Opinion
W.D. Mich. No. 5:99-CV-118; W.D. Mich. No. 5:96-MD-1122
July 26, 2001
OPINION OF THE COURT
ON DEFENDANTS' MOTIONS TO DISMISS
Plaintiffs Francesco A. Carfagno and Laura Lujan de Carfagno, husband and wife, are residents of the Republic of Mexico who, in 1991 and 1995, respectively, purchased life insurance policies from defendant Jackson National Life Insurance Company ("Jackson National"). In their eight-count second amended complaint they assert various claims in contract and tort growing out of misrepre-sentations allegedly made by defendants Jackson National and independent insurance brokers Fernando C. Turpin and Cora Turpin in connection with the sales of the policies. Now before the Court are defendants' motions under Fed R. Civ. P. 12(b)(6) to dismiss plaintiffs' complaint in its entirety for failure to state a valid claim.
In deciding defendants' motions to dismiss under Rule 12(b)(6), the Court must construe the complaint liberally in plaintiffs' favor and accept as true all well-pled factual allegations and all inferences that may be reasonably drawn therefrom. Gazette v. City of Pontiac, 41 F.3d 1061, 1064 (6th Cir. 1994). A claim should not be dismissed unless it appears beyond doubt that plaintiffs can prove no set of facts in support of the claim that would entitle them to relief. Id.
The standards governing the motion to dismiss under Rule 12(b)(6) are a matter of federal law, as to which this Court, the transferee court in this multidistrict litigation, must apply the law of the circuit in which it is located, the Sixth Circuit. See In re Temporomandibular Joint Implants Products Liability Litigation, 97 F.3d 1050, 1055 (8th Cir. 1996).
I. RESCISSION
In count I, plaintiffs pray for rescission of the policies based on illegality, fraud and mistake They contend the insurance contracts were entered into in violation of Mexico law and should be held void. The policies are said to be unlawful because they are the product of unauthorized insurance activities conducted by defendants in Mexico. Further, plaintiffs allege that defendants misrepresented their authority to sell insurance products in Mexico, and that plaintiffs mistakenly believed defendants were authorized to sell insurance products in Mexico.
On July 18, 2001, the Court denied plaintiffs' motion for application of Mexican law to their count I claim for rescission of the insurance contracts, concluding that Texas has a more substantial relationship to the transactions and the parties. Consequently, all eight of plaintiffs' claims are governed by Texas law.
Despite the Court's determination that Texas law shall be applied, plaintiffs ask the Court, under their rescission claim, to defer in comity to Mexico's interest in restricting unauthorized insurance activities by refusing to enforce the policies. Plaintiffs cite the well-settled rule of Texas contract law that "a contract made with a view of violating the laws of another country, though not otherwise obnoxious to the laws either of the forum or of the place where the contract is made, is illegal and will not be enforced." Access Telecom v. MCI Telecommunication Corp., 197 F.3d 694, 707 (5th Cir. 1999).
In the choice of law ruling, the Court expressly rejected this argument. Opinion and Order on Choice of Law, July 18, 2001, p. 17 n. 5. The Court concluded that even though it remains to be established whether defendants engaged in conduct violative of Mexican law, any such violation was incidental to lawful conduct and could not reasonably be deemed so grave as to "demand comity" where plaintiffs undisputedly both initiated negotiations and received the policies in Texas. Id. Plaintiffs offer no persuasive reason to alter this conclusion. Accordingly, Texas law will be applied to the rescission claim and the policies' alleged infirmities under Mexican law are immaterial to enforcement of the policies under Texas law.
Under Texas law, "rescission is an equitable remedy that operates to set aside a contract that is legally valid but is marred by fraud, mistake or some other reason which requires that it be set aside to avoid unjust enrichment." Janis v. Associates Home Equity Services, Inc., 29 S.W.3d 244, 249 (Tex.App.-Waco 2000); see also Humphrey v. Camelot Retirement Community, 893 S.W.2d 55, 59 (Tex.App. — Corpus Christi 1994). "Rescission works to avoid the contract, return any consideration paid, and to return the parties to their respective positions as if no contract had ever existed." Humphrey, 893 S.W.2d at 59.
To the extent plaintiffs' rescission claim is based on fraud or mistake relating to the enforceability of the policies under Mexican law, defendants contend the claim is defective for lack of a cognizable injury. In other words, defendants argue that, even assuming plaintiffs were misled or mistaken about the enforceability of the policies under Mexican law — policies that are otherwise legally valid and enforceable under the law of Texas, where plaintiffs have chosen to sue — they have not alleged a resulting injury that demands rescission to avoid unjust enrichment.
