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Entities, Individuals Seek Dismissal of Captive Insurance Suit

MAR. 8, 2019

Dimitri Shivkov et al. v. Artex Risk Solutions Inc. et al.

DATED MAR. 8, 2019
DOCUMENT ATTRIBUTES

Dimitri Shivkov et al. v. Artex Risk Solutions Inc. et al.

Dimitri Shivkov et al.,
Plaintiffs
v.
Artex Risk Solutions, Inc. et al.,
Defendants.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ARIZONA

Barbara J. Dawson (#012104)
bdawson@swlaw.com
Joseph G. Adams (#018210)
jgadams@swlaw.com
SNELL & WILMER LLP
400 East Van Buren Street
Suite 1900
Phoenix, AZ 85004-2202
Telephone: (602) 382-6000

Stephen V. D'Amore (Admitted pro hac vice)
sdamore@winston.com
Scott P. Glauberman (Admitted pro hac vice)
sglauber@winston.com
Michael A. Skokna (Admitted pro hac vice)
mskokna@winston.com
WINSTON & STRAWN LLP
35 West Wacker Drive
Chicago, IL 60601-9703
Telephone: (312) 558-5600

Lawrence M. Hill (Admitted pro hac vice)
lhill@winston.com
WINSTON & STRAWN LLP
200 Park Avenue
New York, NY 10166-4193
Telephone: (212) 294-6700

Tom Melsheimer (Admitted pro hac vice)
tmelsheimer@winston.com
WINSTON & STRAWN LLP
2121 North Pearl Street, Suite 900
Dallas, TX 75201
Telephone: (214) 453-6500

Attorneys for Defendants
Artex Risk Solutions, Inc., Arthur J. Gallagher & Co., and Debbie Inman

DEFENDANTS' JOINT MOTION TO DISMISS

(Oral Argument Requested)

The Complaint takes 138 pages and 375 numbered paragraphs to try to allege 13 causes of action spanning 13 years that 45 named Plaintiffs assert on behalf of a putative class of “hundreds if not thousands” against 12 Defendants. This piling up of parties, claims, and verbose allegations is a tactic. It aims to overwhelm the reader into overlooking the simple, fatal flaws that require dismissal of the Complaint in the event Defendants' motion to compel arbitration is not granted.

The Defendants are seven corporate entities, ranging from a publicly-traded insurance brokerage company to small actuarial firms, plus five individuals. The Complaint alleges that Defendants played various roles in setting up and running “captive” insurance companies for Plaintiffs to insure their businesses. Plaintiffs sought to achieve tax benefits from their captive insurance companies, but after the IRS disallowed those benefits, Plaintiffs sued.

The Complaint starts with the thrice-defective claim that Defendants violated the federal and Arizona RICO statutes. First, Plaintiffs fail to allege, as the statutes require, how each Defendant directed the RICO enterprise's affairs. They allege instead that each Defendant played an “important role,” ignoring the Ninth Circuit's holding that a defendant alleged only to have a “major role” is not liable. Second, Plaintiffs violate what the Supreme Court called the “basic principle” of alleging an enterprise distinct from the RICO person(s) directing it. Here, the alleged enterprise and RICO persons are exactly the same. Third, Plaintiffs rely on RICO predicate acts of fraud but fail to plead fraud with particularity (as is also true of Plaintiffs' other causes of action). For any or all of these reasons, the RICO claims should be dismissed.

Next, although the Complaint acknowledges that a contract governed each captive insurance company's formation and operation, the Complaint studiously ignores what those contracts say. Plaintiffs' breach of contract, breach of fiduciary duty, and negligence/professional malpractice claims all assert in substance that Defendants did not serve as good tax and legal advisors to Plaintiffs. But the contracts themselves state that Defendants are not Plaintiffs' advisors, and Plaintiffs alone are responsible for tax and legal matters. For example: Defendants do “not opine on the tax treatment of your insurance company, and we are not responsible for any tax compliance matters . . . [and we do] not provide any legal, tax or accounting advice. We are not your lawyers or accountants. You acknowledge that we have encouraged you to consult with your own attorneys, accountants, and advisors.” The contracts also make Plaintiffs responsible for “any challenge of any tax position or treatment taken by you.” Defendants were not responsible for providing tax or legal advice to Plaintiffs.

Plaintiffs' tort claims also violate the economic loss rule, which requires contracting parties such as Plaintiffs to seek recovery pursuant to the terms of the contract itself for any economic (that is, non-physical) injuries. Tellingly, Plaintiffs' breach of contract and tort claims all assert the exact same economic injuries. Plaintiffs may recover, if at all, only under the contracts. The tort claims should be dismissed.

Plaintiffs also assert causes of action for disgorgement, rescission, and civil conspiracy. None of these are causes of action, and they should be dismissed.

For these reasons and those stated in the Memorandum of Points and Authorities below, Defendants jointly move pursuant to Rule 12(b)(6) to dismiss this action.

