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Fidelity & Guaranty Life Insurance Co. v. Sharma

United States District Court, D. Maryland

March 29, 2019

FIDELITY & GUARANTY LIFE INSURANCE CO., Plaintiff,
v.
ABHINAV SHARMA, et al., Defendant.

          MEMORANDUM OPINION

          RICHARD D. BENNETT UNITED STATES DISTRICT JUDGE

         This case arises from an alleged insurance rebating scheme. The Amended Complaint alleges that Defendant Network Partners International, LLC ("Network Partners") coordinated with Defendants Abhinav Sharma ("Sharma"), RequiteLife, Inc. ("RequiteLife"), Jason Mandel, Tower Strategic Group, LLC ("Tower Strategic"), Gregg Kirschner ("Kirschner"), MRM Advisors, LLC ("MRM"), Joshua Mandel, Rubicon Advisory Partners, Inc. ("Rubicon Advisory"), Rebecca Nadler ("Nadler"), Evan Pescatore ('Tescatore"), Agent Does 1-10, and Other Person Does 1-10 (collectively, the "Agent Defendants"), [1] to perpetuate a fraudulent rebating conspiracy, collecting large commissions and bonuses from Fidelity & Guaranty Life Insurance Company ("Fidelity") by financing the expensive first-year premiums for life insurance policies and allowing them to lapse after just one year. In furdierance of the scheme, Defendants are alleged to have made fraudulent misrepresentations to insurance customers and Fidelity. Because Fidelity paid commissions representing 155% of the policy's first year premium payment, this scheme cost Fidelity millions of dollars.

         Now pending before this Court are the following motions: (1) the Broker Defendants' 12(b)(6) and 9(b) Motion to Dismiss the Amended Complaint (ECF No. 88); (2) Plaintiffs Motion for Relief in Scheduling Rule 26(f) Conference (ECF No. 91); (3) Defendant Rebecca Nadler's Motion to Dismiss (ECF No. 96); (4) Defendant Network Partners International, LLC's Motion to Dismiss the Amended Complaint (ECF No. 121); (5) Defendant Evan Pescatore's Motion to Dismiss and, Alternatively, Motion to Strike Plaintiffs Jury Demand and Certain Allegations in the Amended Complaint (ECF No. 129); and (6) Plaintiffs Motion - for Leave to File a Second Amended Complaint (ECF No. 159).[2] The parties' submissions have been reviewed and no hearing is necessary. See Local Rule 105.6 (D. Md. 2018). For the reasons stated herein, Plaintiffs Motion for Leave to File a Second Amended Complaint (ECF No. 159) is DENIED WITHOUT PREJUDICE to refile a more succinct pleading. The motions to dismiss (ECF Nos. 88, 96, 121, 129) are DENIED IN PART AND GRANTED IN PART. Specifically, Count 2 of the Amended Complaint is DISMISSED; Count 6 is DISMISSED; and 7 is DISMISSED as to all Defendants except Sharma and RequiteLife, Inc.[3]Plaintiffs Motion for Relief in Scheduling Rule 26(f) Conference (ECF No. 91) is DENIED AS MOOT.[4] The Notice of Supplemental Authority (ECF No. 146) is HEREBY STRICKEN. The following claims remain:

Count

Claim

Defendant

1

Fraud

Network Partners, Agent Defendants, and Other Person Does

3

Violation of Racketeer Influenced & Corrupt Organizations Act

Network Partners, the Agent Defendants, and Other Person Does

4

Breach of Contract

Network Partners

5

Breach of Contract

Agent Defendants

7

Rescission, Restitution, and Constructive Trust (in the Alternative)

Sharma and RequiteLife

8

Negligence by Failing to Act with the Fiduciary Duty Required from Agent to Principal

Network Partners

9

Indemnification and Attorneys' Fees

Network Partners

         BACKGROUND

         I. Factual Background

         In a ruling on a motion to dismiss, this Court must accept the factual allegations in the plaintiffs complaint as true and construe those facts in the light most favorable to the plaintiff. See, e.g., Edwards v. City of Goldsboro, 178 F.3d 231, 244 (4th Or. 1999). Plaintiff alleges that Network Partners and the Agent Defendants perpetuated an affinity marketing conspiracy involving members of the Hasidic and Orthodox Jewish communities. (ECF No. 57, at¶¶ 1, 2.) The object of this alleged conspiracy was to conduct an insurance rebating scheme targeting these groups. (Id. at ¶ 1.)