Plaintiffs contend their injury consists of having incurred the expenses of purchasing and maintaining the policies, obligations they would not have undertaken had they known the contracts were not enforceable in Mexico. In an action to rescind a contract based on fraud, some pecuniary injury or damage must be shown. Turner v. Houston Agricultural Credit Corp., 601 S.W.2d 61, 64 (Tex.App.-Houston 1980). This requirement is satisfied by a showing that "the defendant party has been induced to incur legal liabilities or obligations which would not have been incurred except for the fraud." Id.
Based on exhibits submitted by Jackson National, it is evident that plaintiffs have paid premiums in excess of $27,000 on the subject policies. They must also continue paying premiums in order to maintain the policies. They have thus allegedly been induced by defendants' misrepresentations to incur substantial pecuniary obligations. This alleged injury is sufficient to support plaintiffs' claim for rescission under Texas law.
Plaintiffs also argue that due to fraud or mistake, they unwittingly exposed themselves to possible criminal sanctions by entering into insurance contracts with a company not authorized to engage in insurance operations in Mexico. This potential liability, they contend, is sufficient injury to support their claim for rescission. The Court disagrees. Such "potential liability" is merely hypothetical or conjectural. Plaintiffs have not alleged or argued that prosecution is currently pending or is imminent. It appears, therefore, that plaintiffs have not in this respect suffered the sort of invasion of a legally protected interest necessary to make out an "injury in fact." See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992).
II. COMMON LAW FRAUD
In count III, plaintiffs assert a common law fraud claim. Defendants attack the facial validity of the claim on several grounds.A. Specificity of Allegations
First, defendants contend the claim is not stated with sufficient particularity to satisfy Fed.R.Civ.P. 9(b). Rule 9(b) requires that averments of fraud be stated "with particularity." In the Sixth Circuit, Rule 9(b) is construed liberally as requiring a plaintiff merely to allege the time, place and content of the alleged misrepresentation, the fraudulent scheme, the fraudulent intent of the defendants, and the injury resulting from the fraud . Advocacy Organization for Patients and Providers v. Auto Club Ins. Ass'n., 176 F.3d 315, 322 (6th Cir. 1999); Coffey v. Foamex L.P., 2 F.3d 157, 161-62 (6th Cir. 1993). Allegations of fraudulent misrepresentations must be made with sufficient particularity and with a sufficient factual basis to support an inference that they were knowingly made. Advocacy Organization, 176 F.3d at 322; Coffey, 2 F.3d at 162. The threshold test is whether the complaint places the defendant on sufficient notice of the misrepresentation to enable the defendant to answer the claim in an informed way. Coffey, 2 F.3d at 162.
Having duly considered the second amended complaint, the Court concludes that plaintiffs' allegations, particularly ¶¶ 29-36, easily satisfy this liberal standard. Although the precise nature of the alleged misrepresentations has not been defined, defendants have certainly been afforded sufficient notice of the claims to enable an informed answer.
B. Materiality of Alleged Misrepresentations
Defendants maintain that even if the allegations are deemed to be stated with sufficient particularity, they fail to make out a valid claim for fraud. Under Texas law, the elements of a fraud claim are: (1) a material representation; (2) the representation was false; (3) the speaker knew it was false or made the representation recklessly without any knowledge of its truth or falsity; (4) the representation was made with the intention that it be acted upon by the recipient; (5) the recipient did act in reliance; and (6) the recipient was injured as a result of that reliance. Conger v. Danek Medical, Inc., 27 F. Supp.2d 717, 722 (N.D.Tex. 1998); American Tobacco Co. v. Grinnell, 951 S.W.2d 420, 436 (Tex. 1997).
To the extent plaintiffs' fraud-based claims are based on alleged misrepresentations concerning defendants' authority to do business in Mexico and the enforceability of the policies under Mexican law, defendants contend that any such misrepresentations were immaterial as a matter of law inasmuch as the policies become effective, pursuant to their own terms, upon delivery to plaintiffs in Texas and are enforceable under Texas law.
Plaintiffs have alleged, however, that these representations were material to their decision and that they were induced to purchase the policies in reliance on them. Second Amended Complaint, ¶¶ 56, 69. While the specific nature of the materiality and the reasons for plaintiffs' reliance are matters of speculation at this point, these allegations are sufficient to withstand scrutiny under Rule 12(b)(6). Defendants' motions to dismiss test the pleadings. Viewing the complaint in the light most favorable to plaintiffs, the Court cannot say at this stage that plaintiffs can prove no set of facts in support of a finding that defendants' alleged misrepresentations were material.
Both cases cited by defendants are readily distinguishable in that representations were held not be material or detrimentally relied upon as a matter of law after the plaintiffs had had full opportunity to adduce evidence in support of their claims. See Conger, 27 F. Supp.2d at 723; Johnson Johnson Medical, Inc. v. Sanchez, 924 S.W.2d 925, 929-30 (Tex. 1996). We have not yet reached that stage in this case.
C. Misrepresentations of Fact
Plaintiff Francesco Carfagno's fraud claims also rest on a second theory. He alleges "he was led to believe," by printed sales illustrations prepared by Jackson National and by representations made by the Turpins, "that the premiums he would be required to pay on the policy he purchased would vanish and that he would no longer be required to make additional premium payments after a specified number of years." Second Amended Complaint, ¶ 30. These representations were based, he alleges, on unrealistic projected rates of return. Both Jackson National and the Turpins allegedly knew that then current (1991) interest rates were declining and expected to decline further and that Francesco Carfagno "would be required to pay premiums beyond the time period projected in the illustrations presented to him." Id., ¶ 35. Thus, defendants allegedly "intentionally misrepresented to Sr. Carfagno that his premium payments would 'vanish' long before they actually would." Id.Defendants challenge these allegations, arguing they are insufficient, even if assumed true, because they are not representations of past or present facts, but statements dependant on future contingencies or mere predictions of future profitability, which are not actionable. See Transport Ins. Co. v. Faircloth, 898 S.W.2d 269, 276 (Tex. 1995). Indeed, a pure expression of opinion will not support an action for fraud. Id. Yet, distinguishing statements of fact and expressions of opinion is not necessarily a simple matter:
Whether a statement is an actionable statement of "fact" or merely one of "opinion" often depends on the circumstances in which a statement is made. Among the relevant circumstances are the statement's specificity, the speaker's knowledge, the comparative levels of the speaker's and the hearer's knowledge, and whether the statement relates to the present or the future. A statement of value may be actionable if the speaker knows it is false.
An opinion also may be treated as an actionable statement of fact when the opinion is based on or buttressed with false facts.
Superior knowledge by one party may also provide the occasion for fraud. A court may consider a false opinion of value as an actionable statement of fact if it is made by one who should know another party is justifiably relying on the speaker's superior knowledge.Id. at 276-77 (citations omitted).
In view of these considerations, it is conceivable that plaintiff Francesco Carfagno could prove facts consistent with his allegations that would justify a finding that defendants made actionable misrepresentations of facts. The precise nature of the representations made and the nature of the relationships between the parties and their comparative levels of knowledge are all matters that require factual development before the merits of plaintiff's fraud claims can be fairly evaluated.
D. Fraud by Omission
To the extent plaintiff Francesco Carfagno's fraud claim is based on defendants' failure to disclose material information, defendants contend the claim should be dismissed because they had no duty to disclose. Under Texas law, defendants correctly contend, the relationship of insurer to its insured has not been held to be a fiduciary relationship. See Garrison Contractors, Inc. v. Liberty Mutual Ins. Co., 927 S.W.2d 296, 301 (Tex.App.-El Paso 1996) ("There is no general fiduciary relationship between an insurer and its insured."). Yet, Texas law also recognizes that a fiduciary relationship "exists in all cases in which influence has been acquired and abused, in which confidence has been reposed and betrayed." United Teachers Associates Ins. Co. v. MacKeen Bailey, 99 F.3d 645, 649 (5th Cir. 1996), quoting Texas Bank Trust Co. v. Moore, 595 S.W.2d 502, 507 (Tex. 1980). Such a "confidential relationship" exists if the extent, nature and duration of the relationship is such that one party has become "accustomed to being guided by the judgment or advice of the other or is justified in placing confidence in the belief that such party would act in its interest." United Teachers, 99 F.3d at 649, quoting Thompson v. Vinson Elkins, 859 S.W.2d 617, 624 (Tex.App.-Houston 1993). However, "mere subjective trust alone is not enough to transform arms length dealing into a fiduciary relationship." United Teachers, 99 F.3d at 649, quoting Thigpen v. Locke, 363 S.W.2d 247, 253 (Tex. 1962).
Again, reviewing the allegations of the complaint, and considering the record developed in connection with the choice of law ruling, the court cannot rule as a matter of law that plaintiff's claim is necessarily defective in this regard. Where Francesco Carfagno undisputedly traveled from his home in Mexico to San Antonio, Texas, to commence negotiations with the Turpins, it is not inconceivable that a relationship of confidence developed between him and defendants. The alleged existence of a fiduciary relationship poses a question of fact that simply cannot be determined at this stage. See United Teachers, 99 F.3d at 699. If such a fiduciary or confidential relationship existed, then defendants may indeed have had a duty to disclose material information to enable plaintiff to make an informed decision.
E. Justifiable Reliance
Defendants contend plaintiff Francesco Carfagno has failed to allege facts sufficient to support a finding that he justifiably relied on the alleged misrepresentations. In view of language appearing on the cover page of his policy indicating annual premiums were payable for life, defendants insist that reliance on any contrary representation was clearly unreasonable and unjustified. Plaintiff responds by arguing that the allegations are sufficient to state a valid claim. The Court agrees. The question of justifiable reliance is one of fact that, like the question of fiduciary duty, requires inquiry into the relationship between the parties. See Greenberg v. Life Ins. Co. of Virginia, 177 F.3d 507, 516 (6th Cir. 1999) (reinstating erroneously dismissed fraud claim). Accepting plaintiff's well-pled allegations as true, it is clear that he could prove facts in support of his fraud-based claims that would entitle him to relief. See id. at 516-17.
The foregoing discussion regarding the adequacy of plaintiff's fraud allegations applies with equal force to his allegations of negligent misrepresentations in count IV of the second amended complaint, which allegations are also sufficient to pass muster under Rule 12(b)(6).
F. Parol Evidence Rule
Defendants maintain that Francesco Carfagno's fraud and negligent misrepresentation claims are based on alleged misrepresentations that contradict the express terms of his policy. Under Texas law, they contend, the parol evidence rule bars introduction of such evidence. See Perez v. Alcoa Fujikura, Ltd., 969 F. Supp. 991, 1006 (W.D.Tex. 1997). If the evidence upon which the claims depend is inadmissible, defendants argue, then the claims must be dismissed.Yet, because the precise nature of the alleged misrepresentations remains undefined at this stage, it cannot be determined whether the alleged misrepresentations necessarily vary or contradict the terms of the policy. Moreover, Texas law recognizes that evidence of fraud in the inducement is excepted from the parole evidence rule. Id. Inasmuch as plaintiff has alleged he was induced to purchase the subject policy by defendants' fraudulent or negligent misrepresentations, the Court cannot hold that the parol evidence rule will necessarily bar introduction of extrinsic evidence in support of plaintiff's fraud and negligent misrepresentation claims. It follows that the Court cannot dismiss plaintiff's claims as facially flawed.
In sum, then, the Court rejects defendants' various facial challenges to plaintiffs' fraud and negligent misrepresentation claims without prejudice to their renewal in a motion for summary judgment under Fed.R.Civ.P. 56 after the record has been developed.
III. DECEPTIVE TRADE PRACTICES
In count II of the second amended complaint, plaintiffs allege that advertising materials and policy illustrations in which defendants conveyed certain misrepresentations are violative of the Texas Deceptive Trade Practices Act — Consumer Protection Act and Texas Insurance Code. Defendants ask the Court to dismiss the claim for lack of sufficiently specific allegations. In support they rely on Frith v. Guardian Life Ins. Co. of America, 9 F. Supp.2d 734 (S.D.Tex. 1998) ("Frith I") and Frith v. Guardian Life Ins. Co. of America, 9 F. Supp.2d 744 (S.D.Tex. 1998) ("Frith II").
In Frith I, the more particular fraud pleading requirements of Fed.R.Civ.P. 9(b) were held applicable to claims brought under the Texas Deceptive Trade Practices Act and Texas Insurance Code. The court, faced with claims and allegations similar to those now before this Court, went on to dismiss the claims. Frith II, 9 F. Supp.2d at 745. To the extent the claims were based on written illustrations and summaries, the claims were held to be defective because the documents were not fraudulent or deceptive on their face. To the extent the claims were based on oral misrepresentations by an insurance agent, the claims were held to lack the requisite specificity. Jackson National contends this reasoning applies with equal force in this case and should yield the same result.
The Court remains unpersuaded. The Court has already visited this issue in this multidistrict litigation and held that other plaintiffs' similar claims under the Texas Deceptive Trade Practices Act and Texas Insurance Code survived challenge under Rules 12(b)(6) and 9(b ). See Spragins v. Jackson National Life Ins. Co., W.D. Mich. No. 5:99-CV-30, Memorandum Opinion and Order Denying Motion to Dismiss, dated March 20, 2000. The ruling was based on recognition of the Sixth Circuit's relatively liberal construction of the Rule 9(b) requirements as applied in Advocacy Organization, 176 F.3d at 322, and Coffey, 2 F.3d at 161-62. For the reasons stated therein, which are consistent with the above analysis of plaintiffs' common law fraud and misrepresentation claims, the Court also finds the Carfagnos' count II allegations sufficient to state a valid claim.
IV. BREACH OF FIDUCIARY DUTY
Plaintiffs assert in count V a claim for breach of fiduciary duty, growing out of the same alleged misrepresentations. Defendants contend the claim should be dismissed for lack of a sufficient factual predicate for recognition of any fiduciary relationship. For the reasons set forth above at pp. 10-12, the Court concludes the existence of a fiduciary relationship is a question of fact that cannot be determined at this stage. Accordingly, defendants' motions to dismiss the claim will be denied.
V. BREACH OF CONTRACT
In count VII, plaintiffs assert a claim for breach of contract, alleging defendants have not fulfilled their "vanishing premium" promises. Defendants have moved to dismiss the claim, citing this Court's earlier opinion in this multidistrict case, awarding partial summary judgment to Jackson National. See In re Jackson National Life Ins. Co. Premium Litigation, 107 F. Supp. 841, 849-50 (W.D.Mich. 2000). In this earlier ruling, the Court applied Texas law to a similar breach of contract claim and held the subject insurance policies were fully integrated contracts and that the parol evidence rule barred introduction of extrinsic evidence that would vary or contradict the terms of the policies. Id. The instant alleged facts appear to be materially indistinguishable from those on which the earlier ruling was based. Indeed, plaintiffs have made no response to this challenge. Accordingly, for the reasons set forth in the Court's earlier ruling, plaintiffs' present breach of contract claim will be dismissed.
Again, the Court acknowledges that although the parol evidence rule operates here to bar extrinsic evidence offered in support of a breach of contract claim, the rule may allow introduction of extrinsic evidence in support of tort claims for fraud in the inducement, as explained above at p. 13. See id., 107 F. Supp.2d at 850 n. 6.
VI. DUTY OF GOOD FAITH AND FAIR DEALING
Count VIII of the complaint sets forth a claim for breach of an implied duty of good faith and fair dealing. Defendants contend the facts alleged, even if accepted as true, do not support such a claim against them.The Texas courts have recognized a duty of good faith and fair dealing emanating from the special relationship between an insurer and its insured. Natividad v. Alexsis, Inc., 875 S.W.2d 695, 697-98 (Tex. 1994); Dagley v. Haag Engineering Co., 18 S.W.3d 787, 790 (Tex.App. — Houston 2000). Yet, as plaintiffs frankly concede, the Texas Supreme Court has expressly refused to extend the duty to the agents of insurance carriers. Natividad, 875 S.W.2d at 698. Plaintiffs therefore acknowledge that count VIII fails to state a valid claim against defendant Turpins.
Further, plaintiffs also concede that the Texas courts have declined to extend the duty of good faith and fair dealing, beyond the negotiating and settling of claims, to the insurance purchase transaction and the calculation of premiums. See Frith, 9 F. Supp.2d at 740; Garrison Contractors, 927 S.W.2d at 301-02. Plaintiffs' count VIII claim undisputedly relates not to the settling of any claim, but to the purchase transaction. Even as against Jackson National, therefore, it fails to state a claim upon which relief can be granted and must be dismissed.
VII. LIMITATIONS DEFENSE
Finally, defendants contend that all of plaintiff Francesco Carfagno's claims are time-barred. They argue he should have known about possible claims against Jackson National and the Turpins when he received his written policy in 1991. In response, plaintiff cites earlier rulings of this Court recognizing that under Texas law, the discovery rule exception presents a fact-intensive inquiry that cannot be resolved on the present record. See Jackson National, 107 F. Supp.2d at 853-54. The Court agrees. For the reasons stated in the Court's earlier rulings, it is clear that defendants have failed to carry their burden, at this stage, of conclusively establishing their limitations defense.
VIII. CONCLUSION
Based on the foregoing analysis, defendants' motions to dismiss plaintiffs' complaint will be granted in part and denied in part. Plaintiffs' count VII claim for breach of contract will be dismissed, and count VIII claim for breach of the duty of good faith and fair dealing will be dismissed. Insofar as the motions challenge the remaining six counts of the second amended complaint, counts I through VI, the motions will be denied. An order consistent with this opinion shall issue forthwith.
ORDER OF PARTIAL DISMISSAL
In accordance with the Court's written opinion of even date,
IT IS HEREBY ORDERED that defendants' motions to dismiss plaintiffs' claims are GRANTED in part and DENIED in part; and
IT IS FURTHER ORDERED that plaintiffs' count VII claim fox breach of contract and count VIII claim for breach of the duty of good faith and fair dealing are hereby DISMISSED under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted; and
IT IS FURTHER ORDERED that defendants' motions to dismiss are in all other respects DENIED.