Plaintiffs’ conspiracy to violate RICO claims (Counts II and IV) also fail and must be dismissed. See id.

5. Plaintiffs’ state RICO claims (Counts III and IV) are not ripe because the Complaint is unverified and was not served on the Arizona Attorney General

Arizona law imposes two requirements on plaintiffs who wish to bring a claim under Arizona’s state-law RICO statute. First, Plaintiffs must serve notice and one copy of the Complaint with the Arizona Attorney General within thirty days after the action is filed. See A.R.S. § 13-2314.04(H). Second, a complaint filed under the Arizona RICO statute must be verified. See A.R.S. § 13-2314.04(O). Because Plaintiffs’ Complaint was not verified and there are no indications that it was served on the Arizona Attorney General, their state RICO claims (Counts III and IV) are not ripe and should be dismissed.

C. Plaintiffs’ breach of contract and breach of good faith and fair dealing claim (Count X) should be dismissed because no specific duty is pleaded

Plaintiffs fail to state a claim against the Fennemore Defendants for breach of contract and breach of the duty of good faith and fair dealing because they have not alleged any specific contract between them and the Fennemore Defendants nor have they alleged any specific violations of such a contract. A breach of contract claim must allege a “violation of a specifically enumerated duty” in the contract itself. See Resolution Tr. Corp. v. W. Techs., Inc., 877 P.2d 294, 298 (Ariz. Ct. App. 1994). A breach of contract claim for a lawyer’s services must be based on more than a breach of the general standard of care to perform legal services. See Keonjian v. Olcott, 169 P.3d 927, 931 (Ariz. Ct. App. 2007) (dismissing breach of contract where “the essence of [the] claim” was negligent performance, not “nonperformance of a specific promise necessary to a breach of contract claim.”); Collins v. Miller & Miller, Ltd., 943 P.2d 747, 755 (Ariz. Ct. App. 1996) (finding an agreement “to provide ‘reasonable and necessary legal services’” lacked “the specificity required for a breach of contract action.”). Thus, to plead a breach of contract, a plaintiff must plead more than legal malpractice. See Lewin v. Miller Wagner & Co., 725 P.2d 736, 743 (Ariz. Ct. App. 1986) (finding the “duty to perform in accordance with a certain standard of care” existed “separate and apart from the contract giving rise to the duty.”).

Plaintiffs’ Count X allegations are directed at the Clark Defendants with only passing, broad, references to other “Defendants.” Count X of the Complaint alleges a breach of contractual “[a]greements includ[ing] engagement agreements” Plaintiffs “signed with Clark and Clark & Gentry.” Doc. 1 at ¶ 287. To the extent Count X is directed also to the Fennemore Defendants, Plaintiffs have not pleaded any contractual provision imposing any specific duty on the Fennemore Defendants. While Plaintiffs point to nine “obligations” within the engagement agreement, they have not alleged the Fennemore Defendants had or failed to perform any obligation under that agreement. Rather, the essence of Plaintiffs’ claim, which they concede, is the Clark Defendants’ alleged negligent performance under the contract in forming and managing insurance companies. See id. at ¶ 288 (“[t]he entities Clark and Clark & Gentry formed and managed were not insurance companies because they did not provide bona fide insurance.”) (emphasis added).

Further, the implied duty of good faith and fair dealing “is not a vehicle for creating contractual terms that the parties did not otherwise agree to.” 11333 Inc. v. Certain Underwriters at Lloyd’s, London, 261 F. Supp. 3d 1003, 1024 (D. Ariz. 2017). Yet that is what Plaintiffs have tried to accomplish in this Complaint. In fact, this cause of action is alleged only “[i]n the alternative to the fraud and rescission claims,” and seeks to impose on the Fennemore Defendants contractual obligations it never had, like promising the Captive Insurance Strategies were legally formed or that all tax returns were properly prepared. Doc. 1 ¶ 289. Because Plaintiffs’ breach of the implied duty of good faith and fair dealing claim would impose contractual obligations the Fennemore Defendants did not agree to, the breach of implied covenant cause of action must be dismissed as well.

D. Plaintiffs’ claims for rescission (Count IX), aiding and abetting (Count XII) and civil conspiracy (Count XIII) are legally defective

Rescission (Count IX) is a remedy and is not an independent cause of action. See e.g. Earven v. Smith, 621 P.2d 41, 43 (Ariz. Ct. App. 1980) (noting the plaintiff had three remedies for breach: rescission, continued performance, or termination and damages). Aiding and abetting (Count XII) and civil conspiracy (Count XIII) are derivative torts. See Wells Fargo Bank v. Arizona Laborers, Teamsters & Cement Masons Local No. 395 Pension Tr. Fund, 38 P.3d 12, 36-37 (Ariz. 2002), as corrected (Apr. 9, 2002) (“A mere agreement to do a wrong imposes no liability; an agreement plus a wrongful act may result in liability.”) (internal quotations omitted); AGA Shareholders, LLC v. CSK Auto, Inc., 589 F. Supp. 2d 1175, 1191-92 (D. Ariz. 2008) (“In Arizona, both civil conspiracy and aiding and abetting are derivative torts for which a plaintiff may recover only if it has adequately pled an independent primary tort.”). Failure to plead an underlying tort requires dismissal of derivative claims. Id. (dismissing the derivative claim where the underlying tort failed as a matter of law).

The Fennemore Defendants can only be held secondarily liable for civil conspiracy and aiding and abetting if the Complaint alleges primary liability against a defendant. As discussed above, the Complaint fails to state a claim for which relief can be granted for primary liability against any of the Defendants for fraud and breach of contract. Accordingly, the aiding and abetting (Count XII) and civil conspiracy (Count XIII) claims should be dismissed. Similarly, rescission is a remedy for fraud and contract causes of actions, and because the Complaint fails to state a claim for which relief can be granted for fraud and breach of contract, the rescission claim (Count IX) must also fail.

IV. CONCLUSION

Plaintiffs believe they received bad advice from a series of tax advisors, lawyers, accountants, and actuaries and have sued eleven different Defendants claiming they all are responsible for everything. Such a complaint cannot stand against the Fennemore Defendants because the fraud-based causes of action (Counts I-V, VII-IX, and XI-XIII) are not sufficiently particularized to satisfy Rule 9(b); the RICO causes of action (Counts I-IV) do not contain allegations that the Fennemore Defendants operated or managed a RICO enterprise or engaged in a pattern of racketeering activity; the contract cause of action (Count X) does not refer to a contract the Fennemore Defendants had with Plaintiffs or a specific contractual obligation the Fennemore Defendants violated; and the derivative causes of action (Counts XI-XIII) fail because the claims on which they are based fail.

DATED this 30th day of August, 2019.

SNELL & WILMER L.L.P.

By: Joseph G. Adams
Matthew L. Lalli
Joseph G. Adams
Rebecca E. Eckert-Fong
One Arizona Center
400 E. Van Buren, Suite 1900
Phoenix, Arizona 85004

Attorneys for Defendants Fennemore
Craig, P.C. and Neil Hiller