MEMORANDUM OF POINTS AND AUTHORITIES

I. Allegations

A. Overview

Trimming away the many tangled branches of the Complaint reveals its root allegation: in order to earn fees and commissions, the Defendants helped the Plaintiffs set up and run captive insurance companies — insurance companies that are related to their insureds — to provide both insurance coverage and tax benefits. (¶¶ 63, 81) The Defendants supposedly tricked the Plaintiffs into believing that the captive insurance companies would provide certain tax benefits, but the IRS later proposed tax deficiencies against Plaintiffs, and Plaintiffs chose to settle with the IRS. (¶¶ 63, 153-54, 176, 194)

B. Defendants

The Complaint often uses the generic umbrella term “Defendants” to refer to the action, inaction, knowledge, or motivation of any one or more of the dozen different Defendants. The Defendants include seven companies, ranging from one of the world's largest insurance brokerages to a small actuarial firm, and five individuals employed by some of them. This is a brief description of the Defendants and their alleged role in the case, organized to show relationships between them:

  • Arthur J. Gallagher & Co.: a publicly-traded insurance brokerage and risk management services firm. The allegations about Gallagher focus on the fact that it owns Artex (described below). (¶¶ 56, 83-84, 168, 189, 230(e))

  • Artex Risk Solutions: a subsidiary of Gallagher that is a licensed insurance management company advising clients about captive insurance. In 2010, Artex acquired the assets of Tribeca Strategic Advisors (n/k/a TSA Holdings), a similar business that Karl Huish founded in 1999. (¶¶ 50-51, 83, 86, 89, 230(a))

    • Karl Huish: founded Tribeca, works at Artex, and is the owner of Provincial (described below). (¶¶ 53, 86, 89, 230(b))

    • Jeremy Huish: works at Artex in business development and previously had the same role at Tribeca. (¶¶ 54, 230(c))

    • Jim Tehero: worked at Artex (¶¶ 55, 230(d)) before retiring in 2018.

    • Debbie Inman: works at Artex, where she provides underwriting services. (¶¶ 57, 124, 230(f))

  • Provincial Insurance: an insurance carrier that issued insurance policies purchased by insureds of captive insurance companies formed by Tribeca and Artex. (¶¶ 61, 87, 89, 230(j))

    • PRS Insurance: an administrator for Provincial. (¶¶ 52, 127, 230(k))

  • AmeRisk Consulting: provides actuarial services for pricing insurance premiums. (¶¶ 60, 124, 230(i))

  • Epsilon Actuarial Solutions: also provides actuarial services. (¶¶ 58, 230(g))1 

    • Julie Ekdom: the CEO of Epsilon. (¶¶ 59, 230(h))

The Defendants are discussed further below.

C. Plaintiffs

1. Spectra Plaintiffs

There are three groups of Plaintiffs. The first is centered on Spectra, a technical services company in the telecommunications market. (¶ 102) Spectra, its three owners, and the company it formed to own a captive insurance company are all Plaintiffs. (¶¶ 5-9, 102) After receiving information about captive insurance, Spectra's CEO signed an engagement agreement with Artex. (¶¶ 103-13)

The 138-page Complaint does not attach that agreement, even though it bears directly on Plaintiffs' claims. This Court may, of course, consider the contracts themselves when ruling on a motion to dismiss claims pursuant to the contracts, even if the Complaint neglected to attach them. Tomlin v. Gafvert, 2015 WL 4639242, at *2 (D. Ariz.); United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003).

The agreement explains that Artex “will form and provide your new insurance company with the risk management services that are described in this Agreement.” (Ex. 1 at 1.)2 The agreement goes on to state that “Artex does not opine on the tax treatment of your insurance company, and we are not responsible for any tax compliance matters or for tax reporting activities.” (Id. at 4 (emphasis added).) In the section on “LIMITATION OF LIABILITY,” the agreement states that Artex is not responsible for “taxes and/or interest” and “penalties” that are “payable to any taxing authority . . . as a result of any challenge of any tax position or treatment taken by you.” (Id. at 5.) It also states that Artex has no liability for any losses “other than losses incurred by the insurance company that have resulted primarily from our gross negligence.” (Id.) In its final substantive paragraph, the agreement concludes:

Please note that Artex Risk Solutions, Inc. is neither a law firm nor an accounting firm. Artex does not provide any legal, tax or accounting advice. We are not your lawyers or accountants. You acknowledge that we have encouraged you to consult with your own attorneys, accountants and advisors prior to entering into the Agreement, and that you have had ample opportunity to do so. We recommend that you consult with other professionals and advisors regarding the appropriateness, terms, and conditions of this contract. (Id. at 6 (emphasis added).)