         The alleged illegal activity began in October 2014, when Network Partners applied to become Fidelity's General Agent. (Id. at ¶ 30.) Fidelity alleges that Network Partners made false representations in order to obtain this position. (Id. at ¶ 31.) On October 16, 2014, Network Partners entered into an "Agency Agreement" with Fidelity, which appointed it to act as a producer and agent for Fidelity for the purpose of selling insurance policies. (Id. at ¶ 32, Ex. D.) Section 15 of this Agreement states as follows:

Section 15. Limitations of Authority: You are not authorized to: (i) incur on behalf of the Company any expense, indebtedness or liability; (ii) make, alter or discharge contracts; (iii) waive forfeitures; (iv) quote rates except as published by the Company; (v) extend the time of payment of any premium; (vi) extend credit for the purpose of purchasing or keeping any insurance product in force; (vii) approve any application for insurance; (viii) represent to any person(s) that any insurance is in effect before the Company so acknowledges; (ix) acknowledge or represent the existence of any insurance with the Company; (x) make any representation or state any opinion regarding the validity or payment of any claim; or (xi) engage in any act on behalf of the Company that is not specifically authorized by this Agreement.
(Id. at ¶ 195.)

         Fidelity also entered into an "Insurance Producer Agreement" with Sharma, RequiteLife, Jason Mandel, Tower Strategic, Joshua MandeL Rubicon Advisory, Nadler, Pescatore, and each of the Agent Does (collectively, the "Agent Defendants"), which appointed these persons and entities to act as the agents for Fidelity for the purpose of selling insurance policies. (Id. at ¶ 34.) Section 13 of the Insurance Producer Agreement included the same provision as quoted above, including the prohibition on extending credit for the purpose of purchasing or keeping any insurance product in force. (Id. at ¶ 197.)

         Like other insurance companies, Fidelity pays its agents a hefty commission for selling life insurance policies. (Id. at ¶¶ 16-17.) In this case, Fidelity paid its agents up to 155% of a policy's first year premium in commission and bonus payments. (Id. at ¶ 16.) Fidelity claims that this figure is not terribly surprising, as other insurance companies also pay commissions and bonuses in excess of each insured's first year premium. (Id. at ¶ 17-18.) Driving these large commissions was Fidelity's expectation that the life insurance policies would remain in effect for years and that Fidelity would turn a profit on its policies. (Id. at ¶ 19.) It was therefore essential that Fidelity's customers enter into their life insurance contracts with the intent to renew them for a period of time and not to allow them to lapse after just one year.

         Fidelity alleges that Network Partners, the Agent Defendants, and Other Person Does breached their contracts and their fiduciary duties as insurance agents by conspiring and scheming to sell insurance policies issued by Fidelity for the sole purpose of obtaining commission payments which exceeded the first year's premiums, then allowing the policies to lapse after one year. (Id. at ¶ 38.) It is alleged that Network Partners and the Agent Defendants lied to Fidelity by claiming that they were "properly selling" the policies. (Id.) Network Partners allegedly directed the activities of the other Defendants, including their sale and financing of life insurance products. (Id.)

         To achieve their illicit objectives, Defendants allegedly falsely represented to the Insureds that they could maintain their policies without paying the full annual premiums, and that the agents would arrange for their payment instead (Id. at ¶ 45.) Network Partners and the Agent Defendants then conspired with Other Person Does to pay some or all of the first-year premiums. (Id.) Next, the Defendants submitted fraudulent applications for life insurance to Fidelity (Id.) After Fidelity paid the Defendants commissions and bonuses, the Defendants would use these funds to pay the Insured's premiums. (Id.) These policies were not intended to be renewed after one year, and the Defendants either allowed or encouraged the Insured to let their policies lapse. (Id.) The Defendants allegedly predicted the difference between the commissions (plus bonuses) they received and the first year's premium, thereby obtaining a profit. (Id.)

         Fidelity bolsters these claims by referencing the unusually high lapse rates associated with the insurance policies sold by the Defendants. (Id. at ¶ 39.) An insurance policy may "lapse" by the insured's failure to pay the annual premium. The "Lapse Rate" describes the percentage of policies that lapse in a given policy year. (Id. at ¶ 40.) Fidelity's Large Policies (i.e., policies for which the insured paid $25, 000 or more in annual premiums) issued from 2011 through August 1, 2016 allegedly had a Lapse Rate of 9.9% during the second policy year. (Id. at ¶ 41.) The Lapse Rate for Large Policies sold by Network Partners and the Agent Defendants during the second policy year was 84.4%-a figure eight times higher than the Lapse Rate for Fidelity's policies sold by other agents. (Id. at ¶ 44.) Fidelity argues that these lapse rates "make[] absolutely no financial sense" in the absence of fraud. (Id. at ¶ 49.) As Fidelity notes, it would not be sensible for an Insured to make a large premium payment (Fidelity supplies the hypothetical figure of $400, 000) only to make no payments after the first year. (Id. at ¶ 49.)

         Fidelity does not merely describe the broader contours of the conspiracy or appeal to logic; it alleges several specific instances of allegedly fraudulent insurance sales. Fidelity provides a chart cataloging "ill-gotten commissions and bonuses paid over some fifteen months." This chart includes the truncated policy number, its effective date, the name of the selling agent, the upline agency associated widi the sale, and the commission and bonuses received associated with each alleged act of misconduct. (Id. at ¶ 13.) All Defendants, save for Joshua Mandel, are implicated in these transactions (Id.) Furthermore, Fidelity lists eight "predicate acts" forming the basis for its claims. (Id. at ¶¶ 101, 111, 121, 136, 146, 156, 167, 177.) By way of example, Defendant Kirschner is alleged to have sold a life insurance policy with a face amount of $7, 500, 000 and an effective date of October 24, 2015. (Id. at ¶ 167.) The first-year premium for the policy was $416, 400.00. (Id. at ¶ 168.) The Insured, referred to as "BS" did not make the second year's scheduled premium payment; in other words, he paid $416, 400.00 for one year of life insurance coverage. (Id. at¶¶ 169, 172.) Network Partners and Kirschner, meanwhile, earned $822, 420.00 in commission and bonus payments from Fidelity. (Id. at ¶ 173.) Suspiciously, although BS resides in Brooklyn, New York, he used an out-of-state bank account to fund the first-year premium and an out-of-state trustee to establish the beneficiary trust, which was formed in Connecticut. (Id. at 175.)

         II. Procedural Background

         On June 2, 2017 Fidelity commenced this lawsuit, naming only Abhinav Sharma, RequiteLife, Inc., and John Doe as Defendants. (ECF No. 1.) On June 30, 2017 Brokerage Insurance Partners, Inc. ("BIP") filed a lawsuit against Fidelity, currently pending before the Honorable George L. Russell, III of this Court. See Brokerage Insurance Partners, Inc. v. Fidelity & Guranty Life Insurance Co., et al. (GLR-17-1815) (the "BIP" litigation). On April 4, 2018 Fidelity filed an Amended Complaint, joining the remaining defendants. (ECF No. 57.) In the Amended Complaint, Fidelity asserts nine Counts:

Count

Claim

Defendant

1

Fraud

Network Partners, Agent Defendants, and Other Person Does

2

Civil Conspiracy to Breach Duty of Agent to Principal and Aiding and Abetting that Breach

Network Partners and Agent Defendants

3

Violation of Racketeer Influenced & Corrupt Organizations Act

Network Partners, the Agent Defendants, and Other Person Does

4

Breach of Contract

Network Partners

5

Breach of Contract

Agent Defendants

6

Rescission, Restitution, and Constructive Trust (in the Alternative)

Network Partners

7

Rescission, Restitution, and Constructive Trust (in the Alternative)

Agent Defendants

8

Negligence by Failing to Act with the Fiduciary Duty Required from Agent to Principal

Network Partners

9

Indemnification and Attorneys' Fees

Network Partners

         On September 4, 2018, Fidelity answered the Complaint in the BIP litigation, asserting counterclaims against BIP closely resembling those in the Amended Complaint.

         STANDARDS OF REVIEW

         I. Motion for Leave to File an Amended Complaint.

         Under Rule 15(a) of the Federal Rules of Civil Procedure, leave to file an amended complaint "shall be freely given when justice so requires." This "liberal rule" reinforces the "federal policy in favor of resolving cases on their merits instead of disposing them on technicalities." Laber v. Harvey, 438 F.3d 404, 426 (4th Cir. 2006). As noted by the United States Court of Appeals for the Fourth Circuit, Rule 15(a) ensures that the "plaintiff [is] given every opportunity to cure a formal defect in his pleading." Qstrzenski v. Seigel, 477 F.3d 245, 252-53 (4th Cir. 1999) (quoting 5A Charles Allen Wright & Arthur R. Miller, Federal Practice & Procedure § 1357 (2d ed.1990)).

         The "liberal rule" of Rule 15(a), however, is not absolute. A court may deny leave to file an amended complaint when the amendment "would be prejudicial to the opposing party, there has been bad faith on the part of the moving party, or the amendment would be futile." Johnson p. Oroweat Foods Co., 785 F.2d 503, 509 (4th Cir.1986) (citing Forman v. Davis, 371 U.S. 178, 182 (1962)). Delay alone may not serve as the basis for denying a plaintiffs motion, Oromat Foods Co., 785 F.2d at 509. Rather, any claimed delay "must be accompanied by prejudice, bad faith, or futility." Id. at 510 (citing Davis v. Piper Aircraft Co., 615 F.2d 606, 613 (4th Cir.1980)). A court must consider the "nature of the amendment and the timing," as the "further the case progresse[s] before judgment [is] entered, the more likely it is that the amendment will prejudice the defendant or that a court will find bad faith on the plaintiffs part." Laber, 438 F.3d at 427.

         II. Motion to Dismiss for Failure to State a Claim.

         Under Rule 8(a)(2) of the Federal Rules of Civil Procedure, a complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). Rule 12(b)(6) procedure authori2es the dismissal of a complaint if it fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). The purpose of Rule 12(b)(6) is "to test the sufficiency of a complaint and not to resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses." Presley v. City of Charlottesville, 464 F.3d 480, 483 (4th Cir. 2006). To satisfy Rule 8(a)(2), a complaint need not include "detailed factual allegations." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2001);Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). In reviewing a Rule 12(b)(6) motion, a court "must accept as true all of the factual allegations contained in the complaint" and must "draw all reasonable inferences [from those facts] in favor of the plaintiff." E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435, 440 (4th Cir. 2011) (citations omitted); Hall v. Direcf TV, LLC, 846 F.3d 757, 765 (4th Or. 2017).

         Rule 9(b) of the Federal Rules of Civil Procedure requires that "the circumstances constituting fraud be stated with particularity." Fed.R.Civ.P. 9(b). The rule "does not require the elucidation of every detail of the alleged fraud, but does require more than a bare assertion that such a cause of action exists." Mylan Labs., Inc. v. Akzp, N.V., 770 F.Supp. 1053, 1074 (D. Md. 1991). To satisfy the rule, a plaintiff must "identify with some precision the date, place and time of active misrepresentations or the circumstances of active concealments." Johnson v. Wheeler, 492 F.Supp.2d 492, 509 (D. Md. 2007). As the United States Court of Appeals for the Fourth Circuit stated in United States ex rel Nathan v. Takeda Pharms. North America, Inc., 707 F.3d 451 (4th Cir. 2013), the aims of Rule 9(b) are to provide notice to defendants of their alleged misconduct, prevent frivolous suits, eliminate fraud actions where all the facts are learned after discovery, and protect defendants from harm to their goodwill and reputation. 707 F.3d at 456 (citation omitted).

         ANALYSIS

         I. Leave to Amend.

         Nearly two years after it filed the present lawsuit, Fidelity seeks leave to file a Second Amended Complaint which is 284 pages long, contains 2, 424 paragraphs, adds over sixty defendants (some of whom are anonymous), and attaches over a thousand pages of exhibits. It justifies these changes by referencing extensive discovery which has taken place in related bankruptcy proceedings before the United States Bankruptcy Court for the Northern District of Illinois. Three sets of Defendants oppose Fidelity's Motion and have filed three Responses in Opposition. (ECF Nos. 163, 164, and 165.) These Defendants maintain that the Second Amended Complaint is neither a "short and plain statement of the claim" as required by Rule 8(a) and that the extravagant amendments Fidelity proposes would prejudice them. (ECF No. 163, at 2-3; ECF No. 164, at 15-19; ECF No. 165, at 3-4.)

         As this Court has previously cautioned, leave to file an amended complaint is "not guaranteed." See Lacy v. Nat'l RR Passenger Corp., RDB-14-0179, 2014 WL 6967957, at *7 (D. Md. Dec. 8, 2014). The "proper length and level of clarity for a pleading cannot be defined with any great precision and is largely a matter that is left for the discretion of the trial court." Stone v. Warfteld, 184 F.R.D. 553, 554 (D. Md. Feb. 22, 1999) (quoting Charles A. Wright and Arthur R. Miller, 5 Federal Practice & Procedure § 1217 (2d Ed. 1990)). In exercising this discretion, this Court must balance its policy of granting leave to amend against its obligation to "manage [its] docket[] and courtroom[] with a view toward the efficient and expedient resolution of cases." Abdul-Mumit, 896 F.3d at 292 (quoting Dietz v. Bouldin, ___ U.S. ___, 136 S.Ct. 1885, 1892 (2016).

         In some situations, the "nature of the amendment and its timing" may warrant the conclusion that it is prejudicial to defendants. Adbul-Mumit v. Alexandria Hyundai, LLC, 896 F.3d 278, 293 (4th Cir. 2018) (quoting Laber, 438 F.3d at 427). Accordingly, while plaintiffs are afforded "every opportunity to cure a formal defect," see Ostrzenski, 177 F.3d at 252-53, they may not use amendments to "radically alter" the course of litigation long after it has commenced. See Macsheny v. Sparrows Point, LLC, ELH-15-0022, 2016 WL 8669914, at *9 (D. Md. Oct. 28, 2016) (quoting Cottman Transmission Sys. LLC v. Kershner, 429 F.Supp.2d 461, 473 (E.D. Pa. 2007).

         The shear length of the Second Amended Complaint contravenes the spirit of the Federal Rules, which contemplates a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a). Although Fidelity must meet a heightened pleading standard to adequately plead its fraud claims, it may do so in a Complaint which is significantly more concise. As discussed below, the operative Amended Complaint (itself 58 pages long) adequately satisfied this pleading standard. Most problematically, the Second Amended Complaint would join over sixty new Defendants-some of whom are anonymous, and others who have been added only for the purposes of setdement. A pleading amendment is not the proper means of effectuating all of these goals at once, thereby radically altering the course of the litigation in one move nearly two years after it has commenced. At a future date, this Court is willing to entertain full briefing on Motions to Join and Motions to ...


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