Spectra operated its captive insurance company from 2011 into 2015. (¶¶ 114, 140) In 2016, the IRS issued Spectra a notice of deficiency for 2012, seeking back taxes and penalties. (¶ 150) Spectra then filed a petition in U.S. Tax Court, eventually settling in 2017 for an unspecified portion of the taxes and penalties the IRS sought, as well as amounts for 2013 and 2014. (¶¶ 152-154)

2. Symphony Plaintiffs

The second Plaintiff group is centered around Symphony, which builds houses in Utah. (¶¶ 14-15, 155-156) The other Symphony Plaintiffs are some of its owners. (¶ 155) They engaged Tribeca in 2005. (¶ 156)

Their agreement was amended several times, due to changes in Symphony's business, until the 2011 version between Artex and Symphony. Like the Spectra agreement, it was not attached to the Complaint. For purposes of the provisions discussed in this Motion, it was identical to the Spectra agreement.

Symphony operated its captive insurance company from 2005 into 2013, when Symphony canceled the 2011 agreement. (¶ 176) In 2016, the IRS issued Symphony a notice of deficiency for 2012, which Symphony challenged in U.S. Tax Court. (¶ 176) In 2018, before the Tax Court ruled, Symphony settled with the IRS for tax years 2012-2015, paying back taxes, interest, and penalties. (¶ 176)

3. Treadstone Plaintiffs

The Treadstone Plaintiffs are three “medical professionals who are also entrepreneurs,” their spouses, and dozens of their businesses. (¶¶ 16-49, 177 & n.1) Two of the three engaged Tribeca in 2009 and created a captive insurance company, which the third joined by engaging Tribeca in 2011. (¶ 180)

Yet again, the Complaint does not attach the engagement agreements. The 2011 Treadstone agreement was, for purposes of the provisions discussed in this Motion, identical to the Spectra and Symphony agreements. The two 2009 Treadstone agreements were if anything even more emphatic:

Insurance tax law and its interpretation are evolving, and there is always some tax risk related to insurance. To summarize on a non-exhaustive basis, some of the risks are that the IRS will challenge the tax deductibility of the insurance premiums paid by the insured and/or disallow the tax status of the insurance company. . . . [T]he final determination of this fact could ultimately depend on an assessment of all the relevant facts and circumstances by a court. By signing this letter, you agree that you . . . are comfortable with the risks inherent in the formation and operation of an insurance company, and that you are in a position to bear such risks.

(Exs. 3, 5 at 10 (emphasis added).) The 2009 agreements also state that Tribeca “is neither a law firm nor an accounting firm” and “does not practice law and does not give legal advice.” (Id. at 11.) “As with any important matter, you are encouraged to seek legal counsel.” (Id.) The 2009 agreements contain nearly identical language to the 2011 agreements in expressly limiting Artex's liability, except that the 2009 agreements refer to “reckless and willful misconduct” instead of “gross negligence.” (Id.) Finally, like all of the other agreements, the 2009 Treadstone agreements state that Tribeca has no liability for “taxes and/or interest” or “penalties payable to any taxing authority.” (Id.)

The Treadstone captive insurance company remained in operation into 2015. (¶ 194) In 2016 and 2017, the individuals among the Treadstone Plaintiffs received notices of deficiency for their 2012 and 2013 tax returns, as did two of their businesses for one tax year each. (¶ 194) All challenged the notices in U.S. Tax Court and then settled in 2018, before the Tax Court ruled. The individuals' settlements also covered 2014 and 2015, including back taxes, interest, and penalties. (¶ 194)

D. Causes of action

As noted above, the Complaint spins Plaintiffs' anger at the IRS's position on their taxes into the following causes of action against all dozen Defendants:

Count(s)

Cause(s) of action

1-4

Violations of the federal and Arizona Racketeer Influenced and Corrupt Organizations (RICO) Acts

5

Breach of fiduciary duty

6

Professional malpractice/negligence

7, 11

Negligent misrepresentation, fraud

8, 9

Disgorgement, restitution

10

Breach of contract

12, 13

Aiding and abetting, civil conspiracy

Counts 3 and 4 are based on the Arizona RICO statute, and the remaining state law causes of action are governed by Arizona law pursuant to the engagement agreements, all of which say, “[a]ll claims or disputes will be governed by Arizona law.” (Exs. 1, 4 at 6; ex. 2 at 5; exs. 3, 5 at 11.)

II. Legal Standard

To avoid dismissal, plaintiffs must “allege facts sufficient 'to raise a right to relief above the speculative level.'” Leoni Fiber Optics v. Kaus, 2013 WL 12106942, at *1 (D. Ariz.) (quoting Bell Atl. v. Twombly, 550 U.S. 544, 555 (2007)). But “[d]ismissal is proper where there is no cognizable theory or an absence [of] sufficient fact alleged to support a cognizable theory.” Jamieson v. Slater, 2007 WL 1101263, at *5 (D. Ariz.). And although all well-pleaded factual allegations are taken as true, “the court [is not] required to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” Leoni, 2013 WL 12106942, at *2. Nor is this Court “required to accept legal conclusions cast in the form of factual allegations if those conclusions cannot reasonably be drawn from the facts alleged.” Hobson v. Temple-Inlet, 2007 WL 3101837, at *1 (D. Ariz.).

III. Argument

Each of Plaintiffs' causes of action lacks a cognizable legal theory or fails to allege facts sufficient to support it. The entire Complaint should be dismissed.

A. Plaintiffs' RICO claims should be dismissed.

Counts 1 and 2 assert that Defendants violated and conspired to violate 18 U.S.C. § 1962(c), which forbids “any person employed by or associated with any enterprise . . . to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity.” Counts 3 and 4 say the same under A.R.S. § 12-2312, which “is patterned after the Federal RICO act.” Rosier v. First Fin. Cap., 889 P.2d 11, 13-15 (Ariz. Ct. App. 1994). Courts interpreting it “look to federal interpretation for guidance.” Hannosh v. Segal, 328 P.3d 1049, 1053 (Ariz. Ct. App. 2014).

Stating a RICO claim requires factual allegations showing that each Defendant engaged in “(1) the conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Sun Sav. & Loan Ass'n v. Dierdorff, 825 F.2d 187, 191 (9th Cir. 1987). Plaintiffs fail to allege facts sufficient to establish the required conduct, enterprise, and racketeering activity.

1. Plaintiffs fail to allege facts showing that each Defendant directed the enterprise's affairs.

Over 25 years ago, the Supreme Court ruled that § 1962(c)'s requirement that a “person . . . conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs” means that the person “must have some part in directing those affairs.” Reves v. Ernst & Young, 507 U.S. 170, 179 (1993). Only persons who “participate in the operation or management of the enterprise” can be liable. Id. at 185. Liability cannot be based on a person simply having “a major role in the enterprise.” Walter v. Drayson, 538 F.3d 1244, 1247 (9th Cir. 2008) (emphasis added). Such allegations might show the person was “part of the enterprise but fail to show that she . . . had 'some part in directing its affairs.'” Id. at 1249 (quoting Reves, 507 U.S. at 179).

The Complaint has an entire section, titled “Operation of the RICO Enterprise,” in which Plaintiffs attempt to satisfy this requirement. (¶¶ 227-233) Many of the allegations in that section have nothing to do with who operated the enterprise, but paragraph 230 gives a list of every Defendant and describes his/her/its “important role in the success of the Enterprise” (emphasis added).

By its own allegations, the Complaint fails the Ninth Circuit's test. It is not enough for a defendant to be “part of the enterprise” or even to have “a major role in the enterprise.” Walter, 538 F.3d at 1247, 1249. Yet that is all the Complaint attempts to allege.

The Complaint identifies services provided by various Defendants in connection with Plaintiffs' captive insurance companies. (¶ 230) But “[s]imply performing services for the enterprise does not rise to the level of direction.” Walter, 538 F.3d at 1249. The allegation, for example, that Gallagher is Artex's parent company and “steered its existing clients to Artex” (¶ 230(e)) does not “rise to the level of direction.” Gaines v. Home Loan Ctr., 2010 WL 11506442, at *14 (C.D. Cal.) (dismissing RICO claims against parent company that “ensured a steady stream” of customers for a subsidiary). Of course, paragraph 230 gives the conclusory characterization that the services were “important,” but “[n]or is it material that the provided services were important and indispensable to the enterprise.” Tonnemacher v. Sasak, 859 F. Supp. 1273, 1277 (D. Ariz. 1994).

Rather than alleging facts to show that any Defendant directed the affairs of the enterprise, paragraph 230 simply alleges each Defendant played a role in an enterprise. No Defendant is alleged to have directed the enterprise's affairs. It is true that the Defendants are alleged to have worked together, so at most Plaintiffs plead the existence of a business relationship, but “the existence of a business relationship between [defendants] . . . does not show” that any one of them “played 'some part in directing the enterprise's affairs,' as opposed to 'simply being involved' in them.” In re WellPoint Out-of-Network UCR Rates Litig., 903 F. Supp. 2d 880, 912 (C.D. Cal. 2012) (dismissing RICO causes of action) see also In re Ariz. Theranos Litig., 308 F. Supp. 3d 1026, 1060 (D. Ariz. 2018) (“entities engaged in 'ordinary business conduct and an ordinary business purpose' do not necessarily constitute an 'enterprise' bound by common purpose under RICO”). All of the RICO claims should be dismissed.

2. Plaintiffs fail to allege facts showing there was an enterprise distinct from the person(s) directing it.

The Supreme Court has adopted “the basic principle that to establish liability under § 1962(c) one must allege and prove the existence of two distinct entities: (1) a 'person'; and (2) an 'enterprise' that is not simply the same 'person' referred to by a different name.” Cedric Kushner Promotions v. King, 533 U.S. 158, 161 (2001). To take the simplest example, “a corporate entity may not be both the RICO person and the RICO enterprise under section 1962(c).” Riverwoods Chappaqua v. Marine Midland Bank, 30 F.3d 339, 344 (2d Cir. 1994).

Here, Defendants are all accused of violating § 1962(c), which requires that they be RICO persons. The question is thus whether Plaintiffs allege facts establishing a distinct enterprise that is not simply the Defendants.

They do not. The Complaint's definition of the enterprise includes Defendants together with “all other persons and entities that solicited persons to participate in Artex's Captive Insurance Strategies Arrangement” (¶ 219) — in other words, Artex's employees or agents. The Complaint does not identify who they are, but in any event “the distinctness requirement may not be circumvented” by “alleging a RICO enterprise that consists merely of a corporate defendant associated with its own employees or agents carrying on the regular affairs of the defendant.” Riverwoods, 30 F.3d at 344. The Complaint's mention of “all other persons and entities that solicited persons to participate” therefore cannot create a distinct enterprise.

On a similar note, the Complaint also adds, to the definition of the enterprise, “the Other Participants” (¶ 219), a group defined to include “individuals and entities such as actuaries, underwriters, attorneys, accountants, brokers, and others not named as Defendants herein who assisted Defendants in designing, promoting, selling, implementing, and managing the Captive Insurance Strategies.” (¶ 62 n.1) Aside from providing that generic list of occupations and business activities, Plaintiffs never so much as hint at who the Other Participants might be or why, if they were participating in a fraud, they were not also sued. In any event, Plaintiffs cannot satisfy the requirement of alleging facts sufficient to establish an enterprise distinct from the Defendants by just making up a term — “Other Participants” — and repeating it over and over again.

Thus, when only their cognizable allegations of fact are considered, Plaintiffs allege an enterprise identical to the persons they want to hold liable — the very thing the Supreme Court found to violate a “basic principle” of RICO. Defendants cannot be both RICO persons and the enterprise, so all of the RICO claims should be dismissed.

3. Plaintiffs fail to allege racketeering activity with the required particularity.

RICO defines “racketeering activity” by referring to a list of other provisions in Title 18. 18 U.S.C. § 1961(1). Here, Plaintiffs try to allege racketeering activity in the form of mail fraud and wire fraud, 18 U.S.C. §§ 1341, 1343. (¶¶ 241-251) But as explained below Plaintiffs fail to plead fraud with particularity, as Rule 9(b) requires, so all of the RICO counts should be dismissed for that reason as well.

B. Many of Plaintiffs' claims cannot coexist with the contracts.

Despite referring to the engagement agreements in 25 paragraphs of the Complaint, and relying on the existence of a contractual relationship in counts 5 to 11, Plaintiffs neglect to attach to the Complaint copies of the contracts themselves. They are attached to this Motion as exhibits, and they defeat many of Plaintiffs' claims.

1. Some of Plaintiffs' claims contradict the contracts' terms.

Plaintiffs may not assert claims that contradict the terms they agreed govern all work related to their captive insurance companies. But several of their claims do just that.

a. Breach of contract (count 10)

Count 10 alleges that Defendants breached the engagement agreements. (¶ 351) The alleged breach was “structuring the Captive Insurance Strategies in a manner that violated applicable tax and insurance laws, improperly advising Plaintiffs that they could deduct the insurance premiums on their respective tax returns, and . . . failing to provide accurate, independent advice regarding the Captive Insurance Strategies.” (¶ 352)

A breach of contract claim must arise “out of the violation of a specifically enumerated duty” found in the contract itself. Resolution Tr. v. W. Techs., 877 P.2d 294, 298 (Ariz. Ct. App. 1994). Yet count 10 does not cite a single contractual provision imposing any duty that Plaintiffs now claim was breached.

On the contrary, the contracts affirmatively state there was no such duty. Instead of making Artex responsible for tax and legal matters, all of the 2011 contracts stated that “Artex does not opine on the tax treatment of your insurance company, and we are not responsible for any tax compliance matters or for tax reporting activities . . . Artex does not provide any legal, tax or accounting advice. We are not your lawyers or accountants. You acknowledge that we have encouraged you to consult with your own attorneys, accountants, and advisors.” They also make clear that Spectra is responsible for “any challenge of any tax position or treatment taken by you.” All tax and legal matters were Plaintiffs' responsibility and cannot show that Defendants breached the contracts.

Likewise, the two 2009 Treadstone contracts warned of the risk that the IRS could “challenge the tax deductibility of the insurance premiums paid by the insured and/or disallow the tax status of the insurance company,” and the Treadstone Plaintiffs agreed they would “bear such risks.” Their agreements in 2009 to bear those risks defeats their claim that Defendants should now bear them.

Nor is count 10 improved by its mention of the duty of good faith and fair dealing that is implied into contracts. The reason is that “an implied covenant of good faith and fair dealing cannot directly contradict an express contract term,” Kuehn v. Stanley, 91 P.3d 346, 354 (Ariz. Ct. App. 2004), or “creat[e] contractual terms that the parties did not otherwise agree to.” 11333 v. Certain Underwriters at Lloyd's, 261 F. Supp. 3d 1003, 1024 (D. Ariz. 2017). The agreements here are clear that Plaintiffs, not Defendants, were responsible for all tax and legal matters. Count 10 should be dismissed.

b. Breach of fiduciary duty (count 5)

The first element of a claim for breach of fiduciary duty is the existence of a duty. Here, Plaintiffs allege that the Defendants owed a fiduciary duty “as the insurance, tax, financial and investment advisors of Plaintiffs.” (¶ 320) In other words, they assert the duty was owed because of the relationship the engagement agreements created.

“A commercial contract creates a fiduciary relationship only when one party agrees to serve in a fiduciary capacity.” Urias v. PCS Health Sys., 118 P.3d 29, 35 (Ariz. Ct. App. 2005); see also Cachet Residential Builders v. Gemini Ins., 2009 WL 692324, at *3 (D. Ariz.). But the Complaint points to no provision of the contracts, because there is none, in which Defendants agreed to owe fiduciary duties as Plaintiffs' advisors. Barbano v. Wash. Mutual/Chase, 2015 WL 7179721, at *6 (D. Ariz.) (dismissing fiduciary duty claim because Plaintiff failed to allege “that any specific Defendant agreed to serve in a fiduciary capacity”); Silaev v. Swiss-Am. Trading, 2015 WL 1469739, at *3 (D. Ariz.) (dismissing fiduciary duty claim arising out of an ordinary commercial relationship).

In fact, the contracts again contradict Plaintiffs' claim: “Artex does not provide any legal, tax or accounting advice. We are not your lawyers or accountants. You acknowledge that we have encouraged you to consult with your own attorneys, accountants, and advisors.” The contracts made Plaintiffs alone responsible for all tax and legal matters. Lerner v. DMB Realty, 322 P.3d 909, 919-20 (Ariz. Ct. App. 2014) (dismissing fiduciary duty claim because the agreement limited the duties owed).

Plaintiffs try to salvage count 5 by alleging they “placed their trust and confidence in Defendants.” (¶ 320) But “[m]ere trust in another's competence or integrity does not suffice” to show a fiduciary relationship. Standard Chartered v. Price Waterhouse, 945 P.2d 317, 335 (Ariz. Ct. App. 1996). Count 5 should be dismissed.

c. Negligence/professional malpractice (count 6)

Count 6 alleges that Defendants were negligent in acting “[a]s the insurance, tax, legal, financial and investment advisors for Plaintiffs.” (¶ 325). It should for two reasons be dismissed. The first, by now familiar from the prior two sections of this Motion, is that the cause of action must start with the existence of a duty, Gipson v. Kasey, 150 P.3d 228, 230 (Ariz. 2007) (negligence); Koss v. Am. Exp., 309 P.3d 898, 917 (Ariz. Ct. App. 2013) (same); In re Bill Johnson's Rest's., 255 F. Supp. 3d 927, 934 (D. Ariz. 2017 (professional malpractice), which is plainly not present here. Count 6 should be dismissed for the same reasons counts 5 and 10 should be dismissed.

Second, all of the 2011 agreements limit liability to “gross negligence” (exs. 1 at 5; exs. 2, 4 at 4), and the 2009 Treadstone agreements limit it to “reckless and willful misconduct” (exs. 3, 5 at 11). Yet count 6 asserts ordinary negligence3 as a basis for the claim. (¶ 327) Even if all of count 6 were not dismissed, it still should be dismissed to the extent it relies on ordinary negligence as a basis for liability, rather than “reckless or willful misconduct.” US Airways v. Qwest, 361 P.3d 942, 947 (Ariz. Ct. App. 2015) (dismissing ordinary negligence claim because contract limited liability to willful misconduct), aff'd in part and depublished in part, 385 P.3d 412 (Ariz. 2016).

2. The economic loss rule bars Plaintiffs' tort claims.

The economic loss rule “bars a [contract] party from recovering economic damages in tort unless accompanied by physical harm.” Finepoint Innovations v. A.T. Cross, 2006 WL 3313688, at *3 (D. Ariz.). The rule “limit[s] a contracting party to contractual remedies for the recovery of economic losses.” Flagstaff Affordable Hous. v. Design All., 223 P.3d 664, 667 (Ariz. 2010).

The Complaint alleges no physical harm. All of Plaintiffs' claimed losses are economic in nature and grow out of the relationships and activities created by the engagement agreements. These are the losses alleged in Plaintiffs' claim for breach of contract (count 10, ¶ 355):

(1) they paid significant premiums and fees to the Defendants and Other Participants, (2) they owe substantial back-taxes, penalties, and interest, (3) Plaintiffs and members of the Class lost the opportunity to avail themselves of other legitimate tax-savings opportunities, (4) they spent substantial funds defending the IRS audits and in Tax Court proceedings, and (5) Plaintiffs and members of the Class have incurred substantial additional costs to rectify the situation.

That is exactly the same recitation of economic losses, with minor variations in wording, which appears in the claims for fraud (count 11, ¶ 362), negligence/professional malpractice (count 6, ¶ 331), and negligent misrepresentation (count 7, ¶ 339). Courts applying Arizona law dismiss torts claims such as these pursuant to the economic loss rule. Apollo Grp. v. Avnet, 58 F.3d 477, 480 (9th Cir. 1995) (negligent misrepresentation); Wojtunik v. Kealy, 394 F. Supp. 2d 1149, 1172 (D. Ariz. 2005) (same); Cook v. Orkin Exterminating, 258 P.3d 149, 153-54 (Ariz. Ct. App. 2011) (fraud and negligence); Finepoint at *3 (fraud); Hayden Bus's Ctr. Condos. Ass'n v. Pegasus Dev., 105 P.3d 157, 158-59 (Ariz. Ct. App. 2005) (negligence). All of these tort claims seek recovery for alleged economic losses that Plaintiffs concede arise from the agreements themselves.

Applying the economic loss rule here will “encourage private ordering of economic relationships and . . . uphold the expectations of the parties by limiting a plaintiff to contractual remedies for loss of the benefit of the bargain.” Flagstaff, 223 P.3d at 671. Plaintiffs' alleged losses are all tied directly to the contract. The first loss is the fees the contracts require. The second and third losses are both about lost tax savings, but the agreements allocated to Plaintiffs all “taxes and/or interest” and “penalties” that are “payable to any taxing authority . . . as a result of any challenge of any tax position or treatment taken by you.” The 2009 Treadstone engagement agreements even stated that Plaintiffs would bear “the risks . . . that the IRS will challenge the tax deductibility of the insurance premiums paid by the insured and/or disallow the tax status of the insurance company.” (Exs. 3, 5 at 10.) Finally, the fourth and fifth losses are about amounts paid to defend the IRS's tax claims and address the situation. Again, the contracts allocated to Plaintiffs all responsibilities for tax and legal matters. For all of these reasons, counts 6, 7, and 11 should be dismissed.

C. Disgorgement, rescission, and civil conspiracy are not causes of action.

The Complaint includes counts for disgorgement (count 8), rescission (count 9), and civil conspiracy (count 13). None are independent causes of action. Horne v. AutoZone, 275 P.3d 1278, 1282 (Ariz. 2012) (disgorgement); Timeless Glob. v. Olson, 2016 WL 3660238, at *5 (Ariz. Ct. App.) (rescission); Hernandez-Wheeler v. Flavio, 930 P.2d 1309, 1313 (Ariz. 1997) (civil conspiracy). All should be dismissed.

D. The Complaint is not pleaded with particularity.

Under Rule 9(b), a party “alleging fraud . . . must state with particularity the circumstances constituting fraud.” This means “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.” Stewart v. Fairley, 2014 WL 12538164, at *4 (D. Ariz.).

This requirement applies on its face to Plaintiffs' cause of action for fraud (count 11), rescission due to fraud (count 9, ¶ 348), aiding and abetting fraud (count 12, ¶ 365), and conspiracy to commit fraud (count 13, ¶ 370), as well as to all four RICO causes of action, which allege predicate acts of mail and wire fraud (counts 1-4, ¶¶ 286, 297, 303, 315). But the Ninth Circuit also applies Rule 9(b) to claims that do not have fraud as an element if “an entire complaint . . . is grounded in fraud.” Vess v. Ciba-Geigy, 317 F.3d 1097, 1107 (9th Cir. 2003); see also Cornell v. That Certain Instrument, 2012 WL 1869689, at *4 (E.D. Cal.) (Rule 9(b)'s heightened pleading standards “may apply to claims — that although lacking fraud as an element — are 'grounded' or 'sound' in fraud”).

Here, the entire Complaint is grounded in fraud. As described in the beginning of the Complaint section titled “Nature of the Claims,” all of the Complaint's allegations and causes of action are about Defendants' supposed “pre-planned and fraudulent scheme.” (¶¶ 65, 66) The Complaint mentions “fraud” or a similar word such as “fraudulent” almost 100 times. The Complaint's request for certification of a class asserts that “[t]he claims of all Class Members originate from the same fraudulent transactions predicated by the Defendants,” and, as a question of law or fact common to the class, it asks “[w]hether Defendants' actions constitute mail and wire fraud.” (¶¶ 204, 208(e)) Finally, the various causes of action are repetitive and overlapping. The fraud claim, for example, includes a 61-item list of fraud. (¶ 358) The breach of fiduciary duty claim repeats those very same 61 items (plus a few more). (¶ 321)

And that same 61-item list also appears in ¶ 245, where it is identified as “Defendants' fraudulent statements and omissions.” Typical of the items are these:

(3) Advising Plaintiffs and members of the Class that the Captive Insurance Strategies would be upheld as a legal tax-advantaged captive insurance strategy if audited;

(4) Failing to advise Plaintiffs and members of the Class that the Captive Insurance Strategies would not be upheld as a legal tax-advantaged captive insurance strategy if audited;

By the stratagem of complaining first about “advising” something, followed by “failing to advise” its opposite, the Complaint manages to double the number of allegations — which the Complaint then repeats three times apiece, in three copies of the list. In all, roughly 18 pages of the Complaint are occupied by these lists.

But the length of these lists is inversely proportional to the amount of detail they provide. They do not allege when each representation was made, who said each one, what exactly was said, why it was false, or who received it and how. The manner of transmission is described only as “sent or delivered by the Postal Service, by wire and through other interstate electronic media.” (¶ 245) Worse, all of the fraud is attributed collectively to “Defendants” as a group. (¶ 245) That is known as “group pleading,” and Rule 9(b) bars it. “A plaintiff may not collectively accuse multiple defendants of committing misdeeds through the expedience of the title 'Defendants.' Such group pleading is not allowed,” Riehle v. Bank of Am., 2013 WL 1694442, at *2 (D. Ariz.), especially given the diversity of Defendants, from a large brokerage firm to small actuarial firms, and the Complaint's allegations about them.

In sum, “Plaintiff[s] ha[ve] mistaken quantity for quality.” Teamsters Local 617 v. Apollo Grp., 2011 WL 1253250, at *34 (D. Ariz.); see also In re PetSmart Sec. Litig.. 61 F. Supp. 2d 982, 991 (D. Ariz. 1999) (“heightened pleading rules are designed to elicit clarity, not volume”). Their failure to plead with particularity has left Defendants without sufficient “notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong.” Forbes v. SGB, 2012 WL 6194197, at *2 (D. Ariz.). For that reason, the entire Complaint should be dismissed. Sw. Pet Prod. v. Koch Indus., 89 F. Supp. 2d 1115, 1130 (D. Ariz. 2000), rev'd in part on other grounds, 32 F. App'x 213 (9th Cir. 2002); Cellco P'ship v. Hope, 2012 WL 260032, at *20 (D. Ariz.).

IV. Conclusion

For the foregoing reasons, Defendants respectfully request that the Court dismiss the Complaint and enter judgment in their favor.

DATED this 8th day of March, 2019

Respectfully submitted,

SNELL & WILMER LLP

By: Barbara J. Dawson
Joseph G. Adams
Attorneys for Defendants
Artex Risk Solutions, Inc., Arthur J.
Gallagher & Co., and Debbie Inman

WINSTON & STRAWN LLP

By: Stephen V. D'Amore
Scott P. Glauberman
Michael A. Skokna
Attorneys for Defendants
Artex Risk Solutions, Inc., Arthur J.
Gallagher & Co., and Debbie Inman

Tom Melsheimer
tmelsheimer@winston.com
WINSTON & STRAWN LLP
2121 North Pearl Street, Suite 900
Dallas, TX 75201
Telephone: (214) 453-6500

Lawrence M. Hill
lhill@winston.com
WINSTON & STRAWN LLP
200 Park Avenue
New York, NY 10166-4193
Telephone: (212) 294-6700

STEPTOE & JOHNSON LLP

By: Karl Tilleman
ktillema@steptoe.com
Erin Bradham
ebradham@steptoe.com
Telephone: (602) 257-5200

Attorneys for Defendants
TSA Holdings, LLC f/k/a Tribeca Strategic Advisors, LLC;
TBS LLC d/b/a PRS Insurance;
Karl Huish;
Jeremy Huish;
Jim Tehero;
Provincial Insurance, PCC

SANDERS & PARKS, P.C.

By: J. Steven Sparks
Steve.sparks@sandersparks.com
Vincent Miner
Vincent.miner@sandersparks.com
Telephone: (602) 532-5679

Attorneys for Defendants
Epsilon Actuarial Solutions, LLC;
Julie A. Ekdom

KUTAK ROCK LLP

By: J. Michael Low
Michael.low@kutakrock.com
Paul Gerding, Jr.
Paul.gerding@kutakrock.com
Telephone: (480) 429-4874

Attorneys for Defendant
AmeRisk Consulting, LLC

FOOTNOTES

1The actuarial Defendants are not alleged to have had a role in the promotion, sale, management, or operations of the captive insurance companies. AmeRisk only provided actuarial input, not tax or legal advice. (¶¶ 124, 160, 190) Epsilon (founded in 2013) and Ekdom were not alleged to be involved with two of the three groups of Plaintiffs — Symphony and Treadstone — and provided actuarial services to Spectra only after its captive insurance company ceased writing business and was in runoff. (¶¶ 123-24)

2All cited exhibits reference the exhibits described in and attached to the Declaration of Michael A. Skokna, filed contemporaneously herewith.

3In reality, Defendants were not negligent at all, much less grossly negligent. In Avrahami v. Commissioner, 149 T.C. No. 7 (2017), the Tax Court recognized that the tax issues around captive insurance arrangements (like those at issue in the Complaint) involve issues of first impression and the complex interplay of portions of the tax code that are not entirely clear and had not previously been adjudicated. The Tax Court therefore found that the taxpayers acted reasonably and in good faith, and would not be assessed a penalty for negligence.

END FOOTNOTES